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'�,� .`-' - . • с .. ц �Gг,,й r_ ; �`3 �гi. _ . у� •. ; .-•. . ` ~ , ;Т- .,� � д:- у д�7vb.}� гF`i.' :. _' ' ' : -� . ' - - . - '•�{������•л��ц',T�G.�.�i.�+P��iS�� . , �,ЗИ�1�д'г�"F,м��У°r!'.�G'ь+` A WORLD BANK COUNTRY STUDY Moldova Moving to a Market Economy The World Bank Washington, D.C. Copyright © 1994 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing March 1994 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and development communities. 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ISSN: 0253-2123 Library of Congress Cataloging-in-Publication Data Moldova : moving to a market economy. p. cm. - (A World Bank country study ISSN 0253-2123) "This report is based on the findings of an October 1992 mission led by Costas Michalopoulos and of subsequent missions led by Jonathan Walters"-p. iii. ISBN 0-8213-2776-3 1. Moldova-Economic policy-1991- 2. Moldova-Economic conditions-1991- I. International Bank for Reconstruction and Development. II. Series. HC340.18.M65 1994 338.947'75-dc2O 94-848 CIP CONTENTS Acknowledgments ........................................... v Currency Equivalents ......................................... vi Acronyms and Abbreviations ................................... vii Executive Summary ......................................... ix Introduction . ............. .. ... . .. .. .. .. ... ............. .. 1 Chapter 1: The Evolving Economic Crisis .......................... 3 The development of the Moldovan economy before 1990 ........... 3 The nature of the shocks in 1991 and 1992 ................... 5 O utput .. . . . . . . . . . . . . . . . . . . . . . ... . . ... . .. . .. 5 Trade . . . . . . . . . . . . . . . . . . . . . . . . .. . . .. .. .. . .. 7 Price and wage developments ........................ 9 Monetary developments .......................... 11 The consequences of the shocks for output, incomes, and macro- stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Chapter 2: The Response to the Need for Structural Transformation ........ 15 The Government's reform program: initial measures ............. 15 The efforts to stabilize the economy ....................... 15 M onetary policy ............................... 15 Fiscal policy ................................. 17 Programs for privatization and a competitive environment . . . . . . . . . . 19 Legal framework .............................. 19 Enterprise development. .......................... 19 Efforts to promote trade and restore external balance ............. 22 External financing .................................. 23 Chapter 3: The RoadAhead .................................. 25 The Government's reform program: future perspectives . . . . . . . . . . . 25 The keys to restoring income ........................... 25 Creation of a stable macroeconomic environment . . . . . . . . . . . 26 Fiscal policy ............................. 26 Monetary policy and financial sector .............. 30 III iv An enabling environment for the private sector and efficient public sector ................................. 34 Exploitation of comparative advantage . . . . . . . . . . . . . 35 Enterprise reform ......................... 40 The labor market .......................... 44 Protecting vulnerable groups . . . . . . . . . . . . . . . . . . . . . . . 49 The role of foreign borrowing and external assistance . . . . . . . . . . . . 52 External financing needs .......................... 52 Aid coordination ............................... 54 Annex on Environment ....................................... 57 Annex on Energy ........................................... 63 Statistical Appendix ......................................... 71 Text Tables, Figures and Charts Text Tables Table 1 Main Economic and Social Indicators . . . . . . . . . . . . . . . . . . . xxiii Table 2 Moldova: Interrepublican, External and Total Trade . . . . . . . . . . . 8 Table 3 Moldova: Monthly Variations in the CPI and WPI Indices . . . . . . . 10 Table 4 Unemployed Receiving Benefits from the Employment Fund ...... 45 Table 5 Moldova: Balance of Payments ....................... 53 Table 6 Energy Imports, 1991 and Projected 1992 . . . . . . . . . . . . . . . . . 68 Table 7 Energy Prices .................................. 69 Table 8 Energy Imports, 1992-94 ........................... 70 Figures Fig. 1 Percentage Structure of NMP in 1991 ..................... 4 Fig. 2 M oldova: Pricelndices ............................. 9 Fig. 3 Moldova: State Government Budget .................... 18 Charts Chart l Transfer Payments,1992 ........................... 48 Chart 2 Social Fund Expenditure, 1992 ........................ 48 ACKNOWLEDGMENTS This report is based on the findings of an October 1992 mission led by Costas Michalopoulos and of subsequent missions led by Jonathan Walters. The initial mission comprised Sunil Gulati (Deputy Mission Leader), Ileana Ionescu (Office of World Bank Executive Director representing Moldova, Coordinator with Government), Helen Sutch (Fiscal Issues), Erik Borset (Environment), Karen Brooks (Agriculture), Galina Mikhlin (Legal Issues), Russell Muir (Enterprise Restructuring and Privatization), Anita Schwarz (Financial Sector), Kathleen Stephenson (Energy), Gabriela Vega (Labor Market and Social Safety Net) and Khangbin Zheng (Statistics). Azita Dastgheib contributed to the Statistical Annex. Benjamin Seay, Lenora Suki and Oxana Zadorojnaya provided secretarial services. Helen Sutch was the principal author of the report. V CURRENCY EQUIVALENTS Currency Unit = Moldovan ruble/coupon (MR) EXCHANGE RATE US$1.0 = MR 1308 (as of September 15, 1993) FISCAL YEAR January 1 - December 31 vi ACRONYMS AND ABBREVIATIONS BIS - Bank for International Settlements CBR - Central Bank of Russia CCFF - Compensatory and Contingency Financing Facility CIS - Commonwealth of Independent States EBRD - European Bank for Reconstruction and Development EC - European Community EF - Employment Fund FSU - Former Soviet Union GATT - General Agreement on Tariffs and Trade GDP - Gross Domestic Product koe - Kilograms oil equivalent LPG - Liquefied Petroleum Gas MIFCE - Moscow Interbank Foreign Currency Exchange NBM - National Bank of Moldova NMP - Net Material Product PF - Pension Fund PSD - Private Sector Development SF - Social Fund SOE - State-owned Enterprise VAT - Value-added Tax vii EXECUTIVE SUMMARY The Context Moldova is an ethnically diverse country wedged between Ukraine and Romania. With a land area slightly larger than that of Belgium, it is the second smallest country in the former Soviet Union (FSU) after Armenia and has the highest population density. Moldova's rich soil and temperate climate made the country a major supplier of agricultural products in the FSU. In 1991, Moldova's income per head ranked eighth out of the fifteen FSU countries or 20 percent below the FSU average. As a small country with powerful neighbors, Moldova has had its boundaries redrawn many times. Once part of the Ottoman Empire, the country was absorbed into the Russian Empire in 1812. After a brief period of independence in 1918, it joined Romania. Then, during World War II, the area on the right bank of the Dniestr River was annexed by the USSR. At that stage it lost part of its territory to Ukraine, while being combined with the Moldavian Autonomous SSR of Ukraine (on the left bank of the Dniestr) to form Moldova as it is constituted today. Ethnic Romanians form the majority of the population (65 percent) of 4.4 million but there are sizeable minorities of Ukrainians and Russians (13 percent each) together with a number of other ethnic minorities including Bulgarians (2 percent) and the Gagauz, a Christian Turkish people in the south (3.5 percent). The proportion of ethnic minorities is much higher than average in urban areas and in the region on the left bank of the Dniestr. Tensions after independence was declared on August 27, 1991, led to intense conflict in which ethnic and language factors were combined with marked differences in approach to economic reform. The ensuing armed conflict resulted in serious casualties and damage to infrastructure and crops. A ceasefire has held since July 1992 and tensions have eased during 1993, but a number of issues relating to the status of the Transnistria region remain to be resolved. The objective of national unity and the means of attaining it are in the forefront of public debate and condition the Government's approach to economic and social transformation. The Structure of the Moldovan Economy In the command economy of the USSR, Moldova's economic role was one of producer of raw and processed foodstuffs (primarily grapes, grains, wines, vegetables and livestock). Agriculture alone accounts for 42 percent of Net Material Product (NMP); agroindustry contributes approximately half of the almost 40 percent of NMP accounted for by the industrial sector, which also produces household appliances and high-technology electrical goods, in part for the defense industry. ix x Executive Summary Moldova has a trade-dependent economy, with the shares of imports and exports in Gross Domestic Product (GDP) averaging 50 percent in 1990. Its principal exports are agricultural, including wine, processed food and tobacco products. Other major exports are light industrial products such as electrical appliances, textiles and leather goods, and products of the machine-building industry. The country is almost totally dependent on imported energy, and most other inputs are also imported. The bulk of Moldova's trade is with the FSU, with Russia and Ukraine jointly accounting for 61 percent of total imports and 76 percent of total exports in 1991. Moldova's trade dependence--and need for imported energy in particular--have made it especially vulnerable to the shocks of the past two years (described in the section below). If the economy is to achieve sustainable growth in the future, it will have to adjust to a sharp permanent fall in the terms of trade and make far-reaching structural changes that will require a great deal of energy and determination. Growth in the future should be export-led, given the small domestic consumer base, and the country will therefore need to enable a switch of resources into products which have export markets in the new environment and can be profitable at the new set of relative prices. Notwithstanding a high degree of integration into the FSU structure of production and trade, Moldova probably faces somewhat less need for adjustment in the sectoral composition of output and exports than many other FSU countries; agriculture and agroprocessing industries will almost certainly continue as the leading sectors, spearheading the recovery and forming the basis for future growth. However, adjustment within sectors will be extensive, as businesses and farms search for economies in energy use, make technological improvements, orient activity to profitability and marketing effort and away from physical production targets, shift product composition, and strengthen links with existing markets and seek new ones. Many of the technical and energy efficiency gains will need to be embodied in new investment, especially as much of the capital stock is out of date. While Moldova does not have environmental problems on the scale of Russia or Ukraine, the country must deal with a polluted environment and problems of soil degradation and erosion. Developments in 1991-92 From 1991 on, Moldova has been hit by a series of shocks both internal and external. On the internal front, a spring freeze in 1991 followed by summer floods depressed GDP by 18 percent. A severe drought in summer 1992 then caused devastating crop losses, especially of cereals. During 1992 and 1993 the country has had to import grain on an emergency basis at relative prices at least five times higher than obtained in the past, when any harvest deficits could be made up by cheap imports from elsewhere in the FSU. Compounding these economic losses, the conflict in June 1992 over the status of the Transnistria diverted expenditure to military purposes and destroyed fuel pipelines and some infrastructure and industrial plant. Executive Summary xi In addition to the economic losses caused by the internal conflict and the drought, Moldovan output was further depressed by the fall in FSU consumer and military demand for its exports and increasing deterioration in the FSU economic environment, resulting in disruption in the trade and payments systems, a sharp adverse shift in relative prices, loss of income transfers from the Union budget, and shortages of imported energy. Moldova is experiencing probably the worst terms of trade fall of any of the FSU countries. These factors were exacerbated by the high level of uncertainty in the economic environment over ownership rights and enforcement of contracts. Reflecting these shocks, GDP fell by 21 percent in 1992, bringing the cumulative fall in output since 1990 to more than 35 percent. Trade declined even more: the shares of imports and exports in GDP declined from an average of 50 percent in 1990 to 33 percent in 1991. In that year, only 4.1 percent of total exports went outside the FSU, but about 17.6 percent of imports came from external sources. Trade with the FSU was normally in surplus but is unlikely to remain so once energy prices reach world levels, while Moldova's deficit on trade outside the ruble area was about R 1.2 billion in 1989 and 1990 and nearly R 1 billion in 1991. This, together with the severe terms of trade shock, indicates that external financing needs in the future will be high. Prices have been raised many times over since 1990, and price liberalization began in 1992, accompanied by a 2,200 percent increase in the general price level that year. There are three pricing regimes. In the first, prices are market determined; in the second and largest regime, wholesale and retail margins are controlled (the Government has recently decided on further liberalization in this category); in the third, prices are directly controlled. The latter regime applies to some food items, services, and a limited list of consumer durables in which Moldova had an FSU monopoly; additionally, in the agriculture sector, the price of animal feed is controlled and subsidized. The minimum wage has been raised at irregular intervals, but changes in wages have consistently lagged behind price increases: the average real wage declined by 33 percent in 1991 and another 42 percent during 1992, a far sharper fall than that experienced in Russia. Money and credit control--or lack of it--was largely determined externally by the Central Bank of Russia, but is now coming under national control. Domestic credit is further driven by Government direction, the growth of inter-enterprise credit arrears and extension of bank credit beyond prudential levels. At the same time, Moldova is vulnerable to developments in demand in Russia and Ukraine. The expansion of credit in the fall of 1992 in those countries, together with widespread price and wage controls in Moldova, resulted in a surge in unofficial exports and hence depletion of Moldova's consumer goods as purchasers from across the uncontrolled border with Ukraine took advantage of cheaper goods. The introduction of a new currency, the karbovanets, in Ukraine led to a further influx of rubles into Moldova. Hence, if it were to remain in the ruble area, Moldova would have an incentive to allow wages and prices to rise to the levels of its trading partners, and the authorities could be drawn into competitive monetary expansion. The prospects for stabilization are therefore poor until the country leaves the ruble area. The authorities are xii Executive Summary now moving to introduce a new currency, the leu, in late 1993. As a first step, the central bank is no longer pegging the Moldovan ruble to the Russian ruble and, since August 1993, has quoted a separate rate for the Moldovan ruble. Fiscal policy is the macroeconomic instrument over which the Government currently has most leverage. Unfortunately, the move to new tax instruments in January 1992 was made without sufficient preparation. Teething problems with the new system, together with poor compliance especially by new enterprises and enterprises situated in the Transnistria region, resulted in a fall in revenues to 19 percent of GDP in 1992 from over 35 percent in the previous year. Meanwhile the tax base has declined, with GDP falling over 35 percent during 1991 and 1992, and collection delays at a time of high inflation are undermining nominal receipts while expenditure claims are rising in both real and nominal terms. Poor revenue yields now compromise the Government's efforts to attain macroeconomic stability, finance implementation of the reform program, and maintain social protection. The authorities contained the fiscal deficit on a cash basis for most of 1992 by slashing public investment and compressing real wages and also by running up substantial arrears, but the deficit rose to 21 percent of GDP by end-1992, largely because of lending for the indexation of working capital for enterprises that was financed from the budget. The deficit was financed by credit from the banking system. Cuts in investment cannot be sustained indefinitely without compromising future growth, however, and domestic arrears and reliance on bank credit are destabilizing the real economy and the nascent financial sector. The Reform Agenda The authorities' objective is to halt the output fall of the last two years, while bringing inflation under control and enabling a re-orientation of production to the new structure of relative prices. In order to stabilize the economy, the authorities will need to improve fiscal programming and control, develop instruments of monetary policy, and build an effective financial sector and payments system to combat the macroeconomic instability arising out of weak financial institutions and inadequate prudential supervision. These reforms will underpin the introduction of the new Moldovan currency and a significant tightening of monetary policy at that stage. While it is a priority to halt the fall in output, it will be necessary at the same time to allow economic activity to respond to the new structure of relative prices and the different market opportunities that will prevail, creating the conditions for growth. Trade policy is the highest priority for structural reform. This will enable the economy to build on its comparative advantage in agriculture and expand exports, while enterprise reform and privatization, the next priorities, will promote dynamic growth in private businesses, marketing and distribution. Executive Summary xiii For this to happen, it is important to move away from a centrally planned economy to create an enabling environment for private markets, put in place the infrastructure and other underpinnings of sustainable growth in the future, and safeguard the welfare of the most vulnerable in the population. Even aside from the disruption in the trade and payments systems and other dislocation associated with the transition, Moldova is suffering a permanent terms of trade fall that implies a sharply lower standard of living for the population as a whole. Adjustment to this loss of welfare needs to be facilitated by protecting the poorest and establishing the conditions for real growth as speedily as possible. Speed in structural adjustment will be of the essence. The introduction of firm macroeconomic policies will reinforce the pressure for structural reform as monetary tightening and the withdrawal of budgetary subsidies bite on enterprise activity and force the release of resources to more economic uses. This process will be less painful and more effective in spurring economic growth if the underpinnings of microeconomic reform are in place and an enabling environment has been created for private market activity. Monetary and financial policy The authorities moved in 1991 to establish the National Bank of Moldova (NBM) as a central bank with the potential authority to exercise instruments of monetary policy. In practice, the NBM has little autonomy. Moldova's monetary and financial sector arrangements are still largely those of a command economy, and directed credit is the norm. Much remains to be done to establish the autonomy of the central bank, develop instruments of monetary control and improve capacity for prudential supervision. The top priority is to contain spiralling risks in the financial system. Bad loans are building up, concealed by opaque accounting systems and the common practice of credit rollover and interest capitalization. Portfolio risk will only increase as economic restructuring progresses and an increasing number of enterprises find themselves unable to service loans. As this process will be dramatically accentuated when monetary and fiscal policy are tightened in preparation for the introduction of the new currency, it is imperative to act now to protect the financial sector from collapse. Further lending must be conditioned by past repayment performance, and in due course by credit and risk analysis, while limits on lending to single borrowers and to shareholders must be enforced. Loan loss provisions should also be built up. Otherwise the banking sector risks widespread failures with concomitant heavy charges on the budget. The Government's decision to eliminate preferential credits to selected sectors and industries will help resources shift to the most productive activities. However, real interest rates remain highly negative, distorting the cost of capital and profits. As a high priority, the NBM should continue to raise interest rates towards positive real levels. It will also need to raise and enforce capital standards on banks, so as to limit the vulnerability of banks to default and reduce future charges on the government budget should banks need to be liquidated and/or recapitalized. The required capital/asset ratio should be raised with a xiv Executive Summary phase-in period for existing banks to at least the Bank for International Settlements (BIS) capital adequacy guideline of 8 percent, and preferably higher during the transition period. Regulations restricting acceptance of deposits should be removed. To promote the development of an efficient enterprise sector, the budget constraint on enterprises should be hardened. This will require the introduction of stricter credit evaluation, higher interest rates, elimination of budget subsidies, and prudential supervision of commercial banks which extend credit to enterprises. However, a closer focus on enterprise efficiency and inter-enterprise arrears is needed in parallel with these general measures. Hence financial discipline should be internalized within the enterprise sector. Until capacity is built up in the financial sector to evaluate risk and profitability and extend credit accordingly, credit demands of existing public enterprises are likely to drive credit allocation. Higher interest rates will be met only by higher credit demand, rather than a rationalization of demand. On the other hand, if the credit safety valve were abruptly shut off, there would be widespread enterprise failures, with follow-on bank failures, and the consequences for both the real economy and the financial system would be disastrous. It will therefore be essential to insist on greater financial discipline within enterprises so as to limit excessive credit demands and prevent further deterioration in bank portfolios. This will require introduction of accounting and auditing standards and of financial reporting requirements, together with regular monitoring of enterprise credit including growth of inter-enterprise arrears. Enterprises will need to replace production targets with profitability objectives, respect financial limits on their activities, pay off existing arrears and place time limits on new arrears, and establish consistent accounting practices and financial reporting. Success in enforcing these requirements entails the development of the corresponding capacity within Government until corporate bodies are strong enough to take over. Reining back the credit demand of existing public enterprises will also reduce crowding out of the growing private sector. Moldova has not seen the proliferation of new banks, many of which have been created solely to lend to their owners, that has occurred in other FSU countries. However, lending limits on credit to owners are frequently exceeded, and a number of banks are dangerously exposed to a few large enterprises to which they customarily lend. As an immediate priority, the NBM should enforce restrictions on connected lending. Then, to take account of the interdependence of the former State banks and their State-owned enterprise (SOE) shareholders, a staged disengagement is needed. Public enterprises should no longer be permitted to buy shares in banks and should divest themselves of existing shares over a set period, preferably before being privatized. Any further indexation of working capital should be conditional on enterprise performance criteria relating to restructuring and to movement towards profitability. Meanwhile the banks will need to improve their capacity to evaluate credit and risk, training staff in these new functions. Executive Summary xv In the longer run, the new private sector banks are likely to expand, attracting new companies as well as some of the traditional customers of the former State banks, but the total number of banks will probably not increase greatly. If risks can be contained, the former State banks should evolve into genuine commercial banks, but are likely to need expensive restructuring. This will need to be postponed as long as possible while budget resources are built up. However, the need for closures cannot be ruled out, and this would also entail heavy budget costs. Mscal policy Immediate priorities in fiscal policy are to shore up revenue collections and cut subsidies. In due course structural reforms will also be needed on both revenue and expenditure sides of the budget and in the assignation of central and local government revenues and expenditure responsibilities. This will be particularly important once enterprise delivery of social services begins to be shifted to local budgets. Revenue. To improve the prospects for macroeconomic stabilization, the highest priority is to raise tax collections by strengthening the tax administration and improving taxpayer information, education and compliance to deal with the new structure of income tax, VAT and excise taxes, which was introduced with little lead-up preparation over the past two years. Both taxpayers and inspectors receive instructions and methodology too late and also have to grapple with retroactive changes in taxation. Taxpayers are likely to need advice on their new obligations (many will be paying tax individually for the first time) and on the accounting requirements for accurate VAT and profits tax assessment. A unique taxpayer number should be introduced, tax requirements codified and published, the tax administration computerized and training programs set up for tax assessors and inspectors. In order to create an environment which will help resources to flow to the most profitable activities, the tax structure should be as neutral as possible. The authorities have already moved towards a simpler, more uniform and more equitable system, with the abolition of concessional profits tax rates for agricultural enterprises and the introduction of a graduated personal income tax. The land tax rate schedule now applying to agricultural enterprises will need to be raised if it is to fulfill the Government's objective of creating, on average, the same tax burden on agricultural as on industrial enterprises. Amendments will also be needed to personal income tax rates, with the aim of aligning the top rate of personal income tax with the corporate income tax so as to ensure tax neutrality between different forms of business activity and to prevent tax avoidance through incorporation (or failure to incorporate, depending on the relative rates of personal and corporate income tax). Differential sector contribution rates to the Social Fund should now be eliminated, and the excess profits tax (defined as taxation on profits exceeding the industry norm by more than 10 percent), which has already been reduced, should now be removed. Expenditure. The immediate priorities are to abolish remaining subsidies to public enterprises, and to concentrate available fiscal resources on essential health and other xvi Executive Summary services, social assistance to those most in need, and infrastructure maintenance. If roads and other capital stock necessary for economic growth are not adequately maintained, they will deteriorate beyond the point where repairs are feasible, and large new investments will be required. After immediate action to cut subsidies, there will be a need for deeper reforms so as to lessen and rationalize expenditure pressures and reduce the growth of arrears and claims on central bank credit to finance the deficit. The Government must be prepared to reprogram expenditure in the course of the year if revenue falls below forecast levels. This in turn requires clear expenditure priorities and already developed ideas about what to cut first--and how to do it. This scrutiny and reordering of priorities should be undertaken for current expenditure and also for investment expenditure. At present, the inclination to finish capital projects that were halted midway because of the outbreak of the conflict or because of revenue shortfalls during 1991 and 1992 often overrides the order of priorities based on real economic or social benefit. There will be occasions when it is more economic to leave a project unfinished than to complete it, transferring the resources available to a higher-priority activity. Private sector development Legal reform. The development of a dynamic private sector fuelled by trade and foreign investment requires a clear legal framework and the capacity to implement it. Parliament has already passed most of the laws needed to frame private sector activity, but some of the existing laws (bankruptcy, foreign investment) are in need of revision and further laws will be needed. In this context, a high priority is the law on mortgage and collateral, which will facilitate timely ownership transfer and also assist new businesses in obtaining credit from commercial banks and suppliers. Capacity to apply the bankruptcy law will also be required so as to facilitate exit. The courts and the legal establishment are unfamiliar with a private sector environment and may also be insufficiently independent of Government. It will therefore be important to develop an independent court system with specialized commercial courts and to promote the formation of an independent legal profession. Capacity within Government will also need to be reinforced so as to continue drafting legislation and regulations needed for private sector development. In parallel with legal reform, entry restrictions for private sector activity have been removed, with the exception of some areas related to defense and a limited number of pharmaceutical products. Land and other asset registration procedures have been established to facilitate the development of markets, and there is a company registry within the Ministry of Justice. However, licensing requirements remain burdensome and permit too great a degree of administrative discretion. They should be replaced by a certification system. Trade policy. The immediate priority is to enable economic agents to build on Moldova's comparative advantage by removing restrictions on exports and ensuring that the trade regime be transparent and clear. Hard currency exports will be crucial, given the need Executive Summary xvii to generate foreign exchange reserves to support the introduction of the new currency and to service debt. To this end, the removal of quotas for hard currency exports and the improvement in export licensing procedures in mid-1993 were major steps forward. Licenses are now granted for a year at a time rather than for each trade operation, and in August 1993, the number of items subject to export licensing and quotas was halved. The top priority now is to ensure that licensing procedures are as clear and simple as possible, minimizing delays and opportunities for rent-seeking. A further priority is to remove all quotas on FSU exports. The proportion of trade covered by State contracts will need to be reduced as rapidly as the practices of Moldova's FSU trading partners permit. Concurrently, the State's direct role in trading should be phased out to facilitate enterprise-to-enterprise contact; at the same time, procurement procedures for state trading will need to become more transparent and competitive. The Government intends to remove export taxes by end- 1993. It will be important to remove remaining export quota obligations and, in the few cases where imports are still administered, replace quotas and licenses with tariffs. In September 1993, the authorities replaced the previous highly dispersed structure of import tariff rates (ranging from 0 to 1,000) by a low and fairly uniform tariff on non-FSU imports, with most rates in the 15-20 percent range. This tariff level is advisable, given that sections of Moldovan agriculture and industry may need a moderate level of protection for a transitional period (particularly once the protection currently afforded by the undervalued exchange rate disappears), and given the pressing need for revenue for macroeconomic stabilization purposes. Differential excise tax rates could still be used on luxury goods and goods with significant social or environmental costs. The surrender requirement for hard currency export receipts has been reduced from 50 percent to the current level of 35 percent and is now calculated at the official Moldovan exchange rate, thus removing the implicit tax imposed by use of the Russian Moscow Interbank Foreign Currency Exchange (MIFCE) rate. (In August 1993, the Moldovan