The WB improved the forecast for Moldova's GDP growth in 2023 by 0.2 p.p. - from 1.6% to 1.8%, but kept the forecast for economic growth in 2024 at 4.2%.
At the same time, it predicts the growth of Moldova's gross domestic product in 2025 by 4.1%. Such data is contained in the new Economic Outlook for Europe and Central Asia, published by the World Bank. WB experts suggest that inflation in Moldova in 2023 will be 14.1%, in 2024 - 6.2%, and in 2025 - 4.9%. The WB study notes that the Moldovan economy was seriously affected by the war in Ukraine and a surge in inflation. The country's GDP shrank by 5.9% in 2022, while average annual inflation reached 28.7%. WB experts point out that Moldova suffered from the consequences of the war, including the energy and migration crises. Despite efforts to cushion the impact of the crises through strong fiscal momentum and rapid monetary policy, private consumption has been held back by shrinking household disposable income and private investment due to uncertainty and difficult financial conditions, sending the economy into recession in 2022. WB analysts believe that Moldova's medium-term outlook will depend on the government's ability to mitigate the decline in household purchasing power while maintaining the momentum of the reform agenda to address low productivity growth, persistent structural and managerial weaknesses, high SEs, stifled competition, uneven playing field and tax distortions. WB experts say that the risks of extreme weather events and energy shocks remain high. Persistent inequality of opportunity limits access to public services and reduces resilience and intergenerational mobility. Significant uncertainty also remains about the impact of the war on the Moldovan economy, as well as energy supply and prices in 2023. A further increase in energy costs in the second half of 2023 may require spending reallocation and/or additional financing to mitigate the impact on households. High production costs and dry weather could further reduce agricultural yields, leading to additional inflationary pressure and weakening economic activity. Against this backdrop, the decline in poverty observed in 2022 was likely short-lived as Moldova felt the effects of the war in Ukraine, with a disproportionate impact on poorer Moldovans, primarily due to the impact of high inflation on food and fuel. Regarding the latest macroeconomic indicators, WB analysts draw attention to the fact that Moldova's GDP in the fourth quarter of 2022 decreased by 10.6%, and its decline in the whole of 2022 amounted to 5.9%. High interest rates and the proximity to war have weighed heavily on investment, while high inflation has eroded household disposable income, resulting in lower private consumption. The strong growth in exports (25%) on the back of good harvests last year and re-exports to Ukraine, however, was not enough to offset the increase in imports (15.8%), mainly driven by high energy costs. As a result, the contribution of net exports to growth turned out to be negative. State consumption increased by about 5%, moderately supporting growth. Moldova's external position worsened due to the impact of the energy crisis and the decline in remittances. The share of external debt in GDP decreased to 62.1%. The monetary stance was eased after inflation peaked in October 2022. Inflation jumped to 28.7% in 2022, driven by an adjustment in managed prices. In 2023, the NBM lowered the discount rate twice - to 17% from 21.5%. The fiscal position appeared to be resilient in 2022, with a 3.3% deficit recorded on strong revenue performance. Government spending increased by 22.4%, mainly due to social spending and subsidies. Public and publicly guaranteed debt fell to about 33% of GDP in 9 months of 2022. Amid a tight labor market, the poverty rate measured by the international poverty line of $6.85 per day increased from 14.4% in 2021 to 17.5% in 2022. Looking ahead, WB experts expect that growth Moldova's GDP will slowly recover to 1.8% in 2023, reaching its potential only in 2024 due to inflation dynamics, concerns about energy security and the ongoing war in Ukraine. It is assumed that the measures taken by the government in 2021-2022 (increasing minimum pensions and their indexation, social protection measures and raising the minimum wage) will partially mitigate the impact on households. However, the main sources of disposable income are shrinking. Proximity to war creates barriers to domestic and foreign investment as well as net exports. WB analysts believe that double-digit inflation in Moldova will continue in 2023, only slowly declining towards the NBM inflation target of 5% (+/- 1.5%) in 2024, subject to moderation in import prices and containment second order effects. Moldova's external position is expected to worsen, reflecting an overall rise in import prices coupled with limited capital inflows due to heightened uncertainty. Over the medium term, remittance inflows will stabilize as Moldovan migrants move to other destinations, which will help reduce the structural current account deficit. Revenues are expected to decline in real terms as economic activity slows, leading to a 5.4% fiscal deficit in 2023. Public debt remains robust despite a worsening near-term outlook. The poverty rate, as measured by the poverty line of $6.85 a day, is expected to fall from 17.5% in 2022 to 16.3% in 2023. Economic growth in Moldova is expected to recover and poverty is projected to fall to 14.5% in 2025. However, the growth outlook, and therefore projected poverty, is subject to significant downside risks.// 06.04.2023 — InfoMarket
