The World Bank kept Moldova's GDP growth forecast at 1.8% in 2023.
In addition, it left unchanged the forecast of Moldova's economic growth in 2024 at the level of 4.2%, and in 2025 at the level of 4.1%. Such data are contained in the new WB Economic Overview for the region. According to the forecasts, the inflation rate in Moldova will amount to 14.1% in 2023, 6.2% in 2024 and 4.9% in 2025. The WB experts note in their materials that the Moldovan economy has experienced serious consequences due to the war in Ukraine and inflation growth. In the first quarter of 2023, the decrease in purchasing power led to a downturn in the economy, nevertheless, inflation is gradually decreasing. The near-term outlook depends on the war in Ukraine, energy prices and weather conditions, while the long-term outlook depends on unfinished structural reforms and the pace of Moldova's accession to the EU. WB analysts point out that Moldova has been severely affected by the spillover effects of the war in Ukraine, leading to an energy and refugee crisis. Despite concerted efforts to mitigate these crises through tight fiscal measures and rapid monetary policy, private consumption has been depressed due to declining household incomes and uncertain financial conditions. As a result, Moldova's economy slipped into recession in 2022. The medium-term outlook will be influenced by the government's ability to counter the decline in household purchasing power while maintaining the momentum of the reform program. Key challenges include slow productivity growth, structural and governance weaknesses, significant presence of state-owned enterprises, limited competition, unbalanced business environment and tax distortions. Heightened risks of extreme weather events and energy shocks remain relevant. The WB experts write that the full impact of the war in Ukraine and energy supply on the Moldovan economy in 2023 remains uncertain. The potential increase in energy costs in the second half of 2023 may require reallocation or additional financing to mitigate the impact on households. Moreover, higher input costs and dry weather conditions could further reduce agricultural yields, adding to inflationary pressures and reducing economic activity. The WB analysts say that against this backdrop, the reduction in poverty seen in 2021 is likely to be short-lived as Moldova struggles with the consequences of the war in Ukraine, affecting vulnerable residents due to high food and fuel prices. In the current geo-economic environment, Moldova's long-term prospects depend on aligning the reform agenda with EU accession and the pace of productivity-enhancing reforms. These reforms include strengthening competition and public sector asset management, improving and digitalizing the business climate, increasing the efficiency of public finances and creating a climate-resilient economy. The WB experts noted that Moldova's GDP contracted by 2.3% in the first half of 2023. This was caused by a 4.7 percentage point drop in private consumption, caused by higher prices and lower purchasing power. Replenishment efforts had a positive effect (1 p.p.), while investment declined (-0.8 p.p.), possibly due to a loose monetary approach and increased risks. Net exports increased by 2.3 p.p. as imports were subdued due to weaker domestic demand. On the supply side, the energy and trade sectors were the main growth inhibitors, losing 2.5 p. p. On the back of a deteriorating regional climate, manufacturing fell 1.3 p.p. and the contribution of IT and communications fell 0.5 p.p. Agriculture struggled with last year's drought and input costs (-0.1 p.p.). The WB experts point out that Moldova's external position has improved, but rising energy prices and declining exports create vulnerabilities. Thanks to sustained exports of services (transportation and IT) and positive developments in primary and secondary accounts (remittances increased by 11%), the current account deficit narrowed by 2.6 p.p., reaching 16.1% of GDP. Financing was mainly driven by cash and deposits. However, external debt rose to 66.6% of GDP. Inflation is on a downward trajectory, reaching 18.7% between January and July. The fiscal deficit widened to 4.7% of GDP in H1 2023, helped by a 20% increase in spending driven by interest rates and social spending. Revenues lagged behind (13%) as economic activity declined. Public debt increased by 2 p.p. to 32.5% of GDP. Due to record high prices and declining purchasing power, average real household income fell by 6% in 2022. Despite the decline in purchasing power, employment grew by 2.2%, driven by a 4.5% increase in female employment. The WB experts forecast that Moldova's GDP growth will gradually recover to 1.8% in 2023 and fully recover in 2024. Against a strong base effect, growth will resume later this year, thanks to strong remittances, fiscal stimulus and improved monetary conditions supporting consumption and investment. On the output side, agriculture is expected to recover strongly from last year's drought. In the medium term, growth depends on inflation dynamics, energy security and developments in Ukraine. Government measures such as pension, social security and wage increases in 2023 are expected to soften the impact on households. Consumer credit remains low, and proximity to Ukraine poses challenges for both domestic and foreign investment, as well as net exports. On the production side, industry will continue to be constrained by higher input costs. Nevertheless, the services sector will lead growth, with a strong contribution from the transportation sector, mainly due to freight traffic from Ukraine. Assuming moderate import prices and controlled second round effects, inflation will gradually decline to the NBB's target of 5% by end-2023. The external position is expected to face the challenge of high import prices and a slowdown in capital inflows caused by increased uncertainty. Remittance inflows will stabilize in the medium term as migrants look for alternative destinations, which will help address the structural current account deficit. The current account deficit is expected to exceed pre COVID-19 levels and will remain dependent on external financing. The expected slowdown in the economy will lead to lower revenues and a fiscal deficit of 5.4% in 2023.The high deficit is expected to persist in the medium term due to infrastructure needs. Despite the challenging outlook, public debt remains resilient. The poverty rate, measured by the poverty line of $6.85 per day, is projected to fall from 16.2% in 2022 to 13.9% in 2023. With the expected economic recovery, the poverty rate is projected to fall to 11.1% in 2024. It should be noted that in the previous WB Overview for June 2023, the World Bank raised Moldova's GDP growth forecast for 2023 by 0.2 p. p. - from 1.6% to 1.8%, kept the forecast of economic growth in 2024 at the level of 4.2%, and for 2025 forecasted the growth of Moldova's GDP at 4.1%. // 06.10.2023 – InfoMarket
