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Report No. 25423-MD
MoldovaPublic Economic Management Review
March 24, 2003
Poverty Reduction and Economic Management UnitEurope and Central Asia Region
Document of [he World Bank
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CURRENCY EQUfIVALENTS UP{liTS(Exchange Rate Effective December 31, 2002)
Currency Unit=Moldovan Leu (MDL)US$1=13.82 MDL
GOVERNMENT ESCAL YEARJanuary 1- December 31
WElRlGTS AND MEASURESMetric System
ACRONYMS AND ABIBEREVIIATlONS
BCP Budget Concept PaperCFAA Country Financial Accountability AssessmentCEE Central and Eastern EuropeCIS Commonwealth of Independent StatesCPI Consumer Price IndexGDP Gross Domestic ProductECA Europe and Central AsiaEU European UnionEBFR Extra Budgetary Funds and ResourcesFSU Former Soviet UnionIDA International Development AssociationIMF International Monetary FundIT Information TechnologyMGs Methodological Guidelines for Annual Budget
PreparationMTEF Medium-Term Expenditure FrameworkNBM National Bank of MoldovaNGO Non-Governmental OrganizationNSIH National Social Insurance HouseOECD Organization of Economic Co-Operation and
DevelopmentPRSP Poverty Reduction Strategy PaperSACHI Structural Adjustment Credit IIISSI State Social InsuranceTIMSS Third International Mathematics and Science StudyVAT Value Added Tax
Vice President: Johannes F. LinnCountry Director: Luca BarboneSector Director: Cheryl GraySector Manager: Helga MullerTeam Leaders: Neil Parison
Elena Nikulina
ACKNOWLEDGEMENTS
The report was prepared by a team managed by Elena Nikulina and Neil Parison.Contributions were provided by Jariya Hoffman, Gord Evans, Joao Oliveira,Chandrashekhar Pant, Carolina Revenco, Reema Nayar and Emily Andrews. DammikaSomasundsaram, Lilian Canamaso and Ofelia Miranda formatted the report. The reportalso makes use of analysis and reports produced in recent years by James Cercone andLiviu Vedrascu (health), and Sue Ellen Berryman, Claude Tibi, and Michael Peleah(education). The report was prepared under the general supervision of Roger Grawe andLuca Barbone, Country Directors (ECC07). Sector Directors were Pradeep Mitra andCheryl Gray (ECSPE). The Sector Managers responsible for the report were ShekharShah and Helga Muller. Allister Moon (ECSPE) and Nick Manning (SASPR) were peerreviewers.
The report is an outcome of more than two years of dialogue with the Governmentof Moldova in the framework of preparation of a comprehensive public sector reformstrategy; and of even longer experience of collaboration in the area of public expendituremanagement led by the Moldova country office. The team is grateful for the assistance ofmany Moldovan Officials who have been most forthcoming with their time andinformation, including the representatives of the Prime Minister's Office, StateChancellery, Ministry of Finance, Ministry of Economy, Ministry of Health, Ministry ofEducation, Ministry of Labor and Social Protection, and the Academy of PublicAdministration. The team is especially grateful to the management team of the Ministryof Finance, led by Minister Zinaida Greciani, for their strong leadership and excellentcollaboration. Thanks are also extended to the Center for Strategic Studies and Reforms(Chisinau) and its Director, Mr. Anatoly Gudym.
CONTENTS
Executive Summary ......................................................... i
Key Recommendations ......................................................... iThe Reform Agenda ......................................................... iTransition Performance ........................................................ iii
Fiscal Adjustment in the Social Sectors ........................................................ ivThe Road Ahead ......................................................... v
Relaunching Public Sector Reform ......................................................... vCenter of Governm ent Decision Making ................................................... viBudget Formulation and Execution ........................................................ viiCivil Service Management and Human Resource Management ......... ...... ixSector-Specific Reforms in the Social Sector ............................................ xi
Next Steps ........................................................ xii
1. Strategic Setting ......................................................... 1
A. Causes of the Disappointing Transition Performance ........................................ IB. Macro-Fiscal Developments ........................................................ 5C. Macro-Fiscal Outlook ........................................................ 10D. Key Risks and Constraints ........................................................ 12E. Conclusions and Outlook ........................................................ 13
2. The Fiscal Adjustment and Reform Efforts in the Social Sectors . . 16
A. The Health Sector ........................................................ 18The Fiscal Crisis and the Government's Response .................................... 19The Impact of Recent Policies and the Remaining Challenges ................. 20The Road Ahead ........................................................ 23
B. The Education Sector ........................................................ 25The Fiscal Crisis and the Government's Response .................................... 25The Impact of Recent Policies and the Remaining Challenges ................. 26The Road Ahead ........................................................ 30
C. The Social Protection Sector ........................................................ 33The Fiscal Crisis and the Government's Response .................................... 33The Impact of Recent Policies and the Remaining Challenges ................. 35The Road Ahead ........................................................ 37
D. Summary ........................................................ 39
3. Strengthening Public Expenditure Management ..................................................... 40
A. Budget Management Performance ........................................................ 41Aggregate Fiscal Discipline ........................................................ 41Allocative Efficiency ........................................................ 42Technical Efficiency ........................................................ 43
B. The Legislative and Institutional Framework .................................................. 44The Legislative Framework ........................................................ 44Budget Coverage ........................................................ 44Budget Process Participants and their Roles .............................................. 48
C. The Budget Process ................................................ 50Budget Preparation and Formulation ............................................... 50Budget Execution ............................................... 59Debt Management ............................................... 61Reporting ............................................... 63Internal Audit ............................................... 65Extemal Audit ..................................................... 65
D. Intergovernmental Fiscal Relations ........................................ 65Expenditure Assignment ..................................................... 66Revenue Assignment ..................................................... 66
E. The Road Ahead ..................................................... 67Key Challenges ..................................................... 67Recommendations ..................................................... 68
F. Conclusion ..................................................... 71
4. Building Capacity For lincreased Government Effecdveness . . 72
A. Present Position ..................................................... 74Center of Government Decision-Making ................................................... 74
Benchmarks ..................................................... 74Functional Arrangements at Center of Government ...................... 75Institutional Arrangements ..................................................... 75
Civil Service Management ..................................................... 77Benchmarks ..................................................... 78Institutional Framework ..................................................... 78Legal and Ethical Framnework ..................................................... 80Pay and Employment Policy ..................................................... 80
Civil Service Human Resource Management ............................................ 86Benchmarks ..................................................... 86Merit ..................................................... 86Depoliticization ..................................................... 87Training and Career Development ................................................. 88Accountability and Transparency .................................................. 89
B. The Road Ahead ..................................................... 90Key Challenges for the Government of Moldova ...................................... 90Short-Term Actions ..................................................... 90
Leadership and Overall Management of Public Sector Reform ....90Center of Govemment Decision-making ....................................... 91Civil Service Management .......................................... 91Civil Service Human Resource Management ............................... 93
Medium-Term Actions .......................................... 94Leadership and Overall Management of Public Sector Reform ....94Center of Government Decision-Making ....................................... 94Civil Service Management ................................................ 94Civil Service Human Resource Management ............................... 95
C. Conclusion ................................................ 95
List of Tables
Table 1: Summary of Priority RecommendationsTable 1.1: Income and Output in CIS countries, 2000Table 1.2: Aggregate Fiscal Trends (percent of GDP)Table 1.3 Revenue Trends (percent of GDP)Table 1.4: General Government Expenditure Trends by Economic and Functional
Classification (percent of GDP)Table 1.5: Expenditure Trends by Functional Classification (percent of total
discretionary expenditures)Table 1.6: Macroeconomic Framework, 2000-2005Table 1.7: Debt Sustainability AnalysisTable 2.1: Recent Social Expenditure TrendsTable 2.2: Distribution of Health Sector Expenditures by Type of Facility (percent of
total)Table 2.3: Distribution of Health Sector Expenditures by Spending Category (percent
of total)Table 2.4: Health Status ComparisonsTable 2.5: Distribution of Education Sector Expenditures by Type of Institution
(percent of total)Table 2.6: Distribution of Education Sector Expenditures by Spending Category
(percent of total)Table 2.7: Share of Salaries and Non-salary Operational Expenses in Recurrent
Expenditures by Level of Education in OECD Countries, 1995 (percent)Table 2.8: Social Protection Expenditure Trends (percent of total)Table 3.1: Consolidated Budget - Deviation between Approved and Executed
Budgets (in percent of approved amounts)Table 3.2: Budget Calendar for Preparation of the 2002 BudgetTable 3.3: Selected Macroeconomic Indicators, Forecast and ActualTable 4.1: Change in the Number of Central Government Agencies in Moldova since
1985Table 4.2: Government Employment as a Percentage of Population and Employment
Levels (2000)Table 4.3: Health, Education and Public Administration Employment, 1997-2000Table 4.4: Civilian Government Wages (monthly average)Table 4.5: Comparison of Civil Service Pay Levels with Market Rates
List of Figures:
Figure 1.1: Budget Deficit Trends (percent of GDP)Figure 1.2: Budget Deficit Financing by Source (MDL million)Figure 3.1: Breakdown of Total General Government Expenditures by Budget
Component (percent of total)Figure 4.1: Private Sector View of the Helpfulness of GovernmentFigure 4.2: Management Time Spent with Government OfficialsFigure 4.3: Typical Policy Cycle for Complex Reform
Figure 4.4: General Civilian Government Employment as a percentage of populationFigure 4.5: Comparison of Civil Service and Private Sector Pay
List of Boxes:
Box 1.1: Moldova's Debt ProfileBox 3.1: Moldova's Budget SystemBox 3.2: Strategic Planning in the Budget Cycle: Indicative TimingBox 3.3: MTEF progressBox 3.4: Program Budgeting PilotsBox 3.5: Moldova's Treasury SystemBox 3.6: Absorption of Contingent LiabilitiesBox 4.1: Center of Govermment Decision-Making BenchmarksBox 4.2: Civil Service Management BenchmarksBox 4.3: Civil Service Human Resource Management Benchmarks
Statistical Annex
Table Al: Moldova - Key Economic IndicatorsTable A2: Moldova - General Government Budget, 1997-2001 (executed, at current
prices)Table A3: Moldova - General Govermnent Budget, 1997-2001 (executed, at 1997
prices)Table A4: Moldova - General Government Budget, 1997-2001 (executed, percent of
GDP)Table A5: Moldova - General Government Budget, 1997-2001 (executed, in percent
of total)Table A6: Moldova - Consolidated Budget Expenditure Arrears, 1996-2001Table A7: Moldova - State Budget, 1997-2001 (executed, at current prices)Table A8: Moldova - Local Governments' Revenue and Expenditure, 1997-2001
(executed, at current prices)Table A9: Moldova - State Social Insurance Budget, 1997-2001 (executed, at current
prices)Table AIO: Moldova - Extra-Budgetary Funds and Resources, 1997-2001 (executed,
at current prices)
Bibliography
Map
EXECUTIVE SUMMARY
Key Recommendations
1. Moldova has experienced a very difficult transition. Initial conditions wereunfavorable and vulnerability to external shocks was extreme. This culminated in the1998 regional financial crisis, which resulted in the need for radical fiscal retrenchment.Expenditures on the social sectors were reduced, with outcomes and quality of servicesdeteriorating, and inequities in service access increasing. While reasonable growthappears to be attainable and sustainable under certain conditions in the medium term, thechallenge for the Govermnent in the short term is.to begin to improve basic outcomes inthe social sectors and address inequities in access to basic social services. This requiresimproving the ability of the center of government to make and stick to painful decisions,particularly with respect to strategic prioritization in budget formulation; andsignificantly improving the efficiency of resource utilization within the social sectors.This in turn will require implementing cross-cutting reforms in civil service managementand budget execution, together with a number of sector-specific reforms.
2. Key recommendations identified and suggested for consideration by theGovernment in this report include: (i) launching a major program of public servicereform; (ii) strengthening center of government decision-making through introduction ofa system of Cabinet Committees and restructuring the State Chancellery into a non-political Government Secretariat; (iii) strengthening strategic prioritization in budgetformulation through a structured and prioritized approach to developing andimplementing the Medium-Term Expenditure Framework (MTEF); (iv) strengthening thebudget process through increasing budget coverage, deepening Treasury coverage, andputting in place a stronger intemal and external accountability framework; (v)strengthening civil service management through amending the Civil Service Law tosecure the application of the key principles of merit and depoliticization, and launching aprogram of functional reviews to rationalize the structure of government; and (vi)undertaking sector-specific reforms in the social sectors to accelerate education andsocial assistance reform while maintaining health and pension reform, and to rebalanceintra-sectoral education and health expenditures further in favor of primary and basicsecondary education and primary health care and emergency services.
The Reform Agenda
3. Moldova has experienced ten very difficult years of transition. One of the deepestand most prolonged GDP declines among the transition economies (a cumulative declineof 65 percent between 1990 and 2000) has turned Moldova into one of the poorestcountries in Europe, with more than half of the population living in absolute poverty.
Social indicators have deteriorated. The accumulation of huge external debt exacerbatesan already very difficult position.
4. A number of factors contributed to the poor transition outcomes experienced:unfavorable initial conditions and shocks at the outset of the transition; the poor qualityof governance over the period; a partial stop-and-go approach to reforms by Moldova'sten governments over this period; a precarious fiscal position resulting from soft fiscalpolicy until 1998; and a vulnerability to external shocks, culminating in the massiveexternal shock from the 1998 regional fiscal crisis, which resulted in the need for deepand painful fiscal retrenchment.
5. While by 2001 the required fiscal retrenchment had largely been achieved, thequality of adjustment was unsatisfactory due to deep institutional weaknesses in center ofgovernment decision-making and an inability and lack of capacity on the part of thegovernment to take decisions on strategic prioritizations and make difficult and painfulchoices. As a result, fiscal consolidation was achieved through implementing across theboard reductions in expenditures. Although the social sectors represented keygovernment priorities, they were not protected during this adjustment. Socialexpenditures declined over the period 1997 to 2001 from 29.0 percent of GDP to 16.7percent of GDP. Outcomes and the quality of services deteriorated, and inequities inaccess to services increased dramatically.
6. The challenge now facing the Government of Moldova is to seek to attainsustainable growth and to significantly reduce poverty and rebuild human capital. TheGovernment of Moldova is, however, particularly constrained in that the resourcesavailable for development are (and are likely to remain) extremely limited and the policy-making and implementation capacity of the government and of the public administrationremains very weak. The level of growth that is likely to be achievable is such that asignificant easing of the severe resource constraint facing the Government can only beexpected to be experienced in the medium term. Inefficiency in public spending will needto be reduced significantly, and expenditures on comparatively low priority areassimilarly reduced. In this context, the specific challenge facing the government in thesocial sectors is to seek to protect them so far as is possible from further reductions inoverall expenditures through making more effective strategic prioritization of resourceallocation in line with government priorities; to achieve reallocations of expenditureswithin each of the social sectors to ensure that key government priorities for each sectorare resourced to the maximum extent possible; and to significantly improve the efficiencywith which the social sectors utilize the limited funding which is available.
7. This will require a series of deep institutional reforms: strengthening center ofgovernment decision-making, particularly in the areas of strategic prioritization andbudget formulation; undertaking some cross-cutting reforms in civil service managementand budget execution to improve operational efficiency and efficiency in resourceutilization; and undertaking some further sector-specific reforms in the education, healthand social protection sectors. Some suggested recommendations for possible reformactions required in these areas are identified in this report for the consideration of theGovernment.
8. While the reform agenda may seem daunting, the Government of Moldova should
approach this agenda with reasonable optimism given actions which it has already taken
and which it plans to take. The ongoing work to develop the full Poverty Reduction
Strategy Paper (PRSP) will provided a vehicle for the Government to make strategic
decisions about reform priorities for the short to medium term. Similarly, the ongoing
work to put in place an MTEF will provide the context to support efforts to strengthen
strategic prioritization in budget formulation, while the continuing program of budget
reforms should help to deliver improvements in efficiency of resource utilization.
Relaunching the Public Sector Reform Strategy and Program will provide the mechanism
for tackling the required reforms of the civil service and public administration. And while
health sector reform and pension reform are comparatively advanced, reforms of the
education sector and social assistance system could now be accelerated.
Transition Performance
9. The complexity of the causes underlying Moldova's disappointing transition
performance should not be underestimated. Initial economic conditions were not
favorable. In the Soviet system, Moldova's major role was to supply agricultural products
while being entirely dependent on imports to meet its energy needs. This led to Moldova
experiencing a particularly severe terms of trade shock upon the breakup of the Soviet
Union, with this being exacerbated by the 1992 conflict in Transnistria. Initialinstitutional constraints were severe, with weak capacity in the country's newly-formed
civil service right from its beginning. Political instability, the absence of political
consensus behind economic reform, and frequent lack of political will have all combined
to produce a stop-and-go pattern in the development and implementation of reforms.
10. Overall, Moldova's quality of governance has remained poor, and is among the
weakest in the region. Moldova had the worst performance among twenty transition
countries when compared on a governance index by the EBRD (1999 Transition Report).
Moldova also rated the lowest among transition countries with respect to perceptions of
quality and efficiency of central government services in the World Bank/EBRD Business
Environment and Enterprise Performance Survey (BEEPS-1999). This survey placed
Moldova toward the top of the scale both on state capture and administrative corruption.
Moldova also remains very vulnerable to extemal shocks, and was one of the countries in
the region hardest hit by the regional financial crisis in 1998. Moldova has also
experienced a number of severe setbacks over recent years caused by adverse weather.
11. In spite of the above factors and constraints, the Moldovan authorities were able
to achieve comparatively good monetary performance until 1998, with inflation
maintained below 15 percent from 1996, and the exchange rate stable. However, the
comparative success of performance in this area was undermined by severely declining
GDP, a soft and unsustainable fiscal policy, and a widening current account deficit.
Following the regional financial crisis of 1998, there was a major devaluation in 1998-99
and a temporary surge in inflation. The Govermment was forced by the regional financial
crisis to tighten fiscal policy dramatically and reduce the fiscal deficit sharply. While
govemment revenues dropped from 40 percent of GDP in 1997 to 31 percent of GDP in
2001, expenditures were reduced over the same period from 50 percent to 30 percent of
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GDP. The situation has to some extent recovered over the last two years, with the returnof economic growth (2.1 percent in 2000 and 6.1 percent in 2001), the stabilization of theexchange rate, and the reduction of inflation to 6.3 percent in 2001. The current accountdeficit widened to over 9 percent of GDP in 2000, but shrank in 2001.
12. While the overall outlook suggests that a GDP growth rate of 5 percent a yearcould perhaps be achievable and sustainable over the medium term, this can only beachieved if the remaining key institutional and structural reforms are developed,approved, and implemented aggressively and effectively, and if external conditions arefavorable. Given the heavy burden of debt servicing in coming years, fiscal policy willneed to remain very tight, and will need to be designed to maintain a primary budgetsurplus of about 1.5 percent of GDP throughout the period 2002 to 2005. Even so,Moldova remains heavily dependent on significant external financial support over theshort to medium term, which could be jeopardized in the event of policy reversals orslower than expected progress in tackling remaining reforms. Moldova will also continueto remain extremely vulnerable to external shocks, particularly any downturn in theRussian economy or further severe adverse weather conditions.
Fiscal Adjustment in the Social Sectors
13. By far the largest share of public expenditures are in the social sectors - health,education, and social protection. Although all these sectors represented key priorities ofthe government's work program, because of weaknesses in center of governmentdecision-making and strategic prioritization in budget formulation, the social sectors werenot afforded any protection by the Government during the severe fiscal retrenchmentwhich followed the 1998 regional financial crisis; and efficiency of resource utilizationwithin these sectors remains problematic. Over the period 1998 to 2001, social sectorspending remained virtually unchanged at 64 percent of total discretionary expenditures.However, over this period, social expenditures declined from 29.0 percent of GDP in1997 to 16.7 percent of GDP in 2001. Within social expenditures, health expendituresover this period fell from 5.7 percent of GDP to 3.0 percent; education expenditures from9.7 percent of GDP to 5.4 percent; and social protection expenditures from 13.5 percentof GDP to 8.3 percent. Outcome indicators show that the quality of service delivery hasdeclined substantially; and that inequities in access to services have at the same timeincreased dramatically.
14. Public sector funding for health care decreased by about 48 percent in real termsfrom 1997 to 2001. The government's response to the fiscal crisis in the health sectorfocused on consolidating the sector, and on beginning to shift intra-sectoral resourceallocation priorities in favor of primary and emergency care. However, much of therestructuring agenda remains incomplete. Major inequities in access to health careservices have arisen, the quality of services as experienced by service users is poor, andMoldova demonstrates very poor health outcomes compared to other countries in Europe.
15. Over the same period, public sector funding for education shrank by about 45percent in real terms. Adjustments in the education sector in response to the reduction inoverall resources have been largely ad hoc. The measures undertaken included some
attempts to begin to shift intra-sectoral financing priorities in favor of primary and basic
secondary education, and some specific measures designed to reduce the high levels of
expenditure on heating utilities in schools. Though certain efficiencies with respect to
utility costs were achieved, -the quality of education has deteriorated, and significant
inequities in access to education services have emerged.
16. In the area of social protection, expenditures decreased by about 39 percent in real
terms between 1997 and 2001. The Government's response to the fiscal crisis in the area
of social protection was fragmented. Structural reform of the public pension insurance
system received priority. The only other part of the system that has undergone
restructuring to date is utility subsidies, which the Government replaced with targeted
"nominal compensations" under energy sector restructuring. Most other social protection
programs, including programs which could have been restructured to support targeted
poverty alleviation (for example, child allowances and social assistance benefits) have
remained unrefortned.
17. While the pension reforms implemented so far have produced relatively good
results with respect to restoring short-term fiscal balances, the level of pensions remains
extremely low, the pension system does not provide pensioners with predictability in
terms of maintaining their purchasing power, and th'e system remains inequitable. The
nominal compensations program continues to suffer from weak targeting of the poor.
18. Responding to the present difficult position in the social sectors requires the
government to be able to increase the ability of the center of Government to make and
stick to tough decisions, particularly in budget formulation. It will also require
improvement in the efficiency of resource utilization within the social sectors through
making progress on cross-cutting reforms in the areas of civil service management and
budget process and execution.
The Road Ahead
Relaunching Public Sector Reform
19. The Government of Moldova developed a comprehensive Public Sector Reform
Strategy in November 2000. The strategy was designed to reorient the role of the state
away from its current role as universal caretaker and toward a role both consistent with
the role of the state in a well-functioning market economy and also appropriate given
government work program priorities and resource constraints. The objectives of the three
components of the developed strategy are as follows:
(i) Public Expenditure Management: "To build a robust, sustainable, and
effective public sector resource management system which provides for
high levels of fiscal control (hard budget constraints at all levels of
government); strategic prioritization (allocative efficiency in budgetformulation and expenditure review and prioritization); and technical
efficiency in budget execution."
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(ii) Public/Private Sector Interface: "To build a public sector whichprovides a supportive partner for the private sector, and an appropriateframework for private sector development, based on accountable,predictable, transparent, simplified, codified, and arms-lengthinteractions with the private sector."
(iii) Public Administration Reform: "To build a market-oriented and service-oriented public administration which meets EU "best practice"standards; is affordable and sustainable; and ensures cost-effectivedelivery of priority goods and services."
20. This provides an excellent summary of the reform agenda now facing theGovernment. The strategy, however, has not been enacted and there has been nomovement towards its implementation. Perhaps the most critical priority in this area is forthe Government to restart the public sector reform process by approving the Public SectorReform Strategy, reconstituting the high-level Steering Committee for Public SectorReform (led by the Prime Minister), and setting up an adequately-resourced Public SectorReform Unit. A detailed Action Plan for Public Sector Reform could then be developed;and a set of monitoring indicators put in place from the outset of the reform process toallow progress in achieving real outcomes from the reforms to be assessed both withingovernment and also externally by civil society.
Center of Government Decision-Making
21. There appear at present to be a number of critical weaknesses in the area of centerof government decision-making. In most OECD countries, effective development andimplementation of a complex policy reform depends on policy continuity being achievedover an extended period of time. It can often take four years for a major policy reform tomove from initial development to the beginning of the implementation stage. Given thatthe average lifespan of a government in Moldova since 1991 has been around a year, andgiven also the high levels of staff turnover at change of govermnent, it has clearly beenextremely difficult for the Government of Moldova to shepherd major policy reforminitiatives from the development stage through to successful implementation.
22. This lack of stability is exacerbated by a number of other serious weaknesses. Themost telling is that the ability of Cabinet to take tough decisions on strategic prioritizationremains weak. The State Chancellery is not as yet sufficiently strong for it to be able toplay a leading role in supporting strategic prioritization in center of government decision-making. The further development of the MTEF will in time lead to the State Chancellery,the Ministry of Economy and the Ministry of Finance having to work much more closelytogether on strategic prioritization of government policy measures and particularly onsupporting and facilitating strategic prioritization in budget formulation. The capacity ofthe State Chancellery needs to be upgraded significantly to equip it to undertake this roleeffectively.
23. A system of Cabinet Committees could also be introduced to support efforts toreduce the overall present overload on the Cabinet agenda, to help improve policy
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contestability, and also to strengthen substantive joint inter-Ministerial working. Efforts
could be made to strengthen strategic planning and policy analysis across governmentthrough developing and introducing a mandatory approach to policy analysis and impactassessment which would be applied to all new proposals to be submitted to Cabinet or to
Cabinet Committee. As a first step towards strengthening capacity of the State
Chancellery, a functional review of the State Chancellery could be undertaken, with a
view to restructuring it over the short to medium term as a non-political Government
Secretariat.
Budget Formulation and Execution
24. The Government of Moldova has made progress in improving and streamlining
certain technical aspects of public expenditure management. Most of the basic legal
framework for the budget system and budget process is in place, a central treasury system
has been established, efforts continue to strengthen revenue administration and collection,
and attempts to launch a far-reaching fiscal decentralization reform were initiated. The
Ministry of Finance is committed to securing further improvements in the quality of thebudget process (particularly budget formulation) through the gradual adoption of the
elements of an MTEF and building capacity in performance and program budgeting
techniques. The Ministry of Finance deserves credit for promoting such an ambitious set
of reforms in an extremely difficult fiscal and political context. However, the measuresundertaken so far have proven insufficient to assure allocative and technical efficiency.
Moreover, the sustainability of the progress achieved in the area of aggregate fiscal
discipline remains questionable.
25. The budget process remains particularly weak in allocating resources based on
strategic priorities. Further development of the MTEF should provide an appropriate
integrating and supporting framework to help underpin the achievement of improvementsin this area. Priority areas for attention should perhaps include approaches to determining
the aggregate resource envelope and to ensuring greater realism and credibility here; and
gradually enforcing tougher top-down prioritization of expenditures across sectors. Inparallel, efforts could be made to strengthen intra-sectoral prioritization in support of key
govermment work program objectives for each of the education, health, and socialprotection sectors. However, it should of course be borne in mind that meaningful,
credible and binding intra-sectoral prioritization can only be undertaken once a credible
and binding top-down process for overall prioritization within a clearly-determined and
enforced resource envelope across sectors is in place.
26. To support ongoing efforts to introduce the MTEF, the Government needs to go
beyond the technical aspects of medium-term macroeconomic planning and budget
estimates and develop the strategic focus of medium-term resource planning. The key to
moving forward in this area may be through improving the quality of the Budget Concept
Paper. Amendments to the Law on the Budget System and Budget Process may need to
be considered to incorporate the schedule for preparing the Budget Concept Paper into
the budget calendar and to reflect the importance of the Budget Concept Paper in setting
the strategic direction for budget formulation.
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27. Aggregate fiscal discipline needs to be strengthened further through improvingthe comprehensiveness of budget coverage. Budget comprehensiveness can bestrengthened by: (i) considering the State Social Insurance budget together with the stateand local governments' budgets as part of a Consolidated General Govermment Budget,which would also include all extra-budgetary funds and resources, and which would beused as the basis for the annual Budget Concept Paper; (ii) including extemal financingof capital investments and other expenditures funded with donor assistance; (iii)integrating capital expenditures in the preparation of the annual budget proposal; and (iv)including contingent liabilities related to arrears of energy enterprises in the fiscalframework for budgeting.
28. Fiscal reporting and budget transparency could be increased further through theproduction of more comprehensive, accurate, and timely budget reports designed tosupport effective and informed management policy-making and decision-making. Inparticular, comprehensive budget execution data for State and local governents'budgets should be prepared and published.
29. Both the intemal and extemal accountability framework appears comparativelyweak. It is planned that the Ministry of Finance's internal audit system be restructured inorder to ensure increased independence. Donor funding could be sought to supportcapacity and institution building for the planned Internal Audit Unit within the Ministryof Finance. Similarly, donor funding could be sought to help enable the Chamber ofAccounts to develop its objectives, functions and capacities in line with those required fora modem supreme audit institution. The present ongoing CFAA is likely also to producea number of specific recommendations in both these areas for consideration by theGovemment.
30. The budget process could be streamlined by adjusting the budget calendar to startthe budget process much earlier in the year. The quality of the macro-fiscal frameworkand the process of its preparation could be improved through strengthening institutionalcapacity in macroeconomic analysis and defining clear institutional arrangements andresponsibilities for this function. Revenue projection methodologies could be reviewedwith the purpose of developing more reliable tools for simulating realistic and crediblerevenue scenarios for all parts of the budget.
31. With respect to budget execution, performance has been disappointing recentlywith increased budget deviation in execution and some new build up of arrearsexperienced in 2001. The present expenditure commitment control system and processneeds to be tightened, extended and made more effective. Implementation of the Treasurysystem to local governments needs also to be completed. The main driver though ofimprovements to budget execution is likely to come from a combination of: (i) morerealistic revenue forecasting; (ii) tougher up-front strategic prioritization of expenditureseach year within the context of a realistic resource envelope; (iii) line Ministriesbeginning to regard top-down sectoral allocations as binding and enforceable; (iv) areduction in policy volatility and in the frequency of amending the budget following itsformal approval during the course of its execution within year.
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32. Further strengthening of public debt management and the development of an
integrated public debt management strategy should be a priority area to minimize the cost
of financing and ensure fiscal sustainability of debt servicing over the medium and long
term.
33. Finally, it should be noted that, as concerns intergovernmental fiscal relations, a
large share of general government expenditures, especially in areas that impinge directly
on the poor, are of course under the jurisdiction of local authorities. The efficiency of
budget relations between the state and local budgets, together with the quality of
expenditure management by the local authorities, is, therefore, an important determinant
of the overall efficiency of public resource management in Moldova. The efficiency of
public spending at the local level in Moldova is affected by a broad range of factors,many of which are political in nature. In 1999, the Government initiated a far reaching
decentralization reform that progressed more slowly than had been expected. In 2002,
Parliament voted for major amendments to the 1999 legal framework, in effect partially
reversing the reform. Only some of these amendments, however, were later accepted by
the Constitutional Court. The present position with regard to the fiscal decentralizationprocess remains unclear.
Civil Service Management and Human Resource Management
34. Moldova started the transition period with a comparatively low level of
institutional capital in its public sector. This situation has worsened considerably since
1991 due to the prevailing chronic political instability and volatility. Moldova has had ten
governments over this period. Increasing politicization has led to high levels of turnoverin the civil service at each change of government (up to 20 percent turnover at change of
government, with turnover down to deputy head of department). This has resulted in
chronic policy discontinuity, weakening of institutional capacity, a severe deterioration in
operational efficiency, erosion of institutional memory, and very low staff morale.
Further, pay and remuneration levels are extremely low.
35. There have been few external pressures on the system for appropriate behavior on
the part of public officials. The private sector has not yet been able to form businessassociations capable of lobbying effectively for business-oriented policies. Less than 10
percent of enterprise managers surveyed in the BEEPS Enterprise Survey felt that the
government in Moldova was helpful to their business. At the same time, they spent
almost 15 percent of their time in dealings with government officials, compared to a CIS
average of 6 percent. Civil society is weak. Citizens have extremely low expectations of
the public sector and extremely limited opportunities to participate meaningfully in
decision-making processes. External accountability of the system is very low, as are
levels of transparency and freedom of information.
36. Unusually perhaps, the overall size of the central civil service and of local
government administrations in Moldova is not a key problem: these are comparativelysmall by international standards, although there are still some areas of over-staffing and
many areas where significant efficiency, effectiveness and cost-effectiveness gains could
be achieved. The greater challenge is perhaps to build capacity, particularly in central
ministries, to provide for more efficient and cost-effective implementation of the coremedium-term priorities of the government's work program. While the overall number ofministries in Moldova (at present fifteen) is also in line with intemational practice,existing ministries need to be significantly streamlined to focus on: (i) policy analysis anddevelopment; and (ii) monitoring and evaluation. Taken together, these factors imply aradical restructuring of existing line ministries.
37. A program of functional reviews could be launched to help achieve thisreorientation. This review would also aim to identify and eliminate non-core functionsand services and provide for the commercialization or spinning off of commercialservices at present provided within government structures. Initially, criteria for such aprogram could be developed, and three pilot functional reviews launched over the firstyear of implementation of the overall Public Sector Reform Strategy and Program.
38. Civil service human resource management is generally underdeveloped, with nostrong central agency setting strategic human resource management policy for the civilservice overall. The present Civil Service Law does not provide a sufficiently clear andstrong legislative underpinning for a merit-based and depoliticized professional civilservice. Key objectives must be to build a career public service; to provide for continuityon change of government; and to differentiate clearly between career civil servants andpolitical appointees.
39. The Civil Service Law, together with supporting legislation and regulations, couldbe reviewed and amendments developed to strengthen the application of merit anddepoliticization. Consideration could also be given to setting up an independent non-partisan oversight body (such as a Civil Service Commission) to afford some protectionof the principles of merit and depoliticization as enshrined in the amended legislation.Further, clear criteria could be established for deciding which posts should be filledthrough competitive external open recruitment. These steps could be accompanied bymoves to develop a Code of Ethics for civil servants and to strengthen provisions relatingto conflict of interest and to declarations of assets and earnings.
40. Accountability could be strengthened through introducing a system forperformance management within the civil service based on the determination of ahierarchy of objectives (for the government overall, next for each ministry, then for eachdepartment within each ministry, and finally for individual employees within eachdepartment). Such a system would also seek to provide performance data on the work ofministries and government bodies. Such performance data could be linked with budgetdata as a first step toward allowing for more explicit assessment of efficiency,effectiveness, and cost-effectiveness. This could also lead to the determination andpublication of service standards for ministries and government bodies, against whichperformance could then be assessed and reported on, both internally and externally. Inaddition, new forms of consultation with, and for providing for participation of, privatesector business associations, and NGOs and individual citizens and service users indecision-making and service management could be developed and introduced.
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41. Pay reform could be considered across the public sector to increase the
competitiveness of government as an employer and to allow government to be able to
recruit and retain sufficient quantity and quality of employees, particularly in managerial
and professional areas. This could go a long way towards rebuilding capacity within the
public sector. Capacity in the central civil service could also be strengthened through
paying increased attention to training and development strategy and programs.
Sector-Specific Reforms in the Social Sector
42. Addressing cross-cutting weaknesses in areas such as center of government
decision-making, budget formulation and execution, and civil service management and
human resource management appears to be an essential pre-condition for strengthening
the government's ability also to define strategic intra-sectoral priorities; to ensure the
optimal allocation of scarce resources in line with the priorities determined; and to
increase overall operational efficiency and efficiency of spending at the sectoral level.
The present inappropriate incentives and weak institutions continue to make it extremely
difficult for government to be able to make and secure the effective implementation of
appropriate policy decisions. However, beside paying attention to cross-cutting reforms,
there also remain a number of sector-specific areas justifying the attention of the
government.
43. In the education sector, the priorities appear to be to strengthen equity in access to
primary and basic secondary education through improving enrolment rates, completion
rates, and attendance rates, particularly for children from low income families and from
rural areas. In the context of the PRSP and the Government's Public Sector Reform
Strategy and Program, a specific Education Reform Strategy could also be developed to
articulate these sector-specific priorities and objectives. This could also include the
completion of rebalancing of intra-sectoral education expenditures further in favor of
primary and basic secondary education; the development of an Education Human
Resource Restructuring Plan designed to allow for rebuilding of human resource capacity
within the education sector; and an approach to increasing external accountability and
strengthening parental and communal involvement in decision-making.
44. In the health sector, the agenda appears to parallel that for the education sector,
although restructuring of the health sector is further advanced. Priorities at sector level
appear to be to strengthen equity in access to basic services, particularly through defining
then implementing the basic health care services package. Also, in the context of the
PRSP and the Government's Public Sector Reform Strategy and Program, the
government's Hospital Restructuring Plan could be finalized and implemented. The
rebalancing of intra-sectoral expenditure allocations in favor of primary health care and
emergency services could be concluded. A Health Sector Human Resource Restructuring
Plan also designed to allow for rebuilding of human resource capacity within the health
sector could be developed and implemented; and approaches to increasing external
accountability and strengthening community involvement in management of community-
based boards for primary health care services developed.
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45. In the social protection sector, the sector specific priorities appear to be tostrengthen equity in, and the medium-term sustainability of, the pensions system; and toimprove the ability to target social assistance to the most vulnerable and needy groups(including through the restructuring of child allowances and the elimination ofcompensations for non-energy communal services).
Next Steps
46. As set out earlier in this report, the challenge facing the Government of Moldovais to seek to secure sustainable growth and significantly reduce poverty, while buildinghuman capital and improving health and education outcomes. This already challengingagenda has to be achieved in an extremely constrained fiscal position and in the contextof weak institutional capacity. This report accordingly presents a set of proposals forconsideration by the Government of Moldova which are designed to help secure increasesin institutional capacity in a number of key areas, such as center of government decision-making, budget formulation and execution, and civil service management and humanresource management. Additionally, a number of sector-specific recommendationsrelating to the public sector reform agenda in the social sectors have also been suggested.The table attached to the Executive Summary summarizes the recommendationsidentified and suggested for consideration by the Government in each of these areas.
