Moldova is still one of Europe’s poorest countries, despite its strong economic performance during the past two decades. High growth and decreased poverty have resulted from a growth model based on remittance-induced consumption, however, this model has become less sustainable over time.
Low productivity growth has resulted from a combination of a smaller and older population and a drop in remittances, and many low-income people have become reliant on government programs like pensions and welfare as a result.
Vulnerabilities in this development paradigm have been exposed by recent shocks such as the pandemic, the energy crisis, and most recently the refugee crisis brought on by Russia’s invasion of Ukraine.
Moldova Economy In Europe 2023 [Facts & History]
As a small, landlocked economy with deep ties to both Ukraine and Russia, Moldova is among the countries most negatively impacted by the conflict in neighboring Ukraine.
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There have been increased government expenditures as a result of the influx of refugees into Moldova, putting pressure on the country’s ability to invest in its long-term economic priorities. There will be a difficult socioeconomic climate in the medium term as a result of the big influx of refugees, especially if many migrants want to stay but are unable to find work.
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Moldova’s dependence on imports to cover its food and energy demands makes the country vulnerable to disruptions in the supply of food, energy, and commodities imported from Ukraine and Russia. More importantly, natural gas imports from Russia remain crucial to Moldova’s ability to meet its energy demands.
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The competitiveness of businesses and household incomes, especially for the poor, is predicted to decline as a result of import interruptions, which would lead to higher prices.
The Government, which has a solid mandate, parliamentary support, and trust among citizens and international partners, must find ways to mitigate the immediate economic impact while maintaining momentum on the long-term agenda as economic activity continues to shrink due to shocks from the war in Ukraine and the ongoing impacts of the COVID-19 pandemic.
In order to assist lead the economy away from the current economic paradigm, it is crucial that short-term recovery measures be accompanied by long-term changes.
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The recent decision by the European Council to give Moldova EU Candidate nation status will provide a significant boost to these efforts. The new 2023–2027 World Bank Country Partnership Framework for Moldova is intended to provide key elements to support the country’s 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.
Transformative Economic Events in Recent Times
Conflict in neighboring Ukraine and a severe drought have posed serious threats to the Moldovan economy. Consequences on private consumption and investment were felt as a result of trade interruptions, reduced foreign inflows, and high inflation.
With zero percent growth over the first half of 2022, the economy shrank by 0.9% in the second quarter. Because of the worsening financial climate and increased uncertainty, investment activity fell by 7.3%.
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From a target rate of 2.5% in 2021 to a target rate of 21.50% this year, the monetary stance has tightened considerably. The plan’s overarching goal was to stabilize the exchange rate, which had lost 9 percent of its value against the US dollar since the start of the war in Ukraine, and to reduce skyrocketing food and energy prices that had reached 34.3% by August 2022.
In the first quarter of 2022, the cost of energy imports grew rapidly, while remittances fell by 9.4 percent, leading to a current account deficit that doubled to 17.1 percent of GDP.
Revenues grew by 19.4 percent while spending rose by only 18 percent, demonstrating budgetary stability. With only the existing debt being refinanced, the public and publicly guaranteed debt fell to 30% of GDP.
Moldova’s Prospects for the Economy
A slowdown in GDP expansion is predicted for 2022. However, the positive contribution from net exports and a sizable fiscal stimulus helps to offset the negative impact on private consumption and investments.
We anticipate growth to pick up to 2.6% in 2023, and then finally attain its full potential in 2024. Inflation will remain over the National Bank of Moldova’s objective of 5% +/- 1.50% during 2022 and 2023 when demands to keep prices down will be greatest.
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Since high import costs are a direct result of COVID, it is anticipated that financing will come mostly from foreign debt instruments, leading to a current account deficit.
It is expected that the fiscal deficit will rise to 5.9% of GDP in 2022 and remain larger than pre-COVID levels since the government will need to insulate the populace from rising prices, provide aid to refugees, and increase both investments and the reform program.
Consequently, the government’s debt is projected to rise but eventually level off at about 40% of GDP. Risks to Moldova’s economy persist because of its proximity to the conflict in Ukraine and because of the unpredictability of energy and natural gas pricing and supplies.
As winter approaches, rising prices might further weaken consumer confidence and worsen the twin deficits.
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Strategic Economic Policies Implementation
The World Bank Group is assisting Moldova in reaching its development goals by investing in human capital, job creation, and infrastructure, such as the energy, information and communications technology (ICT), and transportation sectors; improving governance, institutions, and the quality of public services; boosting the private sector’s development, productivity, and quality; and facilitating private sector investment in public services.
After the outbreak of war in Ukraine, the Bank quickly raised an emergency reaction in the sum of $159.24 million to aid Moldova’s COVID-19 response.
The government is able to help refugees and civilians recover from the war’s effects and prepare for future shocks using the money that was allocated to them in the budget.
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Through a Power System Development Project valued at $70 million, the Bank is also assisting Moldova in its efforts to expand the capacity of its power transmission system while simultaneously boosting its reliability.
As planned, the project will pave the way for Romania to connect the country’s power grid to the European electricity grid. This is critical in assisting Moldova in diversifying its electrical supply sources, which will enable for competitive and transparently priced electricity supply.
Investing $50 million into the Micro, Small, and Medium Sized Enterprises (MSME) Competitiveness Project would assist Moldova cut red tape, expanding access to capital, and boosting the export competitiveness of its businesses.
The government of Moldova has an ambitious reform program notwithstanding the current difficulties. At this pivotal juncture, the World Bank will align its next five-year CPF with the National Development Plan and use a variety of advisory and lending products, such as Development Policy Lending, to address the structural constraints identified by the SCD update and Country Private Sector Diagnostic.
