Moldova - Between east and west : a review of the foreign trade and exchange regime

Report No. 13077-MD Moldova Between East and West A Review of The Foreign Trade and Exchange Regime July 26, 1994 Agriculture Operations Division 2 Country Department IV Europe and Central Asia Region FOR OFFICIAL USE ONLY U Document of the World Bank This document has as restricted distribution and may be used by recipients onlv in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization  CURRENCY EQUIVALENTS Currency Unit - Ruble (R) US$ 1 = R 1,314 (June 1993) US$ 1 = R 3,850 (November 1993) Currency unit - Leu - Introduced November 29, 1993 US $ 1 = Leu 3.80 (November 1993) US $ 1 = Leu 4.05 (May 1994) ABBREVIATIONS CBR Central Bank of Russia CCFF Compensatory and Contingency Financing Facility CIFCE Chisinau Interbank Foreign Currency Exchange CIS Commonwealth of Independent States CPI Consumer Price Index EFTA European Free Trade Area EU European Union EU TACIS European Union Technical Assistance Program for CIS Countries FSU Former Soviet Union GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product IMF International Monetary Fund MFN Most Favored Nation NBM National Bank of Moldova OECD Organization of Economic Cooperation and Development STF Systemic Transformation Facility USSR Union of Soviet Socialist Republics VAT Value Added Tax  FOR OFFICIAL USE ONLY Moldova Review of the Foreign Trade and Exchange Regime CONTENTS Executive Summary and Principal Recommendations .................. i The Foreign Trade and Exchange Regime in Context .................. 1 The Foreign Trade Regime ................................. 4 The Export Regime ............................. 4 The Import Regime ............................. 5 Pricing ..................................... 6 The Role of the State in External Trade ................. 7 Trade Agreements .............................. 8 The Exchange and Payments System ....... . . . . . . . . . . . . . . . . . . . . . 9 Introduction of the National Currency ..... . . . . . . . . . . . . . 9 The Foreign Exchange Market . . . . . . . . . . . . . . . . . . . . . 11 Completing the Liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Further Liberalization of the Export Regime ..... . . . . . . . . 14 Restructuring the Import Tariff . . . . . . . . . . . . . . . . . . . . . 15 Reforming VAT and Excise Taxes ..... . . . . . . . . . . . . . . 17 Price Reform and Competition Policy ..... . . . . . . . . . . . . 18 Reducing the Role of State Purchases ..... . . . . . . . . . . . . 18 Further Liberalization of Foreign Exchange Allocation .... . . . 19 Liberalization of the Foreign Trade and Exchange Regime in Perspective ........ . . . . . . . . . . . . . . . . . . . . . . . . . 20 Select Bibliography ......... . . .. . .. . . .. . . .. . . .. . . .. . . .. . 23 This docunent has a restricted distribution and may be used by recipients only in the performance of their lofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CONTENTS (Cont'd) Boxes: Box 1: Structure of Foreign Trade . . . . . . . . . . . . . . . . . . . . .3 Box 2: Exchange Rate Developments ........ . . . . . . . . . . 13 Box 3: Access for Moldovan Exports to OECD ...... . . . . . 16  Moldova - Review of the Foreign Trade and Exchange Regime Executive Summary and Principal Recommendations Background 1. There is a growing realization in Moldova that output decline cannot be reversed on the basis of a small domestic market in an economy whose production structure is highly oriented towards external trade. There is also a growing belief that the terms of trade shock from increasing energy import prices, and the decline in Russian transfers and credits, is likely to be permanent. External adjustment has therefore become of paramount importance. 2. Moldova has done much to open up its trade and exchange regime since late 1993. Most export controls have been lifted, the exchange rate is now determined in a competitive market, and most current account transactions are free of restriction. A new import tariff has been introduced with a fairly uniform rate structure with most goods subject to rates of less than 30 percent. Most price controls have been lifted and the state's role in trading, although still important, is declining. Free trade arrangements have been concluded with the CIS and Romania. Accession to GATT is under negotiation and the reciprocal granting of MFN status with the European Union has been agreed. Liberalization has been greatly facilitated by the pursuit of a stabilization policy which has allowed the smooth introduction of a national currency and the reduction of inflation. 3. This process of liberalization has paved the way for Moldova's integration into the world economy. Exposing producers to competition in domestic and export markets will allow resources to shift to those sectors in which Moldova has a comparative advantage from less efficient sectors. Competition will also stimulate innovation and the acquisition of more efficient production techniques. 4. However, further measures should be taken if the full benefits of liberalization are to be realized. Of particular importance will be the phasing out of the direct role of the state in trading. In addition, the remaining regulatory obstacles to exporting should be eliminated, and unnecessary barriers to import competition should be removed. The present report makes the following recommendations (which are more fully elaborated in the main text in the section "Completing the Liberalization"). Principal Recommendations Reducing the role of state purchases