The World Bank in Moldova

Country Context

Despite a solid economic performance over the past two decades, Moldova remains among the poorest countries in Europe. Although a growth model reliant on remittance-induced consumption has generated high growth and reduced poverty, it had become less sustainable well before the recent series of crises. The decline in remittances, combined with a shrinking and aging population, has resulted in low productivity growth, and a significant number of the lower-income population has become dependent on pensions and social assistance.

The pandemic, the energy crisis, and the refugee crisis caused by the Russian invasion of Ukraine starkly exposed the vulnerabilities of this growth model to shocks. Moldova is one of the countries most affected by the war in Ukraine, not only because of its physical proximity but also because of its inherent vulnerabilities as a small, landlocked economy with close linkages to both Ukraine and Russia. The influx of refugees to Moldova has resulted in additional fiscal costs, squeezing resources for long-term development priorities. The large wave of refugees has also created a challenging socioeconomic environment in the medium term, especially if many migrants remain but fail to find employment opportunities.

Heavy reliance on imports to meet food and energy needs has left Moldova vulnerable to disruptions in the supply of food, energy, and commodity imports from Ukraine and Russia. Additionally, Moldova continues to be substantially reliant on natural gas imported from Russia, including for powering its energy needs. Import disruptions are expected to further increase price pressures, in turn eroding the competitiveness of firms and household incomes, especially for the poor.

As economic activity continues to shrink due to shocks from the Russia’s invasion of Ukraine and the ongoing impacts of the COVID-19 pandemic, the Government, must find ways to mitigate the immediate economic impact while maintaining momentum on the long-term agenda. At the current economic juncture, it is paramount that short-term recovery measures are complemented by long-term reforms that will help steer the economy away from the current economic model.   

These efforts will now be bolstered by the European Council’s decision to grant European Union Candidate country status to Moldova. The new 2023-27 World Bank Country Partnership Framework for Moldova is designed to provide key elements to support the country in its efforts to transition to a new growth model, delivering targeted activities that respond both to the immediate crisis and to address Moldova’s longer-term development agenda with the goal to advance the agenda toward EU accession.

Last Updated: Apr 07, 2023

Strategy

KEY ENGAGEMENT

The new FY23-FY27 World Bank Group Country Partnership Framework (CPF), will support the Moldovan government’s efforts to move to a new economic model and is based on: the challenges identified in the 2021 Systematic Country Diagnostic update and the Country Private Sector Diagnostic; the government’s medium-term strategy; lessons learned from the implementation of previous CPFs; and selectivity principles based on the World Bank Group’s comparative advantage and areas of emphasis of partner programs. The CPF aims to support the dual challenges of the current crisis stemming from Russia’s invasion of Ukraine as well as longstanding and longer-term reform challenges, with a phased approach of activities to support the development agenda and the goal to advance toward European Union accession. The CPF will provide a phased approach—identifying activities – both lending and analytical – for the initial period of the CPF and leaving flexibility to program the outer years on the foundation of the initial program. 

The overarching objective of the CPF is to support green, resilient, and inclusive development and competitiveness in Moldova. The framework is based on three high-level objectives: (i) increased formal employment; (ii) improved human capital; and (iii) increased green and resilient investments. The objectives of the CPF will focus on key areas including enterprise competitiveness, decreased regulatory burden, key aspects of health and education services, increased energy security and efficiency, and green investments, particularly in infrastructure and agriculture. A critical feature of the CPF will be capacity-building and digitization efforts to strengthen systems and institutions across a broad swath of government and private sector actors at national and local levels. 

Last Updated: Apr 07, 2023

Recent Economic Developments

The Moldovan economy has been severely affected by Russia’s invasion of Ukraine and a surge in inflation. GDP have contracted by 5.9 percent and inflation to have reached an average of 28.7 percent in 2022. Despite the efforts to mitigate the impact of the crises with a forceful fiscal impulse and swift monetary stance, private consumption was restrained by the erosion of households’ disposable income and private investments by the uncertainty and challenging financial conditions, causing the economy to plunge into a recession in 2022. Moldova’s external position has deteriorated due to the impact of the energy crisis and lower remittances. As share of GDP, external debt decreased to 62.1 percent. The monetary stance has been relaxed after inflation reached its peak in October 2022. In 2022, inflation surged to 28.7 percent triggered by adjustments in regulated prices. In 2023, the monetary authorities to decrease the policy rate three times to 14 percent from 21.5 percent. The fiscal position proved to be resilient in 2022, registering a deficit of 3.3 percent, thanks to a strong revenue performance. Public spending increased by 22.4 percent led by social spending and subsidies. Cash buffers were used toward the end of the year to secure the supply of energy.

Economic Outlook 

GDP growth is expected to slowly rebound to 1.8 percent in 2023, reaching its potential only in 2024, due to inflation dynamics, energy security concerns, and the ongoing Russia’s invasion of Ukraine. Double digit inflation will persist in 2023, only receding slowly toward the NBM’s inflation target of 5 percent +/- 1.5 percent in 2024. Moldova’s external position is expected to weaken, reflecting overall elevated import prices coupled with subdued capital inflows due to heightened uncertainty. Revenues are expected to decline in real terms as economic activity subsides, resulting in a fiscal deficit of 5.4 percent in 2023. The medium-term outlook will be influenced by the ability of the Government to mitigate the households’ eroding purchasing power while keeping the momentum on the reform program to address low productivity growth, persistent structural and governance weaknesses, the significant state-owned enterprises footprint, stifled competition, an uneven playing field, and tax distortions. The risks of extreme weather events and energy shocks remain high. Persistent inequality of opportunity limits the ability to access public services and reduces resilience and intergenerational mobility. Significant uncertainty also remains around the impact of Russia’s invasion of Ukraine on the Moldovan economy, and the supply and price of energy in 2023. 

Last Updated: Apr 07, 2023