Moldova - Rehabilitation Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 15311 IMPLEMENTATION COMPLETION REPORT MOLDOVA REHABILITATION LOAN 3653-MD DECEMBER 28, 1995 Country Operations Division II Country Department IV Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EOUIVALENTS (November 1995) US$ 1.00 = Lei 4.53 FISCAL YEAR January I - December 31 METRIC EOUIVALENTS 1 meter (m) = 3.28 feet I square meter (sq.m) = 10.76 square feet 1 kilometer (km) = 0.62 miles I square kilometer (sq.km) = 0.386 square miles ABBREVIATIONS AND ACRONYMS CCFF Contingency and Compensatory Financing Facility CIFCE Chisinau Interbank Foreign Currency Exchange CIS Commonwealth of Independent State CPAR Country Procurement Assessment Review FSU Former Soviet Union EU European Union GDP Gross Domestic Product ICB International Competitive Bidding MERP Memorandum of Economic Reform Policies MFN Most Favored Nation NBM National Bank of Moldova NMP Net Material Product PSD Private Sector Development SAL Structural Adjustment Loan SBA Standby Arrangement STF Systemic Transformation Facility USAID United States Agency for International Development  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Preface ....................................i Evaluation Summary ......................................ii Part I - Project Implementation Assessment ............................I A. Project Origin and Objectives . ............................ B. Achievemnent of Project Objectives ......... ................. 3 C. Implementation Record and Major Factors Affecting the Project. 4 D. Project Sustainability. 8 E. Bank Perfonnance . .................................. 8 F. Borrower Performance. 9 G. Assessment of Performance anid Outcome .10 H. Future Operations .10 I. Key Lessons Learned .... ............................ 10 Appendices A. Borrower's Contribution to the ICR .12 B. Tables 1. Summary of Assessments 2. IBRD Loans/Credits 3. Project Timetable 4. Loan Disbursements: Cumulative Estimated and Actual 5. Key Indicators for Project Operation 6. Key Indicators for Project Operation 7. Studies Included in the Project 8A. Project Costs 8B. Project Financing 9. Economic Costs and Benefits 10. Status of Legal Covenants 11. Compliance with Operational Manual Statements 12. Bank Resources: Staff Inputs 13. Bank Resources: Missions This document has a restricted distribution and may be used by recipients only in the performance of their official dutics. Its contents may not otherwise be disclosed wiLhout World Bank authorization.  Implementation Completion Report Moldova Rehabilitation Loan 3653-MD Preface This is the Implementation Completion Report (ICR) for the Rehabilitation Loan in Moldova, for which a loan 3653-MD in the amount of US$60 million equivalent was approved on October 21, 1993 and made effective on November 3, 1993. The loan was closed on March 31, 1995, the original closing date. The loan was fully disbursed by May 25, 1995. Cofinancing for the project was provided by the Export Import Bank of Japan and the Government of the Netherlands. The Task Manager for the Loan was Jonathan Walters, Country Economist, EC4C2. The ICR was prepared by Chandrashekar Pant, Consultant, for the Country Operations Division II of the Europe and Central Asia Region, and reviewed by Wafik Grais, Division Chief, EC4C2, and Ms. Judy O'Connor, Principal Operations Officer, EC4DR. The borrower provided comments that are included as an appendix to the ICR. Preparation of this ICR was done as a desk task in the second half of 1995. It is based on material in the project file. The borrower contributed to preparation of the ICR by preparing its own evaluation of the project's execution and initial preparation.  Evaluation Summary Rehabilitation Loan 3653-MD Moldova Introduction The Bank had approved four lending operations for Moldova at the time of this Implementation Completion Report (ICR). The first operation was the Emergency Drought Recovery Loan in March of 1993, which closed March 31, 1994, and for which an ICR dated July 21, 1995 has been prepared. The second operation was the Rehabilitation Loan, approved and effective in October 1993, the subject of the present ICR. The third is the Moldova Structural Adjustment Loan (SAL), approved and effective in December 1994. The fourth is the Moldova Pre-Export Guarantee Facility, approved in March 1995, effective October 30, 1995. In addition there have been Sector Reviews in Agriculture, Transport, and a Country Financial Accountability Assessment, a Country Economic Memorandum and economic updates for the participants to two meetings of the Consultative Group for Moldova. Project Objectives The main objectives of the Loan were to (i) support the Government's economic reform program, which was outlined in its Memorandum of Economic Reform Policies (MERP); (ii) finance imports of essential production inputs and health care supplies; and (iii) catalyze the provision of technical assistance (TA) and balance of payment support from other donors to facilitate Moldova's economic transition. Implementation Experience and Results Despite some setbacks and slippage, the thrust of the economic reforms supported by the Rehabilitation Loan has been maintained into late 1995. In some policy areas, significant progress has been achieved. The continuing tight fiscal and monetary policies have succeeded in dampening the rate of inflation since mid-1994, and allowed for the smooth introduction of a national currency, the Leu. Progress has also been good in enlarging the role of markets and reducing state interference in resource allocation. The foreign trade and exchange regime has been liberalized, and prices are largely free from administrative intervention. While progress has been slow in enterprise and agriculture restructuring (including privatization, demonopolization, enterprise closures and land reforms), the broad direction of reform has been unambiguous. However, the program risks being derailed unless critical reforms are implemented consistently and quickly in the following areas. Real economic restructuring in enterprises and farms is yet to occur on a serious scale, as attested by the low rate of unemployment, the build- up of inventories, and the growth of inter-enterprise and other payment arrears. Unless this  iv situation is addressed and firms are forced to adjust to market discipline, prospects for sustainable economic growth will remain dim. Part of the delay in reform can be explained by the fact that the implementation and impact of the policy reforms was adversely affected by factors that were beyond the Government's control. First, there was the severe drought and subsequent floods in 1994 which delayed economic recovery and diverted scarce resources (people and money) towards disaster relief. Second, disbursements from external donors (other than the Bank and the IMF) to bridge the financing gap were less than anticipated. Third, important components of the reformn program, like privatization, were delayed by the preoccupation with electioneering in early 1994. The limited technical and institutional capacity to manage a wide ranging reform program was also a constraint to timely implementation of the reforms. Notwithstanding these constraints, disbursements to fund the imports financed by the Loan was swift, mainly due to effective technical assistance. Thus, the objective of providing timely financing for critical imports was achieved, although somewhat at the expense of longer- term institution building efforts. Disbursements were rapid, and the loan proved to be designed flexibly enough to allow for re-allocation between categories, based upon implementation experience. While the Government succeeded in obtaining grant financing for the technical assistance package identified as part of the program supported by the Rehabilitation Loan, the implementation of this technical assistance led to mixed results. In most cases, the technical assistance did achieve its stated objectives, but the exclusive reliance on donor-implemented technical assistance has led to very weak results in terms of building implementation capacity in the Government. As the programs were donor-implemented, there was no immediate need to build implementation capacity in the Government, which puts Moldova at a disadvantage compared to countries that implemented a country-executed technical assistance program. Summary of Findings, Future Operations, and Key Lessons Learned. Since the Rehabilitation Loan was approved, the Bank has also approved a SAL, November, 1994, and a Pre Export Guarantee Facility in March, 1995 to cover policy risks for exporters. Planned future operations include a mix of adjustment and investment operations designed to promote the private sector and deepen reforms in agriculture and energy sectors. The Rehabilitation loans were meant to ease in reforms at a time when the precise conditionality and tranching associated with SALs and SECALs would be impractical. The lessons from the Moldova experience may have relevance for other