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ChinaGradual economic recovery
The economy will pick up very gradually in 2024 as major uncertainties persist linked to the difficult regional economic context, marked by the nearby war in Ukraine. This situation continues to weigh on industrial and agricultural activity. Domestic demand is recovering cautiously, with private consumption doing better than investment given the different outlook. Foreign demand is trending upwards, which is a growth factor for export industries. The agricultural sector contributes to the production of the food industry, but its growth will remain modest (1% in 2024).
In 2025, the economy should accelerate significantly, better supported by domestic demand, particularly investment, which is expected to pick up again, thanks to the accommodating monetary policy. The National Bank of Moldova (BNM) has continued to reduce its interest rate, setting it at 3.60% in May 2024. Barring an accident, such as a rise in commodity prices for fertilisers and fuel, it could extend the trend as inflation is expected to remain around the target range, set at 5 + or -1.5%. The volume of capital invested by the private sector should increase by 3% in 2025 (after 2.2% in 2024), supported by the application of a zero rate to tax on the undistributed income of small and medium-sized enterprises, as well as the implementation of the 373 programme. This programme gives companies access to investment loans of up to 15 million leu (around EUR 800,000) at reduced rates. Moreover, the National Industrial Development Programme 2024-2028 includes investments for industry. Financed by national funds and international partners, it includes major projects, particularly in energy, road and rail infrastructure, as well as water supply and sanitation. In the energy sector, the plan is to connect Moldova's electricity system to that of Romania, modernise the Balti thermal system and rehabilitate the electricity transmission networks. In addition, infrastructure projects will be financed by the National Fund for Regional and Local Development, as well as by international institutions such as the EBRD and the EIB. These projects include the restructuring and upgrading of railways, and the rehabilitation of local roads. Furthermore, the recovery of the global and European economies should strengthen external demand, leading to an increase in exports. Exports will also be supported by the renewal for one year of the temporary suspension of all customs duties and quotas in favour of Moldova, approved in May 2024 by the European Council. This agreement will support exports and the recovery of industrial production.
Significant deficits, but substantial international aid
Despite the fiscal consolidation on the agenda for 2024 and 2025, the budget deficit will remain high. Subsidies on electricity and agricultural inputs, the large public wage bill and investment in infrastructure will contribute to the rise in spending. The deficit will be financed mainly by concessional project loans, grants from multilateral partners (IMF, European Union, World Bank) and bilateral partners, and to a lesser extent by domestic borrowing. The Extended Credit Facility (FEC) and the IMF's Extended Fund Facility (EFF) for a total of USD 790 million, approved in December 2021 for a period of 46 months were supplemented in December 2023 by a USD 173 million Resilience and Sustainability Facility. In June 2024, the IMF approved the disbursement of USD 175.2 million under these facilities, bringing total disbursements to USD 636.5 million. This funding is crucial to support the reform program in the fiscal and financial fields, as well as infrastructure projects, with a view to future EU membership. However, political and social tensions, particularly those related to the forthcoming elections scheduled for late 2024 and 2025, as well as inflationary pressures, could jeopardise the momentum of the reforms and the commitments made as part of these programmes. Last, public debt with its external share constituting 59% of the total in 2023, will remain moderate by international standards. International organisations are the State's main external creditors (more than 80%). The government plans to develop the domestic debt market. In September 2023, Moldova carried out its first domestic 10-year issue, placing USD 12.75 million worth of bonds on the domestic market. This will result in an increase in debt servicing, which until now has been modest, due to the higher cost of domestic debt.
The current account shows a structural deficit. Transfers from expatriates, income from cross-border workers, budget support and exports of services (15% of GDP in 2023), particularly in the IT sector, do not offset the trade deficit (30% of GDP in 2023) owing to high dependence on imports (50% of GDP). This deficit is financed by international aid (8% of GDP in 2023) and foreign direct investment (2.5% of GDP). This deficit, together with geopolitical uncertainty, is putting pressure on the leu. Nevertheless, since the end of 2023, the local currency has been trading at its pre-war level in Ukraine with very little intervention from the central bank. In addition, improving underlying economic fundamentals and support for the EU accession process, as well as the greater investment flows that will follow, will help to strengthen the leu. In July 2024, the NBM's foreign exchange reserves amounted to the equivalent of 6 months' imports in 2023. Total gross external debt represented 60.9% of GDP at the end of March 2024, of which 64% (or 39% of GDP) was owed by private debtors, mainly in the form of trade credits and intra-group loans for direct investments.
Elections and referendum on EU membership
Moldova's political landscape is dominated by the presidential election due in October 2024 and the parliamentary elections in 2025 (before 11 July). President Maia Sandu, of the pro-EU Party of Action and Solidarity (PAS), is standing for re-election and is expected to garner strong support. The election will be combined with a referendum on EU membership. While PAS continues to carry out reforms with the financial support of international partners, the elections will take place against a backdrop of concern. In addition to the slow pace of growth, there is the war in Ukraine, separatism of Transnistria, located between the Dniestr river and the Ukrainian border, and Gagauzia, another pro-Russian region, as well as the division of public opinion over the future direction of the country. The pro-Russian opposition parties will try to take advantage of this situation to fuel dissatisfaction with the SAP. The municipal elections in November 2023 showed that the opposition, part of which is pro-Russian, has a significant electorate. Russian interference in the next elections is possible.
The EU officially opened accession negotiations with Moldova in June 2024. The country aims to join the EU by 2030. As a result, PAS launched its first Economic Reform Program (ERP) 2024-2026, a set of reforms to comply with the EU acquis communautaire. However, EU membership is running up against Transnistria. In June 2023, Josep Borrel, the European Union's High Representative for Foreign Affairs stated that the EU supports Moldova's territorial integrity, but that the country's membership does not depend on the reintegration of Transnistria.
Significant progress has been made in reducing Moldova's energy dependence on Russia through Transnistria and Ukraine, notably by building interconnection capacity with Romania for gas imports. However, the electricity sector remains largely dependent on a single supplier, MGRES in Transnistria, which obtains its supplies of Russian gas via Ukraine. An agreement was signed with MGRES in October 2023 to ensure supplies until the end of 2024. However, the potential expiry of a gas transit agreement between Russia and Ukraine could disrupt supplies to Transnistria and increase the cost of electricity. International aid is helping to strengthen Moldova's energy security, which plans to store 25 million cubic meters of gas (at least half of its security reserves) in Romania, while most of it is currently stored in Ukraine.
