Commission staff working document -Ex ante evaluation statement Macro-financial assistance to the Republic of Moldova Accompanying document to the Proposal for a Decision of the European Parliamentand of the Councilproviding macro-financial assistance to the Republic of Moldova COM(2010)302
Date: 2010-06-09
Institutions: European Commission
Subjects: EU aid, European neighbourhood policy, Moldova, economic stabilisation, financial aid, macroeconomics, reflation

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EUROPEAN COMMISSION 

Brussels, 9.6.2010 
SEC(2010) 706 final 

COMMISSION STAFF WORKING DOCUMENT 

Ex ante evaluation statement  
Macro-financial assistance to the Republic of Moldova 

Accompanying document to the 

Proposal for a decision of the European Parliament and of the Council  
providing macro-financial assistance to the Republic of Moldova 

COM(2010)302 

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EX ANTE EVALUATION STATEMENT 

MACRO-FINANCIAL ASSISTANCE TO THE REPUBLIC OF MOLDOVA 

TABLE OF CONTENTS 

1. 

1.1. 

1.2. 

1.3. 

1.4. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

4. 

5. 

5.1. 

5.2. 

5.3. 

5.4. 

5.5. 

6. 

6.1. 

6.2. 

7. 

Problem analysis and needs assessment....................................................................... 3 

Background .................................................................................................................. 3 

Recent economic developments and economic outlook .............................................. 4 

The government programme of economic reform ....................................................... 7 

The Republic of Moldova's external financing needs .................................................. 8 

Objectives and related indicators of the macro-financial assistance............................ 9 

Objectives..................................................................................................................... 9 

Indicators.................................................................................................................... 10 

Alternative delivery mechanisms and risk assessment .............................................. 10 

Delivery mechanisms ................................................................................................. 10 

Risk assessment.......................................................................................................... 10 

Added value of EU involvement................................................................................ 11 

Genval criteria on macro-financial assistance............................................................ 12 

Exceptional Character and Limited Timeframe......................................................... 12 

Political pre-conditions .............................................................................................. 12 

Complementarity........................................................................................................ 13 

Conditionality............................................................................................................. 13 

Financial discipline .................................................................................................... 13 

Planning of future monitoring and evaluation ........................................................... 14 

Monitoring.................................................................................................................. 14 

Evaluation .................................................................................................................. 14 

Achieving cost-effectiveness ..................................................................................... 15 

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1. 

PROBLEM ANALYSIS AND NEEDS ASSESSMENT 

1.1. 

Background 

The Republic of Moldova has gone through a difficult period of transition since the breakup 
of the former Soviet Union. It has been one of the countries in the European Union's eastern 
neighbourhood  most  heavily  affected  by  the  global  crisis.  Despite  high  average  economic 
growth rates in the years leading up to the crisis, the country's income level as measured by 
purchasing  power  parity  adjusted  real  GDP  per  capita  is  by  far  the  lowest  among  the  EU 
eastern neighbour countries. The policy response to the economic crisis was delayed first by 
the  preparation  for  parliamentary  elections  in  Spring  2009  and  later  by  internal  political 
tensions over the election results. The repeat elections that had to be organised in the Autumn 
of  2009  brought  a  coalition  government  into  power  on  a  reform  agenda  that  seeks  closer 
approximation  to  the  EU  and  aims  at  turning  around  the  previous  growth  model  that  was 
relied  heavily  on  the  inflow  of  remittances.  These  political  developments  have  allowed  a 
speeding up of the scaling up of bilateral relations with the EU, culminating in the opening of 
formal negotiations on a new Association Agreement on 12 January 2010. 

In  2008,  the  Commission  completed  the  implementation  of  the  previous  package  of  macro-
financial assistance, totalling EUR 45 million, which was adopted by the Council on 16 April 
2007. The second and third instalments of, respectively, EUR 10 and 15 million were released 
in June and December 2008. The programme was part of the financing package in support of 
the  government's  three-year  arrangement  with  the  IMF  under  the  Poverty  Reduction  and 
Growth Facility (PRGF) dating back to May 2006. In addition, the World Bank (WB) has a 
consistent engagement strategy with the country. 

Immediately  after  the  new  government  headed  by  Prime  Minister  Filat  was  sworn  in  on  25 
September 2009 the authorities of the Republic of Moldova approached international donors 
with a request to cover the financing needs of the country. On 29 September, during a visit to 
Commissioners Almunia and Ferrero-Waldner, the new Prime Minister confirmed the request 
for  EU  financial  support  submitted  earlier  in  the  year  by  the  previous  government.  On  29 
January  2010,  the  IMF  Board  approved  a  three-year  assistance  programme,  covering  the 
period  2010-2012.  The  IMF  programme  consists  of  a  mixture  of  Extended  Credit  Facility 
(ECF)  and  Extended  Fund  Facility  (EFF)  Arrangements  and  was  designed  to  be 
complemented  by  other  international  donors,  in  particular  the  WB  and  the  EU.  The  IMF 
programme  entails  a  frontloaded  package  of  SDR  369.60  million  in  total  over  a  three-year 
period  (around  USD  588  million).  An  initial  purchase  of  SDR  60  million  became  available 
upon approval by the IMF Board. In addition, the authorities have been able to use the new 
allocation of SDRs from the IMF (around US$186 million, transferred in late 2009) to cover 
its  immediate  budget  financing  needs.  Key  prior  actions  implemented  before  the  Board 
approval included corrective measures to the 2009 budget (scaling down of commitments to 
public wage increases made earlier in 2009, and measures to increase taxation and the price of 
heating to cost-recovery levels. 