47. While the challenge facing the Government cannot be over-estimated, theGovermnent has been able to demonstrate considerable progress in some early structuralpolicy reforms, and has for example been able to put in place many of the basics requiredfor a well-functioning public resource management system. The government's decision toadopt the MTEF approach also provides an excellent integrating framework to strengthendiscipline within the system and to support the government's efforts to secure the desiredimprovements in institutional capacity. And the PRSP, underpinned by an active PublicSector Reform Strategy and Program, should provide the appropriate policy vehicle forthe Government to develop and begin to implement these reforms.
48. Many of the institutional measures suggested for the Government's considerationmay require years before their effects can really be felt both within and outside thesystem. Yet, making progress on this institutional agenda appears to be a criticalprecondition for making progress on the Government's core policy reform agenda andthereby helping to deliver strong and sustainable growth and achieving real andsignificant reductions in poverty.
Table 1: Summary of Priority Recommendations
OBJECTIVES ACTIONS
Six Months Twelve Months Medium-Term Target(Three to Five Years)
1. Public Sector Reform
1.1 Put in place appropriate Approve Public Sector Reform Strategy Develop and approve detailed and Annual reports on work of publicarrangements for leadership and . . . costed Action Plan for Public Sector service overall and on public sectormanagement of public sector reform Reconuttte hugh-level Steenrng Reform reform activities and outcomes being
Comnittee for Public Sector Reform led ubhshedby Prime Minister; together with the Put m place set of momtoring indicators pthree comnponent-level Working Groups (including statistical and budgetary dataon Public Administration Reform; as well as results of public officialsPublic/Private Sector Interface; and surveys and service delivery surveys ofPublic Expenditure Management service users) to support process of
Set up Public Sector Reform Unit monitonng and evaluation by thereporting directy to Prime Minister government and by external
stakeholders of the Impact of andoutcomes from the Public SectorReform program
Draw up communications and internaland external consultation strategies
2. Center of Government
2.1 Strengthen center of government Introduce system of Cabinet System of Cabinet Comrnittees in placedecision-making through seeking tt Committees to reduce overall load on and working effectivelyincrease both the effectiveness of Cabinet and to irnprove policyCabinet and the ability of Cabinet t- contestability and strengthen substantivereach binding collective decisions mter-Ministerial joint working
OBJECTIVES ACTiONS _
Six Months Twelve Months Medium-Term TargetThree to Five Years)
2.2 Strengthen capacity for strategic Undertake functional review of State State Chancellery restructured into non-planning, policy analysis and policy Chancellery political Government Secretariatcoordination at the center ofcooverdinaenat the center of Set up Public Sector Reform Working Prime Minister's Office strengthenedgovernment Group on Strategic Planning to develop with those political functions previously
methodology for policy analysis and exercised by the State Chancelleryimpact assessment to be applied to all reassigned to itnew proposals to be submitted to Management information systems
Cabinet strengthened to allow State Chancellery
to be able more effectively to monitorimplementation of the Government'swork-program
3. Public Expenditure Management
3.1 Strengthen strategic prioritizatlon Develop Issues Paper and Budget Prepare sectoral expenditure strategies MTEF effectively implementedand allocative efficiency in budget Calendar for preparation of 2004-2006 for each of education, health and socialformulation MTEF protection (to be attached to the 2004
BCP)
Prepare amendments to 1996 BudgetLaw to require Cabinet approval of BCPprior to detailed budget preparationstarting with 2005 Budget
Develop medium-term plan forstrengthening the MTEF framework(determination of aggregate resourceenvelope; prioritization of expenditureitems across and within sectors)
Approve MTEF for 2004-2006 withexplicit expenditure ceilings byfunctional classification, and includingthe sectoral expenditure strategies foreducation, health and social protection
OBJECTIVES ACTIONS
Six Months Twelve Months Medium-Term Target(Three to Five Years)
3.2 Strengthen aggregate fiscal Decide to include externally financed Consolidated General Government
discipline through improving investment in capital expenditures for Budget (including State Budget, local
comprehensiveness of budget 2004 Budget goverrnents' budgets, State Social
coverage Agree to consider capital expenditure Insurance budget, and extra-budgetaryAogehre wthte rcapieta expgendtur funds) developed and used as basis fortogether with the recurrent budget BCP from 2005 budget onwardsproposal for 2004 Budget
Consideration of contingent liabilitiesfrom energy arrears taken properaccount of in budget analysis andplanning
3.3 Imnproving fiscal reporting and Budget execution data for State and
budget transparency local governments' budgets on a
commitment and cash basis beingpublished
3.4 Strengthen internal and external "Reorganization of the Ministry of Mobilize donor support for institution Internal audit system restructured
accountability framework Finance's internal audit system so as to building for newly-established Intemal Accounting Chamber objectives,
ensure increased independence and Audit Unit of Ministry of Finance functions, and capacities in lne with
capacity" (SAC III Second Tranche Core Mobilize donor support for institution those required for modern supreme
Condition) building for Accounting Chamber audit institution
Approve action plan to implement Implement prionty recommendations Implementation of CFAA
CFAA recommendations (CFAA report from CFAA recommendations completed
due to be submitted to GovernmentMarch 2003)
3.5 Enhance quality of Macroeconomic forecasting model
macroeconomic forecasting developed and implemented effectivelyfrom 2005 Budget onwards
OBJECTWES ACT]IONS
WSK Momths TweRve Months MedJumm-Termn Target(Three to Five Years)
3.6 Strengthen budget preparation Amend budget calendar to start budget Develop more reliable and robust Process of monitoring the performancepreparation in January of each year revenue projection methodologies and of budgets includes reviewing outputsstarting with 2004 Budget tools and outcomes of spending programs
Continue building capacity in the area ofperformance and program budgeting;continue and develop the pilots ineducation and health for 2004 Budget;initiate preparatory work for pilot insocial protection for 2005 Budget
3.7 Strengthen budget execution Extend coverage and effectiveness of Borrowing plan consistent with cashexpenditure commitment control system inflows and outflows in placeand processes Implementation of Treasury system to
control expenditure commitments oflocal governments completed
Integrated public debt managementstrategy operational
4. Civil Serviee Manaaement
4.1 Strengthen legal and ethical Undertake review of Civil Service Law Process of putting in place legislativeframework and supporting legislation and framework to give the required
regulations and develop amendments underpinning for the application ofdesigned to strengthen the application merit and depoliticization completedof merit and depoliticization Independent non-partisan oversight
body (such as Civil ServiceCommission) to protect both merit anddepoliticization principles created
Process under way to strengthen andcodify administrative proceduresdesigned to remove inappropriatediscretion from individual civil servants
OBJECTIVES ACTIONS
Six Months Twelve Months Medium-Term Target(Three to Five Years)
Code of Ethics for civil servants; andprovisions relating to conflict of interestand inappropriate political activity onthe part of civil servants in place
Requirements for declarations of assetsand earnings by managerial-level civilservants and public officials of sub-national umts of governmentstrengthened
4.2 Rationalize structure of Develop criteria for program of Implement three pilot functional reviews Program of functional reviewsgovernment and of constituent parts functional reviews of government overall undertaken across government; and forof government and of individual Ministries and other judets and local govermnents
bodies within the structure ofgovernment Line Ministres re-oriented on role of
policy analysis and development,strategic planning, and monitoring andevaluation
43 Increase competitiveness of public Develop medium-term pay policy and Set of targets established for civilsector as attractive employer through pay position for the public sector as service pay compared to the privatepay reform compared to the private sector sector.and for decompression ratio
Develop medium-term target achieveddecompression ratios (ratio of gradelevel 13 to 23 for basic pay)
5. Civil service human resource Define criteria as to which positions are Scope of positions to be subject tomanagement to be filled on the basis of competitive competitive external open recruitment
5.1 Strengthen external competition exteral open recruitment broadenedin recruitment
OBJECTIVES ACTIONS
Six Mounths Twelve Months Medium-1Term Target(Thnree to Five Years)
5.2 Rebuild capacity through Develop overall change management Traming and development strategy andstrengthening civil service training program to support public sector reform program for senior and middle-leveland development managers in place
Training and development strategy andprogram for strengthening skills in areassuch as human resource management,financial management, policy analysisand strategic planning, IT, impactanalysis and legislative drafting in place
5.3 Strengthen transparency and Develop service standards for number of Performance data and budget data forexternal accountability pilot Ministries and other bodies of Ministries and other units of
governrment together with process for government linkedcollecting, analyzing and publishing Application of service standards anddata on actual performance against publishing of reports on actualstandards performance against standards extended
Develop new forms of consultation across governmentwith, and participation of, private sector Performance management system basedbusiness associations, and NGOs and Perarce objemes developed
indvidalcitzes ad ervceusers in on hierarchy of objectives developedindividual citizens and service usr n and imiplementeddecision-making and servicemanagement New forms of consultation with, and
participation of, private sector businessassociations, and NGOs and individualcitizens and service users in place
Processes and procedures to promotefreedom of information implemented
6. Education
6.1 Strengthen equity in access to Define target enrolment ratios, "Government to approve an education Implementation of Education Reformprimary and basic secondary completion rates, and attendance rates: reform policy strategy to address Strategy under way; target enrolmenteducation; and to higher education overall; for children from low income emerging inequities in the system, ratios, completion rates, and attendance
OBJECTIVES ACTIONS
Six Months Twelve Months Medium-Term Target(Three to Five Years)
families; for children from rural areas including (a) drop out of poor children rates for primary and basic secondaryfrom basic education; (b) higher education achieved; satisfactory access
Complete study on levels of formal and education selection and financial of students from low income families
education overall; for students from low support mechanisms to ensure access of and from rural areas to higher educationincome fanilies; and for students from poor students" (SAC Im Third Tranche achievedincome familieas; and for students from Core Condition)rural areas
6.2 Rebalance intra-sectoral Define target allocations for intra- Target intra-sectoral allocations foreducation expenditures further in sectoral expenditures (as percentage of primary education and for basicfavor of primary and basic secondary all public education expenditures) to be secondary education achievededucation achieved for primary and basic
secondary education over medium term
6.3 Rebuild human resource capacity Complete inventory of existing staff Education Sector Humnan Resource xwithin the education sector levels by type of staff (teachers and Restructuring Plan covering: (i)
support); type of educational mstitution; redeployment of existing staff; (ii)location; and subject (for teachers) retraining then redeployment of existing
staff, (iii) required redundancies; (iv)Complete assessment of short-term and management training; (v) professionalmedium-term staffing needs by type of tram ent training in pofessionalstaff; type of educational institution; radining; (vi) training in polcy analysis
locaionand ubjct (or eachrs) and development and monitoring andlocation and subject (for teachers) evaluation for Ministry of Education(including allowing for the effects in staff; and (vii) pay reform strategy formedium term of falling school rolls) areas of recruitment and retention
difficulty; prepared and bemgimplemented
6.4 Increase external accountability Develop proposals for strengthening Comparative information beingparental and community involvement in provided to local communities and todecision-making relating to primary and parents on comparative performance ofsecondary education in their local area educational institutions
OBJECTIES ACTIONS
Six Months Twelve Months Medium-Term Target(Three to Five Years)
7. Health
7.1 Strengthen equity in access to Define basic health care services Prepare costed implementation plan for Basic package of health care servicesbasic services package introduction of basic health care designed to provide universal free
services package access in place
7.2 Rebalance intra-sectoral health "Government approval of a time bound Secure increased intra-sectoral Implementation of Hospitalexpenditures further in favor of Hospital Restructuring Plan for further allocations for primary health care and Restructuring Plan completedprimary health care and emergency elimination of excess capacity in for emergency services within 2004 Target intra-sectoral allocationsservices Chisinau Municipality Hospital and draft Budget achieved
Republican Hospitals" (SAC III SecondTranche Core Condition)
Define target allocations for intra-sectoral expenditures (as percentage oftotal public health expenditures) to beachieved m the medium term for primaryhealth care and emergency services
73 Rebuild human resource capacity Complete inventory of existing staff Prepare Health Sector Human Resource Implementation of Health Sectorwithin the health sector levels by type of staff (doctors, other Restructuring Plan covering: (i) Human Resource Restructuring Plan
professionals, nurses, ancillary); type of redeployment of existing staff; (ii) completedhealth care institution; and location retraining then redeployment of existing
Complete assessment of short-term and staff; (iii) required redundancies; (iv)medium-term staffing needs by type of management training; (v) professionalmdu-emstaff in;eesb type of hat aeisiuinn training; (vi) training in policy analysisstaff; type of health care institution; and and development and monitoring andlocation evaluation for Ministry of Health staff;
and (vii) pay reform strategy for areas ofrecruitment and retention difficulty
OBJECTIVES ACTIONS
Six Months Twelve Months Medium-Term Tarzet(Three to Five Years)
7.4 Increase external accountability Develop proposals for introducing Information being provided to localcommunity-based boards on a pilot basis communities and to health care servicefor primary health care services in a users on comparative performance ofsmall number of primarias community-level primary health care
services'
8.Social protection "Enactment of amendments to the 1998 Reintegration of "special treatment"8.1 Strengthen * ~ . pension law On the State Social professional groups into the general
equity and mium- Insurance Pension" which includes:' pension system on equitable basisterm sustainability of pension system completed
-Integration of privileges into the. generalpension law with gradual withdrawal ofelements inconsistent with the generalpension law
-Specification of a clear financially xviable indexation mechanism with whichto determine future pension increases(SAC III Second Tranche CoreCondition)
8.2 Improve ability to target social Further develop household budget More effective targeting of socialassistance to most vulnerable and survey data and analysis to provide assistance benefits achievedneedy groups, improved analytical base to support Proposals for phasing out of program of
more effective targeting of social nominal compensations developed and
implementation under way withDevelop strategy and action plan for beneficiary groups which are not therestructuring of child allowances most in need eliminated and
compensations for non-energycommunal services also eliminated
Restructuring of child allowancescompleted
1. STRATEGIC SETTING
1.1 The challenge facing the Government of Moldova is to promote sustainablegrowth and to significantly reduce poverty, while building social capital. This has to beachieved in the context of a very constrained fiscal position, weak governance, andlimited institutional capacity. Following the government priorities as set out in theInterim-Poverty Reduction Strategy, the report argues that the required social sectorreform outcomes (restoring equity in access in the health and education and socialprotection sectors) can only be achieved if public expenditure management arrangementsare significantly strengthened and the institutional capacity of government decision-making and of public administration and service delivery is significantly improved.
1.2 To give a context for this discussion, this chapter provides a summary of thecauses of Moldova's disappointing transition performance. Macro-fiscal developmentsare examined, including an assessment of compositional changes in revenues andexpenditures over the last ten years. A macro-fiscal framework for the period to 2005 ispresented, together with a discussion of some of the key risks and constraints to thescenario in the framework.
A. CAUSES OF THE DISAPPOINTING TRANSITION PERFORMANCE
1.3 The complexity of the causes of Moldova's disappointing transition performanceshould not be underestimated. The main causes can be divided into four groups: (i)unfavorable initial conditions and shocks at the outset of transition; (ii) poor quality ofgovernance; (iii) partial and stop-and-go implementation of market reforms; and (iv) theexternal shock from the 1998 regional financial crisis. Moldova has experienced ten verydifficult years of transition. Over the period from 1990 to 2000, GDP declined by 65percent. More than half of the population live in absolute poverty.' External debtincreased from virtually zero to above 100 percent of GDP2.
1.4 Transition was accompanied by a dramatic fiscal adjustment, most of which wasinduced by the 1998 regional financial crisis. The cash budget deficit, which exceeded10 percent of GDP in 1997, was reduced to 1.6 percent of GDP in 2000 and eliminated in2001. Government revenues declined from 40 percent of GDP in 1997 to 31 percent ofGDP over the same period. This was largely the result of the collapse in tax revenues.
I According to the most recent available data on regional poverty levels, Moldova's headcount index for absolutepoverty as measured at $2.15/day in PPP terms stood at 55 percent in 1999 and was the second worst after Tajikistanamong the transition countries for which data were available (see, for example: World Bank. 2000. Malkng TransitionWork for Everyone Poverty and Inequality in Europe and Central Asia. The World Bank. Washington, D.C.)
2 At the end of 2001, total extemal debt, including extemal energy arrears, was estimated at around 103 percent ofGDP. Without energy arrears, extemal debt amounted to 83 percent of GDP.
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The Government had to cut expenditures from 50 percent of GDP in 1997 to 30 percent
in 2001.
1.5 Initiall Economnic Conditions and Shocks of the Early years of Tiransitiom. In
the Soviet system, Moldova's role was primarily to supply agricultural products to the
rest of the Former Soviet Union (FSU). Moldova was almost completely dependent on
imported energy and had no natural resource base of its own. With the dissolution of the
FSU, Moldova experienced one of the strongest terms of trade shocks among the FSU
countries, combined with severe disruption of trade links and loss of traditional markets.
The 1992 civil war, when the region of Transnistria claimed unilateral secession,
considerably eroded Moldova's industrial base, increased its dependence on imported
energy, and made Moldova more reliant on its agricultural output.
1.6 Iitll lInstitutionaR Constraints. Equally important were the initial institutional
constraints. The dissolution of the Soviet Union required the newly independent states to
build from scratch the set of institutions which are part and parcel of modem statehood
and democracy. Like other CIS countries, Moldova started the transition period with a
low level of institutional capacity in its public sector. The situation in Moldova has,
however, been exacerbated over the last decade by chronic political instability and
volatility, with ten governments over this period. Moreover, increasing politicization has
led to high levels of turnover in the civil service at each change of government (up to 20
percent turnover at each change of government, with turnover down to deputy head of
department). This has resulted in chronic policy discontinuity, weakening of institutional
capacity, erosion of institutional memory, and extremely low staff morale.
1.7 Institutional capacity has, in some limited areas, improved since independence.
For example, Moldova has one of the strongest central banks in the FSU. The Ministry
of Finance's technical capacity has also been considerably developed. Both these
agencies were the beneficiaries of substantial externally funded technical assistance.
However, even in these cases, the sustainability of the improvements will depend on
implementing deep public sector reforms to depoliticize the public administration and
provide appropriate incentives to be able to retain good quality professionals.
1.8 Quality of Governance. Overall, Moldova's quality of governance has remained
poor, and is among the weakest in the region. Moldova had the worst performance
among twenty transition countries when compared on a governance index by the EBRD
(1999 Transition Report). Moldova also rated the lowest among transition countries with
respect to perceptions of quality and efficiency of central government services in the
World Bank/EBRD Business Environment and Enterprise Performance Survey (BEEPS-
1999).
1.9 Persistently extremely low compensation levels in the civil service combined with
exposure to opportunities for rent-seeking as elements of a market economy developed
(the new private sector, emergence of some SMEs, restructuring of existing enterprises,
privatization) has led to Moldova experiencing high levels of both state capture and
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administrative corruption.3 At the same time there have been few external pressures onthe system for appropriate behavior on the part of public officials. Politicians have beenunable to secure discipline within the system. The private sector has not been able toform business associations capable of lobbying effectively for business-oriented policies.Civil society is weak. Citizens have extremely low expectations of the public sector andextremely limited opportunities to participate meaningfully in decision-making processes.
1.10 Stop-and-Go Implementation of Reforms. The transition period has beencharacterized by a large degree of political instability, with ten governments sinceindependence. The absence of political consensus behind economic reforms over thisperiod, frequent changes of government, and weak institutional capacity all combined toproduce a stop-and-go pattern in the implementation of economic reforms.
1.11 In the early years of transition, Moldova ranked among the best achievers of thetransition economies with regard to first generation market reforms. The macrostabilization program launched with the introduction of a new currency in 1993 wasrelatively successful: the leu stabilized within twelve months, inflation declined fromabove 100 percent per annum in 1994 to 15 percent per annum in 1996, and the cashbudget deficit was reduced from 22 percent of GDP in 1993 to under 6 percent of GDP in1995. These successes were accompanied by a traditional set of price and tradeliberalization measures and mass privatization.
1.12 Real restructuring of the economy did not start until 1997, however, and progressto date has been mixed. While consecutive privatization programs have moved manyformerly state-owned enterprises into the private sector, many large enterprises perceivedto be of strategic importance for the economy, including enterprises in the wine, tobacco,energy and telecommunications sectors, were kept under state control. Moldova madesignificant progress in land privatization and in agricultural and energy sectorrestructuring between 1998 and 2000.4 The business and investment climate has,however, remained poor. This has discouraged strategic foreign direct investment, whichamounted to a very modest $80 per capita on a cumulative basis for the period from 1994to 1999.5
1.13 Public sector and social sector reforms have been delayed. Health sectorrestructuring and pension refonn were initiated only in 1999. The first steps in
3 See World Bank 2000. Anticorruption in Transition A Contnbution to the Policy Debate The World Bank Washington, D C4 Major achievements in the energy sector include tariff rationalization, replacement of unfunded subsidies withtargeted nominal compensations to vulnerable groups of the population, establishment of an independent regulatorybody, and the sale of three out of five power distribution companies to a strategic foreign investor. Land pnvatizationand farm restructuring are almost completed, with more than 90 percent of all the former collective farms restructuredthrough the national land program.
5 Foreign direct investment in the Moldovan economy was very low in the beginning of transition and has beengrowing slowly From 1995 to 1999, annual net foreign direct investment (FDI) flows averaged US$56 million. Thesale of part of the electricity distribution grid to Union Fenosa company of Spain increased the average to US$68million for 1995-2000 The total volume of net FDI into the Moldovan economy reached US$443.7 million (3.7 percentof GDP) by the end of 2000. As a ratio of GDP, however, this was above the average for FSU countries (I percent ofGDP for 1992-1995, and 2 5 percent of GDP in 1996-1999 (Source World Bank. 2002. Transition. The First TenYears Analysis and Lessons Learnt for Eastern Europe and the former Soviet Union The World Bank. Washington,D C.)
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improving social assistance targeting were taken that same year, when the governmentintroduced a nominal compensations program for vulnerable population groups to replacethe formerly unfunded utility subsidies. Education restructuring has not been initiated.While the Government developed a comprehensive Public Sector Reform Strategy in
November 2000, there have been few concrete steps taken to begin imnplementation of
this Strategy.
1.14 The ExterallR Shock ffruom the 1998 Regional IFinanciaR Crisis. Moldova wasone of the countries in the region hardest hit by the regional financial crisis in 1998. The
depreciation of the leu against western currencies and its simultaneous appreciationagainst the Russian ruble resulted in Moldova's second dramatic terms of trade shocksince independence. Exports halved in 1999 compared to 1997, and by 2001 they hadrecovered to only 70 percent of their pre-crisis level. The incipient positive economicgrowth in 1997, which followed six years of decline, was reversed. Inflation generatedby the leu depreciation reduced real household incomes and savings, leading to anincrease in the incidence of absolute povertyfrom 54 percent of the population at the end of Table 1.1: Income and Output in CIS
1997 to almost 74 percent of population at the Countries, 2000
end of 1999.6 Income per capita plummeted
in 1999 to less than 60 percent of the pre-crisis GNI Real
level. External debt as a percentage of GDP per capita, GDP,
increased from 56 percent in 1997 to above Russia 8010 64
877 percent in 1999. Belarus 7550 88
Kazakhstan 5490 901.15 The cumulative decline in GDP of 65 Turlanenistan 3800 76
percent between 1990 and 2000 (the second Uksraine 3700 43
worst among the Former Soviet Union (FSU) Azerbaijan 2740 55
countries) turned Moldova into the poorest Georgia 2680 29
country in Europe, with Gross National Armenia 2580 67
Income per capita lower than all other FSU Kyrgyzstan 2540 66
countries except Tajikistan. Poverty is Uzbekistan 2360 95
widespread, with more than half of the Moldova 2230 35
population having consumption levels below Tajilkistan 1090 48Source: World Bank 2002 World Development
the internationally comparable absolute Indicators 2002, and Transition The First Ten
poverty line of US$2.15 per day,8 and a Years. World Bank. Washinaton. D.C
6 Murrugara, Edmundo. 2001. "Moldova Dynamic Poverty Study". Working Paper.
7 Excluding energy arrears.
s According to the most recent available data on regional poverty levels (see, for example, World Bank. 2000.Making Transition Work for Everyone Poverty and Inequality in Europe and Central Asia. The World Bank.Washington, D.C.), Moldova's headcount index for absolute poverty as measured at $2.15/day in PPP terms stood at 55percent in 1999 and was the second worst after Tajikistan among the transition countries for which the data wasavailable. The Dynamic Poverty Study undertaken by Bank staff in 2001 (E. Murrugara, 2001) suggested the use forMoldova of an absolute poverty line of 89.97 lei per capita per month valued at end 1997 prices (equivalent to about$20 per month at the time of measurement). The use of this poverty line results in an absolute poverty rate above 70percent for 2000.
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majority9 falling into the category of chronically poor. Social indicators havedeteriorated to among the worst in the region. In 2000, Moldova ranked 102nd of 174countries on the UNDP's human development index, the lowest of all transitioneconomies except Tajikistan and Uzbekistan.10 Moldova's accumulation of one of theheaviest external debt burdens of all the transition countries exacerbates the situation."
B. MACRO-FISCAL DEVELOPMENTS
1.16 In the last two years, GDP growth turned positive, growing by 2.1 percent in 2000and 6.1 percent in 2001. The exchange rate stabilized relatively quickly after the majordevaluation in 1998-99 and has been depreciating slowly for the last two years. After atemporary surge in 1998-99, inflation was reduced to 18.5 percent in 2000 and to 6.4percent in 2001. The current account deficit contracted sharply in 1999, widened to
above 9 percent of GDP in 2000, but fell to 8 percent of GDP in 2001. Following adramatic tightening of fiscal policy, fiscal balances have demonstrated strongimprovements since 1998, with a cash budget surplus of about 1 percent recorded in 2001(see Table 1.2).
Table 1.2: Aggregate Fiscal Trends'2
(Percent of GDP)
1995 1996 1997 1998 1999 2000 2001
Revenues 39.4 35.9 39.8 39.0 32.0 33.0 31.3
Expenditures 46.2 43.9 50.0 42.9 35.0 34.6 30.3
Deficit -6.8 -8.0 -10.2 -3.9 -3.0 -1.6 1.0
Source 1995-96 - IMF, 1997-2001 - Ministry of Finance.
1.17 Overall Fiscal Performance. Up to 1998, fiscal performance was mixed. Whilethe fiscal deficit showed a moderate improvement over the period, the deficit remainedrelatively high (see Figure 1.1).13 Revenues were fairly stable as a share of GDP, ranging
between 35 and 40 percent of GDP. Expenditure fluctuated between 44 and 50 percent.The fiscal deficit was financed through a combination of external financing, domestic
9 The Dynamic Poverty Study found that the share of chronic poverty varied between 90 percent and 67 percent of
the total in 1997-2000 The study follows the cntena used by Jalan and Ravallion (1998, 2000) to distinguish between
chronic and transient poor.10 UNDP. 2000. Human Development Report 2000
" The recent study found that Moldova's and the Kyrgyz Republic's debt indicators at end-2000 exceeded the
sustainability thresholds under the enhanced HIPC Initiative by modest amounts. (World Bank and IMF. 2002. Poverty
Reduction, Growth and Debt Sustainability in Low-Income CIS Countries.)
12 Here and below, if not specified otherwise, fiscal trends are based on the general government budget execution
data. The definiton includes the state budget, local budgets, state social insurance budget, other extra-budgtary funds
and resources (see Box 3.1 for a more detailed description of Moldova's budget system). Consistent time series for
donor financed investment and other extemal inflows not channelled through the govemment budget could not be
compiled, and these items are not included.
13 Measured on a commitment basis, the fiscal deficit ranged from 7.2 to 12.6 percent of GDP between 1993 and
1998. On a cash basis, the deficit was smaller, ranging from 5 7 to 10 2 percent of GDP during the same period.
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borrowing, and domestic payment arrears (mostly on social expenditures, includingpensions).'4 The stock of domestic expenditure arrears peaked at over 12 percent of GDPin 1996 (see Figure 1.2). Heavy recourse was made to external borrowing, whichaveraged above 6.5 percent of GDP between 1995 to 1997. As a result, total externaldebt rose from almost zero in the early 1990s to 67 percent of GDP by the end of 1997(see Box 1.1).
Box 1.1: Moldova's Debt Profile
Moldova's total external debt increased from near zero at the beginning of the 1990s to over $1.2billion (83 percent of GDP ) at end-2001, of which 77 percent was public and publicly guaranteeddebt. Additionally, the remaining outstanding external arrears on energy imports to foreignsuppliers (mainly Gazprom) are estimated at US$298 million (20 percent of GDP). About 60percent of total public and publicly guaranteed debt is owed to multilateral institutions, includingthe IMEF, the World Bank, and the EBRD. About 27 percent is owed to pnvate creditors,including an outstanding balance from a Eurobond in the amount of US$75 million (issued in1997 with a bullet repayment m June 2002), US$90 million securities issued to Gazprom ofRussia, and a number of direct and publicly guaranteed credits from foreign banks. Theremaining public and publicly guaranteed debt (13 percent of total) is owed to bilateral creditors.Private non-guaranteed debt accounted for 22 percent of the total external debt stock in 2001,which has increased in recent years due to increased private sector borrowmg from foreign creditmarkets. A relatively small part of the current government debt portfolio was contracted onconcessional terms.
Source World Bank staff analysis based on data provided by the Govemment of Moldova.
14 For example, the gap between social contnbutions and State Social Insurance budget expenditures has widenedsince 1996; it reached a peak of around 4 percent of GDP in 1997. State Social Insurance budget expenditures(including pensions, family allowances, unemployment benefits and other minor social.assistance benefits andsubsidies) accounted for slightly less than one quarter of total general government expenditures in 1999. Consolidatedstate and local budgets outlays on the social sphere (including public expenditures on health care, education, and someminor social assistance schemes) ranged between 13 and 17 percent of GDP on a cash basis between 1994 and 1998.These levels are high relative to the average for other FSU countnes (8.2 percent of GDP) and even relative to theaverage for countnes in Central and Eastern Europe and the Baltic states (about 10 percent of GDP) in recent years.(Source: Alam, Asad and Sundberg, Mark. 2001. A Decade of Fiscal Transition The World Bank. Washington, D.C.)
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Figure 1.1: Budget Deficit Trends (Percent of GDP)
15%
10%
5%
0%1995 1996 1997 1998 1999 2000 2001
-5%
-Xmcash deficit 0 commitment deficit
Source: Based on the Ministry of Finance and IMF data.
Figure 1.2: Budget Deficit Financing by Source(MDL million)
800
600
400
200 -'
1995 1996 199k 498 199 00 !-200
-400
oO00 g Net domestic
o Net foreign* Prietization Proceeds* Change in domestic expenditure arrears
Source. Based on IMF data.
1.18 Starting in 1998, the Government had to tighten fiscal policy dramatically, in part
because of the regional financial crisis. In the aftermath of the crisis, government
revenues dropped, and external sources of deficit financing and the market for T-bills
both dried up. The urgent need to consolidate the reserve position of the National Bank
of Moldova also reduced the Government's access to National Bank resources to finance
its deficit. Deficit financing was limited to those amounts made available by bilateral and
IFI creditors, and only after sufficient resources had been allocated to the National Bank
to shore up its international reserves and net-credit-to-Government positions. The
Government had no option but to reduce the fiscal deficit sharply, in both cash and
commitment terms.
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1.19 In 1999, the fiscal balance on a commitment basis declined to 3 percent of GDP,an improvement by more than 6 percentage points of GDP compared to 1998. The cashdeficit fell to the same level. The improvement continued in 2000, when the cash deficitdeclined to 1.6 percent of GDP, and the stock of expenditure arrears contracted from 9 to5.2 percent of GDP. In 2001, the dearth of external financing exacerbated by anunexpected shortfall in revenue forced the government to tighten fiscal balances evenfurther. While expenditures were cut during the year, that was insufficient to preventaccumulation of new expenditure arrears, even with an overall cash budget surplus ofabout 1 percent of GDP. During 1999-2001, the primary cash budget surplus exceeded 4percent of GDP.
1.20 IRevenue Performance. As shown in Table 1.3, general government revenuesfell from almost 40 percent of GDP in 1997 to about 31 percent in 2001. Tax revenuesdeclined from 25 percent of GDP in 1997 to below 18 percent in 2001. The continuingeconomic recession eroded the tax base. The high share of the informal sector'5 wenthand in hand with widespread tax evasion. Changes in tax policies and enactment of thenew tax code also adversely affected some types of revenues: for example, in 2001, thestate budget experienced a shortfall of 15 percent of planned VAT revenues because ofhigher than projected VAT refunds. Direct taxes (personal income tax and profit tax)constituted 21 percent of total tax revenues in 2001, and indirect taxes (VAT and excise)accounted for 65 percent of tax revenues. The balance is composed of foreign trade taxes(7 percent) and other taxes (8 percent), including the land tax, real estate tax, naturalresource tax, and state tax.
Table 13: Revenue Trends (Percent of GDP)
1997 1998 1999 2000 2001
Total Revenues 39.8 39.0 32.0 33.0 31.3Tax Revenues 24.8 23.6 18.4 18.8 17.6
of which: VAT 10.6 12.3 7.6 8.4 7.9Excises 4.5 4.1 3.6 4.1 3.6
Non-Tax Revenues 5.5 5.4 4.7 5.0 3.9Social Insurance Contributions 8.2 8.6 6.4 6.3 6.8Extrabudgetary Revenues 1.4 1.4 1.6 2.1 2.3Grants 0.0 0.0 0.9 0.8 0.8
Source Ministry of Finance.
1.21 Expendfture Performance. Government expenditures have been cut drasticallyin response to shrinking revenues, particularly since 1997. General governmentexpenditures were reduced from almost 50 percent of GDP in 1997 to around 30 percentin 2001 (see Table 1.4). Between 1997 and 2001, all categories of discretionaryexpenditures (that is, all expenditures with the exception of interest payment on domestic
15 The Department of Statistics estimated the share of the shadow economy in 2001 GDP at around 35 percent, andthe IMF considered it to be even higher. Independent analysis estimates range between 40 and 60 percent of GDP,depending on the estimation methodology used. (See, for example Center for Strategic Studies and Reforms. Differentyears. Moldova in Transition. Chisinau).
-9-
and extemal debt) were scaled down. Social programs that provide basic health,education, and social protection to the poor were cut sharply. Social expenditures as ashare of GDP fell from 29 percent in 1997 to 16.7 percent by 2001. Within the socialsectors, expenditures on health dropped from 5.7 percent of GDP in 1997 to 3 percent in2001; education expenditure declined from 9.7 percent to 5.4 percent; and expenditure onsocial protection decreased from 13.5 percent of GDP to 8.3 percent.
Table 1.4: General Government Expenditure Trends by Economic and Functional Classification(Percent of GDP)
1997 1998 1999 2000 2001
Expenditures by Economic Classification
Total Expenditures 50.0 42.9 35.0 34.6 30 3
Recurrent Expenditure 38.9 30.9 23.9 23.7 22.3
Interest Payments 4.8 5.5 7.4 6,5 4.3
Capital Expenditures 4 9 5.0 2.6 2.9 2.0
Extrabudgetary Expendituresa 1.1 1.3 1 4 1 7 1.9
Net Lending 0.3 0.3 -0.4 -0.2 -0.1
Expenditures by Functional Classiflcation
rotal Expenditures 50.0 42.9 35 0 34.6 30.3
State Security and General Services 5.9 5.0 4 6 4.5 4.6
Social Expenditures 29.0 23.6 18.0 182 16.7
Education 9.7 7.1 5.3 5.1 5.4
Health 5.7 4.0 2.8 3.0 3.0
Social Protection 13.5 12.4 9.9 10.0 8.3
Economic Expenditures 3.1 2.2 1.7 1.7 1.7
Other Expenditures 2.0 1.3 1.0 1.1 1.2
Interest Payments 4 8 5.5 7.4 6.5 4 3
Extemal 1.9 2.0 3.6 2.7 2.4
Domestic 2 9 3.5 3.8 3.8 1.9
Capital Expenditures 4.9 5.0 2.6 2 9 2.0
Net Lending 0.3 0.3 -0 4 -0.2 -0 I
a Includes expenditure of extra-budgetary funds (except for the state social insurance budget) and extra-
budgetary resources of state budget institutions.
Source- Ministry of Finance.
1.22 Capital expenditures fell from about 5 percent of GDP in 1997 to 2 percent ofGDP by 2001 (see Table 1.4). However, budget financed investment was supplementedby extemal donor-financed capital investment, which is not included in the budget andranged from 3 percent to 6 percent of GDP in 1998-2000.16
1.23 The relative shares of different sectors in discretionary spending did not changesignificantly, suggesting that the government was not able to secure appropriate strategic
16 Includes investment loans directly contracted by the govemment and those guaranteed by the govemment.
Calculations were made on the basis of the disbursement data by project provided by the Ministry of Finance.
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prioritization in budget formulation to protect key government priorities and thatexpenditures were simply cut across the board proportionately.17 The only activity whoseshare in discretionary spending registered a rise during the period is State Security andGeneral Services (including public administration and general public services l, as wellas extemal activities, defense, judicial authorities, public order and safety). The sharerose steadily from about 13 percent in 1997 to above 17.5 percent by 2001.
Table 1.5: Expeniditure Trends by Functional Classiflcation(Percent of Total Discretionary Expenditures)
1997 1998 1999 2000 2001
Total Expenditures 100.0 100.0 100.0 100.0 100.0State Security and General Services 13.0 13.2 16.8 15.8 17.6Social Expenditures 64.1 63.1 65.1 64.7 64.1
Education 21.6 19.1 19.3 18.2 20.7Health 12.6 10.8 10.1 10.8 11.5Social Protection 30.0 33.3 35.8 35.7 32.0
Economic Expenditures 7.0 6.0 6.3 6.1 6.5Capital Investment 10.8 13.3 9.0 10.3 7.6Other 5.1 4.4 2.4 3.1 4.1
Source: Ministry of Finance.
