Overview

  • Country Context

    MOLDOVA

    2016

    Population, million

    3.5

    GDP, current US$ billion

    6.8

    GDP per capita, current US$

    1,935

    School Enrollment, primary (% gross) (2016)

    91.3

    Life Expectancy at birth, years (2015)

    71.6

    Moldova is a small lower-middle-income economy. Although the poorest country in Europe, it has made significant progress in reducing poverty and promoting inclusive growth since the early 2000s. The economy has expanded by an average of 5% annually, driven by consumption and fueled by remittances. The latter account for a quarter of GDP, among the highest shares in the world.

    European integration has anchored the Government’s policy reform agenda, but reforms that are good on paper have yet to materialize. A vulnerable political system, a polarized society, an adverse external environment, a skills mismatch in the labor market, and climate-related shocks are economic challenges.

    Transparency, accountability, and corruption are crucial concerns. Business confidence is low and the macroeconomic framework remains vulnerable, while external budget support, based on an agreement with the IMF, has a high level of conditionality. Continuous economic stabilization, advancement of key economic reforms, and creation of a rule-based environment for businesses are key goals.

    With parliamentary elections due in 2018, the Government has a narrow window of opportunity to implement ambitious reforms in public administration and improve the investment climate.

    Moldova faces other important challenges. Largescale emigration, combined with decreasing fertility rates, has alarmingly reduced the population and hastened the pace of aging in Moldova, putting pressure on the pension system and limiting the country’s long-term competitiveness.

    Last Updated: Oct 06, 2017

  • Strategy

    Number of active projects

    10

    IBRD net commitments

    US$100.5 million

    IDA net commitments

    US$2.78 million

    IFC committed portfolio

    US$50.2 million 

    MIGA exposure

    US$25.4 million in 4 projects 

    GEF

    US$6.4 million in 2 grants

    The FY18–21 Country Partnership Framework (CPF) supports Moldova’s transition to a new, more sustainable, and inclusive development and growth model through a mix of analytics, advice, and financing.

    The CPF is grounded in the National Development Strategy, takes into account outcomes of the FY14–17 Country Partnership Strategy, and incorporates the three topmost priorities of the Systematic Country Diagnostic, namely:

    • strengthening the rule of law and accountability in economic institutions
    • improving inclusive access to and the efficiency and quality of public services
    • enhancing the quality and relevance of education and training for job-relevant skills

    These three priorities define and inform the CPF’s three focus areas: economic governance, service governance, and skills development, which are supplemented by climate change - a World Bank Group corporate priority - as a cross-cutting theme.

    KEY ENGAGEMENT

    Moldova is struggling with a burdensome bureaucracy as well as excessive and redundant procedures that require the modernization of key services and improved access for people and businesses. At the same time, improving economic governance and strengthening the rule of law and accountability in economic institutions are the key pathways to derisking private sector investment for job creation. These issues define the two major pillars of the Country Partnership Framework for fiscal year 2018–21. 

    The US$20 million Bank-supported Modernization of Government Services Project will improve the access, efficiency, and delivery quality of administrative services through the re-engineering, digitization, and creation of points for assisted service delivery at the local level, including for vulnerable groups. It will gradually address administrative corruption by moving government service delivery online, thereby reducing face-to-face interaction between citizens and service providers.

    Increased tax revenue collection is another priority, and the Government has launched a reform of the administrative structure of the State Tax Service (STS), but more needs to be done to improve its effectiveness. The US$20 million Bank-supported Tax Administration Modernization Project will enhance revenue collection, tax compliance, and taxpayer services by tax administration automatization and integration. The project will include tax policy reform, institutional and operational development, IT infrastructure modernization, capacity building, and change management. 

    State-owned enterprises (SOEs) play a major role in Moldova’s economy. SOE assets account for more than 32% of GDP and approximately 10% of the corporate sector’s assets.  The top ten SOEs - those engaged in nationally relevant operations and infrastructure - control over 74% of total SOE assets. Yet, SOEs are incurring losses and rising long-term debt, thus exposing the Government to fiscal risk.

    The World Bank, through technical assistance financed by the United Kingdom’s Good Governance Trust Fund, undertook a comprehensive diagnostic of the SOE sector in Moldova that identified the governance issues directly impacting SOE performance and quality of service delivery. The diagnostic has also established a foundation for the development of a roadmap for potential reforms.

    Last Updated: Oct 06, 2017

  • Economy

    RECENT ECONOMIC DEVELOPMENTS

    In the first half of 2017, Moldova registered robust growth (+2.8%, y-o-y). The recovery in remittances, real wage growth, and recent indexation of pensions supported strong private consumption growth. Net exports contributed negatively, as import growth outpaced the robust export performance that was supported by the good harvest of 2016. Fixed investment recovered following the sharp decline observed in 2016 (4.8% y-o-y). The buildup in inventories added 2.3% to the overall growth.

