Embed Size (px)
Citation preview
Document of The World Bank
FOR OFFICIAL USE ONLY
Report No. 52669-MD
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT
FOR A PROPOSED ECONOMIC RECOVERY DEVELOPMENT POLICY
CREDIT
IN THE AMOUNT OF SDR 16.6 MILLION
(US$25 MILLION EQUJYALENT)
(INCLUDING SDR 7.4 MILLION (US$11.2 MILLION EQUIVALENT)
IN PILOT CRW RESOURCES
TO THE
REPUBLIC OF MOLDOVA
May 14,2010
Poverty Reduction and Economic Management Unit Europe and Central Asia Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
CAS CEM CFAA
CIS
DPL ECA ESRP
FDI FSAP
GDP GNP HIPC
IBRD
IDA
IFC IMF JSAN
MOLDOVA - GOVERNMENT FISCAL YEAR January 1 - December 3 1
CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 30,2010)
Currency Unit = Moldovan Leu US$1 .OO = 1 1.27500 (MDL)
Weights and Measures Metric System
ABBREVIATION AND ACRONYMS
Country Assistance Strategy Country Economic Memorandum Country Financial Accountability Assessment Commonwealth of Independent States Development Policy Loan Europe and Central Asia Economic Stabilization and Recovery Plan Foreign Direct Investment Foreign Sector Assessment Program Gross Domestic Product Gross National Product Heavily Indebted Poor Countries
International Bank for Reconstruction and Development International Development Association International Finance Corporation International Monetary Fund Joint Staff Advisory Note
LDP MDGs MOE
MOF
MOH MTEF NBM
NPL PEFA
PER PFM PHRD
PPG
ROSC
SDR TSA UNDP VAT
Letter of Development Policy Millennium Development Goals Ministry of Education
Ministry of Finance
Ministry of Health Medium-Term Expenditure Framework National Bank of Moldova
Non-Performing Loan Public Expenditure and Financial Accountability Assessment Public Expenditure Review Public Financial Management Japan Policy and Human Resources Development Trust Fund Public and Publically Guaranteed Debt
Report on the Observance of Standards and Codes Special Drawing Rights Targeted Social Assistance United Nations Development Program Value Added Tax
Country Director: Martin Raiser Sector Director: Luca Barbone
ii
FOR OFFICIAL USE ONLY MOLDOVA
ECONOMIC RECOVERY DEVELOPMENT POLICY OPERATION
TABLE O F CONTENTS
I . INTRODUCTION .......................................................................................................................... 1 I1 . COUNTRY CONTEXT ................................................................................................................. 2
A . Political Context .......................................................................................................... 2 B . Recent Economic Developments ................................................................................. 3
I11 . THE GOVERNMENT’S STABILIZATION AND ECONOMIC RECOVERY PROGRAM AND PARTICIPATORY PROCESSES ......................... ....................................................................... 15
rv .
V .
VI .
A . Stabilization And Streamlining Of Public Finance ................................................... IS B . Economic Recovery .................................................................................................. 17 C . Ensuring An Efficient And Fair Social Protection .................................................... 18
BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ................................................ 20 A . Link to the Country Partnership Strategy .................................................................. 20 B . Collaboration with the IMF and Other Donors ......................................................... 21 C . Lessons Learned ........................................................................................................ 22 D . Analytical Underpinnings ......................................................................................... 23
THE PROPOSED OPERATION ............................................................................................... 24 A . Operation Description ............................................................................................... 24 B . 0peration.Implementation. ........................................................................................ 35 C . Poverty and Social Impact ........................................................................................ 35 D . Environmental Aspects ............................................................................................. 38
IMPLEMENTATION, MONITORING, AND EVALUATION ............................................. 39 A . Fiduciary Aspects ...................................................................................................... 39 B . Disbursements ........................................................................................................... 42 C . Risks and Risk Mitigation ......................................................................................... 42 .
ANNEX 1 . LETTER OF DEVELOPMENT POLICY ......................................................................... 45 ANNEX 2 . PROPOSED FINAL MATRIX OF POLICY ACTIONS AND EXPECTED
OUTCOMES ........................................................................................................................... 73 ANNEX 3 . IMF PUBLIC INFORMATION NOTICE (PIN) ................................................................ 76 ANNEX 4 . ACTION PLAN FOR REMOVING ADMINISTRATIVE BARRIERS ......................... 79 ANNEX 5 . MOLDOVA AT A GLANCE ..................................................................... ; ......................... 87
INCREASES ............................................................................................................................ 90 ANNEX 6 . POVERTY AND SOCIAL IMPACT - SIlMULATIONS OF ENERGY TARIFF
Map IBRD 33448R
The Moldova Economic Recovery DPO was prepared by an IDA team consisting of Dino Merotto (Team Leader). Olasupo Olusi. Iaroslav Baclajanschi and Ruslan Piontkivsky (Macroeconomics); Matthias Grueninger. Asa Giertz and Felicia Pricorp (Agriculture). Katerina Petrina (Social Assistance); Juan Navas.Sabater. Siddartha Raja. Sergiu Panaghiu (ICT); Shinya Nishimura (Energy); Sandu Ghidirim and Andreas Schliesser (Roads); Victor Burunsus and Martin Melecky (Private Sector); Ruxandra Costache (Legal); Victor Sulla (Poverty and Social Impact) . Andrei Busuioc. Oxana Druta. Elena Nikulina and Lilia Razlog provided assistance on fiduciary arrangements and Arcadie Capcelea assisted with environmental safeguards . Lilia Razlog and Iaroslav Baclajanschi coordinated the program in Chisinau . The team is grateful to the Government of Moldova for the close collaboration during loan preparation . Benu Bidani (Sector Manager). Erika Jorgensen (Advisor) and Luca Barbone (Sector Director) supported the team with internal quality oversight . Melanie Marlett and Pablo Saavedra gave useful comments . Dammika Somasundaram. Maureen Itepu and Viorica Strah provided program support . Carolina Odobescu coordinated translation . Peer reviewers were Jan Walliser and J . Humberto Lopez .
This document has a restricted distribution and may be used by recipients only in the performance of their official duties . Its contents may not be otherwise disclosed without World Bank authorization .
PROGRAM SUMMARY
MOLDOVA
MIC RECOVERY DEVELOPMENT POLICY OPERATION
The Government of the Republic of Moldova
Not applicable IDA Credit of SDR 16.6 million, including SDR 7.4 million in Pilot CRW Resources. Standard IDA Terms, 20 years to maturity including a 1 0-year grace period Development Policy Operation (DPO)
(i) Economic management, (ii) private sector development. Key outcome indicators which mutually support economic recovery and social protection against the crisis, are: (i) Increase in road maintenance budget; (ii) Increased share of agricultural subsidies spent on investment and received by individual farmers; (iii) at least 2 thirds of eligible beneficiaries receive TSA in 20 10; (iv) Increased volume of wine exports; higher real farm gate prices for grapes; (v) No further accumulation of arrears for gas supply; (vi) At least one private operator licensed to connect cross-border fiber optic cable; (vii) Reduced times to register a business. The program’s objectives are to: Adequately fund priority expenditures for economic recovery and social protection during fiscal correction and lay foundations for a sustained post-crisis recovery through exports and private investment.
ECON( Borrower
Implementing Agency
Amount
Financing Data ODeration Tvoe Main Policy Areas
Key Outcome Indicators
Program Development Objective(s) and Contribution to CAS
Risks and Risk Mitigation
3peration ID
This proposed operation replaces and scales up the third annual PRSC identified in the FY09-FY 1 1 Country Assistance Strategy (CAS). The proposed operation realigns World Bank policy based lending support to reflect the changed economic and political realities. The reform program supported by the operation: (i) aligns behind the policy shift signaled by a new Government, and (ii) responds to the new challenge of addressing the global crisis by complementing an IMF- supported program for fiscal correction with measures to improve the composition of the budget and structural measures to stimulate economic recovery. The increase in funding from $10m to $25 million reflects the need for additional budgetary funding to smooth over fiscal correction of a deficit of close to 7 percent of GDP in 2009. Moldova faces the likelihood of a third round of Parliamentary elections before September 2010, after Parliament again failed to elect a new President. This political backdrop heightens the risk that some overdue fiscal and structural policies may not get implemented on time, leading to less orderly adjustment and prolonged recession. Economic recovery depends strongly upon recovery in the region, and a return to lending by commercial banks facing increasing deterioration in their loan performance. As the global crisis and the energy and food crises and wine export ban which preceded it all show, as a small open economy Moldova is highly susceptible to balance of payments shocks. PI 12625
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT
FOR A PROPOSED ECONOMIC RECOVERY DEVELOPMENT POLICY
OPERATION FOR MOLDOVA
I. INTRODUCTION
1. This program document describes a proposed Economic Recovery Development Policy Loan of US $25 million equivalent to the Republic of Moldova. It supports a reform- minded Government as it starts to implement measures to address a deep fiscal crisis brought on by the global recession and pre-election spending and policy drift. It does so during a period of continued political uncertainty in which the new Parliament has twice failed to elect a President, meaning that another round of general elections is likely in the second half of 2010. The operation is therefore designed as a bridge to a longer term program of annual support which could be developed once political uncertainty abates.
2. This proposed operation realigns World Bank policy support lending to reflect Moldova’s greatly changed economic and political priorities. The Moldova Poverty Reduction Support Credit (PRSC) programmatic series, which consisted of three operations of US $10 million each, was discontinued after PRSC2. In the run-up to two elections in April and July 2009, several actions proposed under the cancelled PRSC3 were delayed and partially implemented. Now in the wake of elections and after the full impact of the global crisis has taken its toll on the economy, Moldova’s financing needs have increased dramatically and the new Government has set out a new policy framework to stabilize the economy through fiscal correction (with IMF support) and stimulate medium term growth in trade and investment. The IMF staff estimates that US$ 1.25 billion in external financing will be required over the three years from 2010-12. On January 29th the Executive Board of the IMF approved a three year arrangement providing US $574 million including US $150 million as budget support to maintain stability with strong but phased fiscal adjustment. This operation starts the realignment of World Bank policy based support with the Government’s ‘Economic Stabilization and Recovery Program’. The Bank intends to continue to help the Government to complete their reform agenda for economic recovery once the political situation is resolved.
3. The operation will support short-term corrective policies in the new Government’s ‘Economic Stabilization and Recovery Program’ in two ways. The program supports many actions that are mutually reinforcing: they aim both to stimulate economic recovery, and to cushion the impact of the severe crisis-induced recession on poor people.
0 First, the program helps to protect priority expenditures for economic recovery and social protection during fiscal correction. The operation supports enhanced fimding for targeted social assistance and road maintenance and a redirection of agriculture subsidies towards more efficient investment grants. The latter two actions should enhance economic activity. Whilst reducing vehicle operating costs in the economy and
preserving public investments, the increase in road maintenance will also help employ returning migrants and recently unemployed construction workers.
0 Second the operation will lay the foundations for a sustained post-crisis recovery through exports and private investment. It will assist Government to remove long- standing structural policy constraints and cumbersome regulations which retard improvements in Moldova’s productivity and competitiveness, restrain exports, limit foreign direct investment, and which have led to jobless growth in recent years. The removal of these constraints should dampen the recession and place Moldova on firmer foundations for growth and job creation once export demand recovers. Since the impact of the crisis on poor people in Moldova will be more acute in rural areas, emphasis is placed on measures which could stimulate traditional wine exports. Complementing these measures the program seeks to initiate reforms which first make the energy sector financially viable and which then pave the way for an injection of private investment in energy and telecommunications. The energy sector reforms supported should stem the drain of subsidized heating on Moldova’s fiscal space, whilst protecting poor people from rising heating costs and providing a framework for cost-cutting energy efficiency measures in future. With limited scope for a fiscal stimulus in Moldova, and slow recovery forecast in the region, attracting new foreign investment in telecommunications and eventually energy could provide a much needed private investment stimulus to the economy in the coming years. Despite the global crisis, there is interest from private investors in both sectors.
4. The proposed operation, is underpinned by extensive economic and sector work. This was conducted over the last five years and is summarized in the Policy Notes prepared for the new Government’.
11. COUNTRY CONTEXT
A. POLITICAL CONTEXT
5. Last year was a turbulent year in Moldovan politics, which ended - as it had started - with political uncertainty. Two fiercely fought Parliamentary elections (April 5’ and July 29’) distracted Government from economic management priorities just as the onset of the global crisis on Moldova was becoming most evident. The results of the first Parliamentary elections were contested in demonstrations that spilled over into civil unrest. Following the second Parliamentary elections, a new coalition of four liberal democratic parties eventually formed the Alliance for European Integration (AEI) in Au ust 2009. Holding 53 of 101 seats in Parliament, they formed a Government on September 25 , replacing the Party of Communists of the Republic of Moldova (PCRM) who had been in office for 8 years. The new Parliament failed twice to elect a President2. Another round of general elections is therefore likely in the second half of 201 0.
t f
’ World Bank (2009): “Moldova: Policy Notes for the Government”, October 2009, World Bank (2004), “Diagnostic Trade Integration Study”, World Bank (2005) and (20 10, forthcoming), “Moldova: Country Economic Memorandum”; World Bank (2007) and (20 10) forthcoming, “Moldova: Public Expenditure Review”. * The Moldovan constitution unusually requires the President to be elected by a majority of 60 out of 100 votes giving the PCRM effectively a blocking minority.
2
6. Moldova reacted late to the economic crisis. Being more focused on April 2009 elections, the previous Government reacted slowly and inappropriately to the sharp rebalancing of the economy which the worsening external environment in 2009 had caused. Against falling tax revenue, they increased public servants’ wages and pensions well above available budget resources in the run-up to April elections, and then promised two further wage increases for teachers and all public servants in advance of July elections. This has resulted in Moldova having one of the highest public wage bills in Eastern Europe, and bucking the trend of wage cuts elsewhere in the region in response to the crisis. Early in 2009, facing pressure on the exchange rate from reduced remittances, the National Bank of Moldova lost a third of their international reserves in attempts to defend the currency. This sharply tightened liquidity and hiked up real interest rates despite falling inflation and economic activity, and an increase in non-performing bank loans. The introduction of new targeted social assistance and gradual reform of the old schemes was delayed, preventing improved targeting to those most in need. In May 2009 the previous Government allowed the IMF supported PRGF program to expire. In June, after inviting the IMF back to Chisinau for an assessment, they were reluctant to make the necessary fiscal correction in the face of political tension and facing a second election.
7. Even with political uncertainty, the new Government has begun to implement comprehensive reform that will entail a shift in economic management and international development relations. Immediately upon taking office in late September, Government took on the challenge of correcting for the impact of the global crisis on Moldova’s economy. In October, the Government launched the ‘Economic Stabilization and Recovery Plan’ (ESRP) which sets the policy framework for this development policy operation. In early November they had reached agreement in principle with the IMF staff on a program for the use of Fund resources, which formed the basis of a 3 year Extended Credit Facility and Extended Fund Facility program approved in January 20 10. Under the ESRP, Government began implementing a comprehensive and detailed action plan of legal and administrative reforms to “de-regulate, liberalize and de-monopolize” the economy. Government also began implementing an action plan for integration with Europe, entitled “European Integration: Freedom, Democracy, Welfare 2009-2013”, which aspires to make the Republic of Moldova eligible for EU accession “in a reasonable time”. The strategy also seeks to develop strategic partnerships with the EU, Romania, Ukraine, Russian Federation and the USA. In response, the European Union is proposing to include Moldova into the EU Eastern Partnership initiative. At the end of November the Government concluded a Compact Program with the US Millennium Challenge Corporation which was signed late January 2010.
8 , The international community is providing strong support. The Consultative Group meeting on Moldova, jointly organized by the EU and the World Bank in March 2010, reinforced the donor’s commitment to support Moldova’s socioeconomic development plan, summarized in its strategic document Rethink Moldova. The CG meeting raised a total of US$ 2.6 billion to support the implementation of the reform strategy over the period 2010-12.
B. RECENT ECONOMIC DEVELOPMENTS
9. Moldova’s economy is in recession. The global crisis undermined all of the main sources of growth in previous years - remittances, private consumption, exports, and private investment, resulting in weaker domestic and external demand, fiscal imbalance, limited financial intermediation, and an increase in the level of poverty.
3
10. Prior to the crisis, economic growth in Moldova had averaged 6 percent between 2004 and 2008, on the back of strong domestic and external demand. The massive inflow of migrant workers’ remittances (averaging about 31 percent of GDP between 2004 and 2008) fuelled a rapid increase in consumption and an even larger increase in the private investment share of GDP, with most of this coming as construction of residential property. Domestic absorption by 2008 had reached 151 percent of GDP, with private absorption at 128 percent. Consumption rose in real terms by an average of 6.7 percent over the period 2004-2008 (see Figure 1). Offsetting a gradual decline in terms of trade from an increased price of imported energy and shocks to agricultural exports, the increase in disposable income propelled growth in imports of goods and services, leading to a deterioration of the current account deficit from 1.8 percent of GDP in 2004 to 16.3 percent by the end of 2008. At the same time, strong currency appreciation pressure from foreign exchange inflows and an improvement in Moldova’s investment climate brought about a sharp rise in private investment expenditure, especially from 2006. Investment was partly financed by the banking sector - domestic credit to the private sector rose by over one third from 27.5 percent of GDP in 2006 to 36.9 percent of GDP in 2007 (36.5% in 2008), as a result of the enhanced growth of loan demand from the industry and trade sectors. Net foreign direct investment became an important source of financing for investment in 2007 and 2008, reaching 12.2 percent of GDP in 2007, and remaining at 11.7 percent in 2008 compared to just 5.6 percent in 2004. While 2009 data are still being finalized, early indications - discussed below - are that foreign direct investment collapsed to just 1.6 percent of GDP in 2009, whilst remittances ended the year down 37.4 percent on 2008 levels.
Table 1: Main Macroeconomic Indicators, 2004 - 2009
Nominal GDP, MDL billion Real GDP, % growth Consumption, % growth GFCF, % growth Export, % growth Import, % growth
Real Effective Exchange Rate (2000=100) GDP deflator, % growth CPI, % eop growth
Current Account Balance, % GDP Remittances, % growth in USD International Reserves (USD Millions) Terms of Trade, % change FDI (% GDP)
Budget Revenue, % GDP Budget Expenditures, % GDP Fiscal Balance, % GDP Credit to Private Sector (% of GDP) External Debt, % GDP PPG Debt, % GDP
2004 32.0 7.4 2.0 8.2
11.0 3.6
106.8 8.0
12.4
-1.8 49.8
470.3
5.6
35.6 35.1 0.5
21.2 73.2 26.8
-1.7
2005 37.7 7.5
13.8 14.4 14.7 23.4
109.1 7.2
11.9
-7.6 31.7
597.4 6.9 6.3
38.6 37.0
1.5 23.6 70.8 22.4
2006 44.8 4.8 8.0
21.3 1.1 9.1
102.9 13.4 12.7
-11.4 28.8
775.5 -16.8
6.9
39.9 40.2 -0.3 27.5 72.9 20.7
2007 53.4 3.0 3.9
25.5 10.5 14.6
101.9 15.9 12.3
-15.3 26.8
333.7 -5.9 12.2
41.7 42.0 -0.2 36.9 71.1 16.2
2008 62.9
7.8 5.7 2.2 3.4 2.9
110.2 9.7
12.7
-16.3 26.5
1672.4
11.7
40.6 41.6 -1.0 36.5 67.9 12.9
-2.5
2009 60.04
-6.5 -6.0
-3 1.3 -7.8
-19.3
92.1 2.5 0.0
-8.1 -37.4 480.3
-0.7 1.6
38.7 45.5 -6.8 36.2 89.5 19.6
Source: National Statistics, IMF, World Bank, and Moldovan authorities; (Real Efective Exchange rate 100 shows a reduction in competitiveness relative to base year)
4
@re 1: Average Real Percent Change in GDP Components (by Expenditure_) 2004-2008 _I_ -. l_ll - - --“- ___ - I -I_-
16 ?. _-_. _ _ ---___-____--I_-___. _L_p-F ”___ I __~~-__ - I
14
12
10
a
6
4
2
0
GDP Gross fixed capital Consumption Imports Exports formation
burce: Moldovan Authorities.
1 1. Growth was driven by remittance-financed consumption and investment from 2004 to 2008, which together widened the balance of trade. Whereas real exports grew faster than real GDP during the period (figure l), export growth was mostly in services and non-traditional exports. Service exports closed the gap on merchandise exports, growing from one third of merchandise exports in 2004 to two thirds by 2008. However, service export growth was almost wholly offset by growth in service imports. Traditional primary exports (wine, agriculture and livestock based products) fell sharply as a share of GDP in the decade 1998-2008 (figure 2), but especially in the 3 years following Russia’s export ban on Moldovan bulk wine in 2006. As discussed below, new Moldovan regulations on the wine sub-sector are seen as having accentuated the impact of the wine ban on the sector. Private investment expenditure outpaced that of consumption, making significant contributions to economic growth - Gross Fixed Capital Formation (GFCF) grew by an average 14.3 percent between 2004 and 2008, compared to an average of 6.7 percent real growth in final consumption. Investment and GDP statistics both suggest that private investment was largely in residential property, as households used remittances to build and buy housing. On a sectoral basis, the service sector accounted for all of the increase in value-added growth between 2004-2008, as both agriculture and industry declined on average. Real estate was the main sectoral contributor to annual real growth in gross fixed capital formation, accounting for well over one third of total real growth in GFCF between 2004 and 2007. National accounts data also suggest an investment price boom - the fastest growing deflator between 2004 and 2008 was the private investment deflator. The second fastest growing was the public consumption deflator.
5
Figure 2: Exports of Goods As Share of I Figure 3: Public Current Spending % GDP GDP 1998 -2008
-Total ----- Non-primary ---=I Primary Exports
" . - " - - ~ ~ 50.0% .
40.0%
30.0%
20.0%
. . . . I . . . . . . ... Publiccurrent Spending - Public Consumption
40% ~~ lllllll___l- -
2004 2005 2006 2007 2008
12. The government maintained fiscal balance with a modest deficit of 1 percent of GDP in 2008. Fiscal balance was driven more by increasing revenues than by expenditure restraint, since fiscal prudence should have generated budget surpluses during the period of high growth. Instead, between 2004 and 2008 growth in Government spending in Moldova kept pace with GDP growth. Buoyant revenue performance was driven mainly by robust VAT on remittance- funded imports. Tax revenues crept up by 3 percentage points of GDP between 2004 and 2008. Between 2005 and 2008, the cumulative growth in wages and capital expenditure exceeded those of tax revenue components. Perhaps most troubling, national accounts data show that between 2004-2008 public consumption rose by 5 percentage points of GDP. Total public current spending increased in this period by 4 percentage points of GDP (see Figure 3). Thus although there was balance in the fiscal accounts before the crisis, the public sector was expanding on the back of buoyant private foreign inflows. As noted in paragraphs 18 and 20, this deteriorating fiscal trend was greatly accentuated in 2009 when the former Government substantially raised public sector wages and pensions.
13. The exposure of the private sector to external financing rose sharply between 2004 and 2008. The private sector's external borrowing increased from 4 percent of GDP in 2004 to 14 percent of GDP in 2008 - a high share of external debt by international standards. While banks' debt rose by nearly 700 percent within the period to USD 578 million in 2008, the bulk of private sector debt is non-bank consisting of trade credits, arrears, and other payment liabilities mostly from the imports of natural resources. The payment liabilities were generated as a result of heating tariffs being set below cost recovery levels in Chisinau, which led to arrears from the transmission and distribution company to the power generator, who in turn ran up arrears to the gas importer.
'
14. The strong economic growth associated with rising real incomes played a critical role in the rapid reduction in poverty. According to the poverty assessment report and the recent poverty updates, poverty in Moldova fell from 30.2 percent in 2006 to 20.4 percent in 2008. Extreme poverty also declined rapidly, falling from 4.5 percent in 2006 to below 2 percent in 2008. The depth of poverty, measured by the poverty gap, also fell from 7.9 percent in 2006 to 5.2 percent in 2008. The level of inequality, as measured by the Gini coefficient
6
remains around 30 percent, which is relatively low by international standards, but average by ECA regional standards. The decline in poverty was largely concentrated in urban areas and thus poverty in Moldova is becoming increasingly a rural phenomenon - in 2008, 73.2 percent of the poor lived in rural areas.
Impact of the Global Crisis
15. The downturn in Moldova?s economy in 2009 is estimated to have increased the incidence of poverty in Moldova by 5 percentage points to 32 percent (see Figure 4). These staff estimates are derived from simulations that use the current macroeconomic projections for 2009, and project the impact of a fall in all households? consumption in line with the decline in private consumption. These projections suggest that the poverty rate in Moldova will remain above the 2008 level until at least 201 1.
Figure 4: Projected Impact on Poverty (2009-2013)
1 i i 35.0 , ?