countries where similar loans are being considered. More general lessons for Bank support for structural reforms may also be drawn from this experience. The main lessons are as follows:  v (i) importance of timeliness. The Bank's prompt response to the economic crisis was important to the initiation of the reforms in Moldova. The noticeable link between reforms and Bank funding, which partly went to alleviate energy shortages in the winter months, strengthened the hands of reformers in the government. The responsiveness of the Bank bought it credibility with respect to the government and helped subsequent policy discussions. (ii) importance of the big picture. The economies of eastern Europe and the FSU are attempting a historic systemic transformation under very adverse external conditions. Theirs is not a marginal change. In these circumstances, it is important to keep the larger objectives of the reforms in focus and to recognize that there will be ups and downs in the reform process. Even if the reforms are generally on track, the government may be forced to retreat temporarily on some issues. The Bank should be prepared to continue providing its support over the longer term, shaping its size and composition to support the most critical policies and to remove the most important bottlenecks. (iii) the need for flexibility. It was recognized that there was insufficient track record in the country both with regard to the implementation capacity as well as the response of the economy to the reforms. The external environment was also uncertain. In these circumstances, and in view of the deepening economic crisis, flexibility was favored over strict conditionality which could have held up disbursements. However, it may also be argued that the absence of leverage until the approval of the SAL slowed down the reform process. Tranching that allows for more flexibility than typically allowed in a SAL may be a good solution. The approach adopted in the Ukraine Rehabilitation loan that combines specific conditionality and phased disbursement (as in a SAL) with greater flexibility in interpreting progress in implementation is one possibility. (iv) the necessity of intensive supervision. In the early stages, a lot of Bank effort will be required during implementation of the loan. This will be needed not only in re- designing components of the loan in the face of emerging realities, but also in assisting the government in specific implementation issues (eg., in privatization, pension reform, procurement, etc). The delay in setting up the Resident Mission was unfortunate in this respect. (v) the importance of capacity building. The Rehabilitation Loan would have been more successful if it were accompanied (or preceded) by effective, country executed, technical assistance in implementing key elements of the reform program. More up-front efforts in this direction may have a high pay-off though it should be recognized that the effort will be intensive in staff resources. Similarly, the strong focus on implementation over capacity building, while understandable given the urgent need for balance of payments support, have resulted in a weak implementation capacity in Moldova as compared to other countries in transition.  vi (vi) reform priorities. By far the most important and most difficult refonns are those that enforce financial discipline in enterprises, farms and banks. Apart from privatization and land reform in agriculture (which give an unambiguous signal of an irreversible change in regime, and forces accountability on the new private owners), other measures to instil financial discipline include the phasing out of subsidies from the government, collecting taxes, strengthening the commercial banking system, improving the payment discipline in the energy sector, and facilitating new entry. Obstacles that prevent the initiation of bankruptcy and/or liquidation by creditors and owners need to be removed and labor mobility enhanced.  IMPLEMENTATION COMPLETION REPORT MOLDOVA REHABILITATION LOAN (Ln. 3653 -MD) PROJECT IMPLEMENTATION ASSESSMENT A. Project Origin and Objectives 1. Moldova became independent on August 27, 1991 in the wake of the collapse of the Former Soviet Union (FSU). From its independence, the country has been in the grip of a severe economic crisis resulting from the break-up of trade and payments arrangements in the FSU, the recession in neighboring economies, a sharp deterioration in its terms of trade, a very severe drought in 1992 and again in 1994, and disruption in economic activity due to civil strife in Transnistria. Overall, output is estimated to have declined by a cumulative 35 percent between 1990 and 1993 when the Rehabilitation Loan was approved. The collapse of output was accompanied by sharply rising prices and erosion of living standards. By the first half of 1993, monthly inflation was about 25 percent and real wages in the first quarter of 1993 were only 39 percent of their level in 1990. This rise in prices was due to a number of factors including factors that were beyond Moldova's control (such as the drought, the large increase in imported energy prices) and inappropriate government policies that resulted in a widening budget deficit and its monetary financing.' This deterioration in the internal balances mirrored a growing deficit in the external sector. As relative prices of imported energy rose to world market levels, Moldova's current account balance moved from a surplus in 1990 to a deficit of close to 11 percent of GDP by 1993. 2. It was in this environment that in March 1993 the Parliament adopted the Government's Program for stabilization and economic recovery. A first drawing of the Systemic Transformation Facility (STF) in support of the Government's stabilization program was approved by the IMF's Board on September 16, 1993. The Rehabilitation Loan, for $60 million, approved on October 21, 1993, signalled the Bank's support for the structural reform policies of the Government. The Rehabilitation Loan also served to mobilize other external donor support for Moldova at the first meeting of the Consultative Group for Moldova. 3. The main objectives of the Loan were to (i) support the Government's reform program, which was outlined in its Memorandum of Economic Reform Policies (MERP); (ii) finance imports of essential production inputs and health care supplies; and (iii) catalyze the provision of technical assistance (TA) and balance of payment support from other donors to facilitate Moldova's economic transition. To achieve these objectives, the proceeds of the Loan were to be used for (a) financing the foreign exchange costs of importing specified health care supplies and production inputs (mainly energy, agriculture, and industrial) up to $53 million; (b) $5 million for sale in the foreign exchange market for use by public and 1/A balanced budget in 1991 had turned into a cash deficit of 21 percent of GDP by 1992, due largely to massive net lending to public enterprises. The deficit in 1993 was about 12.5 percent of GDP.  private sector enterprises for eligible imports; and (c) $2 million for financing TA necessary for implementing the reform program, insofar as this could not be financed from concessional sources. As in other Rehabilitation Loans at the time, the full amount of this loan was made available at effectiveness based on agreement on the MERP and a certain number of prior actions.2 This loan did not contain specific policy conditionality to govern the release of the funds, i.e., no tranches. There was however a general commitment by the Government to implement the policy measures included in the MERP. The loan design was sufficiently flexible to adjust to emerging conditions and both the policy commitments and the pattern of utilization of the loan proceeds were adjusted in the course of loan implementation (see below). 