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World Bank study outlines key constraints to private sector development in Moldova

June 11, 2013

Video: Interview with Melissa Rekas, Team Leader for the World Bank’s private sector development in Moldova.

World Bank Group


CHISINAU, June 11, 2013 – A study launched today by the World Bank - “Moldova: Policy priorities for private sector development” - highlights key constraints to private sector development in the country. It provides an analysis of these constraints and makes recommendations on how to remove them, in order to achieve sustainable economic growth, solidify more vibrant business activity and increase investment, innovation, and competitiveness.

”We are delighted to be strengthening our partnership with the Ministry of Economy and Minister Lazar on the very important agenda of improving the business environment”, said Abdoulaye Seck, World Bank Country Manager for Moldova. „Moldova’s small market and lack of natural resources call for openness, smart business regulations and efficient trade policies and practices. These have the potential to help Moldova capitalize on its comparative advantages and successfully change its economic paradigm to one of export-driven growth.”

The analysis is based on existing studies and contributions from Moldova’s business sector, public authorities, and the donor community.  It identifies five most pressing problems in the business environment that are adversely affecting companies’ productivity and competitiveness. These are: customs administration; tax administration; business regulation, consisting of licenses, authorizations, permits, and inspections; the competition framework; and access to finance.  While progress has been made in these areas over the past several years, and the government has expressed a commitment to reform in relevant areas, there is still much work to be done. The study aims to help the government by identifying priority areas and reform recommendations.

“I want to thank the World Bank for this study and for convening this round-table with key stakeholders”, said Valeriu Lazăr, Deputy Prime-Minister and Minister of Economy. “This is an important report, which addresses key constraints and policy priorities to Moldova’s economic development and competitiveness. It blends naturally into the government efforts to improve the business environment.”

In customs administration the study highlights that the performance of Moldovan companies is adversely affected by delays, unpredictable requirements and valuation practices, burdensome inspections, and corruption. These practices introduce uncertainty and increase transaction costs for enterprises across the whole economy. To address these concerns, the report underlines the need for a comprehensive reform effort that would encourage a shift away from a control-based approach to one that is focused on risk management and trade facilitation.

In the realm of tax administration, companies are affected by lack of consistency in awarding fines and penalties. This is (in part) caused by ambiguity in tax legislation and related government decisions, letters, and other documents. The lack of consistency reduces companies’ capacity to plan because their tax-related costs are uncertain. Businesses struggle with inefficiencies in the tax dispute resolution system, as well as frequent allegations of corruption. Private-public dialogue is weak. Building a clear legal and regulatory framework is critical, as well as setting up the right mechanisms through which the State Tax Service (STS) can provide advance or binding rulings.

Companies also face higher costs of doing business due to overlapping requirements related to licenses, permits, authorizations and inspections. In 2012, managers reported spending 10 percent of their time complying with government regulations on behalf of their firms. Insufficient clarity of requirements as well as the need to get approval from multiple agencies for licenses, permits, and authorizations contributes to this problem. In inspections, a risk-based approach is rarely applied, about 40 percent of inspections are duplicated, and there is a general lack of clear criteria, shared principles, and transparent procedures.

In terms of competition, Moldova’s economy is characterized by a high concentration of firms in some industries, and cases of abuses of dominant positions, monopolistic profits, collusion, and other horizontal and cartel agreements. All of these affect productivity, growth and consumer welfare. Competition problems stem from barriers to market entry, weaknesses in the economy-wide competition policy framework, and, at times, vested interests. Implementation of reforms on business regulation should facilitate market entry, address burdensome requirements for licensing, authorizations and inspections, and successfully implement the recently approved Law on Competition and Law on State Aid.

Companies also state that difficulties accessing finance are a major barrier, including through relatively high costs of borrowing, relatively high collateral requirements, and limited availability of longer loan maturities. The World Bank analysis identified constraints on both the demand side and supply side. On the demand side, although interest rates are in line with those of comparable countries, companies can find them unaffordable due to weak and inconsistent profitability, which is driven by deficiencies in: management practices (financial management, business planning, etc.), value chain integration, product quality, and the business enabling environment. On the supply side, low competition between financial institutions, maturity mismatch in funding sources, lack of diversified credit risk assessment techniques, and weaknesses in the framework for secured lending, also contribute to companies’ difficulties accessing finance. Additional fees charged by financial institutions can also increase borrowing costs.

Many of the reform recommendations in the above areas are included in existing laws and strategies, such as the Regulatory Reform Strategy 2013-2020, Transport and Logistics Strategy (both of which must be adopted), Customs Service 2013 Activity Plan, State Tax Service Development Plan, Justice Sector Reform Strategy, Law on Competition, Law on State Aid, and others. This demonstrates the government’s willingness to reforming the priority areas; these laws and strategies must now be implemented well.

The report’s conclusions highlight the importance of productive, competitive and efficient job-generating firms as the basis of Moldova’s growth, one that replaces the existing remittance-based, consumption-driven model. It notes the centrality of Moldova’s signing of the Deep and Comprehensive Free Trade Agreement and the Association Agreement to the country’s competitiveness and export agenda.

Since Moldova joined the World Bank in 1992, a total of US$ 990 million have been allocated to 48 operations in the country. Currently, the World Bank portfolio includes 12 active projects with total commitments of US$ 239.5 million. Areas of support include regulatory reform and business development, education, social assistance, e-governance, healthcare, water and sanitation, agriculture, and others.

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