33.0 { - E 31.0 -*
g29.0
.- a
P 1 27.0 *
23.0 7 21.0
1 h 17.0 ~
1 15.0 I _ _ _ _ ___-- x _ __-_ _ _ _ _ _ _ ~ _ _ * ____ ~~ ____--?- ?? ---.-____
2008 2009 2010 2011 2012 2013 11_1
Note The 2008 poverty rate is estimated from the household survey, using the naGonal poverty line and adult eqL valent scales to nrliiict cnnriimntinn The niimherq for 70119-17 are nrniertinns iiqinv the nrivate cnnwmntinn ernwth ratec; from Fieure 14
16. The global crisis led to a sharp decline in GDP, exposing the unsustainable nature of remittance-financed and import-intensive economic growth. The effects of the global meltdown were transmitted to Moldova in the fall of 2008, as the recession hit major trading partners - Russia, Ukraine, Romania, and Western Europe, leading to sharp falls in remittances and export earnings. Remittances drastically declined - by 37.4 percent (year on year) in 2009 to 20.8 percent of GDP (from about 30 percent of GDP in 2008, see Figure 5) , leading to a collapse in domestic demand. As a result, consumption expenditure shrunk by 6 percent (year on year) by the end of 2009. The volume of imports into Moldova also dropped by around 20 percent (year on year) in 2009, much faster than the 7.8 percent fall in exports (see Figure 6) thereby narrowing the current account deficit to US $439 million in 2009, from US $987 million in 2008. Similarly, investment expenditure was badly hit. By the end of 2009, GFCF had dropped by 31.3 percent from the previous year. The net flow of FDI also fell sharply during 2009, from US $707 million in 2008 to just US $86 million (see Figure 7).
7
Figure 5 : Remittances %Growth and Value Remittances - (Annual Rolling) ------ Remittances Growth (% YoY) - Remittances (% COP)
USD Millions --I 2000
burce: Moldstat, IMF, and Bank staff calculations.
Figure 6: Changes in Exports and Imports, and the Current Account Deficit (CAD) % Growth and Value
CAD -_---- Export Growth (YoY) Import Growth (YoY)
400 --I"-. -.
17. The slowdown in investment, remittances, and exports put pressure on the exchange rate. As foreign exchange inflows dried up and the Moldovan Lei came under devaluation pressures in late 2008, the National Bank of Moldova (NBM) intervened in support of the Lei, resulting in the loss in international reserves of about 60 percent from the September 2008 peak to US $1.1 billion by the end of March 2009 (see Figure 8). The fall in international reserves is also traceable to the 8 percent points lowering of the required reserves of freely convertible currencies of banks - a measure taken by monetary authorities to ease pressure on the banking sector. From April to the end of December 2009, the Lei depreciated gradually vis-a-vis the US dollar and the euro by 12.2 percent and 22.1 percent respectively, while international reserves increased to USD 1.48 billion due primarily to the IMF's SDR allocation of US $1 85 million.
Figure 7: Foreign Direct Investment % Growth and Value
II Flow of FDI (net) - annualized (USD Million) USD
-Flow of FDI (net) . annualized (% GDP) Millions 14% , - 900
800 700
r 600 8% 500
1 400 6% 1 300 4%
200 100 2%
0
12%
I
i
Source: IMF and Bank staff calculations
Figure 8: Evolution of Exchange Rates (left axis) and International Reserves - Gross International Reserve (USD Millions)
-*---- Nominal MOYUSD Exchange Rate (eop) - Nominal MDUEUR Exchange Rate (eop) USD
Millions 20 I"--_- -- 2000 r-----
1500 -1- - 15
I - 10 - 5
- 0
18. The recession widened the fiscal deficit. The fall in remittance-financed consumption and imports led to a serious drop in VAT receipts, import duties and non-tax revenues, causing fiscal revenue to fall by 8.8% in 2009 from a year earlier. Against this loss in revenues, wage and pension spending increases and social payments caused recurrent public expenditure to rise by about 5 percent by December 2009. Consequently the fiscal deficit increased from 1 percent of GDP in 2008 to an unprecedented 6.8 percent of GDP by the end of 2009.
8
19. All sectors in Moldova's economy contracted sharply in 2009 as the impact of the global meltdown weighed heavily on the real sector, putting downward pressure on prices and jobs. The 6.5 percent contraction in GDP in 2009 (see Figure 9), can be linked to the 22.2 percent fall in output in the industrial sector3 during the year. Several sectors - including mining, agriculture and construction, recorded declines in output ranging from 12 percent to 60 percent during 2009. Resulting job losses have pushed annual unemployment rates to 6.4 percent, from 4 percent at the end of 2008 (see Figure lo), although with minimal effect on the growth of real (total) wages. Deflationary trends also emerged as a result of falling demand and output - annual inflation dropped to -0.6 percent at the end of the fourth quarter in 2009, from around 11 percent in September 2008.
Figure 9: GDP growth:- Percent Change Year on Year
I Source: MoldStat and Bank staff calculations.
Figure 10: Real Wage Growth and Unemployment Rates - Real Wage Growth (annual rolling) ------ Unemployment Rates (Annual Rolling) 15% r - ~ - ~ _______ I__ 111"" __I".
20. In contrast to the private sector, wages in the public sector are rising. Workers in the private sector have seen a significant decline in their real incomes in spite of disinflation. Annual growth in real wages in key sectors like agriculture, construction, and wholesale and retail trade (which together account for about 55 percent of the pre-crisis total labor force) has fallen dramatically since the onset of the crisis - construction workers have seen an 13.1 percent pay cut on average. Total employment in these sectors combined fell by 8 percent (nearly 60,000 jobs) during 2009, compared with the previous year. In contrast, public sector wages are growing fast: average real wages in public administration and education sectors increased by around 14.1 percent and 28 percent in 2009 - a source of concern for the widening budget deficit.
21. The banking sector's stability has come under severe strain as a result of the crisis and profits have been considerably hit. At the end of September 2008, the quality of the loan portfolio of the banks was relatively high - only 4.6 percent of loans were classified as non- performing, and loan loss reserves were almost at par i.e. 4.5 percent of total loans (see Table 2). However, a rapid deterioration in loan quality occurred throughout 2009. The stock of NPLs stood at 16.3 percent of total loans while loan loss provisions lagged behind at 9.65 percent at the end of 2009. While banks have significant buffer to absorb some risks (i.e. capital adequacy ratio average about 32 percent, far above the minimum requirements of 12 percent), NPLs are expected to rise further, raising credit risks within the economy. The drop in remittances and early runs on deposits also exerted some pressure on liquidity - within a year of the
Growth in the industrial sector has stalled since 2005 and the value of output has been dropping, owing to various shocks, including energy price increases, drought, and the Russian ban on Moldovan exports.
9
commencement of the crisis in September 2008, total deposits in the banking system had fallen by about MDL 3 billion (or 11 percent) to MDL 24.9 billion but recovered strongly to MDL 26.4 billion by December 2009. Bank profits have also fallen by more than 100 percent, i.e. returns on assets and equity turned negative at the end of 2009.
22. Moldova is experiencing a credit crunch. Banks have responded to higher credit risks and falling but ample liquidity by curtailing credit to the economy. While credit growth peaked around January 2008 prior to the onset of the crisis, growth in credit to households and private firms fell into negative territory for the first time in 2009 (see Figure 11). Risk-averse banks have kept lending rates high in spite of falling inflation. Interest rates on MDL loans fell 400 basis points from a year earlier to around 18.6 percent in December 2009 whereas annual inflation dropped 900 basis points to -0.6 percent within the same period. The real cost of borrowing has therefore increased, making access to loans for working capital and investment expensive for firms compressing demand (see Figure 12), and prolonging the “credit crunch” which presents significant risks to economic recovery.
Table 2.Moldova: Selected Indicators of the Financial Sector
09.2008 12.2008 03.2009 06.2009 09.2009 12.200‘
Capital adequacy
Regulatory capital in % risk-weighted assets 30.8% 32.23% 32.83% 32.75% 3 1.66% 32.28%
Total Capital to Assets 16.31% 16.92% 18.92% 17.65% 17.12% 16.5%
4sset quality
NPLs to total loans 4.58% 5.15% 8.04% 10.47% 14.6% 16.3%
Loan loss reserves to total loans 4.49% 4.85% 5.62% 6.57% 7.86% 9.65%
FX loans to total loans 40.89% 41.49% 41.47% 45.3% 45.04% 46.31%
Profitability
Return on Assets 4.04 3.49 1.41 0.47 0.16 -0.39
Return on Equity 23.31 19.91 7.53 2.51 0.87 -2.12
Liquidity
Liquid assets to total assets 31.43% 30.63% 29.27% 31.46% 34.53% 38.27%
Loan to Deposit Ratio 89.61% 91.08% 95.6% 92.55% 88.6% 84.9%
Foreign exchange to total deposits 46.54% 46.41% 53.39% 56.56% 54.56% 53.59% ource: National Bank of Moldova
10
Figure 11: Evolution of Credit Growth to the Economy (% Year-on-Year)
bource: National Bank of Moldova and Bank staff calculations.
Medium Term Economic Prospects
Figure 12: Inflation and Interest Rates
+Average Lending rate (foreign currency) -Average Lending Rate (local currency)
% +Annual Inflation Rate ~-
23. In spite of the recent downturn, medium-term economic growth is expected at 5 percent per annum. But it will likely take about 4 years for the poverty rate in Moldova to return to the 2008 level. With the gradual recovery of external demand and remittances, investment is expected to grow by 6.8 percent in 2010 and at a lesser rate in subsequent years (see Table 3). GDP growth is projected at 2.5 per cent in 2010, recovering to an average of 5 percent per annum by 2012. Aside from real investments, exports are also expected to be an important driver of growth once (i) trade partners recover from the crisis, and (ii) structural reform and liberalization in the business environment propel growth of services. Real export growth is projected at 5 percent by 2012.4
24. The NBM is expected to adopt price stability as the primary objective of monetary policy. In reversal of the pervasive disinflation in 2009, consumer price inflation is projected to rise to 8.4 percent by end-2010 on the back of price pressures in the global energy market, recovery in demand, and monetary policy easing (if necessary). The focus on inflation targeting is expected to keep inflation low at around the 5 percent mark in the medium term. To this effect, the NBM has started (from January 2010) to publish quarterly reports providing analysis of monetary policy performance and inflation forecasts.
25. The current account deficit is expected to narrow marginally to around 10 percent of GDP in the medium term, as export recovery outpaces growth in imports. While expectations for FDI inflows and higher energy prices may marginally widen the deficit position in the short term, it is projected that the increased competitiveness of Moldova's exports coupled with improvements in the terms of trade should gradually narrow the deficit to below 10 percent by 20 1 3.
These assumptions are conservative on the rebound in remittance growth, because at this stage little is known with certainty about whether migrants have returned home to Moldova since the crisis.
11
Lame 3: ivioiaova: ivieuium-ierm Economic rrojeciions Ior LUWY - L w i J .
2010 2011 2012 2013
Nominal GDP, MDL billion 65.4 71.7 78.9 86.4
Real GDP, % growth 2.5 4.0 5 .O 5.0
Consumption, % growth 1.8 3.2 4.0 3.6
Fixed Investment, % growth 6.8 7.1 7.8 7.3
Import, % growth 3.7 4.1 4.5 3.9
CPI, YO eop growth 8.4 5.5 4.4 4.3
Export, Yo growth 4.0 4.5 5 .O 5.2
GDP deflator, % growth 6.5 5.3 4.9 4.2
Current Account Balance, % GDP -9.1 -10.0 -9.7 -9.1
Remittances, % growth in USD 6.0 5.0 4 4
Terms of Trade, YO change -3.7 -1.8 1.4 1.8
Budget Revenue, % GDP 39.6 41.1 41.3 42.5
Budget Expenditures, % GDP 45.4 45.1 43.3 43.0
Fiscal Balance, % GDP -5.8 -4.0 -2.0 -0.5
External Debt, % GDP 74.8 77.9 79.9 79.0
PPG Debt, YO GDP 32.7 34.9 34.7 33.1
Source: IMF and Bank staff calculations as at end April 2010. IMF SBA (net credit), % GDP 1.9 2.6 2.3 -0.3
26. Budget consolidation and a tighter fiscal policy are expected in the coming years and are the cornerstone of the IMF-supported program. Expenditure restraint is central to the Economic Stabilization and Recovery Program and to the IMF-supported program (Table 5 shows the fiscal correction which has already been taken into account in revising the 2009 budget and in formulating the 2010 budget). The fiscal adjustment program as set out in the Memorandum of Economic and Financial Policies (MEFP) with the IMF lays out the strategy for the reduction of the deficit. The IMF program for 2010 targeted an adjustment in the structural fiscal balance of 2 % percent of GDP in 2010. In the short term, the rationalization of current expenditure through (i) postponing all wage increases for 2010 until 2012-13, generating savings of MDLl.8 billion, (ii) freezing budgetary sector employment, yielding savings of MDL 400 million, (iii) reducing agricultural subsidies by MDL 350 million; (iv) raising excise tax rates to increase revenue by MDL 500 million, and (v) raising the VAT rate on natural gas from 5 to 6 percent to achieve a gain of about MDL 200 million is expected to reduce the general government deficit to 5.8 percent in 20 10. Longer term measures are expected to drive down the deficit to 4 percent in 201 1, and to a manageable 2 percent of GDP by 20 12.
27. The level of public debt is projected to peak in 2011 as the result of IMF financing, but to remain sustainable. Figure 13 presents results of debt sustainability stress tests. In the base case scenario (see also Table 3), public debt (13.1 percent of GDP in 2008) is expected to rise sharply as a result of the on-going economic crisis and rising fiscal deficit, reaching 34.9 percent by 201 1, Moldova has an unusually large private debt (the legacy of heating arrears) hence external debt stock is projected to reach 79.9 percent of GDP by 2012. Total external debt service will remain high at 19 percent of exports of goods and service until 2014. In a
12
pessimistic scenario, a significant depreciation of the exchange rates is expected to push public debt around 40 percent of GDP by 201 1. (Refer to Joint Staff Debt Sustainability Analysis IDA/SecM2010-0060).
Table 4: Moldova: Financing requirements and Sources in 2010 - 2013
2010 2011 2012 2013
Financing Requirements, USD million 1865 2012 2151 2330
Current Account Deficit 494 569 577 572
Long-Term Debt Amortizations (excl. IMF) 337 342 365 438
Short-Term Debt Amortization 1234 1236 1314 1434
Other short-term capital outflows -199 -135 -105 -1 14
Financing Sources, USD million 1865 2012 2151 2330
FD and portfolio investment (net) 207 27 1 310 3 89
Capital grants 42 44 46 48
Long term disbursements (excl IMF) 529 467 448 479
Short term debt disbursements 1236 1314 1434 1609
Reserve Changes of Monetary Auth. -249 -232 -223 -173
I IMF Credit (net) 101 147 136 -22 Source World Bank and IMF staff calculations as at end April 2010.
28. These macroeconomic projections are consistent with the Government’s three year program with the IMF, which the World Bank team considers provides a credible medium term macro framework. The Fund supported program hinges on reversing the fiscal deterioration that occurred in 2008-9, rebuilding foreign exchange reserves whilst managing inflation, and ensuring financial stability through early detection and strengthening the framework for bank rehabilitation and resolution.
Figure 13: Public Debt Sustainability Analysis (percent of GDP)
%of GDP - Base Case
Key variables are at historical averages
I” Permanently lower GDP growth 15 ; ~~
I Source: Moldstat, WB staff projections.
29. The outlook for household poverty is set to improve gradually (Figure 4 above). Using these medium term economic projections, households’ consumption per capita in real terms will decline by close to 8 percent in 2009 (see Figure 14), but will marginally increase by
13
Figure 14: Projected Real GDP and Consumption Growth Rates, 2009-13
8.0 7.2
6.0
4.0 ' 3.0
2.0 ' I
0.0 !
2007 -2.0
-4.0 ,
-6.0 1
1.8 percent in 2010. Following the decline in consumption, the poverty headcount is projected to increase from 27.4 in 2008 to 32.4 percent in 2009 i.e. about 210,000 people will fall into poverty. The majority of this impact is expected to be in the rural areas. The expected decrease in remittances of 25-50 percent could increase poverty by 2 to 4 percentage points (Box 1). In other words, the fall in remittances will comprise 1/3 to 1/2 of the overall impact of the crisis on poverty. Only by 2012 is the level of poverty in Moldova expected to return to pre-crisis levels.
-8.0 ~
-10.0 1 -7.8
H Real growth rate Private Consumption
5.0 5.0
2010 2011 2012 2013
Box 1: Impact of the Crisis on Households
a could be enough to
14
111. THE GOVERNMENT’S STABILIZATION AND ECONOMIC RECOVERY PROGRAM AND PARTICIPATORY PROCESSES
30. In October 2009 the new Government immediately launched their “Economic Stabilization and Recovery Plan for 2009-2011”. The Plan includes a sequence of measures which aim to; (a) cut inefficient and low-priority public spending; (b) help businesses to withstand the economic slow-down and emerge less burdened by public administrative requirements; (c) protect vulnerable households from a drop in consumption due to the recession and fiscal contraction. The three priorities on which the Plan is built are; (i) Stabilization and streamlining of public finance; (ii) Economic recovery; and (iii) Securing an efficient and fair social protection. In consultation with the IMF, Government corrected the 2009 Budget in early December. The macro program agreed with the IMF focuses primarily upon fiscal policy measures to reverse the fiscal deterioration which occurred in 2008-2009 and to restore the fiscal deficit to a sustainable level by 2012. Fiscal measures in the macro program are fully consistent with policy recommendations from the World Bank’s Public Expenditure Review, The dialogue under this DPL is therefore strongly linked to pillars (ii) and (iii) of the Government’s Plan.
A. STABILIZATION AND STREAMLINING OF PUBLIC FINANCE
3 1. The Government’s stabilization pillar hinges on correcting a sizeable fiscal imbalance, whilst protecting public investment and social spending. The aim under the IMF program is to gradually bring the deficit down to 2 percent of GDP by 2012. However, sizeable correction has been achieved both prior to and under the IMF program agreed in January 2010. Relative to a counterfactual of unchanged policies in 2009 and 2010 which would have allowed the deficit to reach almost 14 percent of forecast GDP, fiscal measures adopted by Government (excluding new budget support grants) narrowed the deficit by some 5.8 percentage points of estimated GDP in 2010 (Table 5). With an increase in budget support grants, this left the IMF’s projected fiscal correction by end-2010 at an impressive 7 percentage points of GDP, but it still left a deficit estimated at 6.8 percentage points of GDP. The IMF program target for 201 1 is 5 percent of GDP - a further correction of 2 percentage points of GDP. Preliminary figures for end-2009 and the first quarter of 2010 suggest the Government may in fact exceed this fiscal correction.
32. The Government plan also recognizes key fiscal challenges of a structural nature that must be tackled in the medium term to restore fiscal sustainability. These involve broadening the tax system to avoid excess reliance on border taxes and VAT on imports, shifting expenditures in line with Moldova’s aging population, and freeing up ‘fiscal space’ for infrastructure maintenance. Others relate to re-orienting public spending in support of economic recovery and social protection. The Government’s fiscal corrections will target a reduction in public employment, starting in the 201 1 budget with a reform of educational institutions. The World Bank contributed extensively to both the short-term fiscal corrections and the Government’s medium term structural agenda for fiscal correction through the “Policy Notes” publication and through several background papers prepared under the 2009/10 Public Expenditure Review which were shared with Government and the IMF team.
15
Table 5: Fiscal Measures Taken in the 2010 Budget Relative to Counterfactual of No Fiscal Correction
Total correction without grants Total gap filled with grants (relative to counterfactual)
Fiscal Policy Measure
5.8 7.0
Revenue Increase Excise Taxes to levels of neighboring countries Raise VAT rate on natural gas from 516% Reduction in income tax from reduced public sector wage bill Increase in budget support grants over 2009
Postpone and reduce scheduled wage increases, fkeeze public employment, and eliminate 4,000 staff positions Apply 20% average reduction in budget allocations for goods and services whilst protecting high priority sectors Reduce overall value of agriculture subsidies, esp. for larger farms
Expenditure
Magnitude of Fiscal Impact (YO GDP)
0.7 0.3 -0.3 1.2
3.5
1.1
0.5
33. The most significant structural fiscal 1 requirement is also the most politically challenging: in the coming years, Moldova needs to close schools, retire teachers and consolidate the school system. Student numbers are declining. There were 26 percent fewer students in 2007/08 compared to 2002/03. By 2014 there will be yet 15,000 fewer students. This combines with high numbers of poorly paid teaching and non-teaching staff to make the school system inefficient. The pupil teacher ratio is very low, averaging 13 pupils per teacher in 2007- 08 compared to 18 on average in Europe. In addition, 37 percent of school employees are not teachers. Running schools is costly; most have excess space but insufficient non-salary budgets to stock and maintain the space they use. Some schools need to close, but since most of these are rural, school ’optimization’ cannot happen without safe transportation to neighboring villages. Significant numbers of teachers could be retired under this process, but this would affect Government’s pension liabilities. The overall pension system does not yet create a disproportionate fiscal burden in Moldova, but this is partly because pension replacement rates are the lowest in Europe (at 27.4 percent of gross wage and 35.1 percent of net wages). Collection and compliance rates for pensions are low. The Bank is assisting the authorities to evaluate experience with piloting school optimization in two Districts, with a view to rolling out the program more broadly.
34. Through the 2010 Budget, Government is taking short-term measures for fiscal correction whilst improving the quality of spending on programs to support economic recovery and social protection. Road maintenance received a sizeable increase compared with the approved Budget for 2009. Overall funding in the Budget for agricultural subsidies was reduced, with inefficient and inequitable subsidies on VAT inputs and outputs being abolished. An increased share of the new agriculture subsidy budget now supports investment (although in 2010 Government must first clear unpaid subsidies due in 2009). The Budget includes measures to increase funding and improve the eligibility formula for targeted social assistance, whilst freezing levels and entrants for other nominal assistance schemes without a break in benefits. At the end of December 2009, Government reconstituted a newly independent energy regulator (ANRE) whose first new task was to set the heating tariff for the 2010 heating season at a rate which would cover operating costs. The 2010 Budget also provides for an increase in overall
16
public capital investment spending by 26 percent over 2009. Along with supplementary financing for the World Bank-supported Social Investment Fund (SIF), this should allow an increase in job-creating small scale capital works and road projects, although challenges remain over how to ensure this budgetary increase is effectively used.
35. The stabilization program allows for monetary easing during 2010, and strengthens financial sector monitoring and the framework for bank resolutions. With headline inflation at -1 -6 percent year-on-year, well below the National Bank’s target, and with monetary policy being increasingly focused on managing inflation instead of exchange rate stability, the authorities have decided to ease monetary policy during the start of 2010. This measure along with a clear re-statement of monetary policy objectives by the National Bank of Moldova is expected to help bring down the very high risk premium reflected in commercial bank lending rates and interest rate spreads. The banking sector’s capital-asset ratios remain safely above the statutory ratio of 12 percent. To ensure continued stability in the banking sector, the National Bank of Moldova is conducting monthly stress tests and has initiated an independent diagnostic study of bank portfolios. The National Bank is amending the legal framework to allow it to intervene in problem Bank’s after the failure of one bank (Invesprivatbank) in June 2009.
.
B. ECONOMIC RECOVERY
36. The Government’s economic recovery program presents a credible and extensive list of long-awaited reforms to stimulate domestic and foreign investment and to increase Moldova’s exports. Implementation has started strongly, with many reforms to simplify, liberalize and de-regulate business already having already been implemented. These reforms recognize that the past model of remittance-funded and consumption-led economic growth in Moldova is not sustainable, and that fbture growth requires improved productivity, export competitiveness and investment. Government also recognizes that in the absence of a significant fiscal or monetary policy stimulus, Moldova needs to stimulate private investment and exports to shorten the recession and kick-start the economy. Since Moldova is a much more heavily regulated economy than many of its competitors, there is substantial scope to provide a stimulus through policy reforms. Despite the impact of the global downturn on their export markets, existing Moldovan businesses - and especially exporters - can achieve significant cost improvements through Government implementing basic market liberalization, and through easing the administrative burden on firms from Government regulations, licensing, certification and reporting procedures. This is why the recovery component of the Plan (and the Action Plan for excluding administrative constraints to the business environment see Annex 4) identifies an extensive list of short-term actions to liberate businesses from public controls (Annex 4). Over time, reforms in the recovery plan to improve the efficiency of energy and telecommunications sectors, to make markets more competitive and imported goods cheaper, and measures to improve the competitiveness of the banking sector will add to these more direct measures to make Moldova a lower cost economy for exporters and private investors.
37. To lay foundations for foreign direct investment and domestic investment, Government is looking to improve the regulatory environment in the energy sector. Government established an independent regulator (ANRE) to regulate tariffs at commercial rates (which addresses quasi fiscal costs). This is seen as key to fiscal sustainability in the medium term. It is also a first step in potentially attracting private investment in the energy sector, where there is interest from private companies in electricity generation. The World Bank
17
staff is discussing options for a debt work-out for the gas company Moldovagaz and the heating distributor Termocom as part of a plan to restructure the energy sector and attract much needed investment. Private operators have already expressed an interest in purchasing the assets of such a merged company. Together with better regulation of the sector and better energy efficiency use through ratification and implementation of the new energy efficiency law, these measures should improve the efficiency and quality of the energy sector. In the telecommunications sector, private telecommunications companies have now connected their fiber optic networks directly to Romania and thence the EU. The Government has removed policy constraints, and has issued directives to allow this investment to proceed. It is now working to simplify the approvals process to enable future cross-border connections. This has ended the de facto monopoly of state telephone company Moldtelecom on external communications, which led to market inefficiencies. The measure, when combined with the telecommunications regulator ANRCETI’s moves to strengthen competition regulation in the sector, should help lower costly external communications, and improve the quality and Internet access. Not only would this reduce costs for existing export businesses, but it should also stimulate the expansion and opening up of new ICT businesses, including service exporters.
38. To stimulate exports, Government has first targeted the wine industry. Wine has long been Moldova’s main export. The sector has strong potential in traditional CIS markets as well as new EU markets, and can have strong multiplier effects through rural Moldova, so long as the policy environment improves. Government has therefore taken steps to remove barriers to exports, simplify the certification procedure, and cut the number and cost of certification procedures for wine exports, whether in the form of bulk wine, bottled wine, or grapes and vines.
