IMF Executive Board Completes Third Reviews Under the Extended Credit Facility and the Extended Fund Facility Arrangements With Moldova, Approves US$79 Million Disbursement

The Executive Board of the International Monetary Fund (IMF) has completed the third reviews of Moldova’s economic performance under the Extended Credit Facility (ECF) and the Extended Fund Facility (EFF) arrangements. The blended financing arrangements under the ECF and the EFF for an amount equivalent to SDR 369.6 million (about US$586 million) were approved on January 29, 2010 (see Press Release No. 10/21). The completion of the third reviews makes an amount equivalent to SDR 50 million (about US$79 million) immediately available for the authorities. The Executive Board also approved the authorities’ request for modification of performance criteria on the National Bank of Moldova (NBM) net international reserves and net domestic assets for end-September 2011 and end-March 2012 in light of the stronger-than-expected external inflows, the increased reserve requirement ratio, and the upwardly revised growth/money demand outlook. The Executive Board’s decision was taken on a lapse of time basis, effective July 13, 2011.1
Moldova’s economy has essentially completed its recovery from the 2009 recession, and the outlook is positive. Robust growth continued into 2011, spurred by brisk domestic demand and very strong exports. Core inflation remained contained, despite some pressure from higher energy prices on headline inflation.
The program is on track to restore fiscal sustainability by 2012 as planned. Fiscal policy appropriately focuses on rationalizing current expenditure, while safeguarding spending on priority investment and social assistance to the most vulnerable. Fiscal consolidation will be further supported by comprehensive tax policy and administration reforms in 2012 and beyond.
The recent tightening of monetary policy has anchored inflation expectations in the face of rising energy prices and domestic demand. Further tightening may need to be considered if the effect of higher energy prices spills over to core inflation or domestic demand accelerates further. The NBM’s planned increase in foreign reserves is also appropriate in response to the higher-than-projected influx of foreign exchange from recovering remittances and capital inflows.
Conditions in the financial sector continued to improve with banks showing stronger profits and declining nonperforming loans. The completion of the frameworks on crisis preparedness and debt resolution will enhance financial stability and promote financial intermediation. The arrangement between the authorities and commercial banks on sharing the costs related to the failed Investprivatbank is welcome.
Comprehensive reforms are needed to restore financial sustainability in the energy sector. The establishment of efficient pricing and payment mechanisms will support cost recovery and contain the accumulation of new debt. Improving the business climate and promoting exports are essential to sustain strong growth in the medium term. The removal of trade barriers and divestment of state enterprises are important steps in that direction.
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1 The Executive Board takes decisions under its lapse of time procedure when the Board agrees that a proposal can be considered without convening a formal discussion.

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