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IMF Executive Board Approves US$574 ECF/EFF Arrangements for Moldova

IMF Executive Board Approves US$574 ECF/EFF Arrangements for Moldova

The Executive Board of the International Monetary Fund (IMF) today approved three-year arrangements for the Republic of Moldova under the Extended Credit Facility and the Extended Fund Facility. With each facility providing an equal amount, the combined financial assistance will be equivalent to SDR 369.6 million (about US$574.4 million) to support the country's economic program aimed at restoring fiscal and external sustainability, preserving financial stability, reducing poverty, and raising growth.

The approval makes an amount equivalent to SDR 60 million (about US$93.2 million) immediately available, with the remainder available in installments subject to semiannual reviews.

The new arrangements follow a three-year program supported by a Poverty Reduction and Growth Facility, which was approved by the IMF Executive Board in May 2006 and expired in May 2009.

Following the Executive Board discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chairman, said:

"The global economic crisis led to a rapid deterioration in the Moldovan economy in 2009. Falling demand in trading partners caused a severe downturn in exports and workers' remittances; FDI and other capital inflows fell dramatically as well. As a result, domestic demand collapsed, causing a sharp GDP contraction and deflationary pressures. Fiscal pressures were exacerbated by pre-election spending hikes.

"The authorities' program for 2010-12 aims to restore fiscal and external sustainability and boost growth. Fiscal policy targets a gradual return to a sustainable position by 2012, or earlier if possible. Monetary policy will focus on maintaining price stability. Structural reforms will support the recovery, including by increasing the flexibility of the highly regulated economy. The program will also increase spending for essential social services and poverty reduction.

"Fiscal policy in 2010 seeks to balance a much-needed adjustment with large public investment and social spending needs. To reduce the deficit, the authorities have rescheduled unaffordable wage increases and rationalized spending on materials and subsidies. At the same time, the budget envisages a rise in targeted social assistance spending to help protect vulnerable households.

"Taking advantage of low inflation, monetary policy will be supportive of the nascent economic recovery. To ensure that the exchange rate is in line with fundamentals, intervention in the foreign exchange market will be limited to smoothing short-run fluctuations. The central bank is closely monitoring banks' financial soundness and stands ready to take preemptive action if needed.

"Structural reforms are designed to unlock the economy's growth potential and support the fiscal program. A wide-ranging program of liberalization and deregulation is aimed at stimulating competition and fostering private sector-led growth. To keep the social insurance system financially sustainable, early retirement privileges of the civil servants will be gradually phased out, and sick leave compensation will be revamped. The authorities will also address the large quasi-fiscal arrears in the heating sector."




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