Publication: Monitor Volume: 4 Issue: 95

Roger Growe, the director of World Bank programs in Moldova, told a Chisinau press conference last week that “Moldova is currently on the threshold of losing its creditworthiness”, adding that “Moldova’s capacity for external borrowing is close to zero.” On the same day, Moody’s announced that its ratings for various classes of Moldovan debt would be re-examined for possible downgrades. (Reuters, May 13) Although Moldovan fiscal and external imbalances are at the center of international investors’ concerns, the World Bank has also delayed the release of the second tranche of a $100 million structural adjustment loan due to the government’s handling of energy-sector restructuring and pension reform.

These developments represent quite a turn of (mis)fortune for Moldova, which until 1997 had generally been regarded as one of the leading economic reformers in the CIS. Moreover, the country managed to report 1.3 percent GDP growth last year for the first time since independence. Unfortunately, this growth has resulted from growing fiscal imbalances and therefore may not be sustainable: The central government’s budget deficit grew from 4.9 percent of GDP in 1995 to some 10 percent in the third quarter of 1997, and seems to have continued to increase this year. While these deficits have boosted spending and growth, they have also pushed Moldova’s external position deeply into the red: The current-account deficit rose from 6.8 percent of GDP in 1995 towards an unsustainable 15 percent in the second half of 1997. Moldova’s foreign debt therefore increased by 25 percent in 1997 alone, to $1.33 billion, a sum about two-thirds of the country’s GDP, and double the government’s 1997 fiscal revenues. The statements by Growe and Moody’s suggest that the burden of servicing this debt is now becoming excessive–if not outright prohibitive.

The causes of Moldova’s economic predicament lie largely in her politics. The political framework required for effective macroeconomic stabilization essentially evaporated during the campaigns for the 1996 presidential and March 1998 parliamentary elections. Hopes that this year’s elections would produce a more workable parliamentary configuration seem to destined for disappointment (see “Quo Vadis, Moldova?”, Prism, Vol. IV, No. 9), so that prospects that the new government (once it is appointed) will bite the bullet and take steps to reduce Moldova’s external imbalance are at best uncertain. Indeed, as the political interregnum lengthens, the likelihood of a Moldovan default on its foreign obligations increases. But even if a default can be avoided, a sharp devaluation of the leu, significant reductions in imports and declines in GDP and living standards now seem inevitable.