TRANSITION REPORT 2014 Innovation in Transition


  • Moldova benefited from an exceptional harvest last year. The economy registered a record growth in 2013, but has slowed considerably since the beginning of 2014 as the effect of the good harvest subsided and remittances from, and exports to, Russia suffered.
  • Transparency and governance problems in the banking sector persisted, with implications for investment and financial sector stability. Another wave of non-transparent ownership changes occurred in the second half of 2013, with the central bank’s ability to enforce policy impaired by the country’s judicial system. Financial sector risks increased as the quality of bank assets became highly uncertain.
  • Moldova signed an Association Agreement (AA) with the European Union (EU). The agreement, which provides for the creation of a Deep and Comprehensive Free Trade Area (DCFTA), will not only become an anchor for reforms in the country, but could also lower trade barriers and create opportunities for increased bilateral trade, investment and mobility.

Key priorities for 2015

  • It is critical to ensure that policies on governance and transparency of banks are implemented. Proper policies and effective enforcement of the central bank’s rules on disclosure of beneficial owners are needed for financial sector stability. Courts should not be able to block the implementation of regulatory or corrective measures aimed at the improvement of governance, transparency and efficiency in the financial sector.
  • The authorities should pursue policies to attract and stimulate investment. Better governance is needed to improve the delivery of public services and to foster private-sector-driven growth. Competitive and transparent privatisation of larger enterprises should help attract private sector investment.
  • Reforms to increase energy security and energy efficiency should continue. Implementing the Energy Community Treaty, completing the integration of the country’s energy networks with those of Romania, and enforcing policies that target greater cost recovery in the energy sector should help to diversify energy sources and increase investment in the sector over time.




2014 sector transition indicators
Corporate Energy Infrastructure FI

Source: EBRD. 
Note: FI – Financial institution; ICT – Information and communication technology; Water – Water and wastewater; IAOFS – Insurance and other financial services; PE – Private equity.

Main macroeconomic indicators %

  2010 2011 2012 2013 2014
GDP growth 7.1 6.8 -0.7 8.9 2.0
Inflation (average) 7.4 7.7 4.6 4.6 5.0
Government balance/GDP -2.5 -2.4 -2.2 -1.8 -1.7
Current account balance/GDP -7.8 -11.2 -6.8 -5.5 -6.2
Net FDI/GDP 3.5 3.8 2.1 2.5 2.5
External debt/GDP 81.6 77.0 82.2 83.2 n.a.
Gross reserves/GDP 29.5 28.0 34.5 35.4 n.a.
Credit to private sector/GDP 33.3 33.6 37.9 39.7 n.a.

Macroeconomic performance

Economic performance has been volatile. After a drought-induced shallow recession in 2012, Moldova’s economy grew by a record 8.9 per cent in 2013 – highest annual rate of growth since the country’s independence – boosted by a good harvest. In the first half of 2014 the economy slowed to 3.9 per cent year-on-year. The high volatility of growth rates reflects a narrow economic base and the underlying weaknesses of the economic model, which depends on agriculture (12.5 per cent of GDP) and remittances (24 per cent of GDP). Investment activity has remained subdued – as evident in the low pace of fixed capital accumulation and declining foreign direct investment (FDI) inflows – and has been aggravated by a weak business environment and significant governance problems in the banking sector. Net FDI inflows fell from more than 10 per cent of GDP before the global economic crisis to just over 2 per cent of GDP in recent years. Growth of remittances weakened in the first half of 2014, reflecting the economic slow-down in Russia – the main destination of Moldova’s migrants. Inflation remained contained within the central bank’s target range of 5 ± 1.5 per cent.

External imbalances have decreased significantly. Moldova’s current account deficit narrowed considerably from 11.2 per cent of GDP in 2011 to 2.5 per cent of GDP in the 12 months ending June 2014. Reserves cover over five months of imports and near-term external debt repayments are low. The Moldovan leu has been gradually depreciating against the US dollar, having dropped by around 15 per cent since early 2013. On the fiscal side, the government maintained fiscal discipline until recently, when a pre-election spending increase was passed.

The near-term growth outlook is weak. Moldova’s growth is expected to moderate in 2014 owing to a high base effect, the crisis in Ukraine, new trade restrictions imposed by Russia and a deceleration of investment activity in Russia affecting the flow of remittances. Moldova’s significant dependence on migrants’ remittances from Russia makes the country vulnerable to potential tightening of Russian migration and labour laws. Investment activity is unlikely to pick up due to challenges in the banking sector and upcoming parliamentary elections. With the AA/DCFTA signed, Moldova’s longer-term growth prospects will hinge on the ability of policy-makers to implement necessary structural reforms and to attract investment.

