The executive board of the International Monetary Fund (IMF) has approved a three-year arrangement under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF) with Moldova to support the country’s economic and financial reform programme. Prior actions have put the financial sector on stronger footing and reduced fiscal risks, giving the program a better chance of success, the Fund explained.
The arrangement was approved between the first and second rounds of Moldova’s presidential election. It represents an opportunity for the Moldovan authorities to implement comprehensive reforms along a predictable schedule. The Fund’s endorsement is likely to unlock financing for the country from World Bank and European Union as well. However, much depends on political stability in the country.
“The programme aims at reinforcing the recent economic stabilisation and advancing a broad structural reform agenda, particularly in the financial sector,” the Fund commented in a press release. The macroeconomic forecast envisages 2% GDP growth this year followed by a 3% advance in 2017. But it also envisages budget deficits of 3.5% of GDP this year and 3.7% of GDP next year, which require significant financing resources.
A first $36mn tranche of the $179mn financing attached to the programme will be disbursed immediately. The remaining amount will be disbursed upon semi-annual reviews of the progress under the programme.
The government of Prime Minister Pavel Filip has performed in line with the expectations of international financial institutions (IFIs) since it took office in January, but this has already created frustration among the population since the executive agreed to pay, at least temporarily, the losses of three failed banks from public money.
Both presidential candidates in the second round of the election on November 13 - pro-Russian Igor Dodon and pro-EU Maia Sandu - have promised that the money will not be paid from the budget. Further unpopular measures likely to be taken during the three-year programme with the aim of fiscal consolidation and bringing energy prices in line with market benchmarks are likely to further complicate political stability.
While the IMF’s approval comes less than one week before the second round of the presidential elections, its impact is expected to be neutral. It could, however, improve the government’s bargaining power with Dodon if he wins the elections, as is expected.
The key objective of the programme is to tackle upfront the urgent governance and stability issues in the banking sector, the IMF explained.
The programme thus focuses on a successful rehabilitation of systemically important banks and radical improvements to the regulatory, supervisory, and contingency frameworks for banks, including through a fundamental shift in the enforcement and sanctioning regime. The parliament has already approved relevant regulations, but its enforcement requires efforts from the central bank.
The Fund recommends the government to boost public investments since private investments cannot pick up quickly as the monetary policy “is loosened more gradually” to prevent financial sector risks. Against the backdrop of a negative output gap and a current account narrower than its long-term norm (3.5% of GDP this year), the programme gives space for fiscal policy to make use of available margins to boost public investment, the Fund explained.
The ECF/EFF will, in that context, safeguard fiscal sustainability by anchoring annual budgets in a sound medium term framework, focusing on revenue mobilisation, expenditure prioritisation, elimination of public payment arrears, utility tariff reform, and tougher monitoring of state-owned enterprises.
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