4. The objectives of the Loan were ambitious given: (i) the extremely unfavorable starting position, with high inflation, sharply deteriorating terms of trade3 and a shrinking economy; (ii) the continuing ideological opposition of many holdovers of the previous regime inside and outside government to the idea of market oriented reforms; (iii) the limited understanding of the reform policies both within the Government and outside; (iv) the limited implementation capacity to deliver such a wide-ranging program of actions over a 12-18 month period; (v) the rudimentary level of institutions and policy instruments available to implement the transition to a market-based economy; (vi) Moldova's extreme isolation from the rest of the world while a part of the USSR contributed to the very limited knowledge and interest among the international community about Moldova and its reform efforts; and (vii) the continuing uncertainty regarding Transnistria and Moldova's relationship with Russia. This not only created uncertainties among potential investors in Moldova, but also made the government cautious in implementing radical measures (such as the introduction of the new currency, privatization) that could jeopardize the relations with Transnistria. These risks were acknowledged at the time of loan preparation but it was believed that the government should be encouraged to adopt an ambitious program, which could subsequently be adjusted as constraints 2/ (i) the exchange rate regime was changed to reflect market factors more fully (this involved an initial devaluation of 30 percent); (ii) a range of export restrictions was removed; (iii) the first refinancing auction was held by the National Bank; (iv) a new import tariff regime (with most rates in the 15-20 percent range) was introduced; (v) VAT was imposed on non-FSU imports; (vi) a revised budget for 1993 reflecting a deficit target of 6 percent of GDP was passed; (vii) prices of bread and dairy products were increased such that the average level of subsidy fell from 80 percent of cost to 40 percent; (viii) the first privatization auction for cash took place; (ix) a law on collateral was submitted to Parliament; (x) a regulation restricting credit to any single borrower to 30 percent of the lending bank's capital was adopted; (xi) all prohibitions on the sale of goods by state enterprises to private enterprises were removed; (xii) the Decision on Social Jobs was amended to allow unemployed people whose benefit has expired to be offered social jobs; and (xiii) legislation reducing the period for which the Government and unions can delay mass dismissals was submitted to Parliament. 3/ Taking the increase in energy prices alone, it has been estimated that Moldova suffered a terms of trade loss equivalent to 20 percent of GDP over 1991 and 1992.  - 3 - became more evident. In the event, several commitments could not be met in the original time frame but are being implemented in the context of follow-up operations (see below). B. Achievement of Project Objectives 5. Despite some setbacks and slippage, the thrust of the economic reforms initiated by the Rehabilitation Loan has been maintained. In some policy areas, significant progress has been achieved. The continuing tight fiscal and monetary policies have succeeded in dampening the rate of inflation since mid-1994, to a yearly rate of around 25% for 1995, and allowed for the smooth introduction of a national currency, the Leu. The Leu was introduced in November 1993 at a rate of 3.85 to the US dollar. After a gradual drop to around 4.5 to the dollar in its first year, it has been stable since. Progress has also been good in enlarging the role of markets and reducing state interference in resource allocation. The foreign trade and exchange regime has been liberalized, and prices are largely free from administrative intervention. While progress has been slow in the areas of ownership reform and enterprise and agriculture restructuring (including privatization, demonopolization, enterprise closures and land reforms), the broad direction of reform has been unambiguous. The status of compliance with specific commitments outlined in the MERP is described in Annex 1. 6. The proceeds of the loan were largely used for purchase of fuel, agricultural and industrial inputs, raw materials and spare parts. While the timely availability of fuel for heating and medical supplies obviously benefitted the population at a critical time, the impact of the increased imports of raw materials for production is hard to assess. Agricultural production and infrastructure was badly affected by the severe drought and the floods that occurred in Moldova in 1994, which dominated any positive impact the loan may have had in terms of output. Not surprisingly, there is not much evidence to suggest that the reforms generated a large supply response to prevent continuing decline in economic activity. Overall GDP shrank by 20 percent in 1994. 7. The Rehabilitation Loan was also to serve as a catalyst for stimulating financial assistance to Moldova from other international donors. A first Consultative Group meeting was held in Paris in October 1993, followed by a pledging session in Washington in December. Counting assistance from all sources, including the Bank and the Fund, a financing package of approximately $300 million was put together in balance of payment support for 1994. However, other than assistance from the Bank and IMF, disbursements from other donors were very slow, essentially due to the bureaucratic procedures in donor countries. This delay severely complicated economic management in 1994, aggravated the social cost of adjustment, and undermined the confidence of the government in the external support Moldova could receive for its efforts. 8. While the Government succeeded in obtaining grant financing for the technical assistance package identified as part of the program supported by the Rehabilitation Loan, the implementation of this technical assistance led to mixed results. In most cases, the technical assistance did achieve its stated objectives, but the exclusive reliance on donor-implemented technical assistance has led to very weak results in terms of building implementation capacity in the Government. In addition, it proved to be impossible for the Government to implement urgent, smaller technical assistance activities in a timely manner. Donor procedures do not allow for such flexibility.  - 4 - C. Implementation Record and Major Factors Affecting the Project (i) Implementation of the Economic Reform Program 9. The Rehabilitation Loan supported a wide range of policy reforms aimed at stabilizing the economy and increasing the role of competitive markets in resource allocation. The stabilization package that was supported by the IMF's STF comprised measures to restrict the budget deficit through cuts in expenditures and rationalization of taxes, strict control of money and credit, and restraint on wages. The structural reforms included the liberalization of prices and domestic trade, the liberalization of the foreign exchange and trade regime, privatization and improved corporate governance of state enterprises, liberalization and improved regulation of the financial system, agricultural policy reform including land reform, and measures to protect the most vulnerable sections of the population. Specific measures in each of these areas were to be implemented over an 18 month period ending in December 1994. 10. There is no doubt that the Government has implemented major policy reforms over the period of the loan. A centralized command economy largely run from Moscow until recently has been transformed into one where, formally at least, the state's role is considerably diminished. Markets and private owners play an increasing role in the allocation of resources. Command economy institutions are being dismantled and new institutions and mechanisms consistent with a market economy have been established or are in the process of being set up. Policy-makers are more familiar with the ways of a market economy which can make further progress more rapid. However, the pace of reform has been uneven, and in some areas progress has been much slower than warranted. Unless this is corrected, the gains from reform may fail to materialize. 11. Stabilization Program. The sharp drop in the monthly rate of inflation, and the stability of the newly introduced national currency (see para 5), are evidence of the satisfactory implementation of tight fiscal and financial policies that constituted the stabilization program supported by the IMF's STF and the Rehabilitation Loan. The monthly inflation rate dropped from an average of 20 percent in the fourth quarter of 1993 to 3 percent during the fourth quarter of 1994. The rate has remained low since. This goal was achieved by tightening credit and by the positive real interest rates resulting from the credit auctions organized by the NBM, thus strengthening the confidence of the population in the leu and reversing currency substitution. Less success was achieved in reducing the government's budget deficit, primarily due to the failure to contain expenditures. Overall, government expenditures exceeded the programmed level by about 5 percent of GDP, largely attributable to higher spending in the social areas (higher wage costs and disaster-related payments), and net lending to enterprises. The slower than anticipated disbursements of external financing necessitated more than anticipated reliance on domestic borrowing to finance the deficit. 12. While the primary objective of the stabilization program was achieved, the experience indicates the need for deeper structural reforms (and more, and timely external financial support) if the stabilization is to be sustained at a reasonable cost. As mentioned, the period was marked by a continuous and significant decline in economic activity. Real GDP fell 20 percent in 1994 compared to the decline of 3 percent foreseen for the year at the time the program was prepared. While agricultural output fell more sharply due to the severe drought (and subsequent flooding) in the third quarter of 1994, this factor alone does not explain the continuing drop in industrial production, which fell by more than 30 percent in the first three quarters of 1994. 