The Commission is submitting to the European Parliament and to the Council a proposal for 
macro-financial  assistance  (MFA)  for  the  Republic  of  Moldova  amounting  to  a  maximum 
total amount in grants of EUR 90 million over a two year period. The European Union MFA 
is aimed at contributing to covering the country's external financing needs in 2010 and 2011 
as identified by the Commission in cooperation with the IMF. Since the uncovered financing 

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needs of the Republic of Moldova are concentrated in those two years, a two-year programme 
would be an appropriate contribution of the EU to close the financing gap. Should in 2012 a 
substantial  financing  gap  still  exist,  further EU  assistance  might  be  considered  under  a  new 
proposal. But  on  present information and  given  the large  uncertainties surrounding the final 
year of the IMF programme, the current proposal appears appropriate.  

The Union MFA will be part of the financing package put in place in support of the Republic 
of Moldova's efforts to confront substantial external financing needs and a sharp deterioration 
of  public  finances  in  the  context  of  a  v  difficult  economic  situation.  It  will  complement 
financing provided by the Bretton Woods Institutions (BWIs) – the IMF, in the context of the 
ECF/EFF  programme  and  the  WB,  centred  on  a  Development  Policy  Operation  currently 
under  preparation.  The  Union  MFA  is  aimed  at  covering  the  residual  financing  needs  that 
remain  after  the  contributions  of  other  multilateral  creditors,  and  of  other  official  bilateral 
donors,  including  other  EU  instruments,  such  as  EIB  loans  and  sectoral  budget  support 
programmes financed under the European Neighbourhood and Partnership Instrument.  

The  swift  implementation  of  the  measure  is  justified  by  the  need  to  close  the  substantial 
external and budgetary funding gap of the Republic of Moldova in 2010 and 2011. EU macro-
financial assistance to help stabilise the macro economy is needed rapidly in the expectation 
that  the  contributions  from  other  (bilateral)  donors  are  likely  to  take  longer  to  come  on 
stream1. A rapid response is in line with the objectives of the MFA instrument, which is by 
design a crisis-related support tool. 

1.2. 

Recent economic developments and economic outlook  

The  Republic  of  Moldova  has  faced  a  very  difficult  year  on  both  economic  and  political 
fronts. In Europe’s poorest country, violent protests in the aftermath of disputed elections in 
April  2009  added  to  political  grievances  and  led  to  new  elections  in  the  summer,  with  a 
victory for the opposition coalition. On the economic side, tumbling remittances are crippling 
the economy. The Republic of Moldova is one of the countries in the Eastern neighbourhood 
hit hardest by the global recession. GDP in 2009 shrank by 6.5%, which is in sharp contrast 
with the 7.2% GDP growth in 2008. External shocks due to the global crisis, such as falling 
remittances and FDI inflows are the main causes for the deep recession. The unemployment 
rate is rising rapidly and the government deficit has widened sharply to 6.9% of GDP in 2009. 
While the deep contraction in demand has also led to a considerable reduction in the current 
account deficit it still remains high. Monetary and fiscal instruments can help to cushion the 
shocks,  but  international  assistance  will  be  crucial  to  help  stabilise  the  economy.  For  the 
medium  term,  the  main  reform  agenda  remains  the  diversification  of  economic  activity  and 
improvements to the business environment and public and private governance.  

The  Republic  of  Moldova  is  suffering  from  the  economic  recession  in  its  main  trading 
partners: Russia, Ukraine, Belarus and the EU. The global crisis started affecting the economy 
already in the last months of 2008. A deceleration of trade growth, declining access to trade 
finance, and lower remittances and FDI inflows were important transmission channels. In the 
course  of  2009,  the  broad-based  downturn  continued.  Exports  declined  substantially  but 
imports  declined  even  more  sharply,  along  with  domestic  demand.  In  the  third  quarter  of 
2009, industrial production was about 25% lower to its level a year before. 

1 

In  this  regard,  the  outcome  of  the  Consultative  Group  meeting  which  took  place  in  Brussels  on  24 
March 2010 was encouraging. 

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With the trade balance improving due to imports contracting faster than exports, the current 
account  deficit  decreased  markedly  but  remains  large;  it  fell  from  around  17%  of  GDP  in 
2008 to some 9% of GDP in 2009. A fall in real incomes was partly cushioned by the rapid 
deceleration in prices. CPI inflation decreased very rapidly, from around 16% in the second 
quarter of 2008, to -2.3% in August 2009, before picking up again to 2.8% in January 2010. 
The  adjustment  of  the  external  deficit  due  to  the  crisis  also  helped  alleviate  financing 
constraints  somewhat.  But  external  financing  sources  dried  up  even  more  sharply  than  the 
current  account  deficit,  as  remittance  inflows  are  estimated  to  have  decreased  by  30%  in 
2009, and foreign direct investment by around 45%. 

