RECENT ECONOMIC DEVELOPMENTS
After a 4 percent growth rate in 2018, growth remained healthy in the first half of 2019 at 5.2 percent due to strong investments and robust private consumption that was driven by remittances and the pre-election tax cuts.
Imports increased rapidly, resulting in a negative contribution of net exports to growth, while a public spending spree before the elections boosted investments and private consumption.
The inflation rate has been in the target corridor of 5 percent since April 2019 due to higher food prices and the depreciation of the lei.
Although the National Bank of Moldova (NBM) increased the policy rate from 6.5 to 7.5 percent to prevent overheating, credit growth intensified in 2019, as the banking sector stabilized five years after revelations of major bank fraud.
The NBM undertook significant reforms, and in June 2019, completed the process of transferring the three largest banks to fit and proper shareholders. On the other hand, the non-banking financial sector continues to pose risks to stability.
The strengthening of the legislative framework and enforcement of supervisory actions across the non-banking sector is currently underway.
The fiscal deficit remained contained at 1 percent of GDP as public revenue collection increased. Public debt decreased to 27.8 percent in June 2019, but with the resumption of external financial assistance in July, it is expected that public debt will grow and that national foreign reserves, which will be used to close the financing gap, will be recovered.
Growth is expected to remain robust at around 3.6 percent on average by 2021, but with significant domestic and external downside risks. In the medium term, the solid but declining remittances, together with private wage growth, will sustain private consumption, which will remain a key driver of growth.
If the reform agenda moves forward, consumer and business confidence, along with a continued normalization of financial conditions, will further support investments. In the medium term, inflation is expected to remain within the target range, also due to moderate import prices.
Despite the declared determination to accelerate reforms, major effort and political will are needed to implement them. Fighting corruption, strengthening institutions, and leveling the playing field for all market participants, including through the elimination of price controls and the demonopolization of several sectors, would unleash productivity that is currently held back by the weak performance of state-owned companies and the barriers to market competition.
In the medium term, the fiscal position may deteriorate due to structural inefficiencies in public spending and the increasing burden from wages and social transfers. Deficit financing also constitutes a risk, as it heavily relies on external financial sources.
Although the banking sector risks have subsided, the accelerated growth of non-bank credit organizations and the insurance sector could lead to an accumulation of systemic risks in the financial sector if the current weaknesses in the regulatory and supervisory framework are not addressed. The economy also remains susceptible to weather and external shocks, while persistent emigration weakens the country’s human capital.
Last Updated: Oct 18, 2019