C. MACRO-FISCAL OUTLOOK
1.24 If the government is able to maintain prudent monetary and fiscal policies andaccelerate and deepen the implementation of the required structural reforms and ifexternal conditions are favorable, GDP growth rates of 5 percent per year appearsustainable over the medium term (Table 1.6).l9 Throughout this period, however,Moldova will continue to face a severe fiscal constraint. Given the heavy burden of debtservicing in the coming years, fiscal policy will have to remain very tight, and will need
17 While the share of social sector spendmg in total budgetary spending declined from 57.9 percent in 1997 to 55.1percent in 2001, it remained virtually unchanged at around 64 percent if discretionary spending is taken as a basis.Within social sector expenditures, there was a shift in expenditures in favor of social protection payments at theexpense of spending on education and health. Expenditures on health fell from above 12.5 percent in 1997 to 11.5percent of discretionary spending in 2001. Education oulays fell from above 21.5 percent in 1997 to about 18 percent in2000, but increased to 20.7 percent in 2001. The share of social protection payments in total discretionary spendingrose from about 30 percent in 1997 to almost 36 percent in 1999-2000, before declining to 32 percent in 2001. Theshare of economic expenditures (in fuel and energy, agriculture, forestry, fishing, environmental protection,manufactunng and construction, etc.) in total expenditures fell marginally from 7 percent in 1997 to 6.5 percent by2001. Expenditures on capital investment declined from 10.8 percent of total discretionary spending in 1997 to 7.6percent in 2001.
is In fact, general public services, including public administration, were the main contributors to the rise in the shareof the State Secunty and General Services expenditure line in GDP and total expenditures.
19 Macroeconomic framework was projected for the base case scenario assuming maintenance of prudent financialpolicies aimed at lowenng inflation and maintaining a competitive exchange rate, as well as continuing deepening ofstructural reforms to improve the business environment and investment climate supported with the IDA StructuralAdjustment Credit III (SACIII). The scenario also assumes no major external shocks. World Bank RMSM-X modelwas used as a projection tool.
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to be designed to maintain a primary budget surplus of about 1.5 percent of GDP during
2002-05.
Table 1.6. Macroeconomic Framework, 2000-2005
2000 2001 2002 2003 2004 2005
Actual Projected
Real GDP growth rate 2.1 6.1 4.8 5.0 5.0 5.0
Inflation (CPI, end of 18.5 6.4 8.0 8.0 6.0 6.0
the year)
Exchange rate 12.4 12.9 13.5 14.4 14.9 15.1
(MDL/USD, annualaverage)
Current account balance -9.4 -8.0 -7.4 -8.0 -6.8 -6.0
(% of GDP)
Fiscal balance' (%of -1.6 1.0 -1.7 -1.0 -0.2 +0.5
GDP)
a General government budget cash deficit, the same definition as used in Table 1 2 above.Source World Bank staff projections
1.25 Both fiscal and external liquidity will be significantly constrained through 2005.
The debt service burden results in a severe liquidity crunch in 2002, and foreignexchange shortages are expected to characterize later years. The financing gap was
estimated at US$62 million for 200220 and an annual average of US$43 million for 2003-2005. Total extemal debt service to exports of goods and services will remain above 20percent during 2003-2005, while debt service of public and publicly guaranteed debt will
begin declining below 30 percent of central government revenue only in 2006. (seeTable 1.7).
1.26 While the debt scenario looks grim in the medium term, debt indicators are
projected to become more manageable over the longer term. By 2011, the total debt
service is projected to decline to 11 percent of exports of goods and services, while debtservice on public and publicly guaranteed debt will be reduced to about 16 percent of
central government revenues.
20 Staff estimate as of end-May 2002, assuming that IMF PRGF is on track and disbursements of IDA SACIII takeplace as scheduled. Without PRGF in place and IDA disbursements, the financing gap was estimated at about S87
million. The financing gap was significantly reduced following successful restructuring by the Govemment ofEurobond debt obligations in late 2002
- 12 -
Table 1.7: Debt Sunstainability Analysis 2 '
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Total extemal debt, 1226 1278 1313 1357 1348 1333 1333 1330 1345 1356 1359million USD
Public and publicly 961 981 982 995 980 944 909 881 883 883 856guaranteed debt,million USD
ExtemaldebttoGDP, 83 81 78 75 68 62 58 54 51 48 45percent
Total debt service to 21 26 24 22 22 18 15 14 14 13 11exports of goods andservices, percent
Total debt service of 42 44 38 37 33 27 23 22 20 19 16public and publiclyguaranteed debt tocentral govemmentrevenues, percentSource: World Bank staff projections.
1.27 Given recent revenue performance and existing capacity and administrativeconstraints, the probability of mobilizing a significantly larger volume of revenues in theshort to medium term is low, and the most realistic strategy for the Government on therevenue side appears to be to seek to sustain and slowly increase current revenue levels interms of GDP share while preventing any further contraction. This requires acontinuation and deepening of the ongoing efforts to improve administration and tostrengthen the enforcement capacities of the tax and custom authorities in order toimprove compliance with tax laws and to expand gradually the tax base.
1.28 On the expenditure side, the availability of resources for domestic needs willdirectly depend on the size of the debt service obligations, as well as on the availability ofexternal financing for the budget deficit. In the medium term there will be very littleroom to increase government expenditures in terms of the ratio to GDP. The challengefor the Government is to direct the very limited resources available to its main priorityactivities, and the emphasis, therefore, needs to be on strengthening the government'sability to make and enforce strategic prioritizations in budget formulation and onrationalizing expenditures and improving their efficiency.
D. KEY RISKS AND CONSTRAINTS
1.29 The prospects of steady economic recovery outlined above could be jeopardizedby a number of risk factors. Not all of those factors are under the Government's control.
1.30 Vulneerabflity to Exteirnal Shocks. Moldova's economy remains extremelyvulnerable to external shocks. The health of the Russian economy is an important source
21 Base case assuming the macro trends in the above presented base case macro scenario and rescheduling of theEurobond balance and Gazprom promissory notes.
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of vulnerability. Russia is Moldova's largest market for its exports and supplies most of
Moldova's gas imports. Almost 12 percent of Moldova's public and publicly guaranteed
debt is owed to Russia, apart from the bulk of the energy arrears. As shown by events of
the last ten years, any downturn in the Russian economy will have an adverse impact on
Moldova.
1.31 Bad weather is also a major risk factor because of its adverse impact on
agricultural production, which remains the mainstay of Moldova's economy, accounting
for about 30% of GDP, and more than 50% of exports and employment.
1.32 Availability of External Financial Resources. Moreover, Moldova's economic
prospects could be jeopardized if adequate external financial resources are not
forthcoming. As already mentioned, even with extremely tight financial policies,
Moldova faces large financing requirements in the short and medium term. If expected
external financing does not materialize and additional funds are not secured (for example,
if creditors lose faith in the Government's commitment to reforms and/or its ability to
implement them), the macro-fiscal outlook for the economy becomes extremely
problematic with the government resource balance even tighter than projected above.
1.33 Political Risks. The political situation remains a key risk factor with regard to
the pace and content of the core structural, social and public sector policy reforms. The
macro-fiscal framework presented above assumes maintenance of tight monetary and
fiscal policy and accelerated implementation of a wide range of remaining reforms.
Policy reversals or an inability to pursue and implement the required reforms would
seriously jeopardize the chances for recovery and growth and could also be expected to
lead to disruptions in external financial support.
1.34 Limited Institutional Capacity. The implementation of the required policy
reforms will require substantial capacity on the part of the Government. Creating the
required capacity to plan, develop, and implement the required complex policy reforms
will require accelerated and deep public sector reform.
E. CONCLUSIONS AND OUTLOOK
1.35 The regional financial crisis forced the Government to undertake a substantial
fiscal adjustment. However, reductions in expenditures were implemented without
appropriate strategic prioritization, and expenditures on health, education and social
protection bore a heavy brunt of the cuts. Outcomes and quality of services deteriorated,
and inequities in access to services increased. Since the tight fiscal situation in the
upcoming years will not allow any substantial increases in overall expenditures, one of
the main challenges will be to improve strategic prioritization in budget formulation so as
be able to identify and protect adequate resources for priority activities and to ensure that
non-priority programs are cut and inefficiencies in resource utilization are minimized.
1.36 In response to the challenges set out above, in November 2000, the Government
of Moldova developed a comprehensive Public Sector Reform Strategy. The strategy
was designed to reorient the role of the state away from its current role as universal
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caretaker and toward a role consistent with the role of the state in a well-functioningmarket economy, and a role appropriate and affordable given Government work programpriorities and resource constraints. The strategy acknowledged that: "the deep economicand social crises faced by the country during the last decade questioned the fundamentalcompetence of the Government to administer the economy and of the public sector toprovide quality public services." The objectives of the three components of the preparedStrategy are as follows:
(i) Public Expenditure Management: "To build a robust, sustainable, andeffective public sector resource management system which provides forhigh levels of fiscal control (hard budget constraints at all levels ofgovernment); strategic prioritization (allocative efficiency in budgetformulation and expenditure review and prioritization); and technicalefficiency in budget execution."
(ii) Public/Private Sector Interface: "To build a public sector which providesa supportive partner for the private sector, and an appropriate frameworkfor private sector development, based on accountable, predictable,transparent, simplified, codified, and arms-length interactions with theprivate sector."
(iii) Public Administration Reforn: "To build a market-oriented and service-oriented public administration which meets EU "best practice" standards;is affordable and sustainable; and ensures cost-effective delivery ofpriority goods and services."
The strategy, however, has not been enacted, and there has been no movement towardimplementation to date. The immediate challenge for the Government is to re-launch thereform process.
1.37 While reasonable levels of growth appear to be attainable under admittedlychallenging conditions in the medium term, the issue facing the Government in the shortterm is to begin to improve basic outcomes in the social sectors and to begin to addressthe present inequities in access to basic social services, particularly in primary andemergency healthcare and primary and basic education. This requires improving theability of the center of government to make and enforce what are likely to be perceived aspainful decisions with respect to strategic prioritization in budget formulation whilesignificantly improving the efficiency of resource utilization. This in turn will require thedevelopment and implementation of cross-cutting reforms in civil service managementand budget execution together with a number of social sector specific reforms in each ofthe education, health and social protection sectors.
1.38 Key recommendations identified and suggested for consideration by theGovernment in this report include: (i) launching a major program of public servicereform; (ii) strengthening center of government decision-making by introducing a systemof Cabinet Committees and restructuring the State Chancellery into a non-politicalGovernment Secretariat; (iii) strengthening strategic prioritization in budget formulation
- 15 -
through a structured and prioritized approach to developing and implementing the MTEF;(iv) strengthening the budget process through increasing budget coverage, deepening
Treasury coverage, and putting in place a stronger internal and external accountabilityframework; (v) strengthening civil service management through amending the Civil
Service Law to secure the application of the key principles of merit and depoliticization,and launching a program of functional reviews to rationalize the structure of government;and (vi) undertaking sector-specific reforms in the social sectors to accelerate education
and social assistance reform while maintaining health and pension reform, and to
rebalance intra-sectoral education and health expenditures further in favor of primary and
basic secondary education and primary health care and emergency services.
1.39 Chapter 2 of this report looks at the experience of fiscal retrenchment in the social
sectors and sets out some suggested recommendations for sector-specific reforms for
consideration by the government. These reforms need to be accompanied by acceleratedand deep public sector reform, designed to secure improvements in budget formulation
and execution; and in center of government decision-making, civil service effectivenessand operational efficiency, and in the ability and capacity of ministries effectively and
efficiently to develop and implement policies in line with the Government's core
priorities. Chapter 3 sets out a suggested reform agenda in the areas of budget
formulation and budget execution; and Chapter 4 sets out a possible reform agenda in the
areas of center of government decision-making and civil service management and human
resource management.
2. THE FISCAL ADJUFTMENT AND REIOIM EFFORTSEN THE SOCUAL SECTOF$
2.1 By far the largest share of public expenditures is in the area of social spending -on health, education and social protection. Together these were about 55 percent of allpublic expenditures in 2001 (and 64 percent of all discretionary public expenditures).These sectors are also all key priorities of the Government, as reflected in the Interim-
22PRSP. What happens in the social sectors has a strong impact on the equity, efficiencyand sustainability of public expenditures overall.
2.2 However, because of weaknesses in center of government decision-making andstrategic prioritization in budget formulation, the social sectors were not afforded anyprotection by the government during the severe fiscal retrenchment necessitated by the1998 regional financial crisis. Expenditures in all the social sectors were slashed: forhealth by about 48 percent from 1997 to 2001 (from 5.7 percent of GDP to 3.0 percent);for education by about 45 percent (from 9.7 percent of GDP to 5.4 percent); and forsocial protection by about 39 percent (from 13.5 percent of GDP to 8.3 percent). Socialsector spending remained virtually unchanged at 64 percent of total discretionaryexpenditures between 1998 and 2001. Further, the quality of the fiscal adjustmentachieved in these sectors left a lot to be desired: the quality of services deteriorated, andaccess became more inequitable. Efficiency of resource utilization within the sectorsremains problematic.
2.3 Using the reform efforts in the social sectors over recent years as an example, thediscussion in this chapter seeks to illustrate how the cross-cutting weaknesses in the areasof center of government decision-making and public expenditure management (andparticularly allocative efficiency and strategic prioritization) contributed to theunsatisfactory reform outcomes experienced since 1998. The chapter argues that theGovernment should: (i) seek to pursue cross-cutting reforms designed to securesignificant improvements in Government decision-making, in budget formulation,implementation and accountability, and in policy analysis and strategic planning; (ii)pursue and secure improvements in the efficiency of resource utilization within the socialsectors through making progress on cross-cutting reforms in the areas of civil servicemanagement and of budget process and execution; and (iii) maintain, and in some cases,accelerate, a number of sector-specific policy reforms. The institutional reform agenda isthen developed in more detail in Chapter 3 (budget formulation and execution) andChapter 4 (public sector reform, center of government decision-making, and civil servicemanagement and human resource management reforms).
22 The main pillars underlying the strategy include: (i) sustainable and inclusive economic growth that should providethe population with productive employment; (ji) human development policies emphasizing increased access to basicservices such as pnmary health and education, and (ifi) social protection policies targeting those most in need.
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2.4 As discussed in Chapter 1, the adverse fiscal conditions after the regional
financial crisis in 1998 resulted in a sharp decline in government spending on health,
education, and social protection, both as a share of GDP and in real terms. Table 2.1
presents the recent trends in government spending on the social sectors. Social sector
expenditures declined from 29 percent of GDP in 1997 to less than 17 percent of GDP in
2001. In 2001, total spending on health, education, and social protection equaled just 57
percent of its 1997 value in real terms.
2.5 Prior to the fiscal retrenchment, Moldova's health and education indicators
compared unfavorably with other transition economies, despite the country's
comparatively high levels of spending on these sectors. Significant governance and
efficiency problems remained to be tackled in all three sectors. Delays in the launching
of structural reforns left the social sectors particularly unprepared to cope with a major
adjustment.23 The contraction in social spending that followed the regional financial
crisis has been accompanied by some indications of worsening social indicators,
deterioration in service quality, and growing inequities in access to services.
Table 2.1: Recent Social Expenditure Trends
1997 1998 1999 2000 2001
Percent of GDP
Social Expenditures 29.0 23.6 18.0 18.2 16.7
Education 9.7 7.1 5.3 5.1 5.4
Health 5.7 4.0 2.8 3.0 3.0
Social Protection 13.5 12.4 9.9 10.0 8.3
Percent of Total Public Expenditures
Social Expenditures 57.9 55.0 51.4 52.5 55.1
Education 19.5 16.6 15.2 14.7 17.8
Health 11.4 9.4 8.0 8.8 9.9
Social Protection 27.1 29.0 28.3 29.0 27.5
Percent of 1997, in Constant Prices
Social Expenditures 100 77.5 57.2 57.2 57.0
Education 100 69.7 50.3 47.7 54.7
Health 100 67.6 45.1 48.8 52.2
Social Protection 100 87.4 67.3 67.5 60.8
Source: Ministry of Finance.
23 Consolidation of the health sector and pension reform were only launched in 1999. The first step towards better
targeting of social assistance was made the same year with rationalization of energy subsidies, while restructuring of
the education sector and reforms of most non-pension social protection programs remain ahead.
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2.6 To illustrate the effects of the weaknesses in the institutional framework and inbudget management, this chapter examines health, education, and social protection inturn. It does not in any way aim to present a comprehensive review of the social sectors.For each sector, the discussion covers: (a) a brief overview of the sector prior to the fiscaladjustment; (b) a description of the Government's response to the regional financialcrisis, including reform efforts; (c) an assessment of the impact of recent reforms; and (d)an identification of key short- and medium-term actions that the Government could taketo improve equity and efficiency in the sector. The chapter emphasizes that effectiveimplementation of sectoral policy reforms in a consistent, effective and sustainablemanner is not possible without also tackling the cross-cutting institutional reformsrequired to strengthen public resource management and to build capacity in the country'spublic administration at all levels of government.
A. THE HBIEALTH SECTOR 24
2.7 Moldova inherited one of the most extensive healthcare networks in the world inper capita terns as part of its legacy from the Soviet system. In 1998, Moldova had 7.7hospitals per 100,000 citizens, compared to the EU average of 3.8, and the Central andEastern Europe (CEE) average of 2.18. Similarly, the number of doctors per 100,000 wasabove the EU and CEE averages (338 for Moldova against 291 and 238 respectively).Each district had several hospitals, several large polyclinics, and multiple, smaller healthposts and feldscher points. Hospitals had been developed under a fragmented modelwhereby many of the services were separated in independent buildings: pediatrics,obstetrics, surgery, and administration would each have their own building. Thisincreased the operating costs related to heating, electricity, cleaning and maintenanceconsiderably. All towns or sectors with a population over 3,000 were provided with apolyclinic and all populations with less than 3,000 were provided with some combinationof health centers, posts, orfeldscher points. In total, the delivery network included morethan 305 hospitals, 1,011 health posts, and 189 health centers.
2.8 Moldova spent 4.0 percent of GDP on the health sector in 1998. This is slightlyhigher than the 3.6 percent average among CIS countries, and considerably higher thanthe averages for low-income countries (1.2 percent) and middle-income countries (2.5percent). Despite comparatively high levels of public spending on health, Moldovaexhibited relatively poor health indicators. The intra-sectoral allocation of resourcesheavily favored hospital care over primary and emergency care: 75 percent of sectoralresources went to hospital care in 1998. Nearly 30 percent of all resources were directedto the 20 Republic Institutes that provided specialized care. Nearly one-third of allgovernment outlays on health in 1998 were spent on utilities and maintenance, crowdingout other essential inputs. Structural reforms had not been initiated when the regionalfinancial crisis occurred. Because of weaknesses in center of Government decision-making and allocative efficiency, these intra-sectoral problems were not addressed ascoherently and consistently as was required.
24 The discussion in this section draws heavily from Cercone, James. 2002. Moldova The Health Sector InTransition Draft.
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The Fiscal Crisis and the Government's Response
2.9 As described in Chapter 1, public expenditures on health were reduced
significantly in the wake of the regional financial crisis. Public sector funding for health
care decreased by 55 percent in real terms from 1997 to 1999 but recovered slightly by
2001, when expenditures stood at 52 percent of the 1997 level. On a per capita basis,
budgetary spending on health care in 2001 had dropped by 62 percent in US dollar terms
relative to 1997. Public outlays on health care were 3 percent of GDP and 10 percent of
public spending in 2001. While this represents a marked drop compared to previous
years, if expressed as a share of GDP, total public expenditures on health in Moldova still
compare favorably to those in an average middle income country (2.5 percent).25
2.10 The Government's response to the fiscal crisis in the health sector, while delayed,
focused on reducing the role of the state in health care provision, consolidating the sector,
and shifting intra-sectoral resource allocation priorities.
2.11 Adjusting the Role of the State. A number of steps were undertaken to adjust
the role of the state in the health sector. Private medical practice for selected types of
services was officially allowed, and official fees for services at public institutions were
introduced. The Government also passed the Law on Free Minimum of Health Care
Services Guaranteed by the State in 1999, and subsequently launched efforts to test
affordable definition, delivery, and financing schemes for the basic health care package.
2.12 Restructuring the Sector. The Government took politically difficult steps to
begin to reduce the number of health care facilities and to close unnecessaryinfrastructure at the remaining hospital facility complexes. Between 1998 and 2000, the
number of hospitals was reduced to 65, and the number of primary care facilities was
reduced from 979 to 800 health care clinics and family medicine offices. Significant
consolidation was achieved through the closure of rural hospitals serving municipalities
and the consolidation of specialties in the judet hospitals. As a result of this process of
consolidation, total staff numbers have been reduced by over 22,000, 180 hospitals have
been eliminated, 154 polyclinics have been consolidated, and more than 670 obstetrics
clinics have been closed. Significant restructuring efforts were also undertaken in the
Chisinau municipality. During the period 1997-2002, the number of hospitals was
reduced from 22 to 10 and the number of beds was cut from 5,700 to 2,979 (by 47.826
percent). In sum, the republican health facilities located in the capital city reduced their
capacity from 10,770 to 7,986 beds (by 26 percent).
2.13 Rebalancing Intra-Sectoral Resource Allocation Priorities. The Government
has sought to secure some rebalancing of expenditures in favor of primary and
emergency care. In parallel with this process, a far-reaching plan for improving the
25 Source: Alam, Asad and Sundberg, Mark 2001. A Decade of Fiscal Transition. The World Bank. Washington,
D.C.
26 This included closure of the Municipal Clinical Hospital for Children No. 2 and the Maternity Hospital "Gh.
Marcu" No. 1, as well as the reprofiling of services, reducing beds and duplication in the Traumatology and
Orthopedics Clinical Hospital and the Republican Clinical Hospital for Children "Em. Cotaga".
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quality of primary care and reducing reliance on tertiary care was launched. This wasbased on the introduction of the concept of the family doctor, with the whole territorydivided into sectors of around 1,000 to 1,800 people, and a family doctor position beingallocated to each sector.
The linmpact of Recent Policies and the Remaining Challeages
2.14 While major fiscal adjustment and consolidation of infrastructure were the rightresponses to the crisis and helped to prevent the complete collapse of the sector,weaknesses in center of Government decision-making, strategic prioritization andallocative efficiency led to a situation where the required trade-offs were not made atpolitical level and policy analysis, development and implementation remained weak atthe technical level. This in turn contributed to outcomes such as inequities in access toservices increasing and quality of health services deteriorating.
2.15 Reallocation of Resouirces Toward Primary Care. As shown in Table 2.2, theshare of expenditures on ambulatory/primary care rose from about 25 percent in 1998 to42 percent in 2001, while there was a corresponding reduction in the share ofexpenditures on hospital care, from 75 percent to 58 percent. However, while this shiftwas desirable and brings Moldova closer to the pattern observed in OECD countries,Moldova still spends comparatively considerably more on hospital care.27
Table 2.2: Distribution of Health Sector Expenditures a by Type of Facility(Percent of Total)
1998 11999 2000 2001actual actual actual budget
Republican Hospitals 28 30 22 21Chisinau Municipal Hospitals 13 11 12 11Rayon Hospitals 29 28 32 26Rural Hospitals 5
Total Hospitals 75 69 66 58Total Ambulatory/Primairy Care 25 31 32 42bTotal IE[ealth 100 100 100 100
a Total covers health expenditures of state and local budgets but does not include expendituresof extra-budgetary funds as well as extra-budgetary resources of health institutions financedfrom the state budget.
b Includes primary care, or family medicine (27 percent of total health expenditures),emergency medical centers (4 percent), specialized care at polyclinics and diagnostic centers(11 percent).
Source: Ministry of Finance, Ministry of Health.
2.16 Reallocation of Resources Among linputs. Prior to the 1998 regional financialcrisis, Moldova spent an unusually high share of the health sector budget on utilities and
27 The unweighted average for 17 OECD countries in 1998 was 41.1 percent Only four countries spent more than 50percent on hospital care in 1998: Denmark (54 percent), Iceland (55 percent), Netherlands (53 percent), Switzerland(50.3 percent). (Source: OECD. 2001. OECD Health Data 2001.)
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maintenance. The intra-sectoral allocation of resources has become somewhat morebalanced in the wake of the consolidation of health care infrastructure and other reforms,with utility costs accounting for a smaller share in the total (see Table 2.3). However,essential inputs remain underfunded and are still crowded out by maintenance and utilityexpenditures. The high share of utilities in the budget is largely due to energy inefficientbuildings and the inability to tum off utility supply in portions of the premises.
Table 2.3: Distribution of Health Sector Expendituresa by Spending Category(Percent of Total)
1996 1997 1998 1999 2000 2001
Salaries and benefits 31 37 40 43 47 42Food 9 9 10 9 6 6Drugs 12 14 11 11 12 18Equipment 3 2 4 3 4 3Supplies 1 1 1 1 2 2Repairs 2 2 2 1 2 2Other, mcl. utilities 43 34 33 31 27 27Total 100 100 100 100 100 100
a Similar to Table 2 2, total covers health expenditures of state and local budgets but does not include expendituresof extra-budgetary funds as well as extra-budgetary resources of health institutions financed from the state budget.
Source Ministry of Finance.
2.17 In 2000, salaries and social benefits accounted for about 47 percent of total healthcare expenditures. Salary levels are extremely low. Public sector wages in health aresubstantially below the relative levels observed in many other countries. Moreover,salaries are not always paid on time: nearly half of health sector arrears in 2000 were forwages and benefits. The extremely low level of salaries does not provide adequateincentives to doctors to provide quality care and has led to high levels of turnover inmedical personnel (many of whom have left the country). There are very few trainedmanagers in the sector capable of securing improvements in efficiency, quality andsatisfaction.
2.18 Poor Quality of Health Services. There is a widespread perception on the partof service users that the quality of health services has deteriorated severely over recentyears. Surveys conducted by the Ministry of Health in 2001 in relation to establishing abaseline for the monitoring and evaluation framework found that over 80 percent of thosesurveyed felt that quality is a major problem in the health sector.
2.19 Inequities in Access to Health Services. Significant inequities in access tohealthcare services have emerged. The introduction of official fees for services atpublic institutions together with informal payments have put the price of medical carebeyond the means of many Moldovans. Analysis of household budget survey dataindicates that the poorest 20 percent of the population is 70 percent less likely to receive
- 22 -
ambulatory care and 33 percent less likely to receive hospital services, relative to thenational average.
2.20 High out-of-pocket costs at the point of service given the mix of formal andinformal payments required for the service to be provided are one factor that limits thepoor's access to health care. Results from the UNICEF household survey conducted in2001 found that the out-of-pocket cost of hospital care can be as much as three times theaverage monthly wage. Nearly 50 percent of the people that require hospital servicesfinance the out-of-pocket payment by selling assets or incurring debt. The same surveyalso showed that nearly 30 percent of the population requiring medical care over theprevious six month period was unable to receive the required services due to theprohibitively high cost of such services.
2.21 Poor Health Outcomes. While there is some evidence that the health status ofMoldovans has improved in some ways since the mid-1990s2 8, health outcomes remainvery poor in Moldova compared to those achieved in other European countries. The tablebelow compares key indicators from Moldova with European, CEE and Commonwealthof Independent States (CIS) country averages. In most cases, the outcomes for Moldovaare at least 50 percent worse than the European average. Compared to other CIScountries, Moldova lags behind in all but life expectancy, infant mortality, and matemalmortality. Moldova has the second highest incidence of breast and colon cancer of allEuropean and CIS countries. Moldova also has the highest mortality rate related todigestive diseases of any CIS county and the second highest rate of standardizedmortality due to strokes.
Table 2.4: Health Status Comparisons
Indicator Moldova CEE C1[S Europe(2000) (1997) (1997/98) (1998)
Life Expectancy 67.4a 71.5 65.7 73.6Male 63.78 n.a. 61.6 69.6Fernale 71.0a n.a. 69.7 77.6
Infant Mortality per 1,000 Live Births 18.3 13.8 18.9 11.1Maternal Mortality 27.1 14.8 39.8 19.0Standardized Mortality Rate, All Causesb 1132.8 1117 1008.6 961Standardized Mortality Rate, Cardiovascularb 632.0 n.a. 502.3 476Standardized Mortality Rate, Digestive Tractb 103.4 50 45.8 38.0Incidence of Tuberculosis per 100,000 60.9 n.a. 76.6 40.4Incidence of AIDs per 100,000 0.07 n.a. n.a. 1.4a
a 1999.b Standardized mortality rate per 100,000 population.Source: Cercone, Jarnes.2002. Moldova The Health Sector in Transition Draft.
2.22 High Levels of Arrears. The sector continues to be burdened by arrears thattotaled 36 percent of the actual consolidated budget spending at the end of 2001, and
28 Life expectancy reportedly increased from 65.9 years in 1995 to 67.4 years in 2000. Maternal mortality wasreduced from 50 deaths in 1995 to 27 deaths per 100,000 in 2000. Infant mortality also posted improvements, decliningfrom 22 deaths per 1,000 live births in 1994 to 18 deaths in 1999.
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almost half of the local health budgets spending in the same year.2 9 These high levels of
arrears are a clear indication that the existing oversized infrastructure and human
resource base of the sector cannot be financed within available resources and that
managers of health services do not apply financial discipline to live within the approved
budget.
The Road Ahead
2.23 Moldova has begun to make progress in consolidating the health sector and in
shifting from an overly hospital-based system to a more balanced and integrated health
system through the strengthening of the primary care network. The Government clearly
faces considerable challenges in completing its reform agenda for the health sector. In
addition to the cross-cutting institutional constraints, the extremely tight fiscal
constraints, growing inequalities in access to care and declining health service quality,
and poor health outcomes all present a significant challenge. Most critically, addressing
the existing budget management and institutional weaknesses will be crucial for
successfully completing the reform process and ensuring access to good quality basic
health services for all Moldovans. The required cross-cutting institutional and public
expenditure management reform agenda is set out in detail in Chapters 3 and 4. This
section presents recommendations for accompanying short- and medium-term sector-
specific actions. Priority sector-specific objectives appear to be to strengthen equity in
access to basic health care services; rebalance intra-sectoral health expenditures further in
favor of primary health care and emergency services; rebuild human resource capacity
within the health sector; and increase external accountability.
2.24 Short-Term Actions. The Government should consider accelerating moves to
implement a basic package of care with universal access for all. This is estimated to cost
US$2.5-3 per person per year and would imply an annual expenditure of roughly $10
million. However, a detailed costed implementation plan for introduction of the defined
basic health care services package should be prepared as a short-term action. The basic
package of care would guarantee access to services, drugs, and laboratory and support
services.
2.25 A time bound hospital restructuring plan to continue progress on the elimination
of excess capacity at the Republican hospitals and the Chisinau Municipality hospitals
should also be developed and formally approved by the Government. Hospital
restructuring should focus on creating Centers of Excellence which would consolidate
existing hospital departments, equipment and knowledge to facilitate the further
consolidation of the republic and municipal hospital network. The hospital restructuring
would also address the large number of patients from the country's judets that are treated
unnecessarily at the republican health facilities30 by strengthening the capacity of lower
level facilities and shaping the Centers of Excellence into facilities that deal with the
29 At the end of 2001, local budgets' arrears amounted to 44 percent of their 2001 actual expenditures on health care
Local governments differ greatly in the extent of their arrears in the health sector.
30 Estimated by the Ministry of Health at about 40,000 patients annually from Judets and 20,000 patients from the
Chisinau municipality.
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cases of highest cost and complexity. Efforts should be accelerated to liquidate non-productive assets such as land and buildings that are no longer in use as a result of theconsolidation in the sector. Consideration could be given to providing incentives to theMinistry of Health and to local authorities to continue downsizing. Target allocations forintra-sectoral expenditures for primary healthcare and emergency services could also beexplicitly defined; and increased allocations for these areas provided for initially withinthe 2004 budget.
2.26 Moves to rebuild human resource capacity within the sector could be based onfirstly, completing an inventory of existing staff levels by type of staff (doctors, otherprofessionals, nurses and ancillary); type of health care institution; and location; andsecondly, completing an assessment of short- and medium-term staffing needs also bytype of staff; type of health care institution; and location. In the context of theGovernment's overall Public Sector Reform Program, a Health Sector Human ResourceRestructuring Plan could also then be developed. This would cover: redeployment ofexisting staff; retraining and subsequent redeployment of existing staff; identification ofany required redundancies; a management training and development strategy and astrategy for training of professional staff; and training for Ministry of Health staff inpolicy analysis and development and in monitoring and evaluation. This could alsoinclude a pay reform strategy for areas of recruitment and retention difficulty, designed toprovide incentives to stem the loss of professionals particularly in the primary health caresector. The plan could also make provision for the development over the medium term ofa performance-based management framework, including performance indicators.
2.27 Efforts could also be considered to strengthen the accountability framework.External accountability could be strengthened initially through the development andintroduction of community-based boards for primary health care services in a number ofpilot locations.
2.28 Medium-Te-rm Actions. The development of the MTEF and of the Health SectorHuman Resource Restructuring Plan will be critical to providing a route-map forward andto generating the basis for building consensus around continuing the medium-termreforms. These should focus on implementation of the Human Resource RestructuringPlan, including achieving staff reductions and redeployment, introducing requiredchanges in medical education, and introducing performance based incentives andtraining. Once efforts to strengthen the primary care and emergency services have beendeveloped, implementation of the Hospital Restructuring Plan should be completed toremove excess capacity in the Republican and Chisinau municipal hospitals. In addition,excess infrastructure should be liquidated and resources should be used instead tostrengthen the delivery network. The planned introduction of health insurance31 offers anopportunity to introduce significant further changes in the sector through introducingselective contracting, accreditation of providers, and innovative payment mechanismsand evaluation. Based on international experience with health insurance, however, it isnot recommended to introduce health insurance until key questions on coverage, financial
31 In the spring of 2002, the Government officially announced an intenion to introduce mandatory health insurancefrom January 2003. Later in the year, after considerable debates in the Government and Parliament, the introduction ofhealth insurance was postponed till mid-2003.
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mechanisms and administrative arrangements are clearly answered. In this context, the
Ministry of Health's plan to introduce health insurance in 2003 is seen as quite ambitious.
2.29 The target intra-sectoral allocations for primary health care and emergency
services should be capable of being achieved over the medium term. Finally, extensive
implementation of community participation in govemance to strengthen the externalaccountability of the health care system should be achieved. A further possible step in
this direction would be to provide information to local communities and to health care
service users on the comparative performance of community-level primary health care
services.
B. THE EDUCATION SECTOR32
2.30 Moldova entered its transition with nearly universal adult literacy and with high
participation and completion rates at all levels of education. The country spent a
relatively high share of GDP on education expenditures (9.7 percent in 1997) comparedwith the CIS average. However, even prior to the regional financial crisis, the educationsector was characterized by a number of allocative inefficiencies. Moldova spent less of
its education budget on basic education (primary and academic secondary) relative to
OECD countries and more on pre-school education. It also spent much more on
utilities-20 percent of all education expenditures in 1997 went to heating alone-andvery little (less than I percent) on textbooks, teaching materials and staff training. The
ratio of non-teaching staff to teaching staff was comparatively high.
The Fiscal Crisis and the Government's Response
2.31 Fiscal retrenchment resulted in a significant reduction in public spending on the
education sector. Public sector financing for education declined by more than 52 percentin real terms from 1997 to 2000 and recovered only slightly to about 55 percent of the
1997 level in real terms in 2001. In 2001, public sector education expenditures were 5.4
percent of GDP and about 18 percent of total government spending. While overallspending on education as a share of GDP is still on a par with the average of CIS
countries, and is indeed more in line with expenditures in high income countries than low
or middle income ones,33 significant issues relating to the underfunding of primary and
basic secondary education persists.
2.32 Adjustments in the education sector in response to the reduction in overall
resources have not so far reflected the Government's priorities for the sector. Further,education sector arrears rose from 1997 through 1999, both in absolute terms and as a
share of total actual education expenditures. The measures undertaken by the
Government in response to the regional financial crisis included attempts to reduce the
state's involvement in education financing, moves to shift intra-sectoral financing
32 The discussion in this section draws heavily from Berryman, Sue, Peleah, Mikle and Tibi, Claude. 2001.
Moldova 's Education Sector. A Financing Strategy to Leverage System- Wide Improvement. Draft.
" The average of high income countries in recent years is 4.8 percent, for middle income countries it is 3.5 percent,and for low income countries it is 2.9 percent. (Source. Alam, Asad and Sundberg, Mark. 2001. A Decade of FiscalTransition, The World Bank. Washington, D.C.)
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priorities, and ad hoc efforts to reduce the high levels of expenditure on heating utilitiesin schools.
2.33 Reducinag the Scope for State Financing. Private schools and universities wereofficially allowed. All kinds of informal contributions by parents and students to supportschool budgets were encouraged. The so-called "contract" practice was introduced forpublic universities, under which a certain quota of places was made available to studentswho did not pass the qualifying test (but, however, did get marks above a certainthreshold) and who could afford to pay for their studies. Universities were allowed toaccumulate such fees for their own disposal in extra-budgetary funds.
2.34 Shiftiing Financing PFriorities Toward Primaary amnd Secondary Education. Anattempt was made to begin to shift financing priorities in favor of primary and secondaryeducation. Public financing of other levels of education was cut, with many pre-schoolinstitutions closed as a consequence.
2.35 Addressing High Utflity Costs. The high utility costs (and the associated issueof the build-up of arrears) began to be addressed by changing the education year scheduleand closing schools for the cold season.
The ltmpact of Recent Policies aind the Remaining Challenages
2.36 The impact of the reforms so far pursued has, however, been that the quality ofeducation has suffered, and inequities in access have increased.