C. ENSURING AN EFFICIENT AND FAIR SOCIAL PROTECTION
39. The ESRP aims to support vulnerable groups through more efficient channeling of social assistance and through promoting social inclusion. Immediate actions under this social protection component of the Government’s program aim to: (i) prevent unpredictable pension reappraisals based upon monthly payment increases, (ii) implement measures to remove monopolies in the provision of socially sensitive products, (iii) monitor the prices and market conditions of “goods of social importance”, (iv) start up projects from external credits for social infrastructure rehabilitation, (v) increase the tax allowance for dependents to ease the burden on large families, and (vi) increase monthly allowances for child care.
40. Expand targeted social assistance. To improve the targeting of the social care system for disadvantaged families based on means-testing, Government intends to gradually replace the nominative compensation system and scale up targeted social assistance. In the 2010 Budget, Government announced that they would freeze rates of nominative compensation rates and prevent new entrants to nominative compensation schemes, starting on 1 January 2010. To make the means tested scheme more attractive to new applicants, Government increased under the 2010 Budget, the guaranteed minimum income under the scheme from 430 to 530 Lei per month. For the 2010 heating season, Government has also provided and additional flat rate compensation for heating tariff increases of Lei 130 through the targeted scheme.
41. Expand coverage of social insurance. Under the ESRP, the Government intends to improve the fairness and coverage of social insurance for poor people. Measures include; extending the obligation to pay for mandatory social insurance to all workers in Moldova;
18
removing pension benefits for wealthy individuals who retain the position that made them wealthy in the first place; unifying retirement age and the way pensions are calculated for all groups of pensioners; and reviewing the feasibility of modernizing to a two-tier pension system comprising a base and insured pension. The ESRP also announced measures to improve the coverage and affordability of the mandatory healthcare insurance, to encourage public private partnerships in health service provision, and to extend the availability of ‘compensated’ medicines to include children under 14.
42. Help the unemployed and returning migrants to find work and re-train. Another component of the ESRP on social protection aims to better inform the population about labor market demand and supply, including for migrants getting back home after having lost their jobs abroad. Immediate actions include scaling up retraining courses for the unemployed and for returning emigrants and setting up (with Bank support under the SIF) short-term public works. Medium term actions aim to expand unemployment benefits to include agricultural workers and migrants.
Participatory Process
43. The new Government immediately consulted the public about the severity of the crisis and corrective measures needed within days of taking office. Before announcing their intention to negotiate a reform program with the IFIs and seek loan financing, the Prime Minister, Minister of Economy, and Minister of Finance each briefed the public at press conferences on the severity of the fiscal situation, the impact of the crisis on economic growth and the balance of payments, and on the need for corrective policy measures.
44. The Bank also consulted widely on recommendations made in the AAA which supported the design of this operation. A joint press conference was held between Government and the World Bank and IMF to discuss the “Policy Notes” publication and the measures within them being recommended by the international community. These notes were posted on websites and widely discussed by chat groups on the World Bank Country Office’s popular Facebook page.
45. Government then led participatory consultations on the measures supported by the DPL under the ESRP.. The Economic Stabilization and Recovery Plan was developed by a preparation committee made up of members of trade unions, private sector groups, and a number of NGOs, civil society leaders and international development agencies. Their views were incorporated in the design of the Plan through the committee’s working group meetings and wider consultations. The preparation of the document was led by the Deputy Prime- Minister, Minister of Economy Valeriu Lazar and developed by the Committee following extensive participatory discussions between sector ministries, their stakeholders, and Moldova’s development partners. For the first time in Moldova’s history a full day retreat bringing together the entire Cabinet, the press, the EU, IFIs and development partners consulted on the country’s crisis response and post-crisis economic growth solutions.
46. At each stage of policy implementation under the DPL, Government has held press conferences to explain the measures being taken. Early in 2010 a Government Decision on transparency established a participatory committee comprising a council of NGO representatives with specific terms of reference to consult on all policies at planning, implementation and evaluation stages. In the case of the most controversial measure -
19
increasing heating tariffs, Government worked with focus groups headed by the Mayor of Chisinau to design compensating measures that would quickly reach the most vulnerable groups. The Minister of Social Protection conducted widespread publicity campaign to raise awareness and enrollment in the new targeted social assistance program, and to explain the reforms to nominative compensation. Press conferences were held to announce the agriculture subsidy reforms, and the granting o f permits to private telecommunications companies to cross the Romanian border with fiber optic links. The Parliamentary working committee on the budget and economy widely discussed reforms to business registration in early readings of the amendments, and with the help of investor groups revised the amendments to further reduce rent-seeking possibilities.
IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM
A. LINK TO THE COUNTRY PARTNERSHIP STRATEGY
47. The Country Partnership Strategy (CPS) of FY09 - FY12 aimed to assist in laying the foundations for inclusive economic growth by addressing three interrelated challenges closely-linked to the objectives of the Government of Moldova’s National Development Strategy (NDS) for 2008 - 2011. These are: (i) improving economic competitiveness to support sustainable economic growth; (ii) minimizing social and environmental risks, building human capital, and promoting inclusion; and (iii) improving public sector governance. DPL support in the areas of agriculture and energy (see policy matrix) are based on technical assistance (TA) activities to assist the government in defining and developing its reform program in these sectors, as set out in Pillar I - “Competitive Market Environment, Stability, and Pro-poor Growth”, of objectives of the CPS.
48. At least one single-tranche budget-support operation within the period was envisaged to support economic recovery. In addition to these broad objectives, the CPS which was prepared at the onset of the crisis and political uncertainty, emphasized the need for flexibility in the lending program of US$45 - $50 million per annum during FY09 - FY12 (depending on IDA’S performance-based allocation system) in response to the impact of the global financial crisis and political uncertainty. With IDA commitments in FY09 backloaded, IDA has been positioned to respond strongly to assist the authorities in mitigating the impact of the crisis in FY 10, with overall IDA commitments, including the present DPO in FY 10 reaching U S 6 9 million.
Link to the Objectives of the Crisis Response Window
49. The case for using Crisis Response Window (CRW) resources to finance this operation is strong. The different components of the program aim for Moldova to stabilize the economy cushion the impact on the poor and stimulate recovery. These objectives are consistent with those of the Pilot Crisis Response Window, in particular with the aim to provide financial assistance to protect core spending to mitigate the impact of the global financial crisis. As described in Part I1 of this document, severe compression of aggregate demand though declining remittances and exports has led to a major loss of welfare, reflected in rising poverty in Moldova. The strong transmission of the crisis to Moldova’s fiscal balance has opened the fiscal deficit which - even under a well-financed IMF program - can only be closed through structural measures in the medium term. To prevent excessive compression of public investment and non-salary expenditures which could prolong the crisis and damage public services,
20
budgetary support is needed in the short-term. Whereas the Bank has front-loaded IDA to respond to the crisis, the provision of CRW resources for Moldova will limit the extent to which the Bank needs to postpone previously planned and much needed IDA-financed investment projects.
B. COLLABORATION WITH THE IMF AND OTHER DONORS
50. The IMF and World Bank maintain close collaboration in Moldova. In October the IMF, World Bank and UNDP presented recommendations to the Government on the pillars of a first draft ESRP at a Cabinet Retreat which was attended by all heads of embassies and development agencies. The Bank has assisted the Fund staff in the design of fiscal stabilization measures through the 2010 PER. The Bank staff also collaborated closely with the Fund on energy sector reforms under this operation.
5 1. Moldova receives developmental funding from several multilateral and bilateral donors and collaboration with the Bank is growing. The Policy Notes that supported the DPL operation’s .dialogue with the Moldovan government were developed jointly with the UN, the IMF, the EU, DFID, and SIDA. The Bank’s team worked closely with the IMF on issues related to short-term fiscal adjustments in the macroeconomic framework. Policy measures under this proposed operation complement the IMF’s structural reform agenda in the Extended Credit Facility and the Extended Fund Facility Arrangements initiated in October 2009.
52. Complementing the IMF and Bank operations, the EU is providing budget support of EUR 50 million to contribute to the sustainable economic development of rural areas, as envisaged under the EU-Moldova Action Plan. The EU’s operation supports priority areas under the National Development Strategy (NDS) 2008 - 201 1 , and the new government’s Anti- Crisis Plan (2009 - 201 1) - (i) enhancing competitiveness, and (ii) regional development, and (iii) gender issues (in conjunction with Swedish SIDA). It will cover policy issues, institutional development, stimulation of business development, regional development, and improvement of public finance management (PFM). On the PFM part, IMF and Bank assessments of their respective operations will be used for performance monitoring and criteria for disbursement.
53. The Millennium Challenge Corporation (MCC), USAID, SIDA, and DFID provide lending and technical assistance operations in infrastructural development and social protection. The MCC signed a US$ 262 million Compact with the Moldovan government in January 2010. The Compact focuses on irrigation sector reform, the reconstruction of irrigation systems, access to agricultural finance, as well as the rehabilitation of a section of the country’s national road network. The DPO’s policy action on the road sector and those of the MCC’s road rehabilitation project are similar. This DPO operation builds upon DFID’s proposed reforms in the government’s Targeted Social Assistance (TSA) program.
54. The EU and the World Bank organized a Consultative Group meeting on Moldova jointly on March 24 in Brussels. The meeting reinforced donors’ overall commitment to support Moldova’s socio-economic development anchored on a strategy of integration and harmonization with the EU. The Government’s strategic framework and request for donor assistance is summarized in a short programmatic document, Rethink Moldova. The Consultative Group meeting raised a total of US$ 2.6 billion in support for the implementation of this strategy over the period 201 0- 13.
21
C. LESSONS LEARNED
5 5 . The formulation of this policy-based operation draws lessons from the preceding PRSCs and earlier policy operations in Moldova, as well as from extensive policy dialogue and analysis in preparation of the policy notes for the new Government. The choice of instrument and balance of responsibilities between the IMF and World Bank programs were informed by experience through the ECA region with crisis response, and through sustained collaboration and dialogue between the Bank and the Fund.
56. The following lessons were applied to this operation:
Policy based loans are useful in crisis response. Previous crises have shown that the impact on poor people can be severe or lasting if the response to crisis results in over- compression of the Government’s fiscal position and hence to pro-poor public services or growth-enhancing infrastructure. Thus, policy based loans, a fast-disbursing instrument, with appropriately designed prior actions can respond effectively to finance a country’s fiscal gap.
a Good public expenditure and Jiscal analysis was critical for designing the crisis response. The public expenditure analysis, as summarized in the Policy Notes, was critical in the crisis response operations of the World Bank and the IMF. Given the relative timing of Fund and Bank programs and the effectiveness of collaboration between the two agencies on Moldova, IMF support focused on the stabilization pillar of the ESRP and the Bank was able to focus its fiscal prior actions on the quality of the fiscal adjustment, concentrating on priorities for economic recovery and social protection, and to focus on the structural agenda for economic recovery. The World Bank team was actively involved in early discussions with the IMF on priorities for fiscal tightening with the Government and the IMF. The fiscal actions for the Fund program were entirely consistent with the findings of the Bank’s public expenditure review work, as noted above.
Government ownership of the policy agenda is key and it is best established through extensive engagement and dialogue. This single tranche operation is fully aligned with the Government’s Economic Stabilization and Recovery Plan which in turn was heavily influenced by technical consultations between the Bank and the new Government on the Bank’s “Policy Notes” publication. More importantly, the Government achieved ownership of the program within the Alliance and with broader civil society through intense consultations. Government also presented the Plan at a joint Government‘Development partner Retreat in October 2009.
Public sector reforms and institutional reforms take time, and are dijjJicult to achieve across-the-board. The experience of PRSCs underscored for Moldova the findings of the IEG public sector evaluation. Centrally driven public sector reforms in Moldova may have generated a substantial understanding of the weaknesses of the public sector, but without yet having a major impact on conditions of service for public sector workers or - most importantly - the size and efficiency of the public sector. Furthermore the change in administration, political uncertainty and the onset of the crisis mean that the time is not right to press for rapid implementation of public sector reforms.
22
An up to date stock of quality analytic work is an essential underpinning for policy- support loans. Over the past 5 years the Bank has prepared two multi sector public expenditure reviews (PERs), an agriculture PER, a comprehensive DTIS , two FSAPs, two PEFA studies, and Institutional and Governance Review, and a Country Economic Memorandum. This equipped the Bank with a good stock of current knowledge of the constraints to trade, growth and service delivery in Moldova. It helped the Bank to advise the previous Government over several years, and when the new Government came to power, the Bank was ready to respond with comprehensive advice.
D. ANALYTICAL UNDERPINNINGS
57. sectors within the Bank, as summarized in Box 2 below.
This operation relies heavily on several analytical reports prepared by various
I DPL 1 Obiective
1. Better maintained
support for agriculture redirected towards investment
3. Better targeted social assistance.
of traditional exports increased
5. More commercial& viable energy sector
)x 2: Links betwec Report
Road sector policy note (May 2009)
Agriculture PER (FY 06)
Social Protection Policy Note
DTIS 2004 Report
Agriculture Sector Policy Note
Technical and Financial Evaluation of Termcom and Heating Tariffs in
the DPO and prior Analytical and Fiduciary Work. Recommendation
The road maintenance budget during 2009 was well below minimum requirements to protect Moldova’s !mu& road network assets fiom further depreciating. Proposed to set aside share of excise tax for Road Fund.
Subsidies need streamlining and optimization to support increased productivity.
Total SSN spending in 2008 was around 2% of GDP. Moldova has 19 types of benefits, some of them very small, others are quite large, all of them categorical. Safety Nets need to be better targeted.
Standards and conformity assessment is a key issue to encourage and facilitate more companies to focus on, and take responsibility for, the quality of the goods they produce.
These measures would pave the way for increasing the focus of Moldovan businesses on quality - a pre-requisite to increase trade with the EU.
Increase the land and labor productivity of agricultural products.
Lack of access to quality inputs constrains competitiveness. Trade distortions thwart a modem competitive and productive sector.
Monopsony practices have reduced farm gate prices.
In the short-run, ensure that Termocom, CET 1 and CET 2 are current in their payables, thus preventing further intra-sector debt accumulation.
In the medium to long run, rationalize and decrease the cost of energy services provision in Chisinau and establish the ground for the sustainable
23
DPL 0 b j ective
6. Barriers to private sector investment & FDI in telecoms removed
7. Bureaucratic red tape removed
Report
Chisinau by SWECO
WB Policy Note on District Heating in Chisinau) Telecoms Policy Note
Doing Business Report 2009
Recommendation
financial recovery of the whole energy system in Moldova addressing the existing problem of the stock of arrears.
The de-politicization of price setting and restoration of commercial principles in the heating sector is crucial.
Moldtelecom has a de facto monopoly on international telecommunications. Competition from private cross-border fiber optic cable providers will support the service sector, reduce international call prices, and spur IT product innovation and Internet use. Moreover, a weak regulatory regime compounds the situation by being unable to mitigate effects of market dominance and suppresses competition.
Lowering international call rates will spur broader use, increase market size, and support trade and services exports. A strong regulator can mitigate the effects of market dominance and create a level competitive playing field.
Substantially reducing the time and costs of business registration and closure during recession could be an important measure to attract small and medium enterprises into the formal sector; and will improve Moldova’s relative ranking on Costs of Doing Business.
V. THE PROPOSED OPERATION
A. OPERATION DESCRIPTION
58. The objectives of the proposed operation are to support the Government’s efforts to adequately fund priority expenditures for economic recovery and social protection during fiscal correction, while laying the foundations for a sustained post-crisis recovery through exports and private investment. The World Bank has provided technical inputs and advice to the Government in the design of structural macro fiscal measures5. In the face of corrections and contractions in public spending, Moldova does not have scope for a fiscal stimulus. The private sector therefore needs to be unleashed from over-regulation, limiting restrictions, and unfair competition. This operation helps to lay foundations for a private sector-led recovery.
59. The proposed Development Policy Operation (DPO) is a single operation of $25 million (SDR 16.6 million equivalent, including SDR 7.4 million in Pilot CRW Resources). It helps the new Government to implement reform measures whilst meeting a dramatically increased financing gap in the aftermath of the effects of the global crisis. It does so during a period of continued political uncertainty, with another round of general elections likely in the second half of 2010. The single operation is therefore designed as a bridge to a medium term program of annual support which could be developed once political uncertainty abates. This section therefore sets out both the details of the short-term program measure-by-measure, and
World Bank (2009); ‘Moldova: Policy notes for the New Government’, and World Bank (2010) forthcoming “Moldova: 2009 Public Expenditure Review”.
24
outlines future medium term priorities in each area for in the form of challenges. The medium term agenda will be discussed in future dialogue.
60. The IMF is supporting fiscal correction measures under the stabilization pillar of the Government?s Economic Stabilization and Recovery Plan. The Fund-supported program includes several high priority fiscal measures (set out in Table 5 ) which were set out in the joint World Bank and development partner publication ?Policy Notes for the Government?. On the expenditure side these include; (a) postponing and reducing wage increases, freezing hiring and eliminating 4,000 staff positions, (b) cutting goods and services expenditures by 20 percent whilst protecting high priority sectors, and (c) reducing the value of recurrent agriculture subsidies.
61. Bank support under this operation complements the Fund-supported program by focusing on the quality of adjustment in 2010 and upon structural measures to accelerate economic recovery. Emphasis is placed on measures in the Government?s Economic Stabilization and Recovery Plan which should; (i) re-prioritize public spending to support economic recovery into the medium term and better target social assistance to the poorest and most vulnerable in the short term; (ii) lay the policy and institutional foundations for investment and productivity in telecommunications and energy sectors, (iii) remove restrictions which deflate farm gate prices, depress productivity and restrict trade in wine and grape products, thus depressing the rural economy; (iv) reduce bureaucratic red tape in Moldova to reduce the overheads faced by businesses and in dealing with the Government.
62. Measures under this operation closely complement the stabilization and streamlining of Public Finance component of the ESRP. This operation proposes to support measures in two broad areas:
I, Adequately fund priority expenditures in the budget during f i c a l correction, in particular;
i. better maintain roads;
ii. redirect agriculture support towards investment and;
iii. better target social assistance to protect the poorest Moldovans.
II. Lay foundations for a sustained post-crisis recovery in exports and investment.
25
I. Adequately Fund Priority Expenditure in the 2010 Budget during Fiscal Correction
A. Better maintained roads
63. A key challenge facing Moldova is to adequately maintain its existing road network, which for the population and land area is regarded as a broadly adequate network. The network is in bad shape, the legacy of at least a decade and a half of under-funded routine and periodic maintenance. About 58 percent of the national roads and 75 percent of local roads are classified as in poor condition. Only 10 percent of national and 5 percent of local roads are in good condition. An urgent effort is needed to save what's left of the road network and, eventually, rehabilitate the rest. The road maintenance budget during 2009 was again well below the minimum requirement to avoid further depreciation. The reform of road maintenance financing and a large increase in funding for road maintenance have been conditions for road investment financing by external partners for some time. PRSCs 1 and 2 sought increases in the roads maintenance budget. The cancelled PRSC3 planned to do so also. The DPO program therefore maintains this measure as a prior action.
64. Consistent with the road sector discussions, thepriur action is:
0 Adequate provision for road maintenance made in 20 10 Budget.
65. Road sector discussions between Government and development partners agreed that an overall amount of MDL 582.9 million should be allocated for road maintenance in 2010, compared with MDL 242 million in 2009. The figure of MDL 582.9 million is deemed adequate by the Bank for 2010. Of which: (i) MDL 448.9 million should be for routine and winter maintenance on public roads, and (ii) MDL 134 million should be for public road capital repair works. On December 29*, 2009, the 2010 Budget approved by Parliament became effective. The overall amount for road maintenance to be transferred to the Road Fund was agreed in Law 138 dated December 29, 2009 which proposes that 50 percent of excise duty be used for road maintenance. Government Decision number 300 of April 21" 2010 established a Steering Committee of the Road Fund, and another Government Decision (to be passed) will set out how the road maintenance budget will be disaggregated by the Ministry of Transportation.
66. In the medium-term, Government intends to provide an annual road maintenance budget at an amount equivalent to a higher share of excise tax on fuels. Government's commitment to increase road maintenance spending will not only protect Moldova's transport network from further depreciation, it should also provide a welcome boost to demand for labor on maintenance contracts during the recession.
B. Reduce inefficient agricultural subsidies.
67. Agriculture should be an engine of growth in Moldova, but between 2003 and 2008 it contributed very little to value added growth, which was driven entirely by growth in services. Key challenges facing agriculture in Moldova have been poor price incentives for outputs and inputs use, poor access to markets, unpredictable policies and regulations, inadequate food safety standards, and inequitable and inefficient public spending - most of it through recurrent subsidies. The largest and, economically, the least rational agriculture subsidies were those that reimbursed all farmers for VAT paid on fertilizers and pesticides, and those that reimbursed some farmers (those above the VAT turnover threshold) for VAT they
26
charged on their outputs. Both were recurrent subsidies. Both have benefited larger commercial farms, and may have encouraged them to overuse of fertilizers and pesticides. In fact recurrent subsidies constituted 45% of total subsidies in 2008. These subsidies distort input and output prices and so interfere with market equilibrium. In 2008, only 7.8% of recurrent subsidies went to small and medium-scale farmers, the so-called “individual farmers”. In contrast, in 2009, 23.6% of all investment subsidies went to individual farmers. In the 2010 Budget through Law number 137, Government reduced total subsidies for agriculture by 6 percent. Within this overall reduction, the World Bank has supported the protection of investment support - recommending that recurrent subsidies be cut. In line with this advice, Government abolished the VAT reimbursement subsidies for inputs and outputs from 2010, and will reallocate these resources towards investment subsidies. In addition, they plan to introduce a cap on public support for each farm in order to increase the share of the support going to smaller farms.
68. Theprior action supported under this operation is:
0 Redirect the subsidy scheme to increase support for investment while reducing recurrent subsidies by approving a Government Decision on the 2010 Regulation of the Use of Agricultural Support ‘Fund Resources.
69. This prior action was met through Government Decision number 167 of March 9’, 201 0.
70. In the medium term structural reforms and public investments are needed to improve productivity and efficiency. These should remove monopsonies in the purchase of outputs, liberalize the use of EU seeds and seedlings, enhance the quality of food products for export, reform research and agricultural education, build suitable irrigation systems and cold storage facilities, and improve the overall investment climate for agri-business. However, in order to free up resources for a more positive role for public investments in the agriculture sector, and to create a level-playing field between commercial and individual farms, it is first necessary to redirect a declining budget for agriculture towards supporting investment. The chosen prior action is therefore a politically challenging strong first step in the direction of medium term sector reform. World Bank technical assistance is already supporting reform of the research institutions and the Bank is discussing with the Government on other partners how best to support a paying agency for agriculture subsidies, and how to help improve food safety.
C. Better targeted social assistance.
7 1. Moldova’s key challenge in social assistance during this recession and economic reform program is how to protect poor people by better targeting an adequate macro level of social assistance spending to reach poor families. Until recently, Moldova has relied exclusively on numerous categorical benefits as the main instrument in its social safety net. In 2008, total expenditure on social assistance benefits was approximately 2.7% of GDP, on par with spending as a share of GDP in OECD countries and higher than the ECA average of 1.6%. In terms of targeting accuracy and cost-effectiveness in addressing poverty, Moldova’s social safety net (SSN) ranks among the worst in the Eastern European and Former Soviet Union. About 28% of overall social assistance spending in Moldova is estimated to reach the poorest 20% of the population. The Government’s policy priority is therefore not to increase such spending under the 2010 Budget, but to improve its targeting. The largest social benejt is compensation for utilities payments, which represents about 40% of the total expenditure on
27
SSN. This is followed by a number of different child benefits (which sum to 20%), then war veterans allowances, Chernobyl allowances, compensation for disabilities, then other numerous and small benefits to different categories considered to be deserving of social support.
72. In mid-2008, Moldova developed and launched a new “Targeted Social Assistance Program” (TSA) that verifies eligibility based on income and proxy-means. The program is being scaled up. Eligibility and the amount of the benefit are contingent on an income gap between a household monthly income and the Guaranteed Minimum Income (GMI) that is set each year in the State Budget law. Since actual income can be under-reported by households, a proxy score has been added to the formula to exclude non-poor households and reduce errors of inclusion of the non-poor. However, in 2009, the proxies were changed by Parliament through changes in the regulation determining the formula and benefit administration, distorting the intended targeting results of the new formula. Partial and preliminary data for 2009 shows that 80% of households pass the proxy test irrespective of their income, and 90% of households that pass the income test also pass the proxy test. So the current proxy test does not add significant gains in accuracy to the targeting mechanism. Implementation results for 2009 point to problems in the formula and administration that the new Government is willing, and planning, to improve. Government has worked with DFID consultants to restore the formula and improve it, so the new Government resolution # 167 contains all the necessary improvements.
73. In 2010, the Government of Moldova suggested further improving the new program; increasing funding by 74 percent, while down-scaling categorical benefits, starting with a freeze in utilities payments and integrating the means-tested child benefit into the new TSA6. This operation proposes to support these changes by supporting the adoption of 3 Government resolutions, one for each program as prior actions for the operation.
74. The proposed prior actions are:
Improve targeting accuracy of new TSA and increase its coverage of the extremely poor by adopting a Government resolution which: (a) revises proxies system to improve targeting; (b) Ignores cadastre income when household is exclusively elderly, disabled or children, (c) Reintroduces income ‘disregard’ in calculation of the household’s monthly income of applicants. This prior action was met in full on February 2”d 2010, through Government Decision number 37.
