-Moldova~ -Country Economic Mlemorandum

Septembe 16,1993.

-¢ oCou ~N*r patiOns Ditvision 2Eu -A- aReg4Dannl

| Eurrpe and CentralAsaRgo

FORt OFFICIAL U.SE ONI. .

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5 C 'i y uniit ' Mol'ovm m (MU_

US$1.0 -MR 1306

(as of Se.embe 15. 19.)

C f~ ~ BEF - ployin.at -ui

FU Ullit -r Moldoe e/neo3

BATf - Oent AN mernaitoan Taifband TaGIBW Cerots Bankti OfRoUBt

cis .omau oil of .qivsubMIFCD - Muopoa Baneek foreiRndmwtim and.DwakMt nt

NUM ~ ~ ~~~A ofna Sa oS, Moldov

-RC - EumPionYtd I t3

P~D - Private -Sveto U.nionien

GDP -4MSocaludOMS j

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koS 4s x w Steqwlem w~

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EFOB - Euomp P*d :"

VA1T -Xea aote Tf d Ttap^

YOi O mVIAL US ONLY

ACZNOWLEDGEBJNTS

This ret is based on the findings of an October 1992 mission led by CostasMicaopoulos and of subsequent missions led by Jonathan Wal. The initial missioncompised Sunil Gulati (Deputy Mission Leader), Ileaa loneact (Office of Wotid Bank

iecutive Director Representing Moldova, Coordinator with Goverment), Heen Sutch(Fiscal Issues), Erk Boret (Envirnm t), Kar Brooks (Agriculture), Gahna M M(al Issues), Russell Muir (E3nterpdse Retcturing and Privatiation), Anita Schwarz(Finani Sector), Kathee Stephenson (EneW), Gabriea Vegaabor Market and SocialSafety Net) and Khangbin Zheng (Stics). Azita Dasgheb contributed to the StscalAnnex Benjamin Seay, Lenora Suld and Oxana Zadorqjnaya provided secretial seMrices.Helen Sutch was the principal author of the reporL

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of b tis dopmstw&bassRstRlct awtst40butio W9 a0ua4b cpiasolyI o v t A' ' A,;

MOLDOVACOUNTHY ECONOMINC 7M{0ANDUM

EXECUIVJ1'IE SUIIIMARY .......... ** 9*99**** 9**~

SRMODUC'ON ....... ............................ i

I. THE EVOLVING ECONOMIC CRISIS ......................... 31. Tbe dvelopmentofthe Moldon eonomy bfoe 1990.......... .- 32. T naturofthesx ocksinl9l M dl9 S . ................. 5

Outu . ............................... * * * .. SThb ................ . .. ....................... 7Pti eandwagedaveopments ............. ................ 9Mornetary deelopmets .............. ......... *. . 11

3. Th consequences of the shoc for output, incomes and mao-siMty ... 12

H. THE RESPONSE TO THE NEED FORSTRUCTURALTRANSFORMATION ....... . i 1

1. The Govnment's refom program: hdtial masue ............... 152. Th defu to stabilize the ecoomy ......................... IS

Monetaw policy ............... .................. , 1SFisadpolicy ..................................... 17

3. Progtams for privaizaon and a compe inn 19Led framework .... ... 99999999999....... 9 19Enterpriseeeop n...99 ** ... 9999***~ 20

4. WEorts topromote tradeandreaoeextmalan ............... * 224. ExtrmnTafinancini ................................... , 23

D)ebt'and c..dito.t.less. . . . ........ * 23

-m. THEI ROAD AHEAD * ......................... 21. Th Govenment's reom program: future perspectives .............. 252. IhkJys to res%ton Incone 999 999 99....................... 25

Creation ofat aable macro3eomnic e .. ............. 26

(Ai)Moneay ypiy andfimaidxsecto ................. 30An enabg for the pivat seco and dffdent publc

sector 99999*................................ 34

0I) Exploitation of v compative advanae ........ .... to 3501) Bntepis ..............99999999 41..VEh " bez .......................... 4(ih) he labr mad 4S

P mze cdug vunerabgroups so

3. TI roleofforelpnbomwwng and extern aasdss tan............... 53*Externafinancing needs 9.9. 9999...999999..99953

AidGoonlination .......... *. ........................ 54

ANNEX ON BNVDUXNMENr ............................ 57

ANNEX ONENERaY . . . . . . . . . . . .. . . . . . . . ... . . . . . ., .. . .. 62STATEnSCAL APPENDKX

... ..

MOLDOVA

Rco Mammudu

Text Tablas, Fgs and Cha

Text Du=

Table 1 Mi Economic and Soca Indicators .................... xvTable2 IAl :Interrepublcan, &ten aa Totol Tmde ........... 8Table3 MiodovE MouthlyV riaos in theeCPland WM ndiea s ....... 10Tal 4 Unemloyed Re ing Benefits fom th Empoyrment Fud ...... 47T" S Moldova: BOaae of Payments ................................. , 55Table6 EnerngyImports, 1991 andProjected ......1992........... 66Table7 EnerPrices .................................. 67hl e 8 Energy Imports, IM92.94 . .......... 68

Pig. 1 Percentage Stuc of NMIP in 1991 ..................... 4Fig. 2 Moldova Price Indices ............................. 9Fig.3 Moldova StaeG rumnment .dget .......-............. 18

Chart I Trnfsr Paymeu, 19M ............................ 49Char 2 Socil Fund pd .................... 49

EXECUIE SUMMARY

1. Moldova is an ethnically diverse county wedged betwee Ukraie and Romania.With a land area slightly larger Oa that of Begum, it is the second smallest country in thefomr Soviet Union (PSU) after Armeria and has the ghest popuation densty. Moldova'srich soil and temperate climate made the ontry a naor spplier of agriculual poducts inthe FSU. In 1991, MoldoWa's Income per head rankd eighth out of the flftewi FSUcounties or 20% below the FSU average.

2. As a small country with powerful ngbos, Moldova has had its boundaries redrawnmay times. Once part of the Ottoman Empie, the country wa absorbed into the RussianEmpie in 1812. Afur a brief d of iin 1918, it joined Ronu Then,during the second Wodd War, the area on the tight bank of the Dniestr rver was annexed bythe USSR. At that stage it lost part of its teriory to Ukine, while being combined withtde Moldavian Autonomous SSR of Ukrine (on the lea bank of the Dniestr) to formMoldova as it is constituted today. Edmic Romanians form the maority of the Polon(65%) of 4.4 mllion but there ae sizeable minorides of Ukrainians and Russians (13% each)togethe with a number of Qte ethnic minoities incuding Bulgarians (2%) and the Gagauz,a Chtitan 1Tuish people in the south (3.5%). he prpotion of ethnic minodties is muchhigher an avege in wban areas and in the region cn the lft bank of the Dniestr.

