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.
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.
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.