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In the news: Moldova’s economic recovery troubled by conflict, stalled reforms

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 2005
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Favorable external factors and increased consumer spending, propelled by large workers’ remittances, helped strengthen the Republic of Moldova’s economic recovery in 2003—04. Nevertheless, according to the IMF’s annual economic assessment, Moldova is lagging considerably behind its neighbors, partly as a result of the Transnistria conflict. Moreover, productive capacity has weakened with the steady exodus of working-age Moldovans following the 1998 regional economic crisis. The IMF Executive Board expressed concern about the recovery’s fragile basis and underscored the importance of resolving the Transnistria conflict. It stressed the need to create an environment supportive of private sector development and foreign investment that will help promote lasting growth, create jobs, and reduce poverty.

Rapid money and credit growth have rekindled inflation expectations, although inflation moderated somewhat in late 2004. Following a general government surplus in 2003, fiscal policy came under pressure in 2004, while fueled by the remittances, monetary policy was expansionary. The Board recommended tighter fiscal and monetary policy to control inflation and make room for current external debt service. It welcomed the recent external debt restructuring agreements, which together with the leu’s appreciation, resulted in a marked decline in the external debt-to-GDP ratio. Moldova has also resumed interest payments to its Paris Club creditors.

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Estimates
2005

Projections
(percent change)
Real GDP7.86.37.05.0
Consumer prices (end period)4.415.711.09.5
(percent of GDP)
Current account balance-4.4-6.8-6.7-6.3
Total external debt101.289.563.358.4
Data: IMF staff report, January 2005.
Data: IMF staff report, January 2005.

In view of stalled structural reforms and a business climate that has not improved significantly, the Board urged the authorities to take decisive steps to reduce government intervention in the economy, revamp the privatization process, phase out excessive regulation, and improve public sector service. Some progress has been registered in fiscal reforms and in revising the legal framework affecting investment, microfinance, auditing, accounting, and leasing.

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