ruble was quoted by the NBM at 1.3 to the Russian ruble). The authorities should now adopt a timetable for removing the surrender requirement altogether, recognizing that it reflects expectations about financial and foreign exchange markets which should disappear once macroeconomic stabilization is achieved and the financial sector develops instruments in which depositors can have confidence. The NBM will need to ensure that there is a functioning foreign exchange market to which all enterprises have access. There is a pressing need for reform of Customs if Moldova is to facilitate external trade, develop accurate statistics for policy-making, and collect revenue. At present immigration and Customs facilities on both sides of the external border with Romania are a barrier to trade. Delays make the export of perishable goods highly risky, raise the cost of exporting, and discourage investors. The authorities have begun to rationalize the application of VAT. At present, the VAT is applied on some variant of the origin principle in many countries of the FSU but is generally applied on the destination principle outside it. This means that VAT was not levied xviii Executive Summary on imports from outside the FSU, while imports from inside the FSU entered Moldova at VAT-inclusive prices and at a high rate of 20 percent. The authorities are now imposing VAT on imports from outside the FSU to provide neutral tax treatment for VAT purposes of all goods, imported and domestic. The Government will now also want to ensure that exports to destinations outside the FSU are zero-rated for VAT, as they will be subject to VAT in the country of sale, in line with western practice. Zero-rating is preferable to exemption because taxes paid earlier in the production process can be reimbursed. Full reimbursement will not be practicable in the immediate future, although it should be possible to reimburse taxes paid in Moldova. In due course, the authorities should consider moving to a VAT based on the destination principle. Enterprise reform Enterprise reform combines the issues of private sector development, financial sector reform, enterprise governance, and privatization. Although there have been some informal privatizations and new business startups, most enterprises are still in the public sector. On present plans, privatization will lead the process of enterprise reform. However, a change of ownership on its own will not be enough to achieve an efficient use of resources and conditions for growth. Attention will also be needed to the competitive environment and to corporate governance both before and after privatization. Freedom of entry will be particularly important. An open trading policy will raise the degree of competition in the economy but it may also prove necessary to regulate or break up domestic monopolies such as those in distribution and other non-tradeables. It will also be important to recognize that ownership change is not just a reassignment of title to a structure of activity that will remain static. Changing incentives, markets, and prices, together with new forms of management, will generate substantial change in the composition of activity and the population of enterprises. During the transition period it is inevitable that a number of enterprises will fail and new ones will emerge. The Government is now planning to move ahead with the 1993-94 Privatization Program recently approved by the Parliament. The aim is to privatize small-scale shops fairly quickly, and then move on to the transport, distribution and marketing systems, thus promoting the development of a dynamic private sector. At the same time, it will be important to address financial and management issues in the larger enterprises, which will take somewhat longer to privatize, and in those slated to remain in the public sector. Enterprise reform. Enterprises have been largely insulated from the budget constraint by the indexation of working capital, generalized clearance of inter-enterprise arrears (and the ability to accumulate further arrears), access to a cheap credit supply from banks they own, and, in some cases, by the ability to charge monopoly prices. There have been few examples of significant redundancies in the industrial sector despite the sharp falls in production and capacity utilization, with firms preferring to introduce short-time working. Government must be prepared to allow liquidations or unemployment to occur in cases where Executive Summary xix market forces indicate that there is no other option. It will be important to ensure that any further compensation for inflation or arrears clearance is conditioned on enterprise performance. In order to improve corporate governance, a program of corporatization of all SOEs is needed, transforming them into joint stock companies and instituting boards of directors that will be elected by the shareholders. This process will take time to complete. As an immediate measure, it is essential to improve financial controls, spell out management responsibilities and obligations more clearly, and introduce sanctions for poor performance into managers' employment contracts. Managers should also be asked to draw up financial plans, and where appropriate, privatization plans for their enterprises. Simultaneously, the role of the Ministries will have to change, starting with the Ministries of Agriculture and Industry, as the country moves to a market-based economy. The emphasis will move from operational issues to monitoring, regulation and the provision of support in marketing. Ministries will become responsible for monitoring information on enterprise output and employment developments and financial performance, including inter- enterprise arrears, as well as for enforcing management contracts. The facilitation of foreign investment will be an important part of the enterprise reform strategy. As it stands, the law does not offer sufficient protection and also defines a number of special procedures that are likely to create obstacles for foreign investors. However, foreign technology and capital will help revitalize enterprise performance, while joint venture partners can assist in penetrating non-traditional markets beyond the FSU. In addition, new investors from abroad can bring managerial innovations from the West. In general, foreign and domestic investors should be subject to the same legal requirements, and care should be taken to avoid special fiscal or other concessions for foreign investors; assurances on repatriation of profits and guarantees against nationalization should suffice. Many larger Moldovan enterprises provide and fund social services on a considerable scale. These obligations will have a significant short-term financial impact on the operation of the enterprise in an increasingly competitive environment, will impede closure when an enterprise is bankrupt, and will also complicate privatization at a later date, particularly if foreign capital or access to external markets is required from joint venture partners. Arrangements will need to be made for a gradual transfer of social functions to central or local government budgets, or at least to clarify the time horizon over which this responsibility will continue while fiscal capacity at the local level is built up. Housing privatization About 70 percent of the housing stock is already in private hands (almost 100 percent in rural areas), and the Government is now pressing ahead with privatizing the 350,000 dwellings still in public ownership. The legal framework is already in place whereby sitting tenants will receive a defined area of space per person free, with an additional space xx Executive Summary allowance depending on years of work. Space above that limit can be acquired for payment. An estimated 75 percent of units can be privatized without payment, and these privatizations are now under way, while those cases requiring partial payment will start by end 1993. Labor market reform Reform of the labor market is needed so as to create greater flexibility in the economy and encourage people to move to more productive opportunities. At present, flexibility is hindered by uncertainty about whether current conditions--such as input shortages--will prove transitory or not. A few, generally higher-skilled, workers have already switched jobs, but shortages of consumer goods tie workers to their enterprises, through which they can obtain supplies, while housing shortages limit geographical mobility. Employers' ability to dismiss workers is constrained by the power conferred on government authorities and unions to delay dismissals for six months and the obligation to pay for retraining. These obstacles should now be removed. An unemployment benefit was introduced in 1992, but restrictive rules on eligibility have prevented the benefit from playing a role in promoting adjustment'. Employment offices can cope at present, with registered unemployment at less than 1 percent of the workforce, but will need substantial reinforcement once unemployment starts to rise as economic restructuring proceeds. As expenditure from the Employment Fund budget tends to be eroded in favor of competing demands from other beneficiaries, it is a high priority to put the Employment Fund budget and expenditure on a secure footing, upgrade employment offices, provide counselling, identify training needs and increase training provision. The authorities may wish to consider expanding their program of small- scale public works and services to provide work and promote labor force attachment in a time of high unemployment. And, to facilitate labor mobility, the authorities will want to give early attention to alleviating the housing shortage and developing housing markets. Attention will also need to be focused on enabling women, who have been laid off in disproportionate numbers, to continue to take an active role in the labor market, if Moldova is to draw on all its resources and talents. Protecting vulnerable groups Large-scale dismissals have yet to occur, but the system of social protection will soon be unable to cover claims under the existing structure and coverage (including provision for unemployment benefits introduced in early 1992). Future developments, including labor shedding by enterprises and a continuing fall in real incomes, will only aggravate this situation, pushing the Social Fund and the government budget further into deficit. Unemployment is likely to rise sharply and to remain high for at least five years, judging by I At present, a worker who leaves because he or she is being paid less than the minimum wage is deemed to have left the enterprise voluntarily and is not eligible for benefit. Executive Summary xxi experience with economic restructuring in other countries. Immediate action is needed to provide social assistance for those most in need and to make savings elsewhere in the system, introducing sharper targeting. Substantial savings can be found in the short term by cutting back on benefit and pension supplements related to work history and income, preferably abolishing them completely. Some savings could also be made by abating or eliminating pension payments to those who are still in employment. The base level of benefit should also be de-linked from the minimum wage: the minimum benefit is currently held equal to the minimum wage, with a sizeable number of benefits above that level. This means that any increases in the minimum wage feed straight through to the structure of benefits. In future, it would be preferable to shift to a system of flat-rate cost-of-living adjustments for all beneficiaries rather than raising the benefit structure as a whole. At the same time, it will be important to devise a system for sharper targeting to the most vulnerable groups. This will require a budget allocation for supplementary benefits, accurate means of identifying those who are most in need and an effective system of delivery. Until this system is in place, it might be advisable to retain a subsidy on bread consumed by the poor and to introduce a bread coupon system for the cheapest type of bread. The next priority will be to address the adverse fiscal and efficiency impacts of the current structure. The current arrangements, whereby the majority of social benefits are delivered through the Social Fund and are largely funded by enterprise contributions (with some budget subsidy), are already at the limit of viability. The contribution rate on enterprises is higher than elsewhere in the FSU and has been frequently changed, reducing enterprises' ability to plan and to maintain economic activity and employment. In addition, different sectoral contribution rates distort allocative choices and profitability. The potential claim on the budget in the future is also high. It is therefore important to restructure the system within a smaller envelope that will entail lower fiscal and non-wage labor costs. Because the disruption associated with the transition is so extreme, the Government now has the opportunity to rethink the philosophical and financial basis of social protection for the medium-term. What the country is facing is a series of shocks that have already severely cut real incomes, and will result in further job and income losses for a large proportion of the population. Government guarantees of full employment, a minimum wage, and a wage tariff related to occupational status can no longer be maintained. In parallel, it will be necessary to move to basic citizen pensions and benefits for the non-employed population, if the share of public transfer payments in national income is to be held at viable levels and adequate minimum standards are to be achieved. It will not be possible to restore old structures. Instead, a new structure of both social assistance and social insurance will have to be devised. xxii Executive Summary External financing requirements During 1992, the country focused on borrowing to obtain exceptional cereal imports, to make up the deficit caused by the drought, and inputs for the spring and winter planting seasons in 1993. Assistance from the European Community of $33 million equivalent took the form of short-term credits for grain imports. Moldova will need to muster assistance from both bilateral donors and multilateral organizations to enable it to refinance and spread this burden over a more realistic repayment period. During 1993, foreign financing for drought relief continued to be an important component of the short-term assistance program, with a World Bank emergency drought recovery loan of $26 million and an IMF Compensatory and Contingency Financing Facility (CCFF) of $19 million equivalent. A World Bank rehabilitation loan of $60 million was approved in October 1993. It is estimated that the financing gap may amount to about $35 million in 1993 and $141 million in 1994. The calculation assumes a 50 percent increase in energy prices in 1993 over the level obtaining in 1992, with a further 50 percent increase in 1994, bringing them to 90 percent of world prices on average. Moldova's financing needs will be substantial over the next five years at least, as energy prices rise to world levels, economic restructuring occurs, and essential investment and rehabilitation take place. The country will need exceptional financing from the donor community over this period before export earnings overtake import requirements. Once this phase is over, it will be well positioned to trade both with the FSU and the rest of the world and is likely to become fully creditworthy. However, the timing of these developments does indicate a need for long-term lending and for some degree of concessional financing, tapering off after approximately five years. Executive Summary xxiii Table 1: MOLDOVA: Main Economic and Social Indicators Social and demographic indicators (1991) Area 33,700 sq.km. Population 4.36 million Urban 2.04 million (46.7%) Rural 2.3 million (53.3%) Population density 129.4 per sq.km. Life expectancy at birth 69 years in 1990 Gross domestic product (GDP) (1992) 226.7 billion rubles GDP per capita (1992) $1,260 1988 1989 1990 1991 1992 Annual Changes of Output in Percent Gross Domestic Product (GDP) -18.0 -21.0 Net Material Product (NMP) 1.7 0.8 -1.5 -18.0 -24.0 Industry 0.8 10.7 16.7 -16.8 -27.0 Agriculture 0.5 7.3 -19.8 -28.0 -10.8 Composition of GNP in Percent Industry 48.3 45.2 43.4 44.5 41.5 Agriculture 37.1 40.0 41.7 41.7 47.2 Transport and communication 4.0 3.8 4.8 3.8 3.7 Other sectors 1.06 11.0 10.1 10.0 7.6 Average Price Change Consumer price 90.8 1255.0 Wholesale price 150.5 2637.0 Retail price 95.5 815.0 Average monthly real wage -33.0 -42.0 Interrepublican and Foreign Trade (In billions of rubles at domestic prices) Exports 5.1 5.5 6.2 8.1 63.9 Imports 6.1 6.6 6.5 8.4 94.9 Trade balance -1.0 -1.2 -0.3 -0.3 -31.0 Trade balance as percent of GDP -10.4 -10.3 -2.2 -1.2 -13.7 General Government Budget as Percent of GDP Revenue 33.6 35.3 35.2 25.8 19.4 Expenditure 31.9 33.0 32.4 25.8 40.5 Overall balance 1.7 2.3 2.9 0.0 -21.1 Money and Credit (end of period) (billions of rubles) Domestic credit (monetary system) 3.9 8.9 98.0 Broad money 7.9 17.8 81.3 Source: Moldovan authorities and Bank staff estimates. INTRODUCTION Moldova is an ethnically diverse country wedged between Ukraine and Romania. It lies at the western edge of the former Soviet Union (FSU), in which it used to describe itself as a Latin island in a Slavic ocean. With a land area of 33,700 square kilometers,' it is the second smallest FSU country after Armenia and has the highest population density, with more than 129 inhabitants per square kilometer. The largest part of the country lies between two rivers, the Dniestr and the Prut. Moldova's rich soil and temperate continental climate have made the country one of the most productive agricultural regions and a major supplier of agricultural products in the FSU. Moldova's income per head ranked eighth out of the fifteen FSU countries in 1991 or 20 percent below the FSU average. As a small country with powerful neighbors, Moldova has had its boundaries redrawn many times. It was absorbed into the Ottoman Empire in the early 16th century and then taken over under the Treaty of Bucharest in 1812 by Russia. After a brief period of independence in 1918, the country united with Romania after the First World War, and was occupied by the USSR during the second World War. At that stage it lost part of its territory in the Bukovina and Southern Bessarabia regions to Ukraine, while being combined with the Moldavian Autonomous SSR of Ukraine to form Moldova as it is constituted today. Ethnic Romanians form the majority of the population (65 percent) of 4.4 million but there are sizeable minorities of Ukrainians (13 percent) and Russians (13 percent) together with a number of other ethnic minorities including Bulgarians (2 percent) and the Gagauz, a Christian Turkish people in the south (3.5 percent).' The proportion of ethnic minorities is much higher than average in urban areas and in the Transnistria region.4 Tensions after independence was declared on August 27, 1991 led to intense conflict in which ethnic and language factors were combined with marked differences in approach to economic reform and restructuring. The ensuing armed conflict resulted in serious casualties and damage to infrastructure and crops. Since the ceasefire in July 1992 the country has been effectively partitioned, with the economically significant Transnistria region remaining under the control of the 14th Russian Army. During 1993 tensions eased 2 Moldova's land area is slightly larger than Belgium, about 5.6 percent of the area of Ukraine and 0.2 percent that of Russia. 3 Figures based on 1989 census. 4 Due to the emigration of ethnic minorities after the disintegration of the FSU, population growth decelerated from an annual average of 1.2 percent in the mid-1970s to 0.1 percent in 1990 and became flat in 1991. Life expectancy at birth is around 65 years for men and 72 years for women, while the infant mortality rate is below 20 per thousand live births. Over half the population lives in rural areas and the level of education is high. 2 Introduction but a number of issues relating to the status of the region on the left bank of the Dniestr river remain to be resolved.s The objective of national unity and the means of attaining it are in the forefront of public debate and will condition the Government's approach to economic and social transformation. There have been three Governments in the two years since independence, and Moldova now has a Government of national reconciliation in which members of ethnic minorities hold senior Cabinet posts. The Government's reform program stresses the need to seek consensus if progress towards a liberal democracy and economy is to be maintained. In this spirit, the Government of Moldova is negotiating a national solution to the de facto secession of the Transnistria region under a new constitution now being prepared, while remaining fully committed to the process of reform that it has already launched. The report is organized as follows. The first section outlines the development and structure of the Moldovan economy up to 1990 and then discusses the nature of the shocks that occurred in 1991 and 1992 and their consequences for output, incomes, and macro-stability; the second section discusses the Government's reform program and its response to the need for structural transformation; the third section sets out a road map of future directions for reform and essential actions for restoring income. ' The disputed region is a narrow strip of land on the left bank of the Dniestr river and also includes the city of Bendery on the right bank; but is usually referred to simply as Transnistria. The issues to be resolved concern the degree of autonomy of Transnistria, the official language, the role of the Russian 14th Army, and participation in the reform program. CHAPTER 1 The Evolving Economic Crisis The Development of the Moldovan Economy before 1990 In the command economy of the USSR, Moldova's economic role was one of producer of raw and processed foodstuffs (primarily grapes, grains, wines, vegetables and livestock) deriving its comparative advantage from the fertile soil and temperate climate. Agriculture alone accounts for about 40 percent of Net Material Product (NMP); agroindustry contributes approximately half of the almost 40 percent of NMP accounted for by the industrial sector, along with household appliances' and high-technology electrical goods (in part, for the defense industry). The Soviet-assigned structure of production and trade created a high degree of economic interdependence among the former republics. Most inputs, particularly primary energy supplies, were imported from the former Soviet Union (FSU), and vertical integration in export industries was discouraged. The high operating and transport costs associated with the interdependence strategy were hidden by the highly subsidized price of energy products. Moldova has a trade dependent economy, with the shares of imports and exports in GDP averaging 50 percent in 1990. Its principal exports are agricultural, including wine, processed food and tobacco products. Other major exports include light industrial products such as electrical appliances, textiles and leather goods, and products of the machine-building industry. Despite its high degree of integration into Soviet production and trade, Moldova was spared the most fuel intensive and polluting smokestack industries, largely because of its almost complete dependence on imported energy. Economic significance of the Transnistria region. About 17 percent of the total population of Moldova lives in the Transnistria region, which covers an area of 4,200 square kilometers, or 15.5 percent of the territory on the left bank of the Dniestr river, together with the city of Bendery (actually on the right bank). Lying between the rest of Moldova to the west and Ukraine to the east and south, it is the natural hub for Moldova's trade with the FSU in terms of both land transportation and energy pipeline connections. It is relatively more industrialized than the rest of the country, with 28 percent of the industrial enterprises, 21 percent of total industrial employment, and more than one third of total industrial output. Nearly all the cotton textiles, power transformers and large electrical machines are produced there, together with 90 percent of the electricity generation, 60 percent of the cement, 25 percent of the sheet metal, and more than half of the low horsepower electric motors. The Transnistria also produces a quarter of the nation's agricultural products. 6 Radios, light electronic goods, refrigerators, electric irons and kettles, and vacuum cleaners. 3 4 Chapter 1 Output trends. After real growth recorded at an average annual rate of 4.1 percent from 1971 to 1985 (0.3 percent lower than the FSU average), net material product fell sharply, largely due to the anti-alcohol campaign of 1985 which resulted in the destruction of some vineyards and a marked reduction in wine production. Agricultural NMP fell almost 30 percent and NMP overall fell by 8.6 percent in 1985. Recovery thereafter was slow and faltering until 1989 when NMP rose 8.8 percent, boosted by a record harvest. In 1990 a serious drought caused a 20 percent fall in agricultural output, leading to a fall in NMP of 1.5 percent. Sector shifts. The size of the agriculture sector has been rising during the crisis as other traditional sectors shrink in relative and absolute terms, while the cooperative and private farming sectors are growing, albeit from a small base. Industrial production has been concentrated in food processing, consumer durables, light industry (such as textiles, clothing and shoes), and machine building. In 1989, Moldova produced 26 percent of some consumer goods such as refrigerators and washing machines sold in the FSU. Since 1989, the share of the machine building sector in production has fallen while the share of textiles has risen. Food processing remains the largest subsector, accounting for 28 percent of industrial output, although its share has fallen from 33 percent in 1985. The structure of the economy in Percmmat atructure if NMP lel15$1 1990: the starting point for adjustment. Moldova's trade dependence--and need for el,...,.4. imported energy in particular-- have made it l, ...i... especially vulnerable to the shocks of the past - two years (described in the section below). If the economy is to achieve sustainable growth in the future, it will have to adjust to a sharp permanent fall in the terms of trade and make far-reaching structural changes that will require a great deal of commitment and energy. Growth in the future will need to be export-led, given the small domestic consumer base, and the country will therefore need to enable a switch of resources into products which have export markets in the new environment and can be profitable at the new set of relative prices. Notwithstanding a high degree of integration into the FSU structure of production and trade, Moldova probably faces somewhat less need for adjustment in the sectoral composition of output than many other FSU countries, although adjustment within sectors is likely to be far-reaching. The country concentrated in the past on agricultural products and agroprocessing industries based on those products, largely consistent with its comparative advantage. The agriculture sectors accounted for nearly 42 percent of net material product (NMP). Industry constituted around 38 percent of NMP, of which approximately half consisted of agroindustry. There is considerable light industry, but few The Evolving Economic Crisis 5 of the industrial dinosaurs whose intensive use of fuel is likely to render then uneconomic in the future. However, adjustment within sectors will be extensive, as businesses and farms search for economies in energy use, make technological improvements, orient activity to profitability and marketing effort and away from physical production targets, shift product composition, and strengthen links with existing markets and seek new ones. Many of the technical and energy efficiency gains will be embodied in new investment, especially as much of the capital stock is out of date. The country must also deal with a polluted environment and problems of soil degradation and erosion. In spite of the substantial adjustments required within the agricultural sector, agriculture and agroprocessing industries will almost certainly lead the recovery and form the basis for future growth. The Nature of the Shocks in 1991 and 1992 Output From 1991 on, Moldova has been hit by a series of shocks both internal and external. On the internal front, a spring freeze in 1991 followed by summer floods depressed Moldova's agricultural NMP by 28 percent and industrial NMP by 21 percent in that year, with a fall in NMP overall of 18 percent. There was then a robust recovery in some agricultural products (grapes, fruits, vegetables), before the drought of summer 1992 struck. This drought, the most severe since that of 1946, which was followed by widespread famine, caused crop losses ranging from 25 percent for sugar beets and sunflowers to 58 percent for fruits and berries. Cereal production declined 30 percent, with drastic consequences for grain availability and animal feed. During 1992 and 1993 the country has had to import grain on an emergency basis at relative prices at least five times higher than obtained in the past, when any harvest deficits could be made up by cheap imports from elsewhere in the FSU. Through loss of feed and lack of farm income to buy inputs for the following agricultural season, the drought is likely to harm agricultural production in 1994 and beyond. Compounding these economic losses, the conflict in June 1992 over the status of Transnistria diverted expenditure to military purposes and destroyed fuel pipelines and some infrastructure and industrial plant. During the same period, Moldovan output was further depressed by the increasing deterioration in the FSU economic environment, resulting in disruption in FSU trade and payments systems, a sharp shift in relative prices, loss of income transfers from the Union budget, and shortages of imported energy. It is estimated that GDP fell by 21 percent in 1992, bringing the cumulative fall in output since 1990 to more than 35 percent. As shown in Figures 2.1 and 3.1, the industrial sector accounted for 21 percent of employment and 38 percent of National Income in 1991. Overall, industry has suffered more than agriculture from the shortage of fuel and raw materials and other shocks noted above. Capacity utilization has plummeted in the consumer goods and defense 6 Chapter I electronics industries and in heavy industry. Industrial output fell by 11 percent between 1990 and 1991, and in 1992 was 30 percent lower than its level in 1991. Terms of trade fall. According to a recent study,' Moldova will experience the worst terms of trade fall in the FSU. If trade in 1991 had been valued at world prices, it is estimated that the terms of trade shock would have approximated 16 percent of GDP. Energy import dependence is the root cause of the severe fall in Moldova's terms of trade. In addition, almost all the raw materials and other inputs for industry - apart from agro- processing - must be imported, at increasing cost as prices move to world market levels. The massive increase in the prices of energy and other inputs in 1992 caused trade deficits in almost every sector, except processed and non-processed agricultural products, light industry and machinery. Expenditure on energy imports amounted to R40 billion in 1992, compared to R1.4 billion for the full year 1991, and it is estimated that energy imports rose from 14 percent of the value of total imports in 1987 to 55 percent in 1992.' Yet energy prices are still well below international levels. Fall in demand. Consumer spending cuts as unemployment began to rise and real incomes fell sharply has reduced FSU demand for Moldovan products such as refrigerators and washing machines, while the sharp drop in demand for military products from CMEA countries and from the United Soviet Command has reinforced industrial decline.' It is reported that a further blow has resulted from the provision of EC credits to Russia tied to the purchase of EC goods. This has hurt Moldovan exports of wine and food processed products to one of its biggest traditional markets. Furthermore, the growth of inter-enterprise arrears and the deterioration of the inter-republican clearing system have hit Moldova badly. In parallel with the reduction and dislocation of trade, Moldovan enterprises, like their counterparts in other FSU countries, are now reacting to credit shortages by resisting the shipment of raw materials or intermediate goods until payments have been cleared through their bank accounts. The result has been to deprive many industries of inputs even while markets still existed for their products, thus compounding the decline in trade. Despite the shocks to the economy that have already been experienced, structural change so far is limited; - though there are some notable exceptions, including in defense conversion. Moldova can expect to hold on to some of its traditional FSU markets, 7 See Tarr "How Moving to World Prices Affects the Terms of Trade in 15 Countries of the Former Soviet Union". World Bank Working Paper WPS 1074, January 1993. 