Economy of Moldova

Theeconomy of Moldovais anemergingupper-middle income economy,Moldovais a landlockedEastern Europeancountry, bordered byUkraineon the East andRomaniato the West. It is a formerSoviet republicand today acandidate memberto theEuropean Union.
On January 2, 1992, Moldova introduced amarket economy, liberalising prices, which resulted in hugeinflation. In 1993, a national currency, theMoldovan leu, was introduced to replace theSoviet rouble.  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%.Remittancesfrom Moldovans abroad account for a quarter of Moldova'sGDP, one of the highest percentages in the world.
Moldova's proximity to theBlack Seagives it a mild and sunny climate. The fertileChernozemsoil supportswheat,corn,barley,tobacco,sugar beet, andsoybeans. Beef anddairy cattleare 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. Moldova producesliqueurandsparkling wine. It is also known for its sunflower seeds, walnuts, apples, and other fruits. This makes the area ideal foragricultureand food processing, which accounts for about 40% of the country'sGDP.
In 2018, Moldova produced:
In addition to smaller productions of other agricultural products, likerapeseed(85 thousand tons). Moldova has a production ofgrapeandapplebetween the 20th and 25th largest in the world, and a production ofplumandsunflower seedbetween the 10th and 15th largest of the world.
Moldova has experienced economic difficulties, like many other former Soviet republics. Since its economy was highly dependent on the rest of the formerSoviet Unionfor 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. TheRussian rouble devaluationof  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 hasprivatized80% of all housing units and nearly 2,000 small, medium, and large enterprises, which led to a rise in homelessness and unemployment. 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 completed in 2000. Astock marketopened in June 1995.
Inflationwas brought down from over 105% in 1994 to 11% in 1997. Though inflation spiked again afterRussia’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 theNational Bank of Moldovaincreased considerably its purchases on theforeign exchange market, theleustabilized in November–December 2004 at 12.00-12.50 to theUS dollar.
Moldova continues transitioning towards a free-market economy. The country recorded its fifth consecutive year of positive GDP growth in 2004, with year-end real GDP growth of 8%. This growth is impressive considering that, prior to 2000, Moldova had recorded only one year of positive GDP growth since independence. Budget execution in 2004 was also impressive, as actual consolidated budget revenues exceeded projections by 1.4% for most of the year.
Privatization results in 2004 were not significant: several smaller companies and one winery were privatized in 2004, but the government postponed indefinitely the privatization of several larger state enterprises, including two electricity distribution companies. Sporadic and ineffective enforcement of the law, economic and political uncertainty, and government harassment and interference continue to discourage inflows offoreign direct investment.
Imports continued to increase more rapidly than exports during the first nine months of 2004; Moldova’s terms of trade worsened, as higher-priced energy imports outpaced the value of Moldova’s main exports—agricultural and agro-processing goods.
During 2002, Moldova rescheduled an outstandingEurobond, in the amount of $39.6 million, to avoid a potential default. In May 2004, Moldova redeemedpromissory noteswith a total value of $114.5 million to RussianGazpromfor 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%. TheInternational Monetary Fund(IMF) andWorld Bankresumed 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 fromUkraineand only 30% is produced in Moldova.
In 2021 Moldova's trade with Russia was $1.33b compared with the EU of $5.06. In 2022 the EU trade increased to $6.9b
As a whole, Moldova is doing well, despite a series of consecutive shocks, which included the doubling of the price of imported natural gas and2006 Russian ban of Moldovan and Georgian wines, and a severe drought in 2007. Growth is estimated at 5 percent in 2007 and is projected to increase to 7 percent in 2008.Investmentis 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 ofGDP. 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 robustVATon 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. TheNational Bank of Moldovaincreased 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 andFDI, 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, Moldova remains Europe's poorest nation, resisting pursuing the types of reforms that have vastly improved the economies of some of itsEastern Europeanneighbors. TheCommunist Partyretained political control after winning the March 2005 parliamentary elections and re-elected its leader,Vladimir Voronin, as president in collaboration with theopposition. Although the government maintains a pro-Western stance, it has had trouble pursuing structural reforms and has made little progress on theInternational 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 andWesterninvestorswill not be satisfied until the government begins to addressfiscal 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-RussianTransnistriaenclave, plagued bycorruptionand the smuggling ofarmsandcontraband, continues despite international attempts at mediation.
According to the 2024Index of Economic Freedom, Moldova ranks 99th globally with the overall score of 57.1, a decrease relative to 2023.
*Everything above 60 is considered to be Moderately Free.
According to the 2020Ease of Doing Business Index, Moldova's Distance to Frontier is 74.4/100 (48th globally), an increase of 1.3 relative to 2019.
*DTF (Distance to Frontier): Higher is better
According to the World Bank, Moldova's weighted average tariff rate in 2001 (the most recent year for which World Bank data are available) was 2.8 percent. (The World Bank has revised the figure for 2001 downward from the 3.9 percent reported in the 2005 Index.) A 2004 World Bank report notes a "range of informal barriers to both imports and exports in Moldova, such as cumbersome and restrictive trade procedures, corruption, burdensome and inappropriate regulations and high transport costs." Based on the revised trade factor methodology, Moldova's trade policy score is unchanged.
