IMF Executive Board Concludes Article IV Consultation with Moldova
OREANDA-NEWS. August 3, 2010. The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the
Background
The economy is steadily recovering, with GDP growing by 4.7 percent in Q1 2010 relative to a year ago. Economic activity is bolstered by a pick-up in industrial production and trade, supported by the removal of many restrictions on exports and imports and exchange rate depreciation, and growth is projected to reach 2.5 percent in 2010. Twelve-month inflation reached 7.9 percent in May owing to necessary increases in energy tariffs, exchange rate depreciation, and increases in excise taxes. However, core inflation remains contained close to 5 percent.
Fiscal adjustment has been strong and focused on restraining current spending. The 2009 deficit came well below expectations as a result of an upsurge in tax revenue and expenditure savings, and the pace of fiscal adjustment has been maintained so far in 2010.
Monetary policy was significantly eased in the second half of 2009 to inject liquidity in financial markets. Early in 2010 the monetary stance was slightly tightened to curb second-round effects from energy tariff increases, but it remains accommodative to shore up the still subdued credit growth and fragile recovery. The National Bank of
The financial sector has been relatively sound. Banks have remained liquid and well-capitalized, and exposure to foreign assets and institutions in distress is minimal. However, nonperforming loans remain high at over 17 percent in April 2010––although this ratio seems to have stabilized––warranting vigilant monitoring of bank stability.
Executive Board Assessment
Fiscal policy has embarked on an adjustment path. Taking advantage of the faster than expected recovery, the amended budget for 2010 appropriately saves the bulk of the extra revenue while allocating more funds for public investment and social protection. The new system of targeted social assistance has helped reduce extreme poverty. To sustain the pace of fiscal consolidation going forward, the focus should remain on restraining current spending and curtailing the oversized public sector.
The moderately accommodative monetary policy stance has been supporting the growth recovery without losing sight of the inflation targets. After the transitory impact of external upward pressures on prices and much-needed adjustment of energy tariffs in early 2010, inflationary pressures have subsided. The central bank closely monitors financial indicators of the banking sector, which appears liquid and well-capitalized. The gradual shift of the monetary policy framework towards inflation targeting should continue, while interventions in the foreign exchange market should aim only at smoothing erratic fluctuations without resisting sustained trends.
The ongoing and envisaged structural reforms are appropriately focused on stepping up liberalization and deregulation and creating a business environment conducive to investments and exports. Building up export potential and expanding access to the vast markets of
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