3. Tensions after indpendenoe was declared on August 27, 1991 led to intense conflictin wh ethnic and language factos were combined with marked differe In apprac tDecono refom. The ensing armed conflict resulted in sei casates and damage toinfrastrur and crops. A caase0e has held sine July 1992 and tensions hawe casedduring 1993, but a number of issues rlating to the stats of the Tnistria region rmain tobe resolved. e objecdve of naonal unity and the means of attaining it are in the forrntof publc. debate and conditton the Government's approach to economic and socatransformation..

4. in the command economy of the USSR, Mdova's eoomic role was one ofproducer of raw and pwesed ftuffs imaiIy gapes, gois, wines, vgeabs andlivestock). Agricute alone accouts for 42 peret of Net Matil Product (P);agroindustry contutes appom y hilf of the almost 40 pereent of NMP acounted forby the industral setr, which also produc h old qa and high-technlgelectrcd goods, in part for the defes industry.

S. Moldova has a t eoconomy, with the shares of import and epor inGDP averagin 50% in 1990. Its princpal eot are agrial, induding wine,prcs food and bco products. Other major eo are light industrl products such-as lectrica applias, texies ad leather goods, and products of tbe machie-budg

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industry. The country i almost totally dendent on mportenergy, and most other inputare also imported. The bulk of Mooa's rade is with th FSU, with Russa arnd Ukliejointly accounting for 61% of imports and 76% of total expotts in 1991.

6. Moldova's tade dependence-and need for impored enerW in pardcular-have madeit espcially vulerable to the shocks of the past two yes (described in the secton below).If the economy s to achieve susainable growth ine futu, :t will have to aust to a shapprmanet fall in the terms of trade and makl racin structural changes tha willreq,uire a great deal of energy and determinati Growth in h funire shold be export-led,given the small domestc consumer base, and the country will teefo need to enable aswitch of reocs into products which have export markets in the new environment and canbe profitable at fte new set of rlative prices.

7. NotwIidnding a high degee of integration into the FSU suctue of production andtrade, Moldova probably faces somewhat less need for adjustnat in the sectoral compositionof output and export than many other FSU countries, as agriculue and industries will almost certinly continue as the leading sect, s ing the recovery andfonming the bas for futre growth. However, adjustmt it sectors will be extensive,as busness and farms search for economies in enr use, make technologicalimprovemoent, orient actvity to profitability and markedtg effort and away from physclproduction tagets, suft product compositon, and sngthen lik with exsting marke andseek new ones. Many of the technical and energy efficiency gains will need to be embodiedin new investment, eaDecialy as much of the capital stock is out of daft. While Moddovades not have environmental problems on the scale of Russia or Ukraine, the country mustdeal with a polluted envirment andproblems of soil degradation an erosion.

DEVE,,QPMENS IN 1-

8. FRom 1991 on, Mokdoa has been hit by a series of shocks both intemal and extnal.On the intemal font, a sping freeze in 1991 followed by smmer fos depssed GDP by18%. A svere drought in summer 1992 then caused devastating crop losses, espcily ofcereas. During 1992 and 1993 the country has had to import grain on an enmgency basis atrelave prices at least five imes higr tan obtined in the past, when any havest deficitsco be made up by cheap imporu from elsewhere in the FSU. Compounding txeeconomic losses, e conflict in June 1992 over the status of the l i divertedexpenditure to militay purposes and destroyed fuel pipelines and some andindustral plt

9. In additon to the economic losses caused by the intea confic and the drought,Mokldovan output was further depressed by the fall in FSU consuie and military demand forits epot ad increasing detioron in the FSU economic envirnment, rug indisruption in the trade ad payments systm, a sharp adver shift in rav prices, loss ofincome tranfers from the Union budget, and shortages of import energy. Modova isexpeiencng probably the worst tems of trade fall of any of the FSU countrie. Tbese

ii*i

factors wer exacerbmd by the high level of uncerainty in the economic envirnment overownership rights and enfment of contract.

10. Reflecting these shocks, =DP fell by 21% in 1992, bringing the cumulative fail inoutput dnce 1990 to more than 35%. md& declined even more: te she of impts andexport-in GDP declined from an average of 50% in 1990 to 33% in 1991. In that year,only 4.1% of tota exports went outside the FSU, but about 17.6% of imports caine fromextenal sours. Trade with the FSU was normally in surplus but is unlikely to remain eonce energy prices reach world levels, while Moldova's deficit on trade outside the rublearea was about R 1.2 bilLon in 1989 and 1990 and nearly R I billion in 1991. This,togther with the severe ternms of tade shock, indicates at ext l financing nc-ds in thefuture will be high.

11. ed= have been raised any times over since 1990, and price,ibraliza onbepn in1992, acompanied by a 2,200% increase in the general paice level that year. There arethree pricing regimes. In the first, prices are market determined; in the second and largestregim, wholesale and retail margins are controlled (the Govemment has recently deided onfurther lberaliaon in this catgory); in the third, prices are directdy controlled. The latterregme apples to some food items, sevices, and a lmited ist of cnsume durables in whichMoldova had an FSU monopoly; addidonally, in the agdculure sector, the price of animalfeed is controlled and subsidized. The minimum wage has been raised at irngular intervals,but changes in magn have consistendy lagged behind price ireases the aveige real wagedeined by 33% in 1991 and another 42 % during 1992, a far shre fall han thatexpenced in Russia.

12. Mq=y -nd credit control-or lack of it-was largely determined extrnaly by theCentral Bank of Russa, but is now coming under national control. Domestic cdit isfurtier driven by Govenmet dicton, the growth of inter-enterprise credit arrears andextens of bank credit beyond prudential levels. At the same time, Moldova is vulnemableto demand developments in Russia and Ukrine. Te epansion of credit in the fall of 1992in those counties, together with widerad prce and wage controls in Moldova, resulted ina sge in unofficial exports and hence depletion of Moldova's consumer goods, aspurchasers firm acrs the uontrod bora with Ukaine took advantage of cheapetgoods. lTe introduction of the krbovanes in Ukrine led to a further influx of rubles intoMoldova. hence, if it were to remain in the ruble area, Moldoa would have an incentieto allow wages and prices to rise to the lvels of its trading parte, and the authoritiescould be drawn into ompedtive mnety expanin. The prset for stblizatio are

rore poor until the comtry a te ruble area. The autries are now ng tointoduce a new currency, the leu, in late 1993. As a first step, the cetml bank is no longerpeging the Moldovan ruble to the Russian ruble and,, since August 1993, is quotig asept rae for the Moldovan ruble.

aiXA ;;;tR, d_i '

13. finl Is te mI creconomic instrument over which the Government crentlyhas most leveage. Unfort_ately, the move to new tax instruments in January 1992 wasmade without sufficient pation. Teetng problems witi' the new system, together withpoor compliance especialy by now enteprises and enterprises situaed in the Transnistriaregion, resWted in a fai in renues to 19% of GDP in 1992 from over 35% in the previousyear. Meanwhile the tax base has decined, with GDP fing over 35% during 1991 and1992, and collection delays at a dme of high inflation are undemining nominal receiptswhile expendite claims are rising in both real and nomini terms.