2.37 ReaRlocation of Resources Toward PIrimairy aznd Seconmdary Educationi.Between 1997 and 2000, resource constraints produced some changes in the intra-sectoralallocation of public education expenditures. (See Table 2.5.) The shares for pre-schools,vocational schools, colleges, and tertiary institutions declined. The drop was significantfor pre-schools and tertiary institutions, where the shares fell respectively from 20.7percent and 14.3 percent of public education expenditures in 1997 to 15.8 percent and10.4 percent in 2000. The shares for all other levels and types of education increased.However, even with these changes, the shares for primary, general secondary, vocationalsecondary, and tertiary education remained very low relative to the average for OECDcountries. For example, the share for primary and general secondary education was 50percent in 2000 versus an average of 68.7 percent of public expenditures for these levelsin OECD countries in 1997.34
34 Source: S. Beffyman, M. Peleah and C.Tibi. 2001. Moldova 's Education Sector: A Financing Strategy to LeverageSystem-Wide Improvement. Draft.
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Table 2.5. Distribution of Education Sector Expenditures aby Type of Institution (Percent of Total)
Level of Education/Type of Institution 1997 1998 1999 2000
Pre-school 20.7 18.6 17.0 15.8Pnmaryb 1.3 1.2 1.4 1.6Secondary general 41.6 41.4 43.5 48.4Secondary boarding 2.6 2.4 3.9 3.6Boarding handicapped 2.2 2.0 2.9 2.9Polyvalent schools 6.2 5.8 6.1 4.4Professional schools 0.2 1.0 1.3 1.0Collegesc 5.4 4.7 4.4 3.6Universitiesc 8.2 8.8 7.3 6.4Other tertiary institutions 1.1 0.7 0.4 0.4Extra-cumcular institutions 2.9 3.5 3.7 4.2Others 7.2 9.3 6.9 6.1Central administration 0.4 0.7 1.2 1.5Total 100.0 100.0 100.0 100.0
a Total expenditures in this table include education expenditures of the state and localbudgets but do not include expenditures of extra-budgetary funds as well as extra-budgetary resources of education institutions financed from the state budget. Analysisof the available data indicates that the share of expenditures going to primary andsecondary education becomes even smaller, while the share of expenditures going totertiary education larger if extra-budgetary funds and resources are included.
b "Primary" spending includes budget outlays on schools that only have grades Ithrough 4. Expenditures on levels I through 4 in schools containing upper grades aswell (I through 9 or I through 11) are included under "secondary general."
c Budget allocations for these institutions do not include resources allocated for tertiaryinstitutions attached to ministries other than the Ministry of Education.
Source. Ministry of Finance.
2.38 Reallocation of Resources Among Inputs. The economic composition ofeducation expenditures has also undergone some change over the period (see Table 2.6).The share of salaries in total education outlays increased from 42 percent to 54 percent of
the total between 1997 and 2000, primarily due to the growth in the share of teachers'salaries from 21 to 32 percent. Despite this shift, in 2000, total spending on staff salariesremained very low relative to industrialized countries (usually around 60 to 70 percent-see Table 2.7) and developing countries (85 to 95 percent). Moreover, compared to theOECD average, Moldova spends a larger portion of salary expenditures on non-teachingstaff salaries (41.6 percent in 2000).
2.39 The share of utility expenses declined between 1997 and 2000 (from 31 percent
in 1997 to 16 percent in 2000), mainly due to the reduction in heating expenditures,which contracted from 20 percent to 7 percent of total education expenditures. Despite
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these changes, utility and maintenance expenses continue to crowd out spending onsalaries and essential inputs such as textbooks, teaching materials, equipment, andtraining.
Table 2.6: Distribution of Education Sector Expenditures by Spending Category'(Percent of Total)
Expenditure l[tem 1997 1998 1999 2000
Teacher salaries 20.9 27.5 29.3 31.6Non-teaching staff salaries 21.4 25.9 24.4 22.6Heating 20.4 12.6 11.7 6.8Electricity 4.4 4.7 5.1 4.6Water 5.8 6.1 3.8 4.6Food 8.7 9.8 9.3 7.7Scholarships 3.0 3.9 4.3 3.0Textbooks, teaching matenals & staff training 0.9 0.4 0.6 0.3Repairs 4.1 4.0 3.9 5.5Equipment 1.1 2.1 0.7 0.8Others 9.3 3.1 6.9 12.4Total 100.0 100.0 100.0 100.0
As in Table 2.5 above, total includes state and local budget education expenditures but does not includeexpenditures of extra-budgetary funds and extra-budgetary resources of state budget institutions
Source Ministry of Finance.
Table 2.7: Share of Salaries and Non-salary Operatiomal Expenses in RecurrentExpenditures by Level of Education in OIECD Countries, 1995 (Percent)
Primary and Secondary Terdary
Teachers Salaries:OECD Countries Average 69 44Minimum Share 44 29Maximum Share 93 73
Non-teaching Staff Salaries:OECD Countries Average 13 22Minimum Share 12 15Maximum Share 27 40
Total Salaries:OECD Countries Average 82 69Minimum Share 56 45Maximum Share 97 84
Operational Expenses:OECD Countnes Average 18 31Minimum Share 11 16Maximum Share 44 55
Source: S. Berrymnan, M. Peleah and C. Tibi. 2001. Moldova 's Education Secsor. A Financing Strategy to LeverageSystem- Wide Improvement Draft.
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2.40 Deteriorating Quantity and Quality of Education Services. The quantity andquality of education services has deteriorated over the transition. Measured by enrollmentrates, Moldova is building less human capital now than at the beginning of the transition.Excluding pre-school, by 1999/2000, the years of education that the average five-year-oldchild could expect to complete had declined by almost three years relative to 1990/1991,giving him or her four fewer years of education compared to an average five-year-oldchild in OECD countries. Most of the decline in enrollment rates occurred prior to thefiscal crisis, with the exception of pre-school enrollments, which continued to drop after1997.
2.41 The reforms have led to an adverse impact on the amount of instructional timewhich students receive. Instructional time per year has decreased through formal decreeand through informal closures of schools that lacked heat during winter months. Whilethe number of subjects remained the same, the number of weekly lessons (and thereforeinstructional hours per subject) was reduced. In 2000, Moldova's instructional time was92 percent of the average for OECD countries and Ukraine for lower secondary educationand only 71 percent of the average instructional time for the same countries for primaryeducation.
2.42 While there is as yet not much statistical evidence of the impact of the fiscal crisison learning outcomes, results are available from the 1999 Third InternationalMathematics and Science Study (TIMSS) for eighth graders, in which Moldovaparticipated together with 37 other countries. Moldovan students did not perform well onthat test, both compared to OECD countries and 10 other transition economies, withscores in mathematics and science significantly below the average scores of their 8thgrade counterparts in all participating countries, all OECD countries, and all other ECAcountries.
2.43 Inequities in Access to Education. Access to educational services has becomemore inequitable. The growing formal and informal private costs for education incombination with increasing poverty levels have acted to limit access to education for thepoor. Since real salaries have dropped significantly and key inputs are underfunded,school heads and teachers are now requiring admission fees in most urban schools andvarious informal and unrecorded contributions. These include payments for heating,maintenance and repairs of premises, extra-curricular activities, and "gifts" for teachers.To compensate for low salaries, an unknown number of teachers "encourage" parents topay for private tutoring, transactions that increase the opportunities for corruption.
2.44 An analysis of household budget survey data for 199935 found that enrollments atthe pre-school and primary school level are not yet affected by family income levels, andenrollment at the lower secondary level is only modestly affected. However, childrenfrom the wealthiest quintile are now almost 60 percent more likely to be enrolled in uppersecondary education and 350 percent more likely to be enrolled in higher education thanchildren from the poorest quintile. There is also a rural-urban divide. Urban children have
35 Analysis was undertaken on the basis of 1999 data and served as an input to Moldova's Education Sector: AFinancing Strategy to Leverage System-Wide Improvement. 2001. Draft.
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a significant participation advantage at the upper secondary level and especially intertiary education, where urban youth are seven times more likely to be enrolled thanrural youth.
2.45 Benefit incidence analysis based on the 1999 household budget survey dataindicates that cumulative public expenditures in education per child are biased towardchildren from non-poor families and toward children in urban families, mainly due todifferences in enrollment rates at the upper secondary and tertiary levels. Majordifferences in per child subsidies by consumption quintile and residential location werefound at those levels of education.3 6
2.46 Higher education financing appears to be particularly unfair. Competition forentrance into university has encouraged unofficial payments at the secondary and tertiarylevels that poor families cannot afford. Pernicious bribery practices are common forentrance to universities,3 7 and have the effect of excluding intellectually capable youthfrom poor families. This also undercuts merit as a basis for admission.
2.47 Arrears. At the end of 2001, accumulated arrears were still 34 percent of totaleducation expenditures, having reached a peak of 70 percent at the end of 1999. Arrearsare concentrated in the salary, heating, electricity, water, and to a limited extent, foodbudget lines. In some communities, teachers and non-teaching staff may be unpaid forfive to six months.
2.48 Undeirfinding. While items such as heating and utilities are underfunded, otherssuch as textbooks, teaching materials, and staff in-service training are virtually ignored.The present very low level of investments in maintenance of premises and equipment isalso not sustainable.
The Road Ahead
2.49 Both sector-specific structural reforms and cross-cutting institutional reforms areurgently needed in the sector to prevent a further deterioration in the quality of educationand a worsening in the inequality in access. Analysis undertaken- with the use of theEducation Strategic Model38 shows that restructuring and consolidation of the sector is animportant prerequisite for improving both outcomes and equity in Moldova's educationsystem. The timing and sequencing of reforms must take into account the limited
36 Benefit incidence analysis was undertaken as an input to the same paper. The cumulative per child subsidyrepresents the benefits received by a child dunng the whole duration of his/her studies from primary through university.The analysis found that the cumulative per child subsidy for children in the nchest 20 percent of the population was 30percent higher than that for the poorest 20 percent. Urban-rural differences were also found' the per child subsidy forthe poorest 20 percent in urban areas was 27 percent above that for the poorest 20 percent in rural areas.
37 Moldova's Education Sector: A Financing Strategy to Leverage System- Wide Improvement gives examples ofsuch practices A website popular with Moldovan students gives the price list for passing the test for universityentrance for some universities, the price varying from US$50 to US$500 A survey by the Center for Transparency andDemocracy in 2001 sampled first and second year students in eight colleges and universities. Sixty-two percent saidthat they had given bribes in connection with the baccalaureate examination and at the university level.
38 See Moldova's Education Sector: A Financing Strategy to Leverage System-Wide Improvement for a detaileddiscussion of the model and scenarios.
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resources available and the weak institutional capacity in the sector at all levels. Therequired cross-cutting institutional and budget management reforms are set out in detailin Chapters 3 and 4. This section suggests short- and medium-term sector-specific actionswhich the Government of Moldova could take to improve the efficiency, equity, andfiscal sustainability of its educational system.
2.50 Short-Term Actions. Priority sector-specific objectives appear to be tostrengthen equity in access to primary and basic secondary education and to highereducation; to rebalance intra-sectoral expenditures further in favor of primary and basicsecondary education; to rebuild human resource capacity within the education sector; andto increase external accountability.
2.51 In pursuit of the first objective of strengthening equity in access to primary andbasic secondary education and to higher education, short-term measures suggested forconsideration by the government include explicitly defining target enrolment ratios,completion rates and attendance rates to be achieved in the medium-term overall, forchildren from low income families, and for children from rural areas; and completing astudy on the levels of formal and informal payments made to secure access to highereducation overall, for students from low income families, and for students from ruralareas. The Government would then be in a position to develop and approve an EducationReform Strategy deigned to address the inequities in the system.
2.52 As concerns the objective of rebalancing intra-sectoral education expendituresfurther in favor of primary and basic secondary education, the priority short-termmeasure suggested for consideration by the Government would be to define targetallocations for expenditures in these areas to be achieved over the medium term.
2.53 As suggested above, in the case of the health sector meeting the objective ofrebuilding human resource capacity within the education sector could perhaps initiallybest be pursued through completing an inventory of existing staff levels by type of staff(teaching and support); type of educational institution; location; and, for teachers, bysubject taught; and a parallel assessment also made of short- and medium-term staffingneeds by type of staff; type of educational institution; location; and, again for teachers, bysubject taught (and including allowing for the medium-term effects of falling schoolrolls).
2.54 With respect to the objective of increasing external accountability, a possibleshort-term measure suggested for consideration by the government is to developproposals for strengthening parental and community involvement in decision-makingrelating to primary and secondary education in their local area.
2.55 Medium-Term Actions. Implementation of the approved Education Reform'Strategy could be pursued as an objective for the medium term, with appropriate progressbeing made to meet the target enrolment ratios, completion rates and attendance ratesdefined for primary and basic secondary education; and to secure satisfactory access ofstudents from low income families and from rural areas to higher education. Similarly,the objective for the medium term of rebalancing intra-sectoral allocations would simply
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be for the target allocations identified for primary and basic secondary education to beachieved.
2.56 To increase equity, the Government should develop approaches to securingincreased enrollments of students from poor families and in rural areas. Reforms of thefinancing of pre-tertiary and tertiary education should be designed to reduce the pressureson schools to levy informal payments. At the very least, informal payments should bemade formal and public, and schools held accountable for their use. Universities could beencouraged to levy fees on all tertiary students at levels below those now paid just by"contract" students. However, such a reform would need to be coordinated with thedevelopment of mechanisms to assist students from poorer families to be able to pay thedetermined fees.
2.57 The main priority here would probably be to begin implementation of the schoolrationalization strategy. The Education Strategy Model, for example, indicates thatsustainable reform scenarios require consolidation of 10 to 20 percent of schools,integration of 20 to 60 percent of pre-school children into general education schools,introduction of multigrade teaching in small schools to increase class sizes withoutdiminishing quality, and reduction of energy costs by 20 percent (through measures suchas introduction of metering, providing incentives to secure energy savings at the level ofeach educational institution, undertaking building modifications and introducing specificenergy efficiency measures).
2.58 In the context of the Government's overall Public Sector Reform Program, anEducation Sector Human Resource Restructuring Plan could also be developed buildingon the staffing and needs assessments undertaken as short-term priority measures. Thiscould cover: redeployment of existing staff; retraining and subsequent redeployment ofexisting staff; identification of any required redundancies; a management training anddevelopment strategy and a strategy for initial professional education and subsequent in-service training of teachers; and training for Ministry of Education staff in policy analysisand development and in monitoring and evaluation. A pay reform strategy for areas andsubjects of particular recruitment and retention difficulty could also be developed.
2.59 With respect to increasing extemal accountability, a possible medium-termapproach could be for information to be provided to local communities and to parents onthe comparative performance of educational institutions both locally and nationally.
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C. THE SOCIAL PROTECTION SECTOR
2.60 Like all the FSU economies, Moldova inherited from the Soviet times anextremely costly, untargeted social protection system. Social protection expenditures inMoldova include pensions, non-pension social insurance benefits (unemployment,maternity, and sick leave benefits), energy subsidies and compensations, childallowances, and other social assistance and social services. Prior to the regional financialcrisis in 1998, Moldova's social protection system was already under severe strain, witharrears mounting in all parts of the system and most programs deteriorated to the state ofbankruptcy.
2.61 The most immediate problems emerged in the pension system, demonstratedthrough the surge in social insurance contribution arrears, delays in pension payments,lack of funds for indexation of pensions, and growth in in-kind transactions. Poverty hadalso emerged as a major new phenomenon, and the deficiencies of the social protectionsystem in coping with poverty were becoming clearer. 39 The severity of the fiscal crisisin the pension system and the energy sector had motivated the Government of Moldovato focus on designing restructuring strategies for the pension system and energysubsidies, but restructuring itself had not taken place by the time of the regional financialcrisis.
The Fiscal Crisis and the Government's Response
2.62 Social protection expenditures decreased from 13.5 percent of GDP in 1997 to 8.3percent by 2001, which represented a 40 percent reduction in real terms. The share ofsocial protection spending in total public expenditures fluctuated between 27 and 29percent over the same period. Within social protection, the share of pension expendituresdeclined from around 70 percent in 1996 to 60.5 percent in 1998, but had recovered to 67percent by 2001 (see Table 2.8). At 6 percent of GDP, Moldova's level of pensionexpenditures was similar to that of many countries in the region, but noticeably higherthan that of other low income transition economies, such as Armenia, Azerbaijan,Georgia, and Tajikistan.4 0 Total non-pension expenditures increased because of therationalization of energy subsidies and compensations, while all other types of non-pension spending, including child allowances, were reduced.
39 Poverty analysis was launched in Moldova in 1997, simultaneously with the introduction of the new householdbudget survey, and as part of the background analysis for the World Bank. 1999. Moldova Poverty Assessment.Washington D.C.
40 In 1999, Armenia spent 3.8 percent of GDP on pensions; Azerbaijan, 4.2 percent; Georgia, 2.6 percent; andTajikistan, 1.8 percent. [Source: World Bank and IMF. 2002. Poverty Reduction, Growth and Debt Sustainability in
Low-Income CIS Countries.]
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Table 2.8: Social Protection Expenditure Trends(Percent of Total)
1996 1997 1998 1999 2000
Pensions 69.3 74.6 60.5 62.2 66.9of which: general pensions 63.9 67.4 54.4 55.1 57.7
privileged pensions 5.4 7.1 6.1 7.1 9.2Energy subsidies and compensations 2.5 3.6 15.9 18.6 11.7Non-pension social insurance benefits 8.4 6.5 6.6 6.1 5.7Child allowances 3.3 2.9 2.9 2.5 2.4Other 16.5 12.5 14.0 10.6 13.2Total 100.0 100.0 100.0 100.0 100.0
Source. Ministry of Finance and National Social Insurance House.
2.63 The Government's response to the regional financial crisis in the area of the socialprotection sector was fragmented and focused primarily on rationalization of socialprotection financing. There has been no overall strategic prioritization across the socialprotection area; nor any accompanying realignment of budget resources to reflect themain priorities of the Government's work-program. Weaknesses in center of Government
Er decision-making and in allocative efficiency in the budget formulation process meant thatthe required difficult prioritizations and trade-offs were not made. Pension system reformwas given priority. Utility subsidies were the only other part of the system that underwent
A restructuring: these were replaced with targeted nominal compensations (under energysector restructuring). Most of the other programs, including non-pension insurance(unemployment, maternity and sick leave benefits), non-energy related social assistancebenefits, child allowances, social services and residential care remained unrestructured.
2.64 Pension Reform. Structural reform of the pay-as-you-go pension system waslaunched in January 1, 1999, after the passage of the new Law on State Social InsurancePensions (October 1998). This laid a solid foundation for transforming the pensionsystem into a sustainable pension insurance program. The structural changes introducedwere medium to long term in nature. The main features of the new pension law include anew benefit formula that bases future pensions on individual contributions rather than onreported wages and years of service; the elimination of most early retirement privileges; agradual increase in retirement age by five years for both men and women at a speed of sixmonths per year; and a synchronized increase in the minimum required contributionrecord.
2.65 Rationalization of social protection financing was implemented throughtransferring all the non-insurance programs to the state budget and limiting spendingfrom the State Social Insurance budget to pensions and other insurance programs.Concerted efforts were undertaken to clear pension arrears through various measures,including through the freezing of pension increases and the allocation of additional statebudget funds in the most severe years to cover the pension fund deficit. Also, annual
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targets were used to gradually eliminate the previously widespread phenomenon of non-cash payments in the system.
2.66 Noniinal Compensations. The surge in social assistance spending in recent yearsarose mainly out of the introduction of the "nominal compensations" program thatreplaced a broad range of unfunded utility privileges for numerous categories ofindividual energy consumers. 41 The introduction of the program was dictated by theincrease of energy tariffs to cost-recovery levels as part of energy sector restructuringimplemented in stages during 1997-1999. On July 31, 2000, legislation was enacted toreplace the unfunded privilefes with limited benefit payments to assist the vulnerablecategories of the population 2 to pay for increased utility costs. Compensations rangefrom 25 to 50 percent of the cost of the service. For most categories, compensations areset at 50 percent of the official norm of the corresponding type of utility expenditures,including heating, electricity, gas and other communal services.43 In 2001, compensationsfor heating accounted for the lion's share (69 percent) of government expenditures on thisprogram, and electricity amounted to 24 percent of the total.
The Impact of Recent Policies and the Remaining Challenges
2.67 Fiscal Balances Restored. Overall, the social protection reforms producedrelatively good results with regard to restoring fiscal balances. As far as the pensionsystem is concerned, while it is still too early to assess the full impact of the reforms,Government efforts did help to stabilize the system, transforming it into a relatively well-functioning system which now pays benefits in cash on a timely basis. Pension arrears,which equaled 4.5 months of pension payments in 1997-1999, were totally eliminated byApril 1, 2001. Furthermore, the use of in-kind payments, which peaked at about half ofall pension payments in 1998, ceased. However, the pension system still faces seriouschallenges.
2.68 Very Low Pensions. The level of pensions, however, remains very low and doesnot satisfy basic needs in old age. The percentage of pensioners receiving the minimumpension increased from 4.6 percent in 1997 to 11.4 percent in 2000. Even after a 50percent increase over 2001,44 the average old aV,e pension was around $11 per month lastyear, well below the national poverty line. 5 This low benefit level discourages
41 Thirty-seven beneficiary categories were identified and documented in 1999. See, for example, the working noteby Sandu, Maya. 1999. "Subsidies for Energy Consumption by the Population"
42 At the moment, ten categones of the population are entitled to nominal compensations: five categories of disabledpersons, participants of World War 11 (WWII) and individuals associated with them, families of deceased Chemobylliquidators, single pensioners, and families with four or more children under age 18.
43 These include water supply, sewerage, elevator service, garbage removal, and general communal services.
44 At the end of 2000, with surpluses beginning to appear in the pension fund, pensions were raised by 16 percent inDecember 2000, by 34 percent in December 2001, and by another 17 percent from May 1, 2002. Those increases wereundertaken through a complex and untransparent recalculation exercise, because the existing legislation lacks a clearand implementable indexation mechanism.
45 Even though Moldova does not have an official poverty. line, the Department of Statistics of Moldova uses 50percent of the official subsistence minimum as an absolute poverty line when calculating poverty indicators. In 2001,this averaged 235 lei per person per month ($18 30). In the same year, the average monthly pension was 140 lei
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participation in the system and does not enable the pension system to meet its basicobjective of providing a source of living in old age.
2.69 Pension Ifndexing CanceRled. The system does not provide pensioners withpredictability in terms of maintaining the purchasing power of their modest pensions:indexing was canceled because of budgetary constraints. The repRacement rate (the ratioof the average pension to the average wage) declined from 39.2 in 1997 to 21.3 in 2000and was the third lowest in CIS countries.46
2.70 Pension l[nequities Remain. The system remains inequitable. Although theelimination of most early retirement privileges was a positive development and wentsome way towards improving the pension system's fairness and equity, importantinequities remain and are, in fact, growing. While expenditures on pensions have beendeclining as a share of GDP, pensions for certain privileged groups have beenincreasing. Special pensions are in effect for eleven professional groups in thepopulation, including the military, prosecutors, civil servants, Chernobyl liquidators,members of Government and Parliament, customs employees, and local elected officials.These pensions are considerably higher than those received by general pensioners;special pensions are received by only 2 percent of old-age pensioners but amount to about14 percent of total pension expenditures.
2.71 Inequalities in contribution rates also still exist, as evidenced by preferential ratesfor the agricultural sector, the self-employed, and several other categories of contributors.The pension system is particularly biased in favor of agricultural workers, for whom the
pension contribution rate has remained fixed at a very low level in nominal lei terms forthe last five years.47 As a consequence, agricultural workers contribute less than 15
percent in revenue to the pension scheme, while their pensions amount to about a half ofall old-age pension expenditures, and their minimum pensions are fixed at 85 percent ofthe general minimum.
2.72 Fiscal Sustainability of the pension system needs to be strengthened. Whileshort-term financial stability of the pension system has been restored, the futureaffordability of the pension system will depend on how well the Govermment implementsand further develops its initial reform strategy. In the long run, fiscal sustainability of the
pension system will depend on the ratio of the eligible pensioner population to workingcontributors. Given the expected scenario of an increasingly aging population togetherwith increases in longevity, Moldova's pension system will be out of balance withoutincreases in retirement ages and improvements in contribution collection.
2.73 The Government of Moldova deserves credit for taking on the task ofrationalizing udtty subsidies. The transparency of energy and housing subsidies was
46 According to Ministry of Labor calculations, Moldova's replacement ratio was the third worst among the CIS
countries, after Georgia and Armenia. (Source: Ministry of Labor and Social Protection of Moldova. 2002. 2001
Annual Social Report. Chisinau. )
47 While the standard social insurance contribution rate is set as a percentage of the contnbutor's wage, contributions
for agricultural sector contnbutors are calculated by applying a fixed rate in lei to the factor measuring the size of the
land plot and its quality as determined by the special point scale.
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greatly increased through linking them directly to the payment process; in many CIScountries, subsidies are still provided directly to utility companies and municipal housingauthorities, thus subsidizing these enterprises without linkages to consumer families.Also, the processing of these funds through the banking system48 provides for much
better monitoring of benefit users and the flow of funds for the compensations programrelative to other cash benefit programs in Moldova.
2.74 The reduction of the number of privileges appears to have had a positive impacton the budget, although the full costs cannot yet be precisely evaluated. Nonetheless, it
appears that while subsidies in 1999 represented 2.1 percent of GDP, they declined to 1.2
percent in 2000.
2.75 Targeting Issues. Given that most privileges have now been eliminated, theobjective of housing and energy subsidies is ostensibly the provision of affordableheating and electricity to poorer or more vulnerable groups in the population. The currentsystem narrowly meets these objectives. Certainly, it is generally agreed that the aged,disabled, and survivor families are among the most vulnerable. The question is the extentto which housing and energy subsidies are needed given limited resources and alternativeuses for these funds. The World Bank's 1999 Poverty Assessment for Moldova foundthat poverty was highest among the rural population, families with children, and theunemployed. Consequently, while energy subsidies do focus on vulnerable groups, theydo not necessarily focus on the most needy.
2.76 On the other hand, the recipients of energy subsidies are now clearly specified, asare the amounts of benefits to be received. Thus, in terms of design, the benefits arelikely to be going to eligible recipients. Further, the process appears to be transparent andthe interactions between the NSIH, the Ministry of Finance and the Banca de Economiismooth. As such, this is perhaps the most efficient social program in Moldova, despite itstargeting deficiencies. Moreover, given the extent of in-kind and informal income inMoldova, income-based targeting is likely to lead to substantial errors of inclusion, sosome type of categorical targeting may remain necessary for some time.
The Road Ahead
2.77 This section suggests short- and long-term actions aimed at improving the social
protection system's efficiency and equity for the government's consideration.
2.78 Short-Term Actions. The key objective in the area of pension reform appears to
be to strengthen equity in, and the medium-term sustainability of, the pension system.Areas for improvement include strengthening the capacity for developing long-termfinancial projections to model the future development of the pension system. A
transparent and affordable indexation rule for pensions should also to the extent possible
be introduced in the main pension law. Consideration could be given to integration of
privileges into the general pension law with gradual withdrawal of elements inconsistentwith the general pension law.
48 These compensations are paid through Banca de Economii (Savings Bank), which invested in information
technologies to establish a link with the NSIH information system.
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2.79 Social assistance and its targeting to the really needy is an area which requiresurgent attention. The main objective here appears to be to improve the ability to targetsocial assistance to the most vulnerable and needy groups. In the short term, availablehousehold budget survey data need to be improved and used more efficiently to developan analytical basis for improved targeting of social assistance benefits. As a first practicalstep, child allowances should be prioritized for restructuring.4 9 One of the sources toimprove financing of the program once it is restructured could be through reducing thecosts of the nominal compensations program over time.
2.80 The transitional nature of the nominal compensations program has to berecognized, and the Government needs to develop a strategy aimed at ensuring its costsare kept under control. The present categorical targeting of nominal compensationsshould be reviewed to ensure that these benefits are indeed targeted to the mostvulnerable groups. As some benefits are extremely low, these could perhaps be removedrelatively painlessly, e.g., compensations for non-energy communal services: thesesubsidies are relatively small, ranging from 1 lei per month to 18 lei per month, and yettheir administrative costs are comparatively high.
2.81 The State Social Insurance budget preparation process could perhaps alsoappropriately be strengthened, and would benefit from being integrated in the overallsectoral budget as well as the government budget. A revenue projections model based onthe existing extensive information base of the Tax Inspectorate and National SocialInsurance House could be developed and introduced.
2.82 Medium-Term Actioims. A comprehensive and financially sustainable strategy ofreforming the social protection system needs to be developed in the medium term, takinginto consideration the interlinkages between various social protection programs andprioritizing those that are most efficient for poverty alleviation. This will requiresignificant enhancement of analytical capacity in both the Ministry of Labor and SocialProtection and the National Social Insurance House. It will also require the establishmentof effective mechanisms for cross-agency coordination on social protection issues.
2.83 The key action suggested in the area of pension reform for the medium tenn is forprofessional groups to be reintegrated into the general pension system and for the size oftheir benefits to be reduced to more equitable levels, with clear and justified eligibilitycriteria. Recent surpluses resulting from economic growth have been used to increasepension payments and to increase average replacement rates. However, it could be moreappropriate to allocate surpluses first to fund three months of payments in a reserve fundfor contingencies, as is intemational practice. Such reserves should be invested in low-risk assets, as established under the basic social insurance law. The regulatory frameworkfor such investments would also need to be developed. In the longer run, given economicgrowth, the Govemment of Moldova might also wish to consider the development of a
49 The Government has reached an agreement wAth the EU on the progam including, among other components, thesupport of the budget financing of child benefits in 2002-2003 through the EU Food Security Program grants. Theprogram envisages restructuring of child benefits and strengthening their administration.
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funded pillar for the public pension system to help ease the burden of public pensions onthe pension fund and consolidated govemrnent budget.
2.84 With respect to social assistance, in the medium term, the government might wishto consider amending the current legislation to reduce nominal compensations, removenon-poor groups from program coverage, and/or place clear sunset provisions on somecurrent entitlements. One option to keep costs down would be to reduce the subsidyamount over time for categories of recipients currently receiving 50 percent subsidiesdown to 25 percent. Based on 2001 figures, such a reduction combined with the removalof subsidies for communal services would have reduced program costs by 15 percent.The rationale behind a phased-out reduction of this type is that with continued economicgrowth, over time most families should be able to afford to pay for full-cost heatingcharges. An even more effective strategy, however, would be to remove all thebeneficiary groups that are not vulnerable, including disability categories II and III andveterans not serving in WWH. With the exclusion of these groups from the program andthe elimination of subsidies for communal services, expenditures on the nominalcompensation program would have been 41 percent lower in 2001. If, in addition, allbenefits had been paid at a 25 percent rate, expenditures would have been 56 percentlower.
D. SUMMARY
2.85 While the reform efforts precipitated by the regional financial crisis had somepositive effects, overall the fiscal adjustment has had negative consequences on servicequality and on equity and access to services in the social sectors. Deficiencies in strategicprioritization, budget management and processes and in public administration contributedto the poor quality of the fiscal adjustment. These weaknesses also present seriousobstacles to completing the necessary remaining structural reforms in health, education,and social protection. They also hinder the government's ability to achieve its key goals,including reducing poverty and improving access to good quality basic social servicesand social protection for those in need. In this context, Chapter 3 discusses specificinstitutional and process-related reforms for improving public expenditure managementin Moldova. Chapter 4 addresses issues of center of government decision-making andcivil service management and human resource management and suggests a reform agendato establish an efficient and effective system of Government decision-making, and amerit-based, de-politicized, corruption-resistant public administration.
30 STRENGTHENlNG PUBLliC EXIENHDTUREMANAGEMENT
3.1 Effective implementation of the Government's work program and priorities needsto be based not only on appropriate macroeconomic policies and sectoral structuralreforms, but also on well-functioning institutions and on a trained and capable publicadministration able to formulate and implement policies and programs in line with theGovernment's strategic priorities. Nowhere is this more important than in the planningand management of public expenditures. Rules, procedures, and organizationalarrangements which govern the budget process and shape the incentives that influence thesize, allocation, and use of budgetary resources need to be in place and be able to delivera high degree of fiscal discipline, strategic prioritization, and efficiency in themanagement of public resources.
3.2 Most of the reforms pursued by the government to date have focused on thepreparation and implementation of the budget. Key reforms include the adoption of a neworganic Law on Budget System and Budget Process in 1996, the introduction of a newbudget classification system (conforming to GFS standards) in 1997 to strengthen thetargeting and monitoring of public expenditures, the establishment of a central treasurysystem (launched in 1997), and the adoption of a Law on Local Public Finance (1999).The Government has also recently committed to introduce a medium- term expenditureframework (MTEF). In 2000 the Ministry of Finance introduced the MTEF concept forplanning and formulating the 2001 budget and prepared a medium- term macro-fiscalframework. This was updated during formulation of the 2002 budget. In 2002, an MTEFfor 2003-2005 was for the first time officially approved by the Government. Programbudgeting is also being introduced on a pilot basis in three program areas. Takentogether, these represent a significant set of reforms and provide a strong basis on whichto build for the future. The Ministry of Finance deserves credit for having been able toimplement such a set of reforms in a consistently difficult fiscal context.
3.3 This chapter provides: (i) an assessment of budget management performance; (ii)a description and assessment of the existing budget management framework and budgetprocess; and (iii) specific recommendations for consideration by the government forimproving the system of public expenditure management. The discussion in this chapterfocuses on the central government budget. It should, of course, not be forgotten that alarge share of social sector spending (in health, education, social security) is implementedat the level of local governments.
3.4 The assessment of the effectiveness of Moldova's budgetary system is undertakenat three levels: (i) achievement of aggregate fiscal discipline; (ii) strategic prioritization inbudget formulation; and (iii) delivering cost effectiveness in specific expenditure
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programs. Examples from the social sectors, particularly education and health, are used tobuild further on the analysis set out in Chapter 2.
3.5 Based on this assessment and the review of the budget system and process thatfollows, recommendations are made concerning suggested priority actions designed tosupport the achievement of a strengthened public expenditure management system. Theserecommendations include: strengthening strategic prioritization and allocative efficiencyin budget formulation; strengthening aggregate fiscal discipline through improvingcomprehensiveness of budget coverage; improving fiscal reporting and budgettransparency; strengthening the internal and external accountability framework;enhancing the quality of macroeconomic forecasting; strengthening budget preparation;and strengthening budget execution. Completion of the implementation of a strategicapproach to expenditure planning in the context of a medium-term expenditureframework is the unifying conceptual approach to achieving the specificrecommendations identified.
A. BUDGET MANAGEMENT PERFORMANCE
3.6 This section assesses Moldova's budget management performance along threedimensions: aggregate fiscal discipline, allocative efficiency, and technical efficiency.While good progress has been made in achieving and maintaining aggregate fiscaldiscipline, there is a concern that institutional arrangements are not yet robust enough tosustain this. At the other two levels, there appear to be particular issues relating to thegovernment's ability to allocate resources based on strategic priorities and to ensure thatpublic spending is efficient and cost-effective.
Aggregate Fiscal Discipline
3.7 While impressive progress has been made in strengthening aggregate fiscaldiscipline since the 1998 regional financial crisis, recent fiscal outcomes provide groundsto question the quality and sustainability of the discipline achieved. As shown in Chapter1, while the cash deficit of the general government budget has been virtually eliminated(a cash surplus was registered in 2001), the sustainability of the downward trend incommitment deficits is under question, as evidenced by the growth in consolidated stateand local budget arrears by 81 million lei by the end of 2001.
3.8 Analysis of divergences between the budget as approved (and amended) and asexecuted also calls into question the sustainability of the improvements (Table 3.1). Overthe years, actual budget outcomes have deviated substantially from the approved budgetswithout any apparent clear pattern. The noticeable reduction in deviations between theapproved and executed budget achieved in 2000 was not sustained in 2001.
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Table 3.1: Consolidated BudgetaDeviation between Approvedb and Executed Budgets
(in Percent of Approved Amounts)
1997 1998 1999 2000 2001
Total Revenuesc 13.6 -5.4 4.3 1.6 -9.0of which: Tax Revenues 8.7 -9.1 -2.2 3.6 -11.5
Total Expenditures 10.9 4.8 -6.1 -2.0 -10.7of which: State Security and General Services 5.6 0.7 14.9 1.6 -7.1
Education 12.4 -13.8 -15.0 -4.4 -9.6Health -1.6 -24.4 -19.3 -4.7 -15.5Social Protection -0.9 -26.5 -18.4 3.1 -21.8Economic Expenditures 7.5 20.3 -2.1 2.5 -13.4
Deficit 3.5 -0.9 -47.2 -32.7 -53.3a Government definition of "consolidated budget", refers to the state budget plus local budgets.b "Approved" stands for the latest version of approved budget (reflecting amendments during the year).' Including grants and excluding privatization proceeds
Source: Ministry of Finance.
3.9 An important feature of Moldova's fiscal adjustment to date which might haveimportant implications for its sustainability is that it was to a significant extent inducedby external restraints. As discussed in Chapter 1, the Government had no option but toenforce aggregate fiscal discipline starting from 1998 given the difficulty in accessingexternal resources in the wake of the 1998 regional financial crisis. This led also toincreased dependence on the IMF program and on World Bank adjustment lending (in1999-2001, 75 percent of total external inflows for budget financing were provided byWorld Bank adjustment lending). The need under these programs to meet specifiedquantitative performance criteria related to fiscal performance was a key factor inenabling the Ministry of Finance to exercise strict control on government spending.
AlIocative EfDciency
3.10 The way that resources are allocated between and within sectors and expenditurecategories does not facilitate the implementation of the Government's strategic priorities.As discussed in Chapter 2, given weaknesses in strategic prioritization, recentexpenditure cuts in the social sectors led to reduced access to basic social services,particularly for the poor. Survey results indicate that a significant part of the populationrequiring medical care is now unable to receive the required services due to theirprohibitively high cost. The increasing formal and informal private costs for educationhave acted to limit access to education for poor children. Higher education financingappears to be particularly inequitable.
