Country brief 2007 Updated January 2008
Moldova is a low–income country with a gross national income per capita of $1100 in 2006 (GNI, Atlas method). The country is small, landlocked, and densely populated. It has few natural resources and is entirely dependent upon imports for its primary energy requirements as well as for inputs for its manufacturing industries.
Endowed with rich agricultural land and a temperate climate, Moldova has relied heavily on agriculture throughout its history. Currently, agriculture and agro-processing activities account for roughly 34 percent of the country’s GDP, and many people still make their livelihoods in this sector. Over half the population lives in rural areas.
Since 2000, Moldova's economic performance has been commendable, in contrast to its deteriorating performance through most of the 1990s. The country has successfully stabilized. It launched structural reforms to stimulate growth and started setting up an effective social protection system. Real GDP growth has been strong, averaging 6.6 percent since the recovery began in 2001. The economy showed remarkable resilience in 2006 and 2007, following a doubling of energy prices, a Russian ban on wine exports, and a severe drought. Growth in 2006 slowed to 4 percent, but is expected to accelerate in 2007 and 2008.
A significant reform agenda remains. While Moldova achieved independence in 1991 as a middle–income country, it is now one of the poorest countries in Europe, with GDP per capita significantly below the average for the Central European countries. With economic recovery, the national poverty rate has dropped from 73 percent in 1999 to under 26.5 percent in 2004. Since then, however, the poverty rate has not declined despite further economic growth. The updated 2006 survey confirms that the poverty rate is highest in small towns and Villages (30.1 and 34.1 percent respectively), while it is lowest in large cities (20.6 percent) Nearly 66 percent of the poor live in rural areas.
Moldova joined the World Bank in 1992. Two years later it joined the International Development Association (IDA)—the soft lending arm of the World Bank. Since then, World Bank lending has consistently supported the country's economic reform program by working to reduce poverty and raise living standards.
Back to Top
Economy
Recent Economic Performance
After falling by more than 60 percent between independence and 1999, cumulative growth of more than 46 percent has been recorded since 2000 in Moldova. Despite the external shocks experienced in 2006, in the past three years, growth has averaged 6.3 percent a year.
The following factors have contributed to Moldova's improved economic fortunes:
- A marked increase in real wages and pensions, combined with a massive inflow of workers’ remittances, has fueled domestic consumption and the remonetization of the financial sector.
- The prolonged economic recession resulted in excess capacity for many domestic enterprises, allowing them to expand production with little additional investment. In recent years, investment, including FDI, has picked up considerably.
- Important structural reforms in the late 1990s have begun to have a positive impact on the economy. These included pension reform and the privatization of two-thirds of the electricity distribution system. More recently, efforts to reduce administrative and regulatory barriers are beginning to pay dividends.
- While the ban on Moldova wine exports was a severe blow, Moldova has increased the diversification of its export markets and is recapturing markets lost after the breakup of the Soviet Union.
While investment has been picking up, Moldova’s impressive growth performance still remains largely consumption-led, driven mainly by the inflow of workers’ remittances. The government is aware of this problem and is eager to change the situation with support under the International Monetary Fund's (IMF) Poverty Reduction and Growth Facility program and budget support from the World Bank and other donor partners. Structural reforms focus on improving the investment climate, increasing the efficiency and management of public resources, and strengthening of social protection systems. The government has been successful in restructuring its bilateral external debt with Paris Club of creditors, contributing to a favorable external debt outlook.
Challenges Ahead
Moldova faces a number of challenges, including:
- Poverty in rural areas remains high and has increased since 2003. Some 66 percent of the country's poor live in rural areas. They have been hurt by the erosion of education, health, and other public services. The poverty rate in rural areas increased over 2004 and 2005, rising by 6.8 percentage points from 2003. The recent drought, combined with underdeveloped market infrastructure and market distortions have reduced farm-gate prices and, hence, the incomes of farmers.
- Growth and vulnerability to external shocks. The country imports almost all its energy requirements, making it vulnerable to international price fluctuations. The recent increase in natural gas prices contributed to a slowing of economic growth and impeded poverty reduction. Further increases in energy prices also risk dampening economic growth. Moldovan exports remain concentrated in a few commodities, mainly agricultural products, and a few export markets, primarily the CIS countries. The ban on Moldova’s export of wine, at 30 percent of total exports, by Russia, which absorbs 80 percent of these exports, undermined growth in 2006. The restoration of wine exports to previous levels may be protracted, with implications for growth prospects.
- Foreign and domestic investment is necessary for growth. The country's uneven track record of economic and structural reform and its poor business environment have discouraged much–needed domestic and foreign investment flows in the past. The recent increases in domestic and foreign investment is encouraging since more investment and technological innovation will be needed to sustain growth over the medium term.
- Continued economic hardship has led to large–scale emigration. More than 25 percent of the economically active population has left the country in search of better economic opportunities abroad. A significant portion of these migrants are young, highly educated, and skilled. To avoid suffering from permanent "brain drain", incentives to bring migrants back to Moldova, such as an improvement of the overall investment climate, will need to be strengthened.