13. To promote efficient and sustainable economic activity, structural reforms that will promote a  positive supply response from the real economy are necessary. Without this, merely tightening financial policies will not necessarily result in real changes at the enterprise level. Thus, enterprises avoided restructuring by accumulating payment arrears to other enterprises (estimated at Mdl I billion by end June 1994), and not paying wages to workers (wage arrears amounted to Mdl 100 million as of end August 1994) and taxes to the government (total tax arrears reached Mdl 276 million as of end September 1994). With inadequate mechanisms and institutions to enforce payment discipline, enterprises resisted fundamental changes by maintaining their work force (despite the continuing collapse in output, registered unemployment is estimated at only I percent of the labor force) and building up stocks, especially in the agro-processing sector. 14. At the same time, the Moldovan experience confirms what has also been observed in other countries: there is a tendency to make optimistic projections about the supply responsiveness of the economy to reforms and concomitantly, requirements for external financing are underestimated. The situation was worse because the actual disbursements tended to lag far behind commitments. Insufficient foreign capital inflows in Moldova not only complicated the stabilization efforts, but it also undermined the liberalization of the import regime. The shortfall in foreign capital inflow made it difficult for the Government to resist protectionist pressures, resulting in the temporary imposition in early 1994 of extremely high import tariffs on a number of "strategic" goods, mainly wine and other processed goods produced in Moldova. Thus, the credibility of the external financial institutions supporting the reforms was undermined at a critical juncture, soon after the election of a new government. A realistic assessment of the economy's supply responsiveness and the external financing needs and prospects must be made to ensure adequate and timely financial inflows. 15. Structural Reforms. Fundamental changes have been introduced in the Moldovan economy since it became independent in 1991. Economic activity is increasingly directed by markets and less and less by government fiat. However, accompanying structural reforms to impose market discipline on enterprises and banks have not kept pace with these changes, as new loopholes to avoid a hard budget constraint on enterprises kept popping up. Most notable in this context was the lax payment discipline in the energy sector. This has prevented real economic restructuring and could jeopardize the transition. The most important of these reforms are privatization (small and large enterprises) and land reform, improvement in corporate governance, and other measures to enforce financial discipline and accountability in state enterprises. 16. A complete inventory of the status of implementation of all the policy reforms undertaken by the government in the context of the Rehabilitation Loan is provided in Annex 1. Broadly, considerable progress was made in increasing the role of markets and reducing state intervention in resource allocation. Most prices were freed from direct government control; quotas on most export goods (with the exception of grain, grain products, and energy) were removed and export taxes eliminated; import licensing was restricted to those products where licensing is necessary for security, health or cultural reasons; a new import tariff was introduced, with most rates in the 15-20 percent range, and a schedule for gradual reduction of the small number of very high rates; and a unified foreign exchange market was established. The role of state orders was reduced and state procurement conducted increasingly on competitive lines. In the financial system, directed and preferential credits were largely eliminated, and interest rates are market determined. All these changes represent a major achievement towards establishing a market based economy. However, while markets were created, effective market competition was limited because the lack of institutional mechanisms and/or political will to enforce financial discipline allowed state-owned enterprises (which constituted most of the economy) to operate with a soft budget constraint (see below). Competition from imports was limited by the severe scarcity of foreign exchange.  17. The area where least progress was achieved was the reform of state-owned enterprises, which allowed them to avoid real economic restructuring. While considerable progress was made in developing legislation and institutions necessary to place enterprises in a market setting, not much happened on the ground. Under the Loan the government was committed to privatizing by end-1994 about 1600 (later amended to 1200 as the list, which dated from early 1993, was updated) enterprises, small and large, that were included in the 1993-94 program. However, partly for technical reasons that prevented the distribution of privatization vouchers, and also for political reasons, including the fear of losing the conservatively- led Transnistria, the privatization of large enterprises didn't take-off till the last quarter of 1994. The privatization of small enterprises, which has been so successful in other countries, was also stalled by the government's inability to overcome the resistance of local authorities. The slow pace of privatization was unfortunately matched by lack of progress in improving the governance of state owned enterprises. While budget subsidies and NBM directed credits to state enterprises were cut back, these were replaced by other forms of subsidization such as payment arrears. During the period of the Loan, the bankruptcy law and liquidation procedures remained mostly inoperative permitting enterprises to avoid restructuring by accumulating arrears and building inventories.4 Limited progress was made by way of introducing modern international accounting standards or developing monitoring indicators to assess the performance of state enterprises and penalize/reward them. 18. In the area of social protection, there was progress in replacing the system of generalized support to the population with a more targeted system. The government introduced cash compensations to the poorest beneficiaries for the increase in prices of basic goods (such as bread and milk). Pensions and other benefits were de-linked from the minimum wage, and replaced by a system of targeted price compensation. While these targeted mechanisms are necessary to provide support to the vulnerable at a time of severe resource scarcity, it not clear for how long even these schemes will provide effective protection in the face of continuing economic decline. The fiscal pressure forced the Government to run the benefits system on arrears for most of 1994, leaving household plots and links to the countryside as the only effective social safety net. This did, however, not lead to pressure to change the system. The implementation of the commitment to gradually raise the retirement age for men and women was postponed to 1995. (ii) Implementation of the Import Component 19. The proceeds of the loan were to be used for three purposes: (i) a direct import component, for purchases of essential raw materials and inputs and health supplies ($53 million); (ii) as inflow to the foreign exchange market for purchase by enterprises for their import needs ($5 million); and (iii) for financing essential TA that could not be procured from other concessional sources (up to a maximum of $2 million). After a slow start (except for the foreign exchange component), the pace of disbursement was rapid. By end December, 1994, only about $100,000 remained undisbursed. 20. A Project Coordination Unit (PCU) was established to control and monitor the flow of funds, assist in the preparation of procurement documents and procedures and train government staff and personnel from the implementing agencies. The PCU comprised an overall coordinator (initially a vice- minister in the Ministry of Foreign Economic Relations), an assistant coordinator, a disbursement specialist from the NBM, an accountant, a secretary and interpreter. In order to speed up procurement 4/ Indeed, some enterprises weie explicitly allowed, by Government, to accumulate arrears on payments for electricity.  of fuel oil and coal for the winter of 1993 an international procurement agency was hired. Subsequently a procurement specialist and a disbursement specialist were recruited from abroad to assist the PCU. 21. Notwithstanding teething troubles and continuing problems due to PCU staff turnover, on the whole disbursements and procurement under the project were implemented satisfactorily. Continuous discussions to build capacity took place between the government and the Bank on procurement and disbursement issues and considerable flexibility was shown by both sides to speed up procurement and disbursements and respond to the emerging needs of Moldova. As a result of this focus on implementation, however, the secondary objective of the technical assistance to the PCU - to build implementation capacity in the Government - was not achieved. 