COMMISSION STAFF WORKING DOCUMENT Ex-ante evaluation statement Accompanying the document Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL providing macro-financial assistance to the Republic of Moldova
Date: 2017-01-13
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Community loan, EU aid, European neighbourhood policy, Moldova, democratisation, economic policy, economic reform, economic stabilisation, financial aid, macroeconomics

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 13.1.2017  SWD(2017) 12 final   COMMISSION STAFF WORKING DOCUMENT Ex-ante evaluation statement  Accompanying the document  Proposal for a  DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL  providing macro-financial assistance to the Republic of Moldova {COM(2017) 14 final}  
 
 
Ex-ante evaluation statement 

EU Macro-Financial Assistance to the Republic of Moldova 

TABLE OF CONTENTS 

1.  PROBLEM ANALYSIS AND NEEDS ASSESSMENT ..................................................................... 3 

1.1 

Introduction ............................................................................................................................. 3 

1.2  Moldova's macroeconomic situation ....................................................................................... 4 

1.3 

1.4 

Structural reform challenges.................................................................................................... 7 

IMF and other donor support ................................................................................................. 11 

1.5  Moldova's external financing needs ...................................................................................... 13 

2.  OBJECTIVES AND MONITORING INDICATORS OF THE MACRO-FINANCIAL ASSISTANCE ...... 14 

2.1 

Objectives .............................................................................................................................. 14 

2.2  Monitoring indicators ............................................................................................................ 15 

3.  DELIVERY MECHANISMS AND RISK ASSESSMENT................................................................ 15 

3.1 

3.2 

Delivery mechanisms ............................................................................................................ 15 

Risk assessment ..................................................................................................................... 16 

4.  ADDED VALUE OF EU INVOLVEMENT ................................................................................. 17 

5.  ASSESSMENT OF CRITERIA APPLICABLE TO MACRO-FINANCIAL ASSISTANCE .................... 18 

5.1 

5.2 

5.3 

5.4 

5.5 

Exceptional Character and Limited Time-frame ................................................................... 18 

Political preconditions and EU-Moldova relations ............................................................... 18 

Complementarity ................................................................................................................... 19 

Conditionality ........................................................................................................................ 19 

Financial Discipline ............................................................................................................... 20 

6.  EVALUATION AND COST-EFFECTIVENESS ........................................................................... 20 

6.1 

6.2 

Evaluation .............................................................................................................................. 20 

Achieving cost-effectiveness ................................................................................................. 21 

Annex: Assessment on Moldova's political reforms prepared by the European External Action 

Service 

2 

 
 
 
1.

PROBLEM ANALYSIS AND NEEDS ASSESSMENT 

1.1 

Introduction 

The  Republic  of  Moldova  has  faced  a  difficult  period  over  the  last  two  years  on  both  the 
economic  and  political  fronts.  A  major  banking  fraud  scandal  erupted  in  November  2014, 
exposing  severe  governance  problems  that  have  since  been  accompanied  by  political 
instability – including the formation of three different governments since the November 2014 
elections and the replacement of the governor of the National Bank of Moldova (NBM) – and 
street protests. These developments have  also led to  a deceleration in economic growth,  the 
suspension  of  budget  support  by  Moldova’s  international  partners,  and  a  weakening  of  the 
fiscal  and  balance  of  payments  position.  Economic  difficulties  have  been  exacerbated  by  a 
recession  or  weak  economic  activity  in  some  of  Moldova´s  key  regional  trading  partners 
(notably  Russia,  but  also  Belarus  and  Ukraine),  developments  which  reduced  exports  and 
remittances. This effect has only been partly offset by increased trade with the EU following 
the entry into force of the Association Agreement signed in 2014, which foresees the creation 
of a Deep and Comprehensive Free Trade Area (DCFTA). 

In  that  context,  Moldova  requested  support  from  the  International  Monetary  Fund  (IMF). 
After difficult and protracted negotiations, which reflected the existing political instability, in 
July  2016  the  authorities  finally  reached  agreement  with  the  IMF  on  a  programme  to  be 
supported  by  a  three-year  Extended  Credit  Facility  and  Extended  Fund  Facility  (ECF/EFF) 
arrangement.  The  agreement  was  approved  by  the  IMF  Board  on  7  November  2016.  This 
agreement was made possible by a new determination on the part of the authorities, following 
the appointment of a new government led by Prime Minister Filip in January 2016 and of a 
new  central bank  governor  in  March  2016,  to  address  governance  problems  in  the  financial 
sector  and  in  public  finance  management  (PFM).  Access  under  the  financial  arrangement 
agreed  with  the  IMF  would  represent  75%  of  Moldova’s  quota  in  the  IMF  (SDR  129.4 
million, or about EUR 161 million). The aim of the ECF/EFF is to make swift improvements 
in financial sector governance and supervision, strengthen policies to ensure macroeconomic 
and financial stability, and foster sustainable and inclusive growth.  

It  should  be  noted  that  following  the  Foreign  Affairs  Council  Conclusions  of  15  February 
2016,  a  Roadmap  for  Priority  Reforms  was  agreed  between  the  EU  and  the  Moldovan 
authorities with the purpose of re-launching key structural reforms; the deadline was set for 
31  July  2016.  There  has  since  been  substantial  progress  with  the  implementation  of  this 
Roadmap, but as yet not all the EU concerns, expressed in the February Council conclusions, 
have been addressed. 

The Moldovan government also requested Macro-Financial Assistance (MFA) from the EU in 
August  2015  and  reiterated  that  request  in  March  2016.  As  a  result  of  that  request  and  in 
context of the political and economic developments since 2014, the European Commission is 
therefore  submitting  to  the  European  Parliament  and  the  Council  a  proposal  for  a  Decision 
providing MFA to the Republic of Moldova of up to EUR 100 million. Of this amount, EUR 
60  million  would  be  in  the  form  of  loans  and  EUR  40  million  in  the  form  of  grants.  The 
proposed  amount  is  justified  based  on  an  updated  assessment  of  the  country's  external 
financing needs, the size of the IMF programme, burden-sharing considerations, and the room 
for manoeuvre available in the EU budget. 

The  proposed  EU  MFA  would  help  Moldova  cover  part  of  its  residual  external  financing 
needs  over  the  period  2016-2018,  which  are  estimated  at  USD  442  million  (EUR  402 
million),  in  the  context  of  the  new  IMF  programme.  The  operation  would  reduce  the 
economy’s  short-term  balance  of  payments  and  fiscal  vulnerabilities.  It  would  be  designed 
and  implemented  in  coordination  with  the  adjustment  and  reform  programmes  Moldova  is 
agreeing with the IMF and the World Bank, as well as with the reforms agreed in the context 
of the EU’s budgetary support operations and the DCFTA agreement.  

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Disbursement would take place in three tranches over 2017 and the first half of 2018, with the 
release  of  each  tranche,  including  the  first  one,  strictly  linked  to  good  progress  with  the 
implementation of both the IMF programme and a number of additional policy measures to be 
agreed  between  the  Commission  and  the  authorities  and  listed  in  the  Memorandum  of 
Understanding. 

The  implementation  of  the  proposed  operation  is  expected  to  go  hand-in-hand  with  the 
resumption  of  disbursements  under  budgetary  support  operations  financed  by  the  European 
Neighbourhood Instrument (ENI). They have been frozen since early 2015 reflecting concerns 
over governance and the lack of a reliable macroeconomic policy strategy. 

1.2  Moldova's macroeconomic situation 

The macroeconomic outlook for Moldova remains vulnerable, but the combination of recent 
adjustment measures and the prospect of a resumption of foreign donor support have helped 
the country regain some stability. 

After  a  marked  deceleration  of  growth  in  2014  (see  Table  1  below),  Moldova  entered  a 
recession  last  year,  with  its  GDP  decreasing  by  0.5%  in  2015  due  to:  (a)  adverse  weather 
conditions causing a 13.4% contraction in agricultural output; (b) an accelerating decrease in 
remittances and weak export performance reflecting the recession or weak economic activity 
in  some  of  Moldova's  main  trading  partners,  notably  Belarus,  Russia  and  Ukraine;  c)  weak 
domestic credit expansion following the problems in the banking system and the tightening of 
monetary  policy;  and  d)  a  fiscal  squeeze  partly  caused  by  the  suspension  of  international 
donors'  support  but  also  by  the  decline  in  tax  revenues  due  to  the  recession,  which 
significantly  affected,  inter  alia,  the  public  investment  programme  for  2015.  After  the 
adjustment in 2015, Moldova's economy is expected to recover only slowly in 2016 and the 
coming years. In 2016, GDP is expected to grow by about 2%. Growth in 2016 will continue 
to be constrained by budget cuts and tight credit conditions as well as by low remittance flows 
and higher local energy tariffs, which will keep private consumption subdued. Meanwhile, the 
reorientation towards EU markets will take time and require investment. 

After accelerating from 4.7% in December 2014 to 13.5% in December 2015 (year-on-year), 
CPI  inflation  has  been  on  a  downward  trend,  reaching  3.0%  in  September  2016.  The  IMF 
projects average annual inflation at 6.9% for 2016 and at 4.9% for 2017. 

In  2015,  the  current  account  deficit  declined  to  EUR  293  million  (by  40%  year-on-year), 
due to  a marked drop  in prices of  imported energy and the weakness of domestic demand, 
which  depressed  imports.  As  a  percentage  of  GDP,  however,  the  current  account  deficit 
declined from 6.7% in 2014 to 5.0% in 2015, due to the decrease of GDP in dollar terms in 
2015 (itself a reflection of both the drop in real GDP and of the depreciation of the leu). 