3.11 A key question is to what extent the Government is able to protect expenditureallocations to priority sectors such as the social sectors when it is forced to reduce overallexpenditures. As seen in Chapter 1, when faced with resource cuts, the Government
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reduced expenditures more or less across the board; social sector expenditures were notafforded any particular protection. The share of social sector spending (of drasticallyreduced total expenditures) remained virtually unchanged at 64 percent of totaldiscretionary expenditures (excluding interest payments) between 1998 and 2001. At thesame time, the share of expenditures on state security and general services in totaldiscretionary expenditures increased, for example, from 13 percent to above 17.5 percent:
Technical Efficiency
3.12 Technical efficiency refers to the capacity of line ministries and agencies to useallocated resources in the most cost-effective way so as to ensure the efficient delivery ofpublic goods and services. As seen in Chapter 2, Moldova's performance on health andeducation indicators compares poorly with other transition economies. At the same time,Moldova spends as much or more on health and education as a share of GDP compared tosimilar countries. Between 1997 and 1999, public expenditures on education averaged6.7 percent, much higher than the 4.6 percent average for CIS and CEE countries. Evenafter substantial cuts, the share remained at 5.4 percent in 2001. In the case of health,Moldova's average level of expenditures as a percent of GDP between 1997 and 1999was about 4 percent, which is slightly higher than the 3.6 percent average among, CIScountries (and considerably higher than the 1.2 percent average arnong low-incomecountries and the 2.5 percent average among middle-income countries.) As was the casewith respect to education spending, Moldova's expenditures on health remainedrelatively high even after the fiscal adjustment, equaling 3 percent of GDP during 2001.
3.13 This combination of relatively poor outcome indicators with comparatively highlevels of spending suggests weaknesses in strategic prioritization and inefficiencies inprogram delivery. The IMF undertook an analysis of the efficiency of social spending inMoldova using a non-parametric method called Free Disposal Hull analysis. This foundthat Moldova's performance in the public provision of social services comparesunfavorably with other transition economies for a wide range of standard health care andeducation indicators. 50
3.14 Two widely used indicators of management efficiency in the health sector are theturnover rate of patients in hospitals and occupancy rates. Moldova's efficiency withrespect to turnover rates is between 50 and 70 percent lower than for comparatorcountries, while the average occupancy rate of 68 percent in hospitals is still about 20percent below the rate achieved in comparator countries. Inefficiency in the health sectoris characterized by excessive capacity in health services infrastructure. It is alsoevidenced by high utility bills that crowd out spending on drugs and other essentialmedical supplies.
3.15 In the education sector, while class size (number of students per class) and schoolsize (number of students per school) appear unexceptionable, inefficiencies are reflectedin the high bills for heating, an excessive number of non-teaching staff, and low externalefficiency of professional/polyvalent schools and vocational colleges. This inefficiency
50 Source. IMF. 2001. "The Efficiency of Social Spending In Moldova: Recent Economic Developments"
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affects learning outcomes: teachers' salaries, learning materials, laboratory facilities, andin-service training for teachers are underfunded.
B. THE LEGISLATIIVE AND IINSTITUTIIONAL FRAMEWORK
3.16 This section provides an overview of the legislative framework and institutionalarrangements that underpin Moldova's budget system and processes. It first discusses thekey legislation that underpins budget management in Moldova. Budget coverage is thenexamined from the point of view of comprehensiveness and fragmentation. Finally, thesection identifies the various budget process participants, describes their respective roles,and highlights aspects of these institutional arrangements that either support or hindereffective budget management.
The Legislative Framework
3.17 The present legal framework for the budget system and budget process isreasonably recent. The most important elements of the framework are two organic budgetlaws, namely the Law on Budget System and Budget Process approved in 1996, and theLaw on Local Public Finance approved in 1999. These two laws provide the generalprocedural rules for the preparation of annual budgets for the central and localgovernments. The Law on Budget System and Budget Process sets out the objectives ofthe budget, its composition, the division of responsibilities among government agencies,the associated budget procedures, and the timetable for budget preparation. The Law onLocal Public Finance sets out the budget process for local governments, establishesrevenue and expenditure assignments for local governments, and mechanisms for inter-governmental resource transfers and borrowings.
3.18 Other relevant laws include the Law on State Debt and State Guarantees (1996),which establishes a ceiling on public debt and a constraint on government guaranteedloans and provides procedures and guidelines for issuing state guarantees. The Tax Code(1997-2001) establishes tax rates and tax bases. hnport tariffs have been fixed in aseparate organic law since 2000. The Law on State Social Insurance (1999) defines thescope and coverage of the state social insurance budget. Gradual implementation of theabove legislation has introduced more stability and transparency into the system.
Budget Coverage
3.19 The general government budget is still fragmented and appears to beinsufficiently comprehensive in its coverage. This presents an important obstacle toimproving aggregate fiscal discipline and allocative efficiency. Under the Budget Systemand Budget Process Law, Moldova's budget system includes the central governmentbudget (state budget), budgets of administrative-territorial units (local governments'budgets), the State Social Insurance Budget (SSIB), and extra-budgetary funds (EBFs).Box 3.1 describes the coverage of each of the budget system components, while Figure3.1 presents the relative shares of the different budget components in the generalgovernment budget.
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3.20 Moldova's general government budget remains fragmented partly as aconsequence of the provision in the 1996 Budget System and Budget Process Law whichrequires Parliamentary approval to be obtained only for the state budget and not for theoverall national public expenditure framework. Only the state budget and localgovermments' budgets are consolidated into the official "consolidated budget" for thepresentation of the annual state budget law and for subsequent reporting. The State SocialInsurance budget and extra-budgetary resources are not consolidated for reportingpurposes.
3.21 A further aspect of fragmentation concerns the incomplete integration of capitalexpenditures in the budget. The 1996 Budget System and Budget Process Law requiresthe inclusion of a line item for expenditure for capital investments in the annual budgetproposal, but without integrating this into line items of the functional classification. Thepresent practice is that expenditures for new constructions/investments are presented as aseparate single line item, while capital repair and maintenance expenditures areincorporated in the lines of functional classification. The breakdown of expenditures for
new construction/investment is often made after the approval of the annual state budget,pending the approval by Parliament of the list of new capital construction objects through
a separate resolution. This approach could be construed as leading to the development ofa separate public investment program (PIP) and the institutionalization of a dual budget.This can lead to the risk of serious imbalances between investment and recurrentspending occurring.
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Box 3.1: Moldova's Budget System.
The State Budget. The State Budget covers the operations of central government institutions, includingtheir deconcentrated structures in the territories. The central government is responsible for providing publicgoods (defense, security, foreign relations, research, justice, environment, and infrastructure), delivery ofsocial services (higher and vocational education, specialized hospital care, and social safety net), thepayment of debt service, and supporting other govermnent operations. In 2001, the state budgetexpenditures net of transfers to local governments and the SSIB accounted for 39 percent of totalactual general government spending (see Table A7 of statistical annex for more detailed numbers on statebudget execution for 1997-2001). The state budget is approved through the annual state budget law.
Local Government Budgets. Based on the 1998 Law on Administrative and Territorial Reform, territorial-administrative units are organized in two levels. The first level of territorial administrative division isrepresented by 10 judets (counties), the autonomous territorial unit of Gaguazia and the municipality ofChismau with a special status. The second and lowest level of territorial adminiustrative division isrepresented by 55 towns and murucipalities, and 594 communes (villages). Each municipality, village, townand conmmune in a judet has a local council that approves its own local budget, and their combined localcouncil budget forms the budget of that judet. Local government budget expenditures (inclusive of statebudget transfers) accounted for 31 percent of the total actual general government spending in 2001(see Table A8 of statistical annex for more detailed numbers on local budget execution for 1997-2001). TheLaw on Local Public Finance stipulates that the local budgets cannot be approved with deficits. If revenuecollection (including "own taxes and fees" for local governnents, tax sharing with the judets, and "gap fill'transfers) is insufficient to cover expenditures, local governments must reduce their expenditures (includingestablished obligations and payments) in order to balance the local budget. The Law on Local PublicFinance allows local governments to borrow from the central government (the state budget), upper levellocal governments and from domestic commercial banks; however, they are prohibited to contract externalloans/credits and to issue treasury bills.
The State Social Insurance Budget (SSIB). The SSIB covers expenditures for pensions, non-pensionsocial insurance programs (unemployment, sickness, and maternity benefits), and most social assistancebenefits. Pension spendmg accounts for the largest share of total expenditure of the social insurance budget(86 percent in 2000). In 2001, state social insurance budget expenditures (inclusive of state budgettransfer) accounted for about 24 percent of total actual general government expenditure (see Table A9of statistical annex for more detailed numbers on SSI budget execution for 1997-2001). The SSIB isfinanced by revenues from social insurance contributions of legal and physical persons. It also receives atransfer from the state budget to cover non-insurance program spending. The SSIB is approved through anannual state social insurance budget law and administered by the National Social Insurance House (NSIH).
Extra-Budgetary Funds and Resources (EBFRs). Generally, these refer to accounts of governmentactivities that are normally excluded from budget documents and do not follow the standard rules for budgetexecution procedures. In Moldova, extra-budgetary funds include those earmarked by specific taxes or feescorresponding to their end uses (e.g., road fund, ecology fund, school text book fund). Extra-budgetaryfunds are incorporated in the budget. Extra-budgetary funds of the central government are approved byParliament as annexes to the annual state budget Law, while extra-budgetary funds of local government areapproved as annexes to local budgets. In contrast, extra-budgetary resources of state budget institutions,referring to special funds of institutions financed from the state budget and originating from official usercharges and fees (e.g., fees charged by education and health care mstitutions for their services), are notexplicitly included in the budget. Sirmlar resources of institutions financed from local budgets make anintegral part of local budgets. Line ministnes, responsible for the sectors where state budget institutions areauthorized to accumulate extra-budgetary resources must submit forecasts of revenues from these resourcesand expenditures to be financed with such resources, together with their annual budget requests. Theseforecasts are used for analytical purposes in the course of budget preparation. Both extra-budgetary fundsand extra-budgetary resources are administered through the treasury system. In 2001, EBFRs accountedfor approximately 6 percent of total actual general government expenditures (see Table AIO ofstatistical annex for more detailed numbers on EBFRs for 1997-2001).
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Figure 3.1: Breakdown of Total General Government Expenditures by Budget Component(Percent of Total)
100% -
0 extrabudgetary80% - funds and
resources
60% - 0 state social
insurance budget
40% - 0~~~~~~~~~ local budgets
20%- 23 state budget
1997 1998 1999 2000 2001
Note. State budget expenditures exclude transfers to local budgets and state social insurance budget.
Source: Based on data provided by the Ministry of Finance.
3.22 A number of important expenditures are also not incorporated in approvedbudgets in any meaningful way. These include: (i) external financing of capital
investments and other expenditures funded with "tied" donor assistance; and (ii)repayment of expenditure arrears. In the case of donor assistance supplementing recurrentexpenditures (for example, drugs supplied to public hospitals in the form of humanitarianassistance), this is a particularly important omission in Moldova's situation; the countryreceives significarit amounts in various kinds of external assistance supplementingbudgetary expenditures.
3.23 Annual disbursements under donor financed investment projects averaged 3percent of GDP over the last seven years, of which 1.4 percent of GDP was in the form of
disbursements under loans directly contracted by the Government, and the rest fromdisbursements under loans guaranteed by the Government. The magnitude of this
assistance was close to total public investment expenditures reflected in .the budget (3.5
percent of GDP on-average over 1997-2001), and the proper reflection of this in thebudget would provide a much more accurate picture of Moldova's public investmentsituation. Moreover, the real impact of those funds on the integrity of the budget processis considerably greater given that some two-thirds of domestically financed public
investment is currently allocated as domestic counterpart funding on externally financed
projects.
3.24 Arrears accumulated over previous years are also not adequately reflected in
Moldova's budgets, and no explicit allocations are made for their repayment, even though
in practice a sometimes significant part of expenditures is expected to be used to clear
past arrears. The official explanation for this is that budgets are prepared on a cash basis,
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and therefore any reflection of past commitments is inappropriate. This is an importantissue since in many sectors, particularly health and education, stocks of arrearsaccumulated during the past years are still significant and amount to important shares ofthe annual allocation. The 2002 state budget law stipulates that the past year's arrearswould be cleared within the limits of current year allocations, implicitly indicating thatarrears would be maintained at the level of the previous year. In the past, and on a fewoccasions only, the state social insurance budget law and state budget law have includeda provision freezing pension arrears as of a certain date and including cross-references toa specific budget allocation to clear those past arrears. This practice proved to be veryuseful in strengthening aggregate expenditure discipline in the pension system and madean important contribution to successful clearance of pension arrears in Moldova.
3.25 Although noticeable progress has been achieved in streamnlining the annual budgetlaw in the last few years, it still contains some provisions that perhaps could moreappropriately be included in the organic laws governing specific areas (Tax Code, Lawon Privatization), e.g., provisions on tax regulation, exemptions, and on other aspects ofrevenue and expenditure, on privatization, transport of goods and services across customsborders, debt restructuring, leasing, and mandatory state insurance.
Budget Process Participants and Their Roles
3.26 Within the central government, the Ministry of IFinance is responsible for thegeneral management of the nation's finances, including budget policy and planning,budget preparation, and budget execution. Once the Government approves the statebudget, the Minister of Finance presents it to Parliament and reports on its execution.
3.27 The responsibilities for budget planning and elaboration are primarily located inthe budget block of the Ministry of Finance, which includes the Budget SynthesisDepartment and the sectoral budget departments which all report to the same DeputyMinister of Finance. Separate divisions within the Budget Synthesis Department areresponsible for macro-economic and fiscal analysis, and revenue forecasting. Sectoralbudget departments are responsible for overseeing the expenditure programs of particularsectors and work in close collaboration with the Budget Synthesis Department. However,responsibilities for certain aspects of the budget are currently located outside the budgetblock of the Ministry. These include the budgeting of certain real sector programs(agriculture, trade and industry, which are managed by the National Economy FinanceDivision of the Ministry of Finance) and of public sector investment (managed by theCapital Investrnent Division of the Ministry of Finance), both of which are located in theDepartment of Financial Analysis and Regulation of the Ministry of Finance and report toa different Deputy Minister. These organizational arrangements hinder the integrity ofthe budget and its preparation process.
3.28 The Budget Department has deconcentrated structures at judet level in the form ofgeneral finance divisions which form part of the local public administrations. Recentchanges have occurred with regard to the status of those divisions. Until July 2001, theyhad dual subordination to judet councils and the Ministry of Finance but were funded bythe judet budgets. Recently, they were transferred into subordination of the prefects'
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offices, and their funding was transferred to the state budget. This move has introduceduncertainty and ambiguity as concerns the relationship of these departments with thelocal authorities.
3.29 Line Ministries participate in budget elaboration and execution and areaccountable for the allocation of resources of their own budgets. All the line ministriesare also responsible for managing their extra-budgetary funds and resources and reportingon them to the Ministry of Finance. However, the capacity of line ministries to participatemeaningfully in the national budget process is severely constrained given that theirtechnical capacities in the areas of budgeting and financial management are relativelyweak compared to the Ministry of Finance; and given also that they have very limitedcapacity in policy analysis and formulation.
3.30 The Ministry of Labor and Social Protection is responsible for preparing andexecuting the State Social Insurance Budget (SSIB) through the National SocialInsurance House.5' The Minister of Labor presents the SSI budget to the Government,and after its approval, to Parliament.
3.31 The revenue collection function is divided between the State Tax Service and theCustoms Department. The former is responsible for collection of taxes on domesticallyproduced goods and all other domestic taxes, as well as social insurance contributions.The Customs Department is responsible for collection of taxes on imported goods,including VAT on imports, as well as customs duties. Both organizations are representedin the territories by networks of deconcentrated units. The importance of revenuecollected by Customs has been increasing during recent years. For example, in 2001,more than 60 percent of the state budget revenue was collected at the border by Customs.The strategic importance of the customs function was quoted as the main reason behindthe recent transfer of the Customs Department from subordination to the Ministry ofFinance to direct subordination to the Cabinet. Currently, the head of the State TaxService reports to the Minister of Finance, while the head of the Customs Departmentreports to the Prime Minister. This tends to create certain operational problems betweenthe two revenue-collecting agencies in terms of their effective collaboration andintegration and also with respect to their coordination with the treasury system.
3.32 Responsibility for budget execution falls under the Treasury Department of theMinistry of Finance, whose functions include budget execution, cash management,accounting, and system development. The goals of the Treasury are ensuring thatsufficient cash is available to meet the day-to-day execution of the budget, that fiscaltargets are met, that spending is within available revenues, and that the budget is executedas approved through the annual budget law. The fiscal operations of the state budget areexecuted through the Treasury System. State budget revenues are collected to a singletreasury account maintained at the National Bank of Moldova. State budget expendituresare made from the same account. Since 2001, local governments' revenues andexpenditures are administered through the territorial treasury branches. Expenditures of
51 The National Social Insurance House was established in 2001 as a semi-autonomous agency that on the one hand
reports to the Minister of Labor, who chairs its supervisory board, but on the other hand has a quite independent status
granted to it by the Law on State Social Insurance and tends to operate correspondingly.
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the State Social Insurance Budget, however, remain outside treasury operations and areadministered by the National Social liDnsurance House.
3.33 Internal government controls over budget execution are carried out by theDepartment of Financial Revision and ControR reporting to the Ministry of Finance,and external audit of the public budget is undertaken by the Couirt of Accounts whichreports to Parliament.
C. THE BUDGET PROCESS
3.34 Moldova's budget process has been developing under the constraint of an ongoingfiscal crisis. So far, the Government has focused on strengthening the technical aspects ofbudget formulation and execution and has achieved the most progress in these areas.
Budget Preparation and Forrmulation
3.35 The Budget Calendar. The budget preparation calendar is approved annually atan early stage of the budget cycle. The calendar is driven by the requirement of the Lawon Budget System and Budget Process to present the annual budget to Parliament byOctober 1. The calendars for preparation of the state and local budgets are summarized inTable 3.2. The calendar for the preparation of the state social insurance budget coincideswith that for the state budget.
3.36 The Ministry of Finance recognizes that the budget calendar does not allocatesufficient time for budget planning. It has recently proposed to modify the calendar bylaunching preparations for the annual budget cycle much earlier in the year, in the contextof the movement towards gradual introduction of the MTEF.
3.37 Planning. Perhaps the major shortcoming of the current budget preparationprocess is the lack of strategic focus together with the absence of a strategic planningphase. The budget exercise remains largely an arithmetic routine of balancing thenumbers. Comparatively little attention is paid to analysis and budget policy formulation.As a result, the later stages of budget formulation are dominated by bargaining about the"shares of the pie", with such bargaining not informed by adequate analytical and policyfoundation. This undermines allocative efficiency, reduces the ability of the Ministry ofFinance to promote rationality in budget policy, eases the way for lobbyism, andnegatively affects budget outcomes. Annual allocations mainly follow the pattem of theprevious years, and strategic prioritization to ensure that allocations match the developingand changing priorities of the Government's work program remains weak.
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Table 3.2: Budget Calendar for Preparation of the 2002 Budget
State Budget Local Government Budgets
Mid Apnl MoE begins updating macroeconomic Methodological Notes issued by Ministry of Financeindicators. to judets.
Ministry of Finance issues Methodological Judets forward the notes to villages, communes andNotes to line Ministnes. cities.
Early May Council of Ministry of Finance approvesbudget calendar.
Early June MoE finalizes macroeconomic forecasts.
Line Ministries submit their budget requests. Villages, communes, and cities prepare draft budgetssubmitted to judets.Judets develop draft budgets submitted to Ministry ofFinance for review.
Mid-June to end Ministry of Finance finalizes macro-fiscalJuly framework.
Budget negotiations between Ministry ofFinance and line Ministnes.
Early-mid August PM/State Chancellery resolve budget Local governments discuss divergences from thedisputes. draft budget with Ministry of Finance.
Mid-end August Ministry of Finance finalizes draft budget.
October I Govemment submits the Draft AnnualBudget Law to Parliament.
November I Villages, communes, and cities revise and submitdraft budgets to local councils for approval
November 15 Judets' budgets submitted to judet councils forapproval
December 5 Parliament approves the state budget
December 10 Village, commune and city councils approve theirbudgets
December 20 Judet councils approve judet budgets
Source Based on the Law on Budget System and Budget Process and Govemment Decision No 303 of May 7, 2001.
3.38 The fundamental constraint to strengthening the strategic planning phase of thebudget preparation process is the absence of incentives to force strategic prioritization inbudget formulation in line with key government work program priorities. This isexacerbated by a weak strategic planning function across government and poor strategicanalysis and planning capacity. This is true for the center of government, as well as forthe line ministries. The current government structure assigns the strategic planningfunction primarily to the Ministry of Economy, which, however, lacks adequate capacityand expertise in many areas, including budgetary and social sector analysis.
3.39 Medium-Term Expenditure Framework. Recognizing these shortcomings, theMinistry of Finance has started to move towards a more strategic approach to the budgetpreparation process through the gradual introduction of the Medium-Term ExpenditureFramework (MTEF). The first steps in this direction included preparation of medium-
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term macroeconomic forecasts for the 2001 and 2002 budgets. In 2002, a strategic budgetplanning phase was added to the budget calendar approved in February 2002 (see Box 3.2for a summary of the activities which were added to the 2003 budget calendar and forindications of desirable timing for their implementation in future years). Work is nowalso ongoing to turn the traditional budget note that used to accompany the submission ofthe draft annual state budget law to Parliament into a Budget Comcept Paper (BCP). InMay 2002, the Goverrnent for the first time considered and formally approved amedium-term Budget Concept Paper (for 2003 to 2005)
Box 3.2: Strategic Planning in the Budget Cycle: Indicative Timing
The following activities were already incorporated into the budget calendar for the 2003budget approved m February 2002, but the approved timing was sub-optimal because oftechnical delays. The list below indicates the desirable timing for these key strategic planningactivities.
January. Presentation to Cabinet of the MTEF Issues Paper and Budget Calendar settingout a preliminary framework and identifying the analysis to be undertaken for the MTEF.
aFebruary-March. Elaboration of the MTEF analysis revision and updating of the macro-fiscal framework; analysis of cross-cutting issues; preparation of sector expenditurestrategies; and elaboration of sector expenditure plans.
a Early April. Review of the initial MTEF analysis at an inter-ministerial Budget OptionsWorkshop, followed by finalization of the draft BCP.
• Late April. Review and approval of the draft BCP by Cabinet and the issuing of the BudgetMethodological Notes to line ministries and local governnents.
Source: Based on Bird, Andrew. 2001. "Moldova: Introduction of a Medium-Term ExpenditureFramework". Consultant report for the Ministry of Finance of Moldova.
3.40 Experience over the last few months with the BCP exercise has highlightedinstitutional weaknesses in the budget preparation process. The main conclusion is thatthe BCP would benefit from being more analytical and from presenting more discussionof underlying assumptions and policy choices. The analysis would also need to becomecomprehensive and integrated; the 2003-2005 BCP covers only the consolidated budgetand does not incorporate the state social insurance budget. An important operationallesson from the BCP exercise relates to the need to create institutional mechanisms forintra-agency coordination. The Ministry of Finance is committed to move further with thegradual development of the MTEF and is seeking to attract more extensive and longer-term technical assistance to support it in this task. Box 3.3 summarizes experience withthe MTEF to date and also indicates the Ministry of Finance's development plans in thisarea.
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Box 33. MTEF progress
The Ministry of Finance is aware that preparation of a full MTEF is a demandmg undertakng and views
the gradual introduction of MTEF as a medium-term project. At the initial stage, the primary focus would
be on the strategic content of the MTEF. In 2002, an interministenal MTEF working group was
established, and its composition and terms of references were approved by the Government together with
the revised budget calendar. In May, the Government officially approved the first Moldova MTEF for
2003-2005.
The analysis required for the preparation of the full MTEF falls into four main elements: (i) preparation ofthe macro-fiscal framework; (ii) analysis of cross-cutting expenditures issues; (iii) preparation of thesector expenditure strategies; and (iv) preparation of the sector expenditure plans.
0 Medium-term macro-fiscal framework was the only element of MTEF that was present in Moldova's
budget preparation process prior to 2002.
0 Analysis of Cross-Cutting Issues. It is planned that each year's MTEF would analyze a number of
specific cross-cutting issues selected for that year. The aim would be to develop specificrecommendations on key public expenditure issues and policies that could then be incorporated into
the MTEF. Examples of the type of topics that might be covered include: (i) an assessment of the
implications of the Government's poverty reduction strategy for expenditure allocations; (ii) an
analysis of inter-governmental finance issues leading to proposals for change in sharing of taxrevenues between central and local governments; and (iii) a review of payroll and wagebill issuesleading to recommendations regarding the level of total wagebill expenditures as well as of wage
levels for specific groups within the public service. No cross-cutting issue was selected for the 2003-2005 MTEF because of the compressed schedule of its preparation and the complexity of analysis
that would need to be undertaken. It is planned to undertake such type of analysis for the first time forthe 2004-2006 MTEF. It is recommended to select for such analysis the central government payroll
and wage bill.
0 Sector Expenditure Strategies are required to inform the decisions on expenditure allocation. It isplanned that sector strategies would initially be developed only for a few major sectors. Health andeducation were the pilot sectors for the first year of MTEF and it is planned to add social protectionto the pilot sectors for the 2004-2006 MTEF.
The initial draft of the pilot sector expenditure strategies was prepared by the line ministries and then
subsequently reviewed together with the Ministry of Finance prior to being incorporated into theMTEF. For the future, the Ministry of Finance needs to develop detailed guidelines for line ministrieson the analysis to be undertaken and the format for its presentation.
0 Expenditure Plans. Drawing together the macro-framework, analysis of cross-cutting issues and thesector expenditure strategies, the final stage of the MTEF analysis involves the development of
expenditure plans. In developing these expenditure plans, the sector expenditure strategies should beused to determine: (i) the strategic shifts in resource allocation between sector, identifying whichsectors justify a greater share of public expenditure resources; (ii) budget priorities withm sectors,identifying which programs justify a greater share of sector resources; and (iii) the key measures to
be taken to improve operational performance, identifying priority items within sector and programbudgets. These expenditure plans should then be used to develop resource ceilings, broken down bysector and spending agency.
The 2003-2005 MTEF identifies the expenditure priorities between sectors and within the two pilot
sectors as well as incorporates sectoral expenditure ceilings. However, significant amounts of technical
analysis and organization will need to be undertaken in the next few years to gradually develop the
process for setting expenditure prionties, elaborating expenditure plans and establishing expenditures
ceilings in an informed way.
Source. Partially based on Bird, Andrew. 2001. "Moldova: Introduction of a Medium-Term Expenditure
Framework". Consultant Report for the Ministry of Finance of Moldova.
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3.41 Macro-Fiscal Framework. A critical element in the budget preparation exerciseis the preparation of the macro-fiscal framework. The macro-fiscal framework (focusedon the overall fiscal deficit and the level and composition of government revenues andexpenditures) forms the basis for the Ministry of Finance to determine preliminary targetsfor total revenue and expenditure of the state budget, to review budget requests submittedby line Ministries, and to make recommendations on changes or revisions.
3.42 Preparation of the macro-fiscal framework is perhaps particularly problematic inMoldova given that the economy is highly dependent on external factors and vulnerableto various external shocks. The Government of Moldova develops three-yearmacroeconomic forecasts and has achieved certain progress in improving such forecastsin the last two years, as reflected in Table 3.3.
Table 3.3: Selected Macroeconomic Indicators, Forecast and Actual
1997 1997 1998 1998 1999 1999 2000 2000 2001 2001Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual
GDP Growth, % 9 1.6 6 -6.5 4 -3.4 2 2. 1 5 6.1CPI, annual n.a. 12 12 8 6 39 28 31 15 10
average, %Exchange Rate, n.a. 4 6 n.a. 5.4 7 10.5 13 12.4 14 12.9
annual average,MDWUSD
Exports, n a. 874 955 632 795 463 630 472 600 570USD million
Imports, n.a. 1171 1121 1024 1200 586 750 776 830 897USD million
Source: Ministry of Economy.
3.43 However, significant weaknesses remain both with regard to the quality ofmacroeconomic framework and the process of its preparation. While the Ministry ofEconomy is formally assigned to coordinate the development of medium-term macro-forecasts with the National Bank, the Ministry of Finance, the Department of Statisticsand the line Ministries, in reality, it does not have sufficient capacity to develop forecastsof monetary and fiscal aggregates, and its main substantive contribution is to forecastGDP and other real sector and external sector indicators. The monetary framework isprojected by the National Bank, and the fiscal framework is projected by the Ministry ofFinance. The existing econometric macroeconomic model developed with externaltechnical assistance a few years ago began to be applied by the Ministry of Economyonly in 2001. However, it is perceived as of limited use by other agencies participating inthe process, and they do not employ this tool. In particular, the linkages between the GDPprojections and fiscal and monetary sector projections are not in-built properly in themethodology used by the Ministry of Economy. This leads quite often to inconsistenciesbetween the projected macro indicators. During the last two years, in response to theneeds generated by the gradual introduction of the MTEF concept in the budgetpreparation process, some limited progress was achieved in developing consultativemechanisms for coordination of macroeconomic projections. The analytical foundation ofmacroeconomic framework, however, remains quite weak and affects its overall quality.
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3.44 Revenue Forecasting is perhaps another area of comparative weakness in
Moldova's budget planning and formulation process which affects the quality of
aggregate fiscal discipline. Forecasting state budget revenue is the responsibility of the
Ministry of Finance, while the National Pension House is responsible for the Social
Insurance Budget revenue forecast, and local authorities are responsible for projecting
their budget revenues. Weaknesses in the analytical foundation and the use of simplistic
forecasting techniques affect the quality of revenue projections across the government.
The methodology used currently by the Ministry of Finance and recommended to the
local authorities basically links tax revenue to projected GDP, adjusted for changes in tax
laws and tax administration. No computerized revenue forecasting models exist to projectrevenue from individual taxes. Besides, individual tax forecasts are deterrnined with
limited inputs from the tax enforcement and collection units (State Tax Service and
Customs Department). Social Insurance Budget revenue projections suffer from the same
problems as state budget revenue projections, including undeveloped forecasting tools
and poor coordination with the tax inspectorate responsible for the social insurance
contributions collections.
3.45 Methodological Guidelines. The Ministry of Finance has been putting a lot of
effort into improving the methodology for budget fornulation. This is summarized in the
budget circular Methodological Guidelines for Annual Budget Preparation (MGs). These
methodological guidelines are issued by the Ministry of Finance at the initial stage of the
annual budget cycle and provide a framework and methodology for annual budget
formulation. This includes estimation of revenues, expenditures, and financing, which
allows for greater transparency in the allocation of public funds and provides policy-
makers with the inforrmation necessary to enable them to review the draft budget. The
methodological guidelines for the state and local governments' budgets are issued
separately every year, and both contain detailed information on the projections of
economic indicators including salaries, prices of products, outputs (by types), social
indicators, and so on. Compilation of the social insurance budget, however, is not guided
by any methodological documents.
3.46 Until recently, an important shortcoming of the MGs was that no explicit
expenditure ceilings were specified by the Ministry of Finance before individual budget
requests were made by line ministries. Expenditure ceilings were, however, established
for certain items of expenditures and certain sector activities. The overall ceilings were
also implicitly set through the calculation methodology based on past year's expenditure
outturns adjusted by inflation and tariff growth. Sometimes, there were provisions for
specific policy changes in the sectors. The parameters for calculating the ceilings were
distributed to line ministries together with MGs for elaborating their budgets. In practice,
the line ministries did not recognize such implicit ceilings as binding and often submitted
budget requests significantly exceeding them. 2002 was the first year when explicit
expenditure ceilings were introduced by the Ministry of Finance at an early stage of
budget preparation process as part of the 2003-2005 MTEF.
3.47 Moldova's incremental budget approach tends to encourage budget managers to
demand additional resources for new programs rather than to encourage the reallocation
of resources from existing programs in support of greater effectiveness. The argument is
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that reallocation could lead to reduced resources for the following year if amounts are tobe based on (re-allocated) current year outlays. The effect is that spending agenciesproject forward their existing budget lines rather than try to review them within a policyframework consistent for the sector and proactively producing planned shifts inexpenditure allocations within an overall resource ceiling.
3.48 Quzalty of Budget Submissions. The quality of line ministries' budget requestsubmissions represents a further obstacle to improving allocative and technical efficiencyof the budget in Moldova. Initial budgetary proposals by line ministries have to reach theMinistry of Finance by the end of June. In compliance with MGs, these proposals mustinclude: (i) recorded revenues and expenditures for the prior fiscal year; (ii) estimatedrevenues and expenditures for the current fiscal year; (iii) estimated revenues andexpenditures for the next fiscal year; (iv) projected revenues and expenditures for at leastone year beyond the next fiscal year; and (v) justifications of the expenditure requests withregard to the preliminary revenue and expenditure targets distributed by the Ministry ofFinance and the expected results of the programs included in these requests.
3.49 In practice, line ministries have experienced particular difficulties with meetingthese requirements. The submissions which the Ministry of Finance receives tend to beoverburdened with exceptionally detailed information by institutions, but contain veryweak analysis and justification of requests, as well as lacking clear statements on sectoralpolicies, expenditure priorities and the rationale behind them. The main spendingagencies, such as the Ministries of Education and Health, tend to submit budget requeststhat exceed the implicit ceilings provided to them from around 50 to even 200 percent.
3.50 At present, sectoral submissions by line ministries are designed to serve thepurpose of providing the required input into the state budget law and are limited thereforeto state budget expenditures only. This restricts, for instance, the scope of the Ministry ofEducation submission primarily to the tertiary education program, leaving the bulk ofprimary and secondary education expenditures, which are in theory the priority for thesector, outside the focus of the ministry. This situation results from the specific modalityof fiscal decentralization that has been implemented in Moldova since 1999, where localauthorities were granted substantive freedom in utilization of local budget resources,including the transfers from the state budget, which are provided in the form ofunconditional grantg.
3.51 Recent Efforts to lfmprove Budget Prepazrationm Methodology. The ongoingefforts to strengthen the strategic focus of the budget preparation promoted by theMinistry of Finance has put additional pressure on line ministries to strengthen theirpolicy analysis and strategic planning functions. In 2002, as part of the preparatory workfor the MTEF, the Ministries of Health and Education were requested to make a firstattempt at drafting overall sectoral expenditure strategies as inputs to the budget conceptpaper.
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3.52 The estimation methodologies prescribed in the MG are still however
significantly driven by the use of norms which translate physical requirements into
monetary amounts through the application of average standardized costs for services.
This is especially the case in estimating budgetary resources for expenditures on health,
education, and energy. The Ministry of Finance realizes the shortcomings of the norms-
based approach, and has been making efforts to improve the methodologies underlying
the derivation of norms. It also realizes the problems related to the use of average norms
for the whole country that do not take into account regional disparities.
Box 3.4: Program Budgeting Pilots
Under the USAID financed Moldova Fiscal Reform Project, the Ministry of Finance was assistedwith the introduction of program budgeting. During 2001, the system was developed and tested withthe preparation of the 2002 budget in three pilot areas: (i) higher education; (ii) hospital services; and(iii) the Mmistry of Finance. The initial plan envisaged moving to full-scale implementation for thepreparation of the 2003 budget, with the aim of having it operational throughout Government in2003. That plan had to be scaled down based on the modest outcomes of the pilot. Social protectionwas added to the pilots for 2003 budget. The social protection pilot was supported by the technicalassistance through the EU Food Security Program.
The preparation of a program budget requires substantial details of activities in each sector, includingtheir scope, objectives, strategy, estimated cost of inputs for three years, total cost of activities, andfinancing sources (budgetary versus extra-budgetary). Preliminary assessment of the programbudgeting implemented in the areas of higher education and hospital services is mixed. The Ministryof Finance considered the program budgeting a useful exercise for identifying efficiency of sectoractivities and thus facilitating prioritization. The hospital care program budget submitted by theMinistry of Health was satisfactory as the Ministry carefully reviewed, analyzed and prioritizedactivities of hospital services based on the cost of providing services and their outputs/outcomes.Consequently, it was able to recommend measures to reduce the cost of service provision in order tomatch a given resource allocation.
However, the interviewed staff of the Ministry of Health involved in the 2002 program budgetexercise raised concerns about the pilot's limitations with regard to the choice of the program and theresulting exaggerated attention paid to the hospital care program, that, as was shown in Chapter 2, isin fact not the priority for the health sector budget at the moment. During the interviews, the samestaff voiced concerns about substantive technical difficulties they anticipated with future extension ofthe approach to the whole health care budget, given the level of details required from them by theMimstry of Finance guidelines, against the background of the gaps in the existing informationavailable to the Ministry as well as the limited capacities for its processing and analysis.
The 2002 program budget exercise at the Ministry of Education brought less advanced outcomes.The Ministry faced technical difficulties in implementing the exercise, was unable to integrate thesubmissions made by institutions, and subsequently failed to come up with a prioritization ofactivities. To be able to move forward with further implementation of program budgeting, theMinistry of Finance considers that intensive capacity building needs to be made available for staff inthe Ministry of Finance and for finance departments in line Ministries through formal and rigoroustraining.
3.53 The budget methodology is at present also purely input based, and does not link
budget requests to performance information or expected program outcomes. The Ministry
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of Finance monitors and controls input items, not the cost of a program or outcome.Recognizing the limitations of this approach in measuring cost effectiveness, the Ministryof Finance launched in 2001 a program budgeting pilot for the 2002 budget (see Box3.4). This involved preparation of supplementary methodological guidelines for programbudgets and their circulation to the pilot Ministries of Health and Education. TheMinistry of Finance itself also participated in the pilot. The ministries involved wererequired to submit program-based budgets for selected programs (hospital care, tertiaryeducation, and tax collection) in parallel with the traditional budget presentation. Thedocumentation had to include the description of those selected programs, including aclear set of program goals and objectives, as well as performance measures for evaluationof efficiency of inputs and effectiveness of outputs.
3.54 The main lesson leamed so far from the pilots is not surprising: namely thatcapacity weaknesses of the line ministries are an important constraint to the speedyintroduction of program budgeting in Moldova. If the decision is taken to continue andextend the experiment, more extensive and, at the same time, focused technical assistancein this area may be necessary.
