Population: 3.6 million Population per sq. km: 129 Population growth: -0.2% Life expectancy: 67 years Population below national poverty line (1997): 23.3% GDP per capita(current US$): 407 GDP( current US$): 1,479 million GDP Growth: 6.1% Sources: National Statistical Offices, IMF, IFS, WDI 2002 and Staff estimates
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Overview
After a decade of deteriorating economic performance, Moldova has successfully stabilized the economy, launched structural reforms to stimulate growth, and begun the process of establishing an effective social protection system. While the Government has made notable progress in the macroeconomic and structural reform process in the last three years, a significant reform agenda remains. Today, Moldova is the poorest nation in Europe, having started out at independence as a middle-income country. With economic recovery only in its second year, poverty is still very high. Moldova has also become one of the region’s most heavily indebted countries.
Moldova’s GDP per capita in 2001 was some US$ 407, or about half of the 1995 figure, which is significantly below the average for the CIS and Central European countries. In 1999, approximately 55 percent of Moldovans lived on less than $2.15 per day. Income inequality is high as are the disparities between large cities and the rest of the country.
The 1998 regional financial crisis significantly exacerbated Moldova’s external indebtedness. Total external debt increased from virtually zero at the beginning of the 1990s to over US$1.2 billion (or 83 percent of GDP) at end-2001, of which 77 percent was public and publicly guaranteed debt. Additionally, there remain outstanding external arrears on energy imports to foreign suppliers (mostly Gazprom) estimated at US$298 million (or 20 percent of GDP).
Moldova’s economic performance during the past three years has been positive, benefiting from favorable external factors, prudent fiscal and monetary policies, and structural reforms in the agricultural and energy sectors. Increased investment and demand for exports contributed to an acceleration of GDP growth from –3.4 percent in 1999 to 2.1 and 6.1 percent, respectively, in 2000-01. Inflation fell from 39 percent in 1999 to a single digit rate of 6.4 percent at the end of 2001. This, combined with increased workers’ remittances and direct investments, helped stabilize the exchange rate which stood at 36 percent of its 1997 level. The Leu depreciated by 3.7 percent in real terms during 2000-2001. The current account balance has stabilized, although its vulnerability to external shocks remains high as the economy is highly dependent on a few export commodities and markets, and on energy imports. Due to limited foreign financing, the deficit is financed mostly by direct foreign investment.
Focus of World Bank Assistance
Since Moldova joined the World Bank in 1992 and the International Development Association (IDA) in 1994, Bank lending has provided consistent support for the country’s economic reform program. Early lending focused on providing adjustment support, strengthening the private sector in both the agriculture and enterprise sectors, and improving the economic and financial management of the energy sector.
The 1999 - 2001 Country Assistance Strategy focused on three inter-related objectives: macroeconomic stability and growth, private sector development, and public sector reform. The strategy gave priority to achieving a stable macroeconomic framework linked to key structural reforms to create the basis for growth in an open market economy. Support was provided in agriculture, enterprise and energy to stimulate a supply response and promote private sector-led growth.
These objectives continue to frame the key development challenges for Moldova under the broad goal of poverty reduction. A major objective of the Bank is to support the country’ s efforts to prepare the Poverty Reduction Strategy Paper. In this context, it will support Government’s actions to sustain sound macroeconomic policies building on the successful stabilization efforts of recent years. Key among these is maintaining a fiscal stance which is consistent with low inflation, and maintaining social expenditures at current levels in real terms, while improving their targeting and efficiency by rationalizing excess facilities and staffing.
The Bank continues to support the development of the private sector to further strengthen the role of market forces in the economy. Privatization of major enterprises, such as wineries, Moldtelecom, and completion of the privatization of the energy sector are considered important measures to achieve this goal.
Another important area that will be supported is the public sector reform that includes public administration reform and a merit-based civil service with concomitant salary reforms. Public expenditure reforms, including strategic planning, expenditure rationalization, expenditure monitoring and a robust audit function are also important measures.
For further details please see the Bank's Country Assistance Strategy for Moldova for 1999 - 2001.
Impact on the Ground
Significant progress was made in establishing and maintaining a sustainable fiscal and monetary framework. After almost a decade of decline, prudent macroeconomic policies and significant progress in structural reforms have resulted in GDP growth of 2 percent in 2000 and an impressive 6.1 percent in 2001.
Progress was achieved in privatization of the energy and agricultural sector. Three out of five power generation companies and the gas distribution company have been sold to strategic investors. Land privatization is virtually complete and farm restructuring covers 80 percent of agricultural land. With IDA assistance, the government introduced a land registration system to establish a land and real estate market, and land transactions, primarily leasing, are beginning to take place.
Pension arrears were eliminated. The new public pension law enacted in 1999 established a direct linkage between individual contributions and benefits, introduced an increase in the retirement age and eliminated privileges. These together with the achievements in improving the general administration of pensions facilitated the elimination of pension arrears by February 2001.
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Challenges Ahead
World Bank Partners in Moldova