Publication: Monitor Volume: 6 Issue: 40

Roughly four months after suspending lending to Moldova amid escalating political turmoil, the IMF has returned to Chisinau to assess the new government’s economic policy objectives and map out the Fund’s criteria for a resumption of lending. The negotiations between Prime Minister Dumitru Braghis’ newly appointed government and the IMF, which began on February 2, have focused on the release of a frozen US$35 million credit disbursement from Moldova’s US$190 million Extended Fund Facility as well as on the terms of a new credit facility, reportedly worth US$100 million (Interlic, February 14-17). The IMF withheld the US$35 million tranche in early November after the Moldovan parliament blocked the privatization of several tobacco and winemaking companies, a key stipulation in Moldova’s credit agreement with the Fund. The World Bank immediately followed suit, freezing a US$20 million structural adjustment credit. Talks with the World Bank about frozen credits have begun as well, but are contingent on an IMF agreement.

Negotiations have revolved primarily around privatizing wineries and tobacco companies and passing a restrictive government budget. Encouragingly, the Braghis government, despite the presence of the powerful, antireform Moldovan Communist Party within it, has expressed a willingness to meet IMF demands. The government is currently working with an IMF team to prepare its draft 2000 budget, which reportedly calls for a state budget deficit of roughly 2.6 percent of GDP, down from 4.8 percent in 1999. Whether the political will to carry on with IMF-style reforms and economic policies proves sufficient or sustainable, however, remains to be seen. Both the privatization and the budget passage could face significant obstacles in parliament, from either less moderate communists or the Popular Front, a small coalition partner with a penchant for obstructing legislation to exact political gains.

In the background of the Moldova-IMF negotiations lurks the specter of a default on the country’s roughly US$633 million external debt, which includes debt on outstanding Moldovan Eurobonds, estimated at US$65 million. A default is not necessarily imminent, however. Official foreign reserves grew to US$202 million by the beginning of this year and are sufficient to cover Moldova’s US$90-$100 million in debt servicing payments in 2000. Without IMF and World Bank lending, and effectively cut off from international capital markets, a default becomes increasingly likely, however. Due to the increasing risk of default and Moldova’s poor economic fundamentals, Moody’s recently placed the country’s B2 sovereign rating under review for a possible downgrade. Despite initial encouraging signs that the government remains committed to meeting its external obligations, its resolve has yet to be tested and could weaken as mounting debt servicing payments and tough budget deficit requirements from the IMF force the government to further squeeze social spending. While such conditions may tempt the government to accept default in order to secure short-term gains associated with the elimination of Moldova’s burdensome debt servicing requirements, the effects of a default on Moldova’s access to foreign capital and its ability to attract foreign investment would have a severe impact on Moldova’s longer-term prospects for economic growth.