0 Prevent Nominative Compensation from expanding at cost of the new social assistance scheme: (a) Freeze the level of Nominative Compensation for utilities for current beneficiaries and allowing no new beneficiaries, and (b) Abolish through a Government Decision the child allowance with a threshold of 54 lei and integrating it with the TSA. This prior action was completed on December, 29th 2009 through the passage of Law number 135 and Government Decision number 19 of January 19,201 0.
75. The medium term reform agenda includes consolidation of the remaining multiple small benefits to the groups of beneficiaries, and downscaling categorical benefits while extending the Targeted Social Assistance. This gradual approach to consolidating benefits into the TSA program and downsizing categorical schemes is needed for political-feasibility. However, savings generated by downscaling old programs would come at a slower pace than
Means-tested child benefit in Moldova is a small allowance. The larger universal child benefit will not be affected.
28
the needs for TSA expansion. The Government and the World Bank staff are discussing how to build on these initial crucial steps to expand the targeted assistance scheme.
11. Lay foundations for a sustained post-crisis recovery in exports and investment
Remove trade restrictions to raise the profitability of traditional exports and rural product markets.
76. In the absence of fiscal space for a public investment stimulus, Moldova faces a serious challenge of how to stimulate the economy into recovery in the face of recession amongst trading partners. On the export side there seems to be scope to undo export restrictions and regulations to give a boost to exports in the short-term. As a result of several ad hoc export bans over the past years, output for a number of products in Moldova has suffered from low farm-gate prices compared with those in neighboring countries. Low profitability in the agriculture sector has led to out-migration from rural areas, mainly to other countries as other domestic sectors have had little capacity to absorb excess rural labor. With the out- migration of labor, increased labor productivity has compensated somewhat for the decreased labor input. However, real prices for farm products have tended to fall by more than the increases in productivity, and despite input subsidies, farm input prices are rising much faster than output prices, so farm incomes have been squeezed in real terms. Household survey data suggest that many small farms are loss-makers, and that over time a higher proportion of poor people in Moldova are farmers. Instead, remittances have functioned as a complementary income support. With lower labor demand from abroad leading to slower migration under the global recession, increasing the profitability of agricultural activities and thus increasing rural labor demand in Moldova’s recovery will protect rural households from falling firther into poverty.
Box 3: Agriculture’s Importance for Recovery in Moldova
Agriculture in Moldova remains an important contributor to the wider economy. About a third (31.1%) of Moldova’s labor force is still engaged in agriculture, forestry and fishing; more than industry ( 12%, which includes agro-processing industries), trade, hotels and restaurants (17%). Agricultural and Food exports account for 37.4% of total exports. Until 2007 Moldova was one of the few CIS countries with positive net exports in food products. This compares with net exports at -51.0% for total goods, and -62.1% for non-agricultural trade in 2008). Hence a short-term strategy for Moldova to boost private sector activity through policy reform by necessity needs to involve agriculture. Despite a decline over the past years as a share of total current price GDP (reaching an all-time low of 9.8% in 2008), primary agriculture still accounts for about 22% of GDP in constant prices. Such a relative decline in the real prices of agricultural products would be good news for Moldova if it had been driven by commensurate gains in land and labor productivity - because farm incomes would be increasing and the food share of households’ consumption would be falling. However, the decline in real farm gate prices since 2003 has been more rapid than the rise in productivity. Export bans, export restrictions and regulations have driven declines in farm-gate prices - by forcing farmers to sell their produce domestically. So too have monopsony purchases in many product markets, some designed to keep urban food prices low, others seemingly designed to subsidize food processors. Wholesale reform is needed to liberalize agricultural product markets.
29
77. The wine sector has traditionally been the main contributor to agro-based exports from Moldova, with an estimated 70,000 producers, most of them smallholder farmers. In addition there are around 15,000 individuals involved in wine processing. Wine accounted for 12 percent of total exports and 33 percent of agro-food exports in 2008. As a result of both internal and external trade restrictions, grape and wine output prices and exports decreased significantly since 2006’. This not only affected the rural economy, but Moldova’s total exports. Liberalizing the trade of grapes and alcoholic beverages would simultaneously raise Moldova’s overall exports and inject a boost to rural incomes. Actions included under the program are a first step to doing away with formal trade restrictions and to support the recovery of one of Moldova’s important industries.
78. The proposedprior action is:
0 Liberalize wine exports by: (a) abolishing restrictions on the exports of bulk wine, grapes for wine, and distilled wine, (b) eliminating certification for each shipment of wine, (c) eliminating state trademarks on alcoholic products for export, (d) dissolving the independent agency Moldova Vin, and delegating its functions to the Ministry of Agriculture and Food Industries. This prior action was completed with the passage of Law 31 on October 7*, 2009, and amendments to Law 91 on trademarks, and Government Decisions numbers 597 of October 21St and 793 of December 2nd, 2009.
79. In the medium term, Moldova needs to develop an export oriented agriculture and agri- business growth strategy. Though labor productivity in agriculture rose, the land productivity of Moldovan agriculture and crop yields remain low compared to other European countries, resulting in low incomes and under-investment. Transport costs are high. Crop prices in Moldova remain systematically low compared to trends on world markets and levels in neighboring countries, and have fallen steadily relative to the GDP deflator since 2000. Agro- food exports are growing faster than agricultural GDP value added, while agro-food imports have grown faster and now exceed exports in US dollars. Limited access to high quality inputs (in the form of seeds and seedlings) has contributed to low productivity. Actions under the Government’s program therefore aim at decreasing input prices and facilitating exports, especially to the EU. Food safety standards in Moldova are well below EU market entry standards, providing a barrier to exports. The medium term policy agenda that the Bank will pursue with Government will therefore includes measures to; facilitate trade in higher value export products for the EU market, to provide farmers with better access to price information and better access to new seed varieties, to reform food safety institutions, and to reform research and agricultural education institutions and programs. Since efficient land utilization is an important determinant of farm profitability, the team will also review how well the rural land market is functioning. Finally, the World Bank Group will help export facilitation through the on-going Competiveness Enhancement Project and through advisory services on the “doing business” agenda, and in follow-up to the DTIS.
,
More commercially viable energy sector
80. A key challenge to macro/fiscal sustainability has been the build-up of arrears in the heating company. The District Heating and Gas sector in Moldova is in a dire situation, which
7 The farm-gate price of technical grapes in 2009 was 1.5-2.0 leiikg, compared to 2.8-3.6 leikg in 2006.
The volume of bulk wine exports in 2009 was just 3,719 thou dal, down from 10,193 thou dal in 2006.
30
has been building up for more than a decade. On the instructions of the municipal council, Termocom, the District Heating Company (DH) in Chisinau has been charging heating tariffs below-cost. Termocom is consequently bankrupt, and has been under insolvency proceedings since 2001. In turn, Termocom has been supplementing its shortfall in revenue by non-payment to its heat suppliers - the Combined Heat and Power plants (CHPs). The CHPs in turn pass on the financial burden as non-payment to Moldovagaz for the gas they use. They also cross subsidize some of their losses on heating by hiking up the price of electricity. Accumulated arrears to Molodvagaz have now reached close to MDL 1.8 billion. The arrears led to a temporary cut off of gas supply in winter 2008, and is now a threatening not only the energy supply security of Moldova, but the welfare of vulnerable population in Chisinau, who are dependent on DH system for heating during the harsh winter season.
8 1. Higher electricity tariffs have knock-on effects on Moldova’s export competitiveness, especially in energy intensive industry, and in particular in the promising ICT sector. Moldova’s electricity market is small, preventing economies of scale in the sector and limiting the attractiveness of private electricity providers. Progress towards efficient pricing in electricity therefore also requires that Moldova resolves the losses made by Termocom. The shift to more commercial tariffs needs to be accompanied by investments in energy efficiency energy savings and development of renewable energy sources. To provide incentives and other measures to facilitate investments in energy efficiency, Government developed an energy efficiency law.
82. compensating poor people are:
The prior actions to improve the commercial viability of the energy sector whilst
0 Submit to Parliament the Energy Efficiency Law. This prior action was met through the Government Decision number 306 dated April 23,20 10.
0 ANRE ensures district heating tariff for Chisinau at a level high enough to allow Termocom to be current on its payables while implementing capital programs submitted in its tariff calculation.
This prior action was met on January 14’ 2010 through ANRE Decision number 364 after ANRE had been granted tariff setting authority through Law number 107 of December 17th 2009.
0 Government approves the Law for Social Compensations for the Cold Period of the Year 2010 to protect poor people from higher heating prices,
This prior action was met on March 5*, 2010 through Government Resolution number 162, following passage by Parliament of Law number 15 on February 26th 2010.
83. The medium term priority is to restructure the energy sector to maintain financial sustainability and facilitate investments. For over a decade Termocom has been unable to work itself out of bankruptcy. Private investors have signaled that only after a comprehensive corporate restructuring for both Termocom and CHPs will they consider investing in either the heating or the electricity sector in Moldova. The World Bank is therefore providing advice to Government on options for developing a comprehensive restructuring plan. The plan, starting in
31
2010 aims to: (a) Ensure cost recovery tariff by transferring district heating tariff setting authority to ANRE (prior action); (b) restructure the energy sector in Chisinau during 2010 to address corporate governance and clear the debt to Moldovagaz by adopting proposed measures which could include:
0
0
0
0
0
e
84.
Valuing gas pipelines built by the state and owned by Districts; Preparing a sector reform program which will cover debt restructuring and corporate restructuring in the energy sector; As part of this sector reform program, the Bank team has suggested considering the merger of Termocom and CHPs - before the next heating season - through a debt-to- equity swap to address the debt stock between them, the inefficiency of the generation and distribution system, and corporate governance; Approving the Energy Efficiency Law and an Energy Efficiency Action Plan to reduce inefficiencies and cushion the impact of higher tariffs; Preparing a program to protect the vulnerable population from the increase in tariffs; and Preparing an investment plan to increase the efficiency of the integrated energy system in Chisinau, which could potentially be supported by World Bank and other international organizations.
Although policy discussions on restructuring are still at the stage of considering options, much of the technical work needed to inform the choice of options has begun. In addition to supporting the development of such a plan, the World Bank is providing technical assistance with energy efficiency policy, and an assessment of the investments requirements of the state-owned CHPs to improve the efficiency of energy supply.
Lower barriers to private investment in telecoms
85. The ICT sector probably has the most potential to quickly attract new private investments. Telecommunications and Internet investments could also stimulate economic recovery through productivity gains from product innovation and service exports, where emerging Moldovan business services potentially provide a low-cost alternative for European out-sourcing businesses looking to cut costs. A key challenge for Government policy is that current regulatory imbalances make the telecommunications sector in Moldova a drag on the economy when it should be an engine of growth. Adequate supply of international connectivity is essential to support growth in service exports, to reduce the price of international calls to and from Moldovan migrants, to bring down the cost of remitting, and to spur Internet use in Moldova. However, although Moldova’s international segment is on paper liberalized, private licensed telecommunications firms face numerous administrative barriers and are prevented from installing cross-border cables for their voice and Internet services.
86. Government has indicated that three licensed electronic communications service providers are ready to connect their fiber-optic networks across the border to Romania. Government has committed to issuing a clear set of instructions to the relevant authorities confirming the legal right of these operators to build such cross-border networks. The Minister of ITC issued a public statement to this effect, indicating that the telecommunications sector will be hlly “de-monopolized”. This operation therefore proposes to de-monopolize cross- border fiber optic cable access.
32
87. The pre-existing procedure for approving permits was arduous and bureaucratic and resulted in no permits being granted to private providers. Under existing rules, licensed electronic communications service providers (ECSP) first approach ANRCETI and six other agencies (including Ministry of Environment, Customs, Border Security, and local authorities) individually for permission to access the border and initiate construction of the cross-border cable facility. Then, upon approval of the request, the ECSP begins construction of the cable facility, connecting it with the other operator. On completion of construction, the ECSP seeks inspection of the facilities individually from ANRCETI and the five agencies (without local authorities) also individually so as to approve its operation. After clearance and approval by the other agencies, ANRCETI would provide a final clearance to the ECSP to begin operation of this facility.
88. For this operation the prior action is:
De-monopolize cross-border fiber optic cable access, by: (i) Issuance of a Government letter to MTIC and a letter from MTIC to ANRCETI providing formal confirmation of the legal rights of all licensed electronic communications service providers (ECSPs) to construct and operate cross-border telecommunications cable facilities; (b) ANRCETI sending an approval letter to at least one ECSP's request to construct and operate a cross- border telecommunications cable facility from a permitted ECSP.
These prior actions were met in full by the end of April 2010. On January 29th Government wrote to MTIC, and of February 22"d MTIC's wrote to ANRCETI providing formal confirmation of the legal rights of all licensed electronic communications service providers (ECSPs) to construct and operate cross-border telecommunications cable facilities. Government has since issued licenses to two of the three licensed ECSP applicants, whereas only one permit was expected to be issued at the time of pre-appraisal. On March 17" the Prime Minister formally requested that the Minister for ICT simplify current procedures, and on March 22"d the Ministry committed in writing to do so.
89. Government is committed to important short and medium term measures to stimulate competitiveness and private investment in the sector, bring down international call rates, and move tariffs closer to costs. The short-term measures include the submission by MITC and ANRCETI to Government amendments to the Government Resolution No. 974 dated August 12 2008 to simplify the procedures through which ECSPs may apply for and receive approvals to construct and commission cross-border telecommunications cable facilities in the future through a simple, transparent, and time-bound process. In the medium term, measures include implementation of a comprehensive tariff rebalancing program to eliminate internal cross-subsidies within Moldtelecom, and issuing further licenses for next generation broadband wireless services (e.g. WiMAX or LTE). These measures will further develop a level playing field in the ICT sector. The next specific step in policy reform after private cross-border cable links are built is to prepare regulations for the bulk resale of international bandwidth. Beyond this, the capacity of the sector regulator (ANRCETI) needs to be built to ensure regulations are reliably enforced. These areas will be discussed as possible follow-up actions under a subsequent development policy operation. Meanwhile the World Bank and EBRD will collaborate in supporting competition and expanding access to international connectivity in the coming years, with the Bank providing technical assistance and financial support through the e- Moldova project, which is currently in preparation.
33
Reduced red tape
90. To develop a more internationally competitive and export-led economy, Government faces key challenges of de-monopolizing the domestic suppij and demand of strategic goods and services and reducing bureaucracy. Moldova has implemented two stages of business regulatory reforms since 2004. These reduced the time spent by Moldova’s business managers on regulatory compliance by 25%. The Doing Business 2010 Report recorded Moldova among the top 10 reformers worldwide. Still, there is plenty of scope to further improve Moldova’s relative business environment.
91. The prior action to reduce red tape is:
Approve and submit to Parliament amendments to the law on State Registration of Companies (Law 220 of November 19,2007 to enable the Chamber of State Registration to become a one-stop-shop for registration for health, statistical and social insurance purposes (CNAM, BNS, and CNAS).
92. This action would substantially reduce the time and costs of business registration during recession. It could be an important measure to attract small and medium enterprises - who are most likely to recover first from the recession - into the formal sector.
The prior action was met through Government Decision number 282 of April 15* approved the amended law, which was submitted to Parliament April 20th.
93. The Economic Stabilization and Recovery Plan sets out an impressive list of short and medium term measures to make Moldova a more competitive, lower cost economy. More recently the Office of the Deputy Prime Minister published a detailed and ambitious Draft Action Plan of some 59 short and medium-term measures to eliminate administrative constraints. This is to form a Government order signed by the Deputy Prime Minister. The World Bank Group is supporting the Ministry of economy with advisory services through FIAS to assess what it would take to reduce the costs of doing business, and to implement the necessary actions. Meanwhile IDA’S recently extended Competitiveness Enhancement Program supports these and other measures designed to improve the investment climate.
Links to the preceding PRSC Series
94. Whereas the global crisis has changed the context and urgency of policy actions, this operation maintains some of the momentum and extends some of the policy areas supported under the preceding PRSC series. It narrows down the coverage of the PRSC series to focus on areas most relevant to the Government’s response to the global crisis. It opens support to new areas on trade liberalization and telecommunications, designed to provide a growth stimulus to the private sector. The operation has achieved a missed 2009 trigger on road maintenance which was proposed at identification stage under the cancelled PRSC3. By changing the Regulation on Agricultural Support Fund resources, it has solidified the intended reforms under PRSC 1 to shift subsidies towards investment and create a level playing field between individual and large commercial farms. Similarly, the measure on targeting social assistance under this operation has fine-tuned regulations for implementation of the Law on Targeted Social Assistance which were being discussed under the PRSC. In energy, the operation supports two components of the energy strategy that was developed as a prior action
34
for PRSC2; (i) set energy tariffs at cost recovery, and (ii) develop incentives and other measures to promote and facilitate energy efficiency. This is a change in direction from what was proposed under the PRSC series which was focused instead on cross-border trade management, power system balancing, and gradual power market opening. The actions to reduce red tape in the business climate under this operation also mark a shift from the focus on competition laws under the PRSCs. The competition agenda was postponed, but is on Government’s list of measures for implementation later this year. The main departure from the PRSC under this operation is that it has dropped the longer-term agenda of public sector reform, which is on hold in Moldova whilst Government focuses on fiscal stability. In addition, it focuses - through telecommunications and wine liberalization - on generating a short-term growth stimulus.
B. OPERATION IMPLEMENTATION
95. Supervision of the program will be aligned with the existing government-led monitoring and evaluation system for the ESRP and the Moldova-EU Action Plan. The Interministerial Committee for Strategic Planning will be responsible for monitoring the program and all benchmark and outcome indicators. The specific benchmarks and outcomes to be monitored have been drawn from the Government’s overall development program, thus providing significant benefits in reducing transaction costs for the Government. The overall reform effort will be reviewed by the Government in close coordination with regular multi- donor missions to ensure continued implementation of the program within an adequate macroeconomic policy framework. Given satisfactory progress, Moldova’s reform program will be supported by subsequent development policy operations under a programmatic lending framework, subject to the approval of the Board of Executive Directors.
c. POVERTY AND SOCIAL IMPACT
96. Prior to the crisis, in 2008, poverty was most common amongst rural Moldovan households, those headed by retired persons, farmers, those with limited schooling, and those with 3 or more children (Figure 15). Poverty was significantly lower in households receiving remittances, although these same households share many of the other characteristics of poor households; they tend to be rural, headed by elderly people, and they tend to be farmers. Analysis of household data on small farm incomes and costs suggests that farm households with remittance income tend to be those most commonly making losses from farming activities. For this reason, those receiving remittances, particularly remittance-receiving farm households, should be included amongst the most vulnerable to the crisis, because remittances into Moldova fell by around one third in 2009. We estimate that the fall in remittances alone could have forced as many as 3 percent of Moldovans into poverty.
35
Figure 15: Who Were the Poor in Moldova in 2008?
97. This profile of the poverty impact and vulnerability to the crisis in Moldova steered the inclusion of prior actions under this operation. Emphasis is placed on measures to stimulate small farmers' incomes whilst boosting exports. Household survey data show 2008 grape sales provided 20 percent of sales income for the smallest 5 deciles of farms by land size, whilst wine provided a further 7 percent. The shares for small farmers in general are slightly lower (Figure 16). This result holds on a regional level too. Household data suggest that small farmers in the Southern wine growing regions had the lowest returns from farming since 2006, when grape and wine prices were driven down by the bulk wine buying restrictions and trade restrictions - restrictions that are now being lifted.
Figure 16: Structure of Small Farmers' Incomes in Moldova in 2008
22.6% 8.0%
36
Impact of the Program
98. Better targeted social assistance is a pro-poor action. Bank staff simulations using household data suggest that the proposed measure to improve the targeting accuracy of social assistance in 2010 should increase the proportion of Moldova’s expenditures on social care going to the poorest quintile from 28 percent to 32 percent. This target is derived from the additional 40,000 households enrolled in the TSA scheme by the end of 2010. Since data on what constitutes ‘32% of the lowest quintile’ is contingent upon the number of additional households and will not be available until mid-201 1, it is agreed to use the additional 40,000 households as the indicative measure. Better targeting also mitigates the poverty impact of macroeconomic shocks more broadly. Moldova operates a number of different types of child benefits which account for 20% of the social safety net. The majority of these are universal, but their overall targeting accuracy is relatively high. This stems from the high correlation between the presence of children in the household, and poverty. For this reason, this operation does not suggest either a freeze or abolition of categorical child benefits. On the contrary, the team suggested indexing these child benefits for inflation. The child benefit which is being abolished under this operation is means tested and is much less significant, totaling 0.1 percent or even less of GDP. It is for Lei 50 per family for any family whose monthly income falls below Lei 54 per month. By comparison, the income threshold for targeted social assistance is 530 lei, and the average benefit is 600 lei. A recent study of performance in 2009 showed that the targeted scheme has successfully targeted poor recipients of previous social protection programs. The net income effect of expanding coverage and benefits under the targeted social assistance whilst abolishing the Lei 54 child allowance will be positive for the recipients of the old targeted child allowance
There are very few such households receiving this small amount.
99. The removal of VAT subsidies on outputs and inputs, with the subsidy being transferred for investment by individual farmers is also pro-poor. In the 2010 Budget, VAT at 8 percent on agricultural products replaced VAT at 20 percent. Therefore the VAT inclusive price of farm products produced by those within the tax net should decline. More importantly, the subsidy on outputs was only given to farmers with an annual turnover above the VAT threshold. So it was provided exclusively to more wealthy farmers, not to smaller farmers. Smaller farmers who are out of the VAT net received no output subsidy. Whereas they pay VAT on fertilizer and pesticide (the two inputs on which the VAT input subsidy was paid) they use a lot less pesticide and fertilizer than larger farmers, who also received the input subsidy. Small farmers can pass the VAT paid on fertilizer and pesticide to consumers in slightly higher prices (these inputs are small compared to their value added). The elimination of both subsidies will mean a net loss in fiscal transfers received by relatively wealthy farmers. That some of this reduction is to be used to support farm investments through a scheme with much better targeting to smaller individual farmers makes the action pro-poor.
100. Increased road maintenance is neutral in its poverty and social impact. Much depends upon which roads are maintained with the increase in the maintenance budget. Rural roads are certainly in worse shape, and are important for prosperity in rural areas where almost three quarters of poor people live. However, prioritization on the basis of traffic counts would tend to focus funding on the main trunk roads around cities and towns.
101. Liberalization of grapes and wine exports is expected to benefit the rural economy, where Moldova’s poorest and most vulnerable people live. Stimulating traditional exports in the wine industry is expected to increase employment and wages in the sector and demand for
37
wine grapes, which should help offset a decline in demand for rural services caused by the crisis. Under the 2004 DTIS, the Bank staff estimated that a 6 percent increase in export prices in Moldova (of which grapes and grape products are significant) generates average gains in the order of 5 percent in household expenditure. The analysis of household data referred to in paragraph 97 shows that grapes and wine remain important income earners, especially for smaller farmers.
102. The prior action on raising heating tariffs was accompanied by better implementation of targeted subsidies to compensate vulnerable households in Chisinau (see Annex 6). In January 2010, the regulator, ANRE recommended an average 29 percent tariff increase for heating tariffs in the capital city of Chisinau. To offset the negative poverty and social impact of increased heating tariffs this winter, Government introduced a temporary Law for Social Compensations for the Cold Period of the Year 2010 which was approved by Government on March 3th, 2010 (G.R. No.162, 5/03/2010). The monthly amount of the compensation under this law is 130 lei, which will be provided to three groups. These are; (a) beneficiaries who are entitled to the targeted social assistance - around 40,000 families estimated to be entitled this past winter (1 52,000 individuals); b) Public sector employees receiving pay in the lowest 7 public pay scales (scale I to VII) - 67,700 individuals; c) pensioners and social allowances beneficiaries (+ 65 years) who receive less than 700 lei per month - a total of 115,582 persons. The World Bank provided analysis of the impact of higher energy prices on poor households (see Annex 6) and the Bank’s social protection team assisted Government to design the compensation scheme.
103. The other prior actions on business environment and telecoms are not expected to have a negative or direct effect on poor people.
D. ENVIRONMENTAL ASPECTS
104. Heating tariffs at cost-recovery levels and the passage of the energy efficiency law are expected to have strong positive environmental effects. The removal of implicit subsidies on the price of heating in Chisinau should increase incentives for loss reduction and when coupled with the update to the Energy Efficiency Law, will make it simpler for utilities and economic agents to become more energy efficient. Together these measures should improve air quality and reduce green house gas emissions in Moldova.
105. Conducting road maintenance activities, if poorly implemented may have environmental effects. Generally road maintenance activities will not generate any major environmental impacts. Most will be temporary and local, and will cause only minor, localized and short-term negative effects, being linked with works such as leveling, grading, potholes patching, cracks priming, surfacing, quarrying, use of hazardous materials, such as combustive- lubricating ones, bitumen, etc. These impacts are common in road maintenance works and can be mitigated by existing management techniques. Maintenance activities will also have positive indirect impacts on human welfare, safety, health and socio-economic environment through reduced vehicles operating cost, decreased number of accidents; reduced air pollution resulted from vehicles emissions on rehabilitated road sections; better access to settlements and markets, development of new business opportunities, etc. The ongoing WB “Road Sector Program Support Project” is helping to ensure that there are no significant environmental effects from the road rehabilitation program. The project Sectoral Environmental Assessment (SER) stipulates all environmental protection requirements for both rehabilitation and maintenance phases.
38
Furthermore it is specified these requirements should be included in technical specifications for contractors. Supervision and monitoring of environmental performance of these activities will be carried out on the site by the SRA environmental specialist.