8 In 1991, Moldova imported 3.6 million tons of petroleum products, 4.2 million tons of coal, 3.9 thousand cubic meters of natural gas and 0.2 million tons of LPG. 9 Much of Moldova's defense industry produces advanced electronic products, however, which could be converted to civilian uses. The Evolving Economic Crisis 7 especially in agro-processed products, but will face considerable change in other markets and products. While it will be important to halt the fall in output, it will be necessary at the same time to re-orient production to the new structure of relative prices and the different market opportunities that will prevail. Trade Although Moldova remains highly dependent on trade," the shares of imports and exports in GDP declined from an average of 50 percent in 1990 to 33 percent in 1991. The bulk of Moldova's trade was with the FSU, with Russia and Ukraine jointly accounting for 71 percent of FSU imports and 79 percent of FSU exports and 61 percent of total imports and 76 percent of total exports in 1991. In the same year, only 4.1 percent of total exports went outside the FSU, but about 14.3 percent of imports came from external sources. Trade with the FSU was normally in surplus but Moldova's deficit on trade outside the ruble area was about R1.2 billion in 1989 and 1990 and nearly RI billion in 1991. 10 In 1987, the shares of total imports and exports in GDP were 60 percent and 57 percent respectively, while the shares of FSU imports and exports were 49 percent and 57 percent respectively. 8 Chapter 1 Table 2 - Moldova: Interrepublican, External and Total Trade (millions of rubles) 1982 1987 1988 1989 1990 1991 1992 1. Interrepublic Exports 4077.5 5158.7 4800.3 5186.4 5853.3 7809.0 47841.7 Imports of which: 3827.4 4607.4 4986.5 5191.5 4991.6 7237.3 74127.3 - Total energy 1355.0 40800.0 Trade balance 250.1 551.3 -186.2 -5.1 861.7 571.7 -30969.6 2. Foreign Exports 162.2 227.6 257.2 270.0 323.4 331.8 16038.3 Imports 973.2 1066.5 1093.9 1420.0 1469.8 1206.5 20722.3 Trade balance -811.0 -838.9 -836.7 -1150.0 -1146.4 -874.7 -4684.0 3. Total Exports 4239.7 5386.3 5057.5 5456.4 6176.7 8140.8 48159.6 Imports 4800.6 5673.9 6080.4 6611.5 6461.4 8443.8 74558.3 Trade balance -560.9 -287.6 -1022.9 -1155.1 -284.7 -303.0 -26398.7 Memo item: GDP 9321.0 9433.0 9830.0 11218.0 12681.0 24800.0 226700.0 In Percent of GDP 1. Interrepublic Exports 43.7 54.7 48.8 46.2 46.2 31.5 21.1 Imports of which: 41.1 48.8 50.7 46.3 39.4 29.2 32.7 - Total energy 5.5 18.0 Trade balance 2.7 5.8 -1.9 0.0 6.8 2.3 -11.6 2. Foreign Exports 1.7 2.4 2.6 2.4 2.6 1.3 7.1 Imports 10.4 11.3 11.1 12.7 11.6 4.9 9.1 Trade balance -8.7 -8.9 -8.5 -10.3 -9.0 -3.5 -2.1 3. Total Exports 45.5 57.1 51.4 48.6 48.7 32.8 28.2 Imports 51.5 60.1 61.9 58.9 51.0 34.0 41.8 Trade balance -6.0 -3.0 -10.4 -10.3 -2.2 -1.2 -13.7 Source: Moldovan authorities and staff estimates. The Evolving Economic Crisis 9 Price and wage developments Mova Price Indicts Prices in Moldova have been raised in several stages from November 1990 when some imported and luxury goods prices were substantially increased. In April 1991 the prices of most final goods (excluding food and some other consumer goods) rose in line with a price adjustment of an average 350 percent throughout the FSU. Liberalization began in -. , . . -, January 1992 when Moldova freed prices for - *to,".0" .O most industrial products and some consumer goods and services. However, wages and input prices were still administered, and the Government subsidized agriculture and food processing industries to compensate for the administered low prices of a number of food products. Energy prices have been sharply increased but remain administered, at least officially; in practice, individual farms and firms are increasingly seeking their own fuel supplies through private contracts, often with suppliers in other FSU countries. Consumer prices rose 2198 percent in 1992, with the bulk of the rise occurring early in the year. There was a deceleration in mid-year, followed by a further spike with the next stage of price liberalization in November 1992. The price of bread was raised from 6 to 35 rubles, there were large increases in the fixed prices of meat and milk, and controls were removed from a number of other foods." Price increases averaged about 25 percent per month in the first half of 1993. However, retail and wholesale margins are still controlled, though the Government now plans to remove price ceilings and margin controls and set administered prices at full cost. To this end, the Government raised grain prices to world market levels in July 1993, and in September 1993 removed price controls and subsidies on certain types of bread and increased prices on dairy products and the remaining subsidized bread products. Bread prices now range from 165 to 190 rubles per kilo. Energy and credit for agriculture are no longer subsidized, and the only industrial goods still subject to price control are consumer durables in which Moldova has an FSU monopoly.12 Wages. Although an indexation law has been on the books since January 1992, it has never been implemented. Instead, the Government has raised the minimum wage at irregular intervals. In January 1992, the minimum wage was raised from 165 rubles per month to 400, to 850 rubles in April, and to 1,700 rubles in November, accompanying the rise in food prices, to 3,000 rubles in March and to 7,500 rubles in July 1993. Pensions and benefits, which are all linked to the minimum wage, went up in the same proportion. However, changes in wages have consistently lagged behind price increases: the average real " Eggs, vegetable oil, sugar, cream and ice cream, most sausage meats, and sardines. 12 Televisions, washing machines, refrigerators, irons, electric kettles, and furniture. 10 Chapter 1 Table 3 - Moldova: Monthly Variations in the CPI and WPI Indices (in percent) WPI 1/ CPI Retail 1991 Jan 50.9 18.2 19.5 Feb 7.7 12.7 12.5 Mar 6.0 2.3 2.1 Apr 38.2 44.6 46.9 May 2.6 3.7 3.3 Jun 1.8 0.7 0.7 Jul 3.0 -0.7 -1.0 Aug 0.3 -1.8 -2.2 Sep 10.4 0.9 0.6 Oct 8.9 4.3 9.1 Nov 6.2 6.2 5.5 Dec 8.4 12.1 11.3 1992 Jan 508.8 240.1 196.3 Feb 49.0 59.5 33.5 Mar 8.5 14.2 9.3 Apr 19.3 21.8 15.7 May 32.5 8.9 9.2 Jun 6.0 5.9 6.5 Jul 2.8 4.5 6.6 Aug 10.5 6.7 5.7 Sep 12.9 11.8 11.2 Oct 22.5 19.7 18.6 Nov 37.2 40.7 33.6 Dec 24.6 25.8 23.0 1993 Jan 53.9 37.1 Feb 33.4 28.0 Mar 20.9 25.0 Apr 19.9 May 17.7 Jun 19.2 Source: The State Department of Statistics 1/ For industrial products. The Evolving Economic Crisis 11 wage declined by 33 percent in 1991 and another 42 percent during 1992, a far sharper fall than that experienced in Russia. 13 The Government also operates an incomes policy, whereby the tax deductible component of wage costs for the purposes of calculating enterprise profit tax is limited to four times the minimum wage times the number employed. This form of incomes policy should be reviewed so that it does not penalize firms with a high proportion of skilled workers. Monetary developments As a small member of the ruble area, Moldova has had a largely passive and accommodating monetary policy. Shortage of ruble banknotes, exacerbated by the rapid rise in prices in early 1992, prompted the authorities to introduce their own coupons" in June 1992, which were accepted by the population and circulated at parity with and alongside the ruble. Moldovan bank deposits, however, trade at a 40-50 percent discount against Russian bank deposits because of blockages in the intra-FSU payments system and Moldova's current account deficit with Russia. Responding to the Russian currency swap, in August 1993 the Moldovan authorities withdrew Russian ruble banknotes with denominations above 100 r from circulation, and established a Moldovan ruble at an initial rate of 1.3 to the Russian ruble. The next stage in the introduction of an official Moldovan currency is the adoption of the leu, planned for late 1993. In addition to ruble shortage, there was also a severe ex post credit crunch in the first half of 1992 with a real decline of 72 percent. Tight monetary conditions were relaxed somewhat at half year, reflecting seasonal priorities, resulting in an overall decline in real credit of 52 percent in 1992. Real credit to enterprises shrank by 50 percent in the first eight months of 1992, during which time enterprise arrears mounted to 37 billion rubles. In October the FSU-wide operations to clear inter-enterprise arrears resulted in an infusion of 12 billion rubles in Moldova - paid to clear net amounts after inter-enterprise compensations, however, not extended in advance. There was a further much larger credit expansion in November, of around 38 billion rubles, with the indexation of working capital financed through the budget. This added an amount equivalent to 15 percent of GDP to the fiscal deficit in 1992. While some compensation for inflation was clearly needed to prevent a catastrophic fall in enterprise output, it was unfortunate that the opportunity was not taken to condition the " By the end of 1992, the Moldovan real wage was at 39 percent of its 1990 level, while in Russia it was 88 percent of its 1990 level. 14 Management of the coupons has given the NBM some practice in monetary issue which will be helpful when the new currency is introduced. Enabling legislation has been passed and supplies of the new currency, the leu, have already been printed ready for issue in late 1993. 12 Chapter I allocation according to measures of enterprise restructuring and profitability. Prices, which had decelerated sharply in the summer and harvest months, then rose more rapidly in the last four months of the year. Moldova is vulnerable to demand developments in Russia and Ukraine. The expansion of credit in the fall of 1992 in those countries resulted in a surge in unofficial exports and hence depletion of Moldova's consumer goods, as purchasers from across the uncontrolled border with Ukraine took advantage of the lower price level in Moldova. Also, the introduction of the karbovanets in Ukraine led to an influx of rubles into Moldova. While the country remains in the ruble area, therefore, it will be in its interest to coordinate monetary policy with other ruble area countries and allow wages and prices to rise to similar levels. If others are not maintaining tight policies, there is no incentive for Moldova to do so. But its success to date in holding wages and prices below those prevailing in its trading partners is a good signal of the prospects for future competitiveness. The Consequences of the Shocks for Output, Incomes and Macro-stability Output. While some of the recent shocks - such as the drought and the conflict with Transnistria - can be regarded as exceptional, Moldova's plummeting GDP reflects not only these transitory events but also the decline in output and trade throughout the FSU, and a projected fall in the terms of trade which is among the worst in the FSU. In the medium-term, trade within the FSU may recover, but is unlikely ever to reach the policy- engineered levels of previous years; and the fall in the terms of trade entails a permanent lowering of income to which Moldova will have to adjust. Only when sustained growth emerges will the country begin to move up towards previous levels of welfare. Adverse relative price changes also entail a shift in the composition of economic activity. Hence the country should regard at least some part of the declines in activity that have been forced by grain and fuel shortages as a permanent feature, accepting that higher prices for these inputs in the future - and changing relative prices in general - will require both an adjustment in the composition of activity and more efficient investment and technology." In this sense, the crisis has both highlighted and accelerated needed adjustment. Income. The overall income distribution has become more compressed. As the crisis began, 4 percent of families had per capita incomes below 50 percent of the average, while 80 percent of all families had per capita incomes between 50 percent and 150 percent of the average. In 1991, 14 percent of workers and collective farmers' families were poor, defined as having per capita income per month of up to 65 percent of the average (200 rubles); another 14 percent of workers' and 21 percent of collective farmers' families fell 15 For instance, lower levels of activity in the livestock sector and closure of inefficient units. The Evolving Economic Crisis 13 within the rich group, defined as having per capita income of 500 rubles per month, or 1.5 times the average at that time." Soaring prices have depressed all real incomes by an estimated 40 percent on average during 1992. As poorer families have been dissaving recently, current consumption and living standards are less dispersed than in the past. According to Moldova's household budget survey, poverty is associated with the number of children per family and the youth of the family. Sources of income for the poor are approximately 60 percent wages and one third income transfers. The real income of workers and civil servants is declining faster than that of collective farmers, who have wages at industrial levels and also have incomes from private farming (and in kind). Declining levels of income and of service quality and availability are now pushing more of the population into poverty. The Social Fund is unlikely to have the income to cover commitments in 1994, a number of enterprises cannot continue to pay family allowances and provide health services, vaccines are scarce and vaccination programs delayed. A greater degree of benefit targeting appears inevitable, while it will also be important to assure vaccination and other primary health services. Macroeconomic stability. Poor revenue yields compromise the Government's efforts to attain macroeconomic stability, finance the reform program, and maintain social protection. The authorities contained the fiscal deficit on a cash basis for most of 1992 by slashing public investment and compressing real wages, and also by running up substantial arrears,' but it rose to 21 percent of GDP by end-1992, largely because of the indexation of working capital for enterprises. The deficit was financed by credit from the banking system. Cuts in investment cannot be sustained indefinitely without compromising future growth, however, and domestic arrears and reliance on bank credit risk destabilizing the real economy and nascent financial sector. Furthermore, efforts to cushion the fall in real wage and benefit levels across the board are having two main effects: generation of inflationary pressures, and intolerable strains on the budget, both leading to macroeconomic instability. Economic stabilization while remaining within the ruble zone is problematic unless Russia stabilizes, and even then macroeconomic coordination would be a challenging task. Even now, with a distinct Moldovan ruble, the country will face continuing inflation and high fiscal deficits in the near future if it does not introduce appropriate supporting policies. Before the new currency is launched, it will be crucial to put in place firm monetary and fiscal policies coupled with structural reforms that will promote a recovery in output within a stable macroeconomic framework. 16 More than 14 percent of the population is in the poor group as poor families have 4 members on average while families in the medium group have 3 (workers) and 3.4 (farmers), and the rich have 2 and 2.7 respectively. 17 Around 60 percent of cash expenditures in the first half of 1992. CHAPTER 2 The Response to the Need for Structural Transformation The Government's Reform Program: Initial Measures Parliament adopted the concept and main principles of transition to a market economy in successive sessions during 1990 and 1991." Since then, the program has been elaborated in further laws and decrees, has been discussed with leaders in the business and academic community, and has undergone several revisions. The Action Program for 1992-95 was adopted in March 1993. The main objectives of the program are stated to be a radical transformation of the management of all economic activity, reduction of the share of state property ownership, together with simultaneous demonopolization of manufacturing, support of private property, formation of market infrastructure, orientation to the world economy and change in the functions of government bodies. The main tasks are set out as: halting the economic decline; privatization and demonopolization; creating the conditions for a broad range of entrepreneurial activity; developing a reliable social safety net; improvements in the financial-budgetary system; measures to attract major foreign capital, technology and experience; and streamlining the structure and functions of the executive. Price and wage liberalization is also envisaged as part of this drive to transform the economy. The Government also sets out the context in which the reform program is to be realized. It emphasizes the need for civil accord, democratization of society and the rule of law, pluralism and adherence to European and international conventions and agreements, together with membership in the international institutions. Finally, it underlines the importance of disarmament and the creation of a demilitarized state, and firm adherence to a market economy. The Efforts to Stabilize the Economy Monetary and financial policy Money and credit control--or lack of it--was largely determined externally by the Central Bank of Russia, but is now coming under national control. Domestic credit is further driven by Government direction, the growth of inter-enterprise credit arrears and 18 The Concept for Achieving a Transition to a Market Economy, July 25, 1990; and the Basic Principles of the Program for Switching to a Market Economy, November 20, 1990. A further program on agrarian reform and socio-economic rural development was adopted on February 15, 1991. 15 16 Chapter 2 extension of bank credit beyond prudential levels. At the same time, Moldova is vulnerable to demand developments in Russia and Ukraine. The expansion of credit in the fall of 1992 in those countries, together with widespread price and wage controls in Moldova, resulted in a surge in unofficial exports and hence depletion of Moldova's consumer goods, as purchasers from across the uncontrolled border with Ukraine took advantage of cheaper goods. The introduction of the karbovanets in Ukraine led to a further influx of rubles into Moldova. Hence, if it were to remain in the ruble area, Moldova would have an incentive to allow wages and prices to rise to the levels of its trading partners, and the authorities could be drawn into competitive monetary expansion. The prospects for stabilization in the ruble area are therefore poor and the authorities are now moving to introduce a new currency, the leu, in late 1993. As a first step, the authorities are using Russian rubles only in denominations of 100 rubles or less, and, since August 1993, are quoting a separate flexible rate for the Moldovan ruble (initially 1.3) against the Russian ruble. In preparation for the new currency, the authorities have moved to establish the NBM as a central bank with the potential authority to exercise instruments of monetary policy. In the meantime, much remains to be done to develop instruments of monetary control, such as discount rate policy and reserve and ratio requirements, and improve capacity for prudential supervision. Moldova's monetary and financial sector arrangements are still largely those of a command economy, and directed credit remains the norm. In the interim before the new currency is issued, the Government has been making efforts to coordinate monetary policy with other ruble area countries. Moldova has participated in all the meetings of central banks of the FSU and was a signatory to the agreement on the ruble area. It has made bilateral agreements with other FSU states aimed at improving the payments and clearing arrangements and trade links. Most recently, Moldova signed a bilateral agreement at a technical level with Russia covering monetary policy, coupons, the conduct of settlements and correspondent accounts, and the introduction of its own currency. Monetary coordination in practice has been patchy. Moldovan interest rates have only recently moved to the same level as those in Russia, while the allocation of credit is subject to a substantial degree of Government intervention. According to Government policy guidelines, the NBM decides on a case by case basis the amount and terms of refinancing for the banks (including a stipulated on-lending rate), depending at least in part on the ultimate purpose of the lending. NBM refinancing rates were 20 percent for most of 1992, while commercial bank lending rates were within a ceiling of 25 percent, but some were as low as 10 percent and 11 percent respectively. In some cases, particularly in the agriculture sector, there was a further subsidy to bring the interest rate down to 3 percent, with the difference being funded from the Government budget.19 Over half of NBM credit to 19 In the first 9 months of 1992, credit of 2.8 billion rubles was charged at 3 percent, out of a total 4.6 billion rubles credit extended to the agricultural sector. The Response to the Need for Structural Transformation 17 commercial banks was on concessional terms lower than 20 percent, and on-lent at even lower rates, some as low as 3 percent. In September 1992, the NBM doubled refinancing and on-lending rates, and there were further increases in November 1992, and March, June, and August 1993 when they were raised to 170 percent, during a staged alignment with Russian rates. Preferential rates have now been eliminated for new lending, but about two-thirds of the total credit outstanding from the NBM is on preferential terms, entailing large budget subsidies. It will be important to ensure that all refinancing occurs at market rates, and that those rates continue to move towards positive real levels. Recognizing the need for a well-functioning and modem financial system, the NBM has streamlined the domestic payments system and is starting to introduce new accounting practices in banks. These reforms will need to be intensified in the near future. Exchange rate and currency. The authorities eliminated the investment ($1 = 15 rubles) and commercial ($1 =55 rubles) rates in 1992, but, until August 1993, continued to use the Moscow Interbank Foreign Currency Exchange (MIFCE) rate of the Central Bank of Russia for surrender purposes. The authorities have been aware for some time that, unless Russia stabilizes, continued membership of the ruble area would be incompatible with macroeconomic stabilization, and have decided to introduce their new currency before the end of 1993. Parliament has adopted most of the necessary legislation and stocks of the leu have been printed. In the interim, the authorities established the Moldovan ruble at an initial rate of 1.3 to the Russian ruble in August 1993, in response to the withdrawal of Russian rubles from circulation, and thus already have a defacto new currency. Macroeconomic policies needed to support a new currency are not yet fully in place, however. It will be important for the Moldovan authorities to use the breathing space before the new currency is officially introduced to strengthen monetary, fiscal and financial control, and to build up reserves to the extent possible. The authorities will also need to determine the exchange rate regime to be established: fixed, floating, or crawling peg. In view of the risks the new currency would face, a fixed rate could be hard to defend, given Moldova's low level of reserves; a float or a crawling peg could be more appropriate. Fiscal policy Fiscal policy is the macroeconomic instrument over which the Government has most leverage, at least in principle. Unfortunately, the move to new tax instruments in January 1992 was made without sufficient preparation. Teething problems with the new system, together with poor compliance especially by new enterprises and enterprises situated in the Transnistria region, resulted in a fall in returns to 19 percent of GDP in 1992 from over 35 percent in the previous year. Meanwhile the tax base has declined, with GDP falling over 35 percent during 1991 and 1992, so that tax revenue in absolute terms is also sharply 18 Chapter 2 down. With the shortfall in revenue, exceptional expenditure on the Transnistria conflict, the loss of transfers from the Union budget, and, most damagingly, the indexation through the budget of working capital to enterprises in November 1992, together with the doubling of the minimum wage and benefits linked to it, the fiscal deficit on a cash basis rose to an estimated 21 percent of GDP in 1992. Aware of the worsening Md State Governrient Budget revenue situation, the Government _,.,_._.,,, introduced a fiscal package in the second half of 1992. The package included a six- fold increase in the price of bread (from about 6 to an average of 35 rubles per kilo) and large increases in the administered prices of the few consumer commodities remaining under price control (oil, milk, meat products) and also of fodder. The full-year effect of these measures was * . estimated to be a reduction in the budget . .. . deficit of 3.5 percent of GDP. The authorities also reduced the scope of the Fig. 3 Moldova: State Government Budget super-profit tax, and in January 1993 implemented tax reforms establishing a land tax, eliminating most tax breaks and raising the taxation of agroindustries significantly from 1.5 percent to the standard rate of 32 percent. However, sectoral distortions in tax burden remain: the land tax on farms, originally intended to bring in revenue equivalent to the profit tax of 32 percent, is actually raising revenue at an equivalent rate of about 25 percent, and is likely to fall further. Abolition of concessional tax rates will bring a double benefit in both fiscal and efficiency terms. However, where the Social Fund contribution rate from the enterprise wage fund is concerned, it would be preferable to lower the 45 percent rate on industrial enterprises, rather than raise the 30 percent rate on farming enterprises. As the higher rate impedes adjustment and discourages employment, it is likely to lower tax revenue overall and increase claims on expenditure. Further measures to restructure public expenditure and raise revenue are now essential to prepare the ground for stabilization and the new currency. On the tax front, reforms in tax policy, strengthening of the tax administration, and the introduction of a Customs administration will be needed. The Response to the Need for Structural Transformation 19 Programs for Privatization and a Competitive Environment Legal framework The Parliament has passed a number of laws required for private sector activity including: company law,20 enacted in early 1992, which provides for a variety of Western company organizational structures and sets out a clear and simple procedure for establishing new enterprises; a bankruptcy law (mid-1992); and property law,21 recognizing the right to private ownership in all types of property, including land, and permitting leases of all property up to 99 years. Plans were in hand to prepare a new Civil Code and Commercial Code by March 1993 (until then, the contractual regime was to be governed by the FSU Civil Code). Although much of the legal framework is now in place, some laws will need considerable revision, including the bankruptcy law and the foreign investment law, which does not provide the protection most foreign investors require. Even more important is the need to develop implementation capacity as soon as possible. The courts and the legal establishment are unfamiliar with a private sector environment and may also be insufficiently independent of Government. It will therefore be crucial to develop an independent court system with specialized commercial courts, and promote the formation of an independent legal profession. Capacity within Government will also need to be reinforced so as to continue drafting legislation and regulations needed for private sector development. In parallel with legal reform, entry restrictions for private sector activity have been removed with the exception of some areas related to defense and a limited number of pharmaceutical products. Equality of treatment for SOEs and private firms is assured under the Employment Law regulations and in the corporate tax system, and the private sector is in principle able to lease space and equipment from SOEs with surplus capacity (there was marked growth in private sector leasing in 1992, but access to space is still somewhat constrained). Private sector trade associations have emerged, such as the Union of Lessees and Entrepreneurs (ULE) formed in 1990 and the Scientific and Industrial Union (SIU) which followed in 1991 with the aim of lobbying for private sector development. Enterprise development State enterprises in Moldova have, in the past two years, experienced a growing degree of freedom in running themselves, given the initial relaxation of the state order requirements (since tightened) and the new ability to fix output prices, obtain independent sources of inputs and develop employee policies. There are some instances of efficient and creative response from public enterprises to these new conditions; some have M The Joint Stock Law and the Law on Entrepreneurs and Enterprises 21 The Land Code, Law on Property, and the Lease Law. 20 Chapter 2 already sought foreign joint venture partners and are adjusting well to the new environment. In many cases, however, the new freedom is a mixed blessing for managers brought up in a production-oriented system where most decisions concerning pricing, sources of supply and sales were the responsibility of Government agents outside the enterprise, and indeed outside the country.22 In this respect, Moldova is in a similar position to all of the other FSU countries: the central planning system has been largely abandoned, leaving a vacuum where management responsibilities have not been well defined nor autonomy adequately tempered by accountability. Control by owners and shareholders is not being exercised; nor, in general, is financial oversight from the suppliers of funds in the banking sector. In addition, enterprises face declining markets together with an unreliable interrepublican payments system and long delays in payment in domestic as well as external trade. The growth in barter trade and the need to find counterpart goods required by trading partners has raised transaction costs substantially. Privatization. During the last two years, there has been exhaustive discussion of approaches to privatization in Moldova, but implementation of privatization, except in the agricultural sector, is only just beginning. Plots of land have been distributed to individuals for private use, and State and collective farms are being converted into joint stock companies, whose members receive title and have the right to take out their shares in the form of land and equipment. Agricultural input supply, distribution and marketing systems have yet to be privatized. Objectives, methods, and lines of responsibility for implementing the privatization program outside the agriculture sector have been substantially revised. The 1993/94 program recently passed by the Parliament envisages that about 1,600 SOEsP will be transferred to the public, mainly through a system of public auctions. For each enterprise, there is a Privatization Commission which, where large enterprises are concerned, will spend several months preparing the enterprise for privatization. The prime objective of the Government is to achieve widespread Moldovan ownership of assets to be privatized. To that end, the plan is to distribute a base value of patrimonial bonds (vouchers) to all citizens, supplemented by additional patrimonial bonds based on length of service in employment. Distribution began in September 1993. Patrimonial bonds are non-tradable, but shares acquired with them will be tradable straight away. In the initial stages of privatization, there will be limited privatization for cash, both for any currency (37 SOEs) and hard currency (7 SOEs). These cash privatizations, of 2 Over 90 percent of Moldova's larger enterprises were all-Union enterprises, directed from Moscow, which were nationalized in October 1991. 2 Assets are being valued according to a formula based on book values (this method risks being extremely misleading, but it is not clear that it could feasibly be improved, given the distortions and uncertainties in the economic environment). The Response to the Need for Structural Transformation 21 which the first three were held on September 11, 1993, cover unfinished building sites and bankrupt enterprises only. At later stages, cash may be used to buy any remaining shares that have not been sold for patrimonial bonds as well as other SOEs excluded from the 1993- 94 program. The Government intends to distinguish between the privatization of small scale units and the share offerings for medium and large SOEs. In order to accelerate implementation, streamlined auction procedures are permitted for the unit privatizations, which started in October 1993. In parallel, the Government intends to prepare the way for the privatization of medium and large enterprises, while providing some incentives for existing managers and employees to maintain the value of assets and the business in the interim. Management and employees will be permitted to use their patrimonial bonds in advance of the auction sale to buy, in total, up to 20 percent of book value. For privatization of food processing enterprises, 50 percent of the shares will be distributed free to the farms which have supplied them in the past. These shares will pass directly to the individual members and not to the collective farm as an entity. The privatization program is being implemented by the State Department of Privatization, which already has a network of regional agencies collecting information on local enterprises. A massive publicity campaign is planned. To complete the process, the Government needs to issue regulations on transforming the legal status of enterprises so that shares can be offered for sale. Legislation for financial intermediaries is also in preparation, with the aim of setting up investment funds before auctions for medium and large SOE shares begin. A regulatory framework will also be established in order to prevent potential fraud associated with such financial vehicles. The current law stipulates that privatized enterprises must continue to provide any social services provided in the past by that enterprise. This stipulation will discourage private investors, will be hard to enforce, and is likely to lead to deterioration in services offered. It will be important to revise the law so as to establish that social assets and services are part of the social protection system and not disposable assets attached to enterprises, and revive the divestiture program as soon as finances permit."4 Improving corporate governance. At the same time, the Government is examining ways of improving corporate governance for public enterprises, including those to be privatized at some stage in the future as well as those to be retained in the State sector (electricity utilities, some R&D institutes and some of the large food processing firms). In the meantime, corporate governance arrangements are somewhat opaque. At present, most enterprises have an Administrative Council made up of branch Ministry representatives and workers' representatives. The Managing Director, with day to day responsibility for the 2 The Government started a divestiture program for such social services, which has ground to a halt for lack of local authority financing to take the services over, and because of enterprise resistance to divesting assets. 