Moldova
The Development Challenge
The dismal economic condition of Moldova was inherited from the former Soviet Union. It worsened during a painful economic transition during the 1990s and after the loss of traditional markets in the East. Since the 2001 presidential election, conditions have been improving very gradually. At that time, the Communist Party of Moldova (CPM) was elected to office in what most observers consider to be a reasonably free and fair process. The CPM was elected based upon the opinion shared by the majority of the population that the previous "reform" government was corrupt, not accountable, and certainly not proactive in helping to improve economic and social conditions within the country. Unfortunately, in many instances the CPM-dominated Government of Moldova (GOM) has demonstrated the same negative qualities of the previous regime. The GOM's public declaration in 2003 that integration into the European Union is the country's strategic priority may signal a renewed commitment to reform processes in Moldova.
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Although the GOM has not denounced pro-democratic, economic and social reform initiatives that were introduced during the 1990's, they have been selective in their support of some reform measures and have worked to reverse or derail others. Good banking regulation has helped the banking sector to develop into one of the strongest among the CIS-7 (Commonwealth of Independent States) countries. However, the GOM has reversed the outcome of several earlier privatizations. As a result, important foreign investors left the country, while others have faced substantial levels of intervention from the authorities. Fortunately, the resolution of the Union Fenosa case, Moldova's largest foreign investment, as well as the amical resolution of a long- running dispute with a French investor, has started the process of restoring Moldova's image. Corruption, however, remains a serious problem.
Other factors that have adversely affected the situation in Moldova include a general decline in the world economy, the reduction in trade with its historically largest trading partner, Russia, and the economic dislocations caused by the breakaway of the Transnistria region, which is home to the majority of Moldova's heavy industry. Drought conditions during 2003 were reported as the worst since 1945, further exacerbating growth in the agri-business sector and serving as a drag on gross domestic product (GDP) growth for the country. Nevertheless, Moldova continues to make progress toward developing a viable free-market economy. Moldova will record its fourth consecutive year of GDP growth in 2003, with year-end real GDP growth predicted at 6%, the same rate of growth as in 2002. This growth rate is impressive considering that, prior to 2000, Moldova had recorded only one year of GDP growth since independence. However, inflation is estimated to be 18% in 2003, up significantly from the 8% rate in 2002.
Moldova has adopted the basic reforms necessary for a market economy: prices have been largely freed, foreign trade has been almost fully liberalized, and the Moldovan leu is fully convertible for current account transactions. Customs revenue increased by approximately 40% in 2003. Export quotas have been eliminated, and import tariffs have been substantially reduced.
According to the European Bank for Reconstruction and Development (EBRD), GDP per capita is $448. This is equivalent to about $1,400 if output is corrected according to purchasing power parity. This puts Moldova in the same income bracket as many low-income developing countries. According to a 2002 household survey, just over 40% of Moldovans live in absolute poverty. Over 70% of the poor live in rural areas, and only 8% live in large cities. Between 12% and 30% (approximately 800,000) of the population has emigrated to work abroad.
Current account deficits remain the Achilles' heel of Moldova's macroeconomic performance. Even with substantial inflows of remittances from Moldovans who are working abroad, the current account deficit is 5% - 7% of GDP. The cumulative current account deficits, particularly large during the second half of the 1990s, have resulted in a debt stock that greatly exceeds prudent limits. According to the Iinternational Monetary Fund (IMF), external debt to GDP is projected at roughly 90% this year. The GOM realizes that this magnitude of external imbalance is unsustainable and has attempted to act preemptively by working on rescheduling debt service with many, if not all, of its institutional lenders.
Geopolitically, Moldova remains important to U.S. interests. A democratic Moldova with a growing economy and improved social services sector will enhance the trade borders with Romania, which is scheduled to join the European Union in 2007, and it will contribute to the development of a Western-oriented Ukraine. The USAID assistance program in Moldova continues to focus on small and medium enterprises and agri-business development, local government reform, citizen participation and citizen rights protection, fighting infectious diseases, and anti-trafficking. Each of these focus areas contribute directly to the U.S. interests noted above.
The USAID Program: The Program Data Sheets provided below cover the three objectives for which USAID is requesting funds in FY 2004 and FY 2005. These objectives concentrate on supporting private enterprise growth to create jobs and generate income; developing effective, responsive and accountable democratic institutions by strengthening local government autonomy and civil society; and helping create a social safety net to reach vulnerable groups.
In the economic area, resources will be used for continued assistance to the agri-business sector, private farmers, and SMEs. A land privatization project will help develop a land market and increase investment opportunities. Continued funding will be provided for the enhancement of credit and the Western NIS Enterprise Fund programs, which also promote investment and private enterprise development.
USAID assistance for better government will be enhanced this year with new or expanded activities in local government reform, citizen participation, assistance to political parties and promotion of the rule of law.
All USAID activities for Moldova include assistance for the economic and social empowerment of women. This common theme throughout the portfolio aims to provide tangible assistance and hope for girls and women who may be misguided into a trafficking situation. USAID will supplement ongoing activities with a new anti-trafficking activity that will be awarded this year. USAID will also assist with combating tuberculosis and other priority health concerns that are prevalent in Moldova.
Other Program Elements: USAID's Economic Growth, Agriculture and Trade Bureau manages the Farmer-to-Farmer Agribusiness Volunteer Program, a Food Industry Development Program, and a Loan Portfolio Guarantee program. The latter, which assists micro-enterprises and small businesses on the basis of a risk sharing arrangement, has been a particular success in Moldova. During the first three years of this program, nearly 1,000 loans became available in the SME sector, totaling approximately $8 million. The U.S. Department of Agriculture administers a commodity monetization program that provides agricultural land mortgage loans. Mortgage loans under this program, working through three financial institutions, total about $1 million.
Other Donors: Donor coordination is maintained through occasional meetings of all bilateral and multilateral donors, at which the United States is represented by the U.S. Ambassador and the USAID Country Program Coordinator. The U.S. is the major bilateral donor. However, Germany, the Netherlands, Denmark, Japan, Great Britain and Sweden all have bilateral programs. In addition, the Soros Foundation and several other private organizations run development programs in Moldova. Besides U.S. bilateral assistance, the other major players include multilateral donors such as the International Monetary Fund (economic policy), the World Bank (economic policy, social investment fund, micro-projects at the village level and energy), the European Union-Technical Assistance to the Commonwealth of Independent States (poverty reduction, legal and economic development, and macro-financial assistance); the European Bank for Reconstruction and Development (private sector development), and the International Fund for Agriculture Development (agricultural sector). The United Nations Development Program provides support for a number of separate activities. By including Moldova in its New Neighbor Process, the EU signaled at the end of 2003 a willingness to increase its assistance levels to Moldova, if it pursues policies bringing it closer to the EU's standard of a democratically-grounded political process and a market-based economy.
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