Moldova is torn between historic links to Russia and a possible future as part of the EU. Whichever direction the country opts for, it must resolve issues with corruption and diversification before it can progress. Kit Gillet reports.

Dumitru Pintea

Dumitru Pintea

One of the poorest countries in Europe, Moldova has found itself pulled in two directions in recent years: between those who want to stay close to traditional partner Russia and those who favour closer ties with the EU.

Since 2009, the former Soviet republic, with a population of 3.5 million, has been pursuing a pro-EU path, and in 2014 it signed an association agreement with the union, which came into full effect in July 2016.

Daniela Re Fraschini, Moody’s assistant vice-president and lead analyst for Moldova, says that EU export quotas have helped to offset the impact of trade sanctions imposed by Russia after the EU association agreement was signed, and that in the longer term Moldova will benefit from the agreement “through improved access to [the] EU market as well as improved trade with the rest of the world, given the expected gradual alignment of export quality standards with those of the EU”.

According to Moldova’s National Institute of Statistics, the EU is currently Moldova’s biggest trade partner. About 66% of the country’s exports go to EU markets, compared with less than 20% to the Russian-led Commonwealth of Independent States (CIS).

Remittance is key

Moldova’s economy relies heavily on agriculture – according to some estimates, about one-third of all workers in the country are farmers – as well as remittances from Moldovans working abroad.

Low wages and a lack of opportunities mean that many Moldovans leave the country to find better opportunities. Remittances account for roughly 25% of gross domestic product (GDP) and provide a key source of funding for domestic consumption, although they also increase the economy’s susceptibility to external shocks and currency fluctuations.

The current flow of remittances points to the continued realignment of the Moldovan economy, with almost equal amounts in 2017 coming from the EU and CIS, according to National Bank of Moldova figures. As recently as 2012, more than 66% of remittances came from the CIS, compared with just 35% last year.

In 2016, Moldova’s GDP returned to growth, expanding by 4.1%, after a 0.5% contraction in 2015 caused by the disappearance from the banking sector of $1bn, the equivalent of one-eighth of the country’s GDP. The massive scandal shook the country and led to a freezing of foreign aid, as well as a series of political crises that have resulted in the appointment of three prime ministers (as well as two interim prime ministers) since 2015.

Moody’s expects the Moldovan economy to grow by about 3.5% in 2018, a similar figure to 2017, which was supported by a pick up in remittances on the back of a stronger recovery in Russia and Europe. In the medium term, the rating agency forecasts a growth rate of about 4%. However, the economy is still struggling to diversify.

New model needed

Moldova receives support from international partners such as the World Bank, the International Monetary Fund (IMF) and the European Bank for Reconstruction and Development (EBRD), which have invested heavily in providing assistance to the country: in 2017 alone, the EBRD invested a record €130m to provide financial support to the private sector and to develop much-needed infrastructure.

A lot of people are closing their businesses and leaving the country. Moldova needs to adopt a new economic model

Dumitru Pintea

“For good companies that are transparent, there are a lot of external funding options from the EBRD [and] World Bank. There is a lot of credit available [for] agriculture,” says Dumitru Pintea, an economist at Expert-Grup, a think tank based in capital city Chisinau. However, he adds that the economy is in a difficult place at the moment because of a loss of trust in economic development due to the banking crisis. “A lot of people are closing their businesses and leaving the country. Moldova needs to adopt a new economic model,” says Mr Pintea.

Moldova also desperately needs to rein in corruption and improve the rule of law: the country languishes in the lower third of Transparency International’s Corruption Perception Index, and there is little trust in the main political parties throughout the country.

Making progress

In 2016, the IMF agreed a three-year loan programme with Moldova, worth about $183m, conditional on the government carrying out serious reforms following the banking scandal. In December 2017, the fund’s board approved the disbursement of the latest tranche, worth $22m, suggesting the government is meeting those requirements.

According to Moody’s Ms Re Fraschini, the EU association agreement is also likely to provide an anchor for economic reforms, which will bring Moldova closer to EU norms and standards, though progress is expected to be gradual, with significant implementation risk given the country’s limited institutional capacity.

The past few years have been challenging for Moldova, struggling with the impact of a major banking sector crisis, the economic realignment towards the EU, and political uncertainty. Ordinary Moldovans are hoping for better years ahead.

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