In 2015, exports decreased by 16% while imports declined by 24%. The trade deficit stood at 
USD  2  billion,  down  by  32%  compared  with  2014.  In  particular,  exports  to  CIS  countries 
decreased by 33% to USD 492 million, reflecting weak economic activity in several key CIS 
partners, as noted, but also import restrictions imposed by Russia. This led the share of CIS 
countries in total exports to decline from 31% to 25%. Exports to the EU countries decreased 
by 2% (although if calculated in euros they increased by 5%) over this period, while the EU 
share in Moldova's export structure increased from 53% to 62%. The decline in imports was 
mainly attributed to the fall in global energy prices and dampened import demand due to the 
leu depreciation. 

4 

 
 
Table 1: Moldova – Selected macroeconomic indicators, 2013-2018 

Sources: IMF staff estimates, World Bank, MoF and Commission staff calculations 

The  Moldovan  economy  is  highly  dependent  on  worker  remittances  from  abroad,  which 
account for about 25% of GDP. In 2015, the total amount of net money transfers from abroad 
made in favour of individuals via authorized banks in Moldova amounted to USD 1.4 billion, 
down  by  27%  as  against  2014,  largely  reflecting  the  decrease  of  transfers  from  Russia  by 
44%. Remittances from Russia accounted for 48% of the total, followed by Italy at 13%, USA 
at 10% and Israel at 9%. 

Despite the turbulent economic and political developments in Moldova, FDI inflows in 2015 
have  not  been  affected.  In  2015,  FDI  inflows  reached  USD  165  million,  compared  to  USD 
158 million for 2014. Moldova’s free economic zones were important in attracting FDI. 

As a result of the developing crisis in the financial sector, international reserves declined by 
35% between September 2014 and February 2015, to USD 1.7 billion, or about 4.3 months of 
imports.  More  specifically,  within  that  period  the  NBM  sold  from  its  foreign  exchange 
reserves,  both  in  special  sales  to  the  three  State-controlled  banks  that  went  into  liquidation 
and on the foreign exchange market, a total of USD 700 million. That decline partly reflected 
an  increase  in  the  rate  of  dollarization  of  savings  as  confidence  in  the  leu  weakened.  Since 
then, reflecting the stabilisation and recovery in the foreign exchange market, the central bank 
accumulated USD 2.1 billion in foreign reserves by end September 2016, which represents an 
estimated  5.1  months  of  projected  imports.  However,  resumption  of  disbursements  from 
official donors will be essential to ensure future stability in the foreign exchange markets.  

The  government  has  been  experiencing  substantial  fiscal  pressures  due  to  lower  budget 
revenues resulting from weaker economic activity and the interruption of budget support from 
5 

 
 
 
donors. These factors contributed to the increase of the budget deficit from 1.9% of GDP in 
2014 to 2.3% of GDP in 2015. In July 2016, the parliament adopted a budget law fixing the 
budget deficit for 2016 at 3.2% of GDP (excluding one-off items). However, this was based 
on unrealistic revenues and expenditure forecasts. According to the IMF, without adjustment 
measures the deficit would in fact reach 3.5% of GDP. And if the one-off costs related to the 
bank resolution1, which amount to about 10% of GDP, are included the deficit for 2016 would 
amount  to  -13.5%  of  GDP.  According  to  the  programme  agreed  with  the  IMF  staff  (prior 
action), a revised 2016 budget was adopted by the Government and signed by the President on 
4  October  2016  based  on  more  realistic  macroeconomic  and  financial  assumptions  and 
foreseeing the necessary adjustment measures on both the expenditure and revenue sides so as 
to  meet  the  3.2%  of  GDP  deficit  target  initially  contained  in  the  budget.  Overall,  savings 
made through both revenues and expenditure measures amounted to 2.2 billion lei, or 1.7% of 
GDP,  in  20162.  They  include  measures  to  control  the  wage  bill  (also  by  cutting  vacant 
positions)  as  well  as  various  measures  to  improve  tax  collections  and  reform  the  tax 
administration and reduce the excessive number of tax exemptions). 

Interest rates on T‐bill auctions (3 to 12 months), which ranged between 23.5% and 26.4% 
in February, have sharply declined since mid-March. In the auction of 4 October, the 3‐month 
T‐bill was allocated at 7.85%. The cut in the base rate by the NBM from 19.5% in February to 
9.0%  in  October  2016  has  been  instrumental  as  well  as  the  prospect  of  an  agreement  on  a 
programme with the IMF and the resumption of budgetary support from other donors.  

The share of the general government debt to GDP increased from 36% at the end of 2014 to 
45%  at  the  end  of  2015.  These  estimates  take  into  account  the  emergency  loans  with  State 
guarantees issued by the NBM to three banks under liquidation.  

Last year's increase in government debt was largely driven by its domestic debt component. 
External government debt increased less (from 18% of GDP in 2014 to 21% of GDP at the 
end of 2015) and the increase was mainly attributable to the deprecation of the leu. External 
debt is mostly medium  - and long- term debt owed to  multilateral and bilateral creditors on 
concessional terms. 

On  4  October  2016,  the  Law  on  the  issuance  of  government  bonds  for  execution  by  the 
Ministry of Finance of the payment obligations derived from state guarantees has entered into 
force  and  government  bonds  in  the  total  amount  of  13.34  billion  lei  have  been  issued  and 
transferred to the central bank. The aforementioned amount was divided into 25 issuances of 
government bonds, with maturities from 1 to 25 years. Thus, the effective interest rate for the 
aforementioned issuances would allow keeping in real terms the value of debt at the time of 
bonds issuance. 

As part of the medium-term monetary policy strategy adopted in December 2010, the NBM 
introduced an inflation targeting regime. The NMB aims to keep inflation (measured by the 
Consumer  Price  Index)  at  the  level  of  5%  annually  with  a  possible  deviation  of  ±  1.5 
percentage  points,  considered  to  be  optimal  for  the  growth  and  development  of  Moldova's 
economy over the medium-term. 

In the aftermath of the banking crisis of November 2014, CPI inflation accelerated from 4.7% 
in  December  2014  to  13.5%  in  December  2015  (on  a  year-on-year  basis),  thus  amply 
breaching  the  central  bank's  target.  Reacting  adequately,  the  NBM  implemented  restrictive 
monetary policies, increasing its leading interest rate from 6.5% in December 2014 to 19.5% 

1  In  2012-2014,  Banca  de  Economii,  Banca  Sociala  and  Unibank  conducted  fraudulent  lending  activities, 
estimated  at  about  MLD  14  billion  (about  USD  1  billion),  which  amounted  to  12.5%  of  2014  GDP.  On  16 
October  2015,  the  banking  licenses  of  these  banks  were  withdrawn  by  the  NBM  and  they  have  been  put  in 
liquidation. 
2 The new assumptions include, inter alia, lower than previously expected imports and consequently lower than 
planned revenue from VAT as well as lower than assumed revenues from official transfers, mostly from the EU. 
6 

 
                                                            
in  September  2015.  This  prevented  inflationary  expectations  from  becoming  ingrained, 
curbed  deposit  outflows  and  supported  the  leu.  As  a  result,  CPI  inflation  has  been  on  a 
downward trend, returning within the bands of the inflation target. 

However,  restrictive  monetary  policies  also  kept  credit  growth  depressed,  exacerbating  the 
slowdown  in  economic  activity.  The  closure  of  the  three  failed  banks  at  the  end  of  2015 
stopped  the  injection  of  liquidity  in  the  system  through  these  banks  and,  together  with  a 
stabilization  of  the  foreign  exchange  market  and  a  decline  in  inflation  expectations,  has 
allowed since February, as noted, a gradual reduction in the central bank's key policy interest 
rate, which was set at 9.0% on 27 October 2016. 

Between  September  2014  and  February  2015  Moldova  has  been  subject  to  increased 
exchange  rate  volatility,  initially  reflecting  weak  fundamentals  (trade  balance,  growth 
forecasts)  and  the  strengthening  of  the  US  dollar,  but  subsequently  also  as  a  result  of 
speculation after the eruption of the banking crisis which caused an increase in dollarization 
(up  to  54%  by  end  March  of  2015)  and  dwindling  confidence  in  the  financial  system.  The 
Moldovan  currency  depreciated  by 21%  against  the  US  dollar  and  12%  against  the  EUR  in 
2015.  However,  following  this  period  of  turbulence,  the  situation  in  the  foreign  exchange 
market has stabilised, with the leu depreciating by just 3.4% against the euro and remaining 
stable against the USD between January and end September of this year. 

1.3 

Structural reform challenges   

After several years of stalemate in the reform process, substantial progress has been achieved 
with  the  implementation  of  the  structural  reform  agenda  over  the  last  six  months, 
including those reforms that are part of the Priority Reform Action Roadmap agreed with the 
EU  in  February  2016.  However,  there  have  been  delays  in  adoption  of  measures  in  some 
areas,  such  as  public  administration  reform  and  the  appointment  of  the  president  of  the 
National  Commission  for  Financial  Markets  (NCFM),  as  well  as  steps  towards  the 
liberalisation  of  the  electricity  and  gas  sectors.  The  short-term  priorities  identified  in  the 
Roadmap for key areas of structural reform in the economic field included: 

1.  Financial sector: in particular, improving banks' shareholder transparency and corporate 
governance,  adopting  a  more  advanced  bank  resolution  framework,  introducing  a  new 
prudential  and  risk  management  framework  for  banks  based  on  Basle  III  and  the  EU's 
Capital Requirements Directive package (CRD IV/CRR), revamping the deposit insurance 
scheme and restoring the powers of the NCFM so that it can better regulate and supervise 
non-bank  financial  institutions,  including  the  insurance  sector,  which,  like  the  banking 
sector, also suffers from serious governance problems. 