22. Procurement under the direct import component of the loan was arranged for fuel oil and coal, pharmaceutical, insulin, vaccines, agrochemicals, and animal feed. Unfamiliarity with World Bank procedures and logistical difficulties (such as long delays and uncertainty about courier services) resulted in some delays in procurement especially in the case of pharmaceuticals. Disbursements through the foreign exchange market proceeded rapidly and the original $5 million was disbursed by December 1993. To meet the needs of the government budget, at the request of the Ministry of Finance, another $14.4 million were reallocated to the foreign exchange market from the direct import component. 23. In retrospect, it may be said that the use of the direct import component for the procurement of energy and medicines in late 1993 and early 1994 was useful and efficient, especially considering the fact that the foreign exchange market had been set up only very recently. However, once the market began functioning, channeling Bank funds through it was more consistent with the spirit of the market-oriented reforms. This mechanism is also more simple to administer. 24. The implementation of the direct import component led to one unforeseen development. In the absence of strict payment discipline, the direct import component undermined budgetary discipline: the government was unable to collect payment from enterprises for the sale of the goods procured with the loan. The capacity of these enterprises to pay for the goods had not been considered in deciding which goods to buy. Thus one important goal of the whole reform program was endangered by the very mechanism that the Bank set up to implement the loan. This aspect needs to be considered very carefully in future operations that have a direct import component. (iii) Factors Affecting the Project 25. At a time when Moldova was just getting introduced to the international community as an independent country, the timely assistance from the Bank was immensely appreciated. This set the stage for a good working relationship between the government and the Bank. The Bank's willingness and ability to respond quickly to the food emergency through the Emergency Drought Recovery Loan and later to the energy shortage through the Rehabilitation Loan (both within about six months of each other) was matched by the government's receptivity to Bank advice. This made for the continuing satisfactory engagement between the government and the Bank on a wide variety of reform issues. The choice not to use Bank financing for technical assistance, however, set an unfortunate precedent for later operations. 26. The implementation of the project was adversely affected by factors that were beyond the government's control. First, there was the severe drought and subsequent floods in 1994 which delayed economic recovery and diverted scarce resources (people and money) towards disaster relief. Second, disbursements from external donors (other than the Bank and the IMF) to bridge the financing gap were  - 8 - less than anticipated, which increased the reliance of the government on domestic borrowing and jeopardized the stabilization and liberalization objectives. It also increased the cost of transition. Third, important components of the reform program (like privatization) were delayed, inter alia by the pre- occupation with electioneering in early 1994. The limited technical and institutional capacity to manage a wide ranging reform program was also a constraint to timely implementation. 27. In some cases, slow implementation may be attributable to wavering commitment of the government to implement the hard decisions that were necessary to reform the system. This was true in the case of privatization (especially small scale) and the inability to take steps to close down enterprises that were insolvent and delinquent in payments. The slow pace of land reform in agriculture can also be attributed in part to political concerns. And while these may be legitimate issues for any government, the prospects of a strong supply response will remain negligible unless they are satisfactorily resolved. D. Project Sustainability 28. The reform program initiated by the government in 1993 is still broadly on track, albeit with slow progress in some critical areas (like enterprise reform) and back-sliding in others (agricultural land reform). While there is discontent at the decline in living standards and increased poverty caused by the continuing drop in output and the sharp deterioration in the terms of trade, there is no popular unrest directed against the reform program as such. Moreover, after many years there are at least some positive achievements. The inflation rate has come down sharply and the national currency remains stable. The decline in output may also be bottoming out. These conditions make it easier to continue and accelerate the reform program. 29. However, the program will derail unless critical reforms are implemented consistently and quickly. Real economic restructuring in enterprises and farms is yet to occur on a serious scale, as attested by the low rate of unemployment (despite the large decline in output), the build-up of inventories, and the growth of inter-enterprise and other payment arrears. Unless this situation is addressed and firms are forced to adjust to market discipline, prospects for sustainable economic growth will remain dim. And unless the economy recovers, the stabilization program will also unwind as more and more resources are used to repair an increasingly tattered safety net. E. Bank Performance 30. The Rehabilitation Loan was the second loan from the Bank to Moldova. In March 1993, the Bank approved an Emergency Drought Recovery Loan to finance the import of critical agricultural supplies to mitigate the effects of the worst drought in a century. The Bank and the government also accelerated their cooperation in preparing a structural reform program. Work proceeded rapidly, and after six months of preparation the loan was approved by the Board on October 21, 1993. This rapid response enabled Moldova to import critical energy supplies during the severe winter of 1993. The Bank's willingness and ability to respond quickly were instrumental in increasing its credibility and maintaining good relations with the government. 31. The Bank took the lead in mobilizing and coordinating donor assistance to Moldova. It organized and chaired the first Consultative Group meeting on October 26, 1993, followed by a pledging session in mid-December 1994. Counting assistance from all sources including the Bank and the IMF, a  - 9 - financing package of approximately $300 million in balance of payment support for 1994 was put together although this fell short of projected requirements. In the context of the preparation of the Rehabilitation Loan, the Bank worked closely with the government in identifying priority TA needs and sources of funding these on concessional terms (which enabled the $2 million allocated for this program in the Rehabilitation Loan to be reallocated to the foreign exchange component). 32. Common to other Rehabilitation Loans in the region, the reform package supported by the loan was comprehensive in coverage. The indicative targets and goals were ambitious. Yet it was also recognized that implementation capacity was weak. This contradiction between ambitious goals and weak implementation capacity was known during the preparation of the loan. It was argued, however, that the government should make its best efforts and that the record of implementation would be assessed flexibly against the stated targets. This approach was also one reason why the loan was not tranched - there was no previous experience of implementation and flexibility was of the essence. 