Moldova Reinvents Itself
A small country in Southeast Europe, and once part of the Soviet Union, Moldova is often in the news for concerning reasons such as political upheaval and corruption. For example, in 2014, over a billion US dollars disappeared from the banking system; considering that Moldova has a GDP of almost USD 8 billion, this event could have triggered major economic crisis. Nevertheless, after a slight decline of 0.4% in 2015, the economy has recovered, growing at an average rate of 4% per year, as driven mostly by private consumption.
The future economic growth of Moldova is expected to remain stable, further supported by private consumption, higher exports to the EU, and additional foreign direct investment. Lacking significant natural resources and relying heavily on remittances from abroad, this small economy has indeed shown resilience.
In a similar manner to that in which the country’s important wine industry — which was affected by an embargo enforced by Russia, Moldova’s main importer, in 2006 and again in 2014 — rebounded after a few years of challenges (later by increasing investment and shifting its export route to the EU), so did Moldova’s banking system, with support from international financial institutions and the EU.
Moldova’s banking sector remains largely underdeveloped and relatively small, accounting for 50% of GDP in 2018; savings are mostly generated from remittances. The share of non-performing loans is relatively small, accounting for just 16% of the total; however, credit activity, in particular by households and small and medium enterprises, also remains low. According to the Governor of the National Bank of Moldova (NBM) Sergiu Cioclea, “reorienting banks toward their primary role, i.e. converting the large deposit base into healthy credits to the economy” has been one of the main goals of Moldova’s banking reform. An International Monetary Fund (IMF) report confirms that “the financial condition of banks [in Moldova] is stable: banks remain highly liquid, well capitalized, and profitable. Depositor confidence is steady and credit growth is less negative than in 2016”. Reform of the banking sector has been a large component of the IMF program, and significant progress has been made in securing shareholder transparency and probity, completing bank diagnostics, and cleaning up balance sheets.
In consultation with the IMF, a new shareholder removal framework has been adopted to support the timely removal of unfit shareholders. Stakes of non- transparent or ‘problem’ shareholders in the three largest banks have either been sold to strategic investors or sale transactions are underway. In addition, investigations into the probity of shareholders in non- systemic banks have been completed and all shareholders have been certified as fit and proper.
Securities registration will be moved from the current 11 private registries to a new Central Securities Depository (CSD) — a framework designed to guarantee the safety of securities and ensure their transparency. The new CSD should become operational in autumn 2018. The NBM has completed an inspection of related party exposure in both systemic and non-systemic banks, with the formulation of further guidelines with regard to risk management by the NBM under way.
Significant progress has been made in rehabilitating the financial sector, and further reforms are expected. These will include crisis preparedness and management as well as tighter regulation of the growing number of micro credit institutions serving households and small and medium-sized enterprises.
In addition to banking reform, the Government of Moldova has initiated public administration reform with the goal of reorganizing public agencies and state-owned enterprises. As a result, the number of government ministries has been reduced from sixteen to nine, and there are plans to review functions and organizational structures, downsize staff, and increase the salaries of public servants.
At the end of July 2018, the government announced a new package of tax incentives aimed at modernizing Moldova’s economy, improving its business climate, increasing competitiveness, and reducing the shadow economy that, at the time of writing, was due to enter into force in Q4 2018. The new package will include:
- reduction of personal income tax from 18% to a flat tax rate of 12%
- reduction of social contributions from 23% to 18%
- tax exemption on income below subsistence level
- reduction of VAT from 20% to 10% for food service and taxi industries
- fiscal amnesty and a 3% tax on declared assets (until December 2018, excluding civil servants)
These new fiscal measures have been criticized by the IMF, the US Embassy in Moldova, and the Moldovan opposition, with various quarters estimating that these will result in a decrease in public revenue of over USD 150 million.
Whether the new tax incentives are merely part of the government’s electoral campaign or are pragmatic attempts by a technocratic government to modernize Moldova’s economy will be decided in the parliamentary elections to be held in early 2019. Despite the government’s significantly reduced size, it does comprise former business executives with local and international expertise whose decisions can indeed be seen as efforts to increase the competitiveness and improve the business climate in this country’s small economy.