Moldova - Rehabilitation Loan Project

 Rehabilitation loan Report No: ; Type: Report/Evaluation Memorandum ; Country: Moldova; Region: Europe And Central Asia; Sector: Public Sector Management Adjustment; Major Sector: Public Sector Management; ProjectID: P008557 Moldova: Rehabilitation Loan (Loan 3653-MD) The Implementation Completion Report (ICR) for the Moldova Rehabilitation Loan (Loan 3653-MD, approved in FY94 and closed, on schedule, in FY95) was prepared by the Europe and Central Asia Regional Office, with Appendix A contributed by the Borrower. This US$60 million Rehabilitation Loan was designed to support the Government's economic reform and stabilization program, initiated in mid 1993, and also supported by an IMF Systemic Transformation Facility approved one month prior to the Rehabilitation Loan. The loan financed imports of essential production inputs and health care supplies, during a time of economic transition and movement toward a market based economy. A subsidiary objective of the loan was to mobilize the provision of technical assistance and balance of payments support from the wider donor community. This was achieved through cofinancing of US$40 million provided by the ExportImport Bank of Japan to finance essential gas imports and by a grant of US$9.2 million from the Government of The Netherlands to fund needed technical assistance and institutional strengthening. Good progress was made in stabilizing the economy, enlarging the role of markets and reducing the role of the state in the allocation of resources. Progress was less satisfactory in ownership reform and enterprise and agricultural restructuring and it proved difficult to impose market discipline on state owned enterprises and banks, which diminished the extent of real economic transformation. This progress must be seen in the context of the ambitious nature of the Government's reform agenda which encompassed monetary stabilization, introduction of a new national currency, extensive privatization and restructuring of state owned enterprises, financial sector reform, trade and pricing policy liberalization, reforms in the agricultural sector and improvements in the social safety net system. This reform program reflected the government's desire to achieve a market based economy, as speedily as possible. However, deteriorating terms of trade, rudimentary institutional capabilities and political uncertainties all represented serious impediments to the transition process. The ICR rates the project's outcome as satisfactory, which is appropriate given the macroeconomic stabilization achieved. Furthermore, the basic legal and institutional framework necessary for a market economy was established. The ICR rates sustainability as likely and institutional development objectives as partially achieved. OED concurs with these assessments, and also rates Bank performance as satisfactory. The ICR is satisfactory and provides the necessary insight into the difficulties encountered by the authorities as they sought to implement such an ambitious reform program. An important omission, however, was the absence of adequate macroeconomic data that would have provided a clearer portrayal of the policy achievements. Also, the ICR does not include an Aide-Memoire nor comments from the cofinanciers. A number of important lessons were learned. First, enforcement of financial discipline in state owned banks and enterprises in transition economies is a vital requirement for success in the transformation process. Second, effective technical assistance is crucial to, and should accompany, adjustment operations in countries with emerging administrative structures. Finally, for adjustment operations in transition economies, intensive staff inputs by the Bank are necessary to ensure effective implementation and provide adjustment advice as the reform process unfolds. An audit is planned.