106. Expansion of wine exports may also have negative effects for Moldova’s environment by increasing pesticide use on vineyards and by generating larger amount of wastes associated with wine processing. A number of ongoing projects financed by the World Bank (RISP; RISP 11; GEF POPS Project) have been designed to mitigate the effects of increased agricultural activity on the environment. For example, among the components of the Bank’s “Persistent Organic Pollutants (POPS) Stockpiles Management and Destruction Project” are those aimed at institutional strengthening, the modernization of current legislation (Le., those related to the Stockholm Convention), and the introduction of broader chemical safety approach in the country consistent with European Union legislation. The project also has a special activity under “Prevention of new Stockpiles of Obsolete Pesticides” that aims to provide support in promoting best practices in Pest Management in crop production, including Integrated Pest Management. The wine industry also may pose some environmental risks, in particular by generating ferrocyanide wastes which are the result of clarification and stabilization of wines. In Moldova currently there are few thousand metric tons of such wastes stored at different wineries. In recent years Moldovan environmental authorities made good progress in disposing them, using a special technology designed by specialists from the Moldova Technical University, Thus the amount of ferrocyanide wastes was reduced by more than 50 % (from about 7,000 metric tons). Disposal is carried out at one of the largest wineries “Vismos”. It is imperative that this work be continued to keep newly generated wastes under control, minimizing their potential environmental impacts.
107. The abolition of VAT subsidies on fertilizer and pesticide inputs could offset negative effects by bringing better relative pricing of inputs in agriculture. This should reduce relative under-pricing and inefficient use of fertilizers and pesticides. The net effect on the environment from actions taken to support agriculture under this program could in fact be positive.
108. Telecoms, business environment and social assistance measures supported under this program are unlikely to have any effects on the environment.
VI. IMPLEMENTATION, MONITORING, AND EVALUATION
A, FIDUCIARY ASPECTS
109. Public Financial Management (PFM)). The crisis has confirmed that Moldova’s system remains vulnerable to macro-fiscal and political shocks and requires further strengthening. The priority reform areas include: (i) improving public resource allocation by introducing modern budget preparation practices; (ii) strengthening financial discipline by modernizing the treasury system and budget execution procedures; (iii) improving public debt management to minimize debt service costs; (iv) improving fiscal administration and increasing the effectiveness of financial controls; (v) increasing the efficiency of budget management through introduction of an integrated financial management information system; and (vi) harmonizing the budget and fiscal legal fiamework with European Union standards. As noted in the 2006 and 2008 PFM assessments based on PEFA methodology, the weaknesses in the current PFM system in
39
Moldova are mainly due to institutional capacity issues typical for a country in transition. Progress achieved in the main areas of PFM reforms and the remaining weaknesses are summarized below.
1 10. Budgeting. The Government has been consolidating budget formulation and increasing the policy focus of the budgets. The main remaining weaknesses in budgeting include failure to adhere to the budget calendar, and the soft link between the budget and sector policy priorities. Last year ‘revealed vulnerability to in-year electioneering and macro-fiscal shocks. Deviations between the approved and executed budgets increased in 2009, and preparation of 2010 budget could not follow the regular budget calendar. Efforts to better link policy priorities with the budget at a sector level are underway, with DFID support. Strengthening budget formulation is also a component of the PFM project which is under implementation.
11 1. Internal controls over budget execution. Moldova has made important progress in developing the national treasury system. Controls over budget execution have been significantly strengthened through gradual expansion of treasury coverage that started in 1997. Significant improvements were made in the last years in functioning of the treasury single account, cash management and forecasting. However, the outcomes of 2009 budget execution confirm that the budget execution procedures are not yet robust enough to assure stable execution of the budget under unfavorable revenue. Accumulation of new expenditure arrears could not be fully prevented in 2009 and the practice of cash rationing - abandoned for many years - had to be re- introduced. Weaknesses in treasury operations are largely being addressed under the PFM project through developing improved budget execution procedures and creation of a comprehensive FMIS expected to become operational in 20 12.
1 12. Procurement. Overall, the public procurement system is favorable and challenges include improving implementation of procurement legislation and strengthening institutional arrangements. The practice of single source tendering has been significantly reduced while the percentage of contracts awarded using an open tender procedure has increased. A new public procurement law, which entered into force in October 2007, has largely brought Moldova legislation in line with international good practices. The remaining legal weaknesses relate to inadequate institutional arrangements for complaints resolution. The new Government implemented important changes to strengthen control over public procurement through reorganizing the Agency for Material Reserves, Public Procurement and Humanitarian aid and establishing the Public Procurement Agency in subordination of the Ministry of Finance. The Regulations on the organization and functions of the Public Procurement Agency and its structure have already been approved. It is expected that with this change the operational links between the procurement and budget execution processes will be strengthened. The Bank completed a draft Country Procurement Assessment Review (CPAR) at the end of April 2010 through close coordination with the Government, and will develop an action plan to improve the shortcomings of the system over the summer of 2010.
113. Accounting and reporting. Under the PFM project, the Government is preparing for important changes in public sector accounting and reporting. The new integrated budget classification and chart of accounts system is being developed on the basis of the GFS2001 standards to be launched with the new FMIS. It is expected that in the medium-term the Government will maintain cash-based accounting for the treasury and modified cash based accounting for the budget institutions. The new FMIS will enable the Government to produce
40
consolidated financial statements showing financial position of the Government, and not only the budget execution reports, as is the practice at the moment.
114. Internal auditing. Internal audit in Government is still at an early stage of development. Small internal audit units have been established in the Ministry of Finance (MOF), State Tax Service, Customs and National Social Insurance House. In addition, there is a Control and Revision Service (CRS) under the Ministry of Finance. In most cases, the CRS is performing ex-post verification of budget execution. Development of a modem internal audit function within the Government is a component of the PFM project. The goal of the reform is to establish Public Internal Financial Control system (PIFC) based on EU model across the budget entities.
1 15. External auditing. The Court of Accounts aims to develop into a modern external audit institution and has made important steps in that direction over the last few years. A new Law on the Court of Accounts was approved in late 2008, but its implementation and the introduction of modem audit practices remain challenging. Until recently, parliamentary oversight remained weak as there was very little follow up on the Court of Accounts’ findings. The recently elected Parliament has taken a more proactive stance and has indicated an intention to establish a closer collaboration with the Court of Accounts through its Economy and Budget Committee. Further capacity building for application of the modem audit and techniques is also required. Technical assistance is being provided by the Swedish and British national audit offices, as well as a recipient executed multi-donor trust b d managed by the Bank, to support the implementation of the COA’s Strategic Development Plan.
1 16. Reforms to strengthen the public financial management framework. Weaknesses in the Moldovan public financial management system are well understood and a broad PFM reform program has started. As a result of these efforts, the credibility of the Moldova PFM framework has been enhanced, as evidenced by improvement of PEFA scores between 2006 and 2008. Major assistance is already being provided by the Bank under the PFM Project, co-financed by SIDA and the Dutch Government. The project is supporting improvements in: (i) budget preparation and execution; (ii) accounting and reporting; (iii) development of FMIS and cash management; (iv) internal auditing; and, (v) PFM related training. TA for the Court of Accounts is under implementation and the dialogue on procurement reform agenda is ongoing. The existing instruments already mobilized through a concerted multi-donor effort appear to be sufficient to support the critical PFM agenda. The fiduciary risk for the present DPO is therefore regarded as acceptable.
117. Central Bank and Foreign Exchange Management. The IMF updated its safeguards assessment of the NBM in 2006 and found that while the NBM has made progress in strengthening its safeguards framework, certain weaknesses remain. To further improve the NBM’s safeguards, the updated assessment recommended: (i) the IMF program data compilation procedures be formalized delineating responsibilities of the involved departments, and the Internal Audit Department should include regular audits of the process in its audit plans; and (ii) the NBM Law be amended to better align profit distribution rules with recapitalization requirements, and formalize the financial relationship between the NBM and the Ministry of Finance. NBM financial statements have received unqualified (clean) audit opinions from external auditors (Ernst & Young) for the past three years (2006, 2007 and 2008). In view of this, there are no additional fiduciary safeguards considered necessary as far as management of the foreign exchange is concerned.
41
B. DISBURSEMENTS
118. Disbursement and Fundsflow. The proposed Credit, SDR 16.6 million (US$25 million equivalent), will follow the Bank?s disbursement procedures for development policy lending. The Credit will be disbursed in one tranche immediately upon effectiveness and is not tied to any specific purchases and no procurement requirements will be needed. The funds.wil1 be deposited at the existing treasury USD account used for held by Ministry of Finance/State Treasury with the NBM. The proceeds of the funds will be used for domestic budget expenditures or for repayment of foreign debt. If the Association determines at any time that an amount of the Financing was used to make a payment for an Excluded Expenditure, the Recipient shall, promptly upon notice from the Association, refund an amount equal to the amount of such payment to the Association. Amounts refunded to the Association upon such request shall be cancelled.
1 19. Accounts and Auditing. The administration and accounting of the Credit proceeds will be the responsibility of the State Treasury of the Ministry of Finance. The standard country rules will be followed by treasury for administration and accounting. The Government will maintain accounts and records, or ensure that such items are maintained in accordance with existing Government system for budgetary spending. The MOF will be responsible for the DPO administration and for preparing the withdrawal application. The DPO will be subject to ratification by Parliament before it becomes effective. The MOF, with the assistance of the NBM, will maintain records of all transactions under the DPO in accordance with sound accounting practices. Within 30 days of the NBM being credited, the MOF will provide to the Bank a confirmation that the amount of the DPO has been credited to an account that is available to finance budgeted expenditures.
C. RISKS AND RISK MITIGATION
120. This proposed operation faces a number of risks, given continued political uncertainty and Moldova?s inherent vulnerability to external shocks. The main risks that could subsequently jeopardize achievement of the intended development results include: (i) political economy risks, especially the fiscal risks which stem from these; (ii) external shocks to economic growth; and (iii) financial sector risks. The macroeconomic implications of (i) and (ii) are discussed in section 11.
121. Political economy andfiscal risk. Unless there is a change to the Constitution (which now seems unlikely), a third round of Parliamentary elections will have to be undertaken before Spring of 201 1. In advance of these elections, it will be politically difficult for Government to get started on civil service reform, school consolidation and pension reform. Given sensitivity and complexity of school reforms on the scale needed to restore structural sustainability to Moldova?s fiscal policy in the medium-term, it is unlikely these can be implemented in the short-term. This creates risks for the 2011 Budget. The World Bank staff is working with Government to develop a feasible path of school reforms, and to identify alternative cost-saving measures in the budget. Similarly, heating price increases have proven politically challenging to the Government, especially in the capital of Chisinau. Further increases will be needed in fiture to avoid Termocom running up new arrears with gas suppliers, and increasing contingent liabilities for the Government during the 2010-1 1 winter season. Should elections be held in the Spring of 201 1 , further reform in the energy sector prior to the heating season would be unlikely, and either arrears or contingent liabilities could re-emerge.
42
122. Reversibility of Policy Actions. There remains a risk that some measures (for instance in agriculture and deregulation) may be reversed, or that the pace of reform could slow down should there be another change in Government after repeat elections. To mitigate such risk, some measures were selected for inclusion under this operation because in addition to bolstering recovery, they are populist and therefore less reversible. For instance de-monopolizing cross border fiber optic cable is already reported to have improved internet service speed and reliability, and has reduced charges by Moldtelecom the previous state monopoly and led to the announcement that tariff rebalancing is needed. The Bank is designing an eGovernment project which will help deepen telecommunications reforms and support the reforms initiated under this proposed operation. In the energy and agriculture sectors, the Bank is providing TA to support the reform efforts with technical analysis and to widen the pro-reform coalitions. Nonetheless, the interests and lobby groups that prevented reform in the past remain present and could regain their strength should there by another change in Government.
123. External shocks and balance of payments risk. Moldova is vulnerable to external market developments. On the import side, the price of natural gas imported in Moldova will continue to rise to European levels over the next five years. Higher energy prices may have significant poverty implications, with the burden of the price increase falling disproportionately on the poor and on households with limited alternative sources of fuel. Regarding exports, any tightening by Russia of license requirements for the export of wine and alcoholic beverages8 may widen the current account balance beyond the level presented in the medium term prospects presented.
124. Financial Sector Risk. The rapid deterioration of the quality of commercial banks’ loan portfolios has significantly curtailed the banking sector’s appetite for risk. In spite of ample liquidity, credit to the private sector - especially to vulnerable but growth-oriented SME and informal sector has stalled. Real interest rates on loans have also risen sharply due to a slowdown in inflation. Given the downward pressure on profitability, banks are less willing to cut lending rates regardless of base rate cuts by the NBM hence the cost of lending is too high prohibiting access to much-needed credit for firms. A survey of the business environment reveals that access to finance is a major obstacle to firms’ growth in Moldova. To ensure the success of the government’s stabilization plan and to foster economic growth, the extension of credit to private sector firms must resume promptly, especially to the key export and SME sector. Policy measures to stimulate bank lending need to be introduced concurrently with the implementation of the reform agenda. To mitigate financial sector risks, the Bank team has in parallel with this operation helped continue dialogue with Government on measures to reduce the risk of capital volatility in the banking sector, and to improve exporters’ access to credit under the foreign exchange law. These mitigating measures are likely to be adopted by the Government. The IMF and US Treasury are also working with Government and the Bank to strengthen the credit environment, bank supervision, non-performing asset management and procedures for failed bank resolution.
125. Governance and publicfinancial management risks. Moldova remains a relatively poor country with a commensurately limited administrative capacity. There remains a risk that limited institutional capacity could hamper Government’s ability to fully implement the ’actions in the ESRP that support the objectives of this operation. Increased support for reform reflected
In 2006 Russia imposed a ban on Moldovan bulk wine exports.
43
by the international community at the recent Moldova Consultative Group Meeting in Brussels should help to mitigate this risk, as donors commit additional technical assistance to Moldova. It will be necessary to improve procurement to avoid a repeat of mis-procurement problems in the roads sector. The fiduciary measures mentioned in section VI A above are designed to mitigate PFM risks.
44
ANNEX 1. LETTER OF DEVELOPMENT POLICY
5 May2010
M e r af Development Policy
Attention: Mr. Robert B. ZoeMick President World Baok l8i831St. ,N.W. Washington D.C., 20433
W r Mr. Zaellick:
The Letter of Dewlagment Policy suttvnajizcS the Moldovan Government's policy framework far the short and medium tam.
11# dewlaprnent agenda of the &public af Moldova is align& with the Government Progrannne "Freedom+ Democrac,v Rnd Welfare 2W9i?O1 3': and targets at irchieving its five- pillar reform pnofities: European integration, wmrnic rccdvwy, rule of law, adminishativt artd fiscal decmtraiization and reunification olf tbc countflr.
The Government of Moldom regards Ewaprm intcgrdion a$ tk most fiuhdamentd priority of damcstic and foreign policy. In the Q6vmient's view the mast cfkicn! way to W ~ V C
political, economic and sacid mdemizatim pf thc col ln~y is to implement tcspsib!y the commi&ments Leading the country on t k path to Ewoperln integration. To this e@ the G o v m o n t is determined tu impfenlent an ambitious agenda for Europciln integration, and has engaged in an active dialog@ with tk civil sociery organizations as pfrtmrs. The Government has alrmdy emharked on dynamic, rdt-orientcd talks d t h its main foreign partners and is in thc process of ncgotiaring the RPsociath Agreement with tfn! Europzran Union. This Agrwrnmt is ~i fnmeuork t~ bring Moldova closer 10 the ELI through political association and econcxnic intwittion.
45
The Govemmcnt' vision for aid-term dcvelopmrnt is restated in thc went strategic document *Rethink Noldove" (March 24,2010) sad draws from several @rete& pkanning Erameworks: thc Economic Stabilization and Rewvcry Pmgnmune, the National De~eIopmmt Strategy, the EU-Mpldova Action Plan, the Eastern Partnership a d the Pmership and Cooperation A ~ R W N between Moldova aad the European Union.
Whilst shiving to advslre in the wcornplishrnea% Qf ?he &or! and mid-tm development priorities, the Government's key priority throughout 2010 is to achieve stabilization and stirnuhate economic recover):. and demase the impact ofthe economic downrum on OW mast wlnerabrs people.
The world financial crisis hjt h e MOIBOWI economy hard, and rcpresenb tbe first hWlc the country fwe on i t s path towards h European Union. Government msponlded through its EMnomic Stabilization and Recovery Rwam.me, backed by the UIF. Tht Progrimme facuses on public Expenditure ratiodizalion, enhancement and targeting o f d e t y acta, and libnalizatian of the highly regulated ccommy, and will put Molduva back on a sustainable macroccmmic path
These kansfbnnattions muire a level ofrfsourccs and expathe that can only be put together in prtuwshp with Maldova's k l o p m e n t pmmm and in a urgent manner in otdw to assure the su$tuincd post-crisis recovery.
F i d f y , I would like to use this opportunity to m e you thal (he & v c m a t iz "ulty rktermined and committed to implement its ambitious reform agmda, to enwe suminable sc~lomic growth a d improve the living standards of &kens.
2
46
Annex to Government Resolution
REPUBLIC OF MOLDOVA ECONOMIC STABILIZATION AND RECOVERY PROGRAM
2009-201 1
BACKGROUND
The economy of the Republic of Moldova is in deep crisis. The depth of the crisis is proven by having basically all sectors of the economy stagnating, the aggregate demand for consumption shrinking, following a drop of remittances, and an entailing decrease in foreign trade, combined with a significant increase in the budget deficit. Economic shortages lead to even more social tensions following people’s undermined trust in the financial sustainability of the budget and Government actions.
The crisis stems abroad - for a country vulnerable to external shocks, as is the case of Moldova, the shrinking economies of the key partner states played a critical role which, starting in late 2008, triggered the reversal of economic development trends. At the same time, a delay in implementing crisis control measures has deepened recession, yielding pessimistic forecasts in the short and medium run.
The framework within which this Program is being carried out in the Republic of Moldova is an extremely difficult and tension-prone one, as economic shortcomings impact the national public budget which, in turn, can no longer act as an efficient and effective tool to support vulnerable groups. Hence, people’s vulnerability is directly proportional to economic stagnation and crisis depth.
The ruling Government is aware of the depth of economic recession, as well as of how vulnerable certain groups of people are to the adverse effects of crisis. Despite the worldwide recession subsiding to the efforts bent by governments around the world, with some first signs pointing out to the world’s economy recovering in the second half of 2009, the beneficial impact of these positive world trends upon the economy of the Republic of Moldova will show up later. Under the given circumstance, the Government should undertake urgent steps towards stabilizing and upturning the country’s economy, in order to prevent the economic crisis from further worsening in the Republic of Moldova.
Considering the sluggish model that the previous Government adopted for economy management in general and for budget in particular, the ruling Government has limited leverage and little room for maneuver today. Nevertheless, identifying the opportunities and the most efficient intervention tools is a priority for the Government. Following the investments made, the Government took a number of reform measures aiming at un-bureaucratizing and demonopolizing the business environment, at improving the efficiency of public expenditure, and at bettering the efficacy of public administration. This Program provides for an array of actions to carry on the efforts that are already being implemented by the Government and which are to be carried out starting with the fourth quarter of 2009 and running up until the end of 201 1 .
47
The tools that the Government is planning to make use of in order to stabilize and recover the country’s economy vary from measures aiming at stimulating consumption and economy to measures meant to facilitate the access of business people to more affordable f h d s , and include well-accepted measures along with less popular measures of reformative nature yet critical given the current circumstances. The selection of these tools had a participatory approach, with the support of the country’s development partners, business environment representatives, academia and civil society. In order to avoid the country’s insolvency, the Government has to make sure that the sparse budgets are adequately earmarked and channeled specifically towards the vulnerable groups and towards working out the burning issues. Therefore, the Government will make sure not only to push up the pace of economic recovery, but also to significantly increase the budget support for vulnerable groups. Thus, regardless of the actions taken, it is a certainty that the Government will start implementing the Program with strengthening public administration and building efficient, sustainable and reliable state bodies.
The Government will bend efforts to find a socially acceptable tradeoff between sacrifices and benefits, so that the burden of imperious reforms does not adversely impact upon those who count on support or who are weakened, whereas those who incur loss today to be repaid in full once the economy takes an upward-sloping trend. Therefore, all throughout the implementation of the Economic Stabilization and Recovery Program, the Government relies, first and foremost, upon its own efforts, but also relies on the understanding and trust of the whole society, along with the support provided by the country’s development partners, without the support of whom the envisaged ambitious reforms would have not been possible. In the context of the dialogue with the general public and aiming at ensuring the full understanding of the message disseminated by this Program, the Government will develop a communication strategy explaining in detail the need and impacts of actions included.
The receptivity of the whole society is critical to keeping up the European integratiofi agenda set by the Government as a top priority in the context of its ruling agenda. The Economic Stabilization and Recovery Program is not meant to substitute for the ongoing ruling agenda, the National Development Strategy (NDS), European integration policy agenda or any other public policy papers, but rather to complement those with concrete and specific actions, aiming at reaching the goals set within the current strategic framework and in the context of crisis today.
SITUATION ANALYSIS
The current picture of the crisis is grim. Although the first signs of economic stagnation, which stirred up countless controversial debates, showed up as early as in September-October of 2008, the evolvement of the economy this year points out at deepening and ramified effects of the crisis. In this vein, is the first half of year in 2009, the Gross Domestic Product (GDP) dropped by 7.8 per cent as compared to the same time span last year, whereas the forecasts for the 2009 year-end were changed from negative 5 per cent to negative 9 percent. The shrinking overall consumption demand, coupled with a decrease by over one-third in the amount of remittances sent back home in the first seven months of the year, underpinned the economic stagnation that has been built based upon an unsustainable growth model, which heavily relied on consumption and imports and to a lesser extent was driven by investments and exports.
48
The economic downturn was also driven by the involution of the industrial sector, wherein outputs dropped by 24.3 pe cent during January-September 2009 as compared to the same period of the previous year, primarily owing to decreasing outputs within the mining industry by 32.4 per cent and within the processing industry by 26.8 per cent. At the same time, although the agricultural sector reported a better performance than that reported within the industry, and agriculture outputs went down by 11.8 percent in January - September 2009, the harvesting of agricultural crops in farms indicates a considerable decrease in the average amount of harvested crops - by 38 per cent, and agricultural production still is mostly uncompetitive. A significant decrease was reported in construction industry - a sector that shrank by some 33.7 per cent in the first half of this year, but the sector reporting the most dramatic drop in outputs was the transportation industry, where the total output of transported goods dropped by 59.2 per cent in January - September 2009. When compared across other sectors, this industry was affected the most by the crisis.
A 1.7-time increase in payroll arrears was reported during a cut by 34.5 per cent of remittances sent back home during January-July, as compared to the same time interval last year, and amidst growing fears of uncertainty about their future among population, leading to a 10.4 per cent reduction of consumption in the first half of 2009. The shrinking overall demand for consumption by 38.3 per cent during January-July resulted in a decrease of imports that enjoyed an amazing high pace of growth over the last years, as well as a decrease by 24.2 per cent in exports. The negative expectations of the economic development prospects in the short run also led to fewer foreign direct investments (FDI). Thus, in the first half of 2009, the foreign direct investments made within the national economy (net value) amounted to merely USD 34.6 million - an 8.9-time reduction as compared to the same time span during 2008.
The negative economic trends in the first 9 months of 2009 have also impacted upon the consumer price index. Thus, since the beginning of the year, a slowdown in the pace of growth of the key sectors of the economy resulted in a 2.9 per cent decrease in average consumer prices, while in September the prices went up by 0.6 per cent as compared to August CPI. While contributing to a raise in people’s purchasing power in the short-term, deflation may have a long- term negative effect on the country’s economy in general and on businesses in particular.
The crisis has also affected the budget revenues, which dropped by 6.9 per cent during January- August, causing an unprecedented budget deficit amounting to over MDL 2.5 billion. This budget deficit is 8.6% greater than that incurred during the same period of 2008. The reduction of revenues pouring into the national public budget was caused by a decrease in collected VAT for imported goods and in taxes on foreign trade and on international operations. At the same time, the increase in national public budget expenditures was owing to the former Government’s observance of its social obligations, which did not match the amount of funds available for payout. Keeping its social payments up, coupled with a significant drop in budget revenues, has resulted in an increase by 33.6 per cent of its internal state debt, as compared to 3 1 August 2008. Its limited internal leverage to control crisis is further proven by a decrease by 26.6 per cent in its official reserve assets during January-August this year, as compared to the same time span last year.
The deepening crisis was accompanied by a growing reticence of the banking sector in granting loans to the private sector. Thus, during the January-August interval in 2009, the amount of loans
49
granted within the economy dropped by 3.7 per cent, as compared to the same time interval last year, and the amount of non-performing loans reached 12.8 per cent of total loans versus 5.9 per cent at the year-end in 2008. The National Bank’s decision to cut the basic rate from 12.5 per cent to 5 per cent and the mandatory reserves for commercial banks from 17.5 per cent to 8 per cent did not result in an expected drop in interest rates on loans for the time being. The interest rate on loans granted in national currency dropped by about 5.2 percentage points, as compared to August 2008, whereas the interest rate on loans given in foreign currency increased by 0.31 percentage points. The overall amount of deposits reported a more significant decrease than that reported for loans - by 8.9 per cent, as compared to August 2008 versus an 8.6 per cent drop as of the beginning of this year. The dropping number of deposits is indicative of slower regaining of people’s trust in the banking sector. The decrease of deposits in national currency is a key factor in having a 7.6 per cent drop of its monetary pool (M3) during January-August, as compared to the same time span last year.