Whereas  the  external  accounts  have  started  to  adjust  as  a  result  of  the  deep  recession,  the 
fiscal situation has deteriorated quickly since the middle of 2008, despite public expenditure 
cuts of 20% across the board decided in Spring 2009. The latest budgetary execution figures 
for 2009 reveal substantial revenue shortfalls (reflecting the strong reduction in imports as a 
key  source  of  revenue),  partly  but  not  fully  offset  by  lower-than-budgeted  expenditures  and 
rectifications implemented by the incoming government. All in all, the government deficit is 
expected to have deteriorated markedly in 2009, to 6.9% of GDP, against only 1% of GDP in 
2008.  The  government  has  been  financing  part  of  the  revenue  shortfall  by  placing  T-bills, 
largely  with  domestic  banks.  But  this  strategy  is  not  sustainable  as  it  is  leading  to  a  sharp 
increase  in  public  debt  (expected  to  rise  to  31%  of  GDP  towards  the  end  of  2009,  up  from 
21% in 2008), and also risks the heightening vulnerability of the financial sector to an adverse 
shift in sentiment.  

The  2010  budget  was  approved  by  Parliament  on  23  December  2009.  It  is  in  line  with  the 
targets of the IMF programme. It includes several adjustment measures aimed at reducing the 
deficit. On the revenue side, taxes were increased for gambling and diesel powered and luxury 
cars, the  road  tax was  increased  and excises were raised  substantially for petrol, beer,  other 
alcoholic beverages and cosmetics. Local taxes will also be higher, whereas the real estate tax 
will be levied on the market value of properties, not on the book value. On the expenditure 
side,  several  measures  were  implemented  as  well.  Public  employment  will  be  reduced  and 
early  retirement  options  curtailed  for  civil  servants,  while  public  sector  wages  are  set  to 
increase less than had been foreseen by the previous government. In addition to the measures 
implemented  in  the  budget,  utility  tariffs  were  raised  to  bring  them  to  cost  recovery  levels. 
This  entailed  sharp  increases  in  the  cost  of  energy  for  households:  16.6%  for  gas,  29%  for 
heating and 20% for electricity as of January 2010. Announced reforms on the structural side 
include  a  simplification  of  the  procedures  to  register,  start  and  liquidate  a  business  and  to 
obtain construction permits. The intended overhaul of the pension and social security schemes 
includes extension of the obligation to pay social security contributions to all employees. The 
statutory pension age (currently 62 for men and 57 for women) will not be raised, however. 

All in all, the 2010 budget foresees a slight reduction of the government deficit to around 6% 
of GDP. The government debt level is expected to rise further to nearly 40% of GDP in 2011-
2012.  Domestic  sources  of  budget  financing  are  not  sufficient  to  cover  budgetary  financing 
needs. Hence, there is a need for higher external financing. 

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Table 1 : Republic of Moldova - Main economic indicators

2007

2008

2009

2010

2011

2012

      actual

projections

Real sector

   Real GDP growth (domestic currency, % change)

   GDP nominal (US$, billion)

   GDP per-capita (EUR)

   Inflation (average)

   Inflation (end-year)

Social indicators

3,0

4.4

902

12,4

13,3

7,2

6,0

1160

12,8

7,2

-6,5

5.4

1091

-0,2

0,5

   Unemployment (ILO definition, %)

5,1

4,0

5,5

Fiscal sector

   Total revenues (% GDP)

   Total expenditures (% GDP)

   General government balance (% GDP)

   Gross public debt (% GDP)

Monetary sector

   Domestic credit to the private sector (% GDP)

   Broad money (M3, % change)

   Degree of monetisation (M2/GDP, %)

   Dollarisation in bank deposits (%)

External sector

   Current account balance (% GDP)

   Trade balance (% GDP)

   FDI (net, % GDP)

   Remittances (% GDP)

External vulnerability

   External public and private debt (% GDP)

debt service (% of exports of goods and services)

   International reserves (USD, million)

Financial sector

   Real effective exchange rate end-year (%, + is apprec.)

   Exchange rate (Moldovan leu per EUR, average)

   Exchange rate (Moldovan leu per USD, average)

41,7

42,0

-0,2

26,8

37,8

12,2

34,5

43,3

-15,3

-52,1

11,0

32,3

64.2

13.7

1334

16,0

16,5

12,1

40,6

41,6

-1,0

21,3

51,7

47,3

34,7

31,3

-16,3

-53,3

11,2

33,9

56,0

16.6

1672

16,0

16,5

12,1

39,3

46,2

-6,9

30,9

20,3

18,4

26,5

43,8

-9,0

-52,8

11,8

31,2

65.9

19.2

1456

23,3

15,2

10,3

Sources: Moldovan authorities, IMF, EBRD, WB, NBM, EC staff calculations.

1.5

5.1

979

6,2

6,5

n.a

38,8

45,8

-6,5

36,9

-4,9

-6,0

26,5

43,8

-9,5

-36,6

6,4

22,5

78.6

20.8

1695

-19,7

15,5

11,1

3,0

5.3

n.a

5,0

5,0

n.a

n.a

n.a

-5,0

39.6

n.a

n.a

n.a

n.a

-11,2

n.a

n.a.

23,6

83.6

16.9

1876

n.a.

n.a.

n.a

5,0

5.7

n.a.

5,0

5,0

n.a.

n.a.

n.a.

