Profitразделитель ссылочного текста №_11-12_2022 (303), noiembrie-decembrie 2022

IMF-required reforms to facilitate Moldova’s debut on capital market

Alexandru TANAS | Interview in English

In addition to sustainable economic growth and development of the country, the successful implementation of the decisive reforms stipulated in the new 40-month $550m program with the IMF will facilitate Moldova’s debut on the capital market, IMF Resident Representative Rodgers Chawani says. He explains that improved macroeconomic policies, strong governance and low debt levels would be critical in determining interest rates and maturities of the bonds. In an exclusive interview with Profit magazine's editor-in-chief Alexandru Tanas, Rodgers Chawani comments on the advantages of the program with the IMF, the budget deficit, the energy crisis, the fight against corruption and informal economy.

Profit: How does the Moldovan government benefit from a 40-month program with the IMF? How can this support be characterized from a macroeconomic point of view? How can the government make the most of the external support, given its financial component: $558 million from the IMF?

Rodgers CHAWANI:
From the macroeconomic perspective, this is a development-focused program. We see multiple benefits from the recently agreed program with the IMF, let me mention a few:

 (i) The program will assist the Moldovan authorities to deal decisively with the fallout from the COVID-19 pandemic, and the energy crisis.

(ii) The program will allow the authorities to tackle deep-rooted structural weaknesses, including the weak business climate, fiscal and financial sector governance.

(iii) The program offers a solid basis for formulating prudent macroeconomic policies to foster inclusive and sustainable growth, critical for accelerating income convergence with European peers.

(iv) The program will catalyze concessional support from development partners to reform efforts.

Profit: What do you think will be difficult for the government to comply with under the IMF-supported program in order to take advantage of its financing? From the point of view of the IMF, what is the "weak link" in the new IMF Program, and what gives Moldova an undeniable advantage and a big incentive for development?

Rodgers CHAWANI:
We have agreed on a very ambitious package of measures supported by home-grown policies and, therefore, are confident about the program's success. Moldova has a reform-minded government with solid commitments to steer change which bodes well for program implementation. We are mindful that the external and domestic environment remains complex due to global recovery, geopolitical tensions, vested interests, weak implementation capacity, and evolving COVID-19 variants. On the upside, the new program and accompanying financial and expert support from external partners will mitigate the risks. The consolidation of power by reform-minded forces provides an opportunity to pursue the development agenda resolutely.

Profit: What reforms does the IMF Program foresee in public administration? What is to be done by the government in order to use public money efficiently? Does the IMF-supported program oblige the government to carry out a territorial and administrative reform and reform the tax system, including the preparation and approval of a new Tax Code to replace the current one that is over 24 years old?

Rodgers CHAWANI:
Our fiscal governance policies focus on the tax side on strengthening revenue mobilization by, among others: conducting tax expenditure analyses to better understand the scope and costs of various tax relief provisions; improving the capacity of the State Tax Service by operationalizing the integrated taxpayer register; and advancing customs reforms to reduce revenue leakages. On spending efficiency, the program envisages improving budgetary processes to improve execution of approved fiscal policies, strengthening the public investment management framework to enhance execution and quality of public investment, improving the unitary pay system in the budget sector, and enhancing the pensions and social assistance programs. While the program does not directly mandate the territorial and administrative reforms and development of the new Tax code, an upgrade would be welcome, and the IMF stands ready to provide technical assistance in the area as needed.

Profit: How does the IMF feel about the government's intention to reduce the tax burden on business to ensure economic development?

Rodgers CHAWANI:
You raise an important question, and I strongly think this is an area where context is more informative. Moldova faces several challenges that require significant finances.  However, a tight budget constraint, revenue losses from tax expenditures and inefficient spending pose substantial risks. To meet its developmental objectives, Moldova needs to implement growth-friendly fiscal reforms. In our view, the implication for the revenue front is a broadening of the base by rationalizing tax exemptions to yield higher revenue and improve equity while enhancing growth. We see scope to focus on rationalizing spending and improving efficiency regarding the spending measures. These efforts, if successful, could help mobilize domestic resources and thus indeed provide space for lowering the tax burden. In the meantime, if businesses face specific constraints, we will support targeted, transparent, and time-bound interventions from the expenditure side of the budget.