Currently Moldova has signed multilateral and bilateral Free Trade Agreements with 43 countries.
Countries tend to benefit from sharing borders with developed markets as this facilitates trade and development. Below is a table of Moldova's neighboring countries, their GDP per capita in 1995 and 2021, and trade values between the pairs. Their evolution is distinct as Romania went from a GDP per capita which was about 1.7 times larger than that of Moldova's in 1995 to one which in 2021 is more than 2.5 times as large. Ukraine on the other hand has decreased when compared to Moldova.
The Russian Federation for comparison rose from 5,613 in 1995 to 34,043 in 2021, slightly less than Romania.
This is a list of regions of Republic of Moldova by nominal GDP shown in Moldovan leu and Euro. Statistics shown are for 2021.
Moldova'sincome taxrate has been a flat 12 percent since 2019.
Thecorporate taxrate for SRL companies has been 12 percent from 2012, since 2018 the unique tax of 7% for IT companies part of Moldova IT Park was implemented.
The Sales tax (VAT) standard rate has remained at 20% since 2014. There are reduced rates of 12% and 8% for certain goods.
In 2024, Moldova decided that companies in Transnistria and Moldova should be treated in a similar way as regards customs duties on imported goods, resulting in Transnistria import companies needing to register with Moldova and pay import custom duties (but not V.A.T., nor excise duties) to Moldova. This would also hopefully reduce smuggling of goods out of Transnistria that had been imported duty free, such as cigarettes.
Annual inflation rate hit 30.2% in December 2022, mainly as a result of the rise in world wide fuel and food costs, falling in 2023, interest rates are now also falling but remain high until inflation is under control.
The Moldovan government does not maintain many formal barriers to foreign investment, and the Moldovan embassy reports that foreign investors are free to "place their investments throughout the Republic of Moldova, in any area of business activity, as long as it does not go against the interests of the national security, anti-monopoly legislation, environment protection norms, public health and public order."
Since gaining independence in 1992, Moldova privatised most state-owned enterprises, and most sectors of the economy are almost entirely in private hands. The government keeping control of electrical distribution, railways, the state airlineAir Moldova, fixed line communication companyMoldtelecomand the country’s largest tobacco company.
Invest Moldova was created to encourage inward investment, promoting the low levels of tax on individuals and companies. Free Economic Zones have been created designed for export-oriented manufacturing companies, Industrial Parks have been established to bring companies together and offer lower operating costs.
Foreign direct investment is slowly rising, $587m in 2022, $410m in 2021 and $150m in 2020, with each year supplemented with $4.7-4.9 billion of loans, with manufacturing, financial intermediation, and trade being the main sectors.
There are no official barriers to founding foreign banks or branches in Moldova. The central bank theNational Bank of Moldovahas a responsibility to the management and control of all banks in Moldova.
In 2014 a major fraud took place, the2014 Moldovan bank fraud scandalwhich nearly bankrupted the country. $1 billion disappeared from three Moldovan banks:Banca de Economii,UnibankandBanca Socială.In the week preceding the2014 Moldovan parliamentary electionmore than $750 million were extracted from the three banks in just three days, with a van loaded with stolen files from the banks being burned. A number of people were charged,Ilan Shorwas convicted but fled justice.
Major reforms to the legal framework of the Moldovan financial sector have taken place as the country progresses to implementing the EU`s legislation. By 2023 the Moldovan banking system is regarded as harmonized at a high level with the relevant EU community.The IMF reported in 2023 that Banks remain adequately capitalised, maintain adequate liquidity coverage and healthy asset quality.
The government influences prices through the large state-owned sector. According to the Ministry of Economy, the state regulates the prices of goods and services provided by monopolies and the prices of electric or thermal energy, land, medical services, and services offered by local tax regions. Moldova has two legal monthly minimum wages: one wage for state employees and another, higher wage for the private sector.
In 2023, the average monthly salary in the economy was MDL 12,175 (approx. 630 EUR / 686 USD)
TheU.S. Department of Commercereports that the "legal system has improved in recent years. Moldova has a documented and consistently applied commercial law." Nevertheless, much more needs to be done. According to theU.S. Department of State, "The Constitution provides for an independent judiciary; however, the executive branch has exerted undue influence on the judiciary. Many observers believe that arrears in salary payments also make it difficult for judges to remain independent from outside influences and free from corruption."
"Bureaucratic procedures are not always transparent and red tape often makes processing unnecessarily long," reports the U.S. Department of Commerce. "[C]ommercial law is a confusing patchwork of narrow statutes and an outdated civil code. WithUSAIDexperts, a draft civil code has been developed which follows the current European practice of incorporating commercial law provisions." The same source reports that anti-corruption laws "are not effectively enforced and corruption exists at an advanced level." A report provided by the World Bank indicates that labor laws are somewhat rigid.
Transparency International's 2004 score for Moldova is 2.3. Thereafter, Moldova'sinformal marketscore is 4 in 2005.
In 2011 the corruption score for Moldova is 2.9, better than it was in 2004, concluding TI.
There are around 15,000 sights and 300 natural zones within Moldova, which represent a potential for domestic and international tourists.
Industrial production growth rate:3.4% (2017)Agricultural production growth rate:2.5% (2018)
This article incorporatespublic domain materialfromThe World Factbook.CIA.