14. Poor revenue yields now compromise tfie Government's efforts to attainmacroeconomic stability, finance implementation of the refoxm program, and maintain socialproteston. The authots contained the fiscal deicit on a cash basis for most of 1992 byslashing public investnent and compressing real wages, and also by running up substantialarres, but the deficit rose to 21% of GDP by end-1992, largely because of lending for thedindexation of working capital' for enterprises that was financed from the budgeE Thedeficit was financed by credit from the bani&x&g system. Cuts in investent canMot besuined ntely without compomising fure gowth, however, and domestic arears

and reliance on bk credit are destabilizing the rea -hornomy and nascent finacl sector.

15. Te athrifies' objecfive is to hlt t output fall of fte last two years, whIlebringig inflat under control and enabling a re-orentaon of production to the newsrucue of relaive pric. hi oder to stabilize fte economy, the authordies wil need toimprove fiscal progranming and control, develop ins:ruments of monetary policy, and buildan effective fimancial sectr and payments sem to comt*t the macrnomic instbilityarising out of weak financial insitutons and inadequate prudential supervisi( These

Aorms wil undep the introduction of the new Moldovan cmun and a tthning of monetauy policy at that stage.

16. Whle it is a piorit to halt the fai in outut, it wll be necessry at the same time talow eonomic activity to respond to the neww struc of reive prices and the differentmarket oppotniti tat will prvail, creafing he onditons for grwth Trade policy is thehighest priority for-structural reform. This will enable the economy.t bild on itscomparative advantage in agriculture and expand exports, while entepise rform andprivatization, the next priorities, will promote dynmic growth in private business,marketing and distribution.

17. For this to happen, It is imporant-to move away frm a oentrally planned economy tocreate an enablng enviment for privae markets, put i pla the in and otherunderpinnin of sustnable growth in the future, and safeguard the wel of the mostvulneble in the population. Even aside from fte dismptn in the trade and paymentsytems and other disocaton aoatd with the transti, Moldo is suffing a

iv

pmanent terms of trade fail tt implies a sbarply lower standard of living for thepopulation as a whole. Adjustment to this loss of welfae needs to be facilitated byprotetng the poorest and establishing the condiions for real grwth as speedily as possible.

18. Speed in strctural adjustmet will be of the essence. The introduction of firmmacoeconomic policies will reinforce the pressure for structural reform as monetaiytightening and the withdrawal of budgetay subsidies bite on enterprise activity and force therelease of eources to more economic uses. This process will be less painful, and moreeffective in spurring economic growth, if the underpinnings of microeconomic reform are inplace and an enabling environment has been created for private market activity.

MQn=y o finani 2wi

19. The authodties moved in 1991 to establish the National Bank of Moldova (NBM) as acentral bank with the potential auhiority to exercise instruments of monetary policy. Inpractie, the NBM has little autonomy. Moldova's monetary and financial sectorarrangements are sfill largely those of a command economy, and directed credit is the norm.Much rmains to be done to establish the autonomy of the central bank, develop instrumentsof monetary control and improve capacity for prudential supevision.

20. The d iost i to contain splg risks in the financial system. Bad loans arebuilding up, concealeo by opaque accoundng systems and the common practice of credrollover and interest apilizaon. Portfolio risk will only increase as econoidcrestrucrng progresses and an increaing number of enterprises find themselves unable toservice loans. As this process will be dramatically accenuated when monetary and fiscalpolicy ae tightened in prepartion for the introduction of the new currency, it is imperativeto act now to protect the financial sector from collapse. Further lending must be conditionedby past repayment performance, and in due course by credit and risk alysis, while limitson lending to single borrowers and to shareholders must be enforced. Lo loss provisionsshould also be built up. Otewise the bancing secor risks widespread failures withconcomitant heavy chages on the budget.

21. The Government's decision to eliminate prefrential credits to selected secors andindusties will help resources sift to the most productive activities. However, real interestrtes remain highly negatdve, distordng the cost of capital and profits. As a bigh Dity.the NBM should continue to raise intet rates towards positive real levels. It wil also needto raise and enforce caital standards on banb, so as to limit the vulnerability of banks todefault ad reduce future clhages on the government budget should banks need to beliquidated and/or recapitlmized. T required capital/asset ratio should be raised with aphase-in peaiod for e g banks to at least the BIS cpital adequacy guideline of 8%, andprefrably higher during the transition period. Regulations resicing acceptance of depositsshoud be rmved.

.~~~~~~~~~~~

22. To promote the development of an efficient enpse sector, the budget consuint onenterpries should be hardened. This will require the introduction of stricter creditevaluation, higher intuest ues, eliminadon of budget subsidies, and prudential supervisionof commercial banks which extend'credit to entprises. However, a closer focus onenterprise efficien9y and intw-enterprise arers is needed in palel to these generalmeasures.

23. Hence financial discipline should be internalized within the enterprise secr. Untilcapacity is built up in the financial sector to evaluate risk and profitability and extend creditaccordingly, credit demands of exiz;ng public enterprises are likely to drive credit allocation.Higher interest rates will be met only by higher credit demard, rather than a ratononof demand. On the other hand, if the credit safety valve were abruptly shut off, there wouldbe widespread enterprise failures, with follow-on bank failures, and the consequces forboth the real economy and the financial system would be disastrous. It will therefore beessential to insist on greater financial discipline within enterprises, so as to limit excessivecredit demands and prevent further deterioration in bank portfolios. This -wil requireintroduction of accounting and auditing standards and finci reporting requiments,together with regula monitoring of enterprise credit including growth of inter-enterprisearers. Enterprises will need to replace production targets with profitability objecives,rect financial limits on their activities, pay off existing arrears and place time limits onnew arrears, and establish consistent accounting practices and financial reporting. Success inenforcing ese requirements entails the development of the coresponding capacity withinGovernment until corporate bodis are strong enough to take over. Reining back tic cr*ditdemand of existing public enterprises will also reduce crowding out of the growing prvatesector.