22 Chapter 2 operations of the enterprise, is appointed for a five year term by the Ministry. As managers' contracts are weak and unclear, much depends on Ministries' interpretation and discretion as to how managers' performance is judged. Financial reporting systems and objectives are loosely defined and need considerable strengthening. Work has begun on developing control mechanisms for these enterprises within a governance framework where Government, as owner, will seek to maximize dividends. Further arrangements being considered include the development of financial reporting systems and controls, and the establishment of Administrative Councils comprising professionals such as lawyers and business people as well as representatives of the Branch Ministry. The selection process and functions of representatives of the Administrative Councils will also be defined. Efforts to Promote Trade and Restore External Balance Developments in State trading The great bulk of trade continues to be conducted within the ruble area through bilateral barter arrangements and is almost totally state-controlled. In the early stages of the transition, the State contracts that operated among all-Union enterprises, and covered almost 100 percent of their production, were relaxed when Moldova took over the enterprises in October 1991 and were replaced by a "tax-in-kind", whereby Government sequestered a much smaller proportion of output than in the past in order to participate in inter-State contracts and barter trade. Since then, State orders have been reinstated in line with the intensification throughout the FSU of quantitative restrictions and state trading, and the Government's economic program for 1993 envisaged that the use of state contracts would continue. In addition, state control of agricultural input sales and distribution was reinforced in the emergency caused by the drought. Global quotas for quarterly production of over one hundred items are set, within which domestic market requirements are determined, and then amounts are set for exports to both FSU and non-FSU countries. There are separate limits for inter-state agreements, barter transactions, and hard currency exports. FSU export quotas are allocated by republic and further sub-divided according to whether exports will be sold by enterprises or by government agencies. Significant restraints on exports remain, although prohibitions on export were removed in August 1992. However, a prohibition on exports of eight commodities was re-imposed in December 1992 and export taxes on both FSU and non-FSU trade were re-introduced in February 1993, having previously been removed. All exports are subject to licensing and require Customs declarations. Official lists define products that can only be exported for hard currency and those that can only be imported or exported under state monopoly. Export licenses are only issued to firms which will guarantee to deliver products to the domestic market. The Response to the Need for Structural Transformation 23 The Government's inability to secure substantial amounts of foreign exchange, despite the foreign exchange surrender requirement,2 hints at the effective independence from the authorities of the enterprises involved in trade outside the FSU.2' Despite the State order system, enterprises that trade within the FSU also appear to enjoy a large degree of independence in terms of finding their own suppliers and negotiating prices. Enterprise-to- enterprise links are growing, especially where fuel imports are concerned: a number of Moldovan enterprises send representatives to other republics to do individual deals for fuel. External Financing Moldova has adopted the FSU zero option, which frees it from obligations to service past FSU debt in return for abandoning its claims on FSU assets. Previously, Russia was servicing Moldova's share of the USSR debt by agreement. At this stage, the Government has accumulated approximately $90 million hard currency debt. In February 1993, the IMF approved a CCFF arrangement in the amount of 13.5 million SDR to compensate Moldova for emergency cereal imports. A World Bank emergency drought recovery loan was approved by the Board in March 1993 for the amount of US$26 million and a rehabilitation loan in the amount of $60 million was approved by the Board on October 21, 1993. 2 The foreign exchange surrender requirement was reduced from 50 percent to 35 percent of export earnings in May 1992. 2 Some private exports to the hard currency area have begun to emerge through joint ventures. CHAPTER 3 The Road Ahead The Government's Reform Program: Future Perspectives Looking at the program and at progress so far, it is evident that, if the program is to be successful, stronger policies will need to be formulated and actions will need to be enhanced. At the most fundamental level, some reflection is still required on the constitutional principles that define roles and functions in democratic liberal institutions. These considerations start at the level of the definition and separation of powers among legislature, executive and judiciary, which are not always clearly distinguished in Moldova. This has practical implications for the reform program. If the Government is to bear ultimate responsibility for the success of the program, Parliament must not run components of the reform program directly, bypassing the executive. An independent judiciary and specialized courts are needed to safeguard individual rights, enforce contracts, and enable dispute resolution. Both the Government and the Parliament must withdraw from directing and funding economic activity and switch to a facilitating role instead. And the other institutions needed to underpin a liberalized economy must be allowed and encouraged to develop: in particular, the National Bank of Moldova must be permitted greater autonomy and commercial banks should be free of political and administrative intervention. Institutional capacity must also be developed to make the new systems work. Moldova already has the advantage of having a relatively efficient and well-run Government administration; now the administration will need to be re-oriented to new functions, which will require redefinition of roles and responsibilities, and considerable training and retraining. It will be important to assure transparency and accountability when new structures and procedures are developed, and to promote public confidence in the new democratic system of government by creating appeal procedures and divulging information. The Keys to Restoring Income The authorities' objective must be to halt the output fall of the last two years, while moving to stabilize the economy by improving fiscal programming and control, developing instruments of monetary policy, and building an effective financial sector and payments system. These reforms will set the foundations for the introduction of the new Moldovan currency and a significant tightening of monetary policy at that stage. While it is a priority to halt the fall in output, it will be necessary at the same time to re-orient production to the new structure of relative prices and the different market opportunities that will prevail, creating the conditions for growth. For this to happen, it is important to move away from a centrally planned economy to create an enabling environment for private 25 26 Chapter 3 markets, put in place the infrastructure and other underpinnings of sustainable growth in the future, and safeguard the welfare of the most vulnerable in the population. Even aside from the disruption in the trade and payments systems and other dislocation associated with the transition, Moldova is suffering a terms of trade fall that implies a sharply lower standard of living for the population as a whole. Adjustment to this loss of welfare needs to be facilitated by protecting the poorest and establishing the conditions for real growth as speedily as possible. At the present stage of transition, however, these objectives will be hard to realize. Required reforms and institution-building measures are considered in turn: first in the macroeconomic field (see below, "Creation of a stable macroeconomic environment") and second, structural reforms (see below, "An enabling environment for the private sector and efficient public sector"). Creation of a stable macroeconomic environment Key to the effective conduct of macroeconomic reform policies is a redefinition of roles of the main economic agencies and reinforcement of their capacity. In particular, the National Bank of Moldova must be free to develop into a central bank and exercise all the functions that entails, and the Ministry of Finance will need to withdraw from the allocation of credit and foreign exchange, focusing rather on building its capacity to monitor and forecast the economy, to program and control expenditure, including public investment expenditure, and to reinforce the tax administration. Macroeconomic stability after the introduction of the new currency will hinge on successful implementation of monetary and fiscal policy together with appropriate external sector policy. In particular, tight fiscal policy will be essential to ensure that the new currency remains stable in value. Otherwise, it will not prove possible to finance the fiscal deficit in non-inflationary ways and the country will enter a cycle of inflation and currency depreciation. Measures need to be put in place immediately to secure the fiscal discipline required before the currency is issued. The ingredients of a sound macroeconomic policy are discussed in turn below. Fiscal policy Immediate priorities in fiscal policy are to shore up revenue collections and cut subsidies. In due course structural reforms will also be needed on both revenue and expenditure sides of the budget and in the assignation of central and local government revenues and expenditure responsibilities. Revenue. The four main sources of revenue are the VAT, excise taxes, the corporate income tax, and personal income tax. (As noted below, revenue from these taxes is assigned in varying proportions to State and local budgets). There are also minor taxes on foreign trade, cooperatives and social organizations, and vehicles, and enterprises pay The Road Ahead 27 contributions to the Social Fund to cover pension and other benefit payments. Despite some recent improvements, the system is still handicapped by exemptions and differential rates which complicate its administration, encourage avoidance, create allocative distortions between sectors, and reduce revenue yield overall. The highest priority is to raise tax collections by strengthening the tax administration and improving taxpayer information, education and compliance to deal with the new structure, which was introduced with little lead-up preparation over the last two years. A unique taxpayer number should be introduced, tax requirements codified and published, the tax administration computerized, and training programs set up for tax assessors and inspectors. Taxpayers are likely to need advice on their new obligations (many will be paying tax individually for the first time) and on the accounting requirements for accurate VAT and profits tax assessment. Amendments should be made forthwith to tax rates, coverage, and concessions with the aim of creating a simpler, more uniform and more equitable system; using, however, the current basic structure. The differential profits tax rate of 52 percent on banks should be eliminated, and the single corporate income tax rate should be the same as the top rate of personal income tax, so as to ensure tax neutrality between different forms of business activity and to prevent tax avoidance through incorporation (or failure to incorporate, depending on the relative rates of personal and corporate income tax). Differential sector contribution rates to the Social Fund should also be eliminated. The excess profits tax (defined as taxation on profits exceeding the industry average by more than 10 percent), which has already been reduced, should now be removed. The VAT rate is now 20 percent, with concessional rates of 14 percent and 15 percent charged on some food and other items. The top rate should be lowered as soon as feasible and comprehensive coverage of the VAT should be restored. In September 1993, Moldova started to charge VAT and customs duties on imports from outside the FSU, thereby removing a distortion according to source and creating an incentive to participate in the formal tax system in order to claim tax due. This should expand revenue collections overall even though taxes on inputs net out. The authorities should now implement zero- rating of exports for VAT purposes, and, in the longer run, should consider moving from the present origin basis for VAT to a destination system (see also the Trade section). As a medium-term objective, the Government will need to review the allocation of taxes to budgets at different levels, and consider introduction of revenue equalization arrangements where local responsibilities exceed local revenue sources. This will be particularly important once enterprise responsibilities for social services begin to be shifted to local budgets. The existing system is briefly described below. The fiscal system includes the Republican (or central government) and local budgets as well as the three extra-budgetary funds: the Social Fund, the Social Assistance Fund, and the Privatization Fund. The State budget covers both the Republican (central) 28 Chapter 3 government budget and the local government budgets for cities and districts. At present, excise taxes and foreign trade taxes are the only taxes which go solely to the Republican budget; all other main categories of taxes are split in varying proportions between central and local governments. For instance, VAT revenue is split among the Republican, cities and district budgets; districts may retain between 10 percent and 100 percent of VAT revenue while cities may retain between 7 percent and 90 percent, with the residue going to the Republican budget. Expenditure responsibilities are also shared between central and local levels, with local bodies responsible for financing local expenditures, some subsidies to enterprises, and the greater part of health and education expenditure. The allocation of revenue sources and expenditure obligations among different levels of government will need revision in the light of: changes in tax policy; economic restructuring; and privatization of larger enterprises, most of which carry out social functions on a substantial scale. Transfer of these responsibilities to local budgets will impose a heavy burden and will also require expertise which local bodies may not have. Such transfers will probably have to be negotiated case by case, and local bodies will have to strengthen their collection capacity, making sure that enterprises pay tax due in full, if they are to finance new social obligations. It will be important to abolish concessional tax rates on agricultural enterprises and strengthen collection capacity, so that tax yields to local authorities in country districts will be sufficient to cover the social services for which they will become responsible. Net changes in fiscal position among levels of government are hard to predict as they will be the result of elimination of subsidies, new tax sources, and, in many cases, new responsibilities. The Government will need to define carefully rights to specific revenue sources and expenditure obligations, and will also want to adopt fiscal equalization principles on a transparent basis where new expenditure obligations exceed revenue capacity. Expenditure. The immediate piorities are to abolish remaining subsidies to public enterprises,27 and to concentrate available fiscal resources on essential health and other services, social assistance to those most in need, and infrastructure maintenance. If the capital stock necessary for economic growth is not adequately maintained, it will deteriorate beyond the point where repairs are feasible, and large new investments will be required. At present, analysis and control of Government expenditure are complicated by measurement problems, making it hard for the authorities to get a full picture on the basis of which to redraw priorities. For instance, that part of public investment expenditure that is financed by bank credit is not normally included in recorded government expenditure. Nor are the implicit subsidy on concessional interest rates for agriculture and interest payments on external loans (presently a minor item but likely to grow rapidly). If central bank expenditure of a quasi-fiscal kind were included in government expenditure, the total would 27 Budgetary subsidies to enterprises were still about 18 percent of State expenditure in 1992. The Road Ahead 29 be much greater and the deficit would be a higher proportion of GDP. Similarly, it appears that the fiscal deficit should have been I billion rubles higher in 1992, because of budget transfers due to the Social Fund for the payment of children's allowances that did not take place. For all these reasons, it is difficult for the authorities to get an accurate picture of total expenditure or expenditure by economic and functional categories. With that caveat, it appears that social expenditures made up 50 percent of total expenditure in 1992, or 11 percent of GDP. After immediate action to cut subsidies, there will be a need for deeper reforms so as to lessen and rationalize expenditure pressures, and reduce the growth of arrears and claims on central bank credit. Expenditure will have to be programmed more realistically relative to revenue forecasts. This will mean placing expenditure plans in a macroeconomic context which includes a tax forecast. New public investments should in general be deferred in favor of maintenance and rehabilitation (as noted above), but where investment expenditure is concerned, the authorities will need to use a medium-term forecasting framework to ensure that the investment contributes appropriate capacity, and also that the debt servicing and current costs associated with the investment project can be accommodated in future budgets. The Government must also be prepared to reprogram expenditure in the course of the year if revenue falls below forecast levels. Given the volatility of the economic situation, there is likely to be a need to adjust expenditure flows frequently during the course of the year in the light of revenue trends. This in turn requires clear expenditure priorities and already developed ideas about what to cut first - and how to do it. This scrutiny and re- ordering of priorities should be undertaken for current expenditure and also for investment expenditure. At present, the inclination to finish capital projects that were halted midway because of the outbreak of the conflict or because of revenue shortfalls during 1991 and 1992 is often allowed to override the order of priorities based on real economic or social benefit. There will be occasions when it is more economic to leave a project unfinished than to complete it, transferring the resources available to a higher priority activity. Development of a full multi-year public investment program is a high priority. At present, budgeting is done on a current year basis, which results in a number of projects being abandoned at later stages when costs are higher and resources become inadequate. Development of a comprehensive investment program will require a macroeconomic framework and forecasting capacity, definition of sector priorities, a thorough evaluation of Ministries' investment proposals in the light of their new roles in a liberalized economic environment, calculation of costs and benefits, and also financial (budget and debt) implications of each project. Substantial gearing up in both the control and sector Ministries will be needed to achieve this objective. In its expenditure planning, the Government also needs to include a program to clear its arrears to domestic suppliers. As this will result in additional charges to the budget, it can only be done in stages as revenue collections improve. Some offsetting reductions in expenditure will also occur as subsidies are eliminated, including, in particular, interest rate 30 Chapter 3 subsidies. These the budget cannot afford; they also distort the real cost of economic activities. Significant savings in government expenditure should also be available through public procurement reforms, which will act both as an economy measure and a stimulus to competition. There will be a radical change in the composition of Government expenditure as interest subsidies and operating subsidies to enterprises are eliminated and the relative emphasis shifts towards infrastructure needed to underpin private sector development, social infrastructure, services and benefits, and the administrative activities needed to support the functions of a modem administration: one that monitors, facilitates, regulates and taxes rather than playing a direct role in economic activity. Current income maintenance expenditure will still be a substantial proportion of total expenditure but will be better targeted; responsibility for income replacement at higher levels may be transferred to the private sector. Rationalization of social expenditure will require careful attention to the actual incidence of poverty and the distribution of current expenditure by age and income class. In the near term, the Government will want to reduce its reliance on central bank credit and explore different methods of financing the deficit. However, bonds may not be attractive until real interest rates become positive and government financial instruments attain credibility. Banks may be the principal bond-holders initially as the adverse experience with frozen Sperbank deposits could deter the public from holding Government paper. Monetary policy and financial sector The effective conduct of monetary policy in the future will require not only a well-functioning central bank with a reasonable degree of autonomy from Government, but also a commercial banking sector that bases decisions on risk and profit criteria, and an efficient interrepublican payments system. Moldova needs to move rapidly away from the existing system of centrally directed credit allocation, widespread interest subsidies and a single bank monopoly over household deposits, to create a modern financial sector. Some actions, outlined below, should be taken or at least initiated immediately, while others form part of the medium-term perspective for reform. While still in the ruble area, Moldova's role in monetary policy was essentially passive (although the authorities were supplementing ruble issue from the Central Bank of Russia with their own coupons). Movement towards a new currency has now outpaced development of the instruments of monetary policy and financial intermediation that will be essential if Moldova is to achieve macroeconomic stability once the new currency is issued. In the financial sector, there is an important role for the nascent central bank to play in reducing risk within the system, enforcing prudential regulations, and moving to introduce financing auctions in order to replace the system of directed credits. The Road Ahead 31 The top priority is to contain spiralling risks in the financial system. Bad loans are building up, concealed by opaque accounting systems and the common practice of credit rollover and interest capitalization. Portfolio risk will only increase as economic restructuring progresses and an increasing number of enterprises find themselves unable to service loans. As this process will be dramatically accentuated when monetary and fiscal policy are tightened in preparation for the introduction of the new currency, it is imperative to act now to protect the financial sector from collapse. Further lending must be conditioned by past repayment performance, and in due course by risk and credit evaluation, while limits on lending to single borrowers and to shareholders must be enforced. Loan loss provisions should also be built up. Otherwise the banking sector risks widespread failures with concomitant heavy charges on the budget. For new lending, the authorities have now eliminated all preferential credits to selected sectors and industries, so that all economic activities will face the same cost of capital. However, the bulk of outstanding credit is at preferential rates, and it will be important to ensure that refinancing occurs at market rates. The NBM has already moved in this direction, with the first refinancing auction held in September 1993. As real interest rates remain highly negative, the NBM should continue to raise standard rates towards positive real levels. Once the country has its own currency, it will be important to maintain the same structure of interest rates irrespective of the intended use of funds. In the short run, the NBM should also raise and enforce capital standards on banks, to limit the vulnerability of banks to default and reduce future charges on the government budget should banks need to be liquidated and/or recapitalized. The required capital/asset ratio should be raised with a phase-in period for existing banks to at least the BIS capital adequacy guideline of 8 percent, and preferably 15 percent during the transition period. These measures should be taken in parallel with increasing financial discipline in the enterprise sector. Until capacity is built up in the financial sector to evaluate risk and profitability and extend credit accordingly, credit demands of existing public enterprises are likely to drive credit allocation. It will therefore be useful to insist on greater financial discipline within enterprises, so as to limit unreasonable credit demands and prevent further deterioration in bank portfolios, while moving at the same time to develop financial sector capacity. Reining back the credit demand of existing public enterprises will also reduce crowding out of the growing private sector. The role of the central bank. To play its proper role the NBM needs a substantially greater degree of autonomy than it has at present. Although legally independent in principle and reporting only to Parliament, the NBM is in practice subject to government decrees relating to directed credit. The Government has also issued laws on the indexation of working capital, financed directly through the Government budget and indirectly through 32 Chapter 3 loans from the NBM to the Government (the most recent working capital indexation added 15 percent of GDP to the fiscal deficit). It will be important to define and acknowledge separate roles for the Government and the NBM in the economic sphere. As a first step, the Government, as represented by the Ministry of Finance, will need to withdraw from active participation in the banking system. It would also be helpful if the Parliament were to accept that a reasonable degree of central bank autonomy is needed. Once appropriate roles have been defined, the NBM and commercial banking legislation can be modernized accordingly and corresponding tasks can be assigned. Although it is crucial for the development of a modern financial sector in the medium-term to pass responsibility for credit management from the Ministry of Finance to the NBM, and for the Government to desist from then on from sectoral and preferential direction of credit and on-lending, in practice it will take time to build up the institutional capacity to develop alternative methods of credit allocation, and to train staff who are capable of using risk and profitability criteria. The NBM will also need to assume full responsibility for the management of foreign exchange, a function which was until recently carried out in the Ministry of Finance. Meanwhile, the NBM will need to withdraw from its residual role as a commercial bank making loans directly to commercial enterprises.28 The NBM will need to continue to impose reserve requirements for prudential reasons and so as to improve its capability to manage the money supply. Regulations and reporting requirements should be tightened and supervisory and inspection capacity strengthened. Bank supervisors must be authorized to mandate provisions for possible credit losses, write-offs, and suspension or non-accrual of interest on non-performing assets. Safeguards on connected lending must be improved, and lending limits will need to be reduced and enforced. The NBM will need legal powers to move against unsound banks, including the right to impose penalties, suspend dividends, order unsafe practices to stop, and remove incompetent or fraudulent management. To make these reforms work, the NBM will need an intensive staff training program, and will also need to review the salaries it pays. Domestic resource mobilization in the financial sector will be severely hampered by unattractive interest rates on deposits and restrictions on access by depositors. Development of domestic resource mobilization will be all the more important since Moldova may have to rely largely on its own resources to start recovery and growth. As a first step, the Government should move quickly to explore and implement options to restructure the State Savings Bank. It is also a high priority to promote the development of independent and well-functioning private sector financial institutions so as to mobilize savings and provide efficient intermediation. 