Moldova - Structural Adjustment Loan Project

 Structural Adjustment Report No: ; Type: Report/Evaluation Memorandum ; Country: Moldova; Region: Europe And Central Asia; Sector: Macro/Non-Trade; Major Sector: Economic Policy; ProjectID: P008554 MOLDOVA: Structural Adjustment Loan (Loan 3815-MD) The Moldova Structural Adjustment Loan (3815-MD) in the amount of US$60 million was approved in FY95. The loan was fully disbursed by September 1995 and closed in June 1996, the original closing date. Grant cofinancing was provided by the Government of Netherlands in an amount equivalent to US$5.4 million. The Implementation Completion Report (ICR) was prepared by the Europe and Central Asia Regional Office with the Borrower’s comments provided as an appendix. The loan’s main objective was to support the Government’s structural adjustment program, particularly in the areas of privatization, hardening the budget constraints on state-owned enterprises (SOEs), creating a competitive environment, better targeting of social assistance programs and providing help for the most vulnerable groups. The loan was also intended to catalyze balance of payment support and technical assistance from other donors. It was expected that this support would induce a quick response in the real economy and generate sustainable export-led growth. The project fell short of achieving most of the stated goals. The economy continued to experience decline. In 1995-96, GDP fell by 3 percent and 8.5 percent, respectively. Although the macroeconomic stabilization was on track, the lack of payment discipline throughout the economy posed a serious threat to fragile financial stability. Inter-enterprise arrears continued to increase. While budget subsidies and central bank credit to SOEs were cut back, those were largely replaced by soft budget loans and loan guarantees. In 1995, payments on loan defaults reached 7.4 percent of government expenditure. The reform of the social safety net did not materialize. Government arrears to pensioners reached an average of 4.5 months, and roughly 4.5 percent of GDP. There were also further rises in government arrears to the energy sector due to reluctance to move toward cost recovery prices. Little progress was achieved on agriculture restructuring, privatization of collective farms, land reform and demonopolization of marketing. Although substantial results were attained in enterprise voucher privatization program with 70 percent of enterprises now privatized, the cash privatization program continued to lag, partly because of unrealistically high minimum prices. The mass privatization of enterprises by patrimonial bonds diluted ownership, and had little positive impact on improving corporate governance. This sad outcome resulted both from insufficient government commitment and from the Bank’s own shortfalls. Faced with strong Parliamentary opposition due to entrenched interests, the Government lacked motivation to push forward with difficult reforms. The Bank, in turn, proposed only weak conditionalities in energy and agriculture, did not fully use the potential synergy between the SAL and sector operations, and did not strongly enforce all conditions. For instance, despite the existence of second-tranche conditionality on privatization of two large state-owned agricultural monopolies and demonopolization of their traditional markets, virtually no progress was made during the SAL period in this area of economic reform. On a more positive note, it should be recognized that the Bank-country dialogue has continued to focus on key adjustment issues. Indeed, in recent months important legislation has been adopted on land ownership and energy sector restructuring. Recognizing the limited progress achieved with regard to major elements of the structural reform program, the ICR rates the outcome of the loan as marginally satisfactory, the institutional development as substantial, and sustainability as likely. OED however does not concur with these assessments. While OED is aware of the tense political environment at the time of project implementation, and especially the political sensitivity of specific reforms involving privatization and overhaul of the pension reform, the project scores poorly when judged against objectives set in the President’s Report. OED therefore considers it necessary to rate the project outcome as marginally unsatisfactory, the institutional development impact as modest and its sustainability as uncertain. Bank performance, however, is rated as marginally satisfactory to reflect the demanding nature of the reform program. Among the key lessons to be learned from this project is that future adjustment operations in transition economies should emphasize the need for creating strong institutional development, promoting good technical understanding, and building political ownership. Future adjustment operations should also provide for better enforcement of conditionalities. A system of quarterly loan performance reviews could be introduced with specific conditions and disbursement amounts associated with each review and contingent upon their outcome. This would enable the Bank to make the enforcement of specific conditionalities in certain sectors more realistic without putting the whole program of country’s structural reforms on hold. Such a system, however, should not be seen as a substitute for the requisite institution building and stakeholder commitment. The ICR provides a relatively comprehensive account of the major factors that affected the project. Although it says little about the shortfalls of the voucher privatization program, OED recognizes its analytical quality and rates it as satisfactory. No audit is planned.