State University of Moldova

Faculty: Economics
Speciality Business and Administration

Individual work
To discipline: English for economics
Topic Economy of Moldova

Elaborate Costru Vasile

Student year 1, group BA1801
Verified: Eșanu Nadejda
Chisinau, 2018
Background

On January 2, 1992, Moldova introduced a market economy, liberalising prices, which

resulted in huge inflation. In 1993, a national currency, the Moldovan leu, was introduced to
replace the Soviet ruble. The economic fortunes of Moldova began to change in 2001; since then
the country has seen a steady annual growth of between 5% and 10%. Remittances from
Moldovans abroad account for a quarter of Moldova's GDP, one of the highest percentages in the
world. However, Ion Marandici claims the high level of remittances did not lead to development.

Moldova's proximity to the Black Sea gives it a mild and sunny climate. The fertile soil
supports wheat, corn, barley, tobacco, sugar beet, and soybeans. Beef and dairy cattle are raised,
and beekeeping is widespread. Moldova's best-known product comes from its extensive and well-
developed vineyards concentrated in the central and southern regions. In addition to world-
class wine, Moldova produces liqueur and sparkling wine. It is also known for its sunflower seeds,
walnuts, apples, and other fruits. This makes the area ideal for agriculture and food processing,
which accounts for about 40% of the country's GDP.

Moldova has experienced economic difficulties, like many other former Soviet republics.
Since its economy was highly dependent on the rest of the former Soviet Union for energy and
raw materials, the breakdown in trade following the breakup of the Soviet Union had a serious
effect, exacerbated at times by drought and civil conflict. The Russian ruble devaluation of 1998
had a deleterious effect on Moldova's economy, but economic growth has been steady since 2000.

Moldova has made progress in economic reform since independence. The government has
liberalized most prices and has phased out subsidies on most basic consumer goods. A program
begun in March 1993 has privatized 80% of all housing units and nearly 2,000 small, medium, and
large enterprises. Other successes include the privatization of nearly all of Moldova's agricultural
land from state to private ownership, as a result of an American assistance program, "Pamânt"
("land"), completed in 2000. A stock market opened in June 1995.

Inflation was brought down from over 105% in 1994 to 11% in 1997. Though inflation
spiked again after Russia’s 1998 currency devaluation, Moldova made great strides in bringing it
under control: 18.4% in 2000, 6.3% in 2001, and 4.4% in 2002. In 2003 inflation escalated again
– due mainly to a drought-driven rise in agricultural prices – reaching 15.7%, although it was
reined in to 12.5% in 2004. The local currency appreciated considerably in 2003 and the first
months of 2004. By May, the leu had reached its highest level since the end of 1999. After
the National Bank of Moldova increased considerably its purchases on the foreign exchange
market, the leu stabilized in November–December 2004 at 12.00-12.50 to the US dollar.
 Moldova redeemed promissory notes with a total value of $114.5 million to
Russian Gazprom for just $50 million. Moldova informed its bilateral creditors in mid-2003 that
it would no longer service its debts. The 2004 budget did provide funds for external debt service
(interest) at some 6% of the government budget, the 2005 budget projects external debt service at
some 4%. The International Monetary Fund (IMF) and World Bank resumed lending to Moldova
in July 2002, and then suspended lending again in July 2003. Although Moldova passed a poverty
reduction strategy in 2004, it has yet to reach an agreement with international financial institutions.

70% of total electrical energy power consumed in Moldova is imported from Ukraine and only
30% is produced in Moldova.

Macroeconomic situation

As a whole, Moldova is doing well, despite a series of consecutive shocks, which included
the doubling of the price of imported natural gas and Russia's ban on imports of Moldovan wine in
2006, and a severe drought in 2007. Growth is estimated at 5 percent in 2007 and is projected to
increase to 7 percent in 2008. Investment is picking up, and is beginning to replace remittances as
the main source of growth—an encouraging sign that the earlier model of consumption-driven
growth is changing.

Moldova increasingly faces the challenges experienced by other transition economies.

Improved growth prospects have come with strong appreciation pressures from foreign exchange
inflows, and a widening trade deficit. Foreign direct investment (FDI) has picked up and is
estimated to have reached 12 percent of GDP in 2007, compared with 7 percent in 2006.

The main macroeconomic concern is inflation, which at 13 percent remains high for the region.

A deterioration in the merchandise trade balance due to strong import growth has been
offset by improvements in net income and transfers, with a small improvement in the current
account deficit to 12 percent of GDP. A resumption of wine exports to Russia in October was a
major positive development, although volumes are likely to recover slowly.

Fiscal policy remained tight, ending 2007 with a modest deficit of 0.3 percent of GDP.
Strong revenue performance was driven by robust VAT on imports, while expenditure was kept
in line with the budget. However, the tax cuts introduced in 2008 may undermine the favorable
fiscal position.

Monetary tightening in 2007 was complicated by the strong inflow of foreign exchange.
The National Bank of Moldova increased reserve requirements from 10 to 15 percent, and raised
policy interest rates by 2.5 percentage points. Nevertheless, the possibility of second-round effects
from the drought, liquidity pressures from growing remittances and FDI, and the continued strong
growth in credit and broad money suggest that upside risks to inflation are not yet fully contained.

In spite of some favorable background, the Republic of Moldova remains Europe's poorest
nation, resisting pursuing the types of reforms that have vastly improved the economies of some
of its Eastern European neighbors. The Communist Party retained political control after winning
the March 2005 parliamentary elections and re-elected its leader, Vladimir Voronin, as president
in collaboration with the opposition. Although the government maintains a pro-Western stance, it
has had trouble pursuing structural reforms and has made little progress on the International
Monetary Fund's program to attract external financial resources. The parliament approved the
government's economic growth and strategy paper in December 2004, but international financial
institutions and Western investors will not be satisfied until the government begins to
address fiscal adjustment, wage restraint, and payment of debt arrears. Despite the fact that the
pace of privatization and industrial output has slowed, GDP growth was 7.3 percent in 2004,
consumption continues to grow, and the currency continues to appreciate. The impasse in the pro-
Russian Transnistria enclave, plagued by corruption and the smuggling of arms and contraband,
continues despite international attempts at mediation.