The economic crisis that quickly took up the country’s entire economy could not but exert adverse effects on the population. During the January-August timeframe, the number of the formerly reported unemployed increased 1.7 times, whereas 25.7 per cent fewer unemployed managed to get a job, as compared to the last year. The upsurge of unemployment emphasizes a problem not only in Moldova, but in other countries as well - where Moldovan migrants work - with some of them having already come back home. This builds up the burden on both the state budget (Le., more unemployed translates into more unemployment payments being made) and on the real economy, unable to take up the unemployed, including those getting back home from jobs abroad.
For the first time in the last three years there was an increase in the poverty level reported in the Republic of Moldova in 2008. Hence, the absolute poverty rate increased by 0.6 percentage points, as compared to 2007, whereas the extreme poverty rate went up by 0.4 percentage points. These trends may as well continue down the road, as the policy impact upon consumption and poverty is not felt right away.
GOVERNMENT VISION
Regaining people’s trust in Government actions and in working and living opportunities in the Republic of Moldova and bringing the country’s economy back on trails to accomplish growth as well as strengthening the premise for developing a steady economy are among the Government’s prerogatives in the context of this Program.
The actions to be implemented within the framework of the given Program aim to resuscitate the economy, so as to accomplish upward trends within the country’s economy already by 2010. Economic recovery will come along with enlivenment of the investment process, including direct foreign investments, an upsurge of outputs within industry, agriculture and services, revival of foreign trade, waning budget deficit and a drop in unemployment.
The Program sets the foundation for the medium-term and long-term actions to underpin a competitive economy, driven by knowledge, high technologies, free of any obstacles for growth and prosperity and will back the setting up of a modern society, sharing contemporary values and
50
upholding advanced living standards. The Government will strive for Republic of Moldova to become a country of law where the freedoms and rights of citizens are observed as well as ownership rights and the right to a decent living.
PRIORITIES UNDER THE PROGRAM
The Economic Stabilization and Recovery Program aims at three priorities, as follows:
1, Stabilization and streamlining of public finance;
2. Economic recovery; and
3. Securing an efficient and fair social protection.
The three priorities that the Government set to withstand the devastating effects of the economic crisis and to prevent an even worse financial and social crisis are cross linked. At the same time, the depth of crisis makes it necessary to implement certain “conflicting” actions - to widen the tax base in order to collect budget revenues and to cut down spending on certain non-priority sectors and less-vulnerable groups of population, as well as to take measures to ease the tax burden, stimulate economy and support those affected by crisis.
One may not ensure a tradeoff between these burning yet somewhat competitive needs without securing a number of indispensable conditions. In this vein, the goals set within the above priorities may be reached only if the following preconditions are ensured: i) getting a stable political situation in the country; ii) donor support to finance the key projects and actions of major importance, for which there is no Government h d i n g available; and iii) Government and society partnership in accomplishing the above goals. Although the three above pre-conditions are equally important, the chance of fulfilling this ambitious yet much-needed Program will be close to none without having secured this partnership.
1 I. Stabilization and streamlining: of nublic finance I Economic stagnation and the shrinking foreign trade have led to eroding the tax base and, as such, to a considerable reduction of tax revenues. The dropping public revenues in 2009, coupled with huge social payouts, have inevitably resulted in growing budget deficit. Budget funds can no longer cover the current needs in terms of maintenance and social needs today, let alone the investment programs and structural reforms, which imply additional costs. Under this circumstance, should there be no actions taken to stabilize public finance, the budget deficit may go over 15 per cent of GDP. In order to prevent the Government from becoming insolvent, amid a growing vulnerability of the country’s economy and population in general, the Government will have to streamline the budget spending, while at the same time widening the tax base and identifying sources from outside to temporarily finance the key important economic and social programs, as well as cover the budget deficit. Hence, the following objectives and short-term and medium-term actions are set within the context of public finance stabilization:
5 1
Obiective 1 the budget deficit
Immediate actions (2009):
Identify potential sources for building up the public revenues and decreasing
1.
2.
3.
4.
5 .
Negotiate with the International Monetary Fund a new economic and financial policy program;
Start up negotiations with the European Commission, the World Bank and with other external development partners of the country, in view of getting budget support, including the strengthening of efforts to disburse the pending installments of ongoing projects and programs that are being implemented; and
Improve the customs and tax administration systems (prevent under-assessment in customs, transfer of profits etc.);
Restart the privatization of state assets in liberalized areas based on open, publicized and transparent tendering;
Modifying current legislation in order to:
I. increase 2 times the maximum rate of the fee for territory development starting with 20 10;
11. increase by 50% the maximum rate of the fee for commercial units and/or social services provisions starting with 201 0;
111. starting with 2010 raise excise taxes on luxury cars, cigarettes and cigars, filter cigarettes, bear, strong and light alcoholic beverages, gasoline and petroleum products, perfumes, eau de cologne and jewelry goods;
IV. starting with 2010 set excise taxes on crystal goods and excise taxes on jewelry goods without justifying papers;
V. starting with 2010 increase by 30 per cent the road taxes for the cars with car plates from the Republic of Moldova using diesel fuel;
VI. raise the rate of the tax for using roads by motor vehicles registered in Republic of Moldova proportionately to the impact on the road infrastructure;
VII. increase the income tax rate on earnings obtained from gambling up to 18% (art.90' ~ a r . 3 ~ of the Fiscal Code);
VIII. starting with 2010, double the tax for issuing gambling licenses.
52
Medium-term actions (20 10-20 1 1): 1. Define “reinvested income” to improve the tool to enforce the tax facilities granted to
legal entities when paying income taxes.
2. Set clear-cut principles for the re-channeling of state budget revenues to the budgets of administrative-territorial units, including by ways of promoting a new law on local public finance;
3. Speed up the implementation of a new real estate taxing system: i) phase IV - living real estate - individual homes (including, homes and luxury mansions) - in 2010; ii) phase I11 - farming lands and buildings located on them - in 201 1. When setting the taxing rates one should make allowance for the location and land surface of the real estate, as well as for the number of tenants living therein.
Obiective 2 and reduce the budget deficit
Cut non-prioritv costs and re-channel the public spending to better efficiency
Immediate actions (2009):
1. Streamline the running costs of central and local public authorities, including by cutting down capital costs at least by 50% , costs for purchasing goods and services and funds earmarked for subsidies, while keeping an adequate level of social costs;
2. Apply the new system to group and grade public servants to underpin a new system for the payroll of public servants;
3. Develop a new Regulation on the payroll of the management of state enterprises, joint ventures in which state holds a majority of assets and the monopolist enterprises outlined by the Government.
Medium-term actions (20 10-20 1 1):
Public finance management:
1. Review the methodology to draft and carry into effect the budget; 2. Develop the new Financial Management Information System;
Public administration:
1, Restructure ministries, agencies and other institutions subordinated to the Government aiming at liquidating low efficiency public authorities, streamlining functional activities and reducing administrative expenditures;
2. Freeze the employment in the public sector and gradually decreasing the number of permanent vacancies within central specialized public bodies of public administration;
53
3.
4.
5 .
6.
7.
8.
9.
Streamline the structure of highest public authorities of the country (Presidency, Parliament, General Prosecutor’s Office, Court of Audit offices, etc.)
Reorganize the facilities subordinate to specialized central authorities and streamline the number of public servants from the facilities subordinate to ministries;
Reorganize the State Security Service of the Ministry of Internal Affairs (M1A)into a state enterprise and demonopolize security services for high importance facilities by improving the legal framework;
Implement the Law on public function and the status of a public servant;
Develop and implement the new payroll system for public servants;
Improve the mechanism of granting sack indemnities when calling off a public authority, downsizing the staff, or changing the staffing, for the public servants that are not subject to work-related transfers;
Postpone the measures aiming to raise salaries of public servants, army and workers of national defence, state security and public order, set for 1 October 2009, to 201 0;
10. Revise the existing legal framework in order to outsource some of the services of specialized central bodies of the public administration by opening the possibility of these services to be provided by the private sector (outsourcing);
1 1. Build capacities for transparent and accurate public procurements.
Education:
1.
2.
3.
Speed up the streamlining of the network of schools and free up resources to improve the quality of education by means of: (i) reorganizing about 130 general education facilities by changing their current status; (ii) create about 50 circumscribing schools and attribute about 60 schools to them; (iii) develop the infrastructure to access the circumscribing facilities (building or refurbishing of roads, ensuring their operation during harsh weather); and (iv) purchase of circa 80 transportation units to transport students to and from school (sub-actions iii) and iv) do not have financial coverage);
Streamline the average number of non-teaching staff units versus the number of teaching staff (to stay below 25 per cent in urban areas and below 35 per cent in rural areas);
Restructure the salary increase of education sector staff and implement this increase gradually during 2009-20 10;
54
4. Change the methodology of setting up the student dormitory tax rate in specialized secondary vocational and higher education facilities based on real expenditure adjusted to current prices and tarrifs;
5 . Level off the terms of stipend payments by calling off the coefficient applied for students and graduates of higher education and specialized secondary education facilities;
6 . Decrease by 20 per cent the ceiling for the stipend holders in higher education (second cycle) (from 70 per cent down to 50 per cent);
7. Full implementation of the reform strategy for the child care residential system;
8. Phase in the implementation during 2009-201 1 of the new way to pay the wages of teaching staff, as per the provisions of the Law on salary payroll in the public sector, no.355-XV1, from 23 December 2005;
9. Adjust the legal framework for the number of students in a class; increase the number of students per class and decrease the number of classes;
10. Streamline the network of secondary vocational and specialized secondary education institutions;
11. Streamline the network of higher education institutions by: i) refining and applying norms for the autonomy of universities and compliance with European standards (increasing the number of contract students); ii) developing the legal and normative framework to insure the financial autonomy of higher education institutions; iii) developing criteria that would allow determining the enrolment capacity of each higher education institution individually;
12. Revise the curriculum for primary, upper and lower secondary education by: i) considering the integration of some school subjects by curricular areashopics; ii) revising the framework Plan in order to decrease the number of academic hours;
13. Reorganize the Academy of Public Administration under the aegis of the President of the Republic of Moldova, including by transferring the Academy under the aegis of the Government and modifying the financing design.
Healthcare:
1. Strengthen and restructure the hospitals pursuant to the national master plan for the hospital sector and setting up the Hospital Registry;
2. Enhance the procurement capacity of the National Health Insurance Company;
5 5
3. Gradual increase of the mandatory health insurance premium up to 7.2% (3.6% for employers and 3.6% for employees) in 20 10;
4. Implement the mechanism for additional financing of medical services provided at the secondary and tertiary level through co-payments applied in differentiated manner depending on the degree of vulnerability of the individual.
Agriculture:
1.
2.
3.
4.
5 .
Ensure efficient use of subsidies granted in agriculture by channeling those towards the high-value areas with potentially high yields in order to improve the output capacity of agriculture and the competitiveness of farming products;
Establishing a Payment Agency subordinated to the Ministry of Agriculture and Food Industry;
Cut by at least 6 per cent in 2010 and 201 1 of overall funds earmarked from the state budget (basic spending, special funds and means) for agriculture;
A total cut in 2010 and 201 1 of the state budget allocations (basic spending, special funds and means) earmarked for planting vineyard plantations;
Call off in 2010 and 201 1 the state budget allocations earmarked for the planting of new forests, while fully keeping the planted plantations (the increase of the surface area covered by forest is to be covered from the assistance provided by development partners);
Public Security:
1. Call off the entitlement of a contract army soldier to: (i) cash compensation in exchange for food parcel; (ii) cash compensation in exchange for uniform; (iii) cash indemnity for health; and (iv) free-of-charge pass to balneotherapeutio treatment;
2. Call off the Government-paid entitlements to care and treatment in health care facilities and balneotherapeutic treatment for the spouses and children of employees of structures with military and special status;
3. Lower the monthly allowance paid based upon the overall work of the unit they are employed with for the contract military, contract troops, and contract commandment;
4. Unify the way a leave indemnity is calculated for the employees with military and special status, as well as for judges and prosecutors;
5. Streamline the spending in order enforcement structures by cutting down the number of permanently vacant jobs;
56
6. Transfer the units responsible for the calculation of salaries of military staff to NHSI.
Research:
1. Cut by 25 per cent during 2010-201 1 as compared to 2009 the spending on research and innovations, promoting applied research and training of research staff in research and innovation organizations, including universities;
2. Improve the correlation between public policies implemented by the Government and research and innovation products provided by the research sector;
3. Extend access to budget funds earmarked for research and development projects by improving the system of accreditation of eligible institutions;
4. Cancel, starting with January 1, 2010, of vacant positions in research and development institutions and auxiliary units of the Academy of Sciences of Moldova.
Road infiastructure:
1. Ensure an adequate and uninterrupted inflow of means to the road fund by separating the state budget finding earmarked for roads by improving the road works financing;
2. Scale down through merging the road maintenance companies (from 39 down to 12);
3. Refining the mechanism of issuing permits for international transport services.
I 11. Economic Recovery
The shrinking of aggregate demand for consumption, coupled with a growing administrative burden on business people, resulted in lower outputs of industrial goods, of services, especially within the transportation sector, of exports and demoralized the current and potential business people. The banking sector having reserve in granting loans to the private sector, as well as the still high interest rates on loans, make up another obstacle to starting up and carrying out business in Moldova. The economic growth in recent years, driven mostly by consumption and imports, is no longer feasible as an economic development model for the country, as it may no longer be secured, even more because of a significant drop of remittances starting this year. The economic crisis has once again proven that the current model of economic growth in the Republic of Moldova is not sustainable. Therefore, today the Government has the task not merely to safeguard those sectors and companies that have felt the devastating ripple effects of the crisis, but also to provide for the conditions that are adequate to operating and scaling up, as well as to the founding a new model of economic growth, based upon investments, enhanced productivity and higher competitiveness. In this context, the following objectives and actions have been set:
57
Obiective 1
Immediate actions (2009):
Ease of administrative burden:
Reduce the administrative and fiscal burden on doing business
1.
2.
3.
4.
5 .
6.
7.
8.
9.
Implement a one-stop shop system at the State Registration Chamber (SRC) with cross-access of the National Bureau of Statistics, the National Social Insurance House (NSIH), the National Healthcare Insurance Company (NHIC) and MSFI to the State Registry of Legal Entities to cancel the redundant registration procedures with the NBS, NSIH, NHIC and MSFI;
Develop a consolidated draft law on simplifying and streamlining of procedures, terms and costs to start up, carry out and acceptance of works in designing and constructions and quality control in constructions;
Reduce the number of types of business subject to licensure and simplify the licensure procedures;
Improve and simplify the way that one may be issued a sanitary and sanitary- veterinary certificate, by clearly defining the operational attributes of the relevant government facilities and by curbing the certification related costs;
Publish on the official webpage of the Main State Fiscal Inspectorate the list of economic agents to be subjected to a planned inspections by the relevant tax authorities;
Improve the way the system of customs brokers operate, by cutting down on the running costs and the costs of servicing one’s related pledges;
Demonopolize the import of meat and meat products by amending the Government Decision no.1363, as of 29 November 2006, on the way to issue import certificates for certain products;
Cancel the State’s marking system for selling mineral water and alcohol drinks;
Cancel the mandatory nature of certifying export-bound alcohol drinks at the unified laboratory - S.E. “National Center for the Quality Control of Alcohol Products’’;
10. Modify current legislation in order to facilitate the import of inputs (chemicals and biological products for agriculture, fertilizers, soil treatment products and goods imported for the promotion of trade) starting with 2010, including by harmonizing local legislation to Communitarian provisions for the procedure of placing these products on the market;
11. Remove barriers to exports, simplify the certification procedure, as well as cut the
58
number and costs of certificates and other required papers when exporting goods, including the calling off the requirement to have each export-bound lot of wine individually certified;
12. Cut the mandatory conformity certification related costs imposed on economic agents by reviewing the roster of products (services) and raw material subject to certification;
13. Demonopolize the business of selling wastes and leftovers of ferrous and nonferrous metals, batteries, used-up accumulators, including those processed, to the economic agents located in the Republic of Moldova and which are not tax related to its budget system, as well as the export of the former;
14. Simplifying and streamlining the mechanism for placing goods for active customs clearance, “zero” VAT taxation, and the way the given tax-break is managed;
15. Amend the Law no.803-XIV, dated 1 1.02.2000, on the industrial safety of dangerous industrial objects by bringing it in line with the EU practices and by simplifying the industry equipment verification procedures; and
16. Draft a Regulation on the issuance and use of certificates (unilaterally) for the international road transports; remove administrative barriers in granting the given certificate.
Ease of tax burden:
1. Cut down the dues for customs clearance, set in Annex no.2 to the Law on the customs dues, regarding the operation of free economic zones, bounded wharehouses and other suspending customs regimens;
2. Repay the debts owed to VAT repayments to unlock one’s economic operations;
3. Postpone the date of taxing revenues from bank interests and corporate securities of legal and physical entities from January 1,20 10 to January 1,20 12;
4. Amend Title IX of the Tax Code in view of paying road taxes in two installments for all transport agents in the country, therefore easing the tax burden on the transporters at the beginning of the year, when one’s revenues are smaller.
Medium term actions (2010-201 1):
Ease of administrative burden:
1. Perform under the central public administration reform a vast analysis of chargeable public services provided by public institutions and reforming them, including by
59
applying a new methodology for equitable and transparent pricing of these services (Guillotine 111);
2. Simplify the procedures set by the law regarding the close-up of a business (amend the Civil Code, Law on notary etc.);
3. Revise the procedure for certifying the goods for those goods that have already been certified in line with the standards of other countries, with which the Republic of Moldova has international agreements for mutual acknowledgement of certificates;
4. Simplify the certification system for the goods imported and put out on domestic markets by curtailing the number of permits and certificates;
5. Define the attributions of the sanitary and sanitary-veterinary services concerning the certification and safety of products, services, and related costs;
6. Simplify the customs clearance procedures by: (i) endorsing a single integrated customs due and by outlining the list of required papers (certificates, licensure, permits etc.) to submit to the customs entity at the time of customs clearance; and (ii) by introducing a simplified in-house customs clearance procedure for the economic agents with a high degree of credibility;
7. Finalize the preparatory works to implement the information system “Border”, which secures the online sharing of information across the one-stop shop authorities, and which are vested with powers to check goods and transport means at the border;
8. Develop an optimal and simplified mechanism for ceding / delegating one’s import entitlements paid in advance, from the accounts of customs brokers to the accounts of economic agents involved in foreign trade;
9. Cut the number of transport categories that have to be declared through specific actions taken (having those registered in the information system of the customs entity);
10. Develop detailed procedures for passing the customs check, by outlining the maximum admissible time limits for each procedure, minimizing the contacts between the customs worker and the economic agent, and by reducing human errors and bias;
11. Improve the system for making the environment payments for the emission by the cars of air pollutants to the atmosphere;
12. Revise the areas and objectives of public health state surveillance, following a review of the regulatory impact of the Law no.10, as of 03 February 2009;
60
13. Completely reform the patrimonial principles of the consumption cooperation system with direct involvement of cooperator members by drawing investments, including direct foreign investments for the development of commercial infrastructure and production in rural areas;
14. Extending access of alternative operators to the support infrastructure (railroads, air transport, quality infrastructure, communications etc.) by removing existing obstacles and restructuring, if necessary, of companies holding dominant positions (monopolists) in the area following a review of constraints for the business environment;
15. Liberalize and develop competitiveness on the market of railroad transport services;
16. Insure free access and protection of competition on the air services market;
17. Decentralize and simplify the procedure of excluding land plots from agricultural use, including by removing the limitations set under the Government Decision no.1451, from 24 December 2007, on the construction of production sites on the farming lands on the outskirts of communities.
Ease of tax burden:
1. Simplify the tax reporting procedures by: (i) implementing the e-declarations; (ii) automating the filling out of tax reports; and by (iii) a code bar based processing of reports;
2. Abrogate the normative provisions allowing for sanctions to be applied to economic agents even if no damage has been inflicted to the state budget and budget funds, as well as amend the provisions of art.188 under the Tax Code, making it possible for the economic agents to amend for the errors committed in the financial statements, at any time before a check is run on them;
3. Revise the tariff policy by cutting as much as possible the customs dues when importing raw materials, ancillary materials and technological equipment, while setting it the highest for finite goods, which are directly competitive to the domestic ones;
4. Remove discriminations applied when paying the environment tax on plastic or tetra- pack containers when importing pre-wrapped goods;
5 . Adjust on a yearly basis the basic tariffs for the rent services rendered by the state enterprises and by joint ventures in which the State holds the majority of assets, by considering the existing market price.
61
Obiective 2 Facilitate the access of businesses to financial means for launching, developing or recovering businesses
Immediate actions (2009):
1. The National Bank of Moldova to conduct an assessment of the banking system to identify problematic banks that need support, by setting the normative criteria and by working out adequate solutions to overcome those;
2. Intensify the process of granting loans under Component I1 of the National Program for the Economic Empowerment of Youth (NPEEY) - funding for private projects of young beneficiaries with a grant component. .
3. Intensify the efforts of implementing foreign assistance projects and capitalizing credit lines to stimulate competitiveness, specifically that of exporters.
Medium term actions (20 10-20 1 1):
1. The National Bank of Moldova will ensure an adequate level of national currency issuance and population-to-banking-unit rate in the economy by providing for favorable monetary conditions to spur economic growth;
2. Approve of the draft Law on the amending of certain legal acts on loans in general and on pledge recovery in particular;
3. Cover in part the interest rate on loans granted to economic agents, subject to the priorities of the national economy and the performance criteria of beneficiaries;
4. Provide for an increase in the annual allocations to the special Fund for Securing Loans (FSL) from MDL 1.5 million up to MDL 100 million and remove administrative hurdles in guaranteeing credits, alongside with an increase in the guaranteed threshold for active companies from MDL 300 thousand up to MDL 700 thousand and from MDL 100 thousand up to MDL 300 thousand for start-ups in 2009;
5 . Provide additional funding for Component I1 of the NPEEY - funding the private projects of young beneficiaries with a grant component, pursuant to the goal of funding approximately 400 private projects ;.
6. Draw financial resources to purchase by the SME subjects of equipment meant to develop small industries from the rural sector (pursuant to the mechanism used by the Implementation Unit of the grant provided by the Government of Japan);
7. Launch the Program (PARE 1+1) - investment of remittances in order to develop the rural sector and set up new businesses. -;
62
8. Set up a network of business incubators and strengthen the existing ones, in order to provide for some of the SME support infrastructure, SME viability and more innovation activities, the introduction of new technologies and the know-how and, as such, to result in growing budget revenues;
9. Draw foreign assistance to provide indirect financial support (technical assistance and consultancy, staff training) to companies in the regions, mostly to those from rural areas;
10. Use innovative infrastructure in order to create SMEs, attract investments and modernize the economy through innovation and technology transfer.
Obiective 3 Stimulate public and private investments
Immediate actions (2009):
1. Draw strategic investments to the country’s economy by securing direct negotiations between the Government and strategic foreign investors, as well as ensure the support of the way their investment projects are carried out;
2. Call on the meeting of the Advisory Board of donors in order to raise the financing of projects contributing to economic boost;
3. Ensure the efficient operability of the Public-Private Partnership Unit within the framework of the Public Property Agency. Submission of suggestions on how to align the normative framework to the provisions of the Law on the public-private partnership, in coordination with the opinion of development partners;
Medium term actions (20 10-20 1 1):
Corruvtion and iustice:
1. Draft and endorse an effective program to prevent and control corruption within public bodies and court entities;
2. Random distribution of cases to courts of law ;
3. Making the retribution of judges harsher when the law is violated.
Better investment climate:
1. Review the normative and legal framework in view of removing the excessive administrative hurdles obstructing the inflow of investments;
63
2.
3.
4.
5 .
6.
7.
8.
9.
Review the work of companies - natural monopolists to cut on the production and non-production costs, as well as to provide for optimal price-setting for the goods put out and services rendered by the given enterprises;
Control over the situation in terms of competitiveness on the most important markets of goods and take measures to ensure the liberty of business activity;
Organize extensive consultations with the private sector and foreign donors in view of identifying and taking urgent measures towards stimulating the consumption of domestic goods (other than those subsidized) and of drawing direct foreign investments to the country’s production sector;
Continue to develop the concept of industrial parks by setting up a new unit, as well as by reviewing the opportunities to scale up the benefits for the residents of the above parks;
Draw foreign assistance to develop a quality infrastructure in the Republic of Moldova, including for the setting up and providing with technical equipment of testing laboratories in order to assess the conformity of goods;
Establish a Development Fund and its capitalization, including using proceeds received as a result of public assets privatization and external resources for supporting the implementation of social infrastructure and innovation projects;
Establish regional development agencies and ensuring the operation of all institutions in the development regions of North, Center and South which will have the goal, inter alia, to foster and attract investments to development regions, including by creating capacities for the capitalization of opportunities provided to Republic of Moldova through participation to cross-border cooperation programs;
Support for domestic producers by creating a trade center or a standing exhibition at the CIE “Moldexpo”, in the municipality of Chisinau, and sales of domestic goods.
Management and de-nationalization of public assets:
1. Review the roster of assets - state property - subject to privatization in order to identify specific ways and optimal time frames for de-nationalization;
2. Develop on the basis of a continuing analysis of the operation of state enterprises and trade companies with a majority state-owned capital development programs, including investment programs, restructuring, etc. programs;
3. Enter and keep up-to-date on a quarterly basis the database on the state enterprises and trade companies in which the State holds assets, state property real estate and incomplete constructions sites;
64
4. Speed up the de-nationalization of state assets through a competitive and transparent process. Take measures, as per the legal provisions, towards preparing and taking over the privatization of 214 economic agents from the roster of state property assets subject to privatization;
5 . Continue the selling of relevant lands and assets not used in the specific work of central and local public facilities. .
