The World Bank in Moldova

Country Context

Moldova is facing unprecedented challenges due to the spillover effects of Russia's invasion of Ukraine, which resulted in an energy and refugee crisis that are straining household budgets, the economy, and public finances. Despite significant efforts to mitigate these crises through fiscal measures and monetary policies, dwindling household incomes and persistent high risks continue to stifle private consumption and investment confidence, resulting in sluggish growth in 2023 after the recession in 2022.  

While a moderate economic recovery and improved household incomes are expected for 2024, there are significant macroeconomic risks, including the potential intensification of the war in Ukraine, additional energy disruptions, and headwinds from the upcoming elections in 2024 and 2025. Moldova's medium-term prospects hinge on structural reforms and progress toward EU accession. 

Despite sustained economic growth over two decades, poverty remains pervasive, particularly in rural regions, with limited access to services and viable economic opportunities. Traditional means of poverty alleviation, such as remittances and social assistance, are slowing, while low labor force participation and employment rates impede a shift to employment-focused poverty reduction, underscoring the urgency for structural reforms. Moldova faces structural challenges including low productivity growth, governance deficiencies, a large state footprint, limited competition, an imbalanced business environment, and tax distortions.

The country remains vulnerable to adverse weather events and energy shocks due to its heavy dependence on energy imports and limited diversification in energy sources. Climate change exacerbates these vulnerabilities, increasing the frequency and severity of droughts and other natural hazards, thereby posing substantial risks to Moldova's agricultural sector and livelihoods. With EU candidate status, strong reform momentum and growth-enhancing, climate-resilient investments are needed to foster long-term, sustainable development and convergence toward EU income levels.

Last Updated: Apr 09, 2024

Strategy

The current FY23-FY27 World Bank Group Country Partnership Framework (CPF), supports the efforts of the Government of Moldova to move to a new economic model and is based on: the challenges identified in the 2021 Systematic Country Diagnostic update and the Country Private Sector Diagnostic; the Government’s medium-term strategy; lessons learned from the implementation of previous CPFs; and selectivity principles based on the World Bank Group’s comparative advantage and areas of emphasis of partner programs. The CPF aims to support the dual challenges of the current crisis stemming from Russia’s invasion of Ukraine as well as longstanding and longer-term reform challenges, with a phased approach of activities to support the development agenda and the goal to advance toward European Union accession. The CPF provides a phased approach, identifying activities—both lending and analytical—for the initial period of the CPF and leaving flexibility for the later years.

The overarching objective of the CPF is to support green, resilient, and inclusive development and competitiveness in Moldova. The framework is based on three high-level objectives: (i) increased formal employment; (ii) improved human capital; and (iii) increased green and resilient investments. The objectives of the CPF focus on key areas including enterprise competitiveness, decreased regulatory burden, key aspects of health and education services, increased energy security and efficiency, and green investments, particularly in infrastructure and agriculture. A critical feature of the CPF is capacity-building and digitization efforts to strengthen systems and institutions across a broad swath of government and private sector actors at national and local levels.

Last Updated: Apr 09, 2024

Recent Economic Developments

Spillovers from the war in Ukraine continued to hinder Moldova’s economic growth in 2023, with a modest 0.7% increase. The agriculture sector saw significant growth at 31.9%, rebounding strongly from the 2022 drought. However, the industry and services sectors faced contraction despite growth in IT, health, and accommodation services, due to high input costs, reduced demand from trading partners, and heightened risk. Net exports contributed positively to growth, supported by services exports and decreased imports due to weak domestic demand. Private consumption and investments contracted due to reduced disposable income, high interest rates, and uncertainties from the war in Ukraine.

The current account deficit improved to 11.9% of GDP in 2023, driven by a lower trade balance and improvements in primary and secondary accounts, despite a 5.8% decline in remittances. Inflation decelerated rapidly to 4.6% in January 2024. Against this background, the base interest rate decreased from 17% in early 2023 to 3.75% by March 2024. However, increased expenditures on social programs, wages, and interest payments widened the fiscal deficit to 5.2% of GDP. Despite government energy subsidies alleviating some pressure, high food and fuel prices reduced purchasing power. Poverty rates marginally dropped from 15.4% in 2022 to 15.0% in 2023.

Economic Outlook 

The economy is forecasted to grow by 2.2% in 2024, driven by rising real wages, a positive fiscal impulse, and subdued inflation. Private consumption and investments will support growth, aided by accommodative monetary policies. However, net exports may impede growth due to increased demand-driven imports. The service sector, especially IT, transport, and public services, is expected to drive growth, while the industrial sector may lag due to weak external demand. Agriculture is anticipated to see modest gains despite higher input costs. Economic reforms aligned with EU accession, along with fiscal measures and favorable interest rates, will bolster medium-term growth.

Average inflation is projected to decline in 2024 and remain within the target corridor in the medium term, though geopolitical tensions from the war in Ukraine pose risks. The current account deficit is expected to narrow in 2024 but remain above pre-pandemic levels due to elevated import prices and transport costs.

The fiscal deficit is anticipated to remain high at 4.1% of GDP in 2024, primarily due to spending pressures. As inflation eases, the poverty rate is expected to decrease to 13.3% in 2024 and further to 11.2% in 2025, supported by economic recovery and normalization.

Last Updated: Apr 09, 2024