33. Supervision of implementation was undertaken not only in the context of loan supervision missions, but also during economic and sector work (Review of the foreign trade and exchange regime) and preparation of the first Structural Adjustment Loan (SAL). Following an in-depth supervision of the enterprise reform component of the loan in December 1993, a first comprehensive supervision of the loan was undertaken in March-April 1994. Subsequently monitoring and supervision of the government's reform program was undertaken in the context of preparation of the SAL (although to some extent this resulted in diminished attention to the detail of Rehabilitation Loan supervision). Indeed, adequate progress in implementing commitments undertaken in the Rehabilitation Loan was a pre-condition for approving the SAL. A productive dialogue was maintained in all areas, and Bank advice on privatization and social safety net were especially welcome. The dialogue involved intensive participation by the Prime Minister, the President and the Chairman of Parliament. Bank staff made considerable efforts to broaden the policy dialogue to include the Parliament, the academic community, business people, trade unionists and journalists. Throughout the period the Bank continued its efforts to identify and procure priority TA and prod the international financial community to support Moldova's efforts. Intensive assistance by Bank staff on procurement and disbursement issues was also required and delivered, although this focussed more on actual implementation of the Loan, than on longer-term capacity building. F. Borrower Performance 34. When Moldova began its reform efforts, it was one of the pioneers among the countries of the FSU (excluding the Baltics). Despite civil strife, bad weather and a deteriorating economy, and less than expected international financial support, the government began implementing a tough stabilization program, introduced a new currency, and started fundamental structural reforms. And while there have been slippage in some important respects (see para 29), on the whole the government has succeeded in staying the course of reforms. The government has also shown an openness to advice, and cooperation with the Bank and the IMF has been good. The support provided by the IMF through a Standby Arrangement and by the Bank's SAL subsequent to the Rehabilitation Loan illustrates the continuing commitment of the government to reforms and the close involvement of the Bretton Woods institutions with this effort. 35. With respect to the implementing arrangement, the government was prompt in establishing a PCU. However, in the absence of domestic funding for its work, the PCU was much too dependent on foreign funding and expatriate assistance. Government salaries, when they were paid, were not adequate  - 10 - to retain good staff and the PCU was plagued by a high turnover of staff. This meant that the objective of domestic institution building was not met. Nevertheless, considering the circumstances, the performance of the PCU in implementing the project was satisfactory. G. Assessment of Performance and Outcome 36. Taking a broad view, performance was satisfactory. Macroeconomic imbalances are less severe. The rate of inflation has been brought down sharply and the national currency is stable. Despite taking some harsh and unpopular measures, the Government remains committed to market oriented reform, the broad thrust remains unchanged, and efforts continue to be made to deepen the reform process. Already, the state's role in resource allocation has been much circumscribed and market forces are playing a larger role. Progress has also been made in privatization and it remains high on the government's reform agenda, as evidenced by the completion of the mass privatization program by the end of 1995. 37. Yet, there are still few signs that real restructuring is occurring and a strong supply response is yet to emerge. Output continued to slide across the board until mid 1995. Since, the economy seems to have bottomed out, and modest growth is expected for 1996. The slow progress in introducing real financial discipline and accountability in state enterprises, and the slow pace of land reform in agriculture are important factors contributing to the absence of real structural change in the economy. Rapid progress in these areas is essential to sustain the reform process. Some of these issues are being addressed under the SAL and the proposed Private Sector Development Loan. H. Future Operations 38. Apart from the Emergency Drought Recovery Loan, the thrust of Bank operations thus far has been to promote efficient and sustainable economic recovery. The Rehabilitation Loan was the first loan to provide balance of payments support to Moldova's reform program. In November 1994, learning from the experience of the Rehabilitation loan, the Bank followed up with a second balance of payments loan (the SAL) to further deepen the reform program, emphasizing privatization and enterprise reform. While not without problems, this operation succeeded in generating strong momentum, notably in privatization. Soon thereafter, to promote exports and reduce the risks of policy slippage, the Bank approved a Pre-export Guarantee Facility to cover policy risks for exporters. Future planned operations include a mix of adjustment and investment operations designed to promote the private sector and deepen reforms in agriculture and energy sectors. The Bank has also continued to take the lead in mobilizing and coordinating external donor assistance and a second CG meeting was held in early 1995. I. Key Lessons Learned 39. The Rehabilitation loans were meant to be one-shot operations designed to ease in reforms at a time when the precise conditionality and tranching associated with SALs and SECALs would be impractical. The lessons from the Moldova experience may have relevance for other countries where similar loans are being considered. More general lessons for Bank support for structural reforms may also be drawn from this experience. The main lessons are as follows: (i) importance of timeliness. The Bank's prompt response to the economic crisis was important  - 11 - to the initiation of the reforms in Moldova. The noticeable link between reforms and Bank funding, which partly went to alleviate energy shortages in the winter months, strengthened the hands of reformers in the government. The responsiveness of the Bank bought it credibility with respect to the government and helped subsequent policy discussions. (ii) importance of the big picture. The economies of eastern Europe and the FSU are attempting a historic systemic transformation under very adverse external conditions. Theirs is not a marginal change. In these circumstances, it is important to keep the larger objectives of the reforms in focus and to recognize that there will be ups and downs in the reform process. Even if the reforms are generally on track, the government may be forced to retreat temporarily on some issues. The Bank should be prepared to continue providing its support over the longer term, shaping its size and composition to support the most critical policies and to remove the most important bottlenecks. (iii) the need for flexibility. It was recognized that there was insufficient track record in the country both with regard to the implementation capacity as well as the response of the economy to the reforms. The external environment was also uncertain. In these circumstances, and in view of the deepening economic crisis, flexibility was favored over strict conditionality which could have held up disbursements. However, it may also be argued that the absence of leverage until the approval of the SAL slowed down the reform process. Tranching that allows for more flexibility than typically allowed in a SAL may be a good solution. The approach adopted in the Ukraine Rehabilitation loan that combines specific conditionality and phased disbursement (as in a SAL) with greater flexibility in interpreting progress in implementation is one possibility. (iv) the necessity of intensive supervision. In the early stages, a lot of Bank effort will be required during implementation of the loan. This will be needed not only in re-designing components of the loan in the face of emerging realities, but also in assisting the government in specific implementation issues (eg., in privatization, pension reform, procurement, etc). The delay in setting up the Resident Mission was unfortunate in this respect. (v) the importance of capacity building. The Rehabilitation Loan would have been more successful if it were accompanied (or preceded) by effective, country executed, technical assistance in implementing key elements of the reform program. More up-front efforts in this direction may have a high pay-off though it should be recognized that the effort will be intensive in staff resources. Similarly, the strong focus on implementation over capacity building, while understandable given the urgent need for balance of payments support, have resulted in a weak implementation capacity in Moldova as compared to other countries in transition. (vi) reform priorities. By far the most important and most difficult reforms are those that enforce financial discipline in enterprises, farms and banks. Apart from privatization and land reform in agriculture (which give an unambiguous signal of an irreversible change in regime, and forces accountability on the new private owners), other measures to instil financial discipline include the phasing out of subsidies from the government, collecting taxes, strengthening the commercial banking system, improving the payment discipline in the energy sector, and facilitating new entry. Obstacles that prevent the initiation of bankruptcy and/or liquidation by creditors and owners need to be removed and labor mobility enhanced.   