Statement by Pieter Stek at the meeting of May 6, 1999

International Bank for Reconstruction and Development International Development Association 87400 International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS99-113 May 3, 1999 Statement by Pieter Stek Date of Meeting: May 6, 1999 MOLDOVA - Country Assistance Strategy 1. As I am travelling, I would like to share my perspective on the proposed Country Assistance Strategy for Moldova, a country I represent in the Board, with colleagues in writing. 2. I find the proposed strategy for Moldova of high quality on several scores: It is accurate and concise in describing the political and economic background and the uneven path Moldova has followed since independence; It is based on a sound diagnosis of the problems Moldova is faced with in the short and medium term; Going forward, it proposes a two-pronged strategy, which emphasizes public sector reform and private sector development; I believe that this is the only pragmatic and realistic approach at this stage, given Moldova's incomplete transition to a market economy; deepening the structural reform in parallel with refocusing the role of the state can be expected to lead to mutual reinforcement, and thus eventually put Moldova on a sustainable growth path with rising living standards; The strategy is fully owned by the Moldovan authorities, which in part is due to the thorough discussions on the basis of which it was prepared; The document is candid about the risks associated with the strategy and proposes practical means to address them. 3. Let me convey to you my Moldovan authorities' own views on the proposed strategy. The Government's strategy pursues exactly the same objectives as the proposed Bank strategy, as is evident from Box 2, page 7. More recently, on AprilS, 1999 the Government detailed its strategy by adopting an Action Program entitled "Law Supremacy, Economic Revitalization, European Integration'"' This program is closely related to the proposed triggers for the high-lending scenario. It is the Government's firm intention to meet and even exceed these triggers. In their assessment, Moldova's development depends crucially on maintaining macroeconomic stability, fostering private sector development, advancing public sector reform :This documem has a restricted distribution and may be used by recipients only in th~ I perfonnmce of their official duties. Its contents may not other.x..:ise be disclosed v.:ithou \\"orld Bmk authorization. and improving project implementation. I want to single out the Government's resolve to undertake a serious, full-fledged anti-corruption program with the assistance of the Bank. 4. The Bank/ IDA has been and continues to be the indispensable partner. The proposed high-case lending volume of$ 130 min, of which 110 min IDA, is depicted as the minimum required to support meaningfully the continuation of the current reform momentum over the medium term (para 45). The IDA allocation now for FY00-01 is only$ 65 mln equivalent. The increase to "the minimum required" (of more than 50%, not less) is conditional on continued improvement of policy performance (para 45). The government in its present reform-minded composition understands the link between performance under the program and the envisaged upward adjustments of the IDA allocation. At the same time I myself am somewhat disappointed that at best there will only be the minimum financing needed to support the current reform momentum. The risk in delaying support and minimalizing it is that it is more difficult to meet the Government's objective of preventing "production and living standards from falling to a level which could generate social conflict and national strife"(Box 2). This risk is all the greater because the IMF too appears to be taking time to judge performance before being willing to conclude an ESAF agreement and disburse. On March 23, Moldova became ESAF-eligible. It will be important for an ESAF program to be put in place rapidly. It bears repeating that a major element of the present acute need for assistance lies in the Russia crisis. External financing to offset its effects would appear to be not only the mandate of both institutions but also in everybody's interest. Once again I quote: "Moldova faces a situation where the authorities could do everything right, and yet still face a balance of payments crisis..... " (para 51). Therefore, given the interest of the international community in the preservation of societies such as Moldova from being overwhelmed, one may hope that bilateral donors will make additional resources available and use any flexibility they have to do this early. I hope that the Bank through the Resident Mission will continue to be instrumental in donor co-ordination. Apart from the volume of its assistance, IDA can be helpful by means of the timing of its operations. For instance, the sooner the Agriculture Services and Rural Finance II projects are prepared, both planned for FYOO, the higher their positive impact on progress with agricultural reform. This is because access to credit and agricultural services is crucial for the success of private fanning. 5. The IFC has a potentially significant role to play by catalyzing foreign investment and providing post-privatization support. One of the risks for the reform program in Moldova stems from the fact that the supply side response to the macro reforms may be slow to come. To reach fully its potential development effectiveness in Moldova, however, the IFC needs to lead foreign investors in the country, instead of following them. As a poor country and a small economy, Moldova is unlikely to be able to attract sizeable foreign investment on its own. By all criteria, Moldova is Extended Reach-eligible, but it is not an extended reach country. I strongly welcome the opening of the IFC unit in the Resident Mission and the FIAS review of the FDI ·framework (para40). 6. Moldova, of all the former Soviet republics, is perhaps the most exposed to the developments in Russia. Russia absorbed 60 % of Moldovan exports in 1997. Therefore, to it is of vital importance for Moldova to diversify its export markets. The EU could lend support by expeditiously reaching a free trade agreement with Moldova. Moldova is also keen to conclude an Association agreement with the EU. The present limited access to Western markets (para 4) again points to a disconnect between trade and aid policies which is no less alarming for being absurd. 7. To sum up, Moldova will need the strong support of its external partners to see its reforms, on which the young country embarked so boldly in the early nineties, bear the fruits of economic growth and rising living standards.