2.  PFM:  in  particular,  strengthening  the  public  procurement  framework  (including  the 
creation of a Complaints Settlement Agency), adopting the new legislative framework for 
the Court of Accounts, improving debt management and clearing expenditure arrears. 

3.  Energy  sector:  raising tariff rates for gas, heating and  electricity  to cost recovery level, 
improving the independence of the regulator and implementing the planned gas pipeline 
and electricity interconnection projects between Romania and Moldova. 

4.  Social safety net: taking measures to compensate the most vulnerable households for an 

increase in utility tariffs. 

5.  Trade and investment: implementing the DCFTA and improving the investment climate.  

The  EU  has  been  increasingly  involved  in  the  provision  of  technical  and  policy  advice  to 
Moldova  on  structural  reforms  through  the  funding  of  a  team  of  25  so-called  High  Level 
Advisors who work side by side with high level officials in different institutions. The latter 
include  the  Prime  Minister,  the  Minister  of  Finance  and  the  Governor  of  the  NBM.  This 

7 

 
 
unprecedented  exercise  touches  upon  reform  areas  as  important  as  financial  sector  reform, 
PFM,  external  audit  and  the  implementation  of  the  DCFTA.  These  advisers  provide  very 
valuable  input  that  can  help  guide  the  design  and  implementation  of  reforms  by  the 
authorities,  while  supporting  the  convergence  of  Moldova’s  regulations  with  the  acquis 
communautaire.  Their  expertise  could  prove  very  useful  in  the  design  of  EU  assistance 
programmes, in particular policy-based operations such as the envisaged new MFA.  

Financial Sector Governance and Stability 

Financial sector reform is one of the key challenges, if not the key challenge, Moldova faces 
as  it tries to improve economic governance, ensure macroeconomic stability and restore the 
credibility  of  the  authorities.  The  authorities’  capacity  and  determination  in  tackling  this 
challenge,  in  particular  the  governance  problems  in  the  banking  and  insurance  sectors,  are 
regarded  by  most  donors  as  the  litmus  test  of  their  commitment  to  reform  the  country’s 
economic and political governance system. 

The  agenda  of  financial  sector  reform  has  a  number  of  inter-connected  but  separate  pillars. 
They include the following: i) completing the liquidation of the three banks involved in the 
2014 bank fraud and pursuing the investigations with a view to recovering the diverted funds 
and  bringing  all  those  responsible  to  justice;  ii)  dealing  with  the  governance  or  solvency 
problems  in  the  three  banks  put  under  special  supervision  by  the  NBM  in  June  2015  (see 
below); iii) strengthening the regulatory and supervisory framework, taking into account the 
recommendations  of  the  updated  Financial  Sector  Assessment  Programme  (FSAP)  jointly 
conducted by the IMF and the World Bank in April 2014, and as part of Moldova’s regulatory 
convergence  commitments  under  its  Association  Agreement  with  the  EU;  iv)  strengthening 
the regulatory framework and oversight of non-financial institutions, notably of the insurance 
sector.  

In  order  to  achieve  the  objectives  of  improving  financial  sector  governance  and  stability,  it 
will be essential to strengthen the independence and bank resolution powers of the NBM; as 
well as to restore the powers of the NCFM, which were struck down by a Constitutional Court 
ruling in November 2012. A number of important initiatives in the banking sector have now 
been  taken,  including  on  laws  on  bank  recovery  and  resolution,  bridge  banking,  central 
depository.  In  the  non-banking  financial  sector,  more  actions  are  called  for,  including  the 
reinforcement of the regulatory and supervisory powers of the NCFM and the nomination of 
its president, the adoption of legislation related to non-banking credit organisations, and the 
creation of a State Register of shareholders. 

Following the  detection of problems related to the non-transparent shareholders  structure of 
Victoriabank,  Moldova-Agroindbank"  (MAIB)  and  Moldindconbank"  (MICB),  and  the 
engagement in high-risk related-party lending operations, the NBM decided in June 2015 to 
put these three banks under special supervision. Independent diagnostic studies of these three 
banks have been undertaken by audit firms, which have discovered serious deficiencies in the 
governance as well as significant solvency problems in one of them (MICB). 

In the case of MAIB, 43% of the bank's capital shares were suspended in March 2016, and 
later  cancelled,  on  suspicion  that  owners  of  these  shares  were  acting  in  concert  without  the 
NBM’s permission. In compliance with the NBM orders, MAIB announced a decision on 19 
September  2016  to  put  up  for  sale,  through  the  regulated  market  of  the  Moldovan  Stock 
Exchange, two blocks of newly issued shares for the initial total price of all the new shares 
equal to approximately EUR 20.3 million. The tender period is set from end of September to 
26 December 2016 and the shares can be purchased only by persons having the prior written 
permission of the NBM. In the case of  MICB, which is in bad financial state due to a high 
amount  of  related-party  lending,  the  NBM  has  performed  a  thematic  on-site  inspection 
concentrating  on  the  examination  of  the  assets’  quality,  shareholders  transparency,  risks  of 

8 

 
 
related-party lending and anti-money laundry prevention. On 20 October 2016, the NBM has 
suspended 64% of the bank's shares on suspicion that owners were acting in concert without 
the central bank's permission. A procedure similar to the one employed in the case of MAIB 
will  be  also  followed  for  MICB.  In  the  case  of  Victoriabank,  the  Supervisory  Board  was 
finally  elected,  after  a  two-year  delay,  at  the  shareholders'  meeting  in  July  2016  and  with 
NBM's approval of another two supervisory board members of the Victoriabank in September 
2016, the supervisory board of Victoriabank became legally functional. The first meeting of 
the Supervisory Board took place on 14 October 2016 and appointed a new management. The 
EBRD increased its total stake in the bank to 27.56% in June 2016 and has expressed possible 
interest in further increasing its ownership to up to 100% of the bank's capital. 

The  NBM  is  also  in  the  process  of  developing,  with  technical  assistance  from  the  central 
banks of the Netherlands and Romania as part of an EU-financed Twinning project as well as 
the  support  of  the  EU's  High  Level  Adviser  posted  at  the  NBM,  a  new  regulatory  and 
supervisory framework for banks based on the EU's Capital Requirements Directive package 
(CRD IV/CRR). 

Moreover, the NBM has developed and intends to implement a new resolution framework that 
will  allow  it  to  act  in  due  time  so  as  to  ensure  the  continuity  of  its  critical  functions, 
preservation  of  financial  stability  and  minimize  the  costs  of  a  bank's  failure.  The 
corresponding  law  was  signed  by  the  President  on  4  October  2016.  It  reflects  the 
recommendations  of  the  IMF  and  the  World  Bank  and  uses  as  reference  the  new  EU 
framework on bank recovery and resolution (Directive 2014/59/EU). 

Moldova  is  also  expected  to  revamp  the  deposit  insurance  scheme  and  to  approximate  its 
legislation to the EU Directive on Deposit Guarantee Schemes. This has been reflected in the 
government's action plan for the implementation of the Association Agreement. In this regard, 
a new draft Law on Bank Deposit Insurance is being prepared by the government. 

Other Structural Reforms 

Public administration reform (PAR) 

PAR is one of the priority reform areas that had been identified in the Roadmap. It is also one 
chapter  of  the  Association  Agreement  and  one  of  the  priorities  of  the  2014-2016  National 
Action  Plan.  A  PAR  Strategy  for  2017-2020  has  been  developed  by  the  State  Chancellery 
with  input  from  SIGMA3  and  in  consultation  with  the  civil  society,  World  Bank  and  other 
development  partners  and  was  adopted  by  the  government  on  6  July  2016.  An  Action 
Programme for implementing the PAR Strategy is currently being developed. 

Public financial management 

In 2013, the government adopted a PFM Strategy for 2013-2020. A key challenge in the area 
of PFM is to restore the timeliness of the budget process. Another challenge is to strengthen 
the Treasury’s debt and cash management. Public Internal Financial Control (PIFC) is being 
strengthened by increasing accountability for the use of public funds by establishing a sound 
Financial  Management  and  Control  system  and  Internal  Audit  Units.  Mid-term  priorities  in 
the  PIFC  area  include  improving  the  national  certification  system  and  strengthening  the 
professional development programme for internal auditors. 

Public procurement 

3 In April 2015, the EU Delegation in Chisinau requested SIGMA to carry out an evaluation of Moldova’s public 
administration  system  based  on  the  “reference  measurement”  methodology  recently  developed  by  SIGMA  for 
accession countries. 

9 

 
 
                                                            
The  new  public  procurement  law  adopted  in  July  2015  incorporates  the  fundamental 
principles of EU practice and the necessary secondary legislation is being adopted gradually. 
An  agreement  to  adhere  to  the  WTO’s  Government  Procurement  (GPA)  was  ratified  by 
parliament  in  June  2016.  A  draft  Public  Procurement  Strategy  for  2016-2020  has  been 
prepared by the ministry of finance. Some aspects of the 2015 law on public procurement still 
deviate, however, from the EU standards. In particular, it does not foresee the creation of an 
independent  appeals  and  review  body.  Amendments  to  the  law  to  address  some  of  these 
shortcomings, in particular by creating a Complaint Settlement Agency, have been submitted 
to the parliament.  

