Moldova's $180mn agreement with IMF in limbo ahead of presidential elections

Moldova's $180mn agreement with IMF in limbo ahead of presidential elections
By Iulian Ernst in Bucharest October 21, 2016

The International Monetary Fund (IMF) executive board will set a date for discussing its three-year agreement with Moldova “following the implementation of all prior actions”, the Fund said in a note on October 20. 

The comment was made in response to speculation that the IMF had decided to postpone endorsement of the programme until after Moldova's October 30 presidential elections. In fact is is most likely that the programme will not be endorsed until after the election, which is only nine days away now. 

Since an IMF mission reached a staff level agreement with Moldova on a three-year economic reform programme on July 26, the Moldovan authorities have made a significant progress in implementing the agreed prior actions needed for the board to consider the programme, the Fund said in the note. 

No postponements have been made to the planned discussions with Chisinau since the meeting had not been previously scheduled, according to the IMF. 

The ministry of finance explained, in a statement on October 20, that talks with the IMF have reached the final stage. The ministry stressed that there is no connection, only coincidence, between the endorsement of the three-year programme by Fund’s executive board and the presidential elections in Moldova.

Prime Minister Pavel Filip has repeatedly announced the agreement with the IMF, which has a $180mn financing attached and will unlock financing and grants from the other development partners, would be completed in October.

However, Chisinau has to meet several conditions set by the IMF, before the agreement is finalised, including resolving the situation in the banking sector. 

Moldovan President Nicolae Timofti promulgated a bundle of seven laws on the banking sector, including one stipulating the payment from public money of the $680mn (10% of GDP) emergency aid given to three bankrupt banks, on October 4. 

The bundle of seven laws includes an amendment to the budget to accommodate the service of the supplementary public debt this year. The budget revision stipulates a significant reduction of the central government’s spending by MDL2bn (1.5% of GDP) to MDL33.5bn, as well as shifting funds to public debt service from other projects. The bundle of laws also includes several bills needed for better regulation of the banking sector, in areas such as the transparency of banks’ ownership.

On October 14, two members of the US Congress, following talks with the Moldovan opposition, sent an open letter to the IMF warning of the risk that the money provided to Moldova under the three-year programme could actually given to those responsible for the banking frauds that made the stabilisation programme with the Fund necessary.

Opposition parties claim that the government coalition is largely responsible for the frauds in the banking system and is now seeking support from external development partners to cover the $1bn stolen from banks. Plans to pay out $680mn from budget to cover the loss have already been approved; the government says this highly unpopular move was a pre-condition for signing the three-year agreement with the IMF.

The Fund’s note was prompted by rumours about the deferral of the agreement until after the presidential elections, which will probably happen. The Fund’s note only says that there was no tentative schedule for the talks in the executive board and that there is no causality between the elections and the endorsement of the agreement.  

Sources within the government quoted by indicated that the Fund has postponed the endorsement of the programme with Moldova “on technical grounds”, specifically because the World Bank has yet not received the documents related to the deal. The World Bank provides the bulk of the external financing to Moldova. Later, the ministry of finance issued its statement and the IMF also confirmed in a note that the process of endorsing the agreement with Moldova had not been postponed.

However, the incident prompted political speculation. Former Prime Minister Ion Sturza, of neutral political orientation, explained that the failure to conclude the agreement with the Fund would cost the government around MDL3bn (nearly 3% of GDP) in financing and would create significant cash flow problems for the government. The latest budgetary data revealed, however, reserves in excess of the MDL3bn mentioned by Sturza. But indeed, the delay of the external financing would put significant pressure on the operations of the government.