Profit: Given the energy crisis that Moldova is going through, will the IMF's requirement for a budget deficit of 3% of GDP be revised? How does the IMF feel about not including infrastructure investment in the calculation of the budget deficit?

Rodgers CHAWANI:
The agreed target for the fiscal deficit under the program is 6% of GDP, and it encumbers the impact of the rising energy prices and related support to vulnerable households. While we feel the earmarked amounts are sufficient, the forthcoming reviews of the program provide an opportunity to re-align the spending pressures with resources in the Budget as needed. Notably, the program includes so-called "floors" for spending on infrastructure, health, education, and social assistance for the vulnerable population. This means that the program would welcome more spending in these areas within the agreed fiscal envelope. This design feature highlights that the new program with Moldova is focused on developing the country, as opposed to a traditional fiscal consolidation focus of many programs with countries with debt sustainability problems.

Profit: Will the IMF support Moldova to issue sovereign securities in order to attract foreign long-term investment in road construction and infrastructure development? Can you say, at least approximately, on what conditions Moldova could place Eurobonds - 3%, 5%, or more?

Rodgers CHAWANI:
Low global interest rates and portfolio diversification have provided developing countries with unprecedented opportunities to tap international bond markets. Moldova, like other countries, could benefit from tapping into international bond markets and we hope that decisive reforms under the new program would facilitate Moldova’s debut at the capital market. The benefits are well-internalized, including the signal of country strength, diversified funding base, reduced refinancing risks due to longer maturities, and lower interest rates. However, remaining clear-eyed about the associated risks, including discipline imposed by markets, foreign exchange risks, escalating transparency requirements, fees, and costs of carry would determine whether Moldova is ready or not. Regarding the conditions for placing the Eurobonds, an expanding economy, improved macroeconomic policies, strong governance, and low debt levels would be critical in determining interest rates and maturities.

Profit: Why does the IMF insist on the need to ensure the independence of the National Bank from the authorities? At critical moments in Moldova, the question arises as to the expediency of the use of foreign currency reserves, managed by the National Bank. How legitimate is this suggestion?

Rodgers CHAWANI:
History demonstrates that insulating central banks from the inevitable pressure of political dynamics remain essential for achieving economic and price stability. Moldova remains susceptible to external shocks and has significant development needs. The current level of reserves provides a sufficient cushion to withstand adverse external shocks and allow the central bank the flexibility to engage in foreign exchange operations to address excessive exchange rate volatility and disorderly market conditions.

The NBM Law prohibits the direct use of foreign reserves for development projects. In the IMF’s view, the NBM’s reserve management strategy is appropriately prudent given Moldova’s vulnerability to external shocks, existing capacity constraints, and past incidents of political pressure on the institution.

The IMF believes the National Bank of Moldova should execute its mandate and functions without political approval or interference by third parties or arms of Government. In its work, adequate legal protection for its staff and management to facilitate the achievement of public policy objectives is critical. Equally important is having a solid balance sheet and sufficient financial buffers to implement its mandate fully and in a sound and efficient manner.

Profit: What should be the NBM’s main tasks in 2022? What are the conditions of the IMF-supported program concerning directly the National Bank and the banking sector of Moldova?

Rodgers CHAWANI:
The NBM has made significant progress in strengthening its governance and enhancing financial sector oversight under the previous program. The priorities going forward include preparations for the transfer of supervisory responsibilities for insurance companies, savings and credit associations, and non-bank credit organizations to the central bank, closing remaining gaps in the macroprudential framework by increasing resources for financial stability surveillance and implementing borrower-based macroprudential tools, and strengthening bank resolution, crisis preparedness, and liquidity management frameworks.

