Moldova, Republic of

major macro economic indicators

(e): Estimate (f): Forecast *Grants included

RISK ASSESSMENT

An uncertain exit from the recession for 2023, but prospect of improvement in 2024

In the wake of the 2022 recession prompted by the sharp rise in inflation caused by the war in Ukraine and the drought, as well as the resulting drop in household consumption and agricultural and industrial production, the Moldovan economy will recover very gradually in 2023, but especially in 2024. Since the start of 2023, inflation has been on a downward trajectory (albeit benefiting from a base effect after very high inflation in 2022). If this trajectory continues in 2024 – there is still some uncertainty linked to the war in Ukraine – private consumption, which accounts for over 100% of GDP (given the large share of imports), should make a positive contribution to growth. This process will be very gradual, however, as inflation remains in double digits and real wages have been falling in 2023. Private consumption will also depend on expatriate remittances (11% of GDP in the first quarter of 2023). Gross fixed capital formation (GFCF) (20-25% of GDP) should also make a positive contribution to growth, although currently below the levels of 2022 and 2021. Net exports will make a negative contribution to growth, with imports rising faster than exports, in line with a recovery in domestic demand. Romania and Ukraine have become the main recipients and suppliers of Moldovan exports and imports (32% and 16% respectively; and 17% and 13%), while trade with Russia fell by almost 30% to just 4% and 5% in the first half of 2023. In 2024, Moldova should continue to strengthen its trade links with EU countries and reduce its dependence on Russia. The Central Bank of Moldova (NBM) is expected to keep cutting its key interest rate, which stood at 21.5% in August 2022 and at 6.0% in June 2023. Inflation, however, will remain above the NBM's 5% target.

Durably massive current account deficit and widening budget deficit

The trade balance, which is structurally very negative (29% of GDP in the first quarter of 2023), will remain as such in 2023 and again in 2024. Services (tourism, IT, inward processing), income from cross-border workers, transfers from expatriates and international aid to support the country affected by the war in Ukraine will continue to reduce the current account deficit. At the end of the first quarter of 2023, the NBM's foreign exchange reserves amounted to 6 months of imports.
The public deficit is set to widen in 2023 despite a rise in revenues associated with a timid economic recovery. This is due to a more than proportional increase in spending, aimed at supporting households (increase in the nominal value of food vouchers), but also businesses (introduction of a 0% income tax quota for micro-, small- and medium-sized enterprises in the event of non-distribution of net income relating to the 2023-2025 tax periods; accelerated depreciation of investments for large companies), as well as an increase in the minimum wage for civil servants. In 2024, it should fall slightly on back of the economic recovery, but remain above its pre-pandemic level. According to the Ministry of Finance, public debt as a proportion of GDP rose sharply by 2022 due to a rise in its external share (64%) and to the contraction of GDP. The state's external debt (excluding loans contracted by other public bodies) will continue to be held almost exclusively by multilateral bodies (more than half by the International Monetary Fund (IMF) and the International Development Association (IDA)). The IMF considers the debt to be sustainable and the risk of over-indebtedness moderate.

A rapprochement towards the EU in conjunction with weaker relations with Russia

The reformist, pro-EU Action and Solidarity Party (PAS) won a comfortable majority (63 seats out of 101 in parliament) in the snap elections held on 11 July 2021, scoring 52.8% of the vote. PAS, the party of President Maia Sandu, who was elected in November 2020 and succeeded Idor Dodon of the pro-Russian Socialist Party, won 86% of the votes cast by the Moldovan diaspora, confirming its strong support during the presidential election. Russia's invasion of Ukraine in February 2022 harmed relations that had already been shaken by the arrival of a pro-European party in power. Maia Sandu's condemnation of the invasion, followed by Ukraine's application to join the European Union in early March 2022, sparked a deterioration in the country's economic situation. The country, which was heavily dependent on Russian gas at the time, suffered after Gazprom decided to reduce its gas supply while sharply increasing its price. In 2021, Gazprom had offered its gas to Moldova at an attractive price in exchange for cooler relations with the EU.
The energy crisis that resulted from Gazprom's decision was one of the triggers of the demonstrations that took place in September 2022 and were organised by the pro-Russian opposition Șor party led by Ilan Șor (exiled in Israel after being sentenced to imprisonment for 7.5 years and later 15 years for money laundering and embezzlement). The opposition called for the resignation of Sandu and her government. Several major events have taken place since these protests, including Sandu's revelation of a Russian plan to overthrow her government in February 2023, the resignation of Natalia Gavrilița, the Prime Minister in the same month, and the ban by the courts of the Șor party for a period of five years in June 2023, followed by the banning of its members from standing for election for five years. Political instability will remain in 2024, the year of the presidential election. The ruling PAS party is supported by 28% of the population, while the pro-Russian bloc made up of the Communists, Socialists and the Șor party (now banned) is supported by 26%. Municipal elections will be held in November 2023. They will mainly see a clash between PAS, whose leader is Igor Grosu, President of the Parliament, and the pro-Russian bloc, made up of the Communist Party of Moldova and the Socialist Party, led respectively by Vladimir Voronin and Igor Dodon, former President of Moldova.
In March 2023, Dorin Recean, Gavrilița's successor, announced Moldova's independence from natural gas and electricity supplies from Russia. This independence has been made possible by loans granted by the European Bank for Reconstruction and Development (EBRD), which have made it possible to change Moldova's sources of supply (one of the new supplier countries being Slovakia). Independence does not appear to be complete, however, as some of Moldova's electricity and gas comes from Transnistria, a pro-Russian separatist territory that declared its independence under the name of the Dniestr Moldavian Republic in 1992, and where a small contingent of Russian forces is present. Transnistria, as well as Gagauzia, another territory that declared itself independent in 1994 and is also pro-Russian, are threats to the country's stability, which could slow down the EU accession process. Relations with Russia continue to deteriorate, as shown by Moldova's decision to reduce the number of Russian employees present in its territory. In August 2023, 45 members of the Russian embassy had to leave Chisinau, the capital. The Russian Foreign Ministry warned that there would be consequences. At the same time, the country is strengthening its ties with the EU. Accreditations have been granted to several universities in the country, and in August 2023, the European Commission announced the redirection of funds initially intended for Russia and Belarus to Ukraine and Moldova, to the tune of €135 million. In the same month, Sandu indicated that she wanted to start EU accession negotiations as soon as possible as of autumn 2023.

Last updated: October 2023