refugees, the impact on revenues and on social spending to mitigate rising infla- MOLDOVA Key conditions and tion, squeezing fiscal space. Persistent inequality of opportunity lim- challenges its the ability of low-income households to access public services, reducing their Table 1 2021 Population, million 2.6 Despite a solid economic performance resilience and cementing low intergen- GDP, current US$ billion 13.7 in the past two decades, the economic erational mobility. Due to the 2020 con- GDP per capita, current US$ 5199.9 model remains reliant on remittances-in- traction, poverty increased from 25.2 a 0.0 duced consumption, with an associated percent in 2019 to 26.8 percent in 2020 International poverty rate ($1.9) a 0.5 low productivity growth resulting from (based on the national poverty line), Lower middle-income poverty rate ($3.2) a 13.3 persistent structural and governance marking the second consecutive year in Upper middle-income poverty rate ($5.5) a 26.0 Gini index weaknesses, significant state enterprises which poverty increased. b 106.3 School enrollment, primary (% gross) footprint, low competition, uneven play- The government faces the challenge of b 71.9 Life expectancy at birth, years ing field, and tax distortions. The 2014 striking the balance between cyclical and Total GHG Emissions (mtCO2e) 12.6 bank fraud uncovered deep weaknesses structural problems, sustaining economic Source: WDI, Macro Poverty Outlook, and official data. in the financial sector. Extreme weather recovery with a stronger fiscal impulse a/ Most recent value (2019), 2011 PPPs. events and the propagation of economic while ensuring fiscal sustainability, and b/ WDI for School enrollment (2020); Life expectancy (2019). and financial crises from the main trad- implementing an ambitious structural re- ing partners have been a traditional risk forms program to improve competitive- for a small open economy like Moldova. ness and long-term growth. Growth is expected to be curtailed by The COVID-19 pandemic has recently al- so raised concerns about the health sys- the unfolding crisis in Ukraine despite tem’s stability. its swift recovery from COVID-19. Recent developments in Ukraine pose Recent developments Medium term growth hinges on the major threats to the economic prospects containment of the war and of the of Moldova through trade (32 percent Economic activity bounced back by 13.9 of imports and 14 percent of exports percent in 2021. A strong increase in COVID-19 pandemic, as well as a suc- are with Russia and Ukraine) and remit- wages, remittances and social transfers cessful management of the refugee crisis tances channels (70 percent of migrants contributed to private consumption and sustained fiscal support. Authorities and 25-30 percent of remittances are re- growth. Investments increased by 7 per- face policy trade-offs between the need lated to Russia and Ukraine). Key in- cent on the back of favorable monetary for mitigating shocks and the implemen- frastructure networks are primarily con- conditions. Strong domestic demand and nected to Ukraine despite recent efforts restocking after the lockdown led to sig- tation of a broad-based reforms program to better connect the country to the nificant drag on growth from net exports, to support long term growth. EU. The potential disruption in the sup- albeit a strong increase of exports due to ply of food, energy and commodity im- high yields. All economic sectors recov- ports is expected to further increase ered after a sharp contraction in 2020, with prices. The fiscal position is expected the agricultural sector leading (14.3 per- to be further weakened by inflows of cent) after the 2020 drought. FIGURE 1 Moldova / Projected macroeconomic indicators FIGURE 2 Moldova / Actual and projected poverty rates and real GDP per capita Percent of GDP Poverty rate (%) Real GDP per capita (constant LCU) 16 45 60000 12 40 50000 8 35 30 40000 4 25 0 30000 20 -4 15 20000 -8 10 10000 5 -12 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 0 0 Real GDP, % change 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Current account balance, % GDP International poverty rate Lower middle-income pov. rate Fiscal deficit Upper middle-income pov. rate Real GDP pc Source: Author's calculations based on national statistics Source: World Bank. Notes: see Table 2. MPO 25 Apr 22 The accommodative monetary conditions of 2021, y/y. The Government almost dou- prices subside, the current account deficit throughout 2021 were reversed as infla- bled the minimum pension in 2021, in- is expected to