An International Monetary Fund (IMF) mission, led by Mr. Ruben Atoyan, conducted discussions from July 20-August 10 in Chișinău and IMF headquarters for the first review of Moldova’s program under the IMF’s Extended Credit Facility (ECF) and Extended Fund Facility (EFF) arrangements. Mr. Atoyan issued the following statement.
“The IMF team has reached a staff-level agreement with the Moldovan authorities for policies needed to complete the first review under the program. The agreement is subject to endorsement by the IMF’s Executive Board, which is scheduled to consider this review in September. SDR 20.65 million (about US$27 million) would become available after the Board meeting, bringing total disbursements under the program to about US$245 million.
“Implementation of the program remains strong despite severe and intertwined shocks. The authorities met all performance criteria, and program-supported structural reforms in areas of anti-corruption, the rule of law, fiscal sector governance, and financial sector oversight are progressing apace. The authorities appointed the head of the Anti-Corruption Prosecution Office—an important milestone under the program—in June, well-ahead of the schedule. Successive shocks have not deterred the authorities’ resolve to advance the much-needed reforms, reaffirming strong ownership and program engagement.
“The war in Ukraine, however, continues to affect the Moldovan economy significantly. Real GDP is expected to stagnate in 2022. Spillovers from a worsening global outlook, supply disruptions, and higher input costs, are compounded by adverse drought conditions on agricultural production. Inflation accelerated sharply due to increased energy and food prices, and the exchange rate depreciated, reflecting exceptionally challenging market conditions. Fiscal indicators remain robust in the first half of 2022, reflecting the confluence of higher revenue collection and grants but also subpar execution of the approved budgetary spending. Well-capitalized, liquid, and profitable, banks have weathered the impact of the current crisis satisfactorily.
“The National Bank of Moldova’s data-driven approach to monetary policy has been instrumental in anchoring inflation expectations. Since the beginning of the year, the authorities have adjusted monetary policy to contain the second-round effects of higher imported inflation and supply-side disruptions. With the inflation outlook marred by deteriorating external environment, the authorities remain committed to exchange rate flexibility, which acts as a shock absorber, and foreign exchange interventions will be limited to smoothing excessive volatility and preventing disorderly market conditions.
“ The 2022 supplementary budget agreed with the mission a ppropriately envisages additional allocations to cushion vulnerable people from rising energy and food prices. Going forward, concerted efforts are warranted to address persistent under-execution of approved budgetary spending with a view to improve spending efficiency and foster budget credibility. With risks skewed to the downside, a strong policy momentum remains critical to securing budget financing from external partners.
“Downside risks continue to beset the economic outlook. Sharper-than-anticipated increases in energy prices, disruption in energy supplies, escalation of international food prices, the rising cost of living, and proximity of the war in Ukraine could further derail activity and hurt confidence, aggravating policy tradeoffs. Resolute implementation of a comprehensive package of reforms and continued support from the IMF and other partners would anchor confidence.”