3.55 Budget Scrutiiy and Negotiadons. Given the absence of substantive discussionof strategic priorities at the onset of the budget cycle, budget scrutiny and negotiations atpresent represent an unnecessarily lengthy and intense phase of annual budgetpreparation. The Ministry of Finance reviews the sectoral proposals received from lineministries and may recommend cuts to adjust sectoral budgets in line with forecastresources. Intense bilateral negotiations between the Ministry of Finance and lineministries are held in order to agree on the sectoral budgets. State budget transfers to theSSI budget are separately negotiated between the Ministry of Finance and the Ministry ofLabor. Weak analytical capacities in the line ministries reduce their ability to defend theirbudget proposals. By default, the negotiations are dominated by the Ministry of Finance.Bilateral disagreements are resolved at a political level through the interventions of theCabinet and the Prime Minister.
3.56 As for local government budgets, the judet administration and the Ministry ofFinance need to agree on the overall local budget (including tax revenues, expenditure,and transfers to local governments' budgets) before the state budget is submitted toParliament. Once agreement is reached with local governments and line ministries, theMinistry of Finance prepares the draft proposal for the state budget and the"consolidated" budget. The draft budget is then submitted to the Cabinet along with theBudget Note, which sets out the underlying macroeconomic parameters, the resourceframework, and the policies within which the draft budget has been prepared.
3.57 The proposed annual Budget Law is approved by Parliament in three readings: thefirst reading approves the main budget policy direction and the Government's policy andobjectives; the second reading approves total revenues, expenditures and the overalldeficit; and the third reading examines in detail the budgetary expenditures of statebodies and settles expenditure appropriations that are financed on a priority basis. TheState Social Insurance Fund budget is simultaneously approved after the approval of the
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annual budget law. After Parliament approves the state budget, local governments mustadjust their budgets in line with the annual budget law within 15 days.
Budget Execution
3.58 Treasury. During the last decade, Moldova has made reasonable progress inestablishing a treasury system (see Box 3.5) to execute national budget. State budgetoperations were transferred under treasury execution in stages during 1993 - 1997; andterritorial treasury branches started to service local governments budgets revenues andexpenditures in 2001. A system has been developed to register contracts concluded bypublic institutions for procuring goods, works and services to support effective control ofexpenditure commitments. The system is operational at the level of state budget and isbeing rolled over to the local budgets. The implementation of the treasury system to datehas contributed to improved control over cash and over unauthorized expenditures. TheTreasury now validates all expenditure transactions requested by line ministries againstbudget appropriations and the availability of funding prior to payment authorization. Italso facilitates monitoring of budget execution and timely reporting of the state and localbudgets, as well as extra-budgetary funds (except for the social insurance budget) andresources, thus contributing to improved fiscal transparency and accountability. Thecentral treasury system is now able to provide information on the execution of the statebudget at the end of each day.
- Box 3.5: Moldova's Treasury System
Moldova's treasury system is a two-tiered structure consisting of a central treasury (state treasury) and anetwork of 37 regional offices (territorial treasuries) subordinated to the central treasury. The centraltreasury became fully operational in 1997 and is responsible for executing all state budget revenues as wellas state budget transfers to local budgets and certain other state budget expenditures. The territorial treasurybranches launched in 1998 aimed initially to ensure control of spending of state budget funded institutionslocated in the regions. In 2000, the extension of the treasury coverage to local budget operations wasmitiated with the objective of irnproving the transparency of local government revenues and expenditures,and improving the availability, reliability, and timeliness of information on the local governments' budgets.All fiscal operations of local governments are conducted through territorial treasury branches since 2001.
The central treasury is organized around a single revenue account maintained at the National Bank ofMoldova where all central government revenues are collected and government operations are recorded.Several additional accounts in various foreign currencies are maintained at the National Bank, as well as aseparate account for the revenues of the State Social Insurance Budget. Territorial treasury branchesoperate with four standard types of treasury accounts including state budget accounts, local budgetaccounts, accounts for extra-budgetary resources of state budget institutions, and foreign currency accounts.State budget revenues collected by tax and customs bodies (including the revenues shared between the stateand local budgets) are deposited at commercial banks, and transmitted to the single treasury account at theNational Bank of Moldova. On the payments side, the Treasury utilizes the bankmg system to transferfunds from the Treasury state budget account at the National Bank to state budget accounts at territorialtreasury offices and to make payments to suppliers of state budget institutions located in the territories.Local budget revenues and expenditures are routed through the local budget accounts at territonal treasurybranches. Public institutions are not allowed to have accounts at commercial banks and perforn theirfinancial operations through the treasury accounts at respective territorial branches. Payments of salariesand pensions are made in cash.
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3.59 The significant decline in state budget expenditure arrears during 1998-2000(from 440 million lei in 1998 to 234 million lei in 2000) appears largely attributable tothe strengthening of controls over commitments. In contrast, expenditure arrears of localgovernments' budgets increased from 526 million lei in 1998 to 693 million lei in 2000.The majority of expenditure arrears (about 75 percent of total expenditure arrears in2000) accumulated by local governments reflects, in part, weak control of expenditurecommitments and the lack of coverage of local budgets by the treasury system prior to2001.
3.60 Further modernization and institutional development of the treasury is a priorityfor the Ministry of Finance. It will, for example, take at least several years for theterritorial branches to become fully operational and integrated in the overall system.Significant investment is likely to be required to upgrade the system's technology andinfrastructure. The Ministry is particularly concemed about the sustainability and securityof the treasury information system and is producing a treasury information technology(IT) development plan to be further circulated to the donors with the purpose of attractingexternal financing for further investment in technology and capacity building.
3.61 Appropriations. After the state budget is approved, the Ministry of Financedistributes monthly allocation limits to central public authorities and requests to submitthem their financial plans and those of subordinate institutions, drafted in conformitywith the approved annual budget law and following the existing budget classification andmonthly allocation limits. Financial plans are drafted by primary budget executors,examined by line ministries' financial divisions, approved by the Ministry of Finance andregistered by the Budgetary Synthesis Department. After registration, financial plans areforwarded to the Ministry of Finance Treasury Department and further to the StateTreasury for execution. The Treasury accepts for processing the expenditures of publicinstitutions only within the limits of allocations approved for the respective period andonly for the categories of spending provided for in financial plans. Financial plans maybe amended within the budget year with approval of the Ministry of Finance. These plansalso provide necessary information for Government cash management, for managementat the level of the spending agencies, and for ensuring that budget execution conforms toappropriation and budget classification as indicated in the plan.
3.62 However, in practice because of institutional capacity weaknesses, the system ofmonthly allocation limits and financial plans is compromised in that the response tounexpected deviations in budget execution has turned out to be very slow (as was thecase in 2001) and takes a long time to be reflected in monthly allocation limits andfinancial plans. In practice, therefore, there is only limited in-year adjustment to reflectnew dynamics in revenues, changes in debt service, and other expenditures throughoutthe year, nor any adjustment for an over-estimated budget.
3.63 Control of Expenditure Commitments. The introduction of the treasury systemalso led to improvements in strengthening controls over expenditure commitments.Previously, expenditure controls became effective only when bills had to be paid, aftergoods were already received and services rendered. Starting in 2000, the central treasurysystem ensures the registration of contracts concluded by state budget funded institutions
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for delivery of goods, works and services. In conformity with the annual budget law,contracts that are not registered in the units of the State Treasury are void. The TreasuryOffice verifies each submitted contract against the agency's financial plan as well as theTreasury's cash position, and if accepted, the contract value is registered. The balance ofresource allocation for the respective expenditure item is calculated after the paymentunder the contract is processed. Following the extension of treasury coverage to localbudgets in 2001, the extension of the contract registration system to local budgets isbeing implemented. Once completed, it will enable the Treasury to exercise better controlof expenditure commitments of local governments.
3.64 Execution of Revenues. Revenues collected by officials of the State Tax Serviceand Customs Department are deposited directly to the Central Treasury Account at theNational Bank. Taxpayers make tax payments through commercial banks by depositing acheck together with submission of a payment form. In the case of shared taxes, the fullamount of tax shared between the state and lower level budgets goes initially to thecentral treasury revenue account. The respective share of the collected tax is furthertransferred to the lower level budget by the treasury system. Similar procedures apply tothe taxes shared between the judet and lower level budgets.
3.65 Cash Planning. The unstable fiscal environment and chronic shortages of publicfunds until recently led to significant and frequent instances of cash rationing duringbudget execution. Under this, cash was released by the Treasury in order of prioritiesdepending on the availability of funds each day. This resulted in considerable uncertaintyfor the budget executors. Consequently, spending units could not implement their budgetscorrectly and were forced to accumulate arrears even when strictly following the budgetlaw. Inadequate analysis of cash flow requirements made it very difficult for debt officesto prepare and implement a cohesive borrowing plan to meet the demand for cash.
3.66 To improve the cash management process, the Governnent approved theestablishment of a new Cash Management Unit in 2001 as part of the new organizationstructure of the Ministry of Finance. The new unit's responsibilities include developingand enhancing cash forecasting, implementing the cash flow plan to allocate budgetaryresources, and coordinating with other Divisions in the Ministry of Finance, State TaxService, the Customs Department, the National Bank, and commercial banks. Once fullyoperational, the unit is expected to contribute to prevention of the situation experienced in2001, when because of institutional capacity constraints, new state budget arrears wereallowed to accumulate as a consequence of a very slow response during the year tounexpected shortfalls experienced both in revenues and in external financing.
Debt Management
3.67 Strengthening debt management has been high on the agenda of the institutionalreforms promoted by the Ministry of Finance for several years. As Moldova's debtservice burden has increased since the 1998 regional financial crisis, the Government hasgiven priority to the fornulation of a concise medium-term government debt strategy thatincorporates all types of government liabilities-external and domestic, direct andcontingent, revealed and hidden. More recently, the Government has approved a decree
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to establish a new Department of Public Debt outside the Treasury Department to beresponsible for all public debt issues; the Department's responsibilities will include themanagement of public debt, assets and liabilities, debt sustainability analysis, formulationof a comprehensive debt strategy, and loan contracting and negotiation.
3.68 The challenges facing the Government in debt management are evident in the areaof contractual contingent liabilities, such as guarantees and energy arrears (see Box 3.6).Following the establishment of the legal arrangements for the issuance of guarantees,during the past few years the Government has abstained from providing guarantees onloans contracted by state enterprises; however, it still honors debt service obligationsresulting from loan guarantees. Although contractual contingent liabilities have benefitedfrom the existence of a clear rule-based approach, the realization of various implicitliabilities, particularly energy arrears incurred by budget institutions and enterprises, inan ad hoc manner resulted in rapid accumulation of public debt. During the past fewyears, the Government repeatedly absorbed various liabilities of other economic agents,mainly energy arrears of enterprises. These were transformed into direct governmentdebt.
3.69 Recent reforms have made a major contribution to bringing a strategic perspectiveto Moldova's public debt management. Moldova's debt managers have managed to copewith a number of difficult repayment situations in the last few years, and the Ministry ofFinance has been successful in rescheduling and restructuring several bilateral loans,notably with Russia, Germany, and Romania. Despite these significant achievements,capacity in the area of debt management needs to be further enhanced. In particular,individual borrowing decisions do not yet fully take into account debt sustainabilityforecasts, and the ability of the Ministry of Finance to prepare such forecasts could bestrengthened further.
3.70 Fiscal risks associated with energy arrears and contingent liabilities need also tobe integrated into budget planning. As mentioned in Chapter 1, the increase in the debtburden after 1998 was partially due to the Government's absorption of contingentliabilities associated with government-guaranteed loans (explicit contingent liability) andenergy arrears of state energy enterprises to suppliers (implicit contingent liability) intodirect public debt (Box 3.6). This action created the expectation that current and futureenergy arrears would also probably be absorbed into direct public debt, and thisexpectation, in turn, generated expenditure commitments with immediate fiscal impacts.Such commitments, therefore, should be fully accounted for when formulating acomprehensive budget framework in order to support accurate overall assessment offiscal risks.
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Box 3.6: Absorption of Contingent Liabilities
Despite Parliamentary approval of the Law on State Debt and State Guaranties as of July 18, 1996,absorption of contingent liabilities associated with energy arrears and state-guaranteed debt has continuedas a result of a weak juridical framework regarding management of state extemal guaranties and slowimplementation of structural reforms in the energy sector. Absorption of energy arrears and state-guaranteed debt increased the stock of external debt by US$260.4 million during 1996-2000, and therefore,future debt service payments beginning 2002 onwards. Debt services associated with absorption ofcontingent liabilities are estimated at about US$30 mnillion per year.
Energy Arrears. The Government has absorbed arrears on energy imports accumulated by a state-ownedenterpnse (MoldovaGaz) as well as by Transnistria. It assumed arrears on gas delivered to Moldovagaz inthe amount of US$140 million in 1996 (7 year maturity, 2 year grace, and 7.5 percent interest rate) andUS$90 million in 2000 (7 year matunty, 2 year grace, and 7.5 percent interest rate). Also m 2000, theGovernment absorbed Transmstria's arrears to Russia in the amount of US$30.39 million in the process ofrestructuring the external debt with the Government of Russia (US$74.4 million) and commercial debt withOneximbank (US$17.27 million). A new debt agreement was signed with the Government of Russiatotaling US$122.06 million (15 year maturity, 5 year grace, and 7 percent interest).
State Guaranteed Debt. During 1996-98, the Government issued ten guarantees on loans from commercialcreditors to seven state enterpnses (including four guarantees on EBRD loans), and the amount ofguaranteed issue totaled US$80 million. The stock of extemal guaranteed debt increased from US$73.3million m 1996 to US$86 million in 1999 and declined thereafter. However, no loan guarantees were issuedafter 1998 as the EFF and PRGF programs agreed with the IMF prohibited the Government from issuingnew loan guarantees.
If an enterprise receivmg state guarantee declares bankruptcy, its debt will be assumed by the Government,increasing the stock of public debt. For example, the joint stock company "Perfuzon" contracted credit fromthe German joint stock company "AKA Bank" in the amount of DM12.74 million for purchasingpharmaceutical equipment in 1994. Since the state failed to finance a part of expenses, "Perfuzon" had tosign the agreement on the additional credit in the amount of DM5 million with "Drezdner Bank" under theGovernment guarantee due by 1999. As "Perfuzon" declared bankruptcy, the Government had to liquidatethe credit. If an enterprise defaults on debt servicing payments, the Government will have to absorb thepayment, thus increasing public debt service.
Source: Based on Ministry of Fmance data.
Reporting
3.71 The Law on Budget System and Budget Process requires the Ministry of Financeto prepare a report on the implementation of the state budget and its relationship withlocal budgets at the end of each fiscal year (December 31) and to present this report to theGovernment and Parliament by May 1 of the following year. The implementation of thetreasury system for central and local governments has helped to improve the timelinessand accuracy of fiscal reporting. The Ministry of Finance compiles cumulative year-to-date data on the execution of the state budget, local governments' budgets and the"consolidated budget" at the end of every month, quarter and fiscal year. It also compilesdata on the revenues and expenditures of extra-budgetary funds as well as of the extra-budgetary resources of budget institutions. Fiscal data on the execution of the statebudget, local govermments' budgets, and State Social Insurance budget cover transactionsin cash, in kind, netting operations, and arrears. However, no data are compiled for the
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consolidated central government (the state budget and the SSI budget) or for theconsolidated general government (the state budget, SSI budget, and local governments'budgets). Moreover, cumulative year-to-date data are prepared rather than monthly flowdata, which would be useful to have for budget monitoring purposes.
3.72 The state budget's monthly, quarterly, and annual data are generated directly fromthe Treasury's computer system, while the local goverrnents' data are generated fromreports received from each of the judets. These data cover the cash operations (includingrevenue and expenditure netting operations) of the central and local governments. Moredetailed reports containing information on commitments and arrears52 of the spendingagencies at both central and local government levels are provided at the end of everyquarter. These reports are included in the Ministry of Finance's quarterly and annualreports. On an annual basis, completely separate reports are also compiled on transactionsin kind.
3.73 The reports prepared by the Ministry of Finance are primarily designed for budgetmonitoring purposes and are, therefore, not always particularly useful for macroeconomicanalysis or policy making purposes. The Ministry of Finance produces a "standard" set ofmonthly and quarterly data on revenues, detailed functional and economic classificationof expenditure for the individual state and local governments' budgets, and theconsolidated budget for its own analytical purposes. These monthly and quarterly reportscontain cumulative information on budget execution during the period (though thequarterly reports provide additional information on commitments and arrears). TheNational Social Insurance House compiles cumulative year-to-date data on the executionof the SSI budget at the end of every quarter and at the end of each fiscal year.
3.74 The approved annual state budget, the local governments' budgets, and theconsolidated budget are published in Monitorul Oficial (the Official Gazette)53 and thelocal press, and are also posted on the government web-site. The Statistics Departmentdisseminates budget execution data for all levels of government operations through itsofficial publications on a monthly and quarterly basis. The cumulative quarterly fiscaldata provided by the Ministry of Finance are published in the Statistics Department'squarterly bulletin on Social-Economic Situation in Moldova, while annual cumulativefiscal data are published in the annual Statistical Bulletin. The published data arecompiled in tables showing the consolidated budget's revenue by main category,expenditures by main function, net lending, the deficit/surplus, and total domestic andforeign financing. The Ministry of Finance also disseminates the data directly through themedia, providing monthly fiscal data on tax collection, budget executions, and financingof the state and local government budgets.
5 Arrears are calculated as arrears at the beginning of the period, plus commitments during the period, less payments(in cash, In kind, and through netting operations) dunng the period.
53 The multi-volume Annual Report on budget execution for these levels of government is only for intemal
Government use.
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Internal Audit
3.75 The audit of public funds is a relatively new concept for the FSU countries. Atpresent, the bodies with responsibilities in this area are charged under legislation, startingwith the Constitution, to undertake "control" of the use of public funds rather than audit.Understanding of the concept of public audit as well as of the purposes anddifferentiation between internal and external audits appears also to be at an early stage ofdevelopment.
3.76 The State Tax Inspectorate and the Department of Financial Revision and Controlin the Ministry of Finance are responsible for implementing financial and administrativecontrol over, respectively, budget revenues and expenditures.
3.77 However, a number of changes are planned with regard to the configuration of thebodies responsible for internal financial control. The Department of Financial Revisionand Control attached to the Ministry of Finance is to undergo a reorganization, and aninternal audit unit was recently established within the Treasury Department of theMinistry of Finance; similar units were also created within the Tax Inspectorate, CustomsDepartment and the National Social Insurance House. The Department of FinancialRevision and Control was originally established in 1991 and charged with ensuring thatbudgetary resources are used in compliance with the budget law. The checks undertakenby the Department focused on cases of misconduct (without reviewing procurementprocesses or management of personnel) and on verifying whether cost-savings measuresdesigned to reduce budget outlays in areas such as energy consumption were actuallyachieved. It appears though that sanctions in cases of misconduct and mismanagementwere not felt to be particularly effective. The initial assessment under the CFAA is that ifthis Department is to serve as the basis for the government's internal audit function thenmajor changes would be required and significant capacity building would be essential.
External Audit
3.78 The responsibility for external financial review of the government's revenues andexpenditures falls under the jurisdiction of the Chamber of Accounts (CoA), whichreports directly to Parliament. The CoA was established in 1994 to control managementof public resources so as to ensure maximum efficiency in the use of public money and tocontrol public property. The CoA scrutinizes the end-of-year accounts of the Governmentand prepares an annual report submitted to Parliament. In practice, the CoA has not yetbeen able to develop into an independent, credible and effective modem supreme auditinstitution. As confirmed by the recent CFAA mission, significant institutionalstrengthening is still required.
D. INTERGOVERNMENTAL FISCAL RELATIONS
3.79 A large share of general government expenditures, especially in areas thatimpinge directly on the poor, are under the jurisdiction of local authorities. In 2001, statebudget expenditures (net of transfers to local governments and the SSI budget) accountedfor 39 percent of total actual general government spending, while local government
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budget expenditures accounted for 31 percent. The efficiency of budget relations betweenthe state and local budgets, together with the quality of expenditure management by thelocal authorities, is therefore an important deterninant of the overall efficiency of publicresource management in Moldova.
3.80 The efficiency of public spending at the local level in Moldova is affected by a
broad range of factors. In 1999, the government initiated a far reaching decentralizationreform that progressed more slowly than had been expected. In 2002, Parliament votedfor major amendments to the 1999 legal framework, partially reversing the reform. Onlypart of those amendments, however, were validated later by the Constitutional Court. Theoverall direction with regard to the decentralization process remains unclear.
ExpendituDre Assignment
3.81 Moldova has two levels of subnational government-the districts (judets) and themunicipalities (primarias), with the latter subordinate to the former. The Government hasaltered this structure several times in recent years. The 1998 territorial reform reduced thenumber of districts. More recent legislation has allowed for an increase in the number ofmunicipalities
3.82 Subnational governments devote the majority of their revenues to social services.Data for 1997-2001 show 40 percent of spending allocated to education, 22 percent tohealth, and 4 percent to social welfare. The division of management responsibilitiesbetween the Government, districts and municipalities, is not well defined. Responsibilityfor setting policy, day-to-day management, and financing is not clearly fixed.
Revenue Assignment
3.83 Districts and municipalities derive a majority (70 percent) of their revenues fromspecific taxes collected by the central government: the corporate income tax, the VAT ondomestic sales and road taxes. In principle, local governments are to receive fixed sharesof each of these taxes on a derivation basis. In fact, during the budget preparationprocess, the expenditure needs of each jurisdiction are calculated. Estimates of revenuesfrom shared taxes (and other resources) are then made. If projected revenues exceedprojected expenditures, the tax sharing ratios of the municipality are reduced until the twomatch. If projected revenues fall short of projected expenditures, the difference isfinanced by a lump sum transfer from the central govermment.
3.84 This approach succeeds in reducing disparities in per capita revenues amongjurisdictions (compared to the levels that would result from distributing funds on aderivation basis). However, the calculation of expenditure needs and expected revenues issubject to extensive bargaining and negotiation. Revenue levels are thereforeunpredictable and are perceived to reflect political favoritism. This is particularly true atthe second stage of distribution-from districts to municipalities. It also seems to deprivelocal governments of any means to respond to demands for higher levels of local servicesor lower taxes. Since the majority of taxes are imposed at nationally uniform rates, localgovernments have little ability to increase (or decrease) local tax rates to reflect local
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priorities. The municipalities do in fact have control over the rate of the local propertytaxes and local fees and charges. But these account for a minor proportion of localrevenues at the present time.
E. THE ROAD AHEAD
Key Challenges
3.85 This review and assessment of the budget system suggests that the governmenthas been relatively more successful in strengthening fiscal discipline than in ensuring thatpublic expenditures conform to strategic priorities and are efficiently utilized. Withrespect to aggregate fiscal discipline, sustainability of the progress is not yet assured; andaggregate fiscal discipline is weakened by fragmentation in the budget and inadequateexternal auditing capacity
3.86 Expenditure allocation decisions across (and within) sectors do not reflectGovernment priorities. Expenditure cuts necessitated by shortfalls in revenue andincreasing debt service payments were made across the board. Within the social sectors,inadequate attention is paid to the relative contribution and effectiveness of differentprograms in terms of alleviating poverty, with social protection expenditures which targetthe poor and primary education and health care receiving insufficient priority and sharesof the budget allocations.
3.87 Allocative efficiency is also adversely affected by weak center of governmentdecision making and lack of strategic planning capacity within the Government. Within asector, allocation of resources is based on incremental budgeting, which encourages lineministries to demand more resources to implement a new program rather thanreallocating from within the old program. In addition, budget managers are not givenincentives to prioritize rigorously across their area of responsibility; and also lackadequate information on the cost effectiveness and on outcomes when seeking todetermine the effectiveness of programs.
3.88 Both budgetary and non-budgetary arrangements fail to promote the efficient useof scarce resources (especially in the social sectors), thereby adversely affectingoperational and technical efficiency. The budgetary institutional arrangements, includingnorm-based expenditure estimates, an input-control budget management approach,unpredictability of cash releases, and limited availability of equipment and technology,do not provide sufficient incentives for budget managers to use resources efficiently.Non-budgetary institutional arrangements, including the efficiency of the tax and customsadministration and human resource management policy, also contribute to limitedtechnical efficiency. Introduction of the elements of a medium-term expenditureframework into the budget preparation process reflects the Government's commitment toimprove the performance of its budget system. However, the Government needs to gobeyond the technical aspects of the medium-term macroeconomic and budget estimatesby emphasizing the strategic focus of medium-term resource planning. This includesestablishing a budget forum to ensure a systematic link between budgeting and theGovernment's strategic policy and priorities to foster greater allocative efficiency and
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linking budget inputs to outputs and outcomes to strengthen technical efficiency. Thiswill require significant enhancement of institutional capacities at all levels ofgovernment.
Recommendations
3.89 This section sets out for consideration by the Government a number of short-termand medium-term recommended actions designed to secure achievement of the followingobjectives: strengthening strategic prioritization and allocative efficiency in budgetformulation; strengthening aggregate fiscal discipline through improvingcomprehensiveness of budget coverage; improving fiscal reporting and budgettransparency; strengthening the internal and external accountability framework;enhancing the quality of macroeconomic forecasting; strengthening budget preparation;and strengthening budget execution.
3.90 Strengthening Strategic Prioritization and Alllocative Effneiency in BudgetFormuRlation. The key short-term recommendation suggested for consideration by thegovernment is to develop an Issues Paper and Budget Calendar for preparation of the2004-2006 MTEF. The 1996 Budget Law should also be amended to take account of keyfeatures of a strategic approach to budget management. The amendment should requireCabinet's approval of the BCP prior to budget preparation each year, starting with the2005 budget. The Cabinet discussion of the BCP would establish a forum whereGovernment strategic policy could be linked to budgeting.
3.91 The ongoing introduction of the MTEF elements could be strengthened so thatthey are fully integrated into the budget process and the BCP's analysis provides thedirection for budget formulation. This could be supported through developing the BCP atthe onset of the budget cycle and improving its analytical content. This earlydevelopment of the BCP would allow a more realistic budget ceiling to be set. In orderfor it to be a more analytical and useful document for budget decision makers, the BCPshould entail sensitivity analysis that outlines policy impacts, associated fiscal risks, andalternative options of expenditure policy initiatives to provide information for policymakers.54 This would change the Ministry of Finance's role from input control to
ensuring effective budget allocation (in line with Government priorities and programeffectiveness) and monitoring of budget outcomes.
3.92 It is suggested also that the government develop and approve a medium-term planfor strengthening the MTEF framework, focusing particularly on the determination of theaggregate resource envelope; and on effective prioritization of expenditure items acrossand within sectors. For the 2004 BCP, it is suggested that sectoral expenditure strategiesfor each of education, health and social protection be prepared and attached to the BCP.
3.93 Successfiil gradual introduction of the MTEF will require complementarymeasures to strengthen the institutional capacities in the Ministry of Finance and line
54 The Ministry of Finance benefited from World Bank technical assistance in introducing the MTEF elements in the
budget process for the 2003 Budget, and technical assistance from DFID was secured to support preparation of the
2004-2006 MTEF.
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ministries over the medium term. The Ministry of Finance will need to strengthen itscapacity in macroeconomic and fiscal analysis in its respective divisions within theBudget Synthesis Department; in project analysis and cost-benefit analysis for the CapitalInvestment Division; and in financial analysis for expenditure planning divisions. TheDepartments of Policy and Budget in line ministries will need to strengthen their capacityin policy analysis, program development, and financial analysis
3.94 Strengthening Aggregate Fiscal Discipline Through ImprovingComprehensiveness of Budget Coverage. Strengthening aggregate fiscal discipline willrequire improving budget comprehensiveness. Key elements in the short term includeconsidering the social insurance budget together with the state and local governments'budgets as part of the comprehensive budget framework at the strategic budget planningphase; including foreign financing in project loan spending; integrating capitalexpenditures in the preparation of the annual budget proposal; and, for the medium term,including contingent liabilities related to arrears of energy enterprises in the fiscalframework for budgeting. The medium-term target could be for a Consolidated GeneralGovernment Budget, including the state budget, local governments' budgets, the StateSocial Insurance Budget, and all extra-budgetary funds, to be developed and used as thebasis for the BCP from the 2005 budget onwards.
3.95 Improving Fiscal Reporting and Budget Transparency. The suggestedmedium-term target is for budget execution data for state and all local governments'budgets on both commitments and cash basis to be prepared and published in a timelymanner. The provision of accurate and timely information to support effective andinformed policy decision making is key. It is also recommended that timely andcomprehensive reports on execution of the State Social Insurance budget based oneconomic and functional classifications, and which also present the state social insurancebudget together with the state and local government budgets, should also be produced.
3.96 Strengthening Internal and External Accountability Framework. Suggestedshort-term recommendations are to reorganize the Ministry of Finance's internal auditsystem so as to ensure increased independence and capacity; and to seek to mobilizedonor support for institution building both for the newly-established Internal Audit Unitof the Ministry of Finance and also of the Chamber of Accounts. The medium-term targetcould be for both the internal audit function and the Chamber of Accounts to haveobjectives, responsibilities, functions, capacities and accountability frameworks in linewith those required for modem internal audit and external supreme audit institutions, andin line with the recommendations from the CFAA.
3.97 Enhancing the Quality of Macroeconomic Forecasting. It is suggested that theGovernment should seek to improve the macro-fiscal framework and to securestrengthened institutional capacity in, and institutional arrangements for, macroeconomicanalysis. As a medium-term target, it is suggested that a comprehensive macroeconomicforecasting model be developed and used initially during preparation of the 2005 budget.
3.98 Strengthening Budget Preparation. The budget process could be streamlinedby starting the budget process earlier and initiating budget preparation at the beginning of
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the year (January). Proposed revisions to the budget calendar, however, should bereviewed carefully to ensure they are realistic and do not place further demands on thelimited capacity of the Ministry of Finance and line ministries at a time when otherbudget-related reforms are being implemented.
3.99 Revenue projection methodologies could also be reviewed with the purpose ofdeveloping more reliable and robust tools for simulating revenue scenarios for all parts ofthe budget. These efforts would need to be supplemented with well-designed internalcapacity-building efforts.
3.100 The Ministry of Finance should continue its efforts to gradually shift away fromusing norm-based budget estimates to approaches based on demand-based inputs,program costing, and monitoring of outputs and outcomes. This approach would enablebudget managers in line ministries to make tradeoffs among sectoral programs, givenlimited resources, based on sector strategies, cost effectiveness, and outputs andoutcomes. It would also allow budget managers to monitor the outcome of a program toensure technical efficiency of resource deployment. Budget proposals should outline theinputs required for a program activity and identify anticipated outputs and outcomes, inorder to facilitate monitoring of budget performance at the levels of allocative andtechnical efficiency. In the short term, attention should continue to be devoted to buildingcapacity in the area of performance and program budgeting, with the pilots in education,and health continued and developed further for the 2004 budget.
3.101 Strengthening Budget Execution. To improve accountability and transparencyin the use of public resources, the Government needs to extend the coverage andeffectiveness of expenditure control systems and processes in order to limit spendingwithin available resources and to minimize the generation of new expenditure arrears. Awell functioning treasury system serving local governments' budgets should play animportant role in enhancing the control of commitments. A medium-term target would beto have in place a borrowing plan consistent with real cash inflows and outflows.
3.102 Strengthening public debt management should be a priority area to ensure leastcost financing of the fiscal deficit in the short run and fiscal sustainability of debt serviceover the medium and long term. The Government's medium-term target should focus onthe development of a comprehensive public debt strategy and ensuring prudentimplementation of the strategy.
3.103 The Ministry of Finance should further strengthen the budget execution process,in particular cash flow planning and management to ensure the predictability of cashrelease. Realistic cash planning could begin with a more realistic forecast of cash inflowsand outflows prepared in close coordination with other departments (NBM, Budget, Tax,Customs, and Debt Departments). In addition, a borrowing plan consistent with forecastsof cash inflows and outflows should be prepared as a part of a cash plan. The plan shouldbe updated weekly and monthly, and it should be communicated to line ministries toprovide predictability of funding and allow them to effectively plan their spending.
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F. CONCLUSION
3.104 This chapter has sought to identify a reform agenda for the deep institutionalreforms required in the area of public expenditure management, particularly strategicprioritization and allocative efficiency in budget formulation and aggregate fiscaldiscipline and technical efficiency in budget execution. In the next chapter, the parallelrequired reforms in the areas of center of government decision-making and strengtheningoperational efficiency of the public administration are identified for consideration by theGovernment.
4. BUf WLD NG CAPACf TY FOR U1CRE 1 MC1ASEfIDGOVEIRNMENT EhFECT¶VENE§§
4.1 In Chapter 3 an assessment of the effectiveness of Moldova's budgetary system atthe levels of aggregate fiscal discipline, allocative efficiency, and technical efficiencywas presented. Recommendations were put forward for consideration by the Governmentof Moldova in order to: (i) strengthen budget management through improvingcomprehensiveness of budget coverage and improving fiscal reporting and budgettransparency; (ii) improve the budget process through strengthening execution processes;and (iii) accelerate the adoption of the MTEF as an integrating mechanism to promotebetter allocative efficiency. However, this mixture of institutional and technical changesin budget management itself cannot be implemented effectively without theimplementation also of deep institutional changes to significantly enhance the capacity ofMoldova's center of government decision-making system; radically streamlinegovernment structures; fundamentally shift incentives and begin radical pay reform; andrebuild the civil service system as a merit-based and depoliticized professional careercivil service. These are the challenges examined in this chapter.
4.2 Moldova is at the beginning of a complex and long-term process to rebuild itspublic administration at all levels of government. While most OECD countries have beenpursuing active public sector reform programs over the last ten to fifteen years (and insome of these countries, radical reforms have indeed been developed and implementedover decades), the challenge for Moldova at the start of this process is particularly severegiven the weakness of the existing public service and the Government's limited ability tomake the required investments to support the development and implementation ofreforms.
4.3 Data from the 1999 BEEPS Enterprise Survey shows that from the perspective ofthe enterprise sector in Moldova, less than 10 percent of enterprise managers surveyedfelt the Government in Moldova was helpful to their business (Figure 4.1). At the sametime, they had to spend almost 15 percent of their time in dealings with Governmentofficials, compared to an FSU average of 6 percent (Figure 4.2). Sixty percent ofMoldovan enterprise managers surveyed felt corruption was problematic for the operationand growth of their business. Less than 10 percent gave a positive evaluation of thequality of central Government services.
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Figure 4.1: Private Sector View of the Helpfulness of Government
How helpful do you find central and local governments
toward businesses like yours?
40%
30%
0~~~~~g CL 20%
tz 10%
b~o 0%
o, Moldova Romania Russia Latvia Poland Ukraine Armenia
ii Central Government Local Government
Source: World BankIEBRD Business Enterpnse Survey (BEEPS - 1999).
Figure 4.2: Management Time Spent with Government Officials(CIS Average is 6 Percent)
Wigt patWag ofarmTfft tttr pe r is spot indm*g with vanimt officals about Ut aplicafion and
iuraiionoflas andihcris?
2 0/o
15%/
20°/aUW
Midcua Romnia Rusia Lalvia Pbland lUaine Amiia
Source: World Bank/EBRD Business Enterprise Survey (BEEPS - 1999)
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4.4 Unusually perhaps, the overall size of the central civil service and of localgovernment administrations in Moldova is not a key problem. These are comparativelysmall by international standards, although there are still some areas of over-staffing andmany areas where significant efficiency, effectiveness and cost-effectiveness gains couldbe achieved.
A. PRESENT POSIiTIION
Cennter of Government Decision-Making
4.5 This section presents an assessment of the functional and institutionalarrangements for center of government decision-making in Moldova against a set ofinternational benchmarks that seeks to summarize present practice in EU member states.
Benchmarks
4.6 The set of international benchmarks is set out in Box 4.1 below.
Box 4.1: Center of Government Decision-Making Benchmarks
A. Functional Arrangements at Center of Government:- Center of government demonstrates ability to manage the logistics of supporting Cabinet and Cabinet
committees.- Cabinet office restricts cabinet agenda to items of strategic significance, and avoids Cabinet agenda getting
clogged up with second-order issues, while ensuring that items of strategic significance are not kept fromconsideration by the cabinet.
- Center of govemnment contains capacity to subject proposed agenda items for Cabinet to rigorous scrutiny andevaluation.
- System is in place and operational for monitonng the timeliness and substantiveness of implementation ofCabinet decisions by ministries.
- Ministry of Finance provides full and timely reporting on actual expenditure against planned to Cabinet.
- Ministry of Finance is able to ensure that allocations required to implement agreed cabinet decisions arereflected in budget and that allocations in the budget are in fact reliably delivered to spending ministries.
- Ministry of Finance is able to provide alternative macroeconomic scenarios to Cabinet to illustrateimplications of varying policy and fiscal stances and provide context for evaluation of specific policy
proposals.
B. Institutional Arrangements for Making Decisions at Cabinet Level Binding on all Ministers:
- Cabinet decisions are taken in the context of detailed supporting information available on costs and benefitsand impact of proposals, including alternative options where appropriate.
- Cabinet takes strategic decisions between different policies and spending areas which are in line with overallgovemment program and reflect government pnonties.
- Cabinet takes decisions which can be contained within overall fiscaUresource constraints.- Cabinet office ensures mnisters have scope for giving real consideration to policy proposals and ensures that
full and appropriate consultation is undertaken.
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Functional Arrangements at Center of Government
4.7 In Moldova, the key central agencies supporting the Government's decision-making process are the State Chancellery, the Ministry of Economy and the Ministry ofFinance. The State Chancellery in Moldova does not currently play a sufficientlystrategic role. While it provides feedback on ministry proposals, assesses their legalimplications, participates in budget deliberations, attempts to coordinate policy acrossministries, manages a control system of line ministry actions, and meets withstakeholders to resolve contentious issues, it does not, as yet, play a strong role insupporting strategic prioritization. This can be illustrated by the fact that, at present, theCabinet receives many proposals which are presented without alternatives, do notpresent a consideration of the fiscal impact, do not reflect a real agreement between allconcerned ministries, and focus overly on short-term measures, not all of which may bealigned with the medium-term priorities as set out in the Government's overall program.