28 These are large loans, primarily in the energy sector, where lending by commercial banks would have violated NBM regulations on lending to a single borrower as a share of capital. The Road Ahead 33 But these measures will be not be fully effective unless the links between banks and enterprises are cut. Moldova has not seen the proliferation of new banks, many of which have been created solely to lend to their owners, that has occurred in other FSU countries. However, lending limits on credit to owners are frequently exceeded and a number of banks are dangerously exposed to a few large enterprises to which they customarily lend. In this situation, higher interest rates are likely to be met only by higher credit demand, rather than a rationalization of demand. On the other hand, if the credit safety valve were abruptly shut off, there would be widespread enterprise failures, with follow-on bank failures, and the consequences for both the real economy and the financial system would be disastrous. To take account of the interdependence of banks and enterprises, a staged disengagement is needed. The main lines of such a disengagement would be as follows. Public enterprises would no longer be permitted to buy shares in banks and would divest themselves of existing shares over a set period, preferably before being privatized. Any further indexation of working capital would be conditional on enterprise performance criteria relating to commercialization and to movement towards profitability. In parallel, enterprises would need to replace production targets with profitability objectives, respect financial limits on their activities, clear existing arrears and place time limits on new arrears, and establish consistent accounting practices and financial reporting. Meanwhile the banks will need to improve their capacity to evaluate credit and risk. Finally, State banks would be restructured and privatized, or closed down. The question arises of how to deal with the large number of existing unsound loans in the system and the portfolios of any banks that fail. Introduction of deposit insurance would be unwise, for reasons of moral hazard and because there would be no funding for it. However, as relative prices continue to change and interest rates rise, a large number of enterprises will become unprofitable, and banks neither can nor should continue to extend credit to them indefinitely. In principle, explicit budget subsidies could be used to shore up the enterprises while they are restructured or privatized, or in some cases liquidated, but present and future fiscal capacity is most unlikely to permit this approach. Some choices will need to be made about how to give financial support while enterprises are wound down or turned around, whether on a case by case basis by individual banks, which will place a serious burden on their balance sheets and operating accounts, or by a restructuring agency. In either case, every effort will need to be made to contain the ultimate cost to the Government budget so as not to compromise stabilization and recovery. It will be important to begin building capacity now in both the NBM and the commercial sector for the next phase of financial sector development. This will require (i) a consistent and transparent system of accounting, auditing, and financial disclosure to be adopted at both enterprise and bank levels to permit assessment of the solvency of the banking system and is borrowers; (ii) further work to automate the domestic interbank clearing system and broaden its coverage to all the banks, building on the improvements that have already been made in domestic interbank clearing procedures and in developing an 34 Chapter 3 interbank market; (iii) an intensive staff training program to make the new systems work and conduct basic tasks (for instance, opening letters of credit, dealing with correspondent accounts in Western banks). Trained staff will also be needed to assess balance sheets, evaluate new lending proposals, and manage portfolios. The Government and the NBM will also want to continue their efforts to improve inter-republican clearing arrangements, which are still subject to substantial delays. In parallel, measures will be required to improve the legal framework within which the banks operate. Implementation of existing laws on repayment of loans and on bankruptcy are needed, as are a law on collateral and registration of collateral agreements. A collateral law would also help improve private sector access to credit markets. The tax rate on banks should be reduced from its current level of between 40 percent and 55 percent, depending on the bank, to a uniform level of 32 percent, in line with the taxation of other enterprises. An enabling environment for the private sector and efficient public sector Legal and regulatory reform. Further laws will be needed, including the law on mortgage and collateral (referred to above) which will not only facilitate timely ownership transfer but also assist new businesses in obtaining credit from commercial banks and suppliers. The bankruptcy law should be amended to allow for debtor rehabilitation and for a change in the order in which creditors are compensated. Occupational health and safety, employment and environmental responsibilities of companies will also need to be clarified. The foreign investment law may require review to check that it offers sufficient protection to foreign investors but does not give too much scope to local authorities to grant advantages beyond the normal law, especially in tax breaks and tax holidays. In general, guarantees other than those assuring profit repatriation and protecting against nationalization should not be needed: normal legal protections and obligations should suffice. Certification and licensing. The current arrangements for establishing a new business in Moldova, while not unduly restrictive in terms of prohibiting areas of private sector activity, do nonetheless involve licensing procedures which are time consuming and leave open the possibility for corruption. Activities which require licenses include retailing, tourism, publishing, medicine and management consultancy as well as educational activities. Some of these procedures can involve several Ministries as well as compliance with municipal regulations. The Government should move to a system of certification to be granted automatically to all applicants in compliance with transparent standards, and restrict licenses to areas such as TV or radio where there is a clear reason why volume must be controlled. The Government should also separate the certification and licensing functions in Ministries from other administrative and policy functions and ensure equal treatment for public and private enterprises. The Road Ahead 35 Establishing independent legal and accountancy professions. The courts and the legal establishment are unfamiliar with a private sector environment and may also be insufficiently independent of Government. It will be important to develop an independent court system with specialized commercial courts, and promote the formation of an independent legal profession. Capacity within Government will also need to be reinforced so as to continue drafting legislation and regulations needed for private sector development. At the same time, there is a need to develop an independent accountancy and auditing profession that can monitor performance and provide cost-effective and timely assistance to new businesses. Eploitation of comparative advantage Trade policy. The immediate priority is to enable economic agents to build on Moldova's comparative advantage by removing restrictions on exports and ensuring that the trade regime be transparent and clear. Hard currency exports will be crucial given the need to generate foreign exchange reserves to support the introduction of the new currency and to service debt. To this end, the removal of quotas for hard currency exports and the improvement in export licensing procedures in mid-1993 were major steps forward. Licenses are now granted a year at a time rather than for each trade operation, and, in August 1993, the number of items subject to export licensing and quotas was halved. The top priority now is to ensure that licensing procedures are as clear and simple as possible, minimizing delays and opportunities for rent-seeking. A further priority is to remove all quotas on FSU exports. The proportion of trade covered by State contracts will need to be reduced as rapidly as the practices of Moldova's FSU trading partners permit. Concurrently, the State's direct role in trading should be phased out to facilitate enterprise-to enterprise contact; at the same time, procurement procedures for state trading will need to become more transparent and competitive. The Government intends to remove export taxes by end 1993. It will be important to remove remaining export quota obligations and, where imports are still administered, replace quotas and licenses with tariffs. Moldova seeks integration in the world trading community and wishes to become a member of the GATT. In September 1993, the authorities replaced the previous highly dispersed structure of import tariff rates (ranging from 0 to 1000) by a low and fairly uniform tariff on non-FSU imports, with most rates in the 15-20 percent range. This tariff level is advisable, given that sections of Moldovan agriculture and industry may need a moderate level of protection for a transitional period (particularly once the protection currently afforded by the exchange rate disappears), and given the pressing need for revenue for macroeconomic stabilization purposes. Differential excise tax rates could still be used on luxury goods and goods with significant social or environmental costs. Depending on the buoyancy of other revenue sources, the tariff could be lowered at a later stage. Next the authorities will need to determine the import tariff which will apply to FSU imports, since the country already faces positive tariff rates in FSU countries. 36 Chapter 3 The authorities have begun to rationalize the application of VAT. At present, the VAT is applied on some variant of the origin principle in many countries of the FSU, but is generally applied on the destination principle outside it. This means that VAT was not levied on imports from outside the FSU, while imports from inside the FSU entered Moldova at VAT-inclusive prices, and at a high rate of 20 percent. The authorities are now imposing VAT on imports from outside the FSU thus providing neutral VAT treatment of all goods, imported and domestic. The Government will now also want to ensure that exports to destinations outside the FSU are zero-rated for VAT, as they will be subject to VAT in the country of sale, in line with western practice. Zero-rating is preferable to exemption because taxes paid earlier in the production process can be reimbursed. This will not be practicable in the immediate future, although it should be possible to reimburse taxes paid in Moldova. In due course, the authorities should consider moving to a VAT based on the destination principle. The surrender requirement for hard currency export receipts has been reduced from 50 percent to the current level of 35 percent, and is now calculated at the official Moldovan exchange rate, thus removing the implicit tax imposed by use of the Russian MIFCE rate. (In August 1993, the Moldovan ruble was officially quoted at 1.3 to the Russian ruble). The authorities should now adopt a timetable for removing the surrender requirement altogether, recognizing that it reflects expectations about financial and foreign exchange markets which should disappear once macroeconomic stabilization is achieved and the financial sector develops instruments in which depositors can have confidence. The NBM will need to ensure that there is a functioning foreign exchange market to which all enterprises have access. Export-led growth. Market development and strengthened access to Russian markets, especially for food, will be a critical component of a strategy of export-led growth. Within the former Soviet Union consumers know Moldovan products and readily accept them. As the Russian economy recovers, demand for Moldovan fruits, vegetables, and wines will increase. However, a number of difficulties impede the country's access to Russian markets, including export restrictions and licensing requirements. With the current uncertainties in the business environment in Russia, it is not easy to identify reliable business partners to market Moldovan products and transfer earnings in a timely fashion to Moldova. After introduction of the Moldovan leu, mechanics of conversion of the two currencies may present problems in the early period. The importance of the Russian market and difficulties in retaining adequate access to it will require commercial solutions more innovative than reliance on state trading and indicative lists. Moldovan processors and private wholesalers will have to establish strong commercial links with wholesalers and large retailers in Russia. Retention of state trading of agricultural products in barter for Russian energy impedes market development, and handicaps Moldovan exports in the increasingly competitive markets that they will soon face. The Road Ahead 37 Moldovan products will be under increasing competition within the former USSR. Retention of the Russian market will require improvements in marketing, packaging, and quality control. Modest investments in these areas should pay off well, and better position Moldova to compete outside the former USSR. Diversification of trading partners will be important in the long run, and exports to the West will increase. At present, however, Moldovan products are essentially unknown in markets of Central and Western Europe. Moldovan exports to nontraditional partners now are so small, and marketing problems associated with expansion so great, that nontraditional sales other than cross border trade with Romania are unlikely to be a significant source of growth soon. Even increased trade with Romania will require significant improvement in border controls on both sides, and reduction of delays, in order to facilitate trade especially in perishable goods (see below). The Moldovan government's role in export enhancement should be to reduce or remove barriers to exports, including state orders and state trading, clarify and simplify export licensing procedures and clearing arrangements, and provide market information. This implies that the government's role in direct investment and trade should be extremely limited. Effective institutional underpinning is needed to help Moldova diversify its export products and markets and become an open trading nation. To promote this development, an agency that could provide information on markets and help establish trading contacts would be useful. This agency need not be within Government. There is an urgent need for reform of Customs if Moldova is to facilitate external trade, develop accurate statistics for policy-making, and collect revenue. A complete new organization needs to be set up on the eastern border with Ukraine (this process is just beginning). At present, immigration and Customs facilities on both sides of the external border with Romania are a barrier to trade. Delays can be as long as several days, which makes the export of perishable goods highly risky, raises the cost of exporting overall, and is discouraging to investors. Streamlining of procedures and methods and staff training are a very high priority. As well as facilitating trade, the Customs organization will need to serve a statistical function, monitoring and reporting on export and import volumes and values. It will also need to collect revenue, which will require adapted systems and specially trained staff; and it will need to provide space for the agricultural inspectorate. Where FSU trade is concerned, the major barrier is the inter-republican clearing and payments system. Moldova will need to find ways of accelerating payments, perhaps in the immediate future on a bilateral basis with its main trading partners, as well as by participating in a FSU-wide system, which will, however, take longer to develop. 38 Chapter 3 Agricultural policy. The strategy for adjustment and growth of Moldovan agriculture must build on the sector's considerable export potential in horticultural products, both raw and processed. Several components of the strategy will be important. Changes in the structure of production will shift resources from products no longer profitable under new market conditions and toward grain, fruits, vegetables, wine, and specialty products. Horticultural products, both raw and processed, have traditionally been important in production and exports. Moldova thus benefits from a strong foundation in a subsector with comparative advantage under the current and future price structure. Moldova also, however, has a livestock sector that is overdeveloped in the light of future higher relative prices for feed and probably reduced feed availability. The contraction of the livestock industry is already under way and is accelerated by the drought and concomitant loss of much of the corn crop in 1992. As the new relative price structure is a permanent feature of the new agricultural economy, rather than a transitory result of the drought, herds should be culled accordingly. Current expenditures, investment, and research will have to shift away from intensive livestock production and toward fruits, vegetables, and wine. Substantial new investment in production, processing, and marketing of horticultural products will be required. Future growth in products will come primarily from investment in improved yields and better processing, and only secondarily from expanded area. Private investment in food processing, including foreign investment, depends critically on the success of macroeconomic stabilization, while investment in production at the farm level depends on clarity and security of property rights. Borrowers and lenders must have confidence in the relative stability of the macroeconomic environment, but small local investors are likely to move more quickly even if the environment is somewhat uncertain than will larger domestic and foreign investors. Evidence of accelerated spontaneous activity in the private sector will be a factor attracting larger foreign investors. Mobilization of private household savings on a small scale in rural areas will initially be the most important source of investment in agro-processing. The most promising source of early investment is neither the state nor the large international private investor. Budgetary pressure on the state as the sources and uses of revenues change will preclude major state programs of reinvestment in food processing, and conditions conducive to attracting foreign investment are not likely to be established soon. Early investment is more likely to come from many rural households seeking productive use and adequate return to small sums. The pace of investment will depend critically on early development of financial institutions serving rural people, rapid transfer of small business and rural services into the private sector, and secure protection of property rights of owners of small business. The density of settlement and relative prosperity of many rural communities create conditions for successful operation of small banks and credit unions serving households. Many households already own some equity in the form of housing, 98 percent The Road Ahead 39 of which is privately owned in rural areas. The potential for enhanced investment activity on the part of households is substantial. In order to realize that potential, financial intermediaries serving households must be developed quickly. In the next stage of land reform and farm restructuring, it will be important to promote the privatization of small scale processing capacity, light industry and services currently within the state and collective farms (see Chapter 3, "Enterprise Reform"). Industrial policy. The industrial sector in Moldova, although smaller as a share of the economy than industrial sectors in Russia, Belarus, Ukraine, or Armenia, is nonetheless an important element of the Government's reform program. Strategy for this sector must include reform of corporate governance, a comprehensive and achievable program for privatization, a clear delineation of the role for State-owned enterprises, a complementary program for corporatization prior to privatization, and policies designed to promote competition and demonopolization. Comparative advantage in industry. The skill level in Moldova is sophisticated and cost-effective compared to a number of FSU republics and Eastern European countries such as Romania and Bulgaria. The level of tertiary education in Moldova is high and it is estimated that over 12 percent of the labor force has had post- secondary education. The development of a high-technology defense industry in Moldova is testimony to this skill base and every effort must be made to retain these skills through the development of a defense conversion program. At the same time, wage levels averaging 15,000 rubles per month in the industrial sector, coupled with good productivity levels, place Moldova in a strong competitive position. However, inexpensive and skilled labor is a necessary but not sufficient condition for developing an industrial strategy. In addition, close attention must be given to the processing of raw materials, such as basic foodstuffs produced locally, from which there is an opportunity to generate real added value. Furthermore, producing low quality products at low prices for the FSU markets is unlikely to be a sustainable approach in the medium term as these FSU economies will gradually expose their consumers to high quality Western products. At an early stage, Moldovan manufacturers should be seeking ways to upgrade packaging, quality standards and marketing, with the assistance of Western joint venture partners wherever possible. Growth through exports. Moldovan industry has very little alternative but to seek sustainable growth through exports given the very small domestic consumer base and the nature of much of its heavy industry. In light of the proximity and size of the FSU markets and the traditional links with these territories, it would be unrealistic and undesirable to ignore these customers. These links should be maintained and strengthened irrespective of any decision related to the introduction of a national currency. At the same time, it will be important for industrialists to seek new markets in Eastern Europe, Africa and the Middle East, as well as in the West, if a substantial fall in sales of Moldovan products is to be avoided in the short term. 40 Chapter 3 Base strategic decisions on international prices. Some firms appear to believe that they will be able to remain competitive internationally, assuming that raw materials such as cotton or leather hides will continue to be purchased or bartered from the FSU at below world prices and that Moldovan products will then be able to undercut the prices of competitors in Western markets. However, Central Asian FSU countries are raising the prices of cotton and other raw materials upon which much of their economy depends. Industrialists will need to face up to these trends and to base decisions concerning production and investments on international prices for inputs and outputs. Enterprise reform Enterprise reform combines the issues of private sector development, industrial strategy, public enterprise governance, and privatization. On present plans, privatization will lead this process, but a change of ownership on its own is not enough to assure efficiency improvements. Attention will also be needed to the competitive environment and to corporate governance both before and after privatization. And ownership change is not just a reassignment of title to a structure of activity that itself will remain unchanged - a misapprehension that seems to be fairly widespread. Changing incentives, markets and prices, and new forms of management, will generate substantial change in the composition of activity and the population of enterprises. During the transition period it is inevitable that a number will fail and new enterprises will emerge. Privatization. In its commitment to use a consistent approach for all privatizations, the Government may have delayed the process. However, there are legitimate reasons to devise transparent, uniform procedures in which the public can have confidence, as there are fears that the nomenclatura and the mafia will dominate the process. Nonetheless, the Government recently decided to permit small scale privatizations to go ahead by auction in the immediate future, concentrating on businesses in the small retail and distribution sectors with a maximum book value of one million rubles (to be revalued to 17 million rubles). The first auctions took place on September 11, 1993. Privatization of the entire large enterprise sector will take longer; wisely, the authorities are planning to select a number of firms for which privatization should go ahead quickly, without waiting until arrangements have been made for all enterprises. They have also allowed some enterprises to be leased, permitting private sector managers to take over, but the legality of the operation has been dubious in some cases. It would be helpful to expose the staff of the State Privatization Department to the approaches used to privatization in other countries, through seminars and visits. In particular, it would be useful to consider asset spinoff, when an enterprise contains a variety of productive and unproductive assets, so that the private investor is not compelled to take (or leave) both. And, if the privatization program is not to be discredited, it will be important to close hopelessly uneconomic enterprises, rather than offload them on unsuspecting domestic buyers. The law entitling buyers in these circumstances to claim compensation if the enterprises goes bankrupt should be withdrawn. Both these approaches The Road Ahead 41 (spinoff and closure) will require a certain amount of information on the financial situation of enterprises, which should be collected by the privatization commissions. Priorities for early privatization are the input supply, distribution and marketing systems in the agriculture sector. Agriculture will remain the lead sector in economic recovery but the scope for growth and trade is presently undermined by rigid state systems which control inputs and limit the distribution of fresh produce even domestically. During the corporatization and privatization of state and collective farms which is now going ahead, it will be advisable to move small food processing units, light industry and services out of the large farm entities and privatize them. It will also be important to attract foreign investors and joint venture partners into food processing for export, an area in which Moldova has good prospects. Facilitate foreign investment. Attracting foreign investment will assist the enterprise reform strategy of Moldova for the following reasons. Foreign technology and capital will help revitalize enterprise performance, while joint venture partners can assist in penetrating non-traditional markets beyond the FSU. In addition, new investors from abroad can bring managerial innovations from the West. However, the Government will need to decide whether it wants foreign investment. As it stands, the law defines a number of special procedures which are likely to create obstacles for foreign investors. In general, foreign and domestic investors should be subject to the same legal requirements, and care should be taken to avoid special fiscal or other concessions for foreign investors; assurances on repatriation of profits and safeguards against nationalization should suffice. Social functions of enterprises. Many larger Moldovan enterprises provide and fund social services on a considerable scale. For instance, one large textile and garment conglomerate owns and operates six schools, two hospitals, and extensive recreational facilities as well as providing housing for over 5,000 workers. Many agro-enterprises provide social services in the villages where they are based. These obligations will have a significant short term financial impact on the operation of the enterprise in an increasingly competitive environment, impede closure when an enterprise is bankrupt, and will complicate privatization, particularly if foreign capital or access to external markets is required from joint venture partners. Arrangements will need to be made for a gradual transfer of social functions to central or local government budgets, or at least to clarify the time horizon over which this responsibility will continue (see also Fiscal section). Enterprises on the list for early privatization should be a priority for divestiture. Housing privatization. About 70 percent of the housing stock is already in private hands (almost 100 percent in rural areas), and the Government is now pressing ahead with privatizing the 350,000 dwellings still in public ownership. The legal framework is already in place whereby sitting tenants will receive a defined area of space per person free, with an additional space allowance depending on years of work. Space above that limit can be acquired for payment. An estimated 75 percent of units can be privatized without 42 Chapter 3 payment and these privatizations are now under way, while those cases requiring partial payment will start at the end of 1993. So far, attention to privatization has exceeded the focus on efficiency issues more generally, whether in public or private sectors. The pursuit of increased efficiency in the enterprise sector will require changes at two levels: within the enterprises and within the framework in which they operate. Many of the framework reforms have already been launched (see Chapter 2, "Programs for Privatization and a Competitive Environment", and Chapter 3, "The Keys to Restoring Income") but it will be necessary to deepen these reforms and also to go further, attending in particular to entry and exit procedures and to mortgage and collateral laws. It will also be important to overcome the recessionary and inflationary tendencies of an economy dominated by monopoly, first by liberalizing trade policy, and second by breaking up monopolistic structures when enterprises are restructured and privatized. This is particularly important where the domestic market is concerned, as FSU monopolies will be undermined in any case as trade diversifies and becomes more open. It will also be important to create a disciplined financial environment. As pressures created by share market activity will take time to develop, it is all the more important that the supply of bank finance should increasingly be conditioned by creditworthiness and risk considerations, and that limits should be placed on enterprises' ability to accumulate arrears, both to banks and to other enterprises (see Financial Sector section). Taking stock of the enterprise sector. Although the Government of Moldova has been active in developing laws for the development of a private sector and considerable thought has been given to discrete elements of privatization, there is as yet no broad strategy for reform of the enterprise sector overall. In particular, given the need to allocate scarce resources in an efficient manner, and the practical impossibility of tackling all enterprises simultaneously, it will be necessary to set priorities for action. To do this, the Government should screen enterprises using criteria based on the need to generate exports and net new private sector investment, and to eliminate the drain on the budget from subsidies to enterprises. This exercise would sort enterprises into the following four broad categories: (a) those enterprises to be privatized in the short term which require no further action; (b) those enterprises which will not be privatized in the short term and require corporatization and financial controls; (c) those enterprises which are to be retained in the State sector for the foreseeable future and require improved management and possibly some restructuring; (d) those enterprises which have no long term future and should be liquidated as a matter of priority. Tempering autonomy with accountability. At the same time, measures will need to be taken to improve corporate governance in both enterprises awaiting privatization and those to be retained in the State sector. Although Parliament has now approved the 1993-94 privatization program, privatization of large and complex enterprises will necessarily The Road Ahead 43 take time. Meanwhile the level of output and efficiency in both agriculture and industry will largely be determined by what happens in the public enterprises in those sectors. Improve corporate governance. It will be important to begin the program of corporatization of all SOEs as soon as possible, transforming them into joint stock companies and instituting boards of directors that will be elected by the shareholders. Training for those who serve on boards will be desirable, and the process as a whole will take time. In the immediate future, it will be essential to impose financial controls and spell out management responsibilities and obligations more clearly, and introduce sanctions for poor performance into managers' employment contracts. Managers should also be asked to draw up financial plans, and where appropriate, privatization plans for their enterprises. Clarify the role of the Ministries. State organizations such as the Ministries of Agriculture and Industry will have to change fundamentally as the country moves to a market based economy. The emphasis will move from operational issues to monitoring, regulation and the provision of support in marketing. The Ministry of Industry is already planning to reorganize its functions around the functions of coordination and monitoring, international relations and marketing and statistical reviews. Broad policy, including the establishment of the regulatory framework, will remain the province of the State but will increasingly need to take into account the needs of private as well as public enterprises. These changes should be set in motion soon, and similar principles should be applied to other Ministries. Implement effective monitoring of SOEs. Although the enterprise reform strategy implies that the State's direct involvement in industry will be minimized, there is a legitimate need to monitor enterprise performance in the light of objectives agreed by the Boards of SOEs. Internationally accepted accounting and auditing standards should be adopted to facilitate this process. Impose hard budget constraints on SOEs. The Government has made significant progress with its announcement in 1991 that State funds would not be made available for direct subventions to SOEs. It also intends to raise the cost of capital to enterprises. However, enterprises have been largely insulated from the budget constraint by an across-the-board indexation of working capital, generalized clearance of arrears (and the ability to accumulate further arrears), access to a cheap credit supply from banks they own, and, in some cases, by the ability to charge monopoly prices. There have been few examples of significant redundancies in the industrial sector despite the falls in production and capacity utilization, with firms preferring to introduce short-time working.29 Government must be prepared to allow liquidations or unemployment to occur in cases where market forces suggest that there is no other option. It will be important to ensure that any " However, one firm reduced its workforce through natural attrition from 7,000 to 4,500 over a two and a half-year period, and has recently laid off 200 workers. 