24. Moldova has not seen the prolifeation of new banks, many of wWich have beencreated solely to lend to their owners, which has occunrd in other FSU countries. However,lending limits on credit to owners are frequently exceeded and a number of banks aredangerousdy exposed to a few large enterprises to which they custozyrily lend. As animmeda priority, the NBM should enforce restrictions on connected lending (as indicatedin paragraph 20 above). Then, to take account of the intrdependence of the fonner Statebnk and their SOE siareholders, a staged disengagemnt is neede. ruib enterprisesshould no longer be periitted to buy aes in banks and shoula8 divest thed=lves ofexisting shams over a set period, preferably before being privaized. Any further indexationof working capital should be conditional on entepise performance criteria relating torestuctring and to movement towards profitability. Meanwhile the ban will need toimprove their capacity to evaluate credit and risk, tanig staff in these new fiunmcios.

25. In the longer run, the new private sector bank are likely to expand, attatng newcompan}es as well as some of the traditional customers of the fome State bob, but thetotal number obanks will probably not incrase grey. If ris can be contained, theformer State banks should evolve into genuine commercial bk, but are likely to need

vi

. . - .

expensive resucturing. This will need to be postponed as long as possible while budgetresources are built up. However, the need for closr cannot be ruled out, which wouldalso entail heavy budget costs.

FEa1 owia

26. Is in fiscal policy are to shore up revenue collections and cutsubsidies. In due course structural reforms will also be needed on both revenue andexpenditure sides of the budget and in the assignation of central and local governmentrevenues and expenditure responsibilities. This wil be particularly important once enterprisedelivery of social services begins to be shifted to local budgets.

27. Rev. To improve the prospects for macreconomic stilization, the higbhet4iiIr is to raise tax collections by strengthening the tax administration and improving

taxpayer information, education and compliance to deal with the new structure of income tax,VAT and excise taxes, which was introduced with little lead-up prepartion over the at twoyears. Taxpayers and inspectors both receive instructions and methodology too late and alsohave to grapple with reative changes in taxation. Taxpayers are likely to need advice ontheir new obligations (may will be paying tax individualy for the first time) and on theaccoumting requirements for accurate VAT and profits tax assessment. A unique taxpayernumber should be introduced, tax requirements codified and published, the tax administrationcomputeizd, and raining programs set up for tax assessors and inpectors.

28. In order to create an environment which will help resources to flow to the mostprofitable activities, the tax stuctr should be as neutral as possible. The authorities havealready moved towards a simpler, more uniform and more equitable system, with theabolition of concessional profits tax rates for agricultural enterprises and the introduction of agraduated personal income tax. The land tax now applying to agricultural enterprises willneed to be raised if it is to fulfill the Government's objective of creating, on average, thesame tax burden on agricultural as on industral enterprises. Amendments will alsca beneeded to personal income tax rates, with the aim of aligning the top rate of peoal incometax with the corporate income tax, so as to enur tax neutality between different forms ofbusiness activity and to preent tax avoidance t gh incorporation (or failure toincorporate, depending on the relative rates of person and corporate Icome tax).Differntial sector contrbution rates to the Social Fund should now be eliminated, and theexcess profts tax (defined as taxation on profits exceeding the industry norm by more than10%), which has already been re4uced, should now be removed.

29. The amMhJr . Theej are to abolish remaining subsidies to publicenterprises, and to concentrate available fiscal reowurces on esstenial health and otherservices, social assistance to those most in need, and infascWure maintenance f roadsand other capital stock nece4sary for economic gowth are not adequately maintained, theywil deteriorate beyond the point where repairs are feasible, and large new investments willbe required

vii,.4-...

30. After immediate action to cut subsidies, there will be a need for deeper reforms so asto lessen and rationalize expenditure pressures, and reduce the grwth of arrears and claimson central bank credit to finance the deficit. The Government must be prepared toreWogmam expenditure in the course of the year if revenue falls below forecast levels. Thisin turn rquires clear expenditure priorities and alWrady developed ideas about what to cutfirst-and how to do it. This scrutiny and re-ordering of priorities should be undertaken forcurrent expenditure and also for investment ependiture. At present, the inclination to finishcapital projects that were halted midway because of the outbreak of the conflict or because ofrevenue shortfalls during 1991 and 1992 often overrides the order of priorities based on realeconomic or social benefit. There will be occasions when it is more economic to leave aproject unfinished than to complete it, transfersing the resoures available to a higher priorityactivity.

Private sector develgmet

31. Le. The development of a dynamic private sector fueled by trade andforeign investment requires a clear legal framework and t'he capacity to implement it.Parliament has already passed most of the laws needed to frame private sector acvity butsome of the existing laws (banlkuptcy, foreign investment) are in need of revision andfurther laws will be needed. In this context, a high priority is the law on mortgage andcollateral which will fcilitate timely ownership transfer and also assist new buinesses inobniing credit from commercial banks and suppliers. Capacity to apply the bankruptcy lawwill also be required so as to facilitate exit. The courts and the legal establishment areunfamilar with a private sector environment and may also be insufficiently independent ofGovernvent. It will therefore be important to develop an independent court system withspecialized commercial courts, and promote the formadon of an indepdent legl pro n.Capacity within Government will also need to be reinforced so as to continue drafinglegislation and regulations needed for prvate sector development.

32. In paralel with legal reform, entry restrictions for privae sector activity have beenremoved with the exception of some areas related to defence and a limited number ofpharmaceutical products. Land and other asset registration procedures have been establishedto facilitate the development of markets, and there is a company registry within the Ministryof Justice. However, licesng requrements remain burdensome and permit too great adegree of adinistative discretion. They shoud be replaced by a certification system.

33. Ixaduplic. The imMedia oit is to enable economic agents to build onMobdova's comparative advantage by removing ctions on expt and ensuring that theatade regime be transp t and clear. Hard currency expot will be crucial given the need

to genere foreign exchange reserves to support the intrxuction of the new rreny and toserce debt. To this end, the removal of quotas for hard currency exports and theimprovement in export licensing procedue in mid-1993 were major steps forward. IAceasesare now granted a year at a time rather than for each trade opetio, and in August 1993,the number of items subject to export licensing and quotas was halved. The to ,ziru now

VWU

is to ensure that licesing procedurs are as clear and smple as possible, minimng delaysand opportunities for rent-seeking. A &fu b it is to remove all quotas on FSUexports. Ihe proportion of tade covered by State contcs wil need to be reduced astapidly as the pratices of MoldoWa's FSU trading parter permit. Concurrently, the State'sdirect role in trading should be phased out to filitate enterpri-toenterprise contact; at thesame time, prcureent procedures for state tading will need to become more transparentand compedtive. The Govemment intends to mnove export taxes by end 1993. It will beimponrtant to remove remaning export quota obligations and, in the few cases where importsare still administered, replace quotas and licenses with tarffs.