-3,0

39.6

n.a.

n.a.

n.a.

n.a.

-10,2

n.a.

n.a.

n.a.

85.7

18.3

2090

n.a.

n.a.

n.a.

As regards monetary and exchange rate policies, as a result of the double external shock on 
trade  and  remittances,  pressures  on  the  national  currency  built  up.  The  National  Bank  of 
Moldova  (NBM)  could,  however,  partly  counter  these  pressures  by  using  some  of  the 
country's  official  reserves.  Reserves  were  reduced  by  nearly  40%  between  September  2008 
and  April  2009.  The  bulk  of  this  reduction  took  place  in  early  2009.  Subsequently,  the 
exchange rate of the Moldovan leu versus the USD (the traditional anchor currency) stabilised 
and reserve levels started increasing again. Between December 2009 and mid-February 2010, 
the exchange rate of the Moldovan leu weakened once more, by around 15% against the USD 
but stabilised thereafter. The central bank was also able to reduce official interest rates despite 
concerns  about  the  exchange  rate  due  to  disinflation.  Reserve  requirements  were  eased 
substantially as well. Between September 2008 and September 2009, the NBM cut its main 
refinancing rate from 18.5% to 5.0%. Nevertheless, real interest rates remain high.  

The  outlook  for  the  Republic  of  Moldova  for  the  short  to  medium  term  is  challenging.  Its 
main  trading  partners  –  Russia,  Ukraine,  Belarus,  but  also  the  EU  –  have  all  been  severely 
affected by the global crisis, and the recovery is expected to be gradual. Moreover, external 
financing conditions, notably the availability of credit resources for transition economies, and 
prospects  for  remittance  flows  have  deteriorated  sharply  since  the  start  of  the  crisis.  Thus, 
after the sharp adjustment in 2009, the economy of the Republic of Moldova is expected to 

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recover only slowly in the coming years. The budgetary situation in particular remains highly 
vulnerable. Macro-economic stabilisation is thus the central immediate concern, and financial 
assistance  of  the  international  community  will  be  crucial  in  achieving  this.  That  said,  the 
ambitious  domestic  reform  and  adjustment  agenda  needs  to  be  implemented  to  put  the 
Republic of Moldova back on a sustainable convergence track.  

1.3. 

The government programme of economic reform 

In  response  to  the  challenges  posed  by  the  economic  crisis,  on  4  December  2010  the 
Moldovan authorities launched an Economic Stabilisation and Recovery Programme covering 
the  period  2009-2011.  The  Economic  Stabilisation  and  Recovery  Programme  aims  at  three 
priorities, namely: 1) stabilisation and streamlining of public finance;  2) economic recovery 
through structural reforms and 3) securing efficient and fair social protection. 

As regards fiscal policy, the authorities are embarking on a path to restore fiscal sustainability 
by  2012.  They  target  a  structural  budget  deficit  adjustment  of  about  6  percentage  points  of 
GDP,  steadily  reducing  the  headline  deficit  from  9  percent  of  GDP  in  2009  to  7  percent  in 
2010,  5  percent  in  2011,  and  3  percent  by  2012.  This  fiscal  effort  should  bring  the  budget 
back to sustainability at a speed matching the economy’s recovery. It will be achieved mainly 
through  reform-based  reduction  of  current  expenditure  to  affordable  levels,  while  public 
investment will be raised and the social safety net enhanced. In addition, there is the intention 
to  raise  revenue  from  consumption-based  taxes,  reinstate  the  corporate  income  tax  in  the 
medium term, and modernise tax administration to support the adjustment.  

Structural reforms will aim to improve the business environment and support the fiscal effort. 
Over the whole programme period, a programme of deregulation and liberalisation will free 
business  initiative,  stimulate  competition,  and  strongly  support  the  economic  recovery.  In 
2010, actions in the district heating sector will address the fiscal losses resulting from prices 
set below cost. Reforms in the social insurance system aim to keep it sustainable by phasing 
out early retirement and improving the mechanism for sick leave compensation. In 2011–12, 
continuing  efforts  to  reform  public  administration  and  the  education  system  should  raise 
efficiency  and  yield  further  savings.  The  planned  restructuring  of  the  energy  and  telecoms 
sectors  would  draw  private  investment  in,  lower  costs  and  raise  the  economy’s  long-term 
growth  rate.  Privatisation  will  accelerate  as  well  once  investor  interest  rekindles.  Specific 
plans for reforms beyond 2010 will be fleshed out in the context of programme reviews and 
the 2010 Article IV consultation. The authorities are collaborating closely with international 
donors in the implementation of the structural agenda. 

The  fiscal  adjustment  and  structural  reform  measures  will  be  supplemented  by  developing 
targeted  social  assistance  programmes  to  help  vulnerable  strata  in  society  cope  with  the 
hardships  stemming  from  the  crisis.  In  this  regard,  the  programme  will  help  mobilise 
resources for successful implementation of the poverty reduction agenda. 

As regards monetary and exchange rate policies, towards the end of 2009 the National Bank 
of Moldova announced a redefinition of its medium-term strategy for the period 2010-2012, 
which  has  price  stability  as  its  chief  objective.  For  2010,  the  central  bank  announced  an 
inflation target of 5.0% with a deviation band of ±1 percentage point. As a first move under 
the new policy framework, the NBM raised the base rate to 6% in late January 2010, due to an 
increased perceived risk of overshooting the inflation target. 