44 Chapter 3 further compensation for inflation or arrears clearance is not across-the-board but is conditioned on enterprise performance. Promote competition and de-monopolization. The Government abolished the intermediary/regional trade enterprises in October 1992, initiating the demonopolization of the trade sector. Progress had also been made in demonopolizing the construction sector through the entry and growth of private construction companies. However, competition in the domestic market in Moldova continues to be constrained, in part by the large size of enterprises and the high degree of vertical and horizontal integration. It will be important to increase competition in the domestic market and there may be a need to establish a de- monopolization agency to deal with this important element of enterprise reform. In the case of enterprises exporting the bulk of their products, however, allowance should be made for the economies of scale that may be required to compete with foreign firms in international markets. In parallel, trade policy should be as open as possible to promote competition in Moldova. The labor market Moldova has greater labor market flexibility than some other FSU countries. Labor turnover in the past was, and still is, unusually high at 20 percent, although geographic mobility in the labor market was low, constrained by a housing shortage and by provision of tied housing and other fringe benefits linked to the enterprise. Downward wage flexibility is now widespread, with enterprises enforcing wage cuts in line with short-time working and unpaid vacations. Change is also beginning to erode the extent to which the labor market is administered. School leavers are no longer required to take assigned jobs for their first three years in employment, and job security has been eliminated. The challenge now is to deepen reforms so as to create a greater degree of labor market flexibility. Initial measures should include removal of the power conferred on Government authorities and on unions to delay dismissals for a period of six months, and the obligation on employers to pay for retraining. The authorities are moving to privatize the 30 percent of housing still in public ownership and plan to remove the propiska law; but even when it is removed, lack of housing will still be a constraint on labor mobility. Unemployment. Open unemployment has not risen greatly because Government policy is to minimize dismissals, there is still some optimism that the present situation will prove temporary, and many enterprises cannot afford severance pay. Firms are therefore keeping workers formally on the payroll, even if they are not in fact paid or are paid only for short-time working. With this status, workers continue to receive non-cash benefits from the enterprise, which include medical services and also housing in many cases. The next stage is actual severance, under which the enterprise must continue to pay wages for two to three months. People cannot register as unemployed if they are on severance pay. Some of the worst off in the population are workers who are paid less than the minimum wage for prolonged periods, but who are not eligible for unemployment benefit if The Road Ahead 45 they leave the enterprise voluntarily. The enterprise in many cases cannot afford to sack them because of the cost of giving severance pay. The result is a stalemate which also inhibits adjustment in the economy. It would be advisable to change the eligibility rules such that workers would be entitled to benefit if they left their employment after a defined period in which they had received less than the minimum wage. It may also be useful to amend the provisions governing severance pay. Although unemployment in the past was largely hidden, employment offices existed in order to place school leavers and because of the relatively high rate of labor turnover. These offices are now attempting to place the rising number of displaced workers and other job-seekers, with a declining degree of success as time goes on (90 percent success rate in 1990, 50 percent in 1991, and 30 percent in 1992). Unemployment is likely to rise sharply in the next few years as restructuring proceeds in the economy, so it is a high priority to upgrade employment offices and introduce computerized systems to register job seekers, record employer needs and vacancies, and match people to jobs. Employment offices could also helpfully provide counselling and identify training needs so that job seekers can be referred to the appropriate training or service. Table 4 - Unemployed Receiving Benefits from the Employment Fund (January to October, 1992) Total percent Unemployed 1649 100 Women 1244 75.4 People with higher education 911 55.2 Dismissals (restructuring) 1196 72.5 Dismissals (closures) 167 10.1 Graduating students 178 10.8 Blue collar workers 746 45.2 White collar workers 903 54.8 Source: Ministry of Labor and Social Affairs In the face of general disruption in output and employment patterns which will entail rapidly rising and persistent unemployment, the authorities can help the transition process and lower the social costs associated with it through an active labor market policy. The authorities should expand provision of small-scale public works and services, job-related 46 Chapter 3 training, and possibly introduce employment subsidies to help place disadvantaged workers and long-term unemployed people, who risk progressive deterioration in their human capital and confidence the longer they are unemployed. Training provision will need to be upgraded substantially to help speed adjustment by providing new skills required in the market economy such as accountancy and computing. As in other FSU countries, there is evidence that women are taking the brunt of the crisis in the labor market. Women form three-quarters of unemployed people on benefit, which implies that they are an even higher proportion of those dismissed (since there is a family income test on unemployment benefit). Their placement rates in new jobs are lower, so the number of women among the long-term unemployed is growing rapidly. Women appear to be less than proportionately represented in the new sectors of dynamic growth: cooperatives, leasing, and joint ventures. These factors will need to be taken into account when labor market policy and employment conditions are reviewed, so as to prevent a pattern of cumulative disadvantage emerging. Attention will need to be focused on enabling women to continue to take an active role in the labor market, if Moldova is to draw on all its resources and talents. Wage policy. The Government has moved from a set wage tariff in which there was a basic minimum wage and also rates for different occupational categories, related to four different levels of work complexity and eight occupational categories. To give an idea of the range: when the basic minimum wage was 850 rubles per month, the minimum for the highest rated occupation was 2650 rubles. There is now a system, designed to provide a transition between the command and market economies, whereby the rates are indicative minima only, and the intention is to move to a market-determined system in 1994. While the Government may wish to keep a basic minimum wage, it would be advisable to eliminate the scale above it, leaving it to employers and workers to negotiate appropriate market rates and reward high productivity on a worker and enterprise basis. Wages also include a non-cash component comprising access to training, housing, free medical services, child care on enterprise premises (or a cash equivalent), subsidized meals, and other services. If the non-cash component is taken into account, the wage structure is somewhat less compressed, with big and more productive enterprises providing a higher level of benefits and distributing them unequally across employees. As inflation reduces the purchasing power of the wage, these fringe benefits grow in importance. Since they represent an obstacle to labor market mobility, and also to privatization, because new buyers may be unwilling to take on extensive social obligations, it would be advisable to privatize some social responsibilities (e.g. housing) and transfer others to agencies unconnected with the workplace and fund them from central or local government budgets (also see sections on Enterprise Reform and Fiscal). Detachment of social services and fringe benefits from enterprises will be a long process, especially as fiscal resources are limited. Planning should therefore start now. The Road Ahead 47 The Government operates an incomes policy whereby wage payments exceeding four times the minimum wage times the numbers employed are not tax deductible. An incomes policy is justified given the need to restrain cost pressures for stabilization purposes, the existence of monopoly conditions, and differential access to credit, - which mean that there is not necessarily any correspondence between financial ability to pay high wages and real productivity. In addition, some enterprises are decapitalizing so as to safeguard wage payments. However, the form of this policy should be revised, as it penalizes companies with high-skilled workers. 48 Chapter 3 CHART 1 Transfer Payments, 1992 Sickness and Maternity (8.9%) Budget Social Asat (6.1%) Social Support Fund (I%) Employment Fund (0.1%) Family Allowances (11.3%) Price Subsidies (32.8%) Age and Invalid Pensions (39.9%) CHART 2 Social Fund Expenditure, 1992 Sickness and Matemity (14.7%) Employment Fund Family Allowances (18.8%) Age and Invalid Pensions (66.3%) The Road Ahead 49 Protecting vulnerable groups Like other FSU countries, Moldova provides a wide range of benefits for old age, invalidity, short term sickness, unemployment, pregnancy, death, children's allowances, and student stipends, together with health care services. In 1992, 60 percent of expenditure for these purposes was made through the budget and 40 percent by the Social Fund, together amounting to half of all expenditures. Food subsidies added an estimated 3.7 billion rubles in 1992. Old age pensions, at R9 billion in 1992, are by far the largest item, absorbing over two-thirds of all benefit expenditures. At 28 percent in 1992, the ratio of people aged 55 and over (women) or 60 plus (men) to the working age population indicates that Moldova does not have a particularly elderly population by Western FSU or central European standards'o. However, all these countries have high dependency ratios due to their low retirement ages (60 for men and 55 for women), together with numerous exemptions to the retirement age, the inclusion of years of higher education when calculating length of service, and universal coverage. Large-scale job losses have yet to occur but the system of social protection is already hard pressed to cover claims under the existing structure and coverage (including provision for unemployment benefit introduced in early 1992). Likely developments in the next year and thereafter, including labor shedding by enterprises and a continuing fall in real incomes, will only aggravate this situation, pushing the Social Fund and the government budget further into deficit. Unemployment is likely to rise sharply and to remain high for at least five years, judging by experience with economic restructuring in other countries. Immediate action is needed to provide social assistance for those most in need and to make savings elsewhere in the system, introducing sharper targeting. The authorities have already explored various approaches to expenditure reduction. Income testing has been introduced for family allowances and unemployment benefits, but unfortunately in such a way as to introduce an arbitrary element and considerable inequity. The authorities now feel that it would be preferable to abandon the present income-testing method. Possible alternatives include an abatement system, and/or taxation of benefits. The authorities have also imposed a ceiling of twice the minimum wage on pensions, although the ceiling was lifted in January 1993 for special categories of 3 For Russia the corresponding pensioner/working age population ration was 34 percent in 1989; for Belarus 34 percent in 1989; and for Rumania 34 percent in 1990. 50 Chapter 3 pensioner". Additional savings would derive from abating or eliminating pension payments to those who are still in employment, but this measure is unlikely to yield a great deal32. The most substantial savings can be found by cutting back on supplements related to work history and income, preferably abolishing them completely. The base level of benefit should also be delinked from the minimum wage: the minimum benefit is currently held equal to the minimum wage, with a sizeable number of benefits above that level (the average pension is just under 150 percent of the minimum wage). To alleviate poverty, it would be more effective to award flat-rate cost of living adjustments for all beneficiaries, rather than increase the minimum wage, which raises the remuneration floor for the economy as a whole as well as feeding straight through to the structure of benefits. Until further information is available, it would probably be advisable to retain children's and family allowances, as household survey findings, and also research elsewhere, indicate that poverty is correlated with family size. Sharper targeting will require an accurate means of identifying those who are most in need and an effective system of delivery of benefits. Until such a system is in place, it could be advisable to retain the bread subsidy and introduce a bread coupon system for the cheapest type of bread. Moldova currently has a Social Support Fund, which distributes one-off payments of cash and in-kind assistance at the local level to beneficiaries who are identified as being in special need. This system appears to work reasonably well in its present limited form, but its resources are small and thinly spread, and its financing uncertain, so that it is unlikely that it could be readily transformed into a general system of social assistance. As a high priority, the authorities will want to set up a more adequate social safety net to ensure assistance reaches the very poorest (often social pensioners, who receive half the minimum pension) and those with no other means of support. As an interim measure, it would be helpful to raise the social pension to the level of the basic minimum pension. At present, a considerable number of enterprises run social services relating to health, education, child care and holiday facilities (see section on wage policy above). This social role is likely to provide an obstacle to commercialization and privatization of enterprises, especially as, according to the privatization law, privatized enterprises must continue to run the social services they operated before privatization. There is also a significant risk that social assets and services operated by enterprises will deteriorate. In some cases they have already done so. The Government initiated a program for the divestiture of enterprise social services in rural areas, under which services would be a The special categories are: war pensioners, invalids of certain types, people aged over 70, and victims of political repression. About 100,000 pensioners are affected by the ceiling, of whom about 26,000 are in one or other of the special categories. 32 In the first quarter of 1993, pensions paid to those in work were abated by 50 percent. However, this rule affected only 25,000 people, as recorded employment among pensioners went down sharply. The Road Ahead 51 transferred to local authorities and financed by local budgets, but this program has ground to a halt for lack of resources and because enterprises are unwilling to relinquish assets and facilities, even when they are no longer supplying services. It will be important to ensure that enterprise social services are now decreed to be part of the overall system of social protection and dealt with on that basis, with formal transfer to local governments as resources permit. After these initial measures have been taken in order to cope with immediate needs, the next priority will be to address the adverse fiscal and efficiency impacts of the current structure of social protection. The current arrangements, whereby the majority of social benefits are delivered through the Social Fund, and largely funded by enterprise contributions (with some budget subsidy), are already at the limit of viability. The contribution rate on enterprises is higher than elsewhere in the FSU,11 and has been frequently changed, reducing enterprises' ability to plan and to maintain economic activity and employment. In addition, different sectoral contribution rates (45 percent for industrial and 30 percent for agricultural enterprises) distort allocative choices and profitability. The potential claim on the budget in the future is also high, at a time when fiscal revenue is already falling far short of expenditure claims and claims are about to rise sharply. The rising fiscal deficit is already a destabilizing force. It is therefore important to restructure the system within a smaller envelope that will entail lower fiscal and non-wage labor costs. At the same time, the authorities will want to decide what role the government should play in income support and how to distinguish social assistance, or the relief of need, from the provision of what is effectively social insurance, related to contributions and work history, which does not necessarily correspond to need. In considering social insurance provision in the longer-term, the authorities may want to bear in mind the experience of OECD countries, which indicates that traditional social insurance programs tend to impede labor market mobility, generate high non-wage labor costs without providing full coverage at an adequate level for the population as a whole, and tend to be disadvantageous for women. This can lead to pressure for subsidies from general revenue or for the creation of a subsidiary assistance scheme, raising budget costs. A number of options is available. The provision of social insurance could be made wholly a personal responsibility, or left to worker-employer negotiation and provision. The latter option has disadvantages, as it can undermine labor market flexibility if benefits are not portable. Also, at a time of widespread economic restructuring, it is particularly undesirable to tie benefit entitlements to the performance of specific firms or industries. Displaced workers may have to fall back on social assistance if their firm goes bankrupt and " The contributions rate for enterprises was 60 percent of the wage bill in the first half of 1992, reducing to 45 percent in the second half of that year. 52 Chapter 3 the insurance scheme is not sufficiently well-funded. This is a characteristic problem of employment-related schemes. They can generally cope with change at the margin, but not with large falls in their financial base accompanied by large increases in claims. Hence the social assistance and social insurance schemes are not independent and should be designed with that in mind. One option which the authorities may wish to consider is to retain only the provision of minimum income maintenance and family allowances in the public sector, while splitting off social insurance to a separate publicly regulated agency, which would administer the scheme and ensure portability of benefit entitlement between jobs. Employers could still be expected to contribute, but preferably at a lower and uniform rate, and the contribution rate from employees would have to rise. Risks from restructuring could be pooled over the economy as a whole. Directions for the future will need to be established after further study. The Role of Foreign Borrowing and External Assistance External financing needs During 1992, the country focused on borrowing to obtain exceptional cereal imports to make up the deficit caused by the drought, and inputs for the spring and winter planting seasons in 1993. Most of this assistance from the European Community34 took the form of short-term credits for grain imports. During the very difficult 1993 year, foreign financing for drought relief continues to be an important component of the short term assistance program. Moldova will need to muster assistance from both bilateral donors and multilateral organizations to enable it to refinance and spread this burden over a more realistic repayment period. Two scenarios have been developed as a basis for assessing Moldova's creditworthiness. Under the first scenario, a credible macroeconomic stabilization program is put in place in 1993/94, accompanied by a comprehensive program of structural reform. This allows a progressive reduction of inflation (to 4 percent by 1995), an appreciation of the real exchange rate (which is currently highly undervalued by reference to purchasing power parity) beginning in 1994, and the restoration by 1995 of positive GDP growth, after precipitous declines since 1990. In the second scenario, the implementation of the stabilization and reform programs is delayed to 1995/96 due to political factors. Positive GDP growth is not restored until 1997, inflation remains above single digits until the same year, and the real exchange rate appreciation does not occur until 1995. 3 Including an EC commercial loan of 27 million ecu of which it is estimated that 20 million was drawn by the end of 1992, using about 15.5 m for cereal and the remainder for medicines. The Road Ahead 53 Table 5 - Moldova: Balance of Payments (millions of US$, unless otherwise specified) 1991 1992 1993 1994 (projected) Exports 4646.0 867.8 808.7 903.0 FSU 4466.0 682.8 648.7 713.5 External 180.0 185.0 160.0 189.5 Imports 4642.5 904.7 1027.5 1118.0 FSU of which: 3986.8 700.0 719.1 839.2 -Energy products 711.0 327.0 431.8 557.7 External 655.7 204.7 308.4 278.8 Trade balance 3.5 -36.9 -218.8 -215.0 Net Services and Transfers -33.0 -2.0 1.7 -21.2 Current Account Balance 3.5 -38.9 -217.1 -236.2 Capital inflows 25.0 34.0 153.1 75.3 Convertible area 34.0 105.1 86.0 Direct foreign investment 25.0 17.4 30.0 36.0 Medium & LT, net 16.6 75.1 50.0 Short term, net 0.8 0.0 Contribution to Int'l. -0.8 0.0 Organization Non-convertible area 48.0 -10.7 Disbursement 1/ 27.9 0.0 Amortization 0.5 -10.7 Interenterprise arrears 19.6 0.0 Errors and omissions 167.0 -9.1 1.8 0.0 Overall balance 195.5 -14.0 -62.2 -160.9 Change in net reserves (- increase) -195.5 -14.0 27.2 19.5 IMF Financing 0.0 50.7 32.1 Gross Official Reserves -2.4 -31.6 -12.6 NBM Correspondent accounts 9,672.0 18.7 -29.6 0.0 DMB Net Foreign Assets -2.3 -5.2 0.0 Debt conversion (net) 2/ 0.0 42.9 0.0 Financing Gap 0.0 0.0 35.0 141.4 Memo item: Ruble per US$, avg. 1.75 94.0 969.0 1914.0 Sources: Moldovan authorities and staff estimates. 1/ A new loan to be extended by Russia in the amount of 35 billion rubles. 2/ Technical credit from Russia transformed into a government loan. 54 Chapter 3 Both cases assume a 28 percent decline in the terms of trade with the FSU in 1993 as energy import prices rise to 57 percent of world levels (from 21 percent in 1992). In 1994, energy prices are assumed to reach 90 percent of world levels. Only in the first scenario, however, it is possible to contain debt service to export ratios within reasonable bounds. Moldova's creditworthiness therefore hinges on early movement to stabilize the economy and the adoption of effective structural reforms. It is estimated that the financing gap may amount to US$35 million in 1993", and to approximately $141 million in 1994 (see Table 5). Moldova's financing needs will be substantial in the next five years as energy prices rise to world levels, as economic restructuring occurs, and essential investment and rehabilitation takes place. The country will need exceptional financing from the donor community over this period before export earnings overtake import requirements. Once this phase is over, it will be well positioned to trade with the FSU, Eastern Europe, and the rest of the world, and is likely to become fully creditworthy. However, the timing of these developments does indicate a need for long-term lending, and for some degree of concessional financing, tapering off after approximately five years. Aid coordination Now that Moldova is beginning to borrow externally, the Government will want to ensure that it has a well articulated set of objectives and order of priorities against which it wishes to borrow or receive grant assistance. This applies to all borrowing and grant money, whether for technical assistance, public investment projects, or policy-based lending. Otherwise it will find that its externally financed activities tend to be determined by external views and interests, and there is a risk that financing will go to lower priority activities. A well-defined program is also helpful so as to avoid duplication and ensure that all support has been well utilized. Where technical assistance is concerned, the authorities should develop an action program to support their reform program, identify the institution- building technical assistance required to implement it, and set priorities within that. Technical assistance is likely to be desirable in the real sectors, as well as in support of policy reform, and should also be included in the overall TA program. At the same time, as part of the reform of Government expenditure programming and control, the authorities will want to establish a medium-term public investment program containing high-return projects in line with sector strategies and priority investment needs. These programs can then be discussed with prospective donors and lending agencies so as to determine appropriate activities for their support within the Government's overall requirements. The implications of external borrowing for future debt servicing and for the Government budget will need to be worked through and incorporated in the order of priorities struck by the Government. The Government may want to seek concessional financing or put off some large discrete projects until its debt servicing capacity increases. 35 This calculation takes into account exceptional financing through debt consolidation of $71.3m from Russia and a new loan of $27.9m, also from Russia. ANNEXES ANNEX ON ENVIRONMENT Although Moldova is a rich agricultural country, it has serious problems of natural resource degradation and pollution which are a threat to the environment and to health, and also to sustained growth in agriculture, where the country's comparative advantage lies. Water Moldova is a country scarce in water resources. Average annual precipitation is low and the two major rivers - the Prut, bordering on Romania, and the Dniestr, forming the border of the disputed area of Transnistria - are heavily polluted. Moldova is downstream from Ukraine, and the two rivers are already polluted from domestic, agricultural and industrial sources in Ukraine when they enter the country. On the Moldovan side, the most important source of water pollution is agro-chemical runoff, exacerbated by waste from feed lots. In the southern part of the Prut basin, there are also deposits of mineral salts and oil, which seep into the Prut causing pollution problems and unusual ecological conditions. Industrial pollution drains into the Dniestr, which is the main source of drinking water for the Moldovan capital, Chisinau, and for the city of Odessa. This water supply was further polluted by petroleum products and runoff from damaged industrial enterprises during the conflict over Transnistria. Further south again, efforts to increase the capacity of lakes for irrigation purposes have resulted in salinization, contaminating irrigation and drinking water and adding to pollution in the Danube river basin. Soil Moldova's soil has some unusual chemical features, with a high level of fluoride in the northwest, an iodine deficit in the north, and a manganese deficit in other regions. Reportedly, these characteristics, combined with heavy application of mineral fertilizers polluted with traces of heavy metals, have led to strange reactions and conditions and humus content has declined by about 40 percent, with a negative balance of nitrogen and phosphorus. Further work will be needed to check whether the agricultural soil, which is basically highly fertile, has suffered some contamination from heavy metals and pesticides and the extent to which this is a serious problem. Erosion may also have become a problem, with consequent loss of topsoil and landslides: some villages have been hit by landslides arising from increasing instability of the land. Air Air pollution is a lesser problem overall than water and soil degradation, but there is marked air pollution in the northern city of Rybnica, and also in Chisinau, Belts, and 57 58 Annex on Environment the Tiraspol region. Except in areas of heavy industry, domestically-generated air pollution is not a serious problem, but Moldova is vulnerable to externally-generated, transborder air pollution. Officials are concerned in particular that there may have been radionuclide contamination from Chernobyl and pollution due to the oil fires in Kuwait. Agricultural pollution The main sources of agricultural pollution are animal waste products from feed lots, poor storage facilities for fertilizer," and extensive pesticide use with little control over application volume and timing. A switch to safer pesticides can be expected once Moldova is able to import from the West, and high rates of pesticide application should be checked against foreign market norms. Recently, application rates have been declining under economic pressure and regulation is getting stricter. Officials are concerned that agricultural pollution may have damaging effects on health, citing relatively high infant mortality, cancer frequency, miscarriages, immune system destruction and reduced life expectancy. The frequency and incidence of these conditions should be checked as soon as possible. It would be beneficial to switch to more environmentally sound agricultural practice in general, including education and regulations on pesticide use, secure fertilizer storage, and reforestation and erosion control. Industrial pollution The production processes for Moldovan manufactures of cement-asbestos products create both air and water pollution. The main power plant has poor pollution control, emitting carbon wastes and 12,250 tons of particulates per year. Other serious sources of industrial pollution are scrap-metal processing, and the production of artificial leather, glass, building materials and tractors. Municipal waste water and drinking water All larger municipalities and towns have biological waste water treatment plants of standard Soviet design. Problems commonly arise from sludge handling and deposits. Properly treated, sludge could be used as an agricultural fertilizer as it has very little heavy metal content. Drinking water plants also follow standard Soviet design, with chemical precipitation of organic matter and pollutants. There is no automation or process monitoring at the drinking water and waste water plants. The technical standard varies and maintenance 3 Fertilizer is delivered in bulk and stored on the ground with little cover or protection against run- off. Annex on Environment 59 is often poor. All plants are overstaffed by Western standards, and water and sewage charges are far below cost. Forestry and nature conservation Extensive cultivation in Moldova has severely reduced the natural habitats and hence biodiversity is low. The authorities now produce a "red book" on endangered plants and animals, and one of the nature reserves is closed to visitors. Only 9 percent of the territory is forested, of which 7 percent is state forests and 2 percent managed by collective farms. Until 1990 forest management was oriented to commercial production; since then, attention has shifted to soil protection and nature conservation. Authorities plan an action program to reforest part of the marginal agricultural land, with the aim of increasing forest area to 25-30 percent of the whole territory. However, this target appears somewhat arbitrary; it would be preferable to make protection from erosion and landslides the primary objective of the reforestation program. Environmental institutions Moldova has a range of environmental institutions, of which the main one is the State Department for the Protection of the Environment and Natural Resources, which was created recently and assigned the functions previously covered by the Ministries of Forestry, Water Resources, Geology and Ecology. It reports to Parliament through the Ecological Commission and is not part of the Government. In the past, the corresponding bodies were attached to production-oriented ministries and had little influence or authority. Other organizational models are under discussion, including the Japanese model, in which the Environmental Agency is under the Prime Minister. The department has a network of ten regional inspectorates and forestry extension services. It has the authority to assess the environmental impact of all construction projects, and to reject projects which do not qualify under existing Soviet standards (it is not entirely clear how this veto works). Pollution control and supervision is carried out by the environmental inspectorates, staffed by 350 inspectors in head office and ten judets (regional offices). These offices oversee industrial and agricultural enterprises and the sewage systems of villages and towns, and give technical advice. Each enterprise has an agreement or contract that sets limits for air emissions, water discharges and level of soil contamination. If the limits are exceeded the inspectors can impose fines, which go to the State Ecological Fund for environmental improvement and protection projects and scientific studies. The state department has an affiliated research body, the Institute of Ecology, to which it transfers 10 percent of its budget. The budget of the state department is a fixed 0.5 percent of the national budget. Judet offices will be key units in the present plan to revise and reorganize the present unsatisfactory system of environmental monitoring and control. Water quality data and monitoring are regarded as particularly unreliable. Under this plan, five monitoring 60 Annex on Environment stations and laboratories will be set up on the Prut river, in cooperation with the Romanian environmental authorities. This border area was previously inaccessible under the FSU. There is an Academy of Science, which is responsible for a number of institutions in all fields of natural science. Funding comes from the national budget and revenues from special projects initiated by enterprises in industry and agriculture. Two non- governmental organizations are also active in the environmental field: the Movement of Ecologists, which undertakes environmental education and information, and the Party of Ecologists. Laws and strategy The Government is keen to distance the new administration and environmental policy from the legacy of the former Soviet Union. It has decided to adopt EC environmental standards and is studying the Romanian environmental strategy. In developing legislation, Moldova has looked to Japan and the United States and has been assisted by the Institute of International Law on the Environment. Legislation on air pollution and wildlife was adopted in 1981, there is now a water code, and a new law is being drafted on genetic preservation. The authorities are also developing new legislation on forestry and soils. The Government has indicated strong interest in developing an Environmental Sector study and a National Environmental Plan with support from the World