4.8 The State Chancellery could usefully assume a stronger role with respect tostrategic planning (assisting the Government with linking policy priorities to the medium-term expenditure framework), horizontal policy coordination, and policy analysis.Consideration could be given to depoliticizing the management positions within the StateChancellery, and perhaps the director's position, in tandem with broader efforts to createa professional depoliticized civil service. Introduction of the MTEF should give increasedprominence to the Ministry of Finance's role in supporting center of governmentdecision-making; and should lead to the State Chancellery and the Ministry of Financehaving to work more closely together on integrating strategic planning, development andmonitoring of implementation of the Government's work program, and strategicprioritization of policy and reform measures.
4.9 At present, Moldova does not have an effective system of Cabinet committees inplace. Such a system often allows for deeper discussion of alternative policy options,helps to improve the quality of final decisions; and allows Cabinet meetings to be morestreamlined and effective, thereby allowing the Cabinet to focus more on the achievementof the medium-tern objectives from the government work program. All OECD countriesnow use some form of Cabinet committee system.
Institutional Arrangements
4.10 Policy Management Capacity. The Public Sector Reform Strategy developed in2000 identified frequent changes of laws and regulations governing entrepreneurialactivity as a major impediment to the development of the private sector. In a recentsurvey, among seven transition countries (also including Armenia, Latvia, Poland,Romania, Russia, and Ukraine), Moldova rated the highest (over 90 percent) with respectto the percentage of businesses that considered policy instability/uncertainty to be aproblem.5 5
55 World Bank/EBRD Business Enterprise Survey (BEEPS - 1999).
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4.11 As can be seen from Figure 4.3 below, effective implementation of a complexpolicy reform depends on policy continuity being achieved over an extended period oftine: for a major policy reform in an OECD country, it can require four years to movefrom strategy development to the beginning of the reform implementation process.
Figure 4.3: Typical Policy Cycle for Complex Reform
develop framework secondary develop obtain hire staff,strategy legislation legislation programs budgets implement
1 year 2 years 3 years 4 years
4.12 The average duration of governments in Moldova since 1990 is around a year.Thus, to move from strategy to implementation for a major policy reform would require afully consistent approach to the development of a new policy together with continuity inkey staffing across the lifespan of four governments. So many changes of governmentand the associated political volatility as experienced in Moldova leads inevitably topolicy discontinuity. Given also the high levels of turnover experienced in Moldova atchange of government, with new staff also requiring training and orientation, it is clearthat it is likely to be extremely difficult for the Government of Moldova successfully tocarry through to implementation major policy initiatives. In some countries, acounterbalance to unpredictability at the political level is the stability of a depoliticizedprofessional civil service. However, the high degree of politicization in Moldova'spublic administration precludes its civil service from playing such a role.
4.13 Government Decision-Making Plrocesses anR Structures. The effectiveness ofMoldova's government decision-making process can be assessed at two levels: first, thestrategic level indicates how well the Government aligns policy priority-setting withresource allocation, especially as part of the annual budget process; second, the policydevelopment level assesses the quality of government deliberations on the detailedpolicy choices that are made on a week-to-week basis.
4.14 At the strategic level, a fundamental determinant of effective public sectormanagement is the capacity of governments to undertake effective strategic prioritization.This requires that governments integrate policy and budget deliberations, recognizing thatpolicy priorities need to be set within a realistic, medium-term fiscal framework. InMoldova, there are several key documents that reflect the Government's strategic policycommitments. These include:
o Government Program
o Activity Program of the Government
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* Government Decision on Implementing the Activity Program of Government
* Budget Concept Paper
* Broad Policy Strategies (e.g., Interim PRSP).
4.15 Only one of the above strategic documents (Budget Concept Paper) attempts tointegrate policy and fiscal planning (see Chapter 3). The most recent Government
Program (from the 2001 election) and the related Government Activity Program outlinethe major policy commitments and the ensuing Government Decision and assignsministerial responsibility and deadlines for each commitment. There is, however, a
flmdamental disconnect between the list of policy commitments in the Activity Programand the fiscal planning that takes place as part of the budget. The initiatives for each
policy sector are not framed within any overarching policy objectives. Expected policyoutcomes are not identified. Although one section of the Activity Program does set out
macroeconomic assumptions (including targets for growth, inflation, deficit reduction,and current account deficit), there is no analysis of how these targets will be achieved or
of their relationship to the numerous economic initiatives listed elsewhere in thedocument. In the subsequent decision designed to secure the implementation of theActivity Program, 189 commitments are listed, but none of these are costed. Most of
these would have some resource implications, and several would have significant fiscalimplications.5 6 - -
4.16 At the policy development level, the primary decision-making forum is theweekly Government meeting. Few explicit standards exist with respect to the quality of
analysis that needs to be reflected in proposals (usually draft legislation) submitted to theGovernment meeting. As a result, full consideration of policy options and of the fiscal
and policy impacts of the recommended option often does not take place. Some brokeringand coordination of policy items between line ministries does occur through the Deputy
Prime Ministers, who are responsible for broad policy sectors (for example, economic,social). In addition, ministerial sub-committees do meet to deal with issues that may notbe reviewed at the weekly Government meeting. However, these structures do not
address the need to provide the Prime Minister and Ministers with a sufficiently effectiveforum for ensuring meaningful consideration of major policy items before their
consideration at the Government meeting.
Civil Service Management
4.17 This section assesses the present position in Moldova in the area of civil servicemanagement against benchmarks derived from present practice in EU member states.
56 For example, the concessional lending program for agncultural producers; commitments to provide sufficient
funding to maintain the minimum level of healthcare, mandatory medical insurance; to increase the scope of free higher
education; to provide for continuous growth of budget allocations in education; to provide for an indexing mechanism
for wages and pensions; to reduce the gap between the minimum wage and the subsistence level; to correlate the family
allowance with the average wage, etc.
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Benchmarks
4.18 The set of international benchmarks in this area is set out in Box 4.2 below.
Box 4.2: Civil Service Management Benchmarks
A. Legal and Ethical Framework- Specific legislation governing the civil service, with subsidiary legislation and/or regulation that
elaborates rules/procedures/systems for personnel management is in place.- Behavior of civil servants and political appointees is governed by a Code of Conduct.- Merit-based rules for civil service management are established in law and are enforced.- Scope of the civil service is clearly defined.- Civil service political neutrality is provided for and is respected in practice.- Civil service operations and policies are transparent, with statutory rights of access for outside
parties to civil service standards, performance targets, and actual performance.
B. Institutional Framework- Effective, dedicated institutions for civil service policy, management and oversight with clearly
established legal status are set up and fully operational.- Accountability and recourse mechanisms for citizens, employees, the legislature and the executive
are in place and operating effectively.
C. Pay and Employment Policy- Numbers of public servants and of civil servants are in line with international and regional best
practice and needs.- Civil service wage bill is affordable and contained within overall fiscal framework.- Remuneration is sufficiently competitive to recruit, retain and motivate sufficient qualified staff at
all levels.- Compensation system is simple, monetized and transparent, with rule and market-based approaches
for determining actual compensation.- Establishment control system is in place and linked to computerized payroll and personnel
information system to provide adequate budget control of personnel expenditure.
Institutional Framework
4.19 Civil Service Human Resource Management. The Personnel Policy Division(PPD), now part of the State Chancellery but until recently reporting directly to theGovernment, has the lead responsibility for development and promulgation of personnelpolicy across government. In practice, the division has encountered difficulties inimplementing its role and has not been able to assume a strategic role in government-wide human resources management or to exercise any effective authority over ministrypersonnel departments. PPD was successful in developing a human resource managementinformation system, but this was never implemented across the whole of government.
4.20 At the ministry level, the Single Regulation of the Personnel Service (1998)delineates the responsibilities for personnel services in line ministries and agencies.These responsibilities cover a wide range of human resources functions, including
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participating in restructuring decisions; preparing 5-year staffing plans; advising on
developmental assignments, recruitment and promotions; and organizing training.Implementation of this regulation varies widely among ministries. Ministries with well-
managed personnel sections appear able to provide effective leadership in human
resources management. In other ministries, however, the personnel function remains
exclusively administrative.
4.21 Structure of Government. The issue of whether Moldova's current array of
government functions and structures is appropriate needs to be linked to the related
questions of whether they are affordable; whether (and how well) they support the
Government's policy priorities; and to what extent they provide value for money. In
seeking to tackle such questions, most advanced transition countries have initiated
restructuring programs. Many of these have been based upon a program of functional
reviews of ministries and other government bodies. The term "functional review" can
cover a wide ran e of approaches to reshaping government. As observed in Manning and
Parison (2001),5 many functional reviews have failed to meet expectations. Complex
government restructuring initiatives are beyond the capacity of the Moldovan civil
service at present. A gradual implementation pace will need to be maintained that links
functional reviews to the MTEF and which gives initial priority within the functional
review program to those areas that support the Government's social and economic policy
priorities.
4.22 Central Government Structure. Although there is no general optimal number of
ministries, OECD countries have over recent years had an average of twelve to fifteen
ministries (and members of Cabinet). This average has been reasonably stable over recent
years. The more noteworthy trend has been for line ministries to become much smaller in
size. The trend among transition countries has been towards consolidation. At
independence, Moldova had sixteen ministries, rising to twenty by 1993. In 2001, the
number of ministries, as shown in Table 4.1 below, stood at fifteen.
Table 4.1: Change in the Number of Central Government Agencies in Moldova since 1985
Ministries Departments/State TotalCommittees
1985 30 14 44
1989 15 17 32
1991 16 13 29
1992/3 20 8 28
1997/8 17 8 25
1999/2000 14 6 z 20
2001 15 13 26
OECD average 12-15
57 Manning and Panson identify five broad types of functional reviews: pure policy/program, pure efficiency,
upstream, intermediate, and downstream. The typology looks at the organizational breadth of the review, its dnvers
and objectives, its linkages to the budget, and the way efficiency versus effectiveness are addressed as the key variables
in determining which type applies
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4.23 The Government also contains several departments as well as the StateChancellery. While the overall number of ministries in Moldova seems in line withOECD and regional practice, a number of concerns remain: duplication of functions;provision of unnecessary or low priority functions; existence of priorities in thegovernment work program which are not appropriately resourced; presence of remainingcommercial activities; and issues concerning the allocation of responsibilities andfunctions between levels of government.
4.24 Finally, there is also a need to rebuild line ministries as smaller units which focuson policy analysis and development and on monitoring and evaluation, for which theprime client group is politicians. This implies a radical restructuring of existing lineministries (particularly sectoral line ministries).
Legal and Ethical Framework
4.25 The principal laws and regulations governing the management of the civil serviceinclude: Law on Civil Service (1995); Regulation on the Organization of Selection to FillVacancies in the Public Administration (1997); Single Regulation of the PersonnelService (1998); Direction for Personnel Policy within Government (1998). In terms ofethics, an oath of service is signed by all new public servants. The present Civil ServiceLaw does not provide as clear a legislative underpinning for a merit-based anddepoliticized professional civil service as is perhaps required. In addition, there is a needto address the issue of the public service ethos having severely eroded over recent years.This needs to be rebuilt and perhaps also underpinned with a Code of Conduct or Ethicsfor civil servants, together with regulation of conflicts of interest.
Pay and Employment Policy
4.26 Pay and Employment Numbers and Expendituires, 1990 to 2000. Whencompared to other transition countries, the total general civilian employment in Moldovaappears to be in the middle range. Table 4.2 ranks Moldova third out of eight transitioncountries in terms of the size of the civilian public workforce as a percentage of thepopulation.
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Table 4.2: Government Employmentas a Percentage of Population and Employment Levels (2000)
General Civilian Government Employment
Central SubnationalCountry Government Government Education Health Total Civilian
Moldova 120001 0.02% 0.03% 3.1% 1.6% 5.2%8 10 112 59 189
FYR Macedonia 2.1% 0.1% 1.0% 0.8% 4.0%
43 1 21 17 82
Hungary 1.5% 1.6% 2.4% 2.2% 7.6%
148 158 237 225 768
Lithuania 1.3% 0.5% 4.0% 2.5% 8.3%47 18 146 93 304
Poland 0.4% 0.3% 1.2% 0.9% 2.7%163 113 452 330 1,058
Romania 0.5% 0.5% 1.1% 0.6% 2.7%
114 114 239 141 608
Russian Federation 0.02% 0.7% 1.5% 1.3% 3.5%36 1067 2,169 1901 5,173
Slovenia 1.4% 0.2% 1.3% 0.9% 3.7%28 3 25 18 71
Australia 0.8% 2.0% 2.3% 1.5% 6.6%
150 389 427 276 1,242
Canada 1.1% 2.0% 2.7% 2.3% 8.1%331 622 814 708 2,475
Sweden 2.3% 9.4% 1.3% 2.4% 15.4%204 832 113 215 1,364
United Kingdom 3.1% 3.4% 1.4% 1.6% 9.5%
1,804.0 1,989 813.0 968.0 5,574
United States 1.0% 5.8% 3.3% 0.5% 10.6%2,634 15,812 9,011 1,256 28,713
Notes: Government emnployment figures are from the World Bank's updated database for An International
Statistical survey of Government Employment and Wages and refer to the mid to late 1990s. Individual data
for a given country may not be for the same year. Total civilian employment is the sum of data in this
table, and may differ from employment totals for any given year. Population figures refer to 1999 and are
from the World Bank Live Database. Some discrepancies may arise due to the use of multiple sources.
Police employment is excluded.
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Figure 4.4: General Civilian Government Employmentas a Percentage of Population
10 8
6-
2-
Moldova CIS Baltic Hungary Bulgana CEE OECDaverage countries average average
* Central Govemnrnt O Local Govemrnent E Education U Health
Source: As for Table 4.2.
4.27 As shown in Figure 4.4,58 the most striking characteristic of public sectoremployment in Moldova compared to other transition economies is its low number ofstate administration employees relative to total population, both at central governmentand local government levels. There are relatively small administrative staffs in ministriesin Chisinau, with the majority of central government employees working indeconcentrated units of the tax inspectorate, customs, and statistics. Although centralgovernment staffing needs to be closely scrutinized in terms of its effectiveness andcapacity, the greater challenge is to rebuild capacity so as to support timely, effective andcost-effective implementation of the Government's work program.
4.28 General civilian government employment in Moldova has been decliningthroughout the second half of the 1990s, with the trend significantly accelerating after1997 (see Table 4.3). In 2000, total civilian employment dropped by almost 20 percent.State administration employment has been reasonably stable, while significant reductionshave been made in education and health employment. This decline arose mainly out of:(i) health sector reform accompanied by health facilities closing down and dismissal ofpersonnel; (ii) fiscal constraints leading to enforced downsizing; (iii) outflow ofspecialists due to low pay, particularly in the education and health sectors. Table 4.4presents the average monthly salaries for government employees working in the stateadministration, education and health. While the salary of employees working in the stateadministration increased in nominal terms about 2.5 times over the last 3 years, salaries inthe social sectors registered a relatively modest rise of 35 to 40 percent. As a result, in2000, the average salary in the education and health sectors was almost four times lowerthan that in the state administration. At the same time, due to inflation and local currencydevaluation, salaries in education and health had deteriorated significantly in real terms.
58 CEE includes all the former socialist countries of East and South Europe, exclusive of Baltic countries.
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Table 4.3: Health, Education and Public Administration Employment, 1997-2000
Average Average1997 1998 1999 2000 Annual Annual
Growth Rate Growth Rate'97 '94
in thousands in percentGeneral Civilian' 275.4 253.4 235.0 190.4 -11.6 n.a.
Health and Social Protection 89.4 83.5 75.4 62.0 -11.5 -2.1
Education, Culture and Sport 167.1 151.0 141.8 110.9 -12.8 -2.7
Public Adminstration 18.9 18.9 17.7 17.6 -2.4 n.a.
a Excludes power structures, police, judiciary.Note: End year data.Source: Mmistry of Finance and the Department of Statistics for pre-1997 data only.
Table 4:4: Civilian Government Wages(Monthly Average)
1998 1999 2000
in MDL
Administration 310 497 767
Central ministries 435 667 937
Decentralized units and agencies 240 371 755
Local administration 325 545 756
Education (excl. administration) 144 156 196
Health (excl. administration 135 154 189
in USD
Administration 58 47 62
Central ministries 81 63 75
Decentralized units and agencies 45 35 61
Local administration 60 52 61
Education (excl. administration) 27 15 16
Health (excl. administration) 25 15 15
Source: Ministry of Finance.
4.29 Moldova's level of public employment in the social sectors is generally
comparable to that of the other transition countries. After a period of decline, in 2000,
employment in the health sector reached a level comparable to that in OECD and CEE
countries and indeed slightly lower than in other CIS countries. Employment in education
on the other hand is somewhat higher than in OECD and CEE countries, but lower than
in other CIS countries. Moldova tends to have comparatively too many support staff and
not enough professional staff in these key sectors.
4.30 High staff turnover remains a serious problem for a number of Moldovan central
government ministries and agencies. Although low salaries relative to those paid by some
segments of the private sector is one of the factors inducing turnover, the large
differences among ministries suggest that other issues may also play an important role.
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One possible explanation is the large difference in market demand for skills of employeesworking in different ministries. For example, the Ministry of Health has enjoyed verylow turnover rates, basically limited to staff retiring, while turnover at the Ministries ofEconomy, Finance, and Foreign Affairs is significantly higher. It seems that ofteninstances of high turnover can be accounted for primarily by staffing changes madeconsequent to change of minister and change of government.
4.31 Compensation Policy. The most extensive regulation governing compensationpolicy in Moldova is the Government Decision 139, On Remuneration of Public Officersand Individuals Performing Technical Services to Ensure the Functioning of PublicAuthorities on the Basis of the Unified Tariff Grid (1998) and the 1999 amendment(Government Decision 766).
4.32 Beyond base salary, the regulation identifies several additional payments,including:
o increases of up to 80 percent to reward tasks of major importance or requiring ahigh degree of qualifications;
o bonus of up to 30 percent to offset additional work owing to the absence ofcolleagues;
o bonus of up to 1.5 times wages to be paid monthly or quarterly depending on joblevel;
o raises for qualification based on a multiple of the minimum salary (3.5 to 5.0 forthe nine classes of the three civil service ranks);
o 15 - 40 percent increase for work experience (five levels from 2 to 20+ years);and
o up to 25 percent language allowance, depending on how additional languages areused on the job.
4.33 In addition, at senior levels there are additional non-cash benefits such as cars thatsubstantially increase the overall value of the compensation package. The bonus andallowance payments, which can be several times the base salary, remain very high incomparison to other countries, where 10-20 percent of base salary is the norm. Forinstance, at grade level 23, the total pay is 4.6 times the base salary; at grade level 13, it is3.7 times base salary.
4.34 Compensation LeveRs. Like most transition countries, Moldova's compensationlevels in the public sector are very low when compared with compensation which couldbe obtained in the private sector or from working with an international organization.However, in Moldova's case the gaps are extreme (see Table 4.6 and Figure 4.5). Atsenior management levels, an equivalent job at the lower end of the market (domesticprivate sector) will pay more than six times the civil service salary (Grant, 2000). Thekey conclusion appears to be that civil servants in Moldova are underpaid compared tothe private sector at all levels; but that the middle management and senior managementlevels are extremely comparatively underpaid (not surprising given that the recruitment
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and retention problems appear particularly acute at management levels, as well as for
some professional skill areas). Not surprisingly, in the recent public officials survey(2000), low salaries were cited as both the main cause of turnover (88.2 percent) and a
leading cause of corruption (56.2 percent).
Figure 4.5: Comparison of Civil Service and Private Sector Pay
20000
X 18000- 416000-14000-
~~~ 12000 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ -OC.S.Salary
E 10000 /-0-25th 0/o-ile-1--.10 -<>--Median
X 8000-.1000" 00 n 75th %-ile
6000-
4000-
20000
13 14/15 16/17 17/18 18/19/20 21/22/23
Civil Service Job Category
Source: Grant, Hugh. 2000. "Moldova Salary Survey Report"..
Table 4.5: Comparison of Civil Service Pay Levels with Market Rates
Pay Total Market MarketCategory Salary Low* High*
Specialist Entry 13 458 779 1470
Specialist I year 14/15 548 1305 3545
Principal Specialist 16/17 635 2410 5570
Section Head 18/19 789 2948 9358
Head of Division 18/19/20 948 4090 14360
Head of Department 21/22/23 1199 6960 18653
"Market Low" represents lowest quartile (pnmarily domestic private sector), while "Market High" representshighest quartile (primarily international organizations)
Source: Grant, Hugh. 2000. "Moldova Salary Survey Report".
4.35 Salary Decompression. A recent salary survey undertaken for the Government
(Grant, 2000) that examined total average compensation for grade levels 13 to 23 (from
specialists up to First Deputy Minister) established that the decompression ratio is 2.76
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for total compensation (excluding non-monetary benefits) for grade levels 13 to 23.59 Bycomparison, OECD levels range from 6 to 9.0 This indicates that there is a very lowlevel of pay differentiation in Moldova between a junior specialist and a Deputy Minister.
Civil Service Hlunnman Resouirce Management
4.36 This section assesses the present position in Moldova in the area of civil servicehuman resource management against benchmarks derived from present practice in EUmember states.
Benchmarks
4.37 Box 4.3 summarizes international benchmarks in this area.
Box 4.3: Civil Service Human Resource Manmagemenmt Benchmarks
A. Human Resource Management- Planning capacity for reviewing and forecasting current and projected staff resource
requirements is operational.- Personnel information system is in place, integrated with budget, accounts, payroll and
establishment management systems.- Recruitment is undertaken on the basis of merit after a competitive process; promotion is based
on open and transparent merit-based procedures.- Performance appraisal system is operational with hierarchy of objectives (ministry to
department to work unit to individual employee), focused on performance improvements.
B. Training and Career Development- Training system provides for systematic identification of training needs.- Training budget is determined in light of affordability, intemational best practice comparators,
and training needs.
C. Accountability and Transparency- Decision-making is placed at lowest appropriate level to ensure effective management, service
delivery, and client responsiveness.- Explicit service delivery standards are determined and made available to citizens and reported to
legislature, together with assessment of performance against these targets.
Merit
4.38 OECD countries have long focused on the merit principle as a key cornerstone formaintaining effective and professional civil services. Meritocratic recruitment has beenshown also to be a key determinant of bureaucratic performance in the public sector in
59 The total pay at level 13 was 443.87 lei per month gross verus 1223 83 lei at level 23.
60 From World Bank 2000 Readyfor Europe. Public Administration in the EU Accession Context
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61developing countries. It is also clear that poorly performing public administrations can
62have far-reaching adverse economic impacts'
4.39 There appears to be a broad consensus within the stakeholder groups for public
sector reform in Moldova that merit needs to be re-established as a core defining
principle of the civil service, enshrined through appropriate provisions in amended civil
service legislation, protected through the setting up of an independent oversight body
such as a Civil Service Commission, and respected by all political parties, factions, and
groupings.
Depoliticization
4.40 The 2000 Public Sector Reform Strategy states that public administration should
be "client-oriented and based on merit, corresponding to the best European practices
depoliticized and corruption resistant." Notwithstanding these stated intentions, Moldova
has yet to take any substantive measures to constrain the practice of placing political
appointees deep into the civil service. Although it is not possible to establish precise
numbers, there is strong anecdotal evidence that Moldova's civil service is highly
politicized and that the level of political appointees varies significantly between
ministries. One ministry reported that as many as 30 percent of its employees are
removed at change of government, whereas another reported turnover of approximately 5
percent.
4.41 This echoes the range from the 2000 public officials survey where positive
responses to the assertion that elected officials often influence promotions and
employment ranged from 10 to 50 percent among ministries. In the same survey, 50.5
percent of the senior managers interviewed had been in their positions less than one year.
Interestingly, although the Civil Service Law makes specific provision for the hiring of
political appointees, this approach is seldom followed. It appears that the unchecked
ability for ministers to place appointees of their choice in positions that would normally
be career civil service posts has reduced incentives to use the legally sanctioned route.
4.42 This phenomenon relates directly to the policy continuity problem identified
earlier, where constant changes of government, accompanied by widespread turnover of
staff, damage the public administration's capacity to implement medium-term policy
reforms. Chronic politically-motivated turnover at senior levels not only raises the issue
of competence, but places new managers in jobs where their likely tenure will not outlast
the leaming curve for the new position. This problem is further aggravated when these
new managers are expected to leave their posts, without pay, to assist in the re-election
campaign of their minister once an election is called.
61 Rauch and Evans study (2000) reviewed data for 35 less developed countries and tested bureaucratic performance
against competitive salaries, intemal promotion and career stability, and mentocratic recruitment. This last factor was
found to be a statistically significant determinant of bureaucratic performance
62 See for example: Nizzo 1999.
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4.43 The apparent high level of politicization, and the negative consequences of thispractice on civil service performance, suggest that an enforceable framework that clearlydifferentiates political and administrative roles and designates those positions that will besubject to political appointment should be highlighted as a key priority area of publicadministration reform in Moldova.63 Given the ongoing high level of political volatility,serious consideration should be given to drawing the line at which the professional civilservice begins at the highest level possible (for example, the most senior post in theministry).
4.44 In choosing the best route to de-politicize its public administration, Moldova candraw upon the experiences of EU accession countries, all of which have implemented, orare in the process of implementing, a professional civil service. Key objectives must be tobuild a career public service, to provide for continuity on change of government and/orchange of minister, and to provide for clear, distinct, and enforceable differentiation inrecrujtment and human resource management arrangements for career civil servants asopposed to political appointees.
4.45 Even if an appropriate legal distinction is made between political appointees andprofessional public servants, compliance problems will arise unless a credibleorganizational framework can be established to exercise an oversight function. Althoughthe Personnel Policy Department has some very limited powers with respect to hearingappeals on recruitment issues, these are not much used in practice. Accordingly, anyefforts to create and enforce an appropriate legal distinction between political andadministrative levels must be accompanied by the creation of an effective oversightorganization that can enforce these provisions. The approach of setting up a body such asa Civil Service Commission is a common one, with senior, experienced, and generallycredible practitioners appointed as commissioners on a non-partisan basis. Clearly, inhighly politicized contexts and highly volatile political environments, the challenge ofpreserving the independence and credibility of such an oversight body is an extremelydifficult one.
Training and Career Develqopiment
4.46 The Civil Service Law identifies "upgrading the qualifications of civil serviceemployees" as one of the main tasks of public administration. A Government decision in1991/92 stipulated that 2 percent of each ministry's wage bill be allocated to training. Inpractice, however, budget constraints have significantly reduced the availability oftraining. Although accurate data do not exist on training expenditures, anecdotal evidenceindicates that this is a growing area of concern. Beyond the issue of the amount or cost ofactual training is the relevance of that training to the country's priorities. Currently, no
63 There is wide variety in terms of the level of politicization in OECD countres. At the higher end, the ratio ofpolitical to professional staff in the US is I to 400, while at the lower end, the ratio is I to 2000 in Sweden (Manningand Parison. 2001).
64 This would likely involve the creation of a state secretary position that would be part of the permanent civilservice (UK model). This would not preclude the minister from hiring political advisers (already permiitted under theexisting Civil Service Law) or from working out some mechanism for addressing situations where the minister-statesecretary relationship becomes dysfunctional.
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national or civil service training strategy or plan exists. A needs analysis of civil servicetraining needs has not been conducted.
Accountability and Transparency
4.47 The link between positive performance and effective accountability underpinsmodem systems of policy, financial, and human resource management in the public
sector. In Moldova's case, there are already extensive, albeit prescriptive target setting,tracking, and reporting systems in operation covering a wide range of inputs and outputs.In one respect, these are remnants of Soviet-style command and control planningsystems. They do, however, represent an existing process and a discipline that may be
constructively reshaped. The challenge will be to evolve a system that appropriatelybalances the need for stronger and publicly reported accountability for policy outcomeswith the need for sufficient flexibility to determine how best to achieve these outcomes at
the line ministry level.
4.48 The elaborate control system managed by the State Chancellery tracks hundredsof items for which line ministries are responsible. These items are drawn from numeroussources, including the Govemment's Action Program, Govemment decisions taken at theweekly Cabinet meeting, and budget execution. Regular reporting against these targets
occurs, and ministry performance against these targets may be raised during budgetdeliberations. At this point, the control system clearly over-prescribes ministry actionsand is not pitched at the outcome level. It does, nonetheless, provide a potential basis for
developing a more outcome-based policy monitoring system. This would dovetail withthe gradual introduction of the medium-term expenditure framework. It needs to be
recognized, though, that building strong accountability systems is a long-term
undertaking.
4.49 Because the control system is so detailed, its results can also often be used as the
basis for assessing individual performance. In fact, some ministries use these results as a
factor in determining the allocation of bonuses to individual employees. The frequency ofbonus distributions ranges from monthly to quarterly, depending on the nature of thebonus and how frequently ministry management meets.
4.50 Although employee performance contracts do not exist per se in Moldova, an
extensive system of attestation does operate whereby every three years, a ministry or
agency attestation committee is formed to review each employee's potential for
promotion. Individual performance is taken into account in making that determination.Job descriptions are in place for most positions.
4.51 Transparency has both intemal and extemal dimensions. Within government, it is
strengthened by the open and full provision of information to decision-makers.Extemally, it is supported through expanding the range and quality of information
available to the public. Civil society groups can play an important role in holding the
govenmment to account for its commitments, but will only be able to do so if they have
access to the necessary information (strategic goals, objectives, service standards and
expected results, budgets, and actual service, financial performance, and results).
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4.52 The gaps in information made available to decision-makers have been discussedearlier in this chapter. With respect to external access to information, Moldova has yet todevelop a tradition where civil society groups routinely participate in public policy. Incountries with weak institutional capacity, stimulating external pressures on the civilservice system to display more effective and appropriate behaviors and operations can beone of the most effective ways of accelerating change.
B . THE ROAD AHEAD
4.53 This section presents for the Government's consideration recommendations forpriority short- and medium-term actions in the area of public sector reform.
IKey ChaRlenges for the Government of Moldova
4.54 As Moldova initiates public sector reform, it needs to take into account thelinkages of public administration reform with several other key areas of reform,particularly public expenditure management reform, social sector reform, andanticorruption efforts. Capacity building must focus on those skills that will be mostneeded to ensure that the state plays a proactive and innovative role in fostering theconditions for private sector development and economic growth. Likewise, improvementsin administrative capacity in the social sector must support key priority reforms.
Short-Term Actions
4.55 The immediate challenge is to relaunch public sector reform. Additionally, it willbe important for the reform team to apply an early focus on functional reviews so as toidentify savings and resources which can be re-applied as investments in other reformareas (including pay reform).
Leadership and Overall Management of Public Sector Reform
4.56 It is essential that a signal be sent throughout the civil service that publicadministration reform is supported at the highest levels and represents a criticalgovernment priority. The immediate priority should be for the Government of Moldovato restart the public sector reform process through considering, amending as required, andthen formally approving the Public Sector Reform Strategy. This would includereconstituting the high-level Steering Committee for Public Sector Reform, led by thePrime Minister; together with the three component-level Working Groups on PublicAdministration Reform, Public/Private Sector Interface, and Public ExpenditureManagement.
4.57 The Steering Committee, based on the work of the three Working Groups, couldthen develop and submit to Government for formal approval a detailed and costed ActionPlan for Public Sector Reform. It would also be necessary to set up a Public SectorReform Unit, reporting directly to the Prime Minister and the Public Sector ReformSteering Committee, which would act as the policy secretariat and support unit to thePrime Minister and Steering Committee, and which would develop specific proposals andmonitor progress on implementation of the reforms. The Steering Committee would also
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need to draw up and have approved by Govemment a communications strategy and aninternal and extemal consultation strategy and program.
4.58 To support the process of monitoring and evaluation by the Government and byexternal stakeholders of the impact of and outcomes from the reform program, it wouldbe desirable from the outset of the reform process to have in place a set of monitoringindicators (including statistical and budget data, as well as results of public officialssurveys, enterprise surveys, and service delivery surveys of service users).
Center of Government Decision-Making
4.59 To strengthen the system of govemment decision-making, it is recommended thatconsideration be given to restructuring the State Chancellery into a non-politicalGovenmment Secretariat which would focus on strategic planning, policy analysis, andhorizontal policy coordination across the Cabinet of Ministers and the Governmentoverall. As a first step to achieving this, a functional review of the State Chancellerycould be undertaken using criteria and terms of reference drawn up by the Public SectorReforrn Steering Committee.
4.60 It could also be appropriate for the Public Sector Reform Steering Committee toset up an additional Working Group on Strategic Planning, drawing on members of boththe Public Administration Reform and Public Expenditure Management Working Groups.This could propose a methodology for introducing policy and fiscal impact assessment ofmajor policy proposals and for requiring mandatory costing, using fiscal impactassessment, of all policy proposals to be submitted to the Cabinet. All policy proposalssubmitted to Cabinet should provide answers to the following questions: what are theoptions; what are the costs of the options; what criteria are suggested for evaluating andranking the options; what are other countries doing; who are the winners and losers fromwhat is proposed; who will oppose the proposal and why; how will the public react andhow should the proposals be presented to the public; what intemal and extemalconsultation has taken place; and what will the recommended option really cost, both inthe short term and in the medium term.
4.61 This Working Group could also consider what changes are required to corelegislation (Budget Law, Law on Government) to institutionalize an integratedstrategic/fiscal planning process in the context of the MTEF. This Working Group couldalso draw up proposals for introducing a system of cabinet committees, to improve thequality of policy analysis and of inter-ministerial coordination, to strengthen policycontestability, and to reduce the overall load on Cabinet itself, thereby freeing Cabinet upto take a more strategic view on management of implementation of the overallGovernment work-program.
Civil Service Management
4.62 Legal and Ethical Framework. The main recommendations in this area are forthe Public Sector Reform Steering Committee and the Public Administration ReformWorking Group to undertake a fundamental review of the existing Civil Service Law and
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supporting legislation and regulations and to develop amendments designed to strengthenthe application of merit and depoliticization. This could include proposals to set up aCivil Service Commission to function as an independent, non-partisan oversight bodywith respect both to merit (open, external competitive recruitment and promotionstogether with an appeals process) and depoliticization. Approaches in this area couldinclude producing recommendations on measures to depoliticize the senior managementlevels of the civil service and to protect the mid and lower job levels from politically-motivated hiring or dismissal; revising the current legislated distinction between politicaland professional employees, so that senior ministry management positions, includingthose in the State Chancellery, are designated as professional, including possibleintroduction of the position of State Secretaries; and acting as the guardian of thedepolitization provisions of the revised law.
4.63 The revised law could be accompanied also by a Code of Ethics for civil servantsand provisions to define and enforce requirements and standards relating to conflict ofinterest for civil servants, and specifying appropriate political activity for different groupsof civil servants.
4.64 Structure of Government. The immediate priority in this area could be for thePublic Sector Reform Steering Committee to develop criteria for a comprehensiveprogram of functional reviews of Government overall and of individual ministries andother bodies within the structure of Government. Initial review priorities could be theState Chancellery, as discussed above, and also an integrated functional review ofGovernment economic ministries and agencies. Such a program would be designed to: (i)identify and eliminate non-core functions and services; (ii) provide for thecommercialization and potentially also privatization, of direct commercial servicespresently provided within Government structures; (iii) and support the process of re-orienting the role of line ministries on policy analysis and development, strategicplanning, management of those parts of the overall Government work-program fallingwithin their remit, and monitoring and evaluation.
4.65 Pay and Employment Policy. The most immediate priority could be for thePublic Sector Reform Steering Committee to develop a medium-term pay policy for thepublic sector. This would include developing a target pay position for the public sector ascompared to the private sector that would be monitored through a series of annualcomparative pay and benefits surveys. It would also entail developing a medium-targetdecompression ratio (the salary ratio of grade level 13 to grade level 23). The SteeringCommittee could also propose a medium-term target for monetization for pay andbenefits, with the target to be expressed as what percentage base pay should be of totalcash and non-cash pay and benefits. The first step toward the medium-term positionsidentified could also then be taken, both in terms of overall pay reform, and in terms ofincreasing the decompression ratio by a certain percentage for the next fiscal year (forexample, so that the decompression ratio for grade level 13 to grade level 23 would movefrom 1:2.76 to reach 1:3.5 by end 2003).
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Civil Service Human Resource Management
4.66 As well as reviewing the legislative underpinning for the merit principle, short-term approaches which could be considered to accelerate its application include: (i) theconsideration of the creation of a senior executive service, which would unite in a singleservice the higher grade officials from all bodies of central executive power; and (ii)generating merit-based competition within the system by making greater use ofcompetitive external recruitment, including the use of secondments from the privatesector, academia, judets and local government.
4.67 Immediate priorities for the Public Sector Reform Steering Committee and thePublic Administration Reform Working Group to consider in the area of training anddevelopment include: (i) proposals for a program for change management across thepublic administration as one of the building blocks to support the overall reform process;and (ii) designing a development strategy and program for senior and middle-levelmanagers within the system. An overall training strategy for strengthening skills withinthe civil service in areas such as human resource management, financial management,policy analysis, economics, IT, and legislative drafting would also be important forbuilding capacity to allow easier implementation of the overall reform program.
4.68 Immediate priorities for the Public Sector Reform Steering Committee and thePublic Administration Reform Working Group in the area of accountability andtransparency could be to move towards internal and external reporting of performanceagainst objectives. An approach toward this could include developing proposals for theintroduction of a scheme for performance management within the civil service based on ahierarchy of objectives being determined (at the level of Government overall, then for theindividual ministry within Government, then for the unit within the ministry, and finallyfor the individual civil servant of the work team within the unit). Such a scheme wouldseek also to provide performance data on the work of ministries and other bodies ofGovernment and to begin to seek to link such performance data with budget data, as afirst step to allowing more explicit assessment of efficiency and cost-effectiveness issues.
