World Bank keeps Moldova's 2021 and 2022 GDP growth at 3.8% and 3.7%, respectively, and in 2023, WB experts expect the Moldovan economy to grow 3.8%.
This is stated in a new World Bank publication the Europe and Central Asia Economic Update, Spring 2021: Data, Digitalization, and Governance. WB analysts also forecast that inflation in Moldova in 2021 will be 4.4%, and in the next 2 years - 5% each. The World Bank draws attention to the fact that Moldova has one of the highest rates of infection and mortality from COVID-19 in Europe. It is emphasized that COVID-19 and the recent drought have sharply worsened the prospects for Moldova, as there was a significant economic downturn in 2020. After 2020, high uncertainty about the duration of the pandemic and its economic and social impact could further deter companies, workers and households, hindering recovery. WB experts point out that if the risks of worsening the situation materialize, then the reduction in fiscal space may limit the possibilities for further countercyclical measures. The World Bank publication draws attention to the fact that, despite strong economic performance in recent years, Moldova has not been able to achieve faster convergence with EU income levels. The economic model continues to depend on consumption driven by remittances of labor migrants from abroad. Slowing productivity growth as a result of deep structural and managerial weaknesses is a key challenge. SOEs occupy a significant place; their productivity is lower than in the private sector, while the business environment, anti-competitive practices and taxes distort private initiatives. While Moldova's medium-term growth prospects remain positive, the sustainable recovery depends on containing the pandemic and a favorable external environment. WB experts note that a new wave of restrictions in Moldova and in the countries-major trading partners may further reduce consumption and business confidence, which will lead to an even greater decline in remittances and exports. On the financial side, while the 2021 budget includes ambitious fiscal stimulus, this may not be enough in the case of slow roll-out of vaccinations and limited external funding. Internal risks are associated with political instability, institutional weakness, and political constraints on judicial and structural reforms. WB experts emphasize that the combination of the pandemic and a severe drought has affected most sectors of the economy. In 2020, economic activity fell sharply, while GDP fell by 7% last year. The main factors behind this decline were a 7% decline in household consumption in 2020, as well as a decline in investment. Lockdown measures halted trade and industrial production, and the severe drought led to a decrease in agricultural production by more than 26%. After the end of the lockdown, the economy began to gradually recover, but most of the short-term indicators remain negative. Against the backdrop of falling import prices and domestic demand, inflation slowed noticeably in 2020, dropping below the lower bound of the target band of 5% (+/- 1.5%) since August. In response, the National Bank reduced the base rate 5 times to a new record low of 2.65% per annum. From pre-COVID-19 level, tax revenue increased by about 0.3 pp of GDP while spending increased by 4.1 pp of GDP. As a result, the budget deficit reached 5.1% of GDP in 2020. Employment fell 0.5% in the last quarter of 2020, with trade and hospitality being the worst hit sectors, followed by agriculture and industry. Job losses, together with declining earnings, the return of the most vulnerable economic migrants, and rising food prices have led to increased strain on households' finances. As a result, the poverty rate is projected to rise from an estimated 10.6% in 2019 to about 14.2% in 2020. Economic growth in Moldova is expected to recover to 3.8% in 2021, subject to favorable conditions thanks to the roll-out of vaccinations. Consumer and investment confidence is projected to improve on the back of a favorable external environment, increased social transfers and favorable monetary policy. Most sectors will return to normal, although 2019 levels are estimated to be reached only in 2022. The agricultural sector is expected to rebound strongly from poor yields in 2020. Inflation is expected to remain lower than the target corridor of 5 percent +/- 1.5 pp in 2021-22 but to pick up as the recovery strengthens. The authorities plan Moldova's budget deficit to reach 6.3% of GDP in 2021 and remain above historical averages over the medium term due to declining incomes as businesses struggle and households suffer from weak job creation. Public debt is expected to increase (by 9.1 pp of GDP from pre-COVID-19 levels) to 36.5% of GDP in 2021, while remaining relatively low by international standards. World Bank experts point out that the Moldovan government is facing significant funding needs that may be difficult to meet domestically, despite aggressive monetary policy easing. The ability to mitigate the impact of the crisis and support economic recovery will be critically dependent on external financing, especially on a successful renegotiation of the IMF's program terms. WB analysts believe that, based on the assumption of the recovery of the economy of Moldova and the main countries of destination of migrants, the poverty level in our country, according to forecasts, will decrease from 14.2% in 2020 to 12.3% in 2021. Going forward, Moldova will need to address the inequality of opportunities and accelerate private sector-driven job creation. // 01.04.2021 – InfoMarket