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The  national  programme  attaches  an  important  role  to  international  financial  assistance  to 
help  the  economy  achieve  macro-economic  stabilisation  and  recovery  and  to  underpin 
implementation of the reform agenda. 

1.4. 

The Republic of Moldova's external financing needs 

Table 2 summarises the estimates of the country's external financing needs over the 
period 2010-2012, the programme period foreseen by the IMF.  

Total needs for the three years amount to a total of USD 8 billion, largely due to the 
need to finance current account deficits of around 10% of GDP. Reduced remittances 
and  private  capital  flows  (the  combined  amount  of  which  is  estimated  to  have 
decreased  from  around  41%  of  GDP  in  2008  to  around  27%  of  GDP  in  2009)  are 
expected to result in a persistent and substantial financing gap over the period 2010-
2012, amounting to slightly over USD 1.4 billion. 

Out  of  this  amount,  the  Bretton  Woods  Institutions  are  expected  to  provide  around 
USD 800 million. For the largest part, this will be in the form of the IMF's ECF/EFF 
programme, while the World Bank is putting in place an additional USD 230 million, 
mainly in the form of budget support. The residual financing gap – around USD 620 
million  or  EUR  480  million  over  the  2010-12  period  (based  on  the  exchange  rate 
assumptions  underlying  the  financing  table)  –  is  expected  to  be  partly  covered  by 
other  multilateral  creditors  (the  EIB,  the  EBRD  and  the  Council  of  Europe 
Development  Bank)  and  bilateral  donors  (Sweden,  the  Netherlands  and  the  USA). 
Identified  loans  and  transfers  under  this  heading  add  up  to  more  than  EUR  210 
million. In addition the EU has put in place sectoral budget support (BS) grants under 
the European Neighbourhood and Partnership Instrument (ENPI). The disbursements 
in 2010-2012 under budget support programmes already approved amount to nearly 
EUR 100 million. Taking into account programmes planned under the ENPI National 
Indicative  Programme  for  the  period  2011-2013  brings  the  total  amount  of  ENPI 
budget support expected to be provided to the Republic of Moldova over 2010-2012 
to nearly EUR 150 million. As ENPI budget allocations under future programmes are 
expected to be somewhat higher than those under the existing programmes, the ENPI 
BS disbursements should be increasing over time. This reflects a higher contribution 
of structural budget support to covering Moldova's financing needs.  

Uncovered financing needs are currently estimated at close to EUR 120 million for 
the  period  2010-12,  including  about  EUR  90  million  for  2010-2011.  The  proposed 
MFA would precisely match this uncovered part of the financing gap in 2010-2011. 
It  would  correspond  to  some  27%  of  the  residual  financing  needs  of  this  two-year 
period  not  covered  by  the  Bretton  Woods  Institutions.  Further  EU  MFA  could  be 
considered  at  a  later  stage,  in  case  substantial  uncovered  financing  needs  remain 
beyond 2011. 

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Table 2: Republic of Moldova - External Financing Requirements and Sources, 2010-12

1 Total requirements

Current account deficit (excl. transfers)

of which : exports of goods
           imports of goods

Debt amortization

of which : public and publicly guaranteed debt
               private debt

2 Available financing

Capital and financial account
         Capital transfers (net)
         Foreign direct investment (net)
         New private borrowing

Current transfers

Worker's remittances
Other private transfers

Compensation of employees

Other financial and income flows 1

3 Gross international reserve accumulation (+: increase)

4 Financing gap

5 Exceptional IFI financing

IMF
World Bank

6 Residual financing gap (after IMF/WB financing)

Residual financing gap (after IMF/WB financing) 2

Identified public borrowing, incl. EIB/EBRD/CEDB
Identified official transfers
EC structural budget support (ENPI-related)

7 Residual

Sources: IMF staff projections and Moldovan authorities

2010

2011

2012

2010-12

   in million USD

2.537

2.172
1.448
-3.358
365
51
314

2.208

716
-11
202
440

955
700
255

536

86

240

569

378

265
113

191

147

38
15
44

49

2.665

2.331
1.761
-3.821
334
48
286

2.363

761
-11
244
460

999
759
240

604

68

180

482

246

186
60

236

   in million EUR

182

38
46
55

43

2.844

2.450
2.020
-4.175
395
50
345

2.664

877
-12
292
534

1.112
855
257

675

63

200

380

184

124
60

197

151

30
46
49

26

8.047

6.952
5.229
-11.354
1.094
149
945

7.235

2.354
-34
738
1.433

3.065
2.314
752

1.816

217

620

1.432

808

575
233

624

480

106
107
148

118

1 Includes portfolio investment, net errors and ommissions, use of IMF credit (PRGF and EFF) and other income balance
2 assuming exchange rate of euro vis-à-vis the US dollar of 1.30

2. 

OBJECTIVES AND RELATED INDICATORS OF THE MACRO-FINANCIAL ASSISTANCE 

2.1. 