Back to Top World Bank Program
Program to Date
- Landmark Projects
- More projects
Since it started operations in Moldova in 1993, some three quarters of Bank lending has historically been provided in two main areas: policy–based lending (46 percent) and industry and infrastructure (20 percent). The remaining lending has been provided for the rural development sector (14 percent), human development (11 percent), and the financial and private sector (8 percent).
Currently, the industry and infrastructure sector dominates Bank financing, receiving over 40 percent of investment funds, followed closely by human development (33 percent), and agriculture and the environment (15 percent). The finance and private sector and the public finance management sectors currently receive comparable shares of Bank funds—6 and 5 percent respectively. The transition from policy–based lending to investment lending has occurred in the last three years, due to slow implementation of structural reforms.
Given a more favorable policy environment, improvement in economic management, progress toward satisfying the CAS triggers, and the resumed program with the IMF, the Bank and a number of bilateral donors are providing budget support to assist in the implementation of policy reforms under the Economic Growth and Poverty Reduction Strategy (EGPRSP) during fiscal years 2006–09.
In fiscal year 2007, the World Bank committed $43 million in lending to Moldova. Additionally, three projects with an estimated IDA funding of around $24 million are under preparation and are expected to be committed in fiscal year 2008. As of December 2007, the Bank’s active portfolio was comprised of 11 IDA–funded investment operations and 13 Bank–administered grants including GEF, CF, IDF, MDTF. Total net IDA commitments reached $258.4 million, of which about 75 percent is undisbursed. Since the inception of the World Bank’s program, 42 projects for a total amount of $689.4 million have been approved by the World Bank’s Board of Executive Directors.
Going Forward
The World Bank's Country Assistance Strategy (CAS) for Moldova for 2005-2008, prepared in partnership with the Government of Moldova and in consultation with the business community, civil society and non-governmental organizations (NGOs), and donors, was endorsed by the World Bank's Board in December 2004. It focuses on three strategic priorities, aligned with the country's plans for poverty reduction detailed in its Economic Growth and Poverty Reduction Strategy Paper, which was adopted by the Government in May 2004 and endorsed by the World Bank and IMF in November 2004. The three priorities follow:
The modernization of customs is facilitating trade and transport.
Read more- Reducing poverty by promoting economic stability, growth, and employment. To reduce poverty in Moldova, the World Bank will help the country generate income and employment through improvements in the economy and in the country's business environment. This involves simplifying bureaucratic controls and time–consuming approval procedures. It also means improving corporate governance and upgrading the maintenance of basic infrastructure. The program will place special emphasis on removing the internal barriers that limit the country's export capacity. It will additionally support the development of the rural economy for the benefit of the country's poor.
- Improving access to social services and minimizing environmental risks. Human and social capital is critical for economic growth and the reduction of poverty. World Bank assistance therefore focuses on better targeting of social assistance to reach the poor. It also focuses on facilitating their access to quality health, education, and social protection services, and on upgrading services such as housing, utilities, and transportation. Priority areas will include secondary cities and rural areas where poverty rates are the highest. The Bank program will also seek to mitigate the significant health risks that arise from groundwater pollution.
- Improving governance and fighting corruption. Within this broad agenda, the World Bank aims at improving transparency and accountability in the management of public funds, introducing public expenditure programming, and promoting better evaluation practices. Civil society involvement is a powerful tool for enforcing accountability among public officials and in the delivery of public services. Accordingly, the program will focus on promoting communities' involvement in development, as well as stronger ownership and leadership from local government officials. This will be supported by reform of the public sector and the civil service.
The existing Country Assistance Strategy for Moldova envisages a lending program of $90 million or more over the three–year period ending in Fiscal Year 2008, depending on implementation of high case triggers and other factors included in the new Performance Based Allocation system introduced in fourteen IDA countries, including Moldova.
With the CAS approaching its completion, the Bank has already initiated the process of developing the new Country Partnership Strategy for Moldova, to cover the period of fiscal years 2008–2011. The Government and development partners have expressed interest in a joint approach to assist Moldova over the upcoming period, utilizing the National Development Plan (NDP) as the overarching framework in this process. The following priorities, as set out in the NDP, will guide the work of the development community over the next years: a modern democratic state based on the rule of law; reintegration of the country; increased national competitiveness; increased employment opportunities and social inclusiveness; and regional development.
NB: Lending is per fiscal year, July 1–June 30
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of December 2007 (US$millions)
The Country Aggregate Report provides more lending data for Moldova
Back to Top
Oficiul Bancii Mondiale
Strada Puskin, 20/1
MD-2012, Chişinău
Republica Moldova
Email: Moldova_Contact@worldbank.org
Tel: (373 22) 200 706
Fax: (373 22) 237 053
Website: http://www.worldbank.org/md
Back to Top
RSS