Energy:
Drawing private investments to the energy sector by:
1. Developing investment programs to upgrade their power-generating capabilities (JSC “CHPP-l”, JSC “CHPP-2”, JSC “CHPP-Nord”), including by applying the principle of public-private partnership;
2. Cany out an energy audit to develop an agenda for the heating renovation and refurbishment of buildings (apartment blocks), including those of social and cultural use, aiming at the following objectives: i) better the hygiene conditions and the heating comfort; ii) minimize the loss of heat and power consumption; iii) scale down the maintenance costs incurred on heating and user-consumed hot water; iv) reduce the pollution with emissions generated for power production, transportation and consumption;
3 . Add on and amend the existing legal and normative framework in order to: i) better the power efficiency and scale up the use of renewable energy sources; ii) reorganize the National Energy Conservation Agency (NECA) into an Energy Efficiency Agency (EEA);
4. Get foreign assistance to support the energy efficiency Fund, which is ought to be created pursuant to the provisions of the Law on renewable energy;
5 . Modify current legislation in order to depoliticize the process of setting up tariffs for heating by transferring this competence to the National Agency for Energy Regulation (NAER). Transfer to the Parliament the authority of approving the budget and appointing the members of Administrative Board of NAER.
Infrastructure:
1. Mobilize foreign funds to renovate and maintain the roads and related infrastructure, engineering networks for water supply and sewage, gas supply networks;
2. Purchase works for the renovation of roads in full compliance with the appropriate applicable procurement rules;
65
3. Implement a truck axle weight limits control system to prevent the heavily loaded and overweight trucks from further deteriorating the national roads;
4. Remove existing barriers to implementing the projects financed by: i) the Arab Economic Development Fund from Kuwait (USD 6.5 million) for water and sewer supply works in 6 locations; ii) World Bank in the amount of USD 12 million to build aqueducts in different communities around the country;
5. Support (including administrative support) the implementation of the investment program of the JSC “Moldovagaz” in the efforts of the latter to supply gas within communities, as well as make it get more involved it in the cross-village gas supply;
6. Develop feasibility studies on storing natural gas and on alternative cross-links with neighboring countries; and
7. Improve the infrastructure adjacent to the international, national and local roads (building up technical servicing stations for the transport means, hotels, camping sites,. restaurants etc. on farming lands in order to draw investments and collect financial means from taking those lands out of farming use.
Agriculture:
1. Provide for a favorable environment to develop business and stimulate investments along the agriculture-food chain;
2. Remove the non-tariff hurdles that limit the export of farming goods;
3. Develop a food safety strategy; and
4. Entitle resident companies with foreign capital to purchasing farming lands;
5. Stimulate the development of market infrastructure by establishing agri-food product centers (terminals) at national level and agri-food markets at local level.
Constructions.
1. Develop a mortgage lending system for purchasing housing by attracting external credit lines;
2. Implement the mechanisms of long-term lending to the construction sector to finalize incomplete apartment blocks, including with the support of development partners of the country.
Communication and information technologies.
1. Implement the electronic governance software applications (“e-governance”) through
66
2.
3.
4.
5 .
6.
7.
open competitive bidding in an attempt to increase the participation of local IT companies;
Update the Strategy for electronic society edification strategy “Electronic Moldova” based upon the best available international experience;
Demonopolize the process of digital transitioning and purchasing by applying he Law on electronic documents and digital signature;
Support the electronic communication infrastructure by implementing the concept of extending Internet access through broadband electronic communication
Liberalize the access to electronic communication infrastructure, ensure under fair conditions for cross-connectivity and access to local loops, by demonopolizing the communication market, including the restructuring of “Moldtelecom” JSC.
Ensure the hct ional and financial independence of NARECIT;
Simplify the legal framework for VAT administration on transactions made through the program, including clear definition in the Fiscal Code of the status of software products.
1 111. Ensuring an efficient and fair social protection
The economic crisis has had adverse effects not only on the country’s economy, but also on the groups of people at risk even before the crisis hit, or who turned vulnerable once the recession stroke. The country’s shrinking economy led to an increase in the unemployment rate, including because of emigrants getting back home, creating a limited number of jobs, payroll cuts or fewer working hours imposed by employers, amid sparse leverage that the Government could make use of to support the affected. The drop of remittances which previously used to provide for decent living conditions for the people and made it possible to avoid poverty, is the critical challenge factoring in making the population vulnerable today. The Government will bend efforts to find a balance between the first two priorities of the Plan and this priority, to establish an economic development model which not merely contributes to collecting public and private revenues but rather channels adequate amounts of public spending to the truly needy, as to avoid social exclusion and diminish the poverty risk. Under this circumstance, below one may find the following objectives and actions for this priority:
Obiective 1 and prevention of social exclusion.
Support vulnerable groups through more efficient channeling of social assistance
Immediate actions (20091:
1. Remove the possibility for multiple reappraisals of pensions and reappraisal of pensions based upon monthly payment increases;
67
2.
3.
4.
5 .
6 .
Social care:
Carry out a strict control over how the setting of the commercial add-on is observed by the economic operators when selling goods of social importance (the commercial add-on must not exceed the ceiling set by the law);
Carry on the implementation of measures to fight the monopolistic arrangements within economy, and which keep the prices at socially inadmissible high levels;
Provide for a minimum guaranteed monthly income for disadvantaged families by providing them with social support following an overall monthly means-test for the family and after the premises are in place to substitute the social .assistance for the nominative compensations;
Carry out the projects from external credits for the social destination objects: district- level hospitals, health centers, kindergartens, schools, high schools etc. and intensifL the negotiations with donors to finance the projects aiming at supporting the vulnerable groups, including social infrastructure rehabilitation projects;
Increase the tax waive and tax-break for dependents when computing the income tax for natural persons starting with 20 10.
1.
2.
3.
4.
5 .
6.
7.
8.
9.
Gradually substitute the social care system for the nominative compensation system, to be rendered to disadvantaged families based on the means-testing, by freezing the nominative compensation rates and by calling off the entitlements to nominative compensations, starting on 1 January 20 10;
Increase the amount of the monthly minimum guaranteed income, as set out in the Law on the State Budget;
Increase the amount of the one-off indemnity payable at the first childbirth and for each of the following child by MDL 300 to the uninsured in 2010;
Increase the monthly allowance payable for childcare until 1.5 years-old by MDL 100 for the uninsured in 20 10;
Increase the amount of death allowance with 100 lei per year (from 800 lei to 900 lei);
Cover expenditures for sanatorium treatment of veterans from state budget;
Approve the draft Strategy on social inclusion of people with disabilities;
Set an integrated system for social services;
Create an Automated Information System for “Social Assistance”;
68
10. Implement the Strategy of the National Reference System for the protection and assistance of victims and potential victims of human trafficking and the Action Plan for 2009-201 1;
11. Develop the National Information System ?State Registry for Cases of Family Violence?.
Social insurance.
1. Extend the obligation to pay for one?s mandatory state social insurance to all those working in the Republic of Moldova;
2. Suspend payment of that part of one?s pension that is paid from the state budget for the privileged groups of pensioners who continue to work in the same position that entitled them to getting their advantageous pensions;
3, Adapt the indexation of social insurance benefits to the current economic conditions;
4. Unify the retirement age and the way pensions are calculated for all groups of pensioners;
5 . Increase the accountability of employees and employers to minimize spending when paying one?s allowance for temporary loss of work capacity owing to common health conditions or to work-unrelated accidents by changing the source of funding and the amount of payable indemnity;
6. Starting in 2010, compensate from the state budget 6 per cent of the amount of the mandatory state social insurance premiums for the employees working in the farming sector and further streamline the compensation mechanism;
7. Review the opportunity to develop a model of pensions made up of two components - base pension, and insured pension.
8. Increase the amount of the one-off indemnity payable at the first childbirth and for each of the following child by MDL 300 in 2010;
9. Increase in 2010 by 5 percentage points the baseline for computations in view of setting the indemnity for raising the first child until 3 years-old and by MDL 50 -the minimum guaranteed amount of the respective allowance provided to the insured, with fiuther streamlining of their indexation mechanism;
10. Starting on 1 January 2010, pay the lifelong indemnities and pensions to prosecutors and judges as follows: 50 per cent from the state budget, and 50 per cent - from the state social insurance budget;
1 1. Increase the amount of annual death indemnity by MDL 100
69
Health:
1. Extend the coverage of population subject to mandatory healthcare insurance;
2. Extend the obligation of paying mandatory insurance contributions for healthcare assistance for all people that work on the territory of Republic of Moldova;
3 . Revise the relationship between the state budget and mandatory healthcare insurance funds to ensure financial protection and access of the whole population, especially, vulnerable population and groups of population with socially conditioned illnesses with a major impact on public health, to a package of key healthcare services, at the same time as streamlining the content of the Unique Program;
4. Streamline the primary health care facilities and ensure the availability of basic medical equipment in all centers;
5. Encourage the involvement of private sector in the additional financing and health service provision by developing private-public partnerships;
6 . Extend the group of beneficiaries of compensated medicines to children under 14 years of age;
7. Implement the mechanism of decreasing retail prices for a list of 5-10 basic medicines used to treat the most common illnesses in children and senior people;
8. Attract additional financial resources from the donor community to cover the deficit in the essential Programs in the public health sector, i.e. immunization, tuberculosis, HIS/AIDS, mental health, cancer and other programs with a major impact on public health.
Obiective 2 migrants.
Provide for employment for the unemployed and for returning
Immediate actions (2009)
1. Scale up the means of informing the population about labor market demand and supply, including for migrants getting back home after having lost their jobs abroad; and
2. Scale up re-training courses for the unemployed and for returning emigrants;
3. Involving unemployed into short-term public works (repairs of engineering networks damaged by breakdowns, fires, natural calamities, etc.) organized and monitored by local authorities.
Medium-term actions (20 10-20 1 1)
70
1. Expand the base of unemployment allowance beneficiaries to include agricultural workers and migrants;
2. Change the way the unemployment payment is provided by motivating the unemployed to search for a job and get integrated in work environment, in order to efficiently use the available funds, including by cutting the amount of unemployment payment by 15 per cent after having benefited from it for 3 months in a row and by further 15 per cent for the next 3 months;
3. Increase the number of people enrolled to professional training courses;
4. Scale up temporary employment opportunities for the unemployed by taking measures to stimulate their involvement in public works of community interest;
5 . Increase the number of recipients benefiting from the professional integration or reintegration allowances;
6. Support the youth by carrying on to implement the National Program for Social Support to Young Families “Jobs for Youth”, and this should be extended to other citizens, too, getting back home; and
7. Develop a labor market information system, including the labor force migration component, keeping them in the lucrative area (procurements, refurbishment, consumables, Internet, telephony etc.)
PROGRAM COSTS
Total costs are disaggregated by priority and source of coverage (national public budget, technical assistance, or uncovered policy costs that will be discussed with donors).
PROGRAM MONITORING AND EVALUATION
The implementation of the Program will be constantly monitored aiming at tracking the performance of proposed actions and results achieved so that, if necessary, adequate modifications can be made to public policies promoted by the Government in the context of this Program. Every quarter, on the basis of the inputs of responsible public authorities, the State Chancellery will develop monitoring reports where it will analyze the progress of implementing the Program, indicate difficulties and make recommendations for removing constraints occurring in the process.
Every semester, the State Chancellery, together with responsible central public administration authorities, will develop semiannual monitoring reports. The outcomes of implementing the Program, outlined in these reports, will be presented every six month at the sessions of the Government and the Economic Stabilization and Recovery Program Monitoring Board lead by the Deputy Prime Minister, Minister of Economy and consisting of representatives of the Government, civil society and development partners. Responsible public authorities will be in
71
charge of monitoring the implementation of Program actions based on a set of quantitative and qualitative monitoring indicators established for each action included in the Program.
The evaluation of the Program is a one-time procedure carried out at the end of the Program. The Evaluation Report, developed by the State Chancellery based on the inputs of responsible public authorities will contain both an analysis of the performance of implementing Program actions and the impact of these actions on the economy, the budget, population, in general, and vulnerable population, in particular. Both during the monitoring process and during evaluation, the Ministry of Finance will provide its advisory support to the State Chancellery and to other public administration authorities on estimating the impact of the Program on the budget, certain economic sectors and vulnerable categories of population.
72
b
m b z! 9 L
P
ANNEX 3. IMF PUBLIC INFORMATION NOTICE (PIN)
IMF Executive Board Approves US$574 million ECF/EFF Arrangements for Moldova Press Release No. 10/2 1 January 29,20 10
The Executive Board of the International Monetary Fund (IMF) today approved three-year arrangements for the Re ublic of Moldova under the Extended Credit Facility and the Extended Fund Facility.- With each facility providing an equal amount, the combined financial assistance will be equivalent to SDR 369.6 million (about US$574.4 million) to support the country’s economic program aimed at restoring fiscal and external sustainability, preserving financial stability, reducing poverty, and raising growth. The approval makes an amount equivalent to SDR 60 million (about US$93.2 million) immediately available, with the remainder available in installments subject to semiannual reviews.
P
The new arrangements follow a three-year program supported by a Poverty Reduction and Growth Facility, which was approved by the IMF Executive Board in May 2006 and expired in May 2009 (see Press Release No. 06/91). Following the Executive Board discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chairman, said: “The global economic crisis led to a rapid deterioration in the Moldovan economy in 2009. Falling demand in trading partners caused a severe downturn in exports and workers’ remittances; FDI and other capital inflows fell dramatically as well. As a result, domestic demand collapsed, causing a sharp GDP contraction and deflationary pressures. Fiscal pressures were exacerbated by pre-election spending hikes. “The authorities’ program for 2010-12 aims to restore fiscal and external sustainability and boost growth. Fiscal policy targets a gradual return to a sustainable position by 2012 or earlier if possible. Monetary policy will focus on maintaining price stability. Structural reforms will support the recovery, including by increasing the flexibility of the highly regulated economy.
The program will also increase spending for essential social services and poverty reduction. “Fiscal policy in 2010 seeks to balance a much-needed adjustment with large public investment and social spending needs. To reduce the deficit, the authorities have rescheduled unaffordable wage increases and rationalized spending on materials and subsidies. At the same time, the budget envisages a rise in targeted social assistance spending to help protect vulnerable households. “Taking advantage of low inflation, monetary policy will be supportive of the nascent economic recovery. To ensure that the exchange rate is in line with fundamentals, intervention in the foreign exchange market will be limited to smoothing short-run fluctuations. The central bank is closely monitoring banks’ financial soundness and stands ready to take preemptive action if needed. “Structural reforms are designed to unlock the economy’s growth potential and support the fiscal program. A wide-ranging program of liberalization and deregulation is aimed at stimulating competition and fostering private sector-led growth. To keep the social insurance system financially sustainable, early retirement privileges of the civil servants will be gradually phased out, and sick leave compensation will be revamped. The authorities will also address the large quasi-fiscal arrears in the heating sector.”
76
Recent Economic Developments The global economic crisis hit Moldova hard, leading to a sharp weakening of the economy. In the first half of 2009, falling demand in trading partners led to a severe downturn in exports and remittances. While GDP dropped by nearly 8 percent over the same period, domestic demand declined even faster, and the current account deficit contracted to about 11 percent of period GDP. At the same time, the balance of payments moved from a surplus to a large deficit as Foreign Direct Investments (FDI) and other capital inflows fell dramatically. Deflation pressures persisted for most of 2009.
Est.\ Proj . I. Real sector indicators (Percent change, unless otherwise
indicated)
Program Summary The program aims to restore fiscal and external sustainability, preserve financial stability, and raise growth. To facilitate the adjustment, the program provides for adequate budget financing. Specifically, program objectives include: (i) reversing the structural fiscal deterioration that occurred in 2008-2009 while safeguarding f h d s for public investment and priority social spending; (ii) keeping inflation under control while rebuilding foreign reserves to cushion the economy from external shocks; (iii) ensuring financial stability by enabling early detection of problems and strengthening the framework for bank rehabilitation and resolution; and (iv) raising the economy’s potential through structural reforms.
Real growth rate 3.0 7.8 Demand 7.8 5.7
The program will also help mobilize resources for successful implementation of the poverty reduction agenda. To promote poverty reduction, the program sets a floor on priority social spending. Moreover, social assistance spending will be increased by 36 percent in 2010 relative to 2009 to support vulnerable households.
-9.0 1.5 -18.9 2.3
Republic of Moldova: Selected Economic Indicators, 2007-10 ”
Consumption Gross fixed caoital formation
I 20071 20081 20091 20101
3.8 25.5
IGross domestic oroduct I I I I I
5.71 -7.01 -1.71 2.21 -38.41 6.11
Foreign saving I 16.51 17.31 National saving 17.6 16.7 Gross investment 34.1 34.0
I. Fiscal indicators (general government)
77
Credit to the economy 51.71 20.31 -7.11 10.7 IV. External sector indicators kMillions of U.S. dollars, unless
Sources: Moldovan authorities; and IMF staff estimates and projections. '' Data exclude Transnistria.
' The Extended Credit Facility (ECF) has replaced the Poverty Reduction and Growth Facility (PRGF) as the Fund's main tool for medium-term financial support to low-income countries by providing a higher level of access to financing, more concessional terms, enhanced flexibility in program design features, and more focused streamlined conditionality. Financing under the ECF carries a zero interest rate, with a grace period of 5 s years, and a final maturity of 10 years. The Fund reviews the level of interest rates for all concessional facilities every two years. The Extended Fund Facility (EFF) carries an annual interest rate equal to the SDR basic rate of charge, and is repayable over 10 years with a 4.5-year grace period on principal payments.
IMF EXTERNAL RELATIONS DEPARTMENT Public Affairs Media Relations
Phone: 202-623-7300 Phone: 202-623-7 100 Fax: 202-623-6278 Fax: 202-623-6772
78
ANNEX 4. ACTION PLAN FOR REMOVING ADMINISTRATIVE BARRIERS
GOVERNMENT OF THE REPUBLIC OF MOLDOVA
Resolution
In an effort to achieve the governance objective of removing administrative
constraints to the business environment stipulated by the Activity Program of the
Government of Republic of Moldova ?European Integration: Freedom,
Democracy, Welfare? 2009-20 13 :
1. To approve the Action Plan for excluding administrative constraints to the
business environment.
2. Ministries and other public administration authorities will ensure the
accomplishment of actions stipulated in the above-mentioned Plan and will submit
a monthly informative report on the achievement of these actions within 15 days of
the following month to the State Chancellery.
PRIME-MINISTER Vladimir FILAT
79
Approved by Government Resolution
6.
- 7.
8. -
- 9.
ACTION PLAN for removing administrative constraints
to the business environment
Action Collect recommendations from the private sector about constraints to doing business Identify the need of certifyingllicensing goods on the domestic market in each sector of the national economy Modify the current legal framework to ensure the clear regulation of financial liability of the administrator when the latter infringes its mandate stipulated by legislation Modify Law no.803-XIV dated 11.02.2000 and Law no.461-XV dated 30.07.2001 to reduce the number of hazardous industrial facilities subject to technical authorization, as well as perform necessary modifications to simplify the authorization procedures for the operation of hazardous industrial facilities Initiate and negotiate with the Federal Veterinary and Plant Protection Service (Russia) a Protocol for supplementing the Collaboration on Plant Protection Regulation Protocol between the Russian Federation and Republic of Moldova dated 10.04.2007 with a view to add new items on crossing the border of the Russian Federation when exporting goods from Republic of Moldova Liberalize (demonopolize) the import of meat and meat products by modifying Government Resolution no. 1363 dated 29 November 2006 on issuing authorizations for the import of some Products Proposals to reduce taxes and tariffs for bounded warehousing Review the quantum of the fee for customs procedures stipulated in Annex no.2 to the Law on customs tariffs Speed up negotiations on increasing the fee for (unilateral) authorizations for international transportation
Responsible Ministry of Economy
Ministry of Economy
National Commission for Financial Market
Ministry of Economy
Ministry of Agriculture and Food Industry
Ministry of Economy
Ministry of Economy
Ministry of Economy, Ministry of Finance
Ministry of Transport and Road Infrastructure, Ministry of External Affairs
Deadline On-going
November 2009
November 2009
November 2009
November 2009
November 2009
November 2009 November 2009
November 2009
80
10.
- 11.
- 12.
- 13.
- 14.
I__
15.
- 16.
- 17.
- 18.
- 19.
-
Adjusting the normative acts of the Customs Service to the provisions of Law on vegetal kingdom no.239-XVI dated 08.1 1.2007 and Law on animal kingdom no.439-XI11 dated 27.04.1995 regarding the import of cultivated wild flora and fauna species Postpone the taxing of income on bank deposits for legal and physical entities from 01.01.2010 to 01.01.201 5
~~
Analyze the opportunity of developing modifications to legislative and normative acts in order to demonopolize the export of ferrous and non-ferrous metal waste Analyze the opportunities to remove the doubling of information requests, including by ensuring the one-time collection of the same data by a public institution
Align the normative acts of the Customs Service to the provisions of Law no.852-XV dated 14.02.2002 on approving Regulations on trade regime and regulation of using halogenated carbons depleting the ozone layer Modify current legal framework for clear
~
delimcation of the functions of sanitary service and veterinary medicine service related to issuing respective authorizations, related payments and development of necessary papers Develop Regulations on issuing and using (unilateral) authorizations for international motor transportation Estimate the reporting burden for business entities and determine quantitative objectives to reduce it
Eliminate the obligation to certify agricultural output at the unified laboratory of SE “National Center for Quality Control of Alcoholic Products” including the certification of each batch of exported wines Finalize implementation of the information system ,,Frontiers" (Border), which allows on- line information exchange between the authorities participating at the ‘one-stop shop’ and are invested with the authority of verifying goods and transportation vehicle at the border
Ministry of Finance
Ministry of Finance
Ministry of Economy with the assistance of RIA Secretariat
State Chancellery, Ministry of Finance, National I
Bureau of Statistics, National Health Insurance Company, National Social Insurance House Ministry of Finance
Ministry of Health, Ministry of Economy
Ministry of Transport and Road Infrastructure
Ministry of Finance, National Bureau of Statistics, National Health Insurance Company, National Social Insurance House Ministry of Agriculture and Food Industry, Ministry of Economy
Ministry of Finance, Customs Service
December 2009
December 2009
December 2009
December 2009
December 2009
December 2009
December 2009
December 2009
December 2009
December 2009
81
- 20.
- 21.
- 22.
23. -
24.
- 25.
26.
- 27,
28.
- 29.
Liberalize the import regime for inputs :chemicals and biological substances for igriculture, fertilizers, soil treatment products ind goods imported for the purpose of promoting rade) starting with 20 10 Modify Government Resolution no. 153 1 dated 29.12.2007 on approving the Concept of [nformation System ‘State Registry for Branded Products’ and Government Resolution no.934 lated 15.08.2007 on setting up the information system ‘State Registry for natural, potable mineral water and bottled non-alcoholic beverages’ Promote the Law on authorizing construction works Specific proposals on implementing land digital television and broadband internet access on the Entire territory of the country Quarterly publishing in the “Official Gazette” of the list of business units to be inspected by fiscal authorities according to their work ~ l a n s Cut down the number of transport categories that have to be declared through specific actions taken (having those registered in the information system of the customs entity) Cut down the mandatory conformity certification related costs for economic agents by reviewing the list of products (services) and raw material subject to certification Review legislation to improve the operation of the institution of customs brokers and to reduce operational costs and service costs for related warranties as well as develop an optimal and simplified mechanism for ceding / delegating import entitlements paid in advance, from the accounts of customs brokers to the accounts of economic agents involved in foreign trade Simplifi (exclude, if not requested by the importing country) procedures for issuing a permit for the export of plant products (plant protection certificate and hygiene certificate) Simplify the customs clearance procedures by: (i) endorsing an integrated customs due (TARIM) and by outlining the list of required papers (certificates, licensure, permits etc.) to submit to the customs body at the .time of customs clearance; and (ii) introducing an on-line customs statement procedure for the economic agents with a high degree of credibility;
Ministry of Agriculture and Food Industry
Ministry of Health, Ministry of Economy
Ministry of Constructions and Regional Development Ministry of Information Technologies and Communications Ministry of Finance
Ministry of Finance, Customs Service
Ministry of Economy
Ministry of Finance, Ministry of Economy, Customs Brokers Association
Ministry of Agriculture and Food Industry
Customs Service
December 2009
December 2009
December 2009 December 2009
December 2009
December 2009
December 2009
December 2009
December 2009
December 2009
82
30.
3 1.
32.
33,
I registering companies 34. I Cancel the stamp “State Commercial Brand” for
Simplify the procedures set by the law regarding the closing-up of a business (amend the Civil Code, Law on notary etc.) Abrogate the normative provisions allowing for sanctions to be applied to business units even if no damage has been inflicted to the state budget and budget funds, as well as amend the provisions of art. 188 of the Tax Code, allowing business units to amend the errors made in financial statements at any time before a check Revise the tariff policy by cutting down as much as possible the customs dues for imported raw materials, ancillary materials and technological equipment, while setting highest dues for finite goods, which directly compete with domestic ones Develop and submit the draft law on institutionalizing the single-stop shop for
1 the export of alcoholic products
Ministry of Justice Ministry of Economy
Ministry of Finance
Ministry of Agriculture and Food Industry, Ministry of Economy
Ministry of Information Technologies and Communications Ministry of Agriculture and Food Industry, Ministry of Economy Ministry of Economy
Ministry of Finance, Ministry of Economy
Ministry of Economy
Ministry of Finance
Ministry of Finance, Ministry of Economy
Ministry of Finance
Ministry of Economy, National Agency for Energy Sector Regulation, energy suppliers Ministry of Constructions
December 2009
2010
January 2010
February 2010
February 2010
February 2010
February 2010
March 201 0
March 20 10
May 20 10
May 20 10
May 20 10
May 2010
83
46.