Profit: What is the IMF’s view of the current situation of the banking sector in Moldova, the quality of corporate governance and the transparency of bank shareholders?

Rodgers CHAWANI:
The banking sector remains well-capitalized, liquid, and profitable, while non-performing loans are relatively low. We have seen extensive regulatory reforms and a transition to fit-and-proper ownership for many banks that have underpinned the banking sector’s soundness. Under previous programs, the central bank has made significant strides in closing gaps in the prudential regulatory and supervisory frameworks based on EU standards. Such efforts have helped in addressing vulnerabilities in the sector. Similarly, the program was instrumental in assisting the NBM to address shareholder suitability and transparency issues for the industry. At the same time, foreign owners, including five EU banks, account for nearly 90% of share capital. The entrance of foreign investors contributes to more robust governance, including significant numbers of independent board members and risk management. The success of these reforms and the ensuing sector’s strength critically cushioned economic recovery during the pandemic.

Profit: How justified are the forecasts of pessimists, who say that inflation will reach 20% in 2022? What tools, other than monetary ones, does the IMF recommend to Moldova to use to fight inflation? In what way, besides the base rate and the required reserves for banks, could the National Bank influence inflation?

Rodgers CHAWANI:
Supporting growth while keeping inflation under control is now a global challenge. Inflation is accelerating globally, including the EU, and most central banks tightened monetary policy. Rising energy and food prices and global supply chain constraints induced by the pandemic have fueled higher inflation in many countries, and these global factors may continue to add to inflation in 2022, especially high commodity food prices. As the Governor of the NBM also indicated, adjustment of regulated prices and utility tariffs and a stronger-than-anticipated domestic recovery will continue to pile pressure on inflation. More recently, consumer credit has picked up, contributing to inflationary pressures.

With inflation reaching 14% in December, prospects for advancing towards 20% are realistic for Moldova. The central bank has proactively raised the policy interest rate and liquidity reserve requirements to contain the rising inflation, while carefully calibrating the scope and pace of monetary tightening to specific sources of inflationary pressure. Tighter monetary policy will weigh on growth in the short term, but we support the central bank’s decision as necessary to contain second-round effects of supply shocks, keep inflation expectations well anchored, and ensure economic stability. The NBM continues to calibrate its response to the sources of inflation, and in this regard, the current instruments are relevant.


Other measures to ease inflationary pressures should focus on addressing bottlenecks in supply chains, improving competition in food and energy markets, and strategic investments in energy efficiency. Unfortunately, effects of these measures, which are urgent and necessary, would only be felt over the medium term.

Profit: The government compensates the population for gas, heating, and electricity tariffs during the energy crisis. How does it comply with the IMF program?

Rodgers CHAWANI:
The IMF supports the response package, that includes compensation for gas, heating, and electricity tariffs. Our understanding is that the authorities are transparently increasing the tariffs while providing direct budgetary support. The efforts so far are transparent and timebound. They are also transparently providing resources to the energy market operators. The above measures are in line with the spirit of the program.

 


Profit: How does the IMF treat the authorities' decision allowing the MoldovaGaz to postpone the VAT payment for natural gas? The authorities and the regulator deliberately delay the adjustment of regulated tariffs for gas, heat, and electricity. Tariff deviations lead to loss of financial liquidity and losses of operators. How consistent is this with the IMF program?

Rodgers CHAWANI:
The unfolding energy crisis continues to create liquidity and cashflow pressures and most countries are implementing different measures including postponement of VAT payments. So, the response is in line with what we are seeing in other countries. What is important for us is proper recording and accounting of the related amounts for future collection.