Objectives 

The objectives of the proposed macro-financial assistance operation are to:  

•  Contribute  to  covering  the  external  financing  needs  of  the  Republic  of  Moldova 

and to alleviating budgetary financing needs; 

•  Support the fiscal consolidation effort and external stabilisation in the context of 

an IMF programme; 

•  In this respect, help the Republic of Moldova to reduce the financial constraints 

on the implementation of its comprehensive economic reform programme; 

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•  Facilitate and encourage efforts of the authorities of the Republic of Moldova to 
implement  measures  identified  under  the  EU-  the  Republic  of  Moldova  Action 
Plan and the Eastern Partnership; 

•  Reinforce the EU role in the economic policy dialogue with the authorities of the 

Republic of Moldova on the programme of reforms. 

Detailed macro-economic and structural reform objectives will be further defined in 
the context of a Memorandum of Understanding, to be agreed with the authorities. 

2.2. 

Indicators 

To  monitor  the  fulfilment  of  the  objectives  of  the  programme  throughout  the 
implementation  period  of  the  assistance,  the  Commission  will  use  two  types  of 
indicators:  

•  Adherence to the IMF-supported programme;;  

•  Progress  in  the  implementation  of  specific  policy  actions  to  be  included  as 
conditions for disbursement. Those actions will be specified in the aforementioned 
Memorandum of Understanding. They will be consistent with the priorities of the 
European Neighbourhood Policy and those of Eastern Partnership and the policy 
orientation  of  the  IMF  programme,  with  an  emphasis  on  the  improvement  of 
public finance management.  

3. 

ALTERNATIVE DELIVERY MECHANISMS AND RISK ASSESSMENT 

3.1. 

Delivery mechanisms 

Given  the  sharp  deterioration  of  the  Moldovan  economy,  the  country's  low  income 
level  and  its  eligibility  for  concessional  lending,  the  foreseen  macro-financial 
assistance  will  be  provided  in  the  form  of  grants.  Macro-financial  assistance  is  an 
untied  and  undedicated  macro-economic  support  instrument,  which  helps  the 
beneficiary  country  meet  its  external  financing  needs,  and  may  contribute  to 
alleviating  budgetary  financing  needs.  Moreover,  as  experienced  with  similar 
operations, including in the Republic of Moldova, the economic policy conditionality 
attached to this support strengthens the stabilisation and reform process. 

3.2. 

Risk assessment 

There  are  both  fiduciary  and  policy  risks  related  to  this  macro-financial  assistance 
operation.  

There is a risk that the macro-financial assistance, which is not dedicated to specific 
expenses (contrary to project financing, for example), could be used in a fraudulent 
way.  In  general  terms,  this  risk  is  related  to  factors  such  as  quality  of  financial 
circuits  and  management  systems  in  the  central  bank  and  Ministry  of  Finance, 
administrative  procedures,  control  and  oversight  functions,  security  of  IT  systems 
and adequate internal and external audit capabilities.  

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To mitigate the risks of fraudulent use, several measures will be taken. The Memorandum of 
Understanding and the Grant agreement will comprise a set of provisions on inspection, fraud 
prevention, audits, and recovery of funds in case of fraud or corruption. Also, the assistance 
will be paid to clearly identified accounts at the National Bank of Moldova. The NBM is one 
of the most professionally well-reputed state institutions in the Republic of Moldova. 

Moreover, before  the agreement  on the Memorandum of Understanding is reached, 
the  Commission  services  will  assess  the  reliability  of  financial  circuits  and 
administrative  procedures  that  are  relevant  to  this  type  of  assistance  and  will 
determine  whether  the  framework  for  sound  financial  management  of  macro-
financial assistance is sufficiently effective in the Republic of Moldova. In the light 
of this assessment, specific mechanisms applying to the management of the funds by 
the beneficiaries may be introduced in agreement with the national authorities. The 
Commission  may  also  use  other  assistance  instruments  at  its  disposal  to  help  the 
beneficiary authorities improve their public finance management systems if this area 
is  not  sufficiently  covered  by  other  donors.  Against  this  background,  special 
conditionalities  on  improving  public  finance  management  will  potentially  be 
required. 

Finally, the assistance will be liable to verification, control and auditing procedures 
under the responsibility of the Commission, including the European Antifraud Office 
(OLAF), and the European Court of Auditors. 

As regards policy risks, the main assumption is that the Government of the Republic 
of  Moldova  will  remain  committed  to  fiscal  adjustment  and  compliance  with  its 
agreement  with  the  IMF.  This  will  be  validated  on  the  basis  of  IMF’s  regular 
monitoring of performance indicators and structural benchmarks. There is a risk that 
the  Government  of  the  Republic  of  Moldova  will  not  comply  with  the  IMF 
programme conditions, as the programme targets may turn out more difficult to reach 
than  assumed  and  as  political  conditions  in  the  country  may  change.  However,  the 
authorities have shown strong commitment to work with international institutions to 
implement the overdue reform agenda. Also, there have been internal discussions in 
the Republic of Moldova regarding independence of the National Bank. 

Having  made  a  serious  assessment  of  the  risks,  the  Commission  services  consider 
that there are sufficiently strong grounds to proceed with the MFA to the Republic of 
Moldova.  

The Commission services will maintain close contacts with the authorities during the 
implementation  of  the  macro-financial  assistance  in  order  to  address  quickly  any 
concerns that may arise.  

4. 