    In August 2017, the Central Bank further lowered the policy rate to 7%,  but credit to the economy remains subdued. The latter, combined with a recovery in deposits, is contributing to persistent excess liquidity. As a consequence, the Central Bank increased the reserve requirement ratio to a record high of 40%. The increase in administrative prices in 2017 kept the inflation rate above the target corridor of 5% (+/- 1.5%) for the fourth consecutive month in July.

    During the first half of 2017, government fiscal revenues and expenditures registered a doubledigit nominal y-o-y increase, resulting in a fiscal balance close to zero. Compared to end-2016, public debt and guarantees decreased by 4% of GDP to 40.1% of GDP thanks to stronger growth.

    In the first quarter of 2017, despite the ongoing recovery of remittances, the current account deficit (CAD) increased by 2.5%. Even with an increase in foreign direct investment (FDI), external debt remains the main source of CAD financing. 

    ECONOMIC OUTLOOK

    In 2017, economic growth is projected at 3.5%, supported by a good harvest and strong private consumption due to higher remittances and private wage growth. Despite strong exports, the contribution of net trade to GDP growth is expected to remain negative as imports are rapidly expanding. In 2017, despite lower foreign budgetary support, the fiscal deficit is forecast to remain below the planned 3% of GDP thanks to a stronger revenue performance than originally anticipated.

    Real GDP is projected to reach 3.8% and 3.7% in 2018 and 2019, respectively. Real growth in public transfers and the ongoing rebound in remittances will help maintain private consumption growth during the remaining part of the forecast horizon. The revitalization of foreign inflows and improvements in the financial sector and in the business environment are expected to encourage private investments further.

    The fiscal deficit is expected to widen but remain below 2.5% of GDP in line with the medium-term fiscal framework.

    As consumption and imports strengthen, the CAD is expected to gradually increase but remain below its historical average thanks to a stronger export performance. The inflation rate is expected to remain on average in the targeted corridor.

    Against this background, the poverty rate measured at the upper-middle-income line of purchasing power parity (PPP) US$5.5/day is projected to decrease by 3.2% in 2016–19, supported by real wage growth (5.7% in the second quarter of 2017 compared to the second quarter of 2016) as well as remittances and public transfers.

    Key downside risks to the baseline outlook involve a slowdown in the implementation of critical growth-enhancing reforms, including the need to restructure the financial and energy sectors and enhance the efficiency of public finances. Weaker-than-expected growth in Moldova’s main partners, such as the European Union (EU) and Commonwealth of Independent States (CIS), could affect the country’s economy.

    Last Updated: Oct 06, 2017

  • Highlighted Project

    Strengthening the Effectiveness of the Social Safety Net in Moldova

    An over-bloated social assistance system inherited after the collapse of the Soviet Union has left Moldova facing no alternative  but to reform. The country’s continuing economic challenges  and social problems, including massive outward labor migration,  have only increased the burden of social assistance programs on the public budget.

    The Strengthening the Effectiveness of the Social Safety Net Project is helping to improve the efficiency and equity of Moldova’s social safety net through a fiscally sustainable expansion and strengthening of the targeted cash transfer program called “Ajutor Social.” The project co-finances the scaling up of targeted cash transfer programs while supporting the consolidation and downsizing of other category-based benefit programs.

    Another component of the project finances investments to strengthen the administration of social assistance benefits and the policy-making capacity of the Ministry of Social Protection, Family and Child. Most importantly, it is helping to put the newly launched, targeted Ajutor Social program on a solid footing. The coverage of the bottom quintile by Ajutor Social benefits increased from 14.3% in 2010 to 23.4% in 2016, with a targeting accuracy of 77% of transfers directed to the poorest quintile.

    The project has strengthened the delivery system, thus reducing the benefit processing time from 30 to 14 days. Furthermore, the project supported the creation of a Social Inspectorate to control fraud and error in the social assistance system. After introducing a risk-based approach to monitoring the benefits, the agency achieved a fraud and error detection rate of 83% in 2016.

    The transformation of the social benefits system has been exceptional. It currently targets a gradual phasing out? of categorical benefits in favor of a transparent system that assesses the real needs of an individual or family and helps them according to that criteria.

     

    Map of Projects in Moldova

    Operational Documents

    Last Updated: Oct 06, 2017




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Additional Resources

Country Office Contacts

Chisinau, Moldova
Pushkin Street, 20/1, MD-2012, Chisinau, Republic of Moldova
+373-22-262-262
+373-22-262-236
moldova_contact@worldbank.org