34. In September 1993, the authorities replaced the previous Wgly dispersed stucture ofimport tariff rates (ranging from 0 to 1000) by a low and fairly uniform tariff on non-PSUimports, with most tes in the 15-20 percent range. This tariff level is advisable, given thatsections of Moldovan agrculurnd industry my need a modert lve of proteton for atansitional period (particulary once the protection currently afforded by the exchange rtedisappears), and given the pressing need for revenue for macnc sabitionpurposes. Differential excise tax rates could still be used on luxury goods and goods withsignificant social or environmental costs.

35. ITe surrender requirement for hard currency export receipts has been reduced from50% to the current level of 35%, and is now calculated at the official Moldovan exchangerate, thus removing the implicit tax imposed by use of the Russian MI;CE rate. (In August1993, the Moldovan ruble was quoted by the NBM at 1.3 to the Russian ruble). Tbeauthorites should now adopt a timetble for removing the urrnder requirement altogether,recognizing that it eflects exectations about financial and foreign ecchange markets whichshould disppear once nmcrconomic stabilization is achieved and the financial sectordevelops instruments in which depositors can have confidenmc. The NBM will need toensure that there is a functioning foreign exchange market to whic all entepris haveaccess.

36. There is a pressing need for reform of Customs if Moldova is to aitate externaltrade, develop accurte statistics for policy-making, and collect revenue. At presentimmigration and Customs facilities on both sides of the exteal border with Roman are abaier to trade. Delays make the export of perishabe goods highly risky, ruse the cost ofexporting, and discourage investors.

37. The authorities have begun to rationaz the application of VAT. At present, theVAT is applied on some variant of the origin princple in many countries of the FSU, but isgenerally applied on the destnation principle outside it. This means that VAT was not leviedon imports from outside the FSU, while inports from inide the FSU entered Moldova atVAT-inclusive prices, and at a high rate of 20%. The authorities are now imposing VAT onimports from outside the FSU so as to provide neutal tx treatment for VAT purpose of allgoods, imported and domestic. The Govenment will now also want to ensure that ex todesinatons outside the FSU are zero-rated for VAT, as they will be subject to VAT in the

ix

.. Fj .

country of sale, in line with western prace. Zero-ratng is preferable to exemption becusetaxes paid earlier in the production process can be reimbursed. Full reimburseent wtll notbe ptdcable in the immediate future, altiough it should be possible to reimburse taxes paidin Moldova. In due courn, the authorities should consider moving to a VAT based on thedesnation principle.

38. ]3ntEopXise reform combines the issues of pivae sector development, financial sectorreform, enterprise governance, and privatation. Although there have been some informalprivatzatons and new business strtups, most enterprises are in the public sctor.

39. On present plans, nron will lead the procass of enterprse reform. However,a chwage of ownership on its own will not be enough to achieve an efficient use of resourcesand conditions for growth. Attention will also be needed to the competitve environment andto corporate govemmr e both before and after pnvazaton. Freedom of entry will bepardcularly important. An open trading pohicy will ise the degree of competition in theeconomy but it may also prove necessay to regulate or break up domestic monopolies suchas those in distribution and other non-tradeables. It will also be important to recognize thatownership change is not just a reassignment of title to a structure of acdvity that will remanstatic. Changing incentives, makets and pries, together with new forms of management,will geneae substantial change in the composition of activity and the population ofenteprises. During the transition period it is inevitable that a number will fl and newentepises will emerge.

40. The Government is now planning to move ahead with the Priwation Program1993-94 recendy appwed by the Pariament. The aim is to privatize small-scale shosfairly quickdy, and then move on to the rnsport, distibution and market sysm, wbichwil promote the development of a dynamic private sector. At te same time, it will beimportant to address finmcial and management issues in the larr enterpris which willtae somewhat longer to privatize, and in those slated to remain in the public sector.

41. EnWdatfflpt M . Bnterprises have been largely sulated from the budget constaintby the indexaon of woring capital, generalized cance of ie arrears (andthe ability to accumulat further arrears), access to a cheap t sly from bank theyown, and, in some cases, by the abilty to charge monopoly prices. There have been fewexamples-of signiflcant redundancies in the industrial sector despite the sharp falls inproduction and capait utilization, with firms prefeing to introduce short-dme workng.Government must be prepared to allow lquidations or unemployment to occur in cases wheremarket forces indicate that there is no othr option. It wilt be imporutw to ensure that anyfurther coaenwon for l&aon or amars clarance Is conditioned on enterprIsepejforma.

I

42. In ordeto inpwve a progam oof ctaonofall SOEsis needed, transforig them intojoint stock companies and sting boards of directorstha will be elected by te sharewd s. This process will takme to complete. As an

immediate measure, it is essendial to improve financial controls and spell out n tfsonsibilities and obligains more cearly, and introduce sanctions for poor performanceinto managers' employment contracts. Managers should also be askd to draw up finmcialplns, and wher appropriate, privataion plans for their enterprises.

43. Simultnously, the role of fte Minisriea will have to change, sarting with theUinisies of Agriculture and Industry, as the country moves to a market based economy.

The emp}asis will move from opertional isues to monitoring, reglation and the provionof supo in maring. Ministries will become responsible for monitoing informati onenise ouWut and employment devopments and financial performance including inter-enterprise arrs, as well as enwfor management conacts.

44. The faclitation of Jj will be an important part of the enterprisereorm strabegy. As it stands, the law does not offer sufficient proteon and also defines anumbe of spei procedures which are likely to creat obstacles for foreig investrHowever, foreign technology and capital will help revitlize enrprise perom , whilejoX venture paru can assist in petring non-traditional markets beyond the FSU. Inaddition, new investor from aboad can bring managerial innovations from te West IngenqW, foreign and domestic investors should be subject to the ame requirent, andce sould be tk to avoid special fiscal or other concessions for foreig investors;as nc on repatiation of profits and guarantees againa should suffice.

45. Many larger Moldovan enteprises provide and fund aon serconsadcrblescale. These obgations will have a significant short tem financial impact on the operaionof the enteise in an inreaingly compedtive environment, impede closue when anenterise is banupt, and will also complicate privazaion at a late date, pauly ifforeign capital or access to exten makes is required from joint venture partners.Arrangemnwts will need to be made for a gradual tansfer of socidal functions to centra orlocal gement budget, or at least to clarify the tie horizon over which thisresponsibility will continue while fiscal capacity at the local level is built up.