ADDED VALUE OF EU INVOLVEMENT 

The  European  Union's  financial  support  to  economic  recovery  in  the  Republic  of 
Moldova reflects the country's strategic importance to the EU as a partner country in 
the  context  of  the  European  Neighbourhood  Policy  and  of  the  recently  established 
Eastern  Partnership.  The  main  financial  support  instrument  to  the  Republic  of 
Moldova  is  the  European  Neighbourhood  Partnership  Instrument  that  has  three 
priority  objectives:  democratic  development,  administrative  capacity  building  and 

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infrastructure development. The macro-financial assistance instrument is directed at 
alleviating short- and medium-term external financial needs.  

In  addition  to  the  financial  impact  of  the  macro-financial  assistance,  the  proposed 
programme  will  strengthen  the  national  government's  reform  commitment  and  its 
aspiration  towards  closer  relations  with  the  EU.  This  result  will  be  achieved,  inter 
alia, through appropriate conditionality for the disbursement of the assistance.  

In  a  wider  context,  the  action  fits  well  into  the  EU’s  general  approach  towards  the 
Republic of Moldova, which is one of an accelerated and progressive engagement, as 
reflected in the opening of negotiations on an Association Agreement. This reflects 
the  impetus  the  authorities  have  recently given  to  deepening  the  country's  relations 
with the EU and is expected to lead to closer co-operation between the EU and the 
Republic of Moldova in many fields. 

5. 

GENVAL CRITERIA ON MACRO-FINANCIAL ASSISTANCE 

On  8  October  2002  the  Council  reconfirmed  a  set  of  principles  for  the  use  of  the 
European Union's macro-financial assistance (Genval criteria). The five criteria are: 
(i) the exceptional character of the assistance, (ii) its complementarity to financing of 
the  International  Financial  Institutions  (IFIs),  (iii) 
the  existence  of  policy 
conditionality attached to the assistance, (iv) the existence of political pre-conditions 
and, finally (v) strong financial discipline that needs to accompany the MFA. 

5.1. 

Exceptional Character and Limited Timeframe 

The financing requirements of the Republic of Moldova in 2010-2011 result from the 
impact  of  the  global  economic  crisis,  and  the  substantial  impact  on  the  country's 
economy  in  view  of  its  external  and  fiscal  imbalances  and  its  high  dependence  on 
foreign inflows and remittances.  

The exceptional character of the foreseen MFA is reflected in the limited timeframe 
of the programme. The programme's planned duration is two years, one year shorter 
that the IMF programme which covers also 2012. In determining the actual amount 
of the tranches under the MFA programme, the Commission services intend to take 
into consideration the progress in the implementation of the IMF programme and of 
the World Bank development policy loans. 

5.2. 

Political pre-conditions 

MFA  is  reserved  to  the  third  countries  that  are  geographically  close  to  the  EU 
territory,  that  respect  democracy  and  human  rights  and  with  which  the  EU  has 
important political, economic and commercial ties. The Republic of Moldova fulfils 
these  criteria.  First,  it  has  direct  borders  with  the  EU.  Second,  its  economic  and 
political relations with the EU are evolving rapidly towards closer approximation: it 
is  an  active  EU  partner  in  the  multilateral  track  of  the  recently  established  Eastern 
Partnership. Third, the Republic of Moldova has made progress regarding respect of 
democracy  and  human  rights.  The  political  situation  in  the  country  remains 
uncertain,  in  particular  as  regards  the  unresolved  issue  of  presidential  elections. 
However, the current government came to power on a pro-European agenda and has 

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initiated  many  initiatives  to  bring  the  country  closer  to  the  EU,  culminating  in  the 
opening of negotiations on an Association Agreement in January 2010. 

5.3. 

Complementarity  

The  proposed macro-financial assistance will be complementary to the existing EU 
financing,  to  the  IMF  financing  and  to  the  financial  support  of  other  international 
donors.  

The  MFA  programme  is  complementary  to  other  EC  financing,  in  particular  to 
medium-term ENPI support. Thus, it can help increase the EU's leverage on policy 
making in the Republic of Moldova as well as help the country overcome the current 
deep economic crisis and to implement reforms as a basis for sustainable recovery.  

The  complementarity  with  the  IMF  programme  is  also  assured.  An  MFA  can  only 
take  place  when  a  residual  external  financing  gap  is  identified  over  and  above  the 
IMF resources and under the condition of a fair burden sharing. A residual external 
financing  gap  has  been  identified  by  the  IMF;  this  assessment  constitutes  the  basis 
for Commission's MFA programme proposal that would cover roughly one third of 
the  external  financing  gap  remaining  after  the  intervention  of  the  Bretton  Woods 
Institutions.  

5.4. 

Conditionality 

The  macro-financial  assistance  to  the  Republic  of  Moldova  will  be  linked  to  the 
existing  IMF  Extended  Credit  Facility/Extended  Fund  Facility  Arrangements.  As 
usual  with  this  type  of  assistance,  disbursements  under  this  macro-financial 
assistance will be subject to progress in the implementation of the IMF arrangement. 
It  will  also  be  conditional  upon  specific  structural  reform  measures  that  will  be 
further  defined  in  the  context  of  a  Memorandum  of  Understanding  to  be  agreed 
between the Commission and the authorities of the Republic of Moldova. 