- 47 *
48.
49.
- 50.
- 51.
_ _ ~
of the expertise systemsfor land improvement projects
Promote the draft Law on domestic trade and related regulations in order to simplify authorization procedures by specifying in detail the responsibilities of public authorities Make necessary amendments to article 10 paragraph (2) letter a) of Law on mandatory health care insurance no.1585AXIII dated February 27, 1998 and to article 26 paragraph (1) of Law on the public social insurance system no.489-XIV dated July 8, 1999 by excluding norms related to registration as payer of state social contributions and mandatory healthcare insurance premiums Develop a normative paper on the procedure, areas and objectives subject to sanitary authorization that require a preliminary risk analvsis Develop an analysis of the opportunity to exclude the stamp as a mandatory attribute for the operation of a business unit Develop proposals on excluding all unjustified authorizations and payments
Develop a methodology for the analysis of economic and social relations and considering the frequency of movement of population Amend Law no.1422 dated 17.12.1997 on protecting atmospheric air by defining a list of enterprises producing a large amount of pollutant emissions for which it is mandatory to submit data on the amount of lowest admissible emissions (LAE) Amend the Law on payments for polluting the environment in order to streamline onerous payments (for packaging, goods provided by international financial bodies, goods for technical assistance projects, for pollutant emission of motor vehicles not registered in Republic of Moldova, etc.) Simplify access to digital signature to the general public, especially, for the business environment,
and Regional Development, Ministry of Environment, Ministry of Internal Affairs, Land Relations and Cadastre Agency, “Moldsilva” Agency Ministry of Economy
Ministry of Justice, National Social Insurance House, National Health Insurance Company
Ministry of Health
Ministry of Economy
Ministry of Economy together with central and local public administration authorities Ministry of Transport and Road Infrastructure
Ministry of Environment
Ministry of Environment
Ministry of Information Technologies and
Ma 2010
June 2010
June 2010
June 2010
June 20 10
June 2010
June 2010
June 2010
June 2010
84
by demonopolizing the procedure of certifling public keys and associated infrastructure
Create and open a one-stop shop for electronic reporting of tax liabilities, social and healthcare payments (contributions) and statistical information
Develop a consolidated draft law (code) on simplifying and streamlining procedures, terms and costs to start up, carry out and acceptance of design and construction works Simplify the procedure of registering real estate by implementing a one-stop shop and submitting electronic documents
Analyze the impact of amending legislation on VAT payment upon invoice payment Adjust on a yearly basis the basic tariffs for rent services provided by state enterprises and by state enterprises in which the State holds the majority stock based on existing market prices Adjust the legal framework in order to implement the- principle i f enforcing sanctions for failing to pay social and pension taxes at the time of paying not of calculating the wage Analyze the opportunity of removing restrictions stipulated by Government Resolution no. 145 1 dated December 24,2007 on building production facilities on agricultural lands outside community land (additional revenues to the budget from excluding lands from agricultural use) Exclude starting with 2009 and until 201 1 ad-hoc inmections of control bodies to business units
Communications, Information and Security Service Ministry of Finance, Ministry of Economy, Ministry of Information Technologies and Communications, National Social Insurance House, National Health Insurance Company, National Bureau of Statistics Ministry of Constructions and Regional Development
Ministry of Information Technologies and Communications, Ministry of Justice, Land Relations and Cadastre Agency Ministry of Finance
Ministry of Finance
an is t ry of Finance
Ministry of Economy, Ministry of Agriculture and Food Industry
Central and local public administration authorities
December 2010
December 2010
December 2010
20 10-20 1 1
20 10-20 1 1
2010-201 1
201 0-201 1
2009-201 1
85
INFORMATION NOTE to the draft Government Resolution on approving
the Action Plan for excluding administrative constraints to the business environment
In an effort to achieve the objectives stipulated by the Activity Program of the Government of Republic of Moldova “European Integration: Freedom, Democracy, Welfare 2009-20 13”, the Ministry of Economy has developed and Action Plan for excluding the administrative constraints to the business environment.
The Plan is submitted to be approved by Government Resolution for its implementation in accordance with the provisions of Article 30 of Law on the Government no.64-XI1 dated 3 1.05.1990.
The actions of the Plan were developed based on the recommendations of Ministry of Economy staff, the consultants of the Regulatory Impact Assessment (RIA) Secretariat, the members of the Working Group of the State Commission on Regulating Doing Business and some central public administration authorities.
The Plan was prepared with consideration to the following documents: Policy Notes for the Governmenthlay 2009; The Activity Program of the Government of Republic of Moldova “European Integration: Freedom, Democracy, Welfare 2009-20 13”; Draft Economic Stabilization and Recovery Program of Republic of Moldova for 2009-20 1 1 ; The report of the RIA Secretariat “Recommendations for the Improvement of the Business Environment”/October 2009; White Charter 2009/0ctober 2009; Action Plan for the implementation of Economic and Financial Policies Memorandum; Central public administration authorities are to urgently develop their own
implementation plans.
The implementation of the Plan will contribute to removing impediments in doing business, demonopolizing imports and exports, implementing modern technologies for reporting in view of minimizing monetary and time costs of business units.
At the same time, the standing of Republic of Moldova in international ranking systems for ease of doing business will improve, a factor taken into consideration by investors.
86
ANNEX 5. MOLDOVA AT A GLANCE
Moldova a t a glance 2/25/1)
Key Development Indicators
72008)
Population. m id-year (m illio ns) Surface area (thousand sq, km) Population growth (%) Urban population (%of total population)
GNI (Atlas method, US$ billions) GNIpercapita(At1as method, US$) GNI percapita (P PP, international $)
GDP growth ( O h )
GDP per capita growth ( O h )
( m o s t recent est imate, 2003-2008)
Povertyheadcount ratio at $125aday(PPP.%) Povertyheadcount ratio at$Z.OOaday(PPP, %) Life eqectancyat birth (years) infant rnortality(per I000 live births) Chiid malnutrition (%of children under5)
Adult literacy, male (%of ages 15 and older) Adult iiteracy,female (%of ages 15 and older) Gross primaryenrollment. male (%of age group) Gross prirnaryenrollment, female (%of age group)
Access to an improvedwatersource(%of population) Access to improved sanitation facilities (%of population)
Moldova
3.6 34
-0.9 42
5.3 1500 3,213
7.2 82
8 29 69 16 3
130 99 95 94
90 79
Europe 8 Central
Asia
44 1 23.96
0.3 64
3,274 7.418
P,220
5.5 5.2
4 9
70 21
99 96 99 96
95 89
Lower middle
income
3.702 32,309
22 41
7,692 2.078 4,592
7.6 6 3
68 46 26
88 77 1P D6
86 52
Net Aid Flows
(US$ millions) Net ODA and official aid Top 3 donors (in 2007):
European Commission United States Sweden
Aid(%ofGNl) Aid per capita (US$)
Long-Term Economic Trends
Consumer prices (annual %change) GDP implicit deflator(annua1 %change)
Exchange rate (annual average, local per US$) Terms of trade index(2000 = 130)
Population, mid-year (millions) GDP (US$ millions)
Agnculture industry
Services
Household final consumption ewnditure General gov't final consumption expenditure Gross capital formation
~xpor ts of goods and sewices Imports of goods and sewices Gross savings
Manufacturing
1980
4 0
1990 2000
W P 3
0 5 9 35 0 2
0.4 9.4 2 30
788.5 312 8.5 27.3
0 .o 2.4 130
4.4 4.1 3,593 1288 (%of GDP) 36.1 29.0 36.7 21.7
36.0 16.3 27.2 49.2
57.5 9 14 15.1 m.3
24.9 23.9
48 2 49 8 50.6 75.4
48.1 B.3
2008
269
66 s R
5.6 73
1.4 9.7
13.4 89
3.6 6,048
13 .9 14.7 y1.1
74.5
93.3 20.6 37.0
40.7 9 15 20.2
Agedistribution, 2008
Female
3 0 3 6
psrcenl of total population
Underd mortalitv rate (per 1,000)
1 6 0 ,
1990 1985 2000 2007
DMoidova OEumpe &Central & a I
1980-90 1990-2000 2000-08 (average annualgrowth %)
0.6 -0.6 -25 2 7 -9.6 6.3
-112 -1.6 -53.6 0.6
-7.1 4 1 0 7 113
9.9 9.4 -8.4 6.7 - 5 5 11.9
0.7 122 5.6 0.8
Nota Figures in italics are for yaan otherthan those specified 2008 data are preliminary a Aiddataarefor2007
Development Economics. Development Data Group (DECDG)
indicates data are not available
87
Moldova
B a l a n c e o f Payments and Trade
(US$ millions) Total merchandiseexports (fob) Total merchandise imports (cif) Net trade in goods and services
Current account balance as a %of GDP
Wbrkers' remittances and compensation of employees (receipts)
Reserves, including gold
C e n t r a l Government F inance
(%of GDP) Current revenue (including grants)
Current expenditure
Overall surplus/deficit
Highest marginal taxrate(%)
Tax revenue
individual Corporate
External D e b t and R e s o u r c e F l o w s
(USS millions) Total debt outstanding and disbursed Total debt service Debtreiief(HiPC.MDRi)
Total debt (%of GDP) Total debt service (%of exports)
Foreign direct investment (net inflows) Portfolio equity(net inflows)
2000
477 793 -331
-96 -7.6
779
218
319 25.0 34.7
-2.6
1,690 150 -
8 1 2 18.0
P 8 3
2008
$076 2,909 -3.28
-118 -18.4
1897
29Q
419 34.5 35.6
-0.5
18 0
3.787 501 -
62.6 m.9
708 11
Composition oftotal external debt, 2008
"%IDA, 311
Shon-term 1.314
US$millicns
P r i v a t e S e c t o r Deve lopment 2000
Time required to start a business (days) - Costto startabusiness (%ofGNIpercapita) - Time required to register property (days) -
2000 Ranked as a major constraint to business (%of managers surveyed who agreed)
Access tolcost o f financing Tax rates
Stock market capitalization (%of GDP) Bank capital to asset ratio (%)
30.4 30.6
2008
15 8.9 46
2008
40.4 37.2
22.1 l7.3
Governance indlcators, 2000 and 2008
Vciceard accocntability
POllbcal Stabilty
Regulatwy qmlity
Ruleof Isw
Contrd ol ccxrtchm
02008
02000
0 25 50 75 100
Counvy's percwtle rank (0-103) h,ghervefuer m # y b&ermfnp
T e c h n o l o g y a n d In f ras t ruc tu re 2000 2008
Paved roads (%of total) 661 855 Fixed line and mobile phone
High technoiogyexports subscribers (per WO people) 18 81
(%of manufactured exports) 3 2 51
E n v i r o n m e n t
Agricultural land (%of land area) 77 77 Forest area (%of land area) 9 9 m o Nationally protected areas (%of land area) 14
Freshwater resources percapita (cu meters) 252 273 Freshwater wthdrawai (billion cubic meters)
C 0 2 emissions per capita (mt) 26 2 1
23
GDP per unit of energyuse (2005 P P P $ per kg of oil equivalent) 2 1 2 6
Energy use per capita (kg of oii equivalent) 699 9?3
(US$ rnrllrons)
iBRD Total debt outstanding and disbursed Disbursements Principal repayments interest payments
IDA Total debt outstanding and disbursed Disbursements Total debt service
IFC (frscalyear) Total disbursed and outstanding portfolio
DisbursementsforlFC own account Portfolio sates, prepayments and
repayments for IFC own account
of Which IFC own account
M iGA Grosse)(Dosure
191 6 5 11
x)3 30
1
35 s 1
0
3
P 9 0 77 7
311 24
4
25 25
5
8
66 7
Note Figures in italics are for years other than those specified 2008 data are preliminary indicates data are not available -indicates observation is not applicable
Development Economics, Development Data Group (DECDG)
2/25/10
88
Millennium Development Goals Moldova
i o0
75
50
25
0
With selected targets to achleve between 1990 and 2015 (estfrnate closest to dafe show, %2jeafs)
90
60
30
0
G o a l 1: halve the rates For extreme pover t y and ma lnu t r i t i on Poverty headcount ratio at 5 125 a day (PP P , %of population) Poveityheadcount ratio at national poverty line (%of population) Share of incomeorconsumption to the poorest qunitile (%) Prevalence of malnutntion (%of children under 5)
1990 1995 2000 2008 RO 151 442 8 1
6 9 6 5 6 8 73 3 2
62 4
G o a l 2: ensure tha t chi ldren are able t o comp le te p r l m a r y s c h o o l i n g Pnmaryschool enrollment (net, %) 86 94 68
Secondaryschool enroilment (gross, %) 81 80 82 89 Pnmarycompletion rate(%of relevant age group) 90 98 93
Youth literacyrate (%of peopieages 15-24) wo WO
G o a l 3 : el iminate gender d i spa r i t y i n educa t ion and e m p o w e r w o m e n Ratio of girls to boys in pnmaiyandsecondaryeducation (“A) W6 M i w2 Women employed in the nonagncultural sector (%of nonagncultural employment) Proportion of seats held bywomen in national parliament (%) 5 9 22
53 54
G o a l 4: reduce under-5 mor ta l i t y by two-thirds Under-5 mortality rate (per 1,000) 37 30 24 w Infant mortalityrate (per looOlive births) Measles immunization (proportion of one-yearolds immunized.%)
30 25 21 # 92 99 87 96
G o a l 5: reduce ma te rna l m o r t a l i t y by three-fourths Maternal mortality ratio (modeled estimate. per QO.000 live births) 22 Births attended by skilled health staff (%of total) $9 WO Contraceptive prevalence (%of women ages 15-49) 74 62 68
G o a l 6: h a l t and begin t o reve rse the spread o f HlV lA lDS and o t h e r m a j o r d i s e a s e o Prevalenceof HN (%of population ages 15-49) 01 0 4 Incidence o f tuberculosis (per 130 000 people) 65 91 a8 I41 Tuberculosis cases detected under DOTS (%) 41 67
G o a l 7: ha l ve the p r o p o r t i o n o f peop le w i thou t sustalnable access t o bas i c needs Access to an improvedwatersource(%of population) 93 92 90 Access to improved sanitation facilities (%of population) Forest area (%of total land area) Nationally protected areas (%of total landarea) C02 emissions (metric tons per capita) GDP perunit ofenergyuse(constant 2005PPP $ perkgofoilequivalent)
78 70 79 95 9 8 9 9 0 0
14 5 5 2 6 16 2 1 17 t 5 2 1 2 6
G o a l 8: d e v e l o p a g loba l partnership f o r deve lopmen t Telephone mainlines (per MO people) 0 6 t31 142 29 4 . . . Mobile phone subscribers (per 130 people) Internet users (per 130 people) Personal computers (per MO people)
00 0 0 3 4 66 6 00 0 0 13 @ I
0 2 15 114
Education indicators ( O h )
75
50
2000 2002 2004 2006 2008 1 -0- Pnrnaiy net enmlmni rat0 - Raiioofgidsto bc+hpmawaeernn&try
sducsnon
ICT indicators (per 100 people) I I Measles immunization (%of 1-year olds)
/ I 1990 io95 2000 2007
DMoidava OEumpe 8 Centmi Asla
2000 2002 2004 2006 2008
EFixed + rnoblls wb&nbemOlnternet users
I 1
Note Figures in italics are for years other than those specified
Development Economics. Development Data Group (DECDG)
indicates data are not available 2/25/M
89
ANNEX 6. POVERTY AND SOCIAL IMPACT - SIMULATIONS OF ENERGY TARIFF INCREASES
Gas, heating and electricity expenditures in Moldova have been rising for the last ten years. Despite these increases, residential heating tariffs remained subsidized. In January, residential utilities tar@ were increased, and in particular the heating t a r 8 was set by the regulator ANRE at a rate consistent with cost recovery. The impact of the increases in utilities tar@ is estimated to disproportionately affect the middle-class and relatively rich deciles of the population. Nonetheless the poor are affected. Pensioners and the low paid in Chisinau are affected through heating price increases. Poorer rural families are affected through electricity, and all groups of the population are affected through increased gas targs. The compensation scheme designed by Government with the World Bank's help (and described in the PSIA section of this program document) offsets the worst of the impact.
Increases in Moldovan utilities tariffs over the last decade have increased household expenditure on gas, electricity, all type of other fuels, central heating and expenditures on water and sanitation from 5.4 percent in 1998, to 14 percent in 2008 of total household consumption. Moldova now ranks above the average of countries in Eastern Europe and Central Asia on this measure, and has the highest share of the utilities expenditure to total household consumption among low income CIS countries (figure 1).
Figure 1 : Utilities expenditures have increased in Moldova 1998-2008
_ _ I I _ _ _ ~ ___l______-_l_I_ "___ _lll ____ll_ll_l__l -- -- " --- -- - " " - - I
I Moldova, share of utilities expenditures in total 18 3 households consumtion
160 17 7
i !
0 y 140 *
I
I 10 120 0 8 f 8 0
.g 60 ; Bosnia and Herzegovina e 40 L
2 0 i Kyrwz Republbc ,
00 , 999 2000 2001 2002 2003 2004 2005 2006 2007 2008
_- ___ Source. Households budget surveys (HBS) , authors' calculatio electricity, all type of other fuels, central heating and expenditures water and sanitation'.
es include the following components: gas,
As Figure 2 shows, the composition of utilities expenditures in Moldova differs significantly across sectors and income groups, making the impact of tariff increases uneven across population groups, depending on the utility. Moldova's middle class faces the highest burden of tariff increases because they consume a higher share of utilities in total consumption. Households between 4* and gth deciles of the consumption distribution have the highest shares of utilities in consumption. In contrast, the first 2 deciles (the poor population) have the lowest, suggesting the impact of the tariff increase will have a relatively more pronounced impact on the middle class than on the poor. Poor people spend a much higher proportion of their utilities consumption on electricity, followed by gas, but spend much less on central heating, and a small proportion on other fuels. Central heating -though a politically charged issue - makes up a relatively small
Excluding water and sanitation component the utilities expenditure level in Moldova is around 11 percent.
90
proportion of the expenditures of all income groups. It is associated with the middle class population, and especially residents of the capital Chisinau.
Figure 2: Share of utilities in total consumption (left chart) composition of utilities expenditures - . . - _ _ _ _ _ (right) - -
Share of utilities by Consumption decile Composition of Households Utilities Expenditures, by Deciles of Consumption
15.4
1 2 3 4 5 6 7 8 9 10 mdle of Consumpfbn 1 a 3 4 5 6 7 s 9 i o
D.dk of Hourholh. Mnsumpthn I Electricity Gas E Central Heating S Wood, Coal, Other fuels
Source: Households budget surveys (HBS), authors' calculations.
Figure 3 shows the composition of households' expenditures by type of utilities, location, and age group. Households in Chisinau rely more on electricity and central heating, while households in other cities spend more on gas and other alternative sources of fuels. Rural households spend less on electricity and much more on wood, coal and alternative energy sources. Younger people spend more on electricity and less on the alternative energy sources. Income groups also consume more of some utilities than others. Poor people spend relatively more on electricity and are thus more vulnerable to changes in electricity tariffs than heating.
Figure 3: Decomposition of the utilities expenditures by location and age groups
Composition of Households Utilities Expenditures, by location
Composition of Households Utilities Expenditures, by Location
capita1 Otherucbsn RYr.1 all Yo"n*er Older 65+
I Electricity 1 Gas Central Heating - Wood, Coal, Other fuels I Elecrricrty Gas Central Heattng I Wood, Coal, Other fuels
*Source Households budget surveys, authors' calculation. Total ut es exclude water and sanitation expenditures.
Table 1 shows the proposed increase in the utilities. The World Bank staff analyzed the impact of the increase in the utility tariffs on poverty, and estimated the monetary loss of income deciles. Our analysis assumes a loss in the household's income equivalent to the increase in the tariffs multiplied by the household's current level of consumption. It is important to emphasize that this partial analysis does not take into consideration the elasticity of consumption or the
91
substitution effect of the price increase. The simulated impact of the increase in the tariffs on poverty is presented in the figure 4.
Table 1: Proposed tariffs increase
I Gas Tariffs 113% I
The results are:
0
Poverty rates are projected to increase by 1.2 percentage points. As low income groups are more dependent on electricity, the increase in electricity tariffs has a stronger impact on poverty; even though the magnitude of the proposed increase in electricity is lower than for other utilities. Pensioners are vulnerable to the increase in all tariffs. Gas and heating tariffs significantly affect pensioners. The overall tariff increase is estimated to have stronger effect on pensioners than other population groups, increasing their poverty by 2 percentage points. Central heating has an important impact on poverty Chisinau. As electricity is associated with low income groups in general, all groups of the population are impacted significantly by higher electricity tariffs, with the impact most prominent in rural areas. (This is a significant finding, because in Moldova high electricity tariffs have tended to cross-subsidize low central heating tariffs, as CHPs attempted to compensate for losses on heating through higher tariffs for electricity.
0
0
Figure 4: Poverty rates after the increase in tariffs (left chart). Changes in the rates (right chart)
Poverty rates before and after the shock
Decomposition of impact on poverty
I 2 5
urban Age location Total
N Poverty beforeincrease B Poverty After increase w Electricity 8 Gas Central Hln ing t3 Wood, Coal, Other fuels I_x.__ --- -_ __I _ _ __lll ___ -- - - _- - __ - _ _ - _ - - - - -
*Source Households budget surveys, authors' calculation. es exclude water and sanitation expenditures.
Figure 5 decomposes the fiscal burden of the proposed tariffs increase by deciles of income distribution and location. Households in the top 10 percentile of the income distribution will pay 24 percent of the tariff increases. Poor people, mostly found in lowest 3 deciles of the distribution, will pay 12 percent of the cost of the program. Thus, the majority of the estimated cost falls on middle and rich group of the population. Nevertheless, taking into consideration low incomes, the burden on the poor population is significant, and requires special attention.
92
The targeted social assistance program proposed in the DPO program should compensate poor families for these losses.
Figure 5: Loss of the population -who pays for the program?
Total Loss by deciles 1-low
Total loss by location
- - - _ ' l_l_ ~ _I" I A - I
*Source Households budget surveys, authors' calculation Total ut es exclude water and sanitation expenditures
93
IBRD 33448R
94
Grigoriopol
Rîbnita
Camenca
Ceadîr-Lunga
Tiraspol
Slobozia
Moghiliov-Podolski
Chiperceni
Balatina
Costesti
Sculeni
Leuseni
Vulcanesti˘
Lapusna˘
Stauceni˘
Edinet Soroca
Balti
Ungheni
Hîncesti
Orhei
Comrat
Cahul Taraclia
Criuleni
Rezina
Drochia
Donduseni
OcnitaBriceni
Rîscani
Glodeni
Nisporeni
Telenesti
Floresti
Sîngerei
Ialoveni
Cimislia
AneniiNoi
Leova
Bender(Tighina)
Cantemir
Basarabeasca
Dubasari˘
Falesti˘
Soldanesti˘
CHISINAU˘
˘ ˘GAGAUZIA
˘ ˘GAGAUZIA
TRANSNISTRIA
Be
ss
ar
ar
ab
ia
Bu
geac
P lain
Mt. Balanesti(430 m)
Grigoriopol
Rîbnita
Camenca
Ceadîr-Lunga
Tiraspol
Slobozia
Moghiliov-Podolski
Chiperceni
Balatina
Costesti
Sculeni
Leuseni
Vulcanesti˘
Lapusna˘
Stauceni˘
Edinet Soroca
Balti
Ungheni
Hîncesti
Orhei
Comrat
Cahul Taraclia
Criuleni
Rezina
Drochia
Donduseni
OcnitaBriceni
Rîscani
Glodeni
Nisporeni
Telenesti
Floresti
Sîngerei
Ialoveni
Cimislia
AneniiNoi
Leova
Bender(Tighina)
Cantemir
Basarabeasca
Dubasari˘
Falesti˘
Soldanesti˘
CHISINAU˘
˘ ˘GAGAUZIA
˘ ˘GAGAUZIA
TRANSNISTRIAROMANIA
UKRAINE
UKRAINE
Prut
Prut
Dnestr
Nistru
Nistru
B lackSea
ToChernivtsi
To Chernivtsi
To Vinnytsya
To Vinnytsya
To Voznesens'k
To Zhmerynka
To Odesa
To Artsyz
To Imayil
To Bucharestand Constanta
To Birlad
To Birlad
To Pascani
Be
ss
ar
ar
ab
ia
Bu
geac
P lain
Mt. Balanesti(430 m)
27°E
27°E
48°N
47°N
46°N
48°N
47°N
46°N
28°E 29°E 30°E
28°E 29°E 30°E
MOLDOVA
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.
0 10 20 30
0 10 20 30 Miles
40 Kilometers
IBRD 33448R
MAY 2007
SELECTED CITIES AND TOWNS
AUTONOMOUS TERRITORIAL UNITCAPITALS
RAIONS OR MUNICIPALITIESCAPITALS*
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
AUTONOMOUS TERRITORIAL UNITBOUNDARIES
RAIONS OR MUNICIPALITIESBOUNDARIES
INTERNATIONAL BOUNDARIES
*Names of the raions or municipalitiesare identical to their capitals.
Cainari˘ Causeni˘
Stefan-Voda
Straseni˘
Calarasi˘˘
MOLDOVA