46. About 70% of the houing stockis already in private hands (almost 100% in rurlareas), and the Gov t is now pressing ahead with pivating the 350,000 dwellingssll in public ownership. The legal fraework is already in place whereby sing tmtswill receive a defined area of space per peron free, with an additional space allowancedependin on years of work. Spae above that limit can be acqired for payment Anestimated 75% of mits caXi be privatzd without payment and these pirvatiaons are nowunder way, while those cases requiring partal payment will start by end 1993.

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Labor mare reform

47. Reform of the labor market is needed so as to crea g er e flebility in theeconomy and encourage people to move to more productive oppunities. At present,flexibility is hindered by uncetainty about whether current condidtions - such as inputshortages - will prove transitory or not. A few, generally higher-skilled, workers havealready switched jobs, but shortages of consmr goods tie workes to their enterprises,

rugh which they can obtain supplies, whle housing shottages limit geographical mobility.Employers' ability to dismiss workers are constrained by the power conferred on govermentauthorides and unions to delay lismissals for six months, and the obligation to pay forreaiing. These obstacles should now be removed. An unemployment benefit wasintroduced in 1992, but restrictve nles on eligibility have prevented the benefit from playinga role in pronwting adjustment.

48. Employment offices can cope at present, with registered unemployment at less than1% of the workforce, but will need substantil reinforcement once unemploymt str torise as economic restucturing proceeds. As expendime from the Employment Fund budgettends to be eroded in favor of competing demands from other beneficiaries, it is a highpriority to put the Employment Fund budget ad exenditure on a secure fboting, upgradeemployment offices, provide counselling, identify trning needs and increase trainingprovisio. The authorities may wish t consider expanding thir progam of small-scalepublic wors and services to provide work and promote labor force attachment in a tme ofhigh unemployment. And, to faclitate labor mobility, the authorities will want to give earlyattention to alleving the hou shortage and developing housing markets. Attention willalso need to be focused on enabling women, who have been laid off in dispnumbers, to continue to take an active role in the labor market, if Moldova is to draw on alits resources and talents.

49. Lge-scale dismissals have yet to occur but the system of social protection will soonbe unable to cover claims under the existng structure and coverage (inc!uding provion forunemployment benefit introduced in early 1992). Future deveopments, including laboshedding by entrprises and a continuing fail in real incomes, will only aggravate thissitaion, pushing the Social Fund and the government budget further into deficit.Unemployment is likely to rise sharply and to remain igh for at least five years, judging byexperience with conomic rs rng in other countri. Im da is ,teeded toprovide social aisac for those most in need and to make savings elsewhere in the sstem,introducing srer tageing.

Jl At present, a worker who leaves becse he or she Is belg pad less tathe mnimum wageisdeemed to have left the enterprs voluntily and is not eligible for benef

Ku=

50. Substanial savigs can be found in the short-term by cutting back on benofit andpemsL.- supments reaed to work histoy and income, preferably abolising tmcompletely. Some saving lao be made by abatng or deiminat peni payments tothose who are still in employment. The base level of benefit should also be d.o4nwkd fomthe minimum wage: the minimum benefit is curretly hld equal to the minnimum wage, witha szeable number of benefits above that level. This men that any increases in themiimum wage feed staight through to th stucture of benefits. In futre, it would bepreekable to shift to a system of flat-te cost-of-living adjustments for all beneficiaries,rther than raising the benefit stucue as a whole. At the same dme, it wil be it todevise a syswem for shaper tgeting to the most vulnerable groups. This wil requie abudget aUocation for supplementary benefits, accrt means of identfying oe who aremost ineed and an effective system of delivery. Untl this sys is in place, it could beadvisable to retain a subs on bread consumed by the poor ad introduce a brd couponsstem for the cheape qpe of bread.

51. The next pfdriW wil be to addes the advee fiscal and efficieny impact of thecurrent strcture. The current arngements, whereby the majority of soeia benefits aredelivered tirough the Social Fund, and largely funded by enteis contribus (with somebudget subsidy), are already at the limdt of viaty. The co on rae on enterpries ishigher than elsewhere in the FSU and has been frequently chngd reducing entepriseability to plan and to maintain economic activity and employment. In addiion, diffentsectora contibuton ras distort allocadve choices and profitab . The poteta caim onthe budget in the future is also high. It is therefore at to restuturthe systemwithin a smaler envelope that will entai lower fiscal and no-wae labor costs

52. Bae the diruption assocated with ie tranton is so extreme, the Governmntnow has the opportunity to reink the philosophical nd fincial basis of socia pot nfor the medium-term. What the country is facing i a seies of hckis at ha areadyseverely cut real incomes, and wi result in fuhher job and income losses for a largeproportion of the popuation. Government guarantees of full employment, a minimum wage,and a wage tariff related to ocapat l status can no longer be maintained. In parallel, itwill be necesay to move to basic citen pendons and benfis for the non-empyedpopulaon, if the dse of public fer payments in naional inome is to be held at viablelevds and adequat minimum stadrds are to be achived. It wil not be possle to resoremold rtures. Instaci, a new sructure of both soci assinc ad soc insurance willhave to be devised.

53. During 1992, the country focused on borwing to obtain i alre importsto make up the deficit caused by the drought, and inputs for the sing- and winter plantgseasons in 1993. Assistance frm the Euopean Community of $33 million egqvalent tookthe form of ot-term credits for gran imports at an interest rate in Iune 1993 of 10.3%.

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Moldova will need to mustr assistnce from boti biatea doo and multlateralorganizatons to enable it to refinance and spread this burden over a more reastic repaymentperiod. During 1993, foeign finaning for drought relief cotinued to be an importantcomponent of the short tm asstance progm, with a World Bank emergency droughtrecovery loan of $26 million and an IMF CCPF of $19 million equivalent.

