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Country Context

Moldova¡¯s economy is showing signs of recovery, while unprecedented challenges due to the spillover effects of Russia's invasion of Ukraine are still unfolding. A moderate economic recovery in the first half of 2024 improved household incomes and investments. Nevertheless, there are significant macroeconomic risks, including the potential intensification of the war in Ukraine, additional energy disruptions, particularly the potential discontinuation of gas transit through Ukraine, and headwinds from the upcoming elections in 2024 and 2025. Moldova's medium-term prospects hinge on structural reforms and progress toward EU accession. 

Despite sustained economic growth over two decades, poverty remains pervasive, particularly in rural regions where access to services and viable economic opportunities is limited. Traditional means of poverty alleviation, such as remittances and social assistance, are slowing, while low labor force participation and employment rates impede a shift to employment-based poverty reduction, underscoring the urgency for structural reforms. Nearly a quarter of young people aged 15-34 were neither employed nor in education and training (NEET). Moldova faces structural challenges including low productivity growth, governance deficiencies, a large state footprint, limited competition, an imbalanced business environment, and tax distortions.

The country remains vulnerable to adverse weather events and energy shocks due to its heavy dependence on energy imports and limited diversification in energy sources. Climate change worsens these vulnerabilities, increasing the frequency and severity of droughts and other natural hazards, thereby posing substantial risks to Moldova's agricultural sector and livelihoods. With EU candidate status, strong reform momentum and growth-enhancing, climate-resilient investments are needed to foster long-term, sustainable development and convergence toward EU income levels.

Last Updated: Oct 23, 2024

Strategy

The current??(CPF), aims to address the dual challenges of the current crisis stemming from Russia¡¯s invasion of Ukraine as well as longstanding and longer-term reform challenges, with a phased approach of activities to support the government¡¯s development agenda and the goal to advance toward European Union accession. The CPF provides a flexible approach in identifying activities¡ªboth lending and analytical¡ªunder the overarching objective of supporting green, resilient, and inclusive development and competitiveness in Moldova. The framework is based on three high-level objectives: (i) increased formal employment; (ii) improved human capital; and (iii) increased green and resilient investments. The objectives of the CPF focus on key areas including enterprise competitiveness, decreased regulatory burden, key aspects of health and education services, increased energy security and efficiency, and green investments, particularly in infrastructure and agriculture. A critical feature of the CPF is capacity-building and digitization efforts to strengthen systems and institutions across a broad swath of government and private sector actors at national and local levels.

ľ¹ÏÓ°Ôº also established a multi-donor trust fund program aimed at complementing CPF implementation and supporting the Government of Moldova in investing and strengthening its institutions to become more competitive, resilient, and inclusive as the country is pursuing integration with Europe. The Moldova Growth, Resilience and Opportunities for Well-Being (M-GROW) Program Multi-Donor Trust Fund, managed by the World Bank, will provide a coordinated financing and support mechanism to assist the government in mobilizing financing for transformative projects and strengthen capacity to prepare and implement them. Early priorities for M-GROW focus on support for enhanced competitiveness, energy efficiency, and strengthening the institutional and governance environment. M-GROW¡¯s founding partners include Ireland, Norway, and the United Kingdom, who have together contributed the equivalent of $23.8 million. 

As part of the World Bank Group¡¯s joint country representation for Moldova, IFC, with its focus on private sector development, continues to support Moldova's transition to a new growth model and EU accession by promoting green, resilient, and inclusive development. This is achieved through investments and advisory services that enhance efficiency, productivity, and value chain development across sectors. IFC aims to support the country in developing Public-Private Partnerships (PPPs) in the transport sector and renewable energy. Additionally, IFC plans to invest in key sectors identified as priorities in the 2022  which highlighted significant growth potential in two enabling sectors¡ª(i) financial services and (ii) transport and logistics¡ªand three tradeable sectors: (iii) renewable energy, i(v) agribusiness, and (v) ICT/business process outsourcing.

Current engagements by the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, include investment through political and economic risk insurance offerings.

Last Updated: Oct 23, 2024

Recent Economic Developments

Despite ongoing spillovers from Russia's invasion of Ukraine, the economy is showing promising recovery signs. In the first half of 2024, the economy grew by 2.2%, driven by rebounds in domestic trade, manufacturing, and a substantial recovery in the energy sector, which saw double-digit growth following the 2023 energy crisis. The IT sector continued to experience robust growth, while agriculture remained resilient, though summer droughts may affect yields later. On the demand side, growth was fueled by investments and restocking, while net exports had a negative impact due to rising imports. Private consumption improved with increasing disposable incomes and lower interest rates. The current account deficit (CAD) improved to 11.8% of GDP in the first quarter of 2024, despite a 6.5% decline in remittances. This improvement was driven by a narrower trade deficit and enhancements in the primary income account. The CAD was mainly financed through cash, deposits, and trade loans while direct investments fell. External debt decreased by 2.4 percentage points from the end of 2023, reaching 60.9% of GDP. Inflation continued to decelerate in 2024, averaging 4.2% (YoY) in the first eight months, driven by weaker domestic demand and lower energy prices. In response, the Central Bank lowered the base interest rate from 4.75% in early 2024 to 3.6% in August 2024. During the same period, banks maintained high liquidity, and the ratio of nonperforming loans dropped to a five-year low of 6.1%. In January-July, total revenues rose by 12.2%, YoY, driven by social contributions, VAT and excise duties on imported goods, and personal income taxes. Expenditures to support the economy remained elevated, including spending on wages, subsidies, and goods and services. The fiscal deficit registered 3% of GDP. Public and publicly guaranteed debt decreased to 33.8% of GDP in the first half of 2024. Poverty rates, as measured by the $6.85 2017 PPP poverty line, are expected to have remained stable, marginally dropping from 15.7% in 2022 to 13.3% in 2023.

Economic Outlook 

The economy is projected to grow by 2.8% in 2024, supported by rising real wages due to lower inflation, favorable interest rates, and a positive fiscal impulse. Despite a decline in real remittances, private consumption is expected to be a major growth driver, supported by gradual improvements in investments. The increase in imports and reduced external demand for exports will result in a negative contribution from net exports. On the supply side, growth will be supported by the IT sector and domestic trade. The industrial sector¡¯s contribution is anticipated to increase, although external demand remains below pre-2021 levels. Agricultural growth will be modest due to summer drought, despite strong results early in the year. Medium-term growth will be fueled by reforms focused on economic diversification and competitiveness, in line with the EU accession agenda. Inflation is projected to stay near the lower end of the 3.5 to 6.5% target range in 2024, with a medium-term average of around 5%. However, inflation remains sensitive to supply-side factors, such as geopolitical tensions, energy prices, and climate conditions. While the CAD is expected to narrow further in 2024, aided by improvements in the trade balance and stable remittances from the EU. However, it will likely remain above pre-pandemic levels due to high import prices, transport costs, and low foreign direct investment amid ongoing uncertainties. The fiscal deficit is projected to remain high at 4.1% of GDP in 2024 due to spending on economic support, refugee assistance, and infrastructure. It is expected to decrease to 3% of GDP by 2026 as fiscal support declines. As inflationary pressures ease, the poverty rate, as measured by the $6.85 2017 PPP poverty line, is expected to decrease to 10.63% in 2024. With the anticipated economic recovery and normalization of inflation, poverty is projected to decline further to 8.6% in 2025.

Last Updated: Oct 23, 2024