Appendix A Implementation Completion Report Moldova Rehabilitation Loan (Loan 3653 - MD) Project Review from the Borrower's Perspective The objectives of the project were relevant to the economic and political situation in the country in the middle of 1993. The objectives were broad and ambitious given that, during project preparation and implementation, dynamic changes and uncertainties beyond the control of the Government or the Bank were taking place, most importantly economic development in the former FSU countries and social changes inside Moldova. Achievement of the project objectives was important to support Moldova's determination to move away from central planning to a market system in the fastest possible way, while maintaining production of essential goods and services. The loan facilitated dialogue between the Government and the World Bank and established a relationship between Moldova and the donor community. The opinion of the Government is that operation was prepared in a timely manner and implemented successfully. The economy of Moldova was badly affected by the collapse of the USSR and the situation was complicated by the politically unstable situation in the East and South regions of the country. With a view to creating a new economic environment, the Government effected, in cooperation with the World Bank and the IMF, an Economic Reform Program reflected in the Memorandum of Economic Reform and STF agreement wi.h the IMF. The main objectives of the program were to stabilize the economy and to replace the centrally planned system with a market-based one. Bearing in mind the critical state of the economy, immediate priority was given to macroeconomic stabilization. Measures which had to be taken included: (i) tightening of monetary policy; (ii) price liberalization for most of the previously controlled items and elimination of subsidies; (iii) foreign trade liberalization; (iv) strengthening of the tax-based income policy; (v) enterprise privatization and restructuring; (vi) financial sector reform; (vii) design and implementation of an adequate social safety net. In support of the program, there was considerable international mobilization of financial resources for the balance of payments and technical assistance. The Government highly appreciates the role played by the World Bank in the process of resource mobilization.  In particular, it is necessary to mention the excellent coordination between the World Bank and the IMF in their dialogue with the Government. The agreement reached under the first SBA with the IMF was a continuation of the program agreed with the World Bank and the STF program. Substantial progress was achieved in all sectors. However, there was a delay in implementation of the 1993-94 privatization program on elimination of profit margin controls on commercial enterprises. This was caused by subjective and objective factors. Another very important objective of the project -- to finance imports of essential production inputs, energy resources and health care supplies -- was successfully achieved. This objective was reinforced with additional funds provided through cofmancing agreements with the Government of the Netherlands and the JEXIM Bank. While the impact of the loan and the imports it has fmanced are difficult to assess in quantitative terms, the loan has provided inputs to keep essential services running during a very difficult transition period characterized by disruption of normal living standards. To some extent, maintaining these essential services helped dispel dissatisfaction among the population, making it less problematic for the Government to proceed with reforms. The provision of fuel oil and coal imports to ensure heating and electric poser generation was critically important. The provision of gas (under the JEXIM loan) helped provide Moldova with the necessary time to renegotiate the gas supply agreement with Russia and prevent discontinuation of gas delivery. In the agricultural sector, the loan financed a large percentage of Moldova's annual imports of fertilizers and pesticides. A key factor in providing the health care system of Moldova with medicines and medical equipment was the import component of the loan. The indirect and initially unforeseen benefits of increasing the knowledge of procurement and other international commercial practices and establishing long term relations with suppliers have also been important. Purchasers gained experience in international procurement, which increased their efficiency and in some cases helped them survive the transition process and remain viable in a market environment. During the whole project (preparation and implementation) the Government has had very close and fruitful cooperation with World Bank staff through visiting missions and communications. The World Bank has assisted Moldovan authorities and the Project Coordination Unit in carrying out this project successfully. The World Bank provided some very useful procurement and disbursement training.  Table 1: Summary of Assessments A. Achievement of objectives* Substantial Partial Negligible Not Applicable Macro policies El a o Sector policies O O al Financial objectives O7 OR al Istitutional development a El ol Physical objectives O O M E Poverty reduction a o ol Gender Issues Ol ao Oeher social objectives E C 0 El Environmental objecrives al o nl Public sector management El El El Private sector development Gl E El Other (specify) a O O G B. Project sustainability Likely Unlikely Uncertain CE n El C. Bank Performance Highly Satisfactory Satisfactory Deficient Identification El El Preparation assistance El El Appraisal El El Supervision Q El D. Borrower performance Highly Satisfactory Satisfactory Deficient Preparation El El Implementation Q El Covenent compliance E El Operation (if applicable) Q E E E. Assessment of outcome Highly Satisfactory Satisfactory Unsatisfactory Highly Unsatisfactory E El El *Some of the objectives were identified in the MERP. Other objectives not originally envisaged were indirectly achieved through loan implementation (such as sector policies arid environmental screening).  Table 2: IBRD Loans/Credits Loan/Credit Title Purpose Year of Approval Status Preceding Operations 1. Emergency Drought Drought assistance FY93 Closed Recovery Following Operations 1. Pre-Export Guarantee Foreign private investment FY95 Under implementation 2. Structural Adjustment Balance of payments FY95 Under implementation assistance  Table 3: Project Timetable Steps in Project Cycle Date planned Date actual/latest estimate Identification (Executive Project Summary) 5/93 10/92 Preparation N/A Appraisal 6/93 6/93 Post appraisal N/A N/A Negotiations 9/93 9/93 Letter of development policy/MERP 9/93 9/93 Board presentation 10/93 10/93 Signing 10/93 10/93 Effectiveness 11/93 11/93 First tranche release N/A N/A Midterm review N/A N/A Second (and third) tranche release N/A N/A Project completion 3/95 3/95 Loan closing 3/95 5/95 * 2 month grace period extended to finalize disbursement.  Table 4: Loan Disbursements: Cumulative Estimated and Actual (US$ thousands) FY94 FY95 Appraisal estimate 50 10 Actual 50.32 9.68 Actual as % of estimate 100% 97% Date of final disbursement - 5/25/95  Table 5: Key Indicators for Project Implementation MOLDOVA REHABILITATION LOAN Implementation Record POLICY COMMITMENTS STATUS OF ACTIONS 1. Privatization 1. Introduction of streamlined procedures for auctions of small scale Streamlined procedures were introduced and a first auction of nine small units and first auction by October 1993. scale units completed in October 1993. But small scale privatization significantly delayed. As of December 1994 only 203 entities privatized. 2. Initiate first auction of medium/large enterprises by January 1994. For political and technical reasons, privatization by vouchers started only Complete privatization of 1555 units (small and large) by end 1994. in June 1994 with a pilot auction, followed by auction of 10 enterprises in end July. By end December only 378 large enterprises (and 203 small ent;;ies) had been privatized. 3. Issue regulations on mechanisms for transforming enterprises listed Enabling Presidential Decree on Commercialization promulgated in April in 1993-94 privatization program by end 1993. 1994. 4. Elaborate regulations for dealing with environmental liabilities of No progress. enterprises to be privatized by January 1994. 5. Elaborate regulations for distribution of shares to employees of Done by Presidential Decree on Commercialization, April 1994. SOEs listed for partial privatization by end 1993. 6. Adoption by government of regulations for financial intermediaries Done in February 1994. in January 1994. 7. Develop privatization program for 1995-96 by September 1994. Draft program adopted by Parliament in early 1995. Housing Privatization Privatize 75% of (350,000) dwellings in state hands by mid-1994. The list of property in state hands revised to 225, 000. Of this as of March 1994, 30,000 units had been approved for privatization. By May 1995 only 124,000 units (55 percent) had been privatized.  