54. It is esimated atthe financing gap may amount to about $35 million in 1993 and$141 million in 1994. calculaion asumes a 50% increase in energy prices in 1993 overhe lvel abtaining in 1992, ith a fier S% inrea in 1994, brngingg t m to 90% of

world prices on aveg. Moldova's fining needs will be substanial over the next fiveyears at least as enegy prices rise to world levels, economic restuctdng occurs, andessental investnent and e litaionke place. The country will need exceptionalfinancing from the donor community over this period before export earnings overk importrequirm ts. Once this phase is over, it will be well positioned to tade both with te FSUand fte rest of the world and is likely to become fidly creditworthy. However, the timing ofthese developments does indicate a need for long-term lending, and for some degree ofconoessional financing, tpering off after approximately five year.

xiv

Table 1: MOLDOVA: Main Eoom and Sodal Indators

Soci d _demO k lndlct (19)Are, 33,700 sq.km.Pop-ation 4.36 mpuio

Udwan 24 mMion (46.7%)Rural 2.3 mlion (53.3%)

PopulatAon density 129.4 per sq.km.Life axpUcay at b 69 yea In 1990

Gros9 domesc prduct (GDP) (19) 226.7 blo rubleGDP per capia (1992) $1l60

1988 1989 1990 1991 1m

Annual Changes of Ouput in %Gross Domestic Prduct (GDP) -18.0 -21.0Net meril prodct (NMP) 1.7 0.8 -1.5 -18.0 24.0

Industry 0.8 10.7 16.7 -16.8 -27.0AgrJuue 0.S 7.3 .19.8 -28.0 -10.8

Composiion of GNP In Indury 48.3 45.2 43.4 44.5 41.5AgrIulu 37.1 40.0 41.7 41.7 47.2Tansport & ComwWioCso 4.0 3.8 4.8 3.8 3.7Other sectors 1.06 11.0 10.1 10.0 7.6

Avege Prie ChanConsume Price 90.8 1255.0Wholesae pm.e 150.5 2637.0Reta pice 95. 815.0Avmee monthy real wape -33.0 -42.0

ra freig -ade (to blion of rble as dmeti pices)EIXpots 5.1 5.5 6.2 8.1 63.9ImpoWI 6.1 6.6 6.5 8.4 94.9Trad balane -1.0 -1.2 -0.3 -0.3 -31.0Trade DBas as % of GDP -10.4 -10.3 -2.2 -1.2 -13.7

Genr gvernmet budgetRevenue 33.6 35.3 35.2 25.8 19.4ExpendIture 31.9 33.0 32.4 25.8 40.3Overall balance 1.7 2.3 2.9 0.0 -21.1

NMny and Cedit (ed of poiod) (bllons of mbbs)Domeao dt (moneta sysem) 3.9 8.9 96.0Broad MOoney 7.9 17.8 81.3

Soure. Moldoan audhons and Bank taff estimes.

xv

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TRODUCTION

1. Moldova is an ethnically diverse country wedged between Ukaine andRomania. It lies at the western edge of fte former Soviet Union (FSU)s in which it used todescribe itself as a Latin island in a Slavic ocean. With a land area of 33,700 squarekiLometers,2 it is etsecond smalest SU ountry after Amena and has tehighestpopulation denity, with more than 129 inhabitants per square klometer. The largest part ofthe country lies between two rivers, the Dniestr and the Prt Moldova's rich soil andtemperate continental climate have made the country one of the most productive agricultualregions and a major supplier of agricultural products in the PSU. Moldova's income perhead ranked eighth out of the fifteen FSU countries in 1991 or 20% below the PSU aveae.

2. As a small country with powerful neighbors, Moldova has had its boundariesredrawn many times. It was absorbed into the Ottoman Empire in the early Ith cenury andthen taken over under the Treaty of Bucharest in 1812 by Russia. After a brief period ofindepenence in 1918, the country united with Romania after the First World War, and wasoccupied by the USSR during the second World War. At that stage it lost part of itsteritory in the Bukovina and Southern Bessarabia regions to Ukmine, while Wing combinedwith the Moldavim Autonomous SSR of Ukri to fom Moldova as it is conktituted today.Ethnic Romnans form the majority of the population (65%) of 4.4 million but there aresizeable minorities of Ukrnans (13%) and Russians (13%) together with a number of otherethic minoties including Bugarians (2%) and the Gagauz, a Christian Turkish people mthe south (3.5%).3 The prportion of ethnic minorities is much higher th averge in urbnareas and In the Transnistla regon.4

3. TensIons atid e was declared on August 27, 1991 led to inenconflict in which ethnic and language facts were combined with marked differences inapoach to economic reform and rttrin g. The ensuing armed conflict resulted inserious casualties and daae to n cture and crops. Since the ceasefire in July 1992fte country has been effecdvely partitioned, with the conomically significant Tnsistriaregion remnin under the contol of the 14th Russian Army. During 1993 tensons easedbut a number of issues relating to the stu of the region on the left bank of the Dniestr river

-I Moldova's land area is slighy la than Begium, about 5.6% of the ar of .kan and 0.2%that of Russia.

Y Figum based on 1989 census.

VI Due to tie emigration of etnc minoridtes aer the disitegation of the FSU, populati growthdecelerad from an annual ven of 1.2% In the mld-1970s to 0.1% In 1990 and became fat in1991. Life expectancyat bih Is around 65 years for men and 72 years for women, while the infmortality rate I below 20 per houand live births. Over half the popuation lives in rural areas andthe level of education is high.

remin to be rsolv&d.3 The objecti of naional unity and te means of attaining it ae inte forefrot of public debate and will condition te Government's approach to economic andsocia transfomation.

4. There have been three Govements in the two years ince independence, andMoldova now hu a Government of nationa reconciliaion in which nnmbers of ethicminoities hold senior Cabinet post. The Govemment's reform progrm res the nead toseek cmsensus if pwr toards a Lbeui democracy and economy is to be maintained. Inthis spirit, the Govement of Moldova is negotiating a national solution to the de factosecession of the Transnistria under a new constitution now being prepared, while remainingfully committed to the process of reform that it has already launched.

S. TLe report Is orgnzed as follows. The first section oudines the deveapmentand struc of the Moldovan economy up to 1990 and th discusses nature of theshocks that ocued in 1991 and 1992 and their cnsequences for output, inomes, andmacro-stability; the second section discusses the Government's reform prorm and itsresos to the need for suu t fo n; the third section set out a road map offuure directons for reform and essential actions for retoing incomi.

e dipuWed region Is a narow strip of lnd on the left bank of tho Diesw river and o includesthe city of Beodery on the right bank; but is usually rAred to simply as the ,Trans estr. Theissues to be resolved conn the degree of auowiy of the T sr officl language, therle of the Russan 14th Army, and pMltcipton in the reionn prram.

*;t) ?' ' ' ,, ' ~~~~~~~~~~~~~~~~~~~*~0,: . ,. ..-.. ) . .

Z 2 o& . , ......

