Average inflation will continue to decline in 2024 and remain within the medium-term targeting corridor.
According to the forecast from the World Bank's new Economic Review, weak domestic demand and stabilization of food and energy prices will support deflationary pressures in 2024, with the inflation rate fluctuating within the lower band of the target corridor (from 3.5% to 6.5%). In the medium term, inflation is expected to stabilize at 5%. However, inflation remains vulnerable to external shocks. Unlike the last 2 years, the impact of regulated prices on inflation is expected to be relatively small. WB experts believe that the National Bank should maintain a flexible exchange rate regime and moderate activity in the foreign exchange market to reduce excessive fluctuations of the national currency. As inflationary pressures subside, the poverty rate is expected to fall to 13.3% in 2024. With the expected economic recovery and normalization of inflation, the poverty rate should fall to 11.2% in 2025. Energy compensations are an important element of support for poverty reduction in Moldova. WB experts' forecasts point to a reduction of the current account deficit to 10.7% of GDP in 2024, supported by favorable development of the income balance and exports of services. This improvement in the income balance reflects the gradual recovery of remittances. WB experts forecast exports to grow, supported by services and food exports, especially in the first half of the year, due to a good harvest in 2023. Following the dynamics of domestic demand and lower re-exports from Ukraine, imports are expected to increase more than exports, leading to a slight worsening of the trade deficit. In the medium term, the current account deficit is projected to improve due to stabilizing import prices, moderate depreciation, improved trade logistics and external demand, especially for services. As economic activity picks up, the current account deficit is expected to remain above its historical average, as the commitment to EU membership will take some time to have a significant impact on investment and exports. As migrants seek alternative destinations, remittances are expected to stabilize after a sharp drop in inflows from CIS countries following Russia's invasion of Ukraine. International reserves are projected to remain at adequate levels and cover future imports for more than four months until 2026.WB experts say that a high fiscal deficit of 4.1% of GDP is expected in 2024 as a result of spending pressures that include population support, support for job creation, refugees and infrastructure investment. Government collections will decline in 2024 due to the normalization of foreign grant revenues to their historical average after a temporary increase caused by recent emergencies. As inflation falls, expenditures will decline further, especially as household support to mitigate the impact of high energy prices becomes more effective. Over the medium term, the fiscal deficit is projected to decline to 3 percent of GDP in 2026 as fiscal support is phased out. While the share of expenditures and revenues to GDP will approach historical averages, fiscal consolidation is supported by measures to improve domestic revenue mobilization. Over time, external grants will continue to decline, but WB experts expect a positive trend in tax revenue collection, supported by ongoing revenue mobilization efforts. These efforts include simplifying tax exemptions, broadening the VAT base, and reducing tax expenditures. However, the introduction of VAT on automobiles, recent budget expenditures to support SME investment, and the implementation of the new Customs Code could undermine these efforts. Modernization of tax administration is essential to improve fiscal sustainability and efficiency. WB experts forecast a reduction in expenditures as a percentage of GDP, which will be facilitated by more targeted support to households to mitigate the impact of high energy prices. Subsidies are also expected to decline as economic activity resumes. At the same time, WB experts forecast an increase in capital expenditures due to the improvement of the state investment system. These additional costs will be partially offset by measures to maintain the real value of wages, goods and services in the context of slowing inflation. They believe that in addition to modernizing tax administration, a more efficient allocation of tax resources is needed to achieve better results with the same financing. Consolidating domestic revenues, improving expenditure efficiency and implementing climate resilience measures are top priorities. Better governance, simplification of public expenditures, and stronger management of fiscal risks, including those related to state-owned enterprises, are also needed. In the medium term, maintaining macroeconomic stability and fiscal buffers requires limiting inefficient and costly subsidy expenditures as well as fiscal spending. This approach will allow the government to adapt to changing economic conditions and accelerate the implementation of structural reforms in various sectors such as energy, education, social assistance, and health, contributing to inclusive and sustainable economic growth. Broadening and strengthening the tax base and improving tax administration are important steps in this direction. // 15.05.2024 - InfoMarket.