Major structural reform developments

Moldova took important steps towards integration into the EU. In June 2014 Moldova signed an Association Agreement with the EU, including a DCFTA, and ratified it shortly thereafter. The AA/DCFTA marks an important milestone for the country and can serve as a powerful anchor for reform. Close political association will entrench and strengthen the values of democracy and good governance, and on the economic front, the enhanced contractual relationship with the EU should facilitate the free movement of goods, capital, services and people between Moldova and EU member states. In addition, approximation and convergence with the EU’s globally recognised technical norms and standards could open up new commercial opportunities beyond the European Union. The association also entails an increase in development assistance to Moldova, including a multi-faceted institutional capacity-building effort. While the EU expects the DCFTA to boost Moldova’s GDP by 5.4 per cent in the long term, the overall positive effect may be even bigger if reforms are completed. The EU significantly liberalised the visa regime for Moldova, effective from May 2014, which enhances mobility opportunities and could diversify migrant remittances.

Governance and transparency issues in the banking sector persist. Challenges still loom as evident in non-transparent transactions and “raider attacks” in 2013. As a result, the banking sector may be exposed to a high risk of related-party lending and money laundering, with adverse consequences for financial and macroeconomic stability. The inability to tackle these issues decisively and in a timely manner compromised the central bank’s – National Bank of Moldova (NBM) – independence and credibility. In October 2013 Moldova’s Constitutional Court issued a ruling that authorised any court to suspend decisions of the NBM. However, in December 2013 parliament partially restored the NBM’s authority. In 2014 the government made some progress in addressing banking sector challenges. In July 2014 the cabinet took the lead in adopting a series of tighter legislative measures aimed at preventing opaque transactions: (i) the threshold on transactions with shares was lowered from 5 per cent to 1 per cent, above which the NMB’s approval is required for new shareholders/buyers; (ii) shares held by shareholders acting in concert can be sold only to NBM-approved buyers; (iii) bank shares cannot serve as collateral (unless approved by the NBM); and (iv) rules governing criminal liability of bank managers were tightened. The efficiency of these new rules will need to be tested at the stage of their application.

Privatisation and restructuring of larger state-owned enterprises progressed slowly. At the beginning of 2014, the government postponed the privatisation of key state-owned enterprises in the tobacco, alcohol, energy and telecommunication industries, citing the inability to secure a transparent and effective process. At the same time, privatisation of small and medium-sized enterprises continued in 2014.

The development of energy and transport infrastructure continued. Construction of the Iasi-Ungheni gas pipeline connecting Romania and Moldova’s gas transport systems was completed at the end of August 2014 and will enable Moldova to receive gas from the EU. This will promote energy diversification for Moldova and help to foster competition in the local gas market, although, due to capacity constraints, the pipeline can only supply a small region around Ungheni, which consumes 3-5 per cent of the country’s yearly gas consumption. In addition, a feasibility study is under way for the construction of another pipeline between Ungheni and Chisinau. If supplemented with a new gas compression station in Romania, the pipeline would provide much larger diversification benefits.

Progress has been made in improving the investment climate. In July 2013 Moldova set up an economic council to improve the business climate. The council, which became operational in late 2013, is chaired by the Prime Minister and brings together policy-makers as well as domestic and foreign investors. The council identifies key obstacles to doing business and it has already been instrumental in reducing certain barriers, such as eliminating export tax for nut exports, simplifying procedures for opening a business, reducing laboratory testing and lowering certification costs for exports of wine products. New state aid and competition legislation have been approved by parliament and new powers have been attributed to the competition authority. However, many challenges remain. Recent administrative pressures exerted by tax and customs authorities on several foreign companies in Moldova underscored the urgency of tackling corruption, and ensuring fair justice and rule of law in order to achieve a visible improvement in the business environment.

Steps have been taken to address corruption in the judiciary. In late 2013 parliament adopted legislation aimed at combating corruption in the courts. It envisaged, among other things, a compensation increase for judges, mandatory polygraph tests for candidates applying for the position of judge, and increased financial liability for illegal enrichment activities. Amendments to the banking legislation, which were adopted in early 2014, placed important limitations on judicial review and clarified the regulatory regime in a number of respects, but the changes mainly targeted damages from the earlier Constitutional Court ruling on the NBM. Meanwhile, exclusive jurisdiction was given to a single court in Moldova’s capital to hear claims against the NBM. In July 2014 legislation for the disciplinary responsibility of individual judges was tightened again, by limiting the immunity of judges accused of corruption or money laundering.