POLICY COMMITMIENTS STATUS OF ACTIONS II. Corporate Governance 1. Elaborate regulations for appointing representatives to Boards of Law on State Enterprises adopted by Parliament in first half of 1994. directors, and the functions of the Board by end 1993. 2. Introduce international accounting standards. Modest accounting changes introduced in January 1995. Further improvements being supported by an IDF Grant. 3. Design monitoring and reporting mechanisms for state enterprises. Selected financial and other information on state enterprises is being monitored by the Government. However, no formal mechanisms were introduced. III. Enterprise Restructuring 1. Amend Bankruptcy Law by June 1994 to allow for debtor The law has not yet been amended, though after some delay technical rehabilitation and privatization of creditors. assistance is being provided to propose appropriate changes. Revisions are to be introduced this year. Regulations allowing out of court debt reconciliation adopted in May 1995. 2. Elaborate procedures and policies for enterprises restructuring by A program for restructuring and break-up of selected large state end 1993. enterprises is being developed in the context of an enterprise isolation program being designed with the assistance of the World Bank. IV. Competition and Anti-Monopoly Policies Elaborate procedures for antimonopoly review prior to privatization Done in early 1994. by January 1994. V. Private Sector Development and Small Business Promotion 1. Submit to Parliament legislation to facilitate the establishment of Done in mid 1994. small businesses by end 1993. 2. Submit to Parliament laws on intellectual property by December Draft legislation on copyright protection submitted to Parliament on 1993. December 1993.  POLICY COMMITMENTS STATUS OF ACTIONS 3. Revise Law on Foreign Investment by mid 1994. Amendments to Law introduced in mid-1994. VI. Financial Sector Refonn 1. Submit to Parliament amendments to NBM and Commercial The NBM law was adopted in mid-1995 and the Banking law is under Banking Laws before end 1993.. consideration by Parliament. 2. Initiate special audits of the 4 major banks to assess the quality of Audits initiated in September 1993 and completed in mid-1994. their portfolios by October 1993. 3. Modify accounting and auditing practices of banks NBM prepared a timetable for modernizing commercial bank accounting system and BAFS will be introduced on January 1, 1996. 4. Develop plan of action for restructuring of Savings Banks by end Technical work underway with foreign assistance. Draft action plan 1993. prepared in March 1995. VIl. Trade and Pricing Policy 1. Liberalize bread and milk prices. Done in end May 1994. 2. Eliminate profit margin controls on all non-monopolistic Margin controls on commodities (except some essential goods) removed as commercial enterprises by end 1993 and on all monopolies of January 1, 1995. The rest to be eliminated by end-December, 1995. immediately prior to privatization. 3. Prepare action plan by end 1993 for eliminating price regulation Done in early 1994. and excess profits tax on monopolies (except for natural monopolies). 4. Phase out all remaining export quotas. Export quotas on grain and grain products were eliminated in October, 1995. 5. Introduce competitive procurement practices on inter-state trade Progress continues to be made. VIII. Agricultural Policy I. Set procurement price of grain at world market level. Done in mid-1993, but not done consistently thereafter.  POLICY COMMITMIENTS STATUS OF ACTIONS 2. Limit state order for grain to food needs in 1994 and eliminate Done. State procurement is undertaken on commercial lines. them in 1995. 3. Equalize contribution rates for social security for agriculture and Done. non-agricultural at 38% in 1994. 4. Provide by April 1994 documents confirming land ownership Land reforms continue but some restrictions on entities of exit from rights to those eligible. existing farms. Distribution of documents not likely to be completed until 1996. 5. Finalize program of demonopolization for agriculture parastatals Starting mid 1994. process initiated to break up and privatize Cereale by end 1994. (grain procurement and processing) and Fertilatatea (fertilizers and other input supplies). Most of the constituent enterprises have been privatized. IX. Social Protection & Labor Market Issues 1. Expand system of targeting social assistance through Social Support System of targeted price compensation for all eligible beneficiaries lFund by end 1993. introduced starting November 1994. Pensions and other henefits de-linked from the minimum wage. 2. Submit legislation to gradually increase retirement age in 1994. Draft legislation is expected to be submitted to Parliament by end- December. 1995. 3. Submit by end 1993 to Parliament legislation extending unem- Not done, for lack of resources in the Employment Fund. ployment benefits to those who leave below-minimum-wage jobs. 4. Submit to Parliament by end 1993 legislation to remove obligation Obligation removed by the act amending Law on Employment in May for worker retraining prior to dismissal. 1994. 5. Submit legislation to Parliament in 1994 to allow wages in all non- While tariffs continue to be set for salaries in non-budgetary organizations, budget organizations to be fully market determined. these are increasingly non-binding and "indicative".  Table 6: Key Indicators for Project Operation Estimated Actual 1. Key operating indicators in SAR ) It. Modified indicators (if applicable) ) - NOT APPLICABLE - 111. Modified indicators for future ) operation (if applicable) )  Table 7: Studies Included in Project Study Purpose as defined Status Impact of study at appraisal/redefined - NOT APPLICABLE -  Table 8A: Project Costs Appraisal estimate Actual/latest estimates (US$ million) (US$ million) Item Local Foreign Total Local Foreign Total costs costs costs costs 1. Import 0.0 107.2 107.2 0.0 107.2 107.2 2. TA 0.0 2.0 2.0 0.0 2.0 2.0 Total 109.2 109.2 0.0 109.2 109.2  Table 8B: Project Financing Appraisal estimate Actual/latest estimates (US$ million) (US$ million) Source Local Foreign Total Local Foreign Total costs costs costs costs 1. IBRD/IDA 0.0 60.0 60.0 0.0 60.0 60.0 2. Cofinancing institutions * 0.0 49.2 49.2 0.0 49.2 49.2 3. Other external sources 0.0 0.0 0.0 0.0 00.0 00.0 4. Domestic contribution 0.0 0.0 0.0 0.0 00.0 00.0 * NLG 15M - Dutch Grant (USD equivalent 9.2) USD 40M - JEXIM  Table 9: Economic Costs and Benefits - not applicable -  Table 10: Status of Legal Covenants Original Revised Agreement Section Covenant Status Fulfillment Fulfillment Description of Covenant Comments Type Date Date LA 3.01 (a) 9 C --- Consultation and exchange of views LA 3.02 9 C --- --- Procurement schedule LA 3.03 3 C --- --- Local currency transactions to be made at Market Exchange Rate LA 3.04(a) 5 C --- Maintain PCU and staff. LA 3.05 5 C --- --- Maintain staffed inter-agency committee responsible for monitoring and coordinating Program implementation. LA 3.06 5 C --- --- Employ consultants in (i) procurement and disbursement and (ii) implementation of the program. LA 3.07 (a) 1 C --- Maintain records and accounts. Covenant type: Present Status 1 = Accounts/audits 8 = Indigenous people C = covenant complied with 2 = Financial performance/revenue 9 = Monitoring CD = complied with after delay generation from beneficiaries 10 = Project implementation not covered b CP = complied with partially 3 = Flow and utilization of project funds categories 1 - 9 NC = not complied with 4 = Counterpart funding 11 = Remedies 5 = Management aspects of the project or 12 = Sectoral or cross-sectoral budgetary or executing agency other resource allocation 6 = Environmental covenants 13 = Other 7 = Involuntary resettlement  Table 11: Compliance with Operational Manual Statements Statement Number and Title Describe and comment on lack of compliance - NOT APPLICABLE -  Table 12: Bank Resources: Staff Inputs ($ '000) Planned Revised Actual Stage of project cycle Weeks US$ Weeks US$ Weeks US$ Preparation to appraisal 72.3 172.7 72.3 172.7 72.3 172.7 Appraisal 68 201.8 53.0 146.6 53.0 146.6 Negotiations through Board 17 47.5 13.6 34.3 13.6 34.3 approval Supervision 17 50.5 40.4 72.7 47.3 123.1 Completion 10 28.5 5 10.3 1.8 4.6  Table 13: Bank Resouces: Missions Performance Rating 2 No. of Days in Implementation Development Types of 3 Status of project cycle Month/Year Persons Field Specialization Status Objectives Problems Preparation 01/93 7 10 E,F,A,O Appraisal through 06/93 13 25 E,F,A,O Board approval Supervision 12/93 3 10 E,O 1 1 04/94 6 8 E,O 1 2 08/94 6 8 0 HS 2 Completion 1 - Specialization 2 - Performance Rating 3 - Types of Problems A = Agriculturalist 1 = Minor problems F = Financial E = Economist 2 = Moderate problems T = Technical F = Financial Analyst 3 = Major problems M = Managerial * Other includes country officer, operations analyst, sector specialist, procurement and disbursement specialists. Many of the specialists visited the country in combination with other missions.   MAP SECTION   IBRD 24285R2 28- T. N..,,., M O L D OVA (k~~~~gil6v- U K R A I N E tT\. > _/ g \; k>Vj7nStso