4.69 Service standards could be determined for a number of pilot ministries or otherbodies of Government, with the service standards (timescales, user fees and charges,contact details, appeals) then published, and provisions made to assess actualperformance against the standards and for monitoring reports of actual performanceagainst standards also to be published. The Steering Committee could also seek todevelop suggestions for new forms of consultation with, and participation of, privatesector business associations, NGOs, and individual citizens and service users in decision-making and service management (budget hearings, discussion of draft laws, formation ofuser groups and consultative bodies, as so on), and for developing freedom ofinformation entitlements for citizens. MIS systems at the center of Government couldalso be strengthened to enable the State Chancellery to monitor the implementation of theGovernment's work-program more effectively.
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Medium-Term Actions
Leadership and Overall Managemeng of Public Sectorz Reform
4.70 Medium-term recommendations in this area could include for the Govermment toprepare and publish an annual report on the work of the public service and central civilservice, and on the overall public service reform process activities and outcomes, togetherwith a presentation of the public sector reform monitoring indicators.
Center of Government Decision-Making
4.71 The next stage of actions in this area could be expected to include the actualrestructuring of the State Chancellery into a Government Secretariat; the strengthening ofthe Prime Minister's Office and the reassignment to the Prime Minister's Office ofpolitical functions previously exercised by the State Chancellery; and the launching of theagreed Cabinet Committees. A further priority area would be to seek to upgrade capacityin legal drafting (establishing standards, providing for improved success in recruitmentand retention of legal resources within the civil service, and ensuring compatibility ofnew laws and regulations with EU standards and acquis communautaire.) Managementinformation systems could be developed over the medium term to allow the StateChancellery more effectively to monitor the implementation of the government's work-program.
Civil Service Management
4.72 Priority medium-term recommendations could be to build on the short-termactions taken through: (i) completing the process of putting in place the primary andsecondary legislation and regulations to give the appropriate legislative underpinning forthe application of merit and depolitization; and (ii) creating the independent oversightbody, the Civil Service Commission, which would have the task of protecting andensuring the appropriate implementation of this legislative framework. Further measuresin the anticorruption area would be to strengthen the requirements for assets and earningsdeclarations by managerial-level civil servants and public servants at subnational levelsof government, and to launch a process to strengthen and codify administrativeprocedures to remove unnecessary requirements while also removing inappropriatediscretion from individual civil servants.
4.73 As regards the structure of Government, medium-term priorities would be tocomplete the application of the program of functional reviews to all central Governmentministries and other bodies of Government and proceed with implementation of therecommendations of such reviews, and to begin a similar process at the level of judetsand primarias.
4.74 Medium-term priority actions in the area of pay and employment would be toachieve the set of targets established by the Government for civil service pay positioncompared to the private sector, the decompression ratio, and base salary as a percentageof total cash and non-cash pay and benefits.
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Civil Service Human Resource Management
4.75 Medium-term actions in the area of merit could be the implementation of a seniorexecutive service and the broadening of the class of positions requiring competitiveexternal recruitment. For training and development, medium-term priority actions wouldbe to secure implementation and delivery of the strategies established earlier for changemanagement and management development, and also for training and retraining in keyskills areas as set out in the section on shorter recommendations above. In the area ofaccountability and transparency, medium-term priority actions would be: (i) theproduction and submission to Parliament of the first annual reports on the effectivenessof the public service overall; and (ii) broadening and deepening the process ofdetermining service standards and publishing the standards determined, together with theintroduction of processes and systems for monitoring actual performance and resultsagainst standards and for publishing such performance evaluations. The Chamber ofAccounts could also be developed to begin undertaking value for money/effectivenessaudits.
C. CONCLUSION
4.76 This chapter has set out for consideration by the Government of Moldova anumber of steps which can be taken to launch a major program of public sector reform.Taken together with the recommendations from Chapter 3 on strengthening aspects ofpublic expenditure management, implementation of this package of measures should helpcreate much greater capacity within the system to allow the Government to secureimplementation in an effective and cost-effective manner of the key priorities from theGovernment's work program, including in the social sectors of health, education, andsocial protection.
4.77 The main recommendations identified above and suggested for consideration bythe Government include: (i) launching a major program of public service reform; (ii)strengthening center of government decision-making through introduction of a system ofCabinet Committees and restructuring the State Chancellery into a non-politicalGovernment Secretariat; (iii) strengthening strategic prioritization in budget formulationthrough a structured and prioritized approach to developing and implementing theMedium-Term Expenditure framework (MTEF); (iv) strengthening the budget processthrough increasing budget coverage, deepening Treasury coverage, and putting in place astronger internal and external accountability framework; (v) strengthening civil servicemanagement through amending the Civil Service Law to secure the application of the keyprinciples of merit and depoliticization, and launching a program of functional reviews torationalize the structure of government; and (vi) sector-specific reforms in the socialsectors to accelerate education and social assistance reform while maintaining health andpension reform, and to rebalance intra-sectoral education and health expenditures furtherin favor of primary and basic secondary education and primary health care andemergency services. These recommendations are summarized in the detailed tableattached to the accompanying Executive Summary.
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4.78 While the reform agenda may appear somewhat daunting, the Government ofMoldova should nevertheless approach this agenda with reasonable optimism givenactions which it has already taken and which it plans to take. The ongoing work todevelop the full PRSP will provide an appropriate vehicle for the Government to makestrategic decisions about reform priorities for the short to medium term. Similarly, theongoing work to put in place an MTEF will provide the context to support efforts tostrengthen strategic prioritization in budget formulation, while it is also the case that theongoing program of budget reforms should help to deliver improvements in the efficiencyof resource utilization. Relaunching the Public Sector Reform Strategy and Programshould provide the mechanism for tackling the reforms identified for the civil service andpublic administration. Finally, health sector reforrn and pension reform are comparativelyadvanced and can be continued, while reforms of the education sector and of the socialassistance system could now be accelerated.
STATISTICAL ANNEXES
Table Al: Moldova - Key Economic Indicators
Actual PreliminaryIndicator 1996 1997 1998 1999 2000 2001
GDP (MDL million at current pnces) 7798 8917 9122 12322 16020 19052GDP (US$ million at current pnces) 1695 1930 1699 1171 1289 1481Real GDP growth (percent per year) -5.9 1.6 -6 5 -3 4 2.1 6 1GNP per capita (USS, Atlas method) 650 590 470 410 390 400
Merchandise Exports (FOB, US$ million) 823 890 644 475 477 569Merchandise Imports (FOB, US$ million) 1075 1238 1032 610 783 882
BoP Current Account Balance,% of GDP -11.1 -14 2 -19 7 -4.0 -9 4 -8 0
General Government Budget*, % of GDPTotal Revenue 35 9 39 8 390 32 0 33 0 31 3Total Expenditure 43 8 50 0 42.9 35 0 34.6 30 3Overall Balance (cash basis) -8.0 -10.2 -3.9 -2 9 -1 6 1 0Stock of Expenditure Arrears 123 76 12.0 90 5.2 47
DebtTotal debt outstanding and disbursed (TDO)**, US$ milliot 847 8 1082.9 1070.6 1024 8 1246 0 1225 9TDO/GDP 50 0 56 1 63 0 87 5 96 7 82 9
PncesInfation
Annual Average 23 5 11.8 7 7 39.3 31 3 9.8End ofPenod 15 1 11.1 182 43.8 18.5 64
Exchange ratesAnnual average (Lei/US$) 4 6 4.6 5.4 10 5 12 4 12.9At end year (Lei/US$) 4 7 4 7 8.3 11.6 12 4 13 1
Real Exchange Rate (1996 =100) 100 0 108 0 109 2 102 1 89 2 85 9
* Includes state budget, local budgets, state social insurance budget, extrabudgetary funds and resources, and excludes donorfinancing of investment projects** Includes public and publicly guaranteed debt, pnvate nonguaranteed, use of IMF credits and net short-term capital and excludesenergy arrears
Source. World Bank Live Database, and Ministry of Finance, Republic of Moldova
Table A2: Moldova -General Government Budget, 1997-2001 (executed, nt current prkces)
(MDL million)
1997 1998 1999 2000 2001
Total Revenues 3550 3560 3946 5280 5961
Tax Revenues 2209 2148 2266 2999 3338
Profit Tax 244 179 233 276 349
Income Tax 281 224 219 265 347
VAT 949 1124 940 1343 1497
Excises 401 375 445 659 681
External economic activity 127 109 231 231 234
Othertaxes 206 137 199 227 231
Non-Tax Revenues 490 497 583 806 749
of which ProfitTransferredbyNBM 131 188 160 387 229
Social Insurance Contnbutions 729 783 783 1008 1287
Extrabudgetary Revenues 122 132 202 334 440
Grants 0 0 112 132 147
By Economic Classiflcation
Total Expenditures 4456 3917 4308 5540 5777
Recurrent Expenditures 3467 2815 2950 3789 4240
Wages 793 647 746 990 1400
Goods and Services 846 582 535 655 964
Subsidies to Enterprises 280 322 374 343 256
Social Payments/Transfers to Persons 1155 987 966 1426 1534
Other Transfers 87 13 19 27 52
Other Expenditures 306 264 311 347 35
Interest Payments 427 503 907 1041 813
External 167 182 441 436 452
Domestic 261 321 467 604 361
Capital Expenditures 437 454 318 464 376
Net Lending 30 30 -44 -32 -17
Extabudgetary expenditures 95 115 176 279 365
By Functional Classificadon
Total Expenditures 4456 3917 4308 5540 5777
State Secunty and General Services 504 438 548 664 803
General Public Services 128 133 201 253 325
External activities 39 35 55 67 74
Defence 77 56 63 63 75
Judicial autonties 30 21 28 32 37
Public Order and Safety 230 193 200 250 292
Social Expenditures 2525 2078 2089 2734 2968
Education 822 585 551 683 868
Health 497 357 320 446 515
Social Protection 1207 1136 1218 1605 1585
Recreation, Culture and Religion 66 61 59 80 88
Science 34 25 27 27 32
Economic Expenditures 271 194 199 250 297
Fuel and Energy 37 4 32 13 4
Agriculture, Forestry, Fishing & Hunting 69 52 60 73 59
Environment Protection 7 5 6 8 9
Manufactunng & Construction 2 2 3 5 6
Transportation and Communications 96 74 55 99 97
Communal Services 58 52 29 37 106
Other Economic 3 4 15 17 16
Completing State Reserves I 1 2 2 2
Other Expenditures 66 19 28 32 47
Interest Payments 427 503 907 1040 813
Extemal 167 182 441 436 453
Domestic 261 321 467 604 361
Capital Expenditures 437 454 318 464 378
Extrabudgetary Expenditures 95 115 176 279 365
Net Lending 30 30 -44 -32 -17
Fiscal Balance (Cash) -906 -357 -362 -262 185
Source: Ministry of Finance, Republic of Moldova
Table A3: Moldova - General Government Budget, 1997-2001 (executed, at 1997 prices)
(in percent of the base year)
1997 1998 1999 2000 2001
Total Revenues 100 93.1 74.1 75.5 77.6Tax Revenues 100 90 3 68 4 68 9 69 9Profit Tax 100 67.9 63 7 57 3 66 0Income Tax 100 74 0 51 9 47 8 57 1VAT 100 110.0 66.0 71 8 72 9Excises 100 86.7 73.9 83 3 78 5Extemal economic activity 100 79.7 120.7 91 9 85 0Othertaxes 100 62 0 64 3 55.9 51 8
Non-Tax Revenues 100 94 2 79 3 83.5 70 7of which.ProfitTransferedfromNBM 100 1330 812 150.0 808
Social Insurance Contributions 100 997 716 702 816Extrabudgetary Revenues 100 99.9 110.1 138 6 166.2Grants
By Economic ClassiflcationTotal Expenditures 100 81.6 64.4 63.0 59.9Recurrent Expenditures 100 75.4 56.7 55 5 56 5
Wages 100 75 8 62 7 63.4 816Goods and Services 100 63 9 42 1 39 3 52 7Subsidies to Enterprises 100 106 8 89.1 62 3 42 3Social Payments/Transfers to Persons. 100 79 3 55 8 62 7 61 4
OtherTransfers 100 13 5 14.2 15.7 277Other Expenditures 100 80.2 67 9 57.7 5.2Interest Payments 100 1093 141 5 123.6 880
Extemal 100 101.7 176 3 132 9 125.6Domestic 100 114 2 119 2 117 6 64 0
Capital Expenditures 100 96.4 48.5 53 9 39 8Net Lending
By Functional ClassificationTotal Expenditures 100 81.6 64.4 63.1 59.9State Security and General Services 100 80.0 72 7 68 9 77 1
General Public Services 100 93.9 104.1 99 2 119.3Extemal Activities 100 79 8 86 3 79 1 81.7Defence 100 67 3 54 3 43 4 48 4Judicial Authonties 100 63 9 62.6 56.2 56 8Public Order and Safety 100 78 0 58.2 58 6 62 7
Social Expenditures 100 77.5 57 2 57 2 57 0Education 100 69 7 50.3 47.7 54.7Health 100 67 6 45.1 48 8 52 2Social Security 100 87 4 67.3 67 5 60.8
Recreation, Culture and Religion 100 86.2 58 3 62.1 62 6Science 100 775 61 1 475 492Economic Expenditures 100 67 7 50 6 49.7 53.4
Fuel and Energy 100 10 3 57.9 19 0 5.1Agnculture, Forestry, Fishing & Hunting 100 73 2 60 3 56 3 44.3Environment protection 100 85 5 699 1078 1064Manufactunng & Construction 100 82 2 96 7 131.0 142 8Transportation and Communications 100 71 5 37.9 52 0 467Communal services 100 84.4 34.1 32 3 85.1Other Economic 100 132 1 358 2 295 2 254.8
Completing State reserves 100 111 0 III 6 655.3 1131 0Other Expenditures 100 27.7 29.1 248 394Interest Payments 100 109 3 141.5 123.6 88 0Extemal 100 101 7 176.3 132.9 125.6Domestic 100 114 2 119 3 117.7 64 0
Capital Expenditures 100 96 4 48 5 53 9 40 0Net Lending
Source Ministry of Finance, Republic of Moldova.
Table A4: Moldova - Genernl Government Budget, 1997-2001 (executed, percent of GDP)
1997 1998 1999 2000 2001
Total Revenues 39.8 39.0 32.0 33.0 31.3Tax Revenues 24.8 23 6 18 4 18.8 17 6
Profit Tax 2.7 2 0 1.9 17 18Income Tax 3 2 2.5 1.8 1 7 1.8VAT 10.6 12.3 7 6 8.4 7 9Excises 4 5 4 1 3 6 4.1 3 6
Extemal economic activity 1.4 1 2 1.9 1 4 1 2Othertaxes 2 3 15 16 14 12
Non-Tax Revenues 5.5 5.4 4 7 5 0 3.9of which: Profit transfered from NBM 1 5 2.1 1.3 24 1.2
Social Insurance Contnbutions 8 2 8.6 6 4 6 3 6 8Extrabudgetary Revenues 1.4 1 4 1 6 2 1 2 3Grants 00 0.0 09 08 08
By Economic Classification
Total Expenditures 50.0 42.9 35.0 34.6 30.3Recurrent Expenditures 38.9 30 9 23 9 23 7 22 3
Wages 89 71 61 6.2 74Goods and Services 9 5 6 4 4 3 41 51Subsidies to Enterpnses 3 1 3 5 3 0 2 1 1.3
Social Payments/Transfers to Persons 13.0 10 8 7.8 8 9 8 1Other Transfers 10 01 0.2 0 2 0 3
Other Expenditures 3 4 2 9 2 5 2 2 0.2Interest Payments 4 8 5.5 7 4 6 5 4.3
Extemal 19 20 3 6 2.7 2.4Domestic 2 9 3 5 3 8 3.8 19
Capital Expenditures 4.9 5 0 2.6 2 9 2 0Net Lending 0 3 0 3 -0.4 -0 2 -0.1Extrabudgetary expenditures I I 1 3 1 4 1 7 1.9
By Functional Classification
Total Elpenditures 50.0 42.9 35.0 34.6 30.3State Secunty and General Services 5 9 5 0 4.6 4.5 4.6
General Public Services 1.6 1.6 1 8 1.7 1 9Extemal activities 0 5 0.4 0.5 0 4 0.4
Defence 0 9 0.6 0.5 0 4 0 4Judicial authonties 0 3 0.2 0.2 0 2 0 2Public Order and Safety 2 6 2.1 1.6 1.7 16
Social Expenditures 29 0 23 6 18.0 18.2 16 7
Education 9 7 71 5 3 5.1 5 4Health 5 7 40 2 8 3.0 3 0Social Protection 13.5 12 4 9 9 10.0 8 3
Recreation, Culture and Religion 0.8 0 7 0 5 0 5 0 5Science 0.4 0 3 0 3 0 2 0 2Economic Expenditures 3.1 2.2 1.7 1.7 1.7
Fuel and Energy 0 4 0 0 0.3 0.1 0 0
Agnculture, Forestry, Fishing & Hunting 0 8 0.6 0.6 0.5 0 4Environment protection 0 1 0 1 0.1 0.1 0 1
Manufacturing & Construction 0 0 0 0 00 0.0 00Transportation and Communications I I 0 8 0.4 0.6 0 5
Communal services 0.6 0 6 0 2 0.2 0.6Other Economic 0.0 0 0 0.1 0.1 0.1
Completing State reserves 0 0 0.0 0 0 0.1 0.1Other Expenditures 0 7 0 2 0.2 0 2 0.3Interest Payments 4 8 5 5 7 4 6.5 4.3
Extemal 19 2 0 3 6 2.7 2.4Domestic 2 9 3 5 3.8 3.8 1.9
Capital Expenditures 49 5 0 2 6 29 2.0
Net Lending 0 3 0 3 -0 4 -0.2 -0.1
Fiscal Balance -10.2 -3.9 -3.0 -I 6 1.0
Source: Ministry of Finance, Republic of Moldova.
Table A5: Moldova -General Government Budget, 1997-2001 (executed, in percent of total)
1997 1998 1999 2000 2001
Total Revenues 100.0 100.0 100.0 100.0 100.0Tax Revenues 62 2 60 3 57 4 56 8 56 0
Profit Tax 6 9 5.0 5 9 5 2 5.8Income Tax 7.9 6 3 5 5 5 0 5 8VAT 26 7 316 23 8 25 4 25.1Excises 11 3 10 5 11 3 12 5 11 4External economic activity 3 6 3 1 5 8 4 4 3 9
Othertaxes 5 8 3.9 50 4 3 3 9Non-Tax Revenues 13 8 14 0 14 8 15 3 12 6
Social Insurance Contnbutions 20 5 22.0 19 8 19 1 21 6Extrabudgetary,Revenues 3 4 3 7 5 1 6 3 74Grants 0.0 0 0 2 8 2 5 2 5
Expenditures by Economic Classifcation
Total Expenditures 100.0 100.0 100.0 100.0 100.0Recurrent Expenditures 77 8 71.9 68.5 68 4 73 4
Wages 17.8 16 5 17 3 17 9 24 2
Goods and Services 19.0 14 9 12 4 11 8 16 7Subsidies to Enterpnses 6 3 8 2 8 7 6.2 4.4Social Payments/Transfers to Persons 24.9 24 0 22 0 25 2 26.1
Other Transfers 1 9 0 3 04 0.5 0 9Other Expenditures 7 9 7 9 7 6 6 9 1 1Interest Payments 9 6 12 8 21 1 18.8 14 1
External 3 7 4 7 10 2 7 9 7 8Domestic 5 9 8 2 10 8 10 9 6.2
Capital Expenditure 9 8 11 6 74 8 4 6 5Extrabudgetary Expenditures 2 1 2 9 4 1 5 0 6 3
Net Lending 0.7 0 8 -1 0 -0 6 -0 3
By Functional Cassification
Total Expenditures 100.0 100.0 100.0 100.0 100.0State Secunty and General Services 11 8 11.5 13 3 12 9 15 1
General Public Services 3 2 3.7 5.1 5 0 6 3External activities 1.0 1 0 1 3 1 3 1 4Defence 1.7 1 4 1 5 1 2 1 4Judicial authonties 0.7 0 5 0 7 0.6 0 7
Public Order and Safety 5.1 4 9 4 7 4 8 5 4Social Expenditures 57.9 55 0 51 4 52 5 55 1
Education 19 5 16 6 15 2 14 7 17 8Health 114 94 80 88 99
Social Protection 27 1 29 0 28 3 29.0 27 5Recreation, Culture and Religion 1.6 1 7 1 4 1.6 1.7Science 0 8 0 8 0 8 0.6 0 7Economic Expenditures 6 3 5 2 49 5 0 5 6
Fuel and Energy 0 8 0 1 07 0 2 0 1Agnculture, Forestry, Fishing & Hunting 1.7 1 5 1 6 1 5 1 2Environment protection 0.2 0.2 0 2 0 4 0 4
Manufacturing & Construction 0.0 0 0 0 1 0 1 0 1
Transportation and Communicabons 2 2 1 9 1 3 1.8 1 7Communal services 1.3 1.3 0 7 0 7 1.8
Other Economic 0 1 0 1 04 0 3 0.3Completing State reserves 0.0 0.0 0 0 0.3 0 5OtherExpenditures 1 5 05 07 06 1 0
Interest Payments 9 6 12 8 21.1 18.8 14 1External 3 7 4 7 10 2 7 9 7 8Domestic 5.8 8 2 10 8 10 9 6 2
Capital Expenditures 9 8 11 6 74 8.4 6 5Net Lending 0 7 0 8 -1 0 -0 6 -0 3
Source Ministry of Finance, Republic of Moldova
Table A6: Moldova - ConsoRidated* Budget Expenditure Arrears, 1996-2001 (as of the end of the year)
(MDL million)
ll 1996 ll 1997 Fl 199$8 l 1999 1[ 2000 ll 2001State Local Total State Local Total 99State Local Total |State 1999 L[ ocal Total [State Local Total I
Total Expenditure Arrears 256.0 430.0 686.0 210.0 350.0 560.0 440.0 526.0 966.0 372.4 718.0 1090.4 234.1 693.3 927.4 306.8 701.5 1008.3Wages 30.0 82.0 112.0 20.8 33.0 53.8 96.0 142.0 238.0 71.6 169.0 240.6 55.9 97.0 152.9 60.8 97.6 158.4Social Insurance
Contributions 10.0 111.0 121.0 8.8 82.0 90.8 20.0 67.0 87.0 16.9 138.9 155.8 12.4 168.5 180.9 11.0 196.9 207.9Goods and services 83.0 184.0 267.0 105.0 130.0 235.0 142.0 157.0 299.0 134.9 216.9 351.8 113.9 213.3 327.2 132.6 169.7 302.3of which: Electricity 18.0 15.0 33.0 1.9 8.8 10.7 6.0 13.0 19.0 13.5 33.7 47.2 7.4 34.7 42.1 11.8 27.6 39.4
Thermal energy 23.0 82.0 105.0 9.6 21.0 30.6 16.0 23.0 39.0 11.7 27.4 39.1 4.1 11.3 15.4 8.2 12.9 21.1Fuel 3.0 10.0 13.0 1.6 12.0 13.6 1.0 14.0 15.0 1.4 17.2 18.6 0.6 22.0 22.6 2.0 20.7 22.7Food 10.0 16.0 26.0 34.0 21.0 55.0 48.0 24.0 72.0 20.1 16.9 37.0 16.0 13.6 29.6 19.9 10.7 30.6Medicine 3.0 25.0 28.0 8.2 15.0 23.2 9.0 18.0 27.0 4.9 16.8 21.7 2.7 16.2 18.9 6.1 13.9 20.0
Capital Investments 90.0 8.0 98.0 56.6 1.0 57.6 37.0 15.0 52.0 17.4 33.0 50.4 10.0 48.4 58.4 14.4 37.4 51.8Other Expenditures 43.0 45.0 88.0 18.8 104.0 122.8 145.0 145.0 290.0 131.6 160.2 291.8 41.9 166.1 208.0 88.0 199.9 287.9
*Government definition of consolidated budget, includes state and local budgets.
Source: Ministry of Finance, Republic of Moldova.
Table A7. Moldova -State Budget 12997-2001 (executed, at carrut prices)
(MDL million)
1997 1998 1999 2000 2001
TotalRevenues 2118.3 2025.6 2392.0 3148.5 29053
TaxRevenues 15982 16456 17361 23552 23188
ProfitTax 1471 1062 1336 1361 2118
income Tax 08 07 16 06 16
VAT 8466 1004 5 802 0 1244 4 1196 9
Excises 4011 374 6 444 5 658 5 680 8
External economic activity 107 3 109 3 230 8 230 7 234 2
Othertaxrevenues 953 503 436 849 873
Non-Tax Revenues 520 1 380 0 544 4 669 5 455 6Pmfits from National Bank 131 1 187 8 159 7 387 3 229 0
Gmnts 00 00 III5 1238 1309
By Ecoseeanic Classifflcano
Total Expenditure 2725.2 2322 0 2736 1 3363.5 2937 6
Cuieel Expenditure 2252 2 2003 2 2554 6 3125 0 2829 7
Wages 2640 2326 3176 3585 6306
Goods and Semces 322 2 250 3 262 5 309 1 428 9Subsidies to Enteapnses 1710 2093 3112 2587 1201
Social Payments/Trnnsfers to Persons 389 7 207 9 208 4 423 0 437 0
OtherTrAtsfers 4796 4420 2987 4564 3859
Interest Payments (Extemal) 166 6 182 4 440 6 436 2 452 5
Interst Payments (Domestic) 212 4 244 7 438 3 584 4 344 7
Other Expenditures 246 6 234 1 277 3 296 7 30 1
Capital Expenditur 3544 3564 2256 2711 1330
Ne Lending 118 7 .37 6 44 0 -32 6 -25 0
By Funcatenal Clasasicanoe
Total Expenditure 2725.2 2322.0 2736.1 3363.5 2937.6
Genral Public Semces 66 4 75 2 121 3 153 7 204 8
Extemal activty 394 35 3 55 2 66 9 78 0Derence 77 2 560 62 8 62 9 76 7Judicial authonties 298 207 285 315 384
Public Oderdand Safety 195 3 164 6 168 6 202 3 240 5
Education 235 1 1702 1688 1808 2236
Scientific research 33 7 24 9 26 6 27 5 32 4
Health 1534 1362 1461 1480 1680
Social Protection 3784 3010 415 1 5607 4737
o/w tirasfes to Social Insurance budget 297 2 136 9 125 3 334 5 300 6
Recreation, Culture and Religion 405 411 37 5 44 5 43 0
FuelandEsnergv 369 41 322 129 41
Environment protection 68 5 3 61 7 3 9 0
Agnculture. Forestay, Fishing & Hunting 49 6 30 5 36 4 54 5 41 6
Manufactunng & Construction 18 13 2 0 25 4 5
Transponation and Communications 96 8 69 9 60 2 79 0 78 3
Communal Semces 16 13 15 04 05
Completing satea serves 12 14 18 2 0 85
OthierEconomic 18 31 135 160 186
Olher Expenditures 429 3 440 0 303 3 450 9 400 8Inerest Paynents 377 0 421 2 8669 10206 797 2
Capital Expenditures 3544 3564 225 6 271 1 203
Net lending 118 7 -37 6 44 0 -32 6 .25 0
Source Ministry of Finance, Republic of Moldova
Table A8: Mondova - Local Goveirnments' Revenues and Expeaudtutres, 1997-2001 (executed, at current prices)
(MDL million)
1997 1998 1999 2000 2001
Total Revenues 1255.5 1173.3 1024.0 1429.4 1797.4Tax Revenues 700.1 560.2 569.3 730.6 1118.2
Personal Income Tax 281.1 223.3 217.2 263.9 346.0Profit Tax 97.1 72.4 99.8 139.6 231.6VAT 102.3 119.5 58.3 98.3 301.0Other tax revenues 219.6 145.0 194.0 228.8 239.6
Non-Tax Revenues 102.9 111.7 . 110.1 176.6 228.0Capital revenues 20.2 24.3 28.6 38.1 57.7Transfers, total 432.3 477.1 316.1 475.4 378.0Grants 8.7 15.6
By Economic Classification
Totaz Expenditures 1403.7 1114.3 960.2 1387.9 1767.6Recurrent Expenditures 1282.5 967.9 837.2 1154.9 1489.2
o/w: Wages 529.2 414.5 428.4 631.2 769.4Goods and Services 523.9 332.0 272.0 346.3 535.0Business delegations/trips 2.0 2.0 2.1 3.2 4.3
Interest payments and reimbursement of loans 74.7 76.0 28.2 19.8 16.2Transfers for products and services 106.7 101.3 62.2 65.8 118.1Transfers for production porposes 2.4 8.1 0.8 18.8 17.8Transfers to other budgets level 5.2 0.0 0.0 7.7 8.5Transfers to financial and other institutions 0.9 1.8 5.3 5.6 8.9Transfers to population 7.1 4.0 6.4 8.9 11.0Other current expenditures 30.6 28.1 31.9 47.5 0.0
Capital Expenditures 121.2 146.4 123.0 233.1 278.5
By Functional Classification
Total Expenditure 1403.7 1114.4 960.2 1388.0 1767.6General Public Services 61.5 57.7 79.3 99.2 135.6Public Order and Safety 34.2 28.1 31.9 47.5 56.8Education 586.7 414.3 381.9 502.1 659.5Health 344.3 224.8 180.7 297.9 359.8Social Protection 75.3 59.5 51.0 52.4 30.5Recreation, Culture and Religion 25.3 19.9 21.5 35.1 46.0Fuel and Energy 0.0 0.0 0.0 0.0 0.0Environment protection 0.0 0.0 0.1 0.4 0.4Agnculture, Forestry, Fishing & Hunting 19.3 21.9 23.0 18.4 21.4Manufacturing & Construction 0.2 0.2 0.7 2.2 2.8Transportation and Communications 0.0 6.4 0.1 19.6 18.9Communal services 56.0 50.8 27.4 36.5 106.1Other Economic 0.9 1.0 1.2 0.8 1.3Other Expenditures 78.8 83.4 38.4 43.2 50.1
Capital Expenditures 121.2 146.4 123.0 232.7 278.5
Source: Ministry of Finance, Republic of Moldova.
Table A9: Moldova State Social Insurance Budget, 1997-2001 (executed, at current prices)
(MDL million)
1997 1998 1999 2000 2001Budget
TOTAL REVENUES 1026.8 920.1 907.9 1343.3 1395.0Social Insurance Contibutions 718.7 780.9 781.2 989.3 1050 0
o/w contributions collected in cash 357 7 347 8 469 7 789 5 0 0Allocations from state & local budgets 305 5 136 9 124 8 334 5 340 0Otherrevenues 2.6 23 18 195 50
TOTAL EXPENDITURES 1060.2 911.9 873.0 1316.2 1393.1Pension Fund 913.6 779.7 749.1 1165.6 1204.3Pensions 827.1 624.9 692.9 965.7 858.2
Old age, disability, survivorspensions 815.9 6146 674.9 919.9 832.1o/w pensions paid in knd 285 6 326 2 216 8 106.8 00
Pensions to military 92 9 5 9.0 17 6 9 3Pensions to Chernobyl participants 2 0 0 8 7 3 22 0 13 4Pensions to former public officials and deputies na n.a. 17 62 3.5
Other benefits 10.4 73.3 17.8 117.1 288.0
Death benefits 83 10 6 117 13 9 13 7Compensations to Chemobyl participants 2 0 2 7 6 1 16.5 16 7Energy compensations to vulnerable groups 0 1 60.0 0 0 86 7 227 8Social benefits (former social pensions) 19.6 20 5 18 6 28 9 22 8Special merit pension supplements 12 9 8.9 00 20.0 71
Administrative expenditures 33.5 20.0 25.1 27.6 57.8
Mail services 175 10 1 112 11.5 82Bank services 60 02 20 4.5 41Sanatorias 71 67 86 7 7 0.0Other administrative expenditures 2 9 3 0 3.3 3 9 45 4
Other expenditures 42.5 61.6 13.3 55.2 0.2
Family Fund 35.4 32.7 30.6 38.8 51.2Compensations in place of food pensions for children 0.1 0 1 0 1 0.1 0 1Compensations to single mothers 13 13 1.2 15 20Allowences for children of up to 18 months old 12 2 9 9 83 13 1 24 6Allowences for children of 18 months- 16 years of age 17 6 176 16.0 16.7 172Child allowences to families with many children 40 3 1 3 7 4 0 1 2Fuel compensations to families with many children 0 2 0 7 1 4 1 4 0 0Child birth allowences 2.0 62
Unemployment Fund 11.5 10.0 14.6 29.0 37.8Unemployment aDowences 5 8 5.0 78 193 26 5Admnistrative expenditures of the Labor Force state service 2 6 2 3 2 9 5 8 5 7Other expenditures 3.0 2 7 3.9 3 9 5 6
Labor Accidents and Professional Deseases Insurance Fund n a. n.a n a. n a 9.2
Pensions 41Compensations 51
Employees' Insurance Fund 92.4 83.3 75.5 82.8 90.6Insurance benefits 72.2 69.6 66.7 71.4 77.1
Sick leave benefits 58.6 579 560 610 678Matemity leave benefits 10 4 8 6 7 9 8 2 8.5Child birth allowences 2 2 2 0 18 1 4 0 0Death allowences 10 11 10 08 0.8
Seaside treatment for employed and their families 18 1 13.0 86 95 11 5Administration & other 2 0 07 02 1 8 2 0
Source National Social Insurance House, Republic of Moldova
Table AIO: Moldova - Extrn-Budgetary Funds and Resources, 1997 -2001 (executed, at current prices)
(MDL million)
I997 1998 1999 2000 2001Revenue Expendimur Balance Revenue Ependiturc Balance Revenue Expenditure Balance Revenue Expenditure Balance Revenue Expesnditure Balance
I. Extrabudgetary Funds, total" n a. n a n a. na. n a. n a. n a. n a n a. 17.3 11.9 5.4 37.4 13.9 23.5National Ecological Fund 7.7 7 1 0 61 7 9 5 8 2CLocal ecological Funds o.o 00 0 0 ol 00 0 0 0Fund for financing works on developmient of the 0 0 0 c 0 4 0.1 03legal framework for constructionEducation 0 1 0 1 0 0 06 0 1 0.Text book fund 9 4 4 6 479 20.3 0 0 203Health care 0 00 0.2 0.2 0 Protection, conservation, restoration and 0 oc0 developntent of cultural patrimnynExploration of new terrai, combating erosion. 0 0 7 7 7 7 0.0Irehabilittion and increasing soil fertilityFund for promotion of nuts cultivation 0.2 0 0.2Social Assistance Fund 0 0.0Energy conservation fitnd 00.0Promotion and development of tourism __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 0
2. Extra-Budgetary Resources of lnstltutlonaiFiasaced from the State Budget"
Total 122.36 95.00 27.36 131.72 114.91 16.81 202.16 176.36 25.11 309.64 262.33 47.31 402.55 351.00 51.55Gcneral Public Scrvices 15 33 13 63 1 70 11.13 10 31 0 82 21.70 20 50 1.20 25 37 24 00 1.37 40.35External Servces 6 33 5 17 1 16 3.57 3.03 0 54 3 62 2.52 1.11 5.43 2 55 2 88 4 90Defence 0 00 0.00 0 00 0 00 0 00 0 00 0 00 0.00 0 00 3 41 3.06 0.35 5 90Judicuiary 2 22 1 44 0.79 0 95 0 70 0 25 0 87 0.77 010o 2 97 2 85 0.12 1.53National Secunty 0.00 0 00 0 00 0.00 0 00 0 00 0 00 0.00 0.00 22.02 15.33 6 69 19.23Education 66.47 46.49 19 98 79.98 67.29 12 69 121 97 104.24 17.73 151.28 128 44 22.84 158.63Research 3 38 3.62 -0 24 7 00 6 28 0 73 8.43 7 66 0 77 8.61 7 43 1.18 7.84CulIire, AMtSports, YouthiActivities 5 65 5 29 0.36 5 02 4 97 0 05 3.94 3.35 0 59 8 27 7 51 0 76 8 41Health caTe 11 61 9 68 1.92 11 92 11 11 0 81 25.16 22 37 2 79 44 10 40.35 3 75 55.49Social Assistance 0 03 0 03 0.00 0 05 0.05 0.00 0.16 0 16 0 00 0.15 0.15 0 00 1.47Agriculture, Fisheries, and Forestry 6.99 5.94 I 05 7.33 6 65 0.68 8 94 8.28 0 66 10 88 10 25 0.64 13.08Environment 2.52 2 38 0 14 3.25 3 16 0 08 3 54 3.43 0 12 5 03 4 73 0.29 5.99Industry and Construction 0 35 0 20 0.15 0 45 0 43 0 02 0 70 0 51 0.19 0 99 0 95 005 0.86
Transportation and Commnunic-ations 0 46 0 40 0 06 0.00 0 00 0 00 0 00 0.00 0 00 0 02 0.01 0.00 0 00Housing and Comsmunal Services 0 36 0 15 0 21 0.59 0 53 006 0 91 0 81 0 09 0 01 0 00 0 00 0 00Fuel and Energy 0 00 0 00 0.00 0 00 0 00 0 00 0000 0 0 0.0 1 38 0 87 0 51 0 00State Rescrves 0 00 0000 00 003 0 02 00 0 45 0 13 0 32 18 67 12 97 5 70 26.31Othcr Economic Activitics 0 23 0.19 0.04 0 14 0.09 004 1 23 1 15 0 09 0.50 0 34 0 16 0.29Other Expeiiditmrs 0.43 0 39 0.04 0.32 0 28 00 0 54 0.49 0 05 0.56 0 54 0 02 0.73
For 1997-1999, extrabudgetary fluids arc included hin extrabudgetary rcsoarces** Extrabudgetary resources of institutions financed by the local budgets miake an integral part of the local budgets
Source Ministry of Finance, Republic of Moldova
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