External audit – Court of Accounts 

Reflecting  the  commitments  made  by  Moldova  under  the  Association  Agenda,  draft 
legislation,  prepared  with  technical  assistance  from  SIGMA  experts  and  the  Spanish  and 
Finish  supreme  audit  institutions,  was  submitted  to  parliament  in  February  2016.  Two  key 
objectives of the draft law are to ensure the financial and administrative independence of the 
Supreme Audit Institution, bringing it fully in line with INTOSAI standards, and to strengthen 
the parliamentary supervision of its audits. The parliament is expected to support the proposed 
legislative changes, including the amendment of the Constitution. The legislation is, however, 
unlikely to be adopted before the end of this year, as any proposed constitutional amendment 
requires at least a 6 months interval between the two readings by the parliament.  

Fight against fraud 

Anti-fraud provisions are an important element of the EU-Moldova Association Agreement. 
The  majority  of  them  relate  to  the  practical  cooperation  between  the  European  Anti-Fraud 
Office  (OLAF)  and  the  Moldovan  agencies  responsible  for  these  matters.  The  draft  law 
amending  the  Criminal  Code  on  frauds  detrimental  to  the  financial  interests  of  EU  was 
adopted by parliament on 26 May 2016. 

Tax policy 

The  bulk  of  Moldova’s  tax  revenues  are  indirect  taxes  on  consumption,  most  notably  VAT 
and excises. The tax system is characterized by numerous tax exemptions that erode the tax 
base as well as weak tax compliance and substantial tax evasion. 

In an effort to increase revenues to deal with the difficult budgetary situation, the authorities 
increased excises in early July 2016. Tax policy measures planned for 2017-2019 include: (a) 
to develop the new Tax Code, including harmonization with the EU with respect to VAT and 
excise duties; (b) to implement the new Customs Code that entered into force on 1 May 2016; 
and  (c)  to  implement  a  Tax  Administration  Modernization  Project  financed  by  the  World 
Bank. 

Energy sector reform and the need to reinforce the social safety net 

Another important area of structural reform relates to utility companies, as tariffs remain well 
below  cost-recovery  levels.  Increasing  them  is  necessary  for  preventing  quasi-fiscal  costs, 
promoting  energy  efficiency  and  ensuring  the  financial  viability  of  energy  companies.  The 
energy regulator in Moldova has hardly adjusted the tariffs over the last few years, which has 
resulted  in  accumulated  financial  deviation  and  rising  intercompany  payment  arrears.  Since 
the  beginning  of  2016,  there  have  been  occasionally  indications  that  the  tariffs  would  be 
adjusted but this has not happened so far. 

Adjusting tariff adjustments towards the cost-recovery levels will increase the need for social 
assistance.  The  most  obvious  option  would  be  to  strength  the  relevant  social  assistance 
programmes (Ajutor Social and Heating Allowance), which, according to the World Bank, are 
rather well targeted. 

10 

 
On 27 May 2016, the parliament adopted new laws on electricity and natural gas that are in 
line  with  the  EU’s  3rd  Energy  Package  (Directives  2009/72/EC  and  2009/73/EC).  The  new 
legislation  corresponds  to  the  commitments  undertaken  by  Moldova  as  a  member  of  the 
Energy Community and reflects the provisions of the Association Agreement. It allows for the 
liberalization of electricity and natural gas markets, which should attract new investments into 
these  markets,  streamlines  the  regulatory  regime  and  creates  the  preconditions  to  facilitate 
interconnectivity with the European energy market. 

DCFTA implementation and measures to improve the investment climate 

In order to advance with the AA/DCFTA implementation process, a calendar has been agreed 
to liquidate the arrears, containing all actions not implemented as required by the end of 2015. 
According to the authorities, this calendar had been 90% implemented as of 31 July 2016. But 
while  efforts  are  being  made  to  liquidate  arrears  for  the  previous  periods,  new  arrears  have 
accumulated for the actions planned for 2016. 

A number of laws aimed at improving the regulatory framework for investment have recently 
been  adopted  or  are  being  considered  by  parliament.  In  March  2016,  the  government 
approved a National Strategy for 2016-2020 for attracting investments and promoting exports.  

1.4 

IMF and other donor support 

Since 1993, Moldova has benefited from a number of arrangements with the IMF in support 
of the authorities' economic adjustment programmes. The last one was a three-year combined 
ECF/EFF, split equally between the two facilities, totalling SDR 370 million (300% of quota), 
which  was  approved  by  the  IMF  Executive  Board  in  January  2010  and  expired  in  January 
2013, without the release of the final tranche of USD 76 million. Total Fund credits and loans 
outstanding at the end of July 2016 amounted to about USD 426 million. 

The EU and the World Bank suspended in early 2015 their budgetary support over concerns 
as regards macro-financial stability following the banking fraud crisis.  In this context, they 
called  for  an  IMF  programme  to  provide  the  guarantees  that  these  concerns  would  be 
addressed.  Meanwhile,  the  Moldovan  authorities  resumed  discussions  with  the  IMF,  which 
had been ongoing since 2013, in view of a new financial arrangement.  

After  protracted  and  sometimes  difficult  negotiations,  complicated  by  several  changes  in 
government  and  at  the  helm  of  the  NBM,  the  Moldovan  authorities  finally  reached  in  July 
2016  an  agreement  with  the  IMF  on  an  economic  reform  programme  to  be  supported  by  a 
three-year  (ECF/EFF)  arrangement.  The  arrangement  was  approved  by  the  IMF  on  7 
November 2016, following implementation by the Moldovan authorities of a number of prior 
actions. Access under this arrangement will be at 75% of Moldova’s quota in the Fund (SDR 
129.4 million, or about USD 178.7 million)4. This was made possible by a new determination 
of the authorities, following the appointment in January 2016 of the government led by Prime 
Minister  Filip  and  of  a  new  central  bank  governor  in  March  2016,  to  address  governance 
problems in the financial sector and in PFM. 

The  new  ECF/EFF  arrangement  aims  at  making  swift  upfront  improvements  in  financial 
sector governance and supervision. It would play a catalytic role for unlocking donor support 
to sustain economic development and rests on two pillars:  

  Policies  to  ensure  macroeconomic  and  financial  stability.  The  programme  will 
tackle  long-standing  vulnerabilities  rooted  in  a  non-transparent  shareholder  structure 
of  the  banks  and  weaknesses  in  the  financial  supervisory  and  regulatory  framework. 

4 In deciding on the size of the arrangement, the IMF has taken into account its already rather large exposure to 
Moldova, stemming from both the SDR 370 million ECF/EFF approved in 2010 and a SDR 111 million PRGF 
approved in 2006. 

11 

 
 
                                                            
Monetary policy will continue to focus on maintaining price stability in the context of 
a flexible exchange rate regime. Fiscal policy will support fiscal consolidation while 
strengthening public investment and pursuing social and developmental objectives.  
  Structural  reforms  to  promote  sustainable  and  inclusive  growth.  Structural 
reforms  will  aim  to  improve  the  business  climate,  attract  investment  and  enhance 
Moldova’s  growth  potential.  Initial  measures  will  support  the  authorities’  anti-
corruption efforts, a sustainable energy policy and the fiscal reform agenda, including 
reforms to mobilize revenue and enhance the efficiency of expenditure. 

Economic  activity  is  projected  to  gradually  gain  momentum  during  the  programme  period, 
with real GDP growth accelerating to 3% in 2017 and to 3.6-3.8% over the subsequent years 
of  the  programme.  Inflation  is  expected  to  slow  down  to  about  5%  by  the  end  of  the 
programme  (from  9.6%  in  2015)  on  the  back  of  a  cautious  monetary  policy  combined  with 
moderate international fuel prices. Under the IMF programme, the budget deficit is expected 
to decrease from 3.2% of GDP in 2016 to 2.9% of GDP in 2019. Higher capital expenditure 
(in an effort to boost productivity growth) and higher debt service costs partly compensate for 
the restraint in public wages and other current expenditure. The current account deficit would 
return to the 5¼ - 5¾% of GDP range (reflecting the recovery of domestic demand and donor 
support), following a brief decline to 3.5% of GDP in 2016. 

The World Bank made substantial progress during 2014 in negotiating with the authorities a 
policy matrix for a USD 45 million Development Policy Operation (DPO II), in the form of a 
loan, but discussions were interrupted after the large bank fraud was uncovered at the end of 
2014. Like the EU, the World Bank is, as noted, expected to resume its budgetary support to 
Moldova  following  the  agreement  reached  with  the  IMF  on  a  programme.  This  will  also 
include  two  new  DPOs  of  USD  30  million  each,  being  planned  for  2017  and  2018, 
respectively. 

Regarding  assistance  from  the  EU,  and  with  the  IMF's  new  programme  confirmed, 
disbursements could be made of up to EUR 50 million in budgetary support operations in 
2016,  up  to  EUR  60  million  in  2017  and  up  to  EUR  40  million  in  2018.  These  estimates 
include budget support disbursements currently on hold and take into account the fact that the 
lack of compliance with some of the measures foreseen in these operations could prevent their 
full  disbursement  even  now  that  the  IMF  agreement  has  been  confirmed.  The  total 
cooperation  assistance  funded  by  European  Neighbourhood  Instrument  (ENI)  for  the  period 
2014-2020,  including  not  only  budgetary  support  but  also  technical  assistance  and  policy 
advice, is set between EUR 610-746 million. The Single Support Framework (SSF) identifies 
the  priority  sectors  of  ENI-funded  cooperation  with  Moldova  for  the  2014-2017  period. 
Internal  discussions  towards  the  new  updated  SSF  for  2017-2020  have  just  started,  and  the 
preparatory work will progress in the coming  months in  close consultation  with all relevant 
stakeholders. 