Given the nature of the planned operation, in defining the conditionality in the area 
of structural policies, particular attention will be paid to public finance management 
with a view to strengthening efficiency, transparency and accountability, and because 
of  its  importance  for  fiscal  consolidation.  As  the  Republic  of  Moldova  is  a  partner 
country  to  the  European  Neighbourhood  Policy  and  to  the  Eastern  Partnership,  the 
targeting  specific  sectoral  policies  of  particular 
Commission  may  consider 
importance, identified as such in the EU- the Republic of Moldova Action Plan or the 
2010 Progress Report, such as financial sector stability. 

5.5. 

Financial discipline 

The planned assistance would be provided in the form of a grant. The Commission 
services propose to limit the macro-financial assistance to the Republic of Moldova 
to  EUR  90  million  for  the  period  2010-2011.  This  corresponds  currently  to  some 
27%  of  the  residual  financing  gap  foreseen  after  IMF  and  World  Bank  support 
identified by the IMF for the years 2010 and 2011. Data on the balance-of-payments 
gap  are  by  nature  volatile.  Additionally,  additional  bilateral  financing  may 

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materialise  in  the  course  of  the  programme  that  cannot  yet  be  included  in  current 
programme assumptions. 

Concerning sound financial management, the Commission services are taking action 
in order to fulfil the requirements of the Financial Regulation. The Commission will 
update  the  Operational  Assessment  (OA)  of  the  reliability  of  financial  circuits  and 
administrative controls at the Ministry of Finance and the National Bank of Moldova 
conducted  in  2007,  in  the  context  of  the  previous  programme  of  macro-financial 
assistance.  Based  on  the  OA  report's  findings,  the  Commission  services  will 
determine  whether  the  framework  for  sound  financial  management  is  sufficiently 
effective in the Republic of Moldova. Also, the results of the OA will contribute to 
the definition of appropriate conditionality in the area of public finance management. 

6. 

PLANNING OF FUTURE MONITORING AND EVALUATION 

This assistance is of exceptional and macro-economic nature and its monitoring and 
evaluation will be undertaken in line with the standard Commission procedures.  

6.1.  Monitoring 

Monitoring  will  involve  the  review  of  reports  and  data  provided  by  the  authorities 
and  by  the  organisation  of  review  missions  to  the  Republic  of  Moldova  by 
Commission staff. Although this assistance is centrally managed, where appropriate, 
the  EU  Delegation  in  Chisinau  will  also  be  called  to  provide  reporting.  The 
monitoring of the action by the Commission services will take place on the basis of 
macro-economic  and  structural  policy  indicators,  which  are  to  be  agreed  with  the 
authorities of the Republic of Moldova in a Memorandum of Understanding. In this 
process, the Commission services will also monitor key areas of the public finance 
management system, as identified in the update of the Operational Assessment so as 
to have the relevant information on any changes in the control environment. 

An  annual  report  to  the  European  Parliament  and  to  the  Council  on  the 
implementation  of  macro-financial  assistance  is  foreseen  in  the  proposed  text  for  a 
Decision of the European Parliament and of the Council. 

6.2. 

Evaluation 

Two  to  three  ex-post  evaluations  of  macro-financial  assistance  operations  are 
planned  per  year  in  the  Multi-annual  Evaluation  Programme  of  the  Economic  and 
Financial Affairs Directorate-General. An ex-post evaluation of the proposed macro-
financial assistance to the Republic of Moldova will be launched within a period of 
two  years  after  the  completion  of  the  operation.  A  provision  for  the  ex-post 
evaluation  is  included  in  the  proposed  legal  basis  for  the  programme,  and  in  the 
Memorandum  of  Understanding.  Budget  appropriations  from  the  macro-economic 
assistance budget line will be used for this evaluation.  

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7. 

ACHIEVING COST-EFFECTIVENESS 

In  implementing  the  programme,  the  Commission  will  be  guided  by  the  following 
principles:  

•  As soon as the European Parliament and the Council have adopted the proposal, 
the Commission will negotiate with the authorities of the Republic of Moldova a 
Memorandum  of  Understanding  laying  out  the  conditions  for  the  release  of  the 
EU  assistance,  as  well  as  a  grant  agreement.  Each  instalment  of  the  proposed 
assistance will be made available by the Commission to the Republic of Moldova 
on  the  basis  of  a  satisfactory  track  record  of  the  implementation  of  the  IMF 
programme  and  the  economic  policy  and  financial  conditions  attached  to  the 
assistance.  

•  In  negotiating  specific  policy  conditions,  the  Commission  will  draw  on  all  the 
expertise, including of the International Monetary Fund and the World Bank and 
of  bilateral  and  multilateral  aid  agencies  active  in  the  Republic  of  Moldova.  In 
addition,  the  Commission  will  aim  at  synergies  with  other  EU  policies  and 
instruments (in particular ENPI as indicated above) that could be used to support 
the  implementation  by  the  beneficiary  of  the  relevant  measures  (notably  in  the 
area  of  public  finance  management).  Where  appropriate,  links  to  any  related 
action  under  the  European  Neighbourhood  Policy  or  Eastern  Partnership  and  to 
findings  of  the  Progress  Reports  on  the  Republic  of  Moldova  would  be 
established.  

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