The World Bank has improved the forecast for the Moldovan economy’s growth for the next three years, envisaging 3% growth in Moldova’s 2021 GDP - from 3.8% to 6.8%.
This is stated by the World Bank's new Economic Outlook for Europe and Central Asia "Competition and Firm Recovery post-COVID-19." According to the research materials, the World Bank experts raised the forecast for Moldova's GDP growth in 2022 by 0.2 percentage points - from 3.7% to 3.9%, and for 2023 - by 0.6 percentage points - from 3.8% to 4.4%. The WB analysts stressed that after last year's 7% GDP decline amid the pandemic and severe drought, the Moldovan economy is recovering rapidly, and its growth is expected to be higher than potential in the medium term. The short and medium-term outlook is based on assumptions about containing the COVID-19 pandemic, implementing an ambitious reform program, and sustained financial support. In case the pandemic resume, the authorities are advised to focus primarily on the health sector in order to manage the pandemic by striking a balance between long-term reforms and mitigation measures. Speaking about the problems and challenges, the WB analysts point out that, despite the strong economic performance over the past two decades, Moldova has failed to fulfill its aspiration for faster convergence with the EU income levels. The country's economic model continues to depend on remittance-driven consumption, with correspondingly low productivity growth as a result of persistent deep structural and managerial weaknesses, significant SOEs impact, low competition, unfair playing rules and tax imbalances. It is emphasized that the 2014 banking fraud revealed serious weaknesses in the financial sector. Moreover, the Moldovan economy is highly vulnerable to external shocks, while extreme weather events and the spread of the economic and financial crisis over major trading partners have been traditional risks for a small open economy like Moldova. The recent COVID-19 pandemic has created challenges for the health system as well. World Bank experts note that persisting inequality of opportunity continues to limit the ability of low-income households to access public services, reducing their resilience to shocks and perpetuating low intergenerational mobility. The recession in 2020 led to an increase in poverty from 25.2% in 2019 to 26.8% in 2020, representing a rise in poverty for the second consecutive year. Although the poverty rate increased more in urban than in rural areas, rural areas remain much poorer: the poverty rate in 2020 was 35.3%, compared with 14% in urban areas. Against this backdrop, the new government is expected to implement an ambitious structural reform program to increase competitiveness (justice reform, strengthening the rule of law, fighting corruption, etc.) while supporting an economic recovery with a stronger fiscal impulse. WB experts point out that striking a balance between cyclical and structural issues and ensuring financial sustainability will be an important aspect that should be taken into account when developing short and medium term policy responses. The World Bank analyst expects the Moldovan economy to grow 6.8% in 2021, noting that strong growth in wages, remittances and social transfers contributed to a significant increase in private consumption. Investments were up 20% thanks to favorable monetary conditions. Strong domestic demand and restocking after the lockdown led to a significant slowdown in net export growth. After a sharp downturn last year, positive shifts have been observed in all sectors of the economy. However, in the first half of the year, the agricultural sector continued to decline. Rising food prices due to crop failures and rising global energy prices, coupled with strong domestic demand, exacerbated inflationary pressures, forcing the central bank to tighten monetary policy by 100 basis points to 3.75% in July after nearly 10 months at a record high low level. External positions deteriorated as imports increased rapidly, while exports did not grow so rapidly, despite improved terms of trade. As a result, the current account deficit reached almost 13% of GDP, up from 8.2% in the first quarter of 2020, and it was financed mainly by cash and foreign currency deposits. External debt slowed down, falling 2.1 percentage points to 68% of GDP. In the first 7 months of 2021, the health sector (+51 percent over the same period last year) and social protection (+ 14.5%) were the main drivers of spending growth (+ 16.4%). Expenses on non-financial assets increased by 25%, despite a decrease in capital expenditures. Revenue collection rose strongly (+ 20.5%) following the softening of restrictive measures. The budget deficit reached 2.8% of the projected GDP and was mainly financed from the domestic market. Public and publicly guaranteed debt increased by 8 percentage points of GDP to 35.2%. WB experts believe that as the economy recovered in the second quarter of 2021, the labor market recovered with an increase in both the employed population (by 1.9%) and real wages (+ 11.8%), which helped households with finances. Despite the overall improvement in employment, certain vulnerable groups continue to experience the effects of the crisis in the form of reduced working hours, forced part-time and remote work as well as work interruptions. The recovery in the economies of Moldova's main trading partners led to a significant inflow of remittances into the country, which helped stabilize household consumption. However, rising food inflation is causing or affecting poorer households. WB experts believe that, based on the assumptions about successful containment of the pandemic, with a broad reform program of the new government supported by development partners, economic growth in Moldova will continue in the medium term and will be higher than potential. Consumer and investment confidence and all sectors are expected to show strong growth, but their 2019 level will not be reached until after 2022. Strong domestic demand and higher global energy prices will lead to widening current account deficits. Inflation is expected to hover at the upper end of the corridor in the second half of 2021, move out of the corridor in 2022, and stabilize at 5% in 2023. The budget deficit in the medium term will remain higher than in the pre-COVID-19 period with a 2022 budget to reflect promised increases in minimum pensions and new external resources from the IMF, EU and other development partners. As a result, public debt is expected to increase while remaining relatively low according to international standards. Vulnerability to natural disasters is expected to remain high, with the risk of disrupting fragile recovery and shifting government attention from long-term reforms to mitigation measures. Poverty is expected to decline from 13.7% in 2020 to 10.6% in 2021, in line with a recovery in the labor market and strong remittance inflows. Subject to continued improvement in the labor market and significant inflows of remittances, the poverty rate is expected to continue to decline to 9.2% in 2022. WB experts believe that risks that could cause a slowdown in the pace of inclusive recovery include slow rates of vaccination, the re-introduction of containment measures, the adverse climatic events and the increase in food inflation. // 06.10.2021 – InfoMarket