On  7  October  2015,  the  Romanian  and  Moldovan  governments  signed  an  agreement  to 
provide  a  EUR  150  million  budget  support  loan  to  Moldova,  once  a  number  of  conditions 
would  be  met,  including  reaching  an  agreement  with  the  IMF  on  a  new  programme  and 
appointing a new governor of the NBM. The loan is to be disbursed in three tranches of EUR 
60 million, EUR 50 million and EUR 40 million. It has a five-year maturity and the interest 
rate is the same interest rate at which Romania borrows on the international capital markets. 
Following  the  announcement  of  the  staff-level  agreement  with  the  IMF  in  late  July,  the 
Romanian government found that Moldova had fulfilled the conditions linked to the release of 
the first tranche of EUR 60 million, which was subsequently disbursed on 24 August 2016. 
The  second  tranche  is  expected  to  be  disbursed  following  the  IMF  Board  approval  of  the 
programme, while the last one is expected to be disbursed in 2017. 

12 

 
The  EBRD  has  invested  close  to  EUR  1.1  billion  to  Moldova  since  1996.  It  currently  has 
about  fifty  active  operations  at  an  investment  value  of  EUR  470  million.  It  is  actively 
pursuing  a  number  of  strategic  projects.  Key  projects  include,  in  addition  to  its  equity 
participation in Victoriabank, its involvement in the construction of the Chisinau-Ungheni gas 
pipeline and the Moldova-Romania electricity interconnection, projects that involve also EIB 
co-financing and EU grants.  

The EIB has  been  active in  Moldova  since 2007 and has  provided to  the country EUR 608 
million  covering  the  following:  credit  lines  for  the  financing  of  SMEs  and  Midcaps  and 
projects in the water, sewage, energy, transport and agricultural sectors. 

1.5  Moldova's external financing needs 

The projections produced by the IMF following their July mission point towards significant 
external  financing  requirements  for  the  2016-2018,  the  period  covered  by  the  proposed 
MFA  operation,  with  the  total  external  financing  gap  for  this  period  estimated  at  USD 
439 million  (see  Table  2).  This  financing  gap  can  broadly  be  attributed  to  three  factors:  a 
relatively  large  current  account  deficit,  the  need  to  build  up  foreign  exchange  reserves, 
and the large debt amortization requirements expected.  

The IMF foresees, as noted, that the current account deficit will remain sizeable, particularly 
if foreign grants are excluded. Indeed, after the reduction in the deficit seen in 2016, which 
was  driven  by  the  compression  of  imports  in  the  context  of  the  interruption  of  budgetary 
support from foreign donors and weak economic activity, the deficit is projected to hover in 
the 5¼ - 5¾% of GDP range in 2017-2018 (6¾ - 7% of GDP excluding grants). This deficit is 
expected  to  be  covered  by  the  surplus  in  the  capital  and  financial  account  during  the  2016-
2018 period.  

The second factor contributing to the estimated external financing gap are the significant debt 
amortisations  foreseen,  increasing  from  USD  326  million  in  2015  to  on  average  USD  582 
million a year over the period of 2016 to 2018. Private debt is the main component of these 
repayments but public and publicly guaranteed debt amortisation is accelerating from USD 35 
million in 2016 to USD 70 million in 2017 and to USD 97 million in 2018 (with the share in 
total  debt  amortisations  going  up  from  6%  in  2016  to  14%  in  2018).  Meanwhile,  net  FDI 
inflows  are  projected  to  remain  moderate,  averaging  USD  142  million  per  year  during  the 
2016-2018  period,  compared  to  USD  165  million  for  2015.  While  other  components  of  the 
capital  and  financial  account,  led  by  foreign  direct  investment  and  loans,  are  enough  to 
produce a surplus in the capital account, more than covering the deficit in the current account, 
this is not enough to finance the considerable need to rebuild the country´s foreign exchange 
reserves. 

Indeed, the IMF programme foresees a build-up of reserves, with reserves expected to raise 
from USD 2.0 billion (or 5 months of imports) at the end of August 2016 to USD 2.4 billion 
at  the  end  of  2017  and  USD  2.6  billion  at  the  end  of  2018  (implying  an  increase  of  30% 
compared to August 2016). This would allow Moldova to maintain an import cover ratio of 
more than 5 months over the programme period. All in all, the targeted build-up of reserves 
and the combined balance of the current account and the capital and financial account produce 
an overall external financing gap of USD 439 million for the period 2016-2018. 

As already mentioned above, the ECF/EFF arrangement proposes the use of IMF funds in the 
amount of SDR 129.4 million, or about USD 178.7 million (EUR 161 million). However, the 
net  use  of  the  IMF  funds  will  remain  negative  over  the  programme  period,  with  net 
repayments  at  USD  108  million  over  2016-2018,  reflecting  the  significant  repurchases 
stemming  from  previous  IMF  financial  arrangements  falling  due  during  this  period.  For  the 
MFA  period  (2016-2018),  IMF  net  repayments  would  amount  to  USD  108  million.  The 

13 

 
 
World Bank, for its part, is expected to disburse to Moldova a USD 45 million in 2016, and a 
further USD 30 million in 2017 and an additional USD 30 million in 2018.  

Table 2: Moldova’s External Financing Gap and Potential Financing Sources 

Sources:  IMF  programme  documentation  (Board  meeting  of  7  November  2016)  and 
Commission staff calculations. 

In total, contributions from the Bretton Woods institutions are expected to be neutral towards 
closing the external financing gap and this would leave a residual external financing gap of 
USD 442 million for the period 2016-2018. Thus, the proposed MFA operation of EUR 100 
million would cover 24.9% of the estimated residual financing gap.  

Other key contributions to covering the residual financing gap include the disbursement of EU 
budget  support grants  (estimated5 at EUR 150  million  for the  period  2016-2018)  and of the 
EUR 150 million budget support loan from Romania mentioned before. 

2.

OBJECTIVES  AND  MONITORING 
ASSISTANCE 

2.1  Objectives 

INDICATORS  OF  THE  MACRO-FINANCIAL 

The objectives of the proposed MFA operation are to:  

i)  Contribute  to  covering  the  external  financing  needs  of  Moldova  in  the  context  of  a 
sizeable external financing gap brought about by a relatively large current account deficit, 
the  need  to  build  up  foreign  exchange  reserves,  and  the  large  debt  amortization 
requirements expected. 

5 For a budget support payment to be made, the Government of Moldova has to met two sorts of conditions (i) 
Eligibility  Conditions  (i.e.  General  Conditions)  –  their  fulfilment  qualifies  the  beneficiary  for  budget  support 
disbursement  or  not  and  they  relate  to  macro-economic  stability-oriented  policy,  public  finance  management, 
budget transparency and sectorial policy progress; (ii) Specific Conditions – they are related to specific results to 
be achieved in each sector and how much will be disbursed reflects how much was achieved. 

14 

 
 
 
 
 
                                                            
ii)  Support the fiscal consolidation effort and external stabilisation in the context of expected 

the IMF programme. 

iii) Support  structural  reform  efforts  aimed  at  improving  the  overall  macroeconomic 
management,  strenghening  economic  governance  and  transparency,  and  improving 
conditions for sustainable growth. 

iv)  Facilitate  and  encourage  efforts  by  the  Moldovan  authorities  to  implement  measures 
identified  under  the  EU-Moldova  Association  Agreement  and  in  the  context  of  the 
bilateral  cooperation  programmes,  support  regulatory  convergence  and  economic 
integration  with  the  EU  and  strengthen  the  EU's  economic  policy  dialogue  with  the 
authorities. 

2.2  Monitoring indicators 

The  fulfilment  of  the  objectives  of  the  assistance  will  be  assessed  by  the  Commission, 
including in the context of the ex-post evaluation (see below), on the basis of the following 
indicators:  

i)   Progress with macroeconomic and financial stabilisation, notably by assessing the degree 

of adherence to the IMF-supported programme.  

ii)  Progress with the implementation of structural reforms, notably the specific policy actions 
identified  as  conditions  for  disbursement  of  the  assistance,  which  will  be  included  in  a 
Memorandum  of  Understanding  to  be  negotiated  between  the  Commission  and  the 
Moldovan authorities. 

3.

DELIVERY MECHANISMS AND RISK ASSESSMENT 

3.1 

Delivery mechanisms 

The MFA operation under consideration would amount to a maximum of EUR 100 million. 
The Commission proposes to provide the amount of the assistance in the form of a medium-
term  loan  of  up  to  EUR  60  million  and  in  grants  of  up  to  EUR  40  million.  Given  the 
proposed  size  of  the  operation,  the  Commission  is  considering  releasing  the  assistance  in 
three instalments. The first two instalments would be disbursed in 2017 and the third one in 
the first half of 2018. The first two tranches will be composed of a grant element of EUR 10 
million and a loan part of EUR 20 million, while the third tranche will be composed of a grant 
element of EUR 20 million and a loan part of EUR 20 million. 

While the proposed amount is significant in terms of its share in the coverage of the residual 
financing  24.9%  as  noted  above),  it  is  important  to  ensure  its  value  added,  notably  by 
providing  the  EU  with  sufficient  leverage  to  promote  progress  with  reforms6.  At  the  same 
time,  and  as  noted,  strict  conditions  will  be  attached  to  the  disbursements  under  the  MFA, 
with  each  tranche,  including  the  first  one,  conditional  on  good  progress  with  both  the  IMF 
programme and the specific policy conditionality agreed with the EU in the Memorandum of 
Understanding attached to this operation.   

The inclusion of a grant element is consistent with the methodology for determining the use 
of  grants  and  loans  in  EU  MFA,  as  endorsed  by  the  Economic  and  Financial  Committee  in 
January 2011 and as mentioned in the Joint Declaration by the European Parliament and the 

6  In  this  respect,  the  proposed  size  of  the  operation  is  close  to  that  of  the  policy-based  budgetary  support 
operations  being  planned  by  other  key  donors  (e.g.  Romania  or  the  World  Bank)  in  complement  of  the  IMF 
programme.  