Bank and the donor community. Parliament included a section on the environment in the privatization law, stipulating that forests and water cannot be privatized (with the exception of artificial fish ponds) and the use of natural resources will be licensed. The Government will pay for the clean-up of past pollution. International agreements Moldova has signed the Convention on Climate Change in Rio and wants to cooperate with the EC on these issues. It has agreements with Ukraine on the management of the Dniestr, with Ukraine and Romania on the Prut, and with Ukraine on the lakes in the Danube delta. More needs to be done, however, to develop a binding system of obligations under these treaties. Technical assistance may be required in the following areas for environmental reform and institution building: Strengthening the Department of Environment. The status and function of the Department/Ministry should be reviewed in order to develop an organizational system with proper enforcement authority and capacity. Its regional/district offices will also need to be strengthened and provided with necessary equipment for control and monitoring. Annex on Environment 61 Revising the pollution charge and fine system. The water supply, waste water discharge and waste treatment charges, together with other environmental fees and fines should be gradually raised in order to cover the real cost of the services provided and the environmental damages incurred. Revising the system of environmental standards. A flexible system of environmental standards for ambient water and air quality, as well as technologically based criteria and standards, should be developed. The standards should be realistic and gradually strengthened, with compliance with EC standards as the goal. Establishing a system of environmental monitoring and data management. There is a special need for technical assistance and equipment for environmental monitoring and establishment of an environmental information system. Reducing the pollution load from feed lots. Environmental concerns should be included in the process of restructuring and reducing the industrial animal production sector. Environmental standards and technical criteria for this type of production should also be developed. Strengthening the efforts of reforestation and erosion control. A prioritized action plan for reforestation and erosion control should be developed. The concept of the Ecological Fund as a financing institution for this purpose should be further elaborated. Improving the control of pesticide use and food contamination. A complete plan and institutional framework for regular quality control of agricultural products should be established. Technical assistance should be provided for equipment and training. Reducing the use of asbestos. The production and utilization of building materials should be modified to avoid the discharge of asbestos or to reduce its total use. Participating in the program of protecting Danube river basin. Include Moldova as a regular Task Force member of the Environmental Program for Danube River Basin. Already completed is the Pre-investment study of Prut river, including the Moldovan part of the catchment area. ANNEX ON ENERGY Background on Energy Supplies Moldova is dependent on imports for virtually all of its energy needs. The continuing breakdown of the trading system of the former USSR and increasing energy import prices are thus forcing difficult adjustments on the Moldovan economy. Traditionally, Moldova received supplies of oil products and coal from Ukraine's refineries and its coal industry. However, Ukraine is not receiving enough oil from Russia to meet its own needs and therefore is not exporting to Moldova. Exports of coal from Ukraine to Moldova are falling as well, but not as drastically as oil products. The Moldovan government has sought government to government import agreements with Russia for oil products, coal and gas," but the volume being committed will not meet all of its needs; moreover, these commitments only imply a right to approach individual suppliers. Table 6 summarizes energy imports in 1991 and 1992 (estimated). Gasoline and diesel imports were the most seriously affected, with a fall of 40 percent and 28 percent respectively from 1991 to 1992. Gasoline for private cars is currently unavailable from government outlets, bus schedules are curtailed, and domestic automobile traffic has been reduced considerably. Preference in supplying oil products has been given to agriculture, especially during the most active seasons. Based on data available from the central government, aggregate oil product imports in 1992 were expected to be down by only 13 percent compared to 1991 because reductions in gasoline and diesel imports have been offset by higher "mazut" (fuel oil) imports. Coal supplies and gas deliveries are both expected to be down by about 20 percent. LPG supplies, primarily for cooking, were very erratic in 1992. About 1.5 million households use coal for heating in the winter, and there is concern about the availability of supplies and the quality of coal available; recent supplies from Russia are of much poorer quality than traditionally supplied coals, eg. anthracite, but are cheap. Authorities say anthracite is too expensive now to purchase; they are trying to purchase coals which domestic consumers will be able to afford at full import prices. For the most part, the Government is being pragmatic, allowing private entrepreneurs and individual enterprises to import oil products (primarily the higher end products, rather than mazut) and coal by buying directly from individual suppliers in Russia and other former Union republics rather than relying solely on the government trading arm (the State Association for Fuels). The State Fuels Association is exploring the possibility of leasing its gasoline stations long term to foreign oil companies (two foreign oil companies are studying proposals) as a way of attracting other sources of gasoline and diesel. 37 It is also discussing a supply contract for gas with Turkmenistan. 63 64 Annex on Energy Estimated electricity production in 1992 was about 10,000 mkWh, down by 20 percent from that produced in 1991, primarily because of fuel shortages." Electricity exports to Romania and Bulgaria have been cut back (Moldova will supply electricity to these countries only to the extent they provide fuel); some domestic rationing has been occurring, primarily during winter in the last two years when peak demand could not always be met. About 86 percent of production comes from one plant, Kushurgan, near Tiraspol; the other thermal plants are used primarily for the heavier electricity load in winter, supplying heat as well as electricity." About 50 percent of the units at the Kushurgan plant are reportedly in need of repair (Moldova does not manufacture boilers and turbines domestically); an estimated 25 percent of the transmission and distribution lines throughout the country need repair also. The quality of coal supplied to the electric power industry is rather poor: average ash content is reportedly 30 percent and the sulfur content is 1.5 percent; the mazut used as an average sulfur content of 2 percent. Such inputs are likely to be affecting the efficiency of electric power boilers as well as their environmental control. About 300,000 flats in urban areas are connected to district heating systems. The total thermal capacity of district heating systems is 7,373 thousand Gcal, of which 78 percent comes from combined heat and power stations, the rest from heat only stations. Built up since the 1950s, some of the systems now need repair, in particular the hot water lines which show evidence of leaking and energy loss; they probably also suffer from design flaws typical of district heating in the former USSR, with the systems tending to be oversized and energy inefficient. Energy Demand Electricity generation and centrally supplied heat account for over 50 percent of total energy consumption. In 1991, the fuel supply of the power/district heat sector comprised as follows: 30.4 percent coal, 24 percent residual fuel oil, 45.2 percent natural gas, and 0.4 percent other. Industry and agriculture sectors account for about 7 percent each of total energy consumption, both of which rely heavily on oil products. The industrial sector is also an important consumer of electricity (40 percent of domestic electricity consumption) and natural gas (25 percent of demand). Transport and households represent 12 percent and 14 percent of total energy consumption respectively. Domestic electricity consumption was reportedly down by 13 percent through the third quarter of 1992 and was expected to fall by 15 percent over the entire year. Apart from the electric power industry, though, little information is available about recent changes 8 Coal, gas and mazut are all used in thermal electricity production. 3 Altogether, there are four thermal stations with combined capacity of 2836 MW and two hydro stations with combined capacity of 64 MW; Moldova also reportedly jointly operates a hydro station with Ukraine on its northern border. Annex on Energy 65 in energy demand, and there seem to be no adjustments in demand figures cited by government suppliers, taking into account the steep price changes. Clearly energy shortages, particularly of oil products and gas, are a constraint affecting industrial output, but it is difficult to gauge to what extent the lack of other inputs is a major constraint on industrial production. Energy Prices Energy import prices rose dramatically in 1992. The costs of gasoline and natural gas, for instance, have both risen forty-fold. The cost of coal has risen one hundred- fold. The full costs of oil product and most coal imports are now passed through to consumers in Moldova.40 A system of cross subsidization was instituted in mid-1992 for natural gas, electricity and district heating sales; higher rates are charged to industry in order to reduce the extent of price increases passed on to households. In the short term, this reduces the subsidy burden of the Government, while not overburdening industry since energy prices are still below world market levels. Over the longer term, however, energy prices to households will need to be adjusted upwards to reflect the economic values of fuels. Efforts to improve tariff structures generally and phase in increases to households over time should be encouraged. In the case of household gas and heating, tariff restructuring will need to be accompanied by a program to introduce metering, as prices are currently charged based on number of families and apartment area respectively. Table 7 provides examples of domestic energy prices in Moldova in 1992 and a comparison with world market prices. It shows the great discrepancy between world and domestic energy prices. For example, domestic natural gas prices per 1000 m3 (household and commercial) in Moldova are below 10 percent relative to likely economic prices. Oil product and coal prices are in the range of 30-50 percent of world market levels. Despite increasing pressures to cushion prices, the Government must continue to try to pass on the full costs because it simply cannot afford to subsidize energy any longer. As an importer, Moldova is in a situation where it will have to adjust quickly to much higher energy prices, which will spur energy conservation over time. The Government will want to identify areas of energy inefficiency and introduce measures to overcome physical and other constraints to improved conservation, in order to speed the response to higher energy prices. Energy Intensity Energy consumption per capita is estimated at 2,270 kilograms oil equivalent (koe) in 1990 and energy intensity of GDP at 1.4 koe/US$. Moldova is not as energy 4 There is a subsidy provided to handicapped people and needy families for coal purchases, cross subsidized by the Fuel Association; in 1992 it will represent a total subsidy of less than Rb 60 million. 66 Annex on Energy intensive as Russia or its neighbor, Ukraine, which have estimated energy intensities in the range of 2.2-2.6 koe/US$, but its energy intensity is higher than those for the Baltic states, in the range of 0.7-1.03. As another comparison, the average energy intensity for upper middle income countries reported by OECD for 1991 is 0.6 toe/US$. Indeed, there is probably considerable scope for energy conservation in Moldova, particularly in the energy sector itself (eg. electricity and heat production and district heating). It will also be important to evaluate further the energy intensity of the agricultural sector because of its economic significance in Moldova. Changes in Corporate Structures of Energy Companies The various government agencies in the energy sector--the State Fuel Association, the Department of Gasification and its subsidiary, Moldovgaz, and the Department of Electricity--have plans to develop new corporate structures to put themselves on a more commercial basis. Consequently, they are interested in the experience of similar firms in other countries. There is an opportunity here for bilateral and international donors to assist them in this process of commercialization, including support for financial planning and tariff restructuring. It is also a good time to identify opportunities for improving energy efficiency by changes in operations and upgrading of equipment. Investments in Energy Supplies Various tradeoffs need to be considered in investment planning in the energy sector as the capital implications of power sector/district heating rehabilitation and investment plans in petroleum and natural gas supplies are overly ambitious in view of the current economic situation. Improved energy pricing, commercialization and greater accountability of the state energy agencies, and introduction to financial planning in those agencies will assist in bringing greater discipline to investment planning. The Moldovan government, under pressure to find supplies, is considering various options to assure itself a secure oil and gas supply, including investing in oil and gas fields in Russia. Specific investments in oil and gas fields in Russia are now under consideration or tentatively agreed. It is unclear how fully evaluated the prospective fields are and whether money is being invested in exploration through appraisal activities, as opposed to less risky field development. The government is also considering undertaking further exploration and appraisal of known domestic oil deposits in the southern part of the country. In its draft reform program, however, the government recognizes the role that private agents can play in petroleum exploration and development, as they are better placed to shoulder the risks involved. Commercial companies also are experienced in undertaking financial analyses to evaluate the likely economic potential of a field. The Moldovan authorities do not appear to be experienced in financial planning and investment analysis, which would help them in deciding whether to risk scarce capital in the petroleum sector rather than investing in sectors where Moldova may have more of a comparative advantage. Annex on Energy 67 The Moldovan authorities are also discussing with Romania an investment in a mazut refinery, in order to "deep refine" the mazut to get higher value products. Again, the proposed investment should undergo the scrutiny of a financial analysis. More promising, with less risk, would be arrangements to refine crude oil in Romania by pass-through arrangements with underutilized Romanian refineries, another option the government is considering. Investments are also planned in the natural gas industry--to expand gas supplies taken from the transmission lines crossing Ukraine (one of which goes through Moldova before reentering Ukraine) and to extend gas distribution lines within Moldova (to the 50 percent of counties now without gas). Molodovgaz's medium term investment plans call for construction of 600 km of pipelines and annual capital costs of R3-3.5 billion for the next five years, again an ambitious effort. 68 Annex on Energy Table 6 - Energy Imports, 1991 and Projected 1992 1991 1992 (est.) Oil Products (Total) 3.58 3.17 (million tons) Gasoline 0.72 0.36 Diesel 0.99 0.71 Residual Fuel Oil 1.65 1.95 Coal 4.19 2.06 (million tons) Natural Gas 3.87 3.4 (thousand m3) LPG (million tons) 0.2 0.1541 41 This may not have been reached because supplies have been erratic. Total deliveries by mid- 1992 were 43,900 tons. Annex on Energy 69 TABLE 7 - Energy Prices Domestic Consumer Prices2 World Prices World Prices Industry/Commercial Households in_US$ in R" Gasoline 24-27,000 200-230 60-69,000 (per ton) Diesel 17,000 180-215 54-65,000 (per ton) Fuel oil 11,000 80 24,000 (per ton) Natural gas 2-3000 1200-1300 150-200 45-60,000 (per 000 m3) LPG 7,800 250-300 75-90,000 (per ton) Coal 3-8,000 3-8,000 35-50 11-15,000 (per ton) District heating 3000 21 35-62 11-18,600 (per Gcal) Electricity 3000 600 50-65 15-19,500 (MWh) 42 Before sales taxes in the case of oil products and natural gas. 43 The prices for oil products, gas and coal are indicative border prices plus margins for transport or infrastructure costs. 4 The exchange rate used here is Rb 300 to the US$1.00. Obviously, the exchange rate selected will affect the size of the gap between domestic and world prices. 70 Annex on Energy TABLE 8 - Energy Imports, 1992-94 (millions of US$) 1992 1993 1994 (projected) (projected) Total Energy Imports 327.0 430.9 557.7 Coal 34.6 61.6 66.0 Volume ('000 tons) 2060.0 2500.0 2250.0 Unit Price ($/ton) 16.8 24.7 29.2 Natural Gas 31.4 115.2 219.0 Volume (mn cubic meters) 3435.1 3113.0 2801.7 Unit Price (($/'000 cubic meters) 009.1 37.0 78.0 Fuel Energy 261.1 254.1 273.0 Volume ('000 tons) 3101.7 2467.9 2221.1 Unit Price ($/ton) 84.1 103.1 123.1 Heating Oil 137.4 115.0 122.0 Volume ('000 tons) 1952.5 1500.0 90.6 Unit Price ($/ton) 70.4 76.7 1.0 Diesel Fuel 71.4 82.0 89.0 Volume ('000 tons) 699.8 600.0 540.0 Unit Price ($/ton) 102.0 136.7 165.7 Benzene 44.3 49.1 53.0 Volume ('000 tons) 364.6 300.0 270.0 Unit Price ($/ton) 121.5 163.7 195.9 Other Fuel Energy 8.0 8.0 9.0 Volume ('000 tons) 84.8 67.9 61.0 Unit Price ($/ton) 93.8 118.0 141.0 Source: Moldovan authorities and IMF staff estimates. Statistical Appendix 71 STATISTICAL APPENDIX LIST OF TABLES 1. Population and Employment 1. 1: Population and Demographic Indicators (in thousands) .................. 73 1.2: Percentage Structure of Population and Demographic Indicators (in percent) . . . . 74 1.3: Employment By Sector (in thousands) ............................ 75 1.4: Percentage Distribution of Employment By Sector (in percent) ............. 76 2. National Accounts 2.1: Net Material Product at Current Prices (MPS Methodology) (millions of rubles) . 77 2.2: Net Material Product at Constant Prices (MPS Methodology) (m illions of 1983 rubles) .................................... 78 2.3: Implicit NMP Deflators (1983=100) ............................. 79 2.4: Growth Rates of Implicit NMP Deflators (in percent) .................. 80 2.5: Gross Output at Current Prices (millions of rubles) .................... 81 2.6: Gross Fixed Investment at Current Prices .......................... 82 2.7: Gross Fixed Investment at Constant Prices ......................... 83 2.8: Industrial Production by Sector (millions of 1983 rubles) . . . . . . . . . . . . . . . . 84 3. Balance of Payments 3.1: Balance of Payments (millions of current US dollars) . . . . . . . . . . . . . . . . . . 85 3.2: Interrepublican, External and Total Trade (millions of rubles) . . . . . . . . . . . . . 86 3.3: Geographical Distribution of Interrepublic Trade at Domestic Prices (m illions of current rubles) ................................... 87 3.4: Geographical Distribution of Extrarepublic Trade . . . . . . . . . . . . . . . . . . . . . 88 3.5: Total Breakdown by Commodity Groups (millions of rubles) . . . . . . . . . . . . . . 89 3.6: Total Trade in 1991, Breakdown by Commodities (millions of rubles) . . . . . . . . 91 4. Public Finance 4.1: General Government Budget (millions of rubles) . . . . . . . . . . . . . . . . . . . . . 92 4.2: State Budget (millions of rubles) ............................... 93 5. Monetary/Financial Sector 5.1: Monetary Survey (millions of rubles, end-of-period) . . . . . . . . . . . . . . . . . . . 94 5.2: Balance Sheet of National Bank of Moldova (millions of rubles, end-of-period) . . 95 5.3: Deposit Money Banks Monetary Accounts (millions of rubles, end-of-period) . . . 96 72 Statistical Appendix 6. Agriculture 6.1: Agricultural Production at Constant Prices (millions of 1983 rubles) . . . . . . . . . 97 6.2: Total Agricultural Output and Average Yields (thousands of tons) . . . . . . . . . . . 98 6.3: Net Material Product ofAgriculture ............................. 99 6.4: Animal Husbandry ....................................... 100 6.5: Changing Structure of Agriculture in 1980 ........................ 101 6.6: Changing Structure of Agriculture in 1991 ........................ 102 7. Prices and Wages 7.1: Monthly Variations in the CPI, WPI and Retail Price Indices (in percent) ..... 103 7.2: Monthly W age Indices,1991-92 ............................... 104 Statistical Appendix 73 Table 1.1 - Moldova: Population and Demographic Indicators 1970 1979 1980 1985 1989 1990 1991 1992 Thousands of Persons 1/ TOTAL 3568.9 3947.4 4011.0 4214.0 4347.0 4362.0 4361.0 4351.0 Population Density (Persons/sq.km) 105.9 117.1 119.0 125.0 129.0 129.4 129.4 129.1 Male 1662.3 1858.4 1897.2 2001.7 2058.2 2071.6 2080.0 2077.0 Female 1906.6 2089.0 2113.8 2212.4 2288.8 2290.4 2281.0 2274.0 Urban 1130.1 1551.0 1588.4 1817.0 2036.0 2055.0 2047.0 2029.0 Rural 2438.8 2396.4 2422.6 2397.0 2311.0 2307.0 2314.0 2322.0 Ethnicity Moldovans 2305.5 2522.4 2803.8 Ukrainians 506.8 560.5 599.9 Russians 414.0 505.3 565.1 Other 342.6 359.2 378.2 Total Labor Force 1906.0 2338.0 2371.0 2421.0 2440.0 2429.0 2463.0 2460.0 Under 16 27.0 16.0 15.0 11.0 11.0 11.0 20.0 20.0 Over Working Age 78.0 80.0 83.0 87.0 80.0 81.0 108.0 109.0 Of Active Age 1801.0 2242.0 2273.0 2323.0 2349.0 2337.0 2335.0 2331.0 Annual Population Change (thousands) 52.8 63.6 40.6 15.0 -1.0 -10.0 Natural Increase 43.2 58.0 44.4 45.0 32.7 Migration 9.6 5.6 -3.8 -30.0 -33.7 Annual Population Growth Rate (%) 1.6 0.1 0.0 0.0 Expected Life Length at Birth (years) 65.6 65.6 66.4 69.0 68.5 Male 62.4 62.4 63.1 65.5 65.0 Female 68.8 68.8 69.5 72.3 71.8 Source: The State Department of Statistics. 1/ Mid-year. 74 Statistical Appendix Table 1.2 - Moldova: Percentage Structure of Population and Demographic Indicators 1970 1979 1980 1985 1989 1990 1991 1992 TOTAL 1/ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Male 46.6 47.1 47.3 47.5 47.3 47.5 47.7 47.7 Female 53.4 52.9 52.7 52.5 52.7 52.5 52.3 52.3 Urban 31.7 39.3 39.6 43.1 46.8 47.1 46.9 46.6 Rural 68.3 60.7 60.4 56.9 53.2 52.9 53.1 53.4 Ethnicity Moldovians 64.6 63.9 64.5 Ukrainians 14.2 14.2 13.8 Russians 11.6 12.8 13.0 Other 9.6 9.1 8.7 Total Labor Force 53.4 59.2 59.1 57.5 56.1 55.7 56.5 56.5 Under 16 0.8 0.4 0.4 0.3 0.3 0.3 0.5 0.5 Over Working Age 2.2 2.0 2.1 2.1 1.8 1.9 2.5 2.5 Of Active Age 50.5 56.8 56.7 55.1 54.0 53.6 53.5 53.6 Source: The State Department of Statistics. 1/ Mid-year. Statistical Appendix 75 Table 1.3 - Moldova: Employment by Sector (Annual average, in thousands) 1985 1986 1987 1988 1989 1990 1991 1992 TOTAL EMPLOYMENT 1/ 2080.8 2082.0 2085.3 2067.5 2091.0 2071.0 2070.0 2050.0 MATERIAL SECTOR 1609.8 1603.0 1592.3 1561.5 1580.0 1552.0 1551.0 1533.0 Industry 432.0 430.0 435.0 435.0 446.0 456.0 424.0 415.0 Construction 147.0 146.0 150.0 147.0 165.0 172.0 153.0 140.0 Agriculture 752.0 742.0 725.0 700.0 712.0 673.0 739.0 745.0 Forestry 5.4 5.3 5.4 5.2 4.8 4.6 4.0 4.0 Transport 74.0 73.0 69.0 67.0 52.0 51.0 48.0 52 Communication 20.4 20.3 19.9 19.3 18.8 19.0 19.0 20.0 Trade & other material services 179.0 186.4 188.0 188.0 181.4 176.4 164.0 157.0 NONMATERIAL SECTOR 471.0 479.0 493.0 506.0 511.0 519.0 519.0 517.0 Housing and municipal services 45.0 47.0 51.0 57.0 55.0 46.0 65.0 66.0 Science, research & development 30.0 30.0 31.0 30.0 32.0 33.0 29.0 28.0 Education 2/ 205.0 207.0 213.0 219.0 227.0 232.0 224.0 223.0 Health care, social security 103.0 103.0 107.0 111.0 113.0 115.0 116.0 116.0 Banking & financial institutions 8.0 8.0 8.0 8.0 9.0 9.0 9.0 9.0 Government 30.0 33.0 34.0 34.0 32.0 24.0 35.0 35.0 Other nonmaterial services 50.0 51.0 49.0 47.0 43.0 60.0 41.0 100.0 Source: The State Department of Statistics. 1/ Includes employment in personal subsidiary agriculture. 2/ Includes culture and art. 76 Statistical Appendix Table 1.4 - Moldova: Percentage Distribution of Employment by Sector (in percent) 1985 1986 1987 1988 1989 1990 1991 1992 TOTAL EMPLOYMENT 1/ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 MATERIAL SECTOR 77.4 77.0 76.4 75.5 75.6 74.9 74.9 74.8 Industry 20.8 20.7 20.9 21.0 21.3 22.0 20.5 20.2 Construction 7.1 7.0 7.2 7.1 7.9 8.3 7.4 6.8 Agriculture 36.1 35.6 34.8 33.9 34.1 32.5 35.7 36.3 Forestry 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 Transport 3.6 3.5 3.3 3.2 2.5 2.5 2.3 2.5 Communication 1.0 1.0 1.0 0.9 0.9 0.9 0.9 1.0 Trade and other material services 8.6 9.0 9.0 9.1 8.7 8.5 7.9 7.7 NONMATERIAL SECTOR 22.6 23.0 23.6 24.5 24.4 25.1 25.1 25.2 Housing and municipal services 2.2 2.3 2.4 2.8 2.6 2.2 3.1 3.2 Science, research & development 1.4 1.4 1.5 1.5 1.5 1.6 1.4 1.4 Education 2/ 9.9 9.9 10.2 10.6 10.9 11.2 10.8 10.9 Health care, social security 5.0 4.9 5.1 5.4 5.4 5.6 5.6 5.7 Banking, finance & credit institutions 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 Government 1.4 1.6 1.6 1.6 1.5 1.2 1.7 1.7 Other nonmaterial services 2.4 2.4 2.3 2.3 2.1 2.9 2.0 4.9 Source: The State Department of Statistics. 1/ Includes employment in personal subsidiary agriculture. 2/ Includes culture and art. Statistical Appendix 77 Table 2. 1 - Moldova: Net Material Product at Current Prices (MPS Methodology) (millions of rubles) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Net Material Product 5910 6160 7105 7653 7698 6537 6969 7190 7361 8272 9443 18753 192529 By Origin: Agriculture 1778 1763 2315 2705 2710 2162 2708 2638 2738 3321 3943 7836 76833 of which: Forestry 7 6 6 6 5 8 8 8 8 9 9 14 158 Industry 2938 3105 3409 3505 3504 3327 3180 3573 3559 3739 4097 8344 82841 of which: Construction 434 423 466 490 579 577 608 654 687 826 852 1296 13551 Transport&Communications 163 164 194 204 206 218 231 221 292 316 452 711 Trade 1000 1098 1155 1203 1247 791 803 709 707 817 871 1757 OtherMaterialServices 31 30 32 36 31 39 47 49 65 79 80 105 By Final Use: Consumption 4450 4749 4893 5055 5266 5419 5551 5751 6168 6860 7777 15140 Private Consumption 4004 4269 4370 4506 4680 4808 4905 5077 5473 6102 6907 13862 Government Consumption 446 480 523 549 586 611 646 674 695 758 870 1278 Investment (accumulation) 1167 1416 2073 1852 1999 1394 1937 1528 2068 2404 2030 5168 Not Fixed investment 794 696 746 838 1012 1034 913 1258 1313 1347 1206 1506 Increase in Inventories 373 720 1327 1014 987 360 1024 270 755 1057 824 3662 Trade Balance 293 -5 139 746 433 -276 -519 -89 -875 -992 -364 -1555 As Percentage Share of NMP: Net Material Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 By Origin: Agriculture 30.1 28.6 32.6 35.3 35.2 33.1 38.9 36.7 37.2 40.1 41.8 41.S 39.9 of which: Forestry 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.: Industry 49.7 50.4 48.0 45.8 45.5 50.9 45.6 49.7 48.3 45.2 43.4 44.5 43.0 of which: Construction 7.3 6.9 6.6 6.4 7.5 8.8 8.7 9.1 9.3 10.0 9.0 6.9 7.0 Transport & Communications 2.8 2.7 2.7 2.7 2.7 3.3 3.3 3.1 4.0 3.8 4.8 3.8 Trade 16.9 17.8 16.3 15.7 16.2 12.1 11.5 9.9 9.6 9.9 9.2 9.4 Other Material Services 0.5 0.5 0.5 0.5 0.4 0.6 0.7 0.7 0.9 1.0 0.8 0.6 By Final Use: Consumption 75.3 77.1 68.9 66.1 68.4 82.9 79.7 80.0 83.8 82.9 82.4 80.7 Private Consumption 67.7 69.3 61.5 58.9 60.8 73.6 70.4 70.6 74.4 73.8 73.1 73.9 Government Consumption 7.5 7.8 7.4 7.2 7.6 9.3 9.3 9.4 9.4 9.2 9.2 6.1 Investment (accumulation) 19.7 23.0 29.2 24.2 26.0 21.3 27.8 21.3 28.1 29.1 21.5 27.6 Net Fixed Investment 13.4 11.3 10.5 10.9 13.1 15.8 13.1 17.5 17.8 16.3 12.8 8.0 Increase in Inventories 6.3 11.7 18.7 13.2 12.8 5.5 14.7 3.8 10.3 12.8 8.7 19.5 Trade Balance 5.0 -0.1 2.0 9.7 5.6 -4.2 -7.4 -1.2 -11.9 -12.0 -3.9 -8.3 Source: The State Department of Statistics. 78 Statistical Appendix Table 2.2 - Moldova: Net Material Product at Constant Prices (MPS Methodology) (millions of 1983 rubles) 1985 1986 1987 1988 1989 1990 1991 1992 Net Material Product 6962 7513 7606 7735 8416 8292 6801 5352 By Origin: Agriculture 2487 3084 2980 2997 3215 2579 1856 1655 of which: Forestry 8 8 8 8 9 9 6 5 Industry 3429 3367 3612 3641 4030 4705 3916 2853 of which: Construction 631 614 654 646 773 810 838 544 Transport & Communications 219 231 221 292 301 239 201 Trade 347 354 402 441 490 555 449 Other Material Services 488 485 399 373 389 223 385 By Final Use: Consumption 5569 5713 5930 6281 6835 7018 6952 Private Consumption 4957 5067 5254 5585 6088 6199 5868 Government Consumption 612 646 676 696 747 819 1084 Investment (accumulation) 1314 2005 1591 1933 2084 1498 2042 Net Fixed Investment 1036 924 1257 1243 1201 943 570 Increase in Inventories 278 1081 334 690 883 555 1472 Trade Balance 79 -205 85 -479 -503 -224 -2193 Real Growth Rates (%) Net Material Product 7.9 1.2 1.7 8.8 -1.5 -18.0 -21.3 By Origin: Agriculture 24.0 -3.4 0.6 7.3 -19.8 -28.0 -10.8 of which: Forestry 0.0 0.0 0.0 12.5 0.0 -33.3 -16.7 Industry -1.8 7.3 0.8 10.7 16.7 -16.8 -27.1 of which: Construction Transport & Communications 5.5 -4.3 32.1 3.1 -20.6 -15.9 Trade 2.0 13.6 9.7 11.1 13.3 -19.1 Other Material Services -0.6 -17.7 -6.5 4.3 -42.7 72.6 By Final Use: Consumption 2.6 3.8 5.9 8.8 2.7 -0.9 Private Consumption 2.2 3.7 6.3 9.0 1.8 -5.3 Government Consumption 5.6 4.6 3.0 7.3 9.6 32.4 Investment (accumulation) 52.6 -20.6 21.5 7.8 -28.1 36.3 Net Fixed Investment -10.8 36.0 -1.1 -3.4 -21.5 -39.6 Increase in Inventories 288.8 -69.1 106.6 28.0 -37.1 165.2 Trade Balance -359.5 -141.5 -663.5 5.0 -55.5 879.0 Source: The State Department of Statistics. Statistical Appendix 79 Table 2.3 - Moldova: Implicit NMP Deflators (1983=1.0) 1985 1986 1987 1988 1989 1990 1991 1992 Net Material Product 0.939 0.928 0.945 0.952 0.983 1.139 2.757 35.973 By Industrial Origin: Agriculture 1/ 0.869 0.878 0.885 0.914 1.033 1.529 4.222 46.425 Industry 2/ 0.970 0.944 0.989 0.977 0.928 0.871 2.131 29.036 Transport & Communcations 0.995 1.000 1.000 1.000 1.050 1.891 3.537 Trade 2.280 2.268 1.764 1.602 1.667 1.569 3.913 Other Material Services 0.080 0.097 0.123 0.174 0.203 0.359 0.273 By Expenditure Category: Consumption 0.973 0.968 0.966 0.978 1.000 1.104 2.170 Private Consumption 0.970 0.966 0.964 0.978 1.000 1.112 2.357 Government Consumption 0.998 0.985 0.983 0.984 1.000 1.047 1.162 Investment (accumulation) 1.061 0.837 0.833 0.927 1.000 1.175 2.194 Net Fixed Investment 0.998 0.881 0.892 0.942 1.000 1.140 2.356 Increase in Inventories 1.295 0.791 0.675 0.914 1.000 1.240 2.078 Source: The State Department of Statistics. 1/ Includes forestry. 2/ Includes construction. 80 Statistical Appendix Table 2.4 - Moldova: Growth Rates of Implicit NMP Deflators (in percent) 1986 1987 1988 1989 1990 1991 1992 Net Material Product -1.2 1.9 0.7 3.3 15.9 142.1 1204.6 By Industrial Origin: Agriculture 1/ 1.0 0.8 3.2 13.1 48.0 176.1 999.6 Industry 2/ -2.7 4.7 -1.2 -5.1 -6.1 144.7 1262.7 Transport & Communications 0.5 0.0 0.0 5.0 80.1 87.0 Trade -0.5 -22.2 -9.2 4.1 -5.9 149.3 Other Material Services 21.3 26.7 41.9 16.5 76.6 -24.0 By Expenditure Category: Consumption -0.5 -0.2 1.3 2.2 10.4 96.5 Private Consumption -0.4 -0.2 1.4 2.3 11.2 112.0 Government Consumption -1.3 -0.3 0.2 1.6 4.7 11.0 Investment (accumulation) -21.1 -0.6 11.4 7.8 17.5 86.8 Fixed Capital -11.7 1.3 5.5 6.2 14.0 106.6 Other -38.9 -14.7 35.4 9.4 24.0 67.6 Source: The State Department of Statistics. 1/ Includes forestry. 2/ Includes construction. Statistical Appendix 81 Table 2.5 - Moldova: Gross Output at Current Prices (in millions of rubles) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 Total Material Sphere Gross Output 13,920 14,344 16,555 17,943 18,371 17,202 17,737 18,123 18,648 20,134 22,629 42,527 Material Input 8,010 8,184 9,451 10,290 10,673 10,665 10,768 10,933 11,287 11,862 13,186 23,774 Net Product 5,910 6,160 7,104 7,653 7,698 6,537 6,969 7,190 7,361 8,272 9,443 18,753 Industry Gross Output 8,145 8,470 9,781 10,416 10,514 10,081 10,056 10,626 10,852 11,378 12,698 24,940 Matial Input 5,641 5,788 6,838 7,401 7,589 7,331 7,484 7,708 7,980 8,465 9,453 17,892 Net Product 2,504 2,682 2,943 3,015 2,925 2,750 2,572 2,918 2,872 2,913 3,245 7,048 Agriculture Gros Output 3,188 3,270 3,931 4,453 4,512 4,167 4,630 4,470 4,633 5,268 6,095 11,337 Material Input 1,417 1,513 1,622 1,754 1,807 2,013 1,930 1,841 1,903 1,957 2,161 3,514 Net Product 1,771 1,757 2,309 2,699 2,705 2,154 2,700 2,629 2,730 3,311 3,934 7,823 Construction Gross Output 1,083 1,003 1,123 1,281 1,512 1,462 1,512 1,594 1,629 1,760 1,806 2,505 Material Input 649 580 657 790 932 885 904 939 942 934 955 1,209 Net Product 434 423 466 491 580 577 608 655 687 826 851 1,296 Transport and Communication Gross Output 344 344 391 405 402 473 501 473 544 575 762 1,296 Material Input 181 181 196 201 197 256 270 252 252 258 310 585 NetProduct 163 163 195 204 205 217 231 221 292 317 452 711 Retail Trade and Catering Gross Output 360 380 391 397 417 422 441 471 523 563 642 1,278 Material Input 68 72 78 82 85 92 97 110 120 125 143 290 Net Product 292 308 313 315 332 330 344 361 403 438 499 988 Wholsale Non-agric. Trade Gross Output 60 61 65 71 76 79 81 81 82 93 84 230 Material Input 7 8 10 10 10 12 13 15 18 14 17 78 Net Product 53 53 55 61 66 67 68 66 64 79 67 152 Wholsale Agric. Trade Gross Output 118 112 118 123 125 132 147 118 113 179 257 404 Material Input 31 26 32 33 34 42 36 34 21 43 48 74 NetProduct 87 86 86 90 91 90 111 84 92 136 209 330 Foreign Trade Gross Output 568 651 700 736 758 304 280 199 148 164 96 287 Material Input Net Product 568 651 700 736 758 304 280 199 148 164 96 287 Forestry Gross Output 9 8 8 8 8 12 12 12 13 14 13 22 Material Input 2 2 3 3 3 4 4 4 5 5 4 9 NetProduct 7 6 5 5 5 8 8 8 8 9 9 13 Other Gross Output 44 46 47 51 47 72 78 79 111 141 177 238 Material Input 14 15 15 15 16 34 29 29 45 62 97 132 NetProduct 30 31 32 36 31 38 49 50 66 79 80 106 Sources: The State Department of Statistics. 