Moldova

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Af­ter grow­ing briskly in 2013, Moldova’s eco­nomic growth is ex­pected to de­cel­er­ate in 2014. Weak­ness in ex­ports and a mod­er­a­tion in farm pro­duc­tion are the main rea­sons for the slow­down. Up to 50% of the work­ing pop­u­la­tion has been em­ployed abroad in re­cent years, many of them in Rus­sia. A con­tin­ued slow­down in the Rus­sian econ­omy and/or an es­ca­la­tion of trade ten­sions with Rus­sia would have a sig­nif­i­cant neg­a­tive im­pact on Moldova’s eco­nomic growth prospects. Moldova is the poor­est coun­try in Europe. Though dis­putes with Moscow slowed progress, the econ­omy grew at an av­er­age rate of around 5.0% per year prior to the global re­ces­sion. How­ever, a sharp con­trac­tion oc­curred in 2009 when do­mes­tic de­mand plum­meted. Un­em­ploy­ment soared and pub­lic rev­enue fell as VAT re­ceipts and for­eign trade taxes de­creased.

The econ­omy re­bounded in 2010 and 2011 but per­for­mance de­te­ri­o­rated in 2012 when real GDP con­tracted by 0.7%. For­eign and do­mes­tic trade, in­dus­trial pro­duc­tion, and re­mit­tances all de­cel­er­ated markedly. Eco­nomic ac­tiv­ity re­cov­ered in 2013, led by a strong per­for­mance in agri­cul­ture

and other in­dus­tries.

Mol­da­vans have con­tin­ued to em­i­grate at a rapid pace. The gov­ern­ment es­ti­mates that more than 500,000 have left the coun­try to work abroad, ei­ther in Western Europe or Rus­sia. Much of the ex­o­dus is driven by poverty.

Eco­nomic prospects

Growth is ex­pected to slow down in 2014 to 3.5%, from 8.9% in 2013. Weak­ness in ex­ports and a mod­er­a­tion in farm pro­duc­tion are the main rea­sons for the slow­down.

In­fla­tion was 4.6% in 2013. Prices are ex­pect-

ed to rise by 5.5% in 2014. The tar­get range of the cen­tral bank is 3.5-6.5%.

Moldova's bud­get deficit was 1.8% of GDP in 2013 but it is ex­pected to rise to around 2.6% in 2014 and 4.6% in 2015.

Con­sumer spend­ing de­pends heav­ily on re­mit­tances. The real value of pri­vate fi­nal con­sump­tion is ex­pected to grow by 2.6% in 2014 af­ter gains of 6.0% in 2013.

Up to 50% of the work­ing pop­u­la­tion has been em­ployed abroad in re­cent years, many of them in Rus­sia. The value of re­mit­tances (in dol­lars) rose by 11.6% in 2013 but is ex­pected to fall as the Rus­sian econ­omy weak­ens in 2014.

The cur­rent ac­count deficit was 4.8% of GDP in 2013. The deficit should grad­u­ally nar­row as a re­sult of sus­tained re­forms and ex­port pro­mo­tion ef­forts.

Eval­u­a­tion of market po­ten­tial

Dis­agree­ment within the rul­ing coali­tion slows the pace of re­forms and en­ables spe­cial in­ter­est groups to ex­ert con­sid­er­able in­flu­ence on pol­icy de­ci­sions. The Na­tional De­vel­op­ment Strat­egy aims at rais­ing in­vest­ment and in­creas­ing pro­duc­tiv­ity and com­pet­i­tive­ness.

A con­tin­ued slow­down in the Rus­sian econ­omy and/or an es­ca­la­tion of trade ten­sions with Rus­sia would have a sig­nif­i­cant neg­a­tive im­pact on Moldova's eco­nomic growth prospects. Rus­sia presently ac­counts for about a quar­ter of Moldova's ex­ports while re­mit­tances rep­re­sent an­other 15%. The Moldovan bank­ing sys­tem is heav­ily re­liant on fund­ing from Rus­sian banks.

Busi­ness en­vi­ron­ment

Struc­tural re­forms have im­proved the busi­ness cli­mate and pro­moted com­pet­i­tive­ness. Of­fi­cials hope to ac­cel­er­ate the pri­vati­sa­tion pro­gramme and the sale of a large bank is near­ing com­ple­tion. Cor­po­rate in­come taxes have been re­duced and an amnesty has been granted. Ef­forts to cut red tape, safe­guard com­pet­i­tive­ness and stim­u­late trade are broadly on track. How­ever, the econ­omy is ex­ces­sively over­reg­u­lated and ham­pered by price dis­tor­tions. Cor­rup­tion is wide­spread and gov­er­nance is weak.

Moldova's pub­lic sec­tor still dom­i­nates the econ­omy and is much larger than in neigh­bour­ing coun­tries. The pos­si­bil­ity of early re­tire­ment is grad­u­ally be­ing phased out. In the medium term, the huge pub­lic sec­tor will have to be scaled back in or­der to main­tain a sound fis­cal po­si­tion.

A planned tax pol­icy re­form aims to im­prove tax ad­min­is­tra­tion and sim­plify reg­u­la­tions. Author­i­ties are com­mit­ted to close loop­holes in the VAT, up­grade tax and cus­toms ad­min­is­tra­tion, and clear gov­ern­ment ex­pen­di­ture ar­rears. At the same time, the cor­po­rate in­come tax will be re-in­tro­duced with a sin­gle rate of 12% and a broad base to en­sure ad­e­quate re­sources.

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