L TER EVOLVING ECONOMIC CRISIS

1. ME de__me of the Mldv emy before 1990

6. In the command economy of the USSR, Moldova's economic role was one ofproducer of raw and processed foodstuffs (pdmarily grapes, grains, wines, vegetables andlivestock) deriving its comparative advantage from the ferffle soil ant. temperate climate.Ag lture alone accounts for about 40 pert of Net Mrial Pdwuct (NMP);agroindustry contbutes approxiinately half of the almost 40 percent of NWP accounted forby the industial sector, along with household applian and high-technoloy eleticalgoods (in part, for the defne industry). The Soviet-assigned structue of producton andtaade created a high degee of economic n among the former republic Mostinputs, pacularly primary energy supplies, were imported ftom the form Soviet Union(PSU), and vertical intgadon in export indusies was discouaged. The high opeting andtranso costs assodated with te intedepence strey were hidden by the highlysubsidized pice of eneWgy products.

7. Moldova has a trade depden economy, with the shaes of imports andexots in GDP averang 50% in 1990. Its principal expors are agiiculual, indudingwine, processed food and tobacco products. Other major expr include ltk industralproducts such as eleical appliances, teiles and leat goods, and producs of themachine-building industry. Despite its high degree of inteation into Sovt prouction andtade, Moldova was spared the most fuel intenve and polluting smostack industries,largely because of its almost compete dependence on imported energy.

8. igpificn oSe Tran reWion. About 17% of the totlpopultion of Moldova lives in the TInsnistria region, which cover an area of 4,200 squaekilometers, or 15.5% of the tertitory an the left bank of the Dniestr river, togeer with thecity of Bendery (taly on the right bank). Lying beten the rt of Moldoa to the westa Ukrne to the eas and south, it is the natural hub for Moldova's trade with the PSU intums of both land transporton and energy pipeline comecons. It is rlatively moreindustried than the res of the country, with 28% of the industl enteprises, 21% oftowl iduial employment, and more than one third of total indusil outpu. Nearly al thecotn textiles, power tansformes and large electrical mchines are produced there, togetherwith 90% of the electicity generation, 60% of the cement, 25% of the shee meta, andmore hn half of the low hboepower eectric motors. The Tsnistri also produces aquarter of the nation's acultal produc.

fi Radios, lH electronic goods, refIgeaors, elic s ad kettles, and.vacuum deanr.

3

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PARTI

9. Ouamd as. After al growth recorded at an average annual rate of 4.1%from 1971 to 1985 (0.3% lower Oa the FSU avmage), net material product fell hply,lary due to the anti-alcohol campaign of 1985 which resulted in the destuction of somevineyards and a makd reduction in wine production. Agricultual N M fell almost 30%and NMP overall fell by 8.6% In 1985. Recovery trasft was slow and faltering untl1989 when NW rose 8.8%, boosted by a record harvest. In 1990 a serious drought causeda 20% fall in agicltu output, leading to a fal in NM? of 1.5%.

10. Lu if. The size of the agricult sector has been risng dunmg thecrisis as ohr traditional sectors siin relatve and absolute ms, while the cooperaveand private farming secto are growing, albeit from a small base. Indusial producdon hasbeen conceted in food processing, consumer durables, light industry (such as textiles,clothing and shoes), and machine building. In 1989, Moldova produced 26% of someconsumer goods such as rigerators and washing mchines sold in the FSU. Since 1989,the shae of the machine building sectr in production has allen while the share of teleshas risen. Food processng remins the large subsector, accounting for 28% of industiaouut, although its share has fallen from 33% in 1985.

11. The tuecre of the economy oin # t1F

190: th stating RAWn for adousbtn.'~ U oi

Moldova's trade dependence-and need forimported energy in paricular- have made itespecialy vunerble to the shocks of tie past two years (descrie in the secdon below). Ifthe economy is to achieve susainable gwwth inte futue, it wil have to adjust to a wharppmaet fall in hie trm of trade and makefar-raching struct changes that will requirea great deal of commitment and energy.CGrowth in the future wMll need to be eport-led,given the small domestc consumer base, and thecountry will thfore need to enable a switr.h ofresouc into products which have export markets in the new environmt and can beprofitable at the new set of relive prices.

12. Notwithstanding a high degee of integati into the FSU structure ofproduion and tde, Moldova prbably faces somewhat less need for adjustment in thescto. coti of outpt may other FSU counties, although adjsument wiIbnsectors is lioely to be far-raching. e country concentated in the past on agricumual- product and ag sg induies based on those produc, lgely consisdtt with itsopartiveadvantage. The agicultue sectors accounted for nearly 42% of nt mateal

'4

. _0. ._

- ~- .- :

: 0 <,' S F - - H ,> a d' ,, - . 5 . v-- - 9

PARTI

product (NMP). Industry constiUted arourd 38% of NMP, of whicb approximately halfonsisted of agroindustry. There is considerable light Industry, but few of the industil

dinosaurs whose intensive use of fuel is likdy to render then uneconomic in the future.However, adjustment within sctos will be extensive, as businesses and fams searh foreconomies in energy use, make technological improvements, orient activity to profitabiityand marlketng effort and away from physical production tagets, shift product composition,and strenhen links with extng makets and seek new ones. Many of the technical andenergy efficiency gains will be embodied in new investment, especially as much of hiecapital stock is out of date. The county must also deal with a polluted environment andproblems of soil degradon and eroon. In spite of the substantial adjustments rqiredwithin the agricultural sector, agriculture and ag g industies will almost ceainlylead the recovery and form the basis for future grwth.

2. The natue of the shocks in 1991 ad 12

13. From 1991 on, Moldova has been hit by a series of shocks both internal andexternal. On the internal fiont, a spring freeze in 1991 foLowed by smmer floodsdepressed Moldova's agricultur NW by 28% and industral NMP by 21% in that year,with a fal in NMP overl of 18%. There was then a robust recovery in some arculuralproducts (grapes, frits, vegetables), before the droht of ummr 19 suck. Thisdrought, the most severe since that of 1946, which was followed by wiespead famine,caused crop losses ranging from 25% for sugar beets and sunflowers to 58% for fruits andbrries. Cereal production declined 30%, with drasc conequenes for gain awailbilityand anmal feed. During 1992 and 1993 the country has had to import gmin on anemergency basis at prices at least five times higher ta obtained in the past, when anyharvest deficits could be made up by chapimports from elsewwe in the FSU. Throughloss of feed and lack of farm income to buy inputs for the folowing agrtural seas, thedrought is likely to harm agriculturl production in 1994 and beyond. Compo i theseeconoic losses, the conflict in June 1992 over the stu of Transnistria diertexpenditue to military puposes and destroyed fue pipelines and some inf andindusil plant.

14. During the same period, Moldovan outut was futer depressed by theincwasing deteriortion