improve. High inflationary tionary pressures began to pick up due to creasing disposable incomes for pension- pressures will persist throughout 2022 increasing global energy and food prices receiving households. However, rising en- with the inflation rate remaining well and strong domestic demand. Policy inter- ergy and food prices started affecting pur- above the upper bound of the central Bank est rate tightened to 10.5 percent from 2.5 chasing power of vulnerable households in target corridor of 5 percent (+/-1.5 percent). percent in 2021. In the first three quarters the last quarter of 2021. The fiscal deficit in the medium term is of 2021, the current account deficit almost expected to remain higher than in pre- doubled reaching 13 percent of GDP as im- Covid-19 years, as the economy will need ports expanded quicker than exports and to protect the disposable income of the remittances, financed primarily by cash Outlook population from increasing prices (par- and deposits in foreign currency. On the ticularly energy and food), support the back of higher GDP, external debt de- The unfolding war in Ukraine is expected refugees and increase investments as the creased by 4.5 percentage points to 66.1 to affect the economy through the trade ambitious reform program gains steam. percent of GDP. and remittances channels as well as prices As a result, public debt is expected to in- In 2021, health and social protection (35.4 and financial uncertainties. Even under an crease, while remaining relatively low by percent and 13 percent, y/y) were the main optimistic scenario of the resolution of the international standards. drivers of spending increase (+ 11.9 percent, conflict in Ukraine and reestablishment of Given the recovery in the labor market and y/y). Spending on non-financial assets in- the trade routes, subsiding pandemic risks, strong remittance receipts, poverty is ex- creased by 17.6 percent despite lower execu- a continuation of a broad-based govern- pected to have decreased from 15.7 percent tion of capital investments. Revenue collec- ment reform program, and sustained fiscal in 2020 to 10.8 percent in 2021, according tion rebounded strongly (+23.5 percent, y/ impulse, growth is expected to substantial- to US$5.50 PPP poverty line. Impacts of the y). The fiscal deficit, mainly financed ly decelerate to -0.4 percent in 2022. In an war in, including higher food and fuel in- through foreign debt, reached 2 percent of optimistic scenario of de-escalation of the flation, the potential for return migration GDP. Public and publicly guaranteed debt situation in Ukraine, growth is expected and lower remittances, as well as a weaker decreased to around 33 percent of GDP. rebound to 3.8 percent in 2023 and around labor market due to lower demand for ex- Employment recovered to its pre-pandem- 4.4 percent in 2024. As the economy gains ports, are forecasted to lead to a stagnation ic levels by Q4 of 2021 and wages grew steam and the trade routes are reestab- in poverty of 10.9 percent in 2022. by 13 percent in the first three quarters lished and higher global energy and food TABLE 2 Moldova / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 3.7 -7.4 13.9 -0.4 2.7 4.2 Private Consumption 3.2 -8.3 15.5 0.8 3.8 4.4 Government Consumption 1.3 3.1 3.8 2.6 1.3 2.1 Gross Fixed Capital Investment 11.9 0.4 1.7 -1.0 3.7 4.3 Exports, Goods and Services 8.2 -9.6 17.5 0.8 4.1 4.3 Imports, Goods and Services 6.2 -5.0 19.2 2.0 4.6 3.9 Real GDP growth, at constant factor prices 4.0 -7.6 15.6 -0.8 2.5 4.2 Agriculture -2.3 -26.4 18.7 5.0 2.0 7.0 Industry 7.1 -4.3 5.6 3.5 4.3 5.4 Services 4.3 -4.8 19.3 -3.4 1.9 3.2 Inflation (Consumer Price Index) 4.7 4.1 5.1 18.1 6.2 4.6 Current Account Balance (% of GDP) -9.3 -7.7 -11.1 -10.4 -9.0 -8.8 Net Foreign Direct Investment (% of GDP) 4.2 1.3 1.6 0.8 1.5 2.7 Fiscal Balance (% of GDP) -1.4 -5.3 -1.9 -6.1 -4.1 -3.1 Debt (% of GDP) 27.4 36.4 32.4 36.6 36.0 35.2 Primary Balance (% of GDP) -0.7 -4.5 -1.1 -4.9 -2.9 -2.1 a,b International poverty rate ($1.9 in 2011 PPP) 0.0 0.0 0.0 0.0 0.0 a,b Lower middle-income poverty rate ($3.2 in 2011 PPP) 0.5 0.8 0.4 0.4 0.4 0.3 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 13.3 15.7 10.8 10.9 10.0 8.6 GHG emissions growth (mtCO2e) -1.3 -9.6 6.0 -2.7 -0.7 -0.1 Energy related GHG emissions (% of total) 61.9 62.1 62.0 60.5 59.8 59.5 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2019-HBS.Actual data: 2019. Nowcast: 2020-2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2019) with pass-through = 0.7 based on GDP per capita in constant LCU. MPO 26 Apr 22