82 Statistical Appendix Table 2.6 - Moldova: Gross Fixed Investment at Current Prices (in millions of rubles) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1/ Total 1,498 1,490 1,611 1,741 2,064 2,005 2,068 2,258 2,347 2,486 2,474 3,295 6.140 of which: Material Sphere 1,100 1,082 1,180 1,272 1,474 1,371 1,349 1,417 1,523 1,633 1,643 2,041 2,838 Industry 353 329 376 398 532 455 390 435 542 573 558 531 835 Electricity 2/ 18 14 14 67 40 45 57 52 50 Agriculture 552 534 570 633 683 660 696 654 678 725 738 1130 1441 Forestry 2 2 2 2 2 2 5 1 2 2 2 2 Construction 40 47 62 57 50 55 64 57 62 59 51 56 87 Others 155 170 170 182 189 185 183 199 200 229 237 270 423 Nonmaterial Sphere 398 408 431 469 590 634 719 841 824 853 831 1,254 3,302 Housing 201 211 233 249 329 354 401 437 442 427 451 697 1847 Others 197 197 198 220 261 280 318 404 382 426 380 557 1455 (Percentage Shares of Gross Fixed Investment) Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 of which: Material Sphere 73.4 72.6 73.2 73.1 71.4 68.4 65.2 62.8 64.9 65.7 66.4 61.9 46.2 Industry 23.6 22.1 23.3 22.9 25.8 22.7 18.9 19.3 23.1 23.0 22.6 16.1 13.6 Electricity 2/ 0.0 0.0 0.0 0.0 0.9 0.7 0.7 3.0 1.7 1.8 2.3 1.6 0.8 Agriculture 36.8 35.8 35.4 36.4 33.1 32.9 33.7 29.0 28.9 29.2 29.8 34.3 23.5 Forestry 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.0 0.1 0.1 0.1 0.0 Construction 2.7 3.2 3.8 3.3 2.4 2.7 3.1 2.5 2.6 2.4 2.1 1.7 1.4 Others 10.3 11.4 10.6 10.5 9.2 9.2 8.8 8.8 8.5 9.2 9.6 8.2 6.9 Nonmaterial Sphere 26.6 27.4 26.8 26.9 28.6 31.6 34.8 37.2 35.1 34.3 33.6 38.1 53.8 Housing 13.4 14.2 14.5 14.3 15.9 17.7 19.4 19.4 18.8 17.2 18.2 21.2 30.1 Others 13.2 13.2 12.3 12.6 12.6 14.0 15.4 17.9 16.3 17.1 15.4 16.9 23.7 Source: The State Department of of Statistics. 1/ Refers to the first 6 months of 1992. 2/ For 1980-83, investment for electricity is included in investment for industry. Statistical Appendix 83 Table 2.7 - Moldova: Gross Fixed Investment at Constant Prices (in millions of 1991 rubles) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1/ Total 2,433 2,423 2,603 2,825 3,034 2,972 3,040 3,319 3,450 3,654 3,640 3,295 678 of which: Material Sphere 1,754 1,724 1,868 2,022 2,123 1,974 1,943 2,040 2,193 2,352 2,365 2,041 406 Industry 563 521 591 628 761 640 557 620 773 818 791 531 125 Electricity 2/ 26 21 21 98 59 66 75 52 Agriculture 886 857 908 1014 990 964 1009 957 983 1051 1077 1130 202 Forestry 3 3 3 3 3 3 3 7 2 3 3 2 Construction 65 77 101 93 74 82 95 75 89 87 76 56 10 Others 237 266 265 284 269 264 258 283 287 327 343 270 69 Nonmaterial Sphere 679 699 735 803 911 998 1,097 1,279 1,257 1,302 1,275 1,254 272 Housing 350 369 404 435 520 560 634 690 698 675 709 697 134 Others 329 330 331 368 391 438 463 589 559 627 566 557 138 (Growth rates in percent) Total -0.4 7.4 8.5 7.4 -2.0 2.3 9.2 3.9 5.9 -0.4 -9.5 of which: Material Sphere -1.7 8.4 8.2 5.0 -7.0 -1.6 5.0 7.5 7.3 0.6 -13.7 Industry -7.5 13.4 6.3 21.2 -15.9 -13.0 11.3 24.7 5.8 -3.3 -32.9 Electricity 2/ -39.8 11.9 13.6 -30.7 Agriculture -3.3 6.0 11.7 -2.4 -2.6 4.7 -5.2 2.7 6.9 2.5 4.9 Forestry 0.0 0.0 0.0 0.0 0.0 0.0 133.3 -71.4 50.0 0.0 -33.3 Construction 18.5 31.2 -7.9 -20.4 10.8 15.9 -21.1 18.7 -2.2 -12.6 -26.3 Others 12.2 -0.4 7.2 -5.3 -1.9 -2.3 9.7 1.4 13.9 4.9 -21.3 Nonmaterial Sphere 2.9 5.2 9.3 13.4 9.5 9.9 16.6 -1.7 3.6 -2.1 -1.6 Housing 5.4 9.5 7.7 19.5 7.7 13.2 8.8 1.2 -3.3 5.0 -1.7 Others 0.3 0.3 11.2 6.3 12.0 5.7 27.2 -5.1 12.2 -9.7 -1.6 Source: The State Department of of Statistics. 1/ Refers to the first 6 months of 1992. 2/ For 1980-83, investment for electricity is included in investment for industry. 84 Statistical Appendix Table 2.8 - Moldova: Industrial Production by Sector (in millions of 1983 rubles) 1975 1980 1985 1986 1987 1988 1989 1990 1991 1992 ALL INDUSTRY 5,647 7,413 9,167 9,269 9,713 9,953 10,506 10,884 9,676 6,821 HEAVY INDUSTRY 1,766 2,392 3,323 3,626 3,900 4,135 4,367 4,591 4,073 2,835 Fuel & Energy 250 289 320 336 324 319 323 302 264 225 Electricity 250 289 320 336 324 319 323 302 264 225 Fuel industry .. .. .. .. .. .. Metallurgy .. 7 32 83 106 111 102 114 110 Machine Building 592 1,021 1,583 1,713 1,909 2,017 2,178 2,278 2,394 1,508 Pulp and Paper 20 23 27 27 28 31 27 31 30 Petrochemical 51 149 228 253 277 319 347 360 271 161 Forestry/Wood 181 252 322 338 344 371 366 384 276 207 Construction Material 287 322 383 410 437 455 430 448 360 186 Other 135 40 108 130 151 193 271 372 104 323 LIGHT INDUSTRY 1,129 1,580 2,007 2,015 2,133 2,254 2,377 2,456 2,434 1,679 Textiles 419 623 834 845 893 1,060 1,065 1,132 1,163 819 Clothing 408 548 721 691 720 714 823 863 867 561 Leather & shoes 302 409 452 479 520 480 489 461 404 299 FOOD INDUSTRY 2,752 3,441 3,837 3,628 3,680 3,564 3,762 3,837 3,169 2,307 Food processing 2,268 2,907 3,154 2,899 2,934 2,769 2,866 2,915 2,498 1,968 Meat and dairy 475 520 667 710 728 776 877 904 662 335 Fish 9 14 16 19 18 19 19 18 9 4 (Average growth rates in percent) 1/ ALL INDUSTRY 9.2 5.6 4.3 1.1 4.8 2.5 5.6 3.6 -11.1 -29.5 HEAVY INDUSTRY 6.3 6.8 9.1 7.6 6.0 5.6 5.1 -11.3 -30.4 Fuel & Energy 2.9 2.1 5.0 -3.6 -1.5 1.3 -6.5 -12.6 -14.8 Electricity 12.4 2.9 2.1 5.0 -3.6 -1.5 1.3 -6.5 -12.6 -14.8 Fuel industry .. .. .. .. .. .. Metallurgy 14.0 .. 35.5 159.4 27.7 4.7 -8.1 11.8 -3.5 Machine Building 15.3 11.5 9.2 8.2 11.4 5.7 8.0 4.6 5.1 -37.0 Pulp and Paper 2.8 3.3 0.0 3.7 10.7 -12.9 14.8 -3.2 Petrochemical 23.9 8.9 11.0 9.5 15.2 8.8 3.7 -24.7 -40.6 Forestry/Wood 6.8 5.0 5.0 1.8 7.8 -1.3 4.9 -28.1 -25.0 Construction Material 11.4 2.3 3.5 7.0 6.6 4.1 -5.5 4.2 -19.6 -48.3 Other -21.6 22.0 20.4 16.2 27.8 40.4 37.3 -72.0 210.6 LIGHT INDUSTRY 10.3 7.0 4.9 0.4 5.9 5.7 5.5 3.3 -0.9 -31.0 Textiles 8.3 6.0 1.3 5.7 18.7 0.5 6.3 2.7 -29.6 Clothing 6.1 5.6 -4.2 4.2 -0.8 15.3 4.9 0.5 -35.3 Leather & shoes 6.3 2.0 6.0 8.6 -7.7 1.9 -5.7 -12.4 -26.0 FOOD INDUSTRY 7.4 4.6 2.2 -5.4 1.4 -3.2 5.6 2.0 -17.4 -27.2 Food processing 5.1 1.6 -8.1 1.2 -5.6 3.5 1.7 -14.3 -21.2 Meat & dairy 1.8 5.1 6.4 2.5 6.6 13.0 3.1 -26.8 -49.4 Fish 9.2 2.7 18.8 -5.3 5.6 0.0 -5.3 -50.0 -55.6 Source: The State Department of Statistics. 1/ 1975 figures refer to averages for 1971-75; 1980 figures are for 1976-80; and 1985 figures refer to 1981-85. Statistical Appendix 85 Table 3.1 - Moldova: Balance of Payments (millions of US$) 1991 1992 1993 1994 (projected) Exports 4646.0 867.8 808.7 903.0 FSU 4466.0 682.8 648.7 713.5 External 180.0 185.0 160.0 189.5 Imports 4642.5 904.7 1027.5 1118.0 FSU of which: 3986.8 700.0 719.1 839.2 -Energy products 711.0 327.0 431.8 557.7 External 655.7 204.7 308.4 278.8 Trade balance 3.5 -36.9 -218.8 -215.0 Net Services and Transfers -2.0 1.7 -21.2 Current Account Balance 3.5 -38.9 -217.1 -236.2 Capital inflows 25.0 34.0 153.1 75.3 Convertible area 25.0 34.0 105.1 86.0 Direct foreign investment 25.0 17.4 30.0 36.0 Medium & LT, net 16.6 75.1 50.0 Short term, net 0.8 0.0 Contribution to Int'l Organization -0.8 0.0 Non-convertible area 48.0 -10.7 Disbursement 1/ 27.9 0.0 Amortization 0.5 -10.7 Interenterprise arrears 19.6 0.0 Errors and omissions 167.0 -9.1 1.8 0.0 Overall balance 195.5 -14.0 -62.2 -160.9 Change in Net Reserves (- = increase) -195.5 -14.0 27.2 19.5 IMF financing 0.0 50.7 32.1 Gross Official Reserves -2.4 -31.6 -12.6 NBM Correspondent accounts 15958 18.7 -29.6 0.0 DMB Net Foreign Assets -6286 -2.3 -5.2 0.0 Debt Conversion (net) 2/ 0.0 42.9 0.0 Financing Gap 0.0 0.0 35.0 141.4 Sources: Moldovan authorities and staff estimates. 1/ A new loan to be extended by Russia in the amount of Ruble 35 b. 2/ Technical credit from Russia transformed into a government loan. 86 Statistical Appendix Table 3.2 - Moldova: Interrepublican, External and Total Trade (millions of rubles) 1982 1987 1988 1989 1990 1991 1992 1. Interrepublic Exports 4077.5 5158.7 4800.3 5186.4 5853.3 7809.0 47841.7 Imports of which: 3827.4 4607.4 4986.5 5191.5 4991.6 7237.3 74127.3 - Total energy 1355.0 40800.0 Trade balance 250.1 551.3 -186.2 -5.1 861.7 571.7 -26285.6 2. Foreign Exports 162.2 227.6 257.2 270.0 323.4 331.8 16038.3 imports 973.2 1066.5 1093.9 1420.0 1469.8 1206.5 20722.3 Trade balance -811.0 -838.9 -836.7 -1150.0 -1146.4 -874.7 -4684.0 3. Total Exports 4239.7 5386.3 5057.5 5456.4 6176.7 8140.8 63880.0 imports 4800.6 5673.9 6080.4 6611.5 6461.4 8443.8 94849.6 Tradebalance -560.9 -287.6 -1022.9 -1155.1 -284.7 -303.0 -30969.6 Memo item: 22831 215067 GDP 9321.0 9433.0 9830.0 11218.0 12681.0 24800.0 226700.0 In Percent of GDP 1. Interrepublic Exports 43.7 54.7 48.8 46.2 46.2 31.5 21.1 Imports of which: 41.1 48.8 50.7 46.3 39.4 29.2 32.7 - Total energy 5.5 18.0 Trade balance 2.7 5.8 -1.9 0.0 6.8 2.3 -11.6 2. Foreign Exports 1.7 2.4 2.6 2.4 2.6 1.3 7.1 imports 10.4 11.3 11.1 12.7 11.6 4.9 9.1 Trade balance -8.7 -8.9 -8.5 -10.3 -9.0 -3.5 -2.1 3. Total Exports 45.5 57.1 51.4 48.6 48.7 32.8 28.2 Imports 51.5 60.1 61.9 58.9 51.0 34.0 41.8 Trade balance -6.0 -3.0 -10.4 -10.3 -2.2 -1.2 -13.7 Source: Moldovan authorities and IMF staff estimates. Statistical Appendix 87 Table 3.3 - Moldova: Geographical Distribution of Interrepublic Trade at Domestic Prices (millions of current rubles) Exports Imports Exports Imports 1991 1992 1991 1992 1991 1992 1991 1992 (Percentage Share of Total) TOTAL TRADE 7809.0 47841.7 7237.3 74127.3 100.0% 100.0% 100.0% 100.0% Armenia 71.4 171.4 68.2 114.8 0.9% 0.4% 0.9% 0.2% Azerbaijan 106.2 1259.5 81.7 1149.5 1.4% 2.6% 1.1% 1.6% Belarus 508.7 2776.0 598.2 9571.0 6.5% 5.8% 8.3% 12.9% Estonia 103.4 176.9 73.8 94.1 1.3% 0.4% 1.0% 0.1% Georgia 60.9 291.4 122.6 367.9 0.8% 0.6% 1.7% 0.5% Kazakhstan 180.2 1232.3 260.6 760.8 2.3% 2.6% 3.6% 1.0% Kyrgyzstan 55.8 350.9 39.6 255.0 0.7% 0.7% 0.5% 0.3% Latvia 150.1 578.3 100.5 382.0 1.9% 1.2% 1.4% 0.5% Lithuania 170.1 761.6 160.5 869.0 2.2% 1.6% 2.2% 1.2% Russia 4724.7 25015.7 3269.8 42876.3 60.5% 52.3% 45.2% 57.8% Tajikistan 46.0 106.7 14.3 88.0 0.6% 0.2% 0.2% 0.1% Turkmenistan 36.5 1696.4 50.1 1725.6 0.5% 3.5% 0.7% 2.3% Ukraine 1418.8 12466.3 1863.0 14351.0 18.2% 26.1% 25.7% 19.4% Uzbekistan 166.4 958.3 258.9 1522.3 2.1% 2.0% 3.6% 2.1% Statistical Discrepancy 9.8 0.0 275.5 0.0 0.1% 0.0% 3.8% 0.0% Source: Moldovan authorities. 88 Statistical Appendix Table 3.4 - Moldova: Geographical Distribution of Extrarepublic Trade (in millions of rubles) Exports Imports Exports Imports 1991 1992 1991 1992 1991 1992 1991 1992 (rubles) (rubles) (rubles) (rubles) (Percentage Share of Total) TOTAL TRADE 331.7 16038.3 1206.5 20722.3 100.0% 100.0% 100.0% 100.0% INDUSTRIAL COUNTRIES 162.2 2835.0 543.3 9506.9 48.9% 17.7% 45.0% 45.9% Austria 49.5 28.5 78.6 431.4 14.9% 0.2% 6.5% 2.1% France 6.4 22.7 53.5 262.0 1.9% 0.1% 4.4% 1.3% Germany 58.3 721.3 64.6 2812.8 17.6% 4.5% 5.4% 13.6% Italy 11.2 142.0 19.4 1419.4 3.4% 0.9% 1.6% 6.8% Switzerland .. 1372.6 270.8 Japan 10.0 0.4 27.9 17.3 3.0% 0.0% 2.3% 0.1% United Kingdom 14.0 56.7 6.8 54.6 4.2% 0.4% 0.6% 0.3% United States 4.7 0.4 239.0 4207.4 1.4% 0.0% 19.8% 20.3% Canada 8.1 490.5 53.5 31.35 2.4% 3.1% 4.4% 0.2% Asia 8.0 3159.8 7.1 34.3 2.4% 19.7% 0.6% 0.2% Singapore 8.0 20.9 7.1 .. 2.4% 0.1% 0.6% 0.2% Turkey .. 3138.9 .. 34.3 Europe 129.1 9797.7 399.7 9986.2 38.9% 61.1% 33.1% 48.2% Bulgaria 37.3 2387.2 48.1 2388.5 11.2% 14.9% 4.0% 11.5% Czechoslovakia 9.5 98.5 52.6 142.7 2.9% 0.6% 4.4% 0.7% Hungary 18.3 450.9 14.4 223.2 5.5% 2.8% 1.2% 1.1% Poland 8.7 754.2 22.8 376.6 2.6% 4.7% 1.9% 1.8% Romania 55.3 6106.8 261.8 6855.2 16.7% 38.1% 21.7% 33.1% Latin America and Caribbean 4.9 0.0 30.9 .. 1.5% 0.0% 2.6% 0.0% Cuba 4.9 0.02 30.9 .. 1.5% 0.0% 2.6% 0.0% Other 1/ 27.5 245.8 225.5 1194.9 8.3% 1.5% 18.7% 5.8% Source: Moldovan authorities. 1/ Includes rest of the world. Table 3.5 - Moldova: Total Trade by cnnodity Groups, 1987-1992 (millions of current rubles) 1987 1988 1989 1990 1991 1992 (1st Half) Export Import Balance Export Import Balance Export lport Balance Export Import Balance Export Import Balance Export import Balance TOTAL TRADE 5386 5674 -288 5058 6080 -1023 5456 6612 -1156 6177 6461 -284 8141 8444 -303 19776 20807 -1031 Foreign 228 1067 -839 257 1094 -837 270 1420 -1150 324 1470 -1146 332 1207 -875 360 458 -98 Interrepubtlic 5159 4607 551 4800 4987 -186 5186 5192 -6 5853 4991 862 7809 7237 572 19416 20349 -933 OIL AND GAS 0 498 -498 0 514 -514 0 520 -520 0 425 -425 0 1218 -1218 0 9584 -9584 Foreign 0 0 0 0 514 -514 0 0 0 0 0 0 0 0 0 0 0 0 Interrepublic 0 498 -498 0 0 0 0 520 -520 0 425 -425 0 1218 -1218 0 9584 -9584 ELECTRIC ENERGY 122 17 105 105 13 92 114 16 98 81 17 64 50 0 50 0 0 0 Foreign 96 0 96 94 0 94 88 0 88 59 0 59 36 0 36 0 0 0 Interrepublic 26 17 9 11 13 -2 26 16 10 22 17 5 14 0 14 0 0 0 COAL 0 128 -128 0 139 -139 0 129 -129 0 120 -120 0 146 -146 0 2614 -2614 Foreign 0 0 0 0 0 0 0 0 0 0 1 -1 0 0 0 0 0 0 Interrepubtic 0 128 -128 0 139 -139 0 129 -129 0 119 -119 0 146 -146 0 2614 -2614 OTHERENERGY (PEAT) 0 0 -0 0 1 -1 0 0 0 0 0 0 0 0 0 0 0 0 Foreign 0 0 -0 0 1 -1 0 0 0 0 0 0 0 0 0 0 0 0 Interrepublic 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 FERROUS METALS 59 301 -242 60 319 -258 63 322 -259 70 308 -238 6 266 -260 0 1203 -1203 Foreign 1 10 -9 9 8 1 7 11 -4 11 22 -11 0 3 -3 0 93 -93 Interrepublic 59 291 -233 51 311 -259 56 311 -255 59 286 -227 6 263 -257 0 1149 -1149 NONFERROUS METALS 0 158 -158 0 180 -180 0 182 -182 1 151 -150 8 265 -257 453 219 234 Foreign 0 31 -31 0 22 -22 0 27 -27 1 1 0 5 1 4 0 1 -1 Interrepubtic 0 128 -128 0 157 -157 0 155 -155 0 150 -150 3 264 -261 453 218 235 CHEMICALS AND PRODUCTS 198 656 -458 191 681 -490 198 711 -513 210 731 -521 188 1161 -973 6 1726 -1720 foreign 0 111 -110 0 99 -98 2 122 -120 4 150 -146 7 92 -85 1 60 -59 Interrepublic 198 545 -348 190 582 -392 196 589 -393 206 581 -375 181 1069 -888 5 1666 -1661 MACHINE BUILDING 972 1566 -594 963 1796 -833 1033 1861 -828 1045 1861 -816 1553 1294 259 3054 1275 1779 Foreign 37 177 -140 39 193 -154 50 251 -201 67 357 -290 21 160 -139 202 41 161 Interrepubtlic 935 1389 -454 924 1604 -679 985 1610 -627 978 1504 -526 1532 1134 398 2B52 1234 1618 WOOD AND PAPER PRODUCTS 103 254 -151 106 262 -156 112 262 -150 84 224 -140 137 375 -238 243 635 -392 Foreign 2 37 -35 1 39 -38 3 38 -35 3 19 -16 2 25 -23 0 8 -8 > Interrepublfc 101 217 -116 105 223 -118 109 224 -115 81 205 -124 135 350 -215 243 627 -384 1 CD CONSTRUCTION MATERIALS 71 116 -44 70 120 -50 60 151 -91 59 144 -85 88 124 -36 68 176 -108 Foreign 2 13 -11 2 15 -13 1 32 -31 1 26 -25 0 8 -8 0 7 -7 Interrepublic 69 103 -34 68 105 -37 59 119 -60 58 117 -59 88 116 -28 68 169 -101 LIGHT INDUSTRY 1075 1169 -95 1088 1147 -59 1183 1274 -91 1207 1307 -100 1757 2197 -440 5125 2093 3032 Foreign 31 431 -400 22 428 -406 34 570 -536 42 538 -496 99 429 -330 77 238 -161 Interrepublic 1044 738 306 1066 719 347 1149 704 445 1165 769 396 1658 1768 -110 5048 1855 3193 'C Table 3.5 - Moldova: Total Trade by Commodity Groups, 1987-1992 (millions of current rubles) 1987 1988 1989 1990 1991 1992 (1st Half) Export Import Balance Export Import Balance Export Import Balance Export Import Balance Export Inport Balance Export Import Balance FOOD INDUSTRY 2228 454 1774 2008 538 1471 2183 604 1579 2733 461 2272 2923 581 2342 9424 236 9188 Foreign 52 154 -102 84 170 -86 81 239 -158 112 204 -92 133 89 44 58 17 41 a Interrepublic 2176 300 1877 1924 367 1557 2102 365 1737 2621 257 2364 2790 492 2298 9366 219 9147 M OTHER INDUSTRFAL BRANCHES 150 135 15 138 136 2 143 145 -2 199 217 -18 583 249 334 14 1128 -1114 Foreign 2 3 -1 2 3 -1 0 3 -3 1 29 -28 10 6 4 0 0 0 Interrepublic 148 132 16 136 133 3 143 142 1 198 188 10 573 243 330 14 1128 -1114 UNPROCESSED AGNB-PRODUCTS 402 199 203 321 216 105 322 217 105 449 271 178 821 555 266 1389 110 1279 Foreign 3 100 -97 3 117 -114 3 126 -123 23 121 -98 16 389 -373 22 10 12 Interrepubtlic 399 99 300 318 99 219 319 90 229 426 150 276 805 166 639 1367 100 1267 OTHER (COMMN., MRANSP. L ETC. 8 23 -15 8 24 -16 45 219 -174 39 224 -185 27 13 14 0 0 0 Foreign 1 0 1 2 0 1 1 1 0 0 1 -1 3 5 -2 0 0 0 Interrepublic 6 22 -16 6 24 -18 44 218 -174 39 223 -184 24 8 16 0 0 0 Statistical Discrepency -192 Source: The State Department of Statistics. Statistical Appendix 91 Table 3.6 - Moldova: Total Trade in 1991, Breakdown by Commodities (million of rubles) Inter-Republic Trade Foreign Trade Total Trade Exports Imports Net Exports Imports Net Exports Imports Net POWER 14.0 0.0 14.0 36.0 0.0 36.0 50.0 0.0 50.0 OIL AND GAS 0.0 1218.0 -1218.0 0.0 0.0 0.0 0.0 1218.0 -1218.0 COAL 0.0 146.0 -146.0 0.0 0.0 0.0 0.0 146.0 -146.0 OTHER FUEL 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 FERROUS METALLURGY 6.0 263.0 -257.0 0.0 3.0 -3.0 6.0 266.0 -260.0 NON-FERROUS METALLURGY 3.0 264.0 -261.0 5.0 1.0 4.0 8.0 265.0 -257.0 CHEMICAL & PETROLEUM 181.0 1069.0 -888.0 7.0 92.0 -85.0 188.0 1161.0 -973.0 MACHINERY AND METAL WORKS 1532.0 1134.0 398.0 21.0 160.0 -139.0 1553.0 1294.0 259.0 SAWMILL & LUMBER INDUSTRY 135.0 350.0 -215.0 2.0 25.0 -23.0 137.0 375.0 -238.0 BUILDING MATERIALS 88.0 116.0 -28.0 0.0 8.0 -8.0 88.0 124.0 -36.0 LIGHT INDUSTRY 1658.0 1768.0 -110.0 99.0 429.0 -330.0 1757.0 2197.0 -440.0 FOOD PRODUCTION 2790.0 492.0 2298.0 133.0 89.0 44.0 2923.0 581.0 2342.0 OTHER INDUSTRIES 573.0 243.0 330.0 10.0 6.0 4.0 583.0 249.0 334.0 AGRICULTURE 805.0 166.0 639.0 15.8 388.8 -373.0 820.8 554.8 266.0 OTHER 24.0 8.0 16.0 3.0 5.0 -2.0 27.0 13.0 14.0 TOTAL 7809.0 7237.0 572.0 331.8 1206.8 -875.0 8140.8 8443.8 -303.0 Source: The State Department of Statistics. 92 Statistical Appendix Table 4.1 - Moldova: General Government Budget, 1985-92 (millions of rubles) 1985 1986 1987 1988 1989 1990 1991 1992 1. TOTAL REVENUES 2/ 2740 2732 3014 3300 3958 4468 6403 43956 1.1. Tax Revenues 2513 2348 2686 3115 3518 2911 5525 39122 Profit taxes 845 876 872 783 757 994 1687 13056 3/ Income tax 160 162 168 183 200 306 501 Turnover taxes and excise duties 1005 790 1124 1563 1703 1239 2832 9953 Sales tax and VAT 238 270 294 320 .360 14278 Other 265 250 228 266 498 372 505 1835 1.2. Nontax Revenues 1134 868 4834 1.3. Transfers from the all- 227 384 328 185 440 423 10 0 Union budget II. TOTAL EXPENDITURES 2655 2680 2903 3137 3702 4105 6401 91894 H.1. Recurrent Expenditures 2134 2638 2835 3005 3554 4084 6177 53214 National economy 945 1373 1450 1510 1895 2180 2445 7833 Social sphere 1090 1172 1300 1421 1568 1702 3261 33103 - Price subsidies 1280 8533 Administration 32 31 31 32 40 64 110 1502 Law enforcement and defense 162 3255 Other 67 62 54 42 51 138 199 7521 11.2. Net lending 38680 11.3. Transfers to the all- Union budget 63 42 68 132 148 21 224 0 II.4. Capital Expenditures 458 III. GENERAL GOVERNMENT BUDGET 85 52 111 163 256 363 2 -47938 Source: Ministry of Finance and IMF staff estimates. 1/ Actual Jan-Sep 1993; excludes Trans-Dniester region. 2/ Includes transfers from all-Union budget. 3/ Includes income taxes. Statistical Appendix 93 Table 4.2 - Moldova: State Budget (millions of rubles) 1990 1991 1992 Total revenues 4463 6403 43956 Total Expenditures 4110 6401 91895 Surplus/Deficit 353 2 -47939 Share of GDP Revenues/GDP 35.2 25.8 19.4 Expenditures/GDP 32.4 25.8 40.5 Surplus/Deficit 2.8 0.0 -21.1 Memorandum Item: GDP 12681 24800 226700 Source: Ministry of Finance, Moldova. 94 Statistical Appendix Table 5.1 - Moldova: Monetary Survey (millions of rubles, end of period) 1990 1991 1992-Q1 1992-Q2 1992-Q3 1992-Q4 1993-Ql Net foreign assets 25 1865 2732 419 115 -9069 -23008 Foreign assets 25 1865 2732 419 115 -9069 -23008 - Convertible -24 14 5 18 278 977 4360 - Nonconvertible 1/ 49 1851 2727 401 -163 -10046 -27368 ClaimnsonSperbankU.S.S.R. 4583 6610 6610 6247 6214 5963 5609 Net Domestic Assets 3716 17741 23709 41186 92538 129266 200453 Domestic credit 3941 17310 31306 45369 114416 142866 235443 - Credit to gerneral government (net -192 756 2120 3285 4389 54785 60265 - Credit to the economy 4133 8400 14797 21277 55375 44851 92975 Other items (net) -225 431 -7597 -4183 -21878 -13600 -34990 Broad Money 7931 17815 18252 26574 43492 81310 90079 Source: Moldovan authorities; IMF staff estimates. 1/ Reflects the impact of the new system of accounts introduced in May 1992. Statistical Appendix 95 Table 5.2 - Moldova: Balance Sheet of National Bank of Moldova (millions of rubles, end-of-period) 1990 1991 1992-Q1 1992-Q2 1992-Q3 Assets 1. Foreign Assets 1 148 -4412 -10374 1.1- Convertible currencies 1 1 1.2- Nonconvertible currencies 1/ 1 146 -4412 -10375 2. Total Credits to: 2.1- Government 2/ -121 477 1394 1343 2949 2.2- Nonfinancial public 1 92 813 1658 7102 2.3- Private sector 0 0 0 0 0 3. Interbank accounts (net) 3/ 123 -525 -2190 2802 4249 4. Total claims on other banks 110 1141 5282 7411 14304 5. Other assets (net) -40 -142 -1201 -954 6. Money 4/ 3 5 22 189 2972 6.1- Coupons 5/ 166 2915 6.2- Deposits 3 5 22 23 57 I/ Reflects the impact of the new system of accounts introduced in May 1992. 2/ Includes republican, pension fund, and local and union government accounts. 3/ Includes local currency holdings, legal reserves, bank loans and other correspondent and settlement accounts. 4/ Includes deposits and coupons only. No estimate for currency in circulation is available. S/ Coupons were introduced on June 10, 1992. 96 Statistical Appendix Table 5.3 - Moldova: Deposit Money Banks Monetary Accounts (millions of rubles, end of period) 1990 1991 1992-Q1 1992-Q2 1992-Q3 Net foreign assets 4608 7014 7163 6578 7256 Foreign assets 4608 7014 7163 6578 7256 - Convertible -24 14 3 17 338 - Nonconvertible 1/ 49 390 550 314 704 of which: Russia 49 390 549 3314 704 Claims on Sperbank U.S.S.R. 4583 6610 6610 6247 6214 Foreign liabilities 0 0 0 0 0 Net Domestic Assets 3320 9337 9036 15307 26916 Domestic credit 4061 8341 14302 21091 43459 - Credit to government 2/ -71 33 318 1472 -619 - Credit to the economy 4132 8308 13984 19619 44078 Nonfinancial public 3863 6789 11397 17172 38845 Private sector 269 1519 2586 2447 5233 Interbank accounts (net) 3/ -516 2004 -3493 -3379 -13443 Other assets (net) -225 -1008 -1773 -2405 -3100 Total deposits 7928 16351 16199 21885 34172 Source: Moldovan authorities; IMF staff estimates. 1/ Reflects the impact of the new system of accounts introduced in May 1992. 2/ Includes republican, pension fund, and local and union government accounts. 3/ Includes local currency holdings, legal reserves, bank loans and other correspondent and settlement accounts. Statistical Appendix 97 Table 6.1 - Moldova: Agricultural Production (in millions of 1983 rubles) 1980 1985 1986 1987 1988 1989 1990 1991 1992 GROSS AGRICULTURAL PRODUCTION 4,174 4,532 4,990 4,776 4,806 5,058 4,409 3,964 3,322 CROP PRODUCTION 2,717 2,742 3,211 2,976 2,887 3,078 2,537 2,386 2,061 Grains 252 206 250 240 370 413 311 384 254 Potatoes 75 100 86 58 57 89 56 56 59 Other fodder/root crops 236 340 183 237 233 243 176 202 Vegetables 412 493 432 386 395 372 367 306 249 Fruits (excluding grapes) 506 524 648 574 495 660 476 401 314 Grapes 461 251 570 485 524 484 438 362 395 Tobacco 517 559 683 615 400 357 348 338 234 Sugarbeets 116 101 124 108 117 186 122 116 101 Sunflowers 63 61 63 52 67 71 63 42 53 Other 79 107 172 221 229 203 180 179 402 LIVESTOCK PRODUCTION 1,457 1,790 1,779 1,800 1,919 1,980 1,872 1,578 1,261 Livestock, of which: 835 1,027 1,012 1,040 1,121 1,167 1,089 885 647 Cattle 322 397 387 389 411 402 363 287 229 Pigs 368 431 420 444 482 520 487 405 294 Sheep and goats 17 23 18 22 21 23 24 16 14 Poultry 121 171 184 184 205 220 213 177 110 Milk 469 554 555 564 592 615 600 513 451 Eggs 84 103 107 107 112 111 108 102 78 Wool 24 25 23 24 26 26 26 25 22 Other 45 81 82 65 68 61 49 53 63 Growth rates in percent: 1/ GROSS AGRICULTURAL PRODUCTION 1.7 10.1 -4.3 0.6 5.2 -12.8 -10.1 -16.2 CROP PRODUCTION 0.2 17.1 -7.3 -3.0 6.6 -17.6 -6.0 -13.6 Grains -4.0 21.4 -4.0 54.2 11.6 -24.7 23.5 -33.9 Potatoes 5.9 -14.0 -32.6 -1.7 56.1 -37.1 0.0 5.4 Other fodder/root crops 7.6 -46.2 29.5 -1.7 4.3 -27.6 14.8 Vegetables 3.7 -12.4 -10.6 2.3 -5.8 -1.3 -16.6 -18.6 Fruits (excluding grapes) 0.7 23.7 -11.4 -13.8 33.3 -27.9 -15.8 -21.7 Grapes -11.4 127.1 -14.9 8.0 -7.6 -9.5 -17.4 9.1 Tobacco 1.6 22.2 -10.0 -35.0 -10.8 -2.5 -2.9 -30.8 Sugarbeets -2.7 22.8 -12.9 8.3 59.0 -34.4 -4.9 -12.9 Sunflowers -0.6 3.3 -17.5 28.8 6.0 -11.3 -33.3 26.2 Other 6.3 60.7 28.5 3.6 -11.4 -11.3 -0.6 124.6 LIVESTOCK PRODUCTION 4.2 -0.6 1.2 6.6 3.2 -5.5 -15.7 -20.1 Livestock, of which: 4.2 -1.5 2.8 7.8 4.1 -6.7 -18.7 -26.9 Cattle 4.3 -2.5 0.5 5.7 -2.2 -9.7 -20.9 -20.2 Pigs 3.2 -2.6 5.7 8.6 7.9 -6.3 -16.8 -27.4 Sheep and goats 6.2 -21.7 22.2 -4.5 9.5 4.3 -33.3 -12.5 Poultry 7.2 7.6 0.0 11.4 7.3 -3.2 -16.9 -37.9 Milk 3.4 0.2 1.6 5.0 3.9 -2.4 -14.5 -12.1 Eggs 4.2 3.9 0.0 4.7 -0.9 -2.7 -5.6 -23.5 Wool 0.8 -8.0 4.3 8.3 0.0 0.0 -3.8 -12.0 Other 12.5 1.2 -20.7 4.6 -10.3 -19.7 8.2 18.9 -- - -------- -- - --- - - - - -- - - Source: The State Department of Statistics. 1/ 1985 figure refers to average growth 1980-85. 98 Statistical Appendix Table 6.2 - Moldova: Total Agricultural Output and Average Yields (thousands of tons) - - - - -- -- - - ---- ------ - - - - - - - - - -- ----- First H-al-f 1985 1986 1987 1988 1989 1990 1991 1992 Total Agricultural Output 1/ Grain - cleanweight 2,317 1,994 1,952 2,970 3,323 2,539 3,106 1,500 Winter Wheat 782 726 712 1,027 1,130 1,129 1,056 905 Rye 1 1 3 7 4 2 2 1 Corn 1,330 908 750 1,338 1,586 885 1,501 275 Barley (winter) 232 223 205 299 327 325 346 232 (spring) 36 48 116 98 118 94 81 86 Oats 5 3 5 7 7 4 4 3 Oilseeds 256 274 246 323 333 276 203 203 Sunflowerseed 244 253 209 269 282 252 169 184 Soybeans 12 20 37 53 51 24 33 15 Cotton Sugarbeets 2,365 2,413 2,155 2,270 3,612 2,374 2,262 1,784 Potatoes 377 449 304 299 464 295 291 259 Pulses 145 73 148 187 147 97 105 71 Vegetables 1,442 1,438 1,282 1,281 1,203 1,177 989 824 Fruit 1,653 2,424 2,114 1,987 2,213 1,841 1,471 400 Grapes 654 1,222 1,040 1,122 1,037 940 774 921 Other 999 1,202 1,074 865 1,176 901 697 602 Tobacco 133 119 78 67 66 63 Source: The State Department of Statistics. 1/ These data refer to clean-weight and may differ from gross weight. Statistical Appendix 99 Table 6.3 - Moldova: Net Material Product of Agriculture 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 At current prices, millions of rubles Total 1,771 1,757 2,309 2,699 2,705 2,154 2,700 2,629 2,730 3,311 3,907 State Farms 508 557 762 842 863 625 834 797 841 901 925 Cooperative Farms 941 878 1,157 1,401 1,401 1,157 1,428 1,401 1,406 1,798 2,266 Private Farms 322 322 390 456 441 372 438 431 483 612 716 Other . . . . . . . .. .- Percentage of total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 State Farms 28.7 31.7 33.0 31.2 31.9 29.0 30.9 30.3 30.8 27.2 23.7 Cooperative Farms 53.1 50.0 50.1 51.9 51.8 53.7 52.9 53.3 51.5 54.3 58.0 Private Farms 18.2 18.3 16.9 16.9 16.3 17.3 16.2 16.4 17.7 18.5 18.3 Other . . . . . . . .. -- At constant prices, millions of 1983 rubles Total 2,688 2,364 3,119 3,057 3,168 2,479 3,076 2,972 2,988 3,206 2,570 State Farms 772 749 1,029 953 1,011 719 951 901 920 872 622 Cooperative Farms 1,427 1,182 1,563 1,587 1,641 1,331 1,627 1,584 1,539 1,741 1,480 Private Farms 489 433 527 517 516 429 498 487 529 593 468 Other . . . . . . . .. Annual change at 1983 prices, in percent Total -12.1 31.9 -2.0 3.6 -21.7 24.1 -3.4 0.5 7.3 -19.8 State Farms -3.0 37.4 -7.4 6.1 -28.9 32.3 -5.3 2.1 -5.2 -28.7 Cooperative Farms -17.2 32.2 1.5 3.4 -18.9 22.2 -2.6 -2.8 13.1 -15.0 Private Farms -11.5 21.7 -1.9 -0.2 -16.9 16.1 -2.2 8.6 12.1 -21.1 OtherC.: h. ..t.Dep.tm.t.f -ttisics SOURCE: The State Department of Statistics. 100 Statistical Appendix Table 6.4 - Moldova: Animal Husbandry 1980 1985 1986 1987 1988 1989 1990 1991 1992 Livestock Inventory (thousands) Cattle 1,176 1,259 1,214 1,162 1,131 1,112 1,061 1,001 970 Of which cows 435 446 431 415 412 402 395 397 403 Pigs 1,971 1,962 1,892 1,703 1,871 2,045 1,860 1,753 1,487 Sheep 1,163 1,232 1,230 1,233 1,272 1,306 1,245 1,239 1,294 Goats 17 21 23 25 31 32 37 50 63 Horses 57 49 49 47 46 46 47 49 51 Poultry .. .. 21,779 21,206 22,157 23,916 24,814 23,614 17,128 Production (thousands of tons) Meat 1/ 275 303 328 331 339 356 366 304 234 Beef 86 93 103 103 106 109 114 97 75 Pork 139 146 156 160 162 172 177 145 114 Lamb 4 5 5 5 5 5 7 5 4 Poultry 44 55 60 58 63 66 66 56 39 Other 2 4 4 5 3 4 2 1 2 Milk 1,194 1,402 1,398 1,421 1,490 1,548 1,511 1,292 1,135 Eggs (millions) 874 1,075 1,119 1,116 1,169 1,155 1,129 1,061 813 Wool (tons) 2,762 2,757 3,007 3,078 3,043 2,869 2,616 Productivity measures 2/ Eggs per laying hen 209 217 220 210 207 194 Milk per cow 3/ 3,424 3,510 3,582 3,861 4,022 3,972 Source: The State Department of Statistics. 1/ Slaughter weight. 2/ Productivity measures exclude private subsidiary agriculture. 3/ At beginning of the year, kilograms per cow. Statistical Appendix 101 Table 6.5 - Moldova: Changing Structure of Agriculture in 1980 Collective State Other Private Total Farms Farms (state, Plots (kolhozes) (sovhozes) coop.) Number of farms 978 588 390 Gross Output in 1983 prices 4,174 2,217 1,159 36 762 (in million 1983 rubles) Fixed capital 6,025 3,314 2,405 306 (in million 1983 rubles) Profits 223 155 68 (in million 1983 rubles) Number of loss-making far 247 203 44 As % of All Farms 25.3 34.5 11.3 Production Grain (thousand tons) 2,815 1,892 629 14 280 Sugar beets (thousand tons) 2,726 2,689 37 Sunflowers (thousand tons) 250 184 63 1 2 Potatoes (thousand tons) 308 13 13 .. 282 Vegetables 1,221 649 447 3 122 Meat 245 126 58 1 60 Milk 1,194 686 289 2 217 Eggs (millions) 874 51 544 6 273 Cattle (thousands) 1,176 677 249 38 212 of which: Cows 335 134 95 2 104 Pigs 1,971 1,215 349 227 180 Sheep, goats 1,180 362 155 2 661 Poultry 17,851 1,314 7,906 527 8,104 Percent of total Number of farms 100.0 60.1 39.9 0.0 0.0 Gross Output in 1983 prices 100.0 53.1 27.8 0.9 18.3 Fixed capital 100.0 55.0 39.9 5.1 0.0 Profits 100.0 69.5 30.5 0.0 0.0 Number of loss-making far .. .. Production Grain (thousand tons) 100.0 67.2 22.3 0.5 9.9 Sugar beets (thousand tons) 100.0 98.6 1.4 0.0 0.0 Sunflowers (thousand tons) 100.0 73.6 25.2 0.4 0.8 Flax (thousand tons) .. .. Potatoes (thousand tons) 100.0 4.2 4.2 0.0 91.6 Vegetables 100.0 53.2 36.6 0.2 10.0 Meat 100.0 51.4 23.7 0.4 24.5 Milk 100.0 57.5 24.2 0.2 18.2 Eggs (millions) 100.0 5.8 62.2 0.7 31.2 Cattle (thousands) 100.0 57.6 21.2 3.2 18.0 of which: Cows 100.0 40.0 28.4 0.6 31.0 Pigs 100.0 61.6 17.7 11.5 9.1 Sheep, goats 100.0 30.7 13.1 0.2 56.0 Poultry 100.0 7.4 44.3 3.0 45.4 Source: The State Department of Statistics. 102 Statistic p dengix Table 6.6 - Moldova: g tructure of Agriculture in 1991 Collective State Other Private Total Farms Farms (state, Plots (kolhozes) (sovhozes) coop.) Number of farms 1,261 696 389 176 Area (thousands of hectares) 2718 1673 601 7 437 Gross Output in 1983 prices 3,964 2,222 853 29 860 (in million 1983 rubles) Fixed capital 10,353 6,342 3,009 1,002 (in million 1983 rubles) Profits 3,056 2,081 975 (in million 1983 rubles) Number of loss-making far 9 1 8 As % of All Farms 0.7 0.1 2.1 Production Grain (thousand tons) 3,203 2,133 615 17 438 Sugar beets (thousand tons) 2,262 2,237 20 5 Sunflowers (thousand tons) 170 129 37 2 2 Potatoes (thousand tons) 291 25 9 2 255 Vegetables 989 623 156 3 207 Meat 304 155 62 2 85 Milk 1,292 778 228 1 285 Eggs (millions) 1,061 16 723 7 315 Wool (tons) 2869 730 252 4 1883 Cattle (thousands) 1,001 619 150 3 229 of which: Cows 297 211 64 1 121 Pigs 1,753 1,195 211 22 325 Sheep, goats 1,289 299 103 2 885 Poultry 23,716 619 11,511 177 11,409 Percent of total Number of farms 100.0 55.2 30.8 14.0 0.0 Gross Output in 1983 prices 100.0 56.1 21.5 0.7 21.7 Fixed capital 100.0 61.3 29.1 9.7 0.0 Profits 100.0 68.1 31.9 0.0 0.0 Number of loss-making far .. .. Production Grain (thousand tons) 100.0 66.6 19.2 0.5 13.7 Sugar beets (thousand tons) 100.0 98.9 0.9 0.2 0.0 Sunflowers (thousand tons) 100.0 75.9 21.8 1.2 1.2 Flax (thousand tons) .. .. Potatoes (thousand tons) 100.0 8.6 3.1 0.7 87.6 Vegetables 100.0 63.0 15.8 0.3 20.9 Meat 100.0 51.0 20.4 0.7 28.0 Milk 100.0 60.2 17.6 0.1 22.1 Eggs (millions) 100.0 1.5 68.1 0.7 29.7 Cattle (thousands) 100.0 61.8 15.0 0.3 22.9 of which: Cows 100.0 71.0 21.5 0.3 40.7 Pigs 100.0 68.2 12.0 1.3 18.5 Sheep, goats 100.0 23.2 8.0 0.2 68.7 Poultry 100.0 2.6 48.5 0.7 48.1 Source: The State Department of Statistics. Statistical Appendix 103 Table 7.1 - Moldova: Monthly Variations in the CPI, WPI and Retail Price Indices (In percent) WPI 1/ CPI Retail 1991 Jan 50.9 18.2 19.5 Feb 7.7 12.7 12.5 Mar 6.0 2.3 2.1 Apr 38.2 44.6 46.9 May 2.6 3.7 3.3 Jun 1.8 0.7 0.7 Jul 3.0 -0.7 -1.0 Aug 0.3 -1.8 -2.2 Sep 10.4 0.9 0.6 Oct 8.9 4.3 9.1 Nov 6.2 6.2 5.5 Dec 8.4 12.1 11.3 1992 Jan 508.8 240.1 196.3 Feb 49.0 59.5 33.5 Mar 8.5 14.2 9.3 Apr 19.3 21.8 15.7 May 32.5 8.9 9.2 Jun 6.0 5.9 6.5 Jul 2.8 4.5 6.6 Aug 10.5 6.7 5.7 Sep 12.9 11.8 11.2 Oct 22.5 19.7 18.6 Nov 37.2 40.7 33.6 Dec 24.6 25.8 23.0 1993 Jan 53.9 37.1 Feb 33.4 28.0 Mar 20.9 25.0 Apr 19.9 May 17.7 Jun 19.2 Source: The State Department of Statistics. 1/ For industrial products. 104 Statistical Appendix Table 7.2 - Moldova: Monthly Wage Indices, 1991-92 Nominal Avg. Nominal Min. Retail Price Real Avg. Real Min. Wage Index Wage Index Index Wage Index Wage Index (Dec. 1990 = 100) 1990 Dec 100.0 100.0 100.0 100.0 100.0 1991 Jan 100.0 119.5 83.7 Feb 100.0 134.4 74.4 Mar 109.0 100.0 137.3 79.4 72.9 Apr 165.0 201.6 81.8 May 165.0 208.3 79.2 Jun 127.0 165.0 209.7 60.5 78.7 Jul 165.0 207.7 79.5 Aug 165.0 203.1 81.2 Sep 138.0 165.0 204.3 67.5 80.8 Oct 165.0 222.9 74.0 Nov 165.0 235.2 70.2 Dec 176.0 165.0 261.7 67.2 63.0 1992 Jan 417.0 400.0 775.5 53.8 51.6 Feb 558.0 400.0 1035.3 53.9 38.6 Mar 669.0 400.0 1131.6 59.1 35.3 Apr 716.0 850.0 1309.2 54.7 64.9 May 997.0 850.0 1429.7 69.7 59.5 Jun 1114.0 850.0 1522.6 73.2 55.8 Jul 1146.0 850.0 1623.1 70.6 52.4 Aug 1134.0 850.0 1715.6 66.1 49.5 Sep 1378.0 850.0 1907.7 72.2 44.6 Oct 1632.0 850.0 2262.6 72.1 37.6 Nov 2396.0 1700.0 3022.8 79.3 56.2 Dec 4375.0 1700.0 3718.0 117.7 45.7 1993 Jan 2790 1700.0 .. Feb 3070 1700.0 .. March 4159 3000.0 .. Source: Moldovan authorities. 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Moldova - Moving to a market economy
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Informations clés
Organisation
Groupe de la Banque mondiale
Type de document
Publication
Pays
Moldavie
Source
Banque mondiale