15 

 
 
 
 
 
                                                            
Council  adopted  together  with  the  decision  providing  further  macro-financial  assistance  to 
Georgia7, which takes into account the following criteria8. 

Firstly, Moldova is a lower middle-income country with a relatively low per capita income 
level. Moldova’s per capita Gross National Income (GNI) of USD 2,220 in 2015 is, indeed, 
the lowest in the Eastern neighbourhood9. 

Secondly,  while  Moldova`s  public  debt  dynamics  are  judged  to  be  sustainable  by  the  IMF 
(based  on  its  latest  Debt  Sustainability  Analysis,  produced  in  the  context  of  the  proposed 
programme),  Moldova’s  public  debt  ratios  have  significantly  increased  following  the 
banking crisis and the depreciation of the leu. The public debt-over-GDP ratio increased from 
36% at the end of 2014 to 45% at the end of 2015 and is expected to further rise to about 48% 
in  2018 before gradually decreasing again. Total external debt,  including public and private 
debt, has risen from 85% of GDP at the end of 2014 to 99% of GDP at the end of 2015 and is 
projected to continue increasing in the coming years, peaking at about 101% in 2017.  

Thirdly,  Moldova  is  eligible  for  concessional  financing  from  both  the  IMF's  Poverty 
Reduction  and  Growth  Trust  and  the  World  Bank’s  International  Development  Association 
(IDA).  In  its  assessment  issued  in  July  201510,  IMF  staff  considered  Moldova’s  short-term 
vulnerabilities to be too elevated to merit graduation from PRGT eligibility. But Moldova is, 
as noted, obtaining blended finance (a mix of regular and concessional finance) from the IMF. 
Moldova is also a blended country at the World Bank, being considered as creditworthy for 
borrowing  from  the  IBRD.  IDA  credits  to  Moldova  currently  represent  95.5%  of  the 
outstanding World Bank's IBRD/IDA lending to Moldova. 

While Moldova meets, as noted, the criteria for receiving at least part of the proposed MFA in 
grants, the fact that it is not a PRGT-only/IDA-only country but a blended one, the constraints 
in the EU budget for MFA grants and lingering concerns about financial governance (despite 
the  encouraging  governance  reforms  being  adopted  and  planned)  argue  in  favour  of  using 
both  loans  and  grants  in  the  proposed  operation.  The  Commission  proposes  to  provide  the 
bulk of the proposed MFA in the form of medium-term loans. As usual, these loans will carry 
very favourable conditions in terms of long maturities and grace periods (of up to 15 years) 
and a low interest rate (the rate at which the EU, benefiting from its triple A rating, borrows 
the funds in the international capital markets). 

3.2 

Risk assessment 

There are fiduciary, credit, policy and political risks related to the proposed MFA operation. 

There is a risk that the MFA, 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  the  quality  of  management  systems  in  the  central  bank  and  the 
ministry of finance, administrative procedures, control and oversight functions, the security of 
IT systems and the appropriatedness of internal and external audit capabilities. 

To  mitigate  the  risks  of  fraudulent  use  several  measures  will  be  taken.  First,  the  Loan 
Agreement  and  the  MFA  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 a dedicated account of the National Bank of Moldova.  

7 OJ L 218, 14.8.2013, p. 18. 
8“Criteria  for  Determining  the  Use  of  Grants  in  EU  Macro-Financial  Assistance”,  note  of  the  European 
Commission to the EFC, January 2011. 
9 World Bank’s Atlas 2015 figures. GNI per capita is the gross national income, converted to US dollars using 
the World Bank Atlas method, divided by the population. 
10 http://www.imf.org/external/np/pp/eng/2015/062415.pdf  

16 

 
 
                                                            
Moreover, in line with the requirements of the Financial Regulation, the Commission services 
have  carried  out  an  Operational  Assessment  of  the  financial  and  administrative  circuits  of 
Moldova  to  ascertain  that  the  procedures  in  place  for  the  management  of  programme 
assistance, including MFA, provide adequate guarantees. They received the final report of the 
Operational Assessment,  prepared  by  a  consultancy  company,  in  February  2016.  The  report 
concludes  that  the  current  status  of  the  administrative  and  financial  circuits  of  Moldova  is 
broadly adequate for managing a new MFA operation although important weaknesses remain. 
Developments  in  that  area  will  continue  to  be  closely  monitored  also  through  the  regular 
progress reports on PFM reforms produced by the EU Delegation in Chisinau.  

The  Commission  is  also  using  budget  support  assistance  to  help  the  Moldovan  authorities 
improve their PFM systems and these efforts are strongly supported by other donors. 

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.  

A  second  risk  stems  from  the  possibility  that  Moldova  will  fail  to  service  the  financial 
liabilities  towards  the  EU  stemming  from  the  proposed  MFA  loans  (default  or  credit  risk), 
which  could  be  caused  by  a  significant  additional  deterioration  of  the  balance  of  payments 
and  fiscal  position  of  the  country  or/and  by  unforeseen  events.  This  risk  is  mitigated, 
however, by the fact that the EU’s MFA would be part of an international package of official 
assistance led by the IMF that is supporting an adjustment and reform programme aimed at 
restoring fiscal and balance of payments sustainability through the implementation of a series 
of  policy  measures,  included  those  to  be  agreed  in  the  MoU  between  the  EU  and  the 
Moldovan authorities. Moreover, the risks for the EU budget are in a first instance covered by 
the EU’s Guarantee Fund for external actions. 

Another  key  risk  to  the  operation  stems  from  the  domestic  political  situation,  which  could 
weaken the authorities' determination to implement the necessary economic reforms and fuel 
social  unrest.  A  derailment  of  the  reform  process  could  put  the  objectives  of  the  IMF-
supported  programme  in  jeopardy,  endanger  macroeconomic  stability  and  prevent  the 
effective  disbursement  of  the  EU's  MFA.  There  are  also  risks  from  regional  instability, 
notably  the  conflict  in  Ukraine,  which  is  having  a  negative  impact  on  Moldova's  economic 
and  social  situation;  a  prolongation  of  weak  economic  conditions  in  Russia  and/or  possible 
new trade and economic sanctions by Russia. 

Finally,  there  are  risks  stemming  from  a  possible  weakening  of  the  European  and  global 
economic  environment  (taking  into  account  Moldova’s  increasing  dependence  on  the  EU 
market) and an increase in international energy prices, which would have an important effect 
on Moldova’s fiscal and balance of payments situation. 

Having made a thorough assessment of the risks, the Commission services consider that there 
are sufficient grounds and guarantees to proceed with the proposed MFA to 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 Union's financial support to Moldova reflects the country's strategic importance to the EU 
in the context of the European Neighbourhood Policy. The MFA instrument is a policy-based 
instrument directed to alleviate short- and medium-term external financial needs. As a part of 
the  overall  EU  package  of  assistance,  it  would  contribute  to  support  the  European  Union's 
objectives  of  economic  stability  and  economic  development  in  Moldova.  By  supporting  the 
authorities'  efforts  to  establish  a  stable  macroeconomic  framework  and  improve  economic 

17 

 
 
governance,  the  proposed  assistance  would  help  improve  the  effectiveness  of  other  EU 
financial assistance to the country, including budgetary support operations. 

The  EU´s  MFA  would  also  complement  the  standard  EU  aid  packages  mobilised  under  the 
ENI. By supporting the adoption, by the Moldovan authorities, of an appropriate framework 
for  macroeconomic  policy  and  structural  reforms,  the  EU’s  MFA  would  enhance  the  added 
value  and  effectiveness  of  the  EU's  involvement  through  other  financial  instruments.  The 
proposed MFA would increase substantially the EU's leverage on policy making in Moldova, 
helping steer the country towards a reform trajectory that should help restore macroeconomic 
stability, address governance problems and boost potential growth in the longer run. 

5.

ASSESSMENT OF CRITERIA APPLICABLE TO MACRO-FINANCIAL ASSISTANCE

11 

5.1 

Exceptional Character and Limited Time-frame 

The MFA operation would be exceptional, aiming to support the restoration of a sustainable 
external  finance  situation  for  Moldova.  It  would  run  in  parallel  to  the  IMF  ECF/EFF 
arrangement, approved by the IMF Board on 7 November 2016. The proposed  MFA would 
only  be  implemented  if  the  IMF  arrangement  on  track,  and  only  during  a  strict  timeframe 
covering part of the IMF programme period. Against this background and given the expected 
time  of  approval  of  the  programme,  the  assistance  is  expected  to  be  implemented  in  2017-
2018.  The  disbursement  of  the  first  tranche  could  take  place  in  the  first  half  of  2017,    the 
second tranche could be disbursed in the second half of 2017 and the third in the first half of 
2018. All disbursements are conditional on the IMF programme remaining on track and on a 
number  of  policy  measures,  agreed  with  the  EU  and  listed  in  the  Memorandum  of 
Understanding attached to the proposed MFA operation. While in the short-term the country 
faces  substantial  balance  of  payments  financing  needs,  the  macroeconomic  and  structural 
adjustment  programme  to  be  agreed  with  the  IMF  and  supported  by  the  proposed  MFA  is 
expected to produce a gradual strengthening of the balance of payments and fiscal positions. 

5.2 

Political preconditions and EU-Moldova relations 

MFA  is  reserved  to  geographically  close  third  countries  that  respect  effective  democratic 
mechanisms  (including  a  multi-party  parliamentary  system)  and  the  rule  of  law  and  that 
guarantee human rights, and with which the EU maintains close political and economic links. 
Countries that are covered by the ENP, like Republic of Moldova, are eligible for MFA. 

