The World Bank cuts Moldova's GDP growth forecast for 2024 by 2 p.p. - from 4.2% to 2.2%, and for 2025 from 4.1% to 3.9%.
At the same time, the WB experts forecast Moldova's economic growth at 4.5% for 2026. Such data are contained in a new report on the economy of the Europe and Central Asia region "Creating Opportunities for Private Sector Development," published by the World Bank. According to the document, the inflation rate in Moldova in 2024 is projected at 4.9%, in 2025 - 5.2%, and in 2026 - 5%. WB experts note that Moldova faces unprecedented challenges due to the side effects of Russia's invasion of Ukraine, which led to an energy crisis and a refugee crisis that created a strain on households, the economy and public finances. Despite significant efforts to mitigate these crises through fiscal measures and monetary policy, declining household incomes and persistent high risks continue to weigh on private consumption and investment confidence, leading to sluggish growth in 2023 following a recession in 2022. Although While the economy is expected to recover moderately and household incomes to rise by 2024, there are significant macroeconomic risks, including a potential intensification of the war in Ukraine, additional power outages, and headwinds from upcoming elections in 2024-25. The WB analysts point out that Moldova's medium-term prospects depend on structural reforms and progress towards EU accession. Despite two decades of sustained economic growth, poverty remains widespread, especially in rural areas, with limited access to services and real economic opportunities. Traditional means of poverty alleviation, such as cash transfers and social assistance, are slowing, while low labor force participation and employment rates impede the transition to employment-oriented poverty reduction, underscoring the urgency of structural reforms. WB experts note that Moldova faces structural challenges, including low productivity growth, governance weaknesses, high state influence, limited competition, unbalanced business environment, and tax distortions. The country remains vulnerable to adverse weather events and energy shocks due to its heavy reliance on energy imports and limited diversification of energy sources. Climate change exacerbates this vulnerability by increasing the frequency and severity of droughts and other natural disasters, thereby posing significant risks to Moldova's agricultural sector and livelihoods. EU candidate country status, strong reform momentum and growth-enhancing climate-resilient investments are needed to promote long-term, sustainable development and move closer to EU income levels. The WB contribution emphasizes that the spillover effects of the war in Ukraine continue to weigh on Moldova's economy. It grew by 0.7% in 2023, driven by a strong recovery in the agricultural sector, which grew by 31.9% after the 2022 drought. The industrial and services sectors contracted despite strong growth in the information technology, healthcare, hospitality and food services sectors, amid high production costs, lower demand from trading partners and increased risk. On the demand side, net exports contributed positively to economic growth, supported by services exports and lower imports amid weak domestic demand. Private consumption and investment declined due to lower disposable income, higher interest rates and uncertainty caused by the war in Ukraine. Despite a 5.8% decline in remittances, the current account deficit widened to 11.9% of GDP in 2023, driven by a decline in the trade balance along with improvements in the primary and secondary accounts. External debt declined by 2.8 percentage points from end-2022, reaching 63.3% of GDP. Inflation slowed rapidly in 2023, thanks to timely monetary measures in 2022 and lower food and fuel prices, reaching 4.6% in January 2024. As inflation eased, the National Bank reduced the benchmark interest rate from 17% in early 2023 to 4.25% in February 2024. Total revenues increased by 11.8%, driven by income tax, social contributions, and excise taxes on imported goods. Increases in spending on social programs, wages and interest payments offset income growth, reflecting inflationary pressures and higher financing needs. As a result, the budget deficit increased to 5.2% of GDP. High food and fuel prices reduced purchasing power, while state-allocated energy compensations provided some relief. The WB experts forecast that Moldova's economy is expected to grow by 2.2% in 2024, supported by real wage growth, positive budgetary momentum and subdued inflation. Private consumption and investment will contribute to economic growth, supported by an adaptive monetary policy. Net exports are expected to restrain economic growth, reflecting an increase in demand-driven imports. On the output side, the services sector, especially IT, transportation and government services, is expected to contribute to growth. The contribution of the industrial sector will be in line with pre-war levels, mainly due to weak external demand. Agriculture is expected to grow modestly on the back of higher input costs and good harvests. Reforms to diversify the economy and improve competitiveness, in line with the EU accession agenda, as well as positive fiscal policy, measures and favorable interest rates will support medium-term growth. Average inflation is projected to continue to decline in 2024 as commodity prices decline and remain within the target corridor over the medium term. However, inflation remains highly sensitive to geopolitical tensions due to the war in Ukraine. The fiscal deficit is expected to remain high at 4.1% of GDP in 2024 due to spending pressures including support for households, jobs, refugees and infrastructure. The deficit is projected to narrow in the medium term and reach 3% of GDP in 2026 as fiscal support is phased out. // 12.04.2024 – InfoMarket