You are right that tariff deviations lead to loss of financial liquidity and losses of operators. This is a point we have consistently raised in recent years with many Moldovan governments. We take comfort in recent announcements that the tariff will be adjusted. In every crisis, there are opportunities, and the narrative of the current crisis demonstrates the unintended consequences for lagged and politicized adjustments in tariffs.

Profit: How realistic do you consider the following macro-economic indicators of Moldova in 2022: GDP growth – 4.5%, budget revenue – 50 billion lei, budget deficit – 15.14 billion lei, budget deficit to GDP ratio - 6%, national currency exchange rate – 18.77 MDL per USD, public debt to GDP – 45%, inflation rate – 6.9%?

Rodgers CHAWANI:
The program mission only took place in September and October, and at the time, information for the third quarter was not yet available. The projections were aligned with the ministry of finance and economy and the NBM forecasts at the time. Since the mission, the macroeconomic context has evolved, with inflation and energy sector issues dominating the outcomes. We are currently updating our projections to reflect these developments, and it is expected that the World Economic Outlook update will provide more clarity to the expectations for 2022.

Profit: Mr. Chawani, you have been working in Moldova during a very interesting and challenging period – since the end of 2020 we have a pro-European president and since mid-2021 a ruling pro-European party. Could you give a general overall impression of Moldova at this stage?

Rodgers CHAWANI:
Moldova currently enjoys a unique opportunity to implement ambitious reforms. However, the lingering pandemic, energy crisis, and still-developing implementation capacity continue to beset the reform momentum. Despite these headwinds, the commitments under the program, if appropriately sequenced and resolutely implemented, remain critical to shift the focus towards securing sustainable and inclusive growth. While the pandemic may delay, it will not derail progress, and with increased collaboration, the ambitious governance and institutional reforms are feasible.

Profit: According to different kinds of research, approximately 35% of the Moldovan economy is a shadow economy, so how could we get out of this situation? What is the IMF's advice?

Rodgers CHAWANI:
The informal economy in Moldova is indeed sizeable. Underlying structural weaknesses, including a large cash economy, a dominant share of low productivity sectors, an unfavorable business environment, weak investor protection, lack of competition, and longstanding weak institutions and governance vulnerabilities, remain critical drivers for informality. These factors have led to significant brain drain, and skills in the labor market remain suboptimal while employers face difficulties in hiring and retaining the right caliber of workers. There are no easy solutions; however, we see merit in addressing informality and labor market irregularities under the program, hence focusing on reforms to strengthen governance and institutions.

Profit: Fighting corruption has been one of the main election promises of the President and her PAS party and now, once in power, they are taking steps to honor their promise. But what do you mean by corruption as a representative of the IMF? What are things you would like to see improved? What are your major concerns if you are speaking about corruption and the fight against it?

Rodgers CHAWANI: 
We define corruption as the abuse of public office for private gain. Corruption is a problem because it distorts the activities of the state and undercuts efforts to achieve sustainable and inclusive economic growth. Corruption helps some people evade taxes, whereas others often pay more. It leads to loss of revenues hampering governments’ ability to provide social spending. Moreover, public services and infrastructure quality is undermined when bribes or vested interests influence government decisions. Ultimately, corruption erodes trust in government and can lead to social and political instability.

The IMF report on governance assessment in Moldova found that profoundly entrenched systemic corruption continues to mark Moldova’s economy, eroding trust in public institutions and weakening the rule of law. Although institutions carrying out essential anti-corruption functions are in place, they are perceived as being subject to political influence and failing to deliver meaningful results. Corruption enforcement remains focused on low-level instances of corruption and has not resulted in dissuasive, proportionate, or effective sanctions.

Against this background, the program envisages reforms to improve the implementation of anti-corruption policies and tackle vested interests, to strengthen the independence and accountability of anti-corruption and judicial bodies, reduce avenues for political influence, instill more trust in the justice system, and hold individuals fully accountable for abuse of public office for private gain are essential objectives and are vital to the success of the program.

Profit: Thank you for the interview!■

 

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