Political  preconditions:  Countries that  are  covered  by  the European  Neighbourhood  Policy 
are eligible for MFA. A pre-condition for granting MFA is that the eligible country respects 
effective democratic mechanisms, including a multi-party parliamentary system and the rule 
of  law,  and  guarantees  respect  for  human  rights.  Despite  concerns  on  human  rights, 
governance and the rule of law in the country12, Moldova can be considered as a country with 
democratic  mechanisms,  including  a  multi-party  parliamentary  system,  with  a  political  and 
institutional system that broadly respects the rule of law and human rights but where vested 
interests  are  still  very  present.  Between  the  parliamentary  elections  of  November  2014  and 
early 2016, Moldova experienced significant political instability, partly reflecting governance 
problems. That said, following the appointment of a new government in January 2016, and of 
a new governor at the central bank, and the adoption in February and implementation of the 
Roadmap for Priority Reforms agreed with the EU, the authorities are now demonstrating a 

11  Established  Commission  practice  in  line  with  the  Joint  Declaration  by  the  European  Parliament  and  the 
Council adopted together with Decision No 778/2013/EU of the European Parliament and of the Council of 12 
August 2013 providing further macro-financial assistance to Georgia, OJ L 218, 14.8.2013, p. 15.    
12  These  include,  in  particular,  the  need  to  ensure  freedom  of  the  media,  guarantee  the  independence  of  the   
judiciary,  fight  against  corruption  and  enhance  transparency  of  political  party  financing,  as  stressed  in  the 
Roadmap for Priority Reforms. 

18 

 
 
                                                            
renewed  commitment  to  addressing  the  country´s  governance  challenges  and  to  moving 
forward with the necessary political reforms. In this context, the political preconditions for an 
MFA  can  be  considered  to  be  satisfied13.  However,  delivering  on  key  reforms  remains 
indispensable for a successful implementation of the MFA and will be monitored closely.  

EU-Moldova  relations:  The  EU  and  the  Republic  of  Moldova  have  developed  a  close 
political  and  economic  relationship  over  the  years.  It  has  led  to  the  conclusion  of  an 
Association Agreement, including a DCFTA, which was signed on 27 June 2014 and entered 
fully into force on 1 July 2016. The Association Agreement replaced the previous Partnership 
and  Cooperation  Agreement  and  will  allow  for  the  political  association  and  economic 
integration of Moldova with the EU. An Association Agenda - approved in 2014 - sets out a 
list of priorities for joint work in the 2014-16 period, based on the structure of the Association 
Agreement. It is currently under review in order to produce an updated version for 2017-2019. 
The  Single  Support  Framework  for  2014-2017  identifies  the  priority  sectors  of  EU 
cooperation  with  Moldova  under  the  European  Neighbourhood  Instrument.  Work  has  also 
started to produce a new Single Support Framework for 2017-2020.  

Moldova's  economic  ties  with  the  EU  are  also  well  developed.  In  2015,  the  EU  was 
Moldova's largest trading partner, with a trading share of 53%,  well in  front of Russia with 
13%. In 2016, that share has further risen to 62%. 

In sum, Moldova has a democratic political system based on the rule of law and the respect of 
human  rights  and  is  taking  steps  to  strengthen  its  democratic  institutions  and  address  the 
serious  governance  problems  brought  to  the  fore  by  the  2014  bank  fraud  and  its  aftermath. 
There is also a very close framework of bilateral relations between the EU and Moldova under 
the Association Agreement and the ENP.  

5.3 

Complementarity 

The  proposed  MFA  would  complement  the  assistance  provided  by  other  multilateral  and 
bilateral donors in the context of the new IMF-sponsored economic programme. The agreed 
IMF programme as described in the previous section, multilateral and bilateral donors other 
than the EU are expected to cover at least 50% of the estimated external financing gap for the 
period  2016-18,  ensuring  a  reasonable  burden-sharing.  The  proposed  new  MFA  would 
represent  24.9%  of  the  residual  financing  gap.  This  is  consistent  with  the  existing  burdern-
sharing guidelines applicable to MFA, while it ensures also the value added and significance 
of the EU's involvement. 

The  EU´s  MFA  would  also  complement  the  foreseen  EU  budget  support  operations,  which 
could make up to EUR 50 million in 2016, up to EUR 60 million in 2017 and up to EUR 40 
million in 2018. By supporting the adoption, by the Moldovan authorities, of an appropriate 
framework for macroeconomic policy and structural reforms, the EU’s MFA would enhance 
the  added  value  and  effectiveness  of  the  EU's  involvement  through  other  financial 
instruments.  The  proposed  MFA  would  increase  substantially  the  EU's  leverage  on  policy 
making  in  Moldova,  helping  steer  the  country  towards  a  reform  trajectory  that  should  help 
restore macroeconomic stability, address governance problems and boost potential growth in 
the longer run. 

5.4 

Conditionality 

Disbursements  under  the  proposed  MFA  operation  would  be  conditional  on  successful 
programme reviews under the IMF programme and on the effective use by Moldova of these 
IMF  funds.  In  addition,  the  Commission  and  the  Moldovan  authorities  would  agree  on  a 
specific set of structural reform measures, to be defined in a Memorandum of Understanding. 
These  reform  measures  would  support  the  authorities’  reform  agenda  and  complement  the 

13 A complete assessment of the fulfillment of the political preconditions for MFA, provided by the European 
External Action Service, can be seen in the Annex of this document. 

19 

 
                                                            
programmes  agreed  with  the  IMF,  the  World  Bank  and  other  donors,  as  well  as  the  policy 
programmes  associated  with  the  EU’s  budgetary  support  operations.  They  would  be 
consistent with the main economic reform priorities agreed between the EU and Moldova in 
the  context  of  the  Association  Agreement,  including  its  DCFTA,  the  Association  Agenda, 
Moldova's  National  Action  Plan  for  the  Implementation  of  the  Association  Agreement  and 
other strategic documents.  

The Commission will seek a broad consensus with the Moldovan authorities, so as to ensure a 
smooth implementation of the agreed conditionality. Strict conditions will be attached to the 
disbursements uner the MFA, with each tranche, including the first one, conditional on good 
progress with both the IMF programme and the specific policy conditionality agreed with the 
EU in the Memorandum of Understanding attached to this operation. These policy conditions 
should address some of the fundamental weaknesses shown over the years by the Moldovan 
economy  and  economic  governance  system.  Possible  areas  of  conditionality  could,  in 
principle,  include  reforms  to  strengthen  governance  in  the  financial  sector,  PFM,  energy 
sector reform, and accompanying measures to strengthen the social safety net, improving the 
investment climate and supporting the implementation of the DCFTA agreement. 

5.5 

Financial Discipline 

The planned assistance will be provided in the form of a loan and a grant. The loan will be 
financed  through  a  borrowing  operation  that  the  Commission  will  conduct  on  behalf  of  the 
EU.  The  budgetary  impact  of  the  loan  assistance  will  correspond  to  the  provisioning  of  the 
EU's  Guarantee  Fund  for  external  actions,  at  a  rate  of  9%  of  the  amounts  disbursed,  from 
budget line 01 03 06 ("Provisioning of the Guarantee Fund"). Assuming that the first two loan 
disbursements (of EUR 20 million each) will be made in 2017 and the third loan disbursement 
(of  EUR  20  million)  in  2018  in  accordance  with  the  rules  governing  the  guarantee  fund 
mechanism  the  provisioning  will  take  place  in  the  2019-20  budgets,  for  an  amount  of  EUR 
3.6 million and EUR 1.8 million, respectively. The grant element of the assistance (EUR 10 
million  each  for  the  first  two  tranches  and  EUR  20  million  for  the  third  tranche)  would  be 
financed from commitment appropriations of the 2017 and 2018 budget, under the budget line 
01 03 02 (Macro-financial assistance), with payments taking place in 2017 and 2018. Based 
on  current  projections  on  the  utilisation  of  the  budget  line  01  03  02  and  01  03  06,  the 
Commission assesses that the budgetary impact of the operation can be accommodated. 

In line with the requirements of the Financial Regulation, the European Commission services 
have  carried  out,  as  noted,  an  Operational  Assessment  of  the  financial  and  administrative 
circuits  of  Moldova.  Developments  in  this  area  will  continue  to  be  closely  monitored  also 
through  the  regular  progress  reports  on  PFM  reforms  produced  by  the  EU  Delegation  in 
Chisinau. 

6.

EVALUATION AND COST-EFFECTIVENESS 

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

6.1 

Evaluation 

Ex-post  evaluations  of  MFA  operations  are  foreseen  in  the  Multi-Annual  Evaluation 
Programme of the Commission's Directorate-General for Economic and Financial Affairs. An 
ex-post evaluation of the proposed MFA to Moldova will be launched within a period of two 
years  after  the  availability  period  has  expired.  A  provision  for  the  ex-post  evaluation  is 
included  in  the  proposed  Decision  for  the  assistance,  and  will  also  be  included  in  the 
Memorandum  of  Understanding.  Budget  appropriations  from  the  macro-financial  assistance 
grant budget line will be used for this evaluation.  

