consumption accounts for about 40 percent of the total final energy consumption (TFEC) due to relatively low share of industrial consumption (only about 19 percent of TFEC).<sup>5</sup> The second largest consumer of energy is the transport sector which accounts for about 18 percent of TFEC.

The high vulnerability of Moldova to external energy price shock is determined by its dependence on imported natural gas as the main energy source and its high energy intensity which, despite the low level of energy consumption by industry, is relatively high (0.54 tons of oil equivalent (toe)/000$ of GDP at PPP) – about two times energy intensity of Romania and three times energy intensity of Germany. On the other hand, per capita consumption of energy in Moldova (0.77 toe/pc) is significantly below energy consumption in Romania (1.79 toe/pc) and Germany (4.21 toe/pc) which indicates a relative “energy poverty” of Moldova and the demand potential if the country is to achieve its objective of sustainable economic growth and poverty elimination. This also indicates that the most vulnerable categories of consumers may not have much capacity to reduce their demand further in response to the raising energy prices, which underscores the importance of well targeted safety net.

An important element of Moldova’s exposure to the energy price shock is the relatively low level of its gas tariffs (about US$3/Gigajoule (GJ)) in comparison with other countries in the South East Europe (SEE) where average gas prices are in the range of US$6-7/GJ (see Appendix Figure 1). This implies significant discount at which Moldova has been able to secure gas supplies relative to the European parity price<sup>6</sup> , which was in the order of $230/mcm this winter. The electricity price differential is smaller since the average price of electricity in Moldova (6 US cents/kWh) is closer to the average electricity tariffs in the SEE countries (see Appendix Figure 2).

Given its almost complete dependency on imported energy, higher energy prices will immediately result in a larger import bill. If no offsetting financing is available the demand for other imports must be reduced. This implies a reduction in domestic consumption and investment demand and reduced domestic production. The simplest calculation to estimate the direct impact of higher energy prices on GDP is based on the ratio of imports to GDP.<sup>7</sup> In addition to the size of energy imports relative to GDP, the impact of higher energy prices on GDP will

**Table 2:  Impact on GDP of Higher Energy Prices**

||Price<br>In % of G|DP|
|---|---|---|
||Shock<br>1 year|2 year|
||A<br>2006|2007|
||Scenario 1 - Natural Gas Pric|e of $110/tcm|
|**Partial impact**|||
|oil and oil products|10.0%<br>-0.8%|-0.7%|
|natural gas|37.5%<br>-1.1%|-1.0%|
|electricity|30.0%<br>-0.5%|-0.4%|
|**Composite (joint) impact**|**-2.4%**|**-2.1%**|
||Scenario 2 - Natural Gas Pric|e of $160/tcm|
|**Partial impact**|||
|oil and oil products|10.0%<br>-0.8%|-0.7%|
|natural gas|100.0%<br>-3.0%|-2.6%|
|electricity|80.0%<br>-1.3%|-1.1%|
|**Composite (joint) impact**|**-5.1%**|**-4.4%**|

Source: Bank staff calculations.

> 5 By comparison, industry consumes over 40% of TFEC in Ukraine and Romania and 30% in Germany. 6 The European parity price would be the price of natural gas supplied by Gazprom to Romania and other SEE countries net of transit costs after Moldovan border.

7 In 2004, energy imports amounted to about 12 percent of GDP (or 18 percent of total imports).

4