The World Bank has worsened the GDP growth forecast for Moldova in 2022 and 2023 and expects the Moldovan economy to decline by 0.4% this year and to grow by 2.7% next year.
This is stated in the new World Bank’s Europe and Central Asia Economic Update ”War in the region”. It should be noted that before the war in Ukraine, the World Bank predicted that Moldova's GDP growth would be 3.9% in 2022, and 4.4% in 2023. For 2024 the WB experts forecast 4.2% growth of the Moldovan economy. The World Bank experts expect inflation in Moldova to be 18.1% in 2022, 6.2% in 2023 and 4.6% in 2024. World Bank analysts note that economic growth in Moldova is expected to be limited this year due to the crisis in Ukraine, despite the rapid recovery of the economy from COVID-19, and medium-term growth depends on containment of war and pandemic COVID-19, as well as successful management of the refugee crisis and sustained fiscal support. The WB review points out that despite robust economic performance over the past two decades, the economic model remains dependent on remittance-driven consumption, with concomitant low productivity growth as a result of persistent structural and governance weaknesses, the significant presence of state-owned enterprises, low competition, an uneven playing field, and fiscal distortions. Bank fraud in 2014 exposed serious weaknesses in the financial sector. Extreme weather events and the spread of economic and financial crises from major trading partners were traditional risks for a small open economy like Moldova. The recent COVID-19 pandemic has also raised concerns about the stability of the health system. The WB experts note that recent developments in Ukraine pose serious threats to Moldova's economic prospects through trade (32% of imports and 14% are linked to Russia and Ukraine) and remittance channels (70% of migrants and 25-30% of remittances are linked to Russia and Ukraine). The main infrastructure networks are mainly linked to Ukraine, despite recent attempts to improve the country's connection to the EU. Potential disruption of food, energy, and imports of goods is expected to lead to further price increases. The financial situation will deteriorate further due to the influx of refugees, the impact on income and social spending to mitigate rising inflation, resulting in shrinking fiscal space. Due to the economic downturn in 2020, poverty in Moldova increased from 25.2% in 2019 to 26.8% in 2020 (based on the national poverty line), and there was an increase in poverty for the second year in a row. As the WB analysts note, the Moldovan government faces the challenge of balancing cyclical and structural challenges, sustaining the economic recovery with a stronger fiscal impulse while ensuring fiscal sustainability, and implementing an ambitious structural reform program to improve competitiveness and long-term growth. Moldova's GDP growth in 2021 was 13.9%. Strong growth in wages, remittances and social transfers boosted private consumption. Investments grew by 7% amid favorable monetary conditions. Strong domestic demand and restocking after the embargo led to a significant slowdown in net export growth, despite strong export growth due to a strong harvest. All sectors of the Moldovan economy recovered from the sharp downturn in 2020, with the agricultural sector leading (14.3%) after the 2020 drought. At the same time, adaptive monetary conditions reversed in 2021, as inflationary pressures began to intensify due to rising global energy and food prices and strong domestic demand. The base refinancing rate was raised to 10.5% from 2.5% in 2021. The current account deficit almost doubled in the first three quarters of 2021, reaching 13% of GDP, as imports grew faster than exports and remittances, financed mainly by cash and foreign currency deposits. Against the backdrop of GDP growth, foreign debt fell by 4.5 percentage points, to 66.1% of GDP. Health care and social protection were the main drivers of spending growth in 2021. Expenditures on nonfinancial assets increased 17.6%, despite lower execution of capital expenditures. Revenues were up 23.5%. The budget deficit was mainly financed by external debt, which reached 2% of GDP. Public and publicly guaranteed debt declined to about 33% of GDP. Employment recovered to pre-pandemic levels by the fourth quarter of 2021, and wages grew by 13% in the first three quarters of 2021. According to the WB experts, even with an optimistic scenario of resolving the conflict in Ukraine and restoring trade routes, reduced risks of the pandemic, a continuation of the large-scale reform program by the government, and a sustainable fiscal impulse, the economic decline in Moldova will be 0.4% in 2022. With an optimistic scenario of de-escalation in Ukraine, Moldova's economy is expected to grow by 3.8% in 2023 and by 4.4% in 2024. As the economy picks up and trade routes recover and higher global energy and food prices decline, the current account deficit is expected to improve. High inflationary pressures will continue throughout 2022, with inflation rates remaining well above the upper bound of the central bank's target range of 5 percent (+/- 1.5 percent). Fiscal deficits are expected to remain higher in the medium term than in the years before COVID-19, as the economy will need to protect disposable income from rising prices (especially for energy and food), support refugees, and increase investment as the reform program gathers momentum. As a result, government debt is expected to increase but remain relatively low by international standards. // 11.04.2022 – InfoMarket