20 

 
 
 
6.2 

Achieving cost-effectiveness 

The proposed assistance would entail a high degree of cost effectiveness for several reasons:  

i)   Since  the  assistance  would  be  leveraged  by  that  provided  by  the  international  financial 
institutions,  with  which,  as  noted,  it  would  be  closely  coordinated,  its  ultimate  impact 
could  be  very  significant  compared  to  its  cost.  Moreover,  in  negotiating  specific  policy 
conditions,  the  Commission  will  be  able  to  draw  on  the  expertise  of  those  institutions, 
including  the  IMF  and  the  World  Bank,  and  to  influence  their  conditionality  as  well  in 
ways that will take into account the EU's views.  

ii)  Providing  a  coordinated  macroeconomic  support  to  Moldova  on  behalf  of  the  EU 
countries,  the  MFA  would  be  more  cost  efficient  than  the  provision  of  a  similar  total 
amount of financial support by EU Member States individually.  

iii)  A substantial part of the proposed assistance would be provided in the form of loans, the 

budgetary impact of which is more limited. 

iv)  Finally,  the  Commission  will  aim  at  achieving  synergies  with  other  EU  policies  and 
instruments  used  to  support  the  implementation  by  the  beneficiary  of  the  relevant 
measures (notably in the area of PFM).  

21 

 
 
 
 
 
 
EUROPEAN EXTERNAL ACTION SERVICE 

ANNEX 

Head of Division 

Brussels, 9 December 2016 

ASSESSMENT ON DEMOCRACY, HUMAN RIGHTS, RULE OF LAW AND 
REFORMS IN MOLDOVA 

Moldova's  Constitution  enshrines  a  parliamentary  democracy  for  the  country,  based  on  the 
rule  of  law,  a  division  of  powers,  the  independence  of  the  judiciary  and  respect  for  human 
rights;  a  constitutional  court;  an  electoral  law  that  allows  for  a  multi-party  pluralist 
democracy;  an  electoral  commission;  and  legislations  guaranteeing  the  freedom  of 
press/media, speech, religion, association, assembly and civil society organisations.  

Today, Moldovans generally enjoy all major fundamental rights and freedoms. However, the 
consolidation of democracy and rule of law need to continue. 

On  27  June  2014,  the  EU  and  Moldova  signed  an  ambitious  and  innovative  Association 
Agreement, including a Deep and Comprehensive Free Trade Area. The Agreement had been 
provisionally  applied  from  1  September  2014  until  completion  of  the  ratification  process, 
which allowed its full application since 1 July 2016. 

Recent developments 

Following  parliamentary  elections  in  November  2014,  the  then  ruling  coalition  (Liberal-
Democratic  Party  (PLDM),  Democratic  Party  (PDM),  Liberal  Party  (PL)),  which  defined 
itself as "pro-European", managed to form a minority government. However, the discovery of 
the fraudulent diversion of $1bn (equal to  12% of GDP)  from three  major  Moldovan banks 
shook the political establishment and threw Moldova into a period of political instability and 
financial vulnerabilities. 

Fragilised by internal fights for control over the state institutions and access to resources, the 
ruling coalition was unable to produce a stable government that would restore macro-financial 
stability, take the necessary steps to genuinely address the banking governance problems and 
the concerns and demands of an increasingly unsatisfied population. 

This  internal  struggle  took  a  turn  in  October  2015,  with  the  arrest  of  one  key  figure  of  the 
coalition, former Prime Minister Filat, on corruption charges, in an investigation linked to the 
banking frauds. Eventually, this led to the creation of a new coalition, which, on 20 January 
2016,  voted  in  Pavel  Filip  as  new  the  Prime  Minister  amid  street  protests.  Since  then, 
Moldova has re-gained a degree of political stability. 

In an effort to address the EU's concerns, as expressed in the Council conclusions of February 
2016,  the  authorities  engaged  rapidly  in  a  reform  process  that  led  them  to  adopt  several 

22 

 
 
 
 
 
 
 
 
 
 
 
 
dozens  of  laws  and  measures  related  to  justice,  anti-corruption,  banking,  media,  energy, 
business sectors and public administration.  

In the same vein, the authorities addressed one of the protesters' main requests and restored 
the  direct  election  of  the  President,  yet  through  a  ruling  by  the  Constitutional  court  that 
declared  that  the  modalities  of  the  2000  reform  on  the  President's  indirect  election  were 
unconstitutional.  

The  presidential  election,  which  took  place  on  30  October  and  13  November  2016,  was 
competitive, with respect of fundamental freedoms, according to the report issued by the joint 
electoral  observation  of  the  OSCE,  the  Council  of  Europe  and  the  European  Parliament. 
Candidates  could  campaign  freely  without  restrictions.  Widespread  abuse  of  administrative 
resources,  lack  of  campaign  finance  transparency,  and  unbalanced  media  coverage  were, 
however, also reported during the process. 

The runoff led to a victory of Socialist Igor Dodon, by 52%, against PAS leader Maia Sandu. 
Against  a  background  characterised  by  lack  of  independence  of  key  institutions,  the 
subsequent  effects  of  this  result  on  the  partially  stabilised  but  still  fragile  political  situation 
will remain to be assessed at a later stage. 

A strong political will and leadership will be necessary to engage the country in deep changes 
to  address  all  the  shortcomings  in  the  democratic  process,  legal  uncertainty  and  lack  of 
inclusion of minorities.  

Whereas  the  reform  steps  undertaken  by  the  government  in  2016  have  undoubtedly 
contributed  to  stabilise  the  banking  sector  and  have  sent  positive  messages  to  international 
donors, they will require strong implementing measures to bring more tangible changes. This 
implementation  phase  will  be  a  real  test  for  Moldova's  willingness  to  reform.  The  still 
significant influence of vested interests over state institutions and the so-far limited results of 
the investigation on the banking fraud of 2014 (also in terms of prosecution of all the persons 
responsible  for  it)  suggest  that  there  are  still  serious  governance  issues  that  need  to  be 
addressed. 

The  political  developments  throughout  2015  and  2016  have  been  accompanied  by  low 
transparency  in  the  political  and  economic  life  and  in  the  judiciary,  as  well  as  a  worrying 
trend  of  criminal  cases  being  brought  against  politicians,  civic  activists,  representatives  of 
national minorities, staff of the National Bank of Moldova, and even a human rights lawyer 
and  a  judge,  often  on  legally  dubious  grounds,  in  particular  when  those  individuals  were 
engaged  in  undermining  vested  interests.  Most  of  the  people  involved  remain  to  date  under 
house  arrest,  judicial  control  or  threat  to  be  arrested  or  sentenced.  This  underlines  the 
importance of implementing reforms aimed at ensuring the full independence of the judiciary. 

The  reform  process  that  started  in  early  2016,  including  as  part  of  the  commitments  made 
under  the  Roadmap  for  Priority  Reforms  adopted  by  the  government  in  March  2016,  is 
intended to tackle these problems. International donors, above all the International Monetary 
Fund (IMF) and the  EU, have  positively embraced the new reform  momentum in  Moldova. 
On  7  November  2016,  the  IMF  Board  approved  a  three-year  Extended  Credit  Facility  and 
Extended Fund Facility (ECF/EFF) arrangement for an amount of EUR 161 million, and the 
EU intends to resume the disbursements of its budget support in due course and is considering 
a  Macro-Financial  Assistance  operation.  It  will  be,  however,  essential  for  the  EU  and  other 
donors  to  continue  to  monitor  closely  developments  and  make  disbursements  of  assistance 
strongly  conditional  on  good  progress  with  the  implementation  of  the  authorities'  reform 
commitments.  

23 

 
 
 
 
 
 
 
 
EU-Moldova relations 

Relations  between  the  EU  and  Moldova  are  deep  and  multifaceted,  encompassing  gradual 
economic  integration  and  deeper  political  cooperation.  Moldova  participates  in  many  EU 
agreements and programmes. 

On  27  June  2014,  the  EU  and  Moldova  signed  an  ambitious  and  innovative  Association 
Agreement, including a Deep and Comprehensive Free Trade Area. The Agreement had been 
provisionally  applied  from  1  September  2014  until  completion  of  the  ratification  process, 
which allowed its full application by 1 July 2016. 

With  a  view  to  facilitating  the  implementation  of  the  Association  Agreement,  the  EU  and 
Moldova  agreed  in  2014  on  an  Association  Agenda,  which  provides  a  list  of  priorities  for 
joint  work  through  which  the  overarching  objectives  of  political  association  and  economic 
integration could be attained. This Agenda is currently being updated for the years 2017-2019. 

The agreements on visa facilitation and readmission between the EU and Moldova took effect 
in January 2008, and a wider Mobility Partnership was signed in June 2008. Since 28 April 
2014, over half a million Moldovan citizens with a biometric passport have been able to travel 
to the Schengen area without a visa following the successful completion of a VLAP.  

Conclusions 

Moldova's  constitution  and  organic  legislation  enshrine  the  principle  of  a  multi-party 
democracy, the rule of law and respect for law. Also, the EU and Moldova have developed 
close institutional and economic ties, and the Association Agreement signed in 2014 should 
help deepen them further. However, the political system continues to suffer from significant 
governance problems and from interference with the work of the judiciary. The authorities 
have  recently  engaged  in  a  welcomed  reform  process,  although  the  process  still  needs  to 
deliver tangible results. At a time when the IMF has agreed with Moldova on an economic 
adjustment and reform programme, the EU remains fully committed to supporting Moldova 
in  its  reform  efforts  together  with  other  international  donors.  The  envisaged  financial 
assistance  should  help  keep  the  current  reform  momentum  to  the  extent  that  its  effective 
disbursement will be conditional on continued progress with key reforms. In this context, 
the European External Action Service stands ready to provide a further detailed assessment 
of  the  situation  of  democracy,  human  rights,  rule  of  law  and  reforms  in  Moldova 
throughout  the  lifecycle  of  the  proposed  Macro-Financial  Assistance  operation,  whose 
political preconditions may be considered as being fulfilled. Delivering on key reforms will 
be  indispensable  if  the  Macro-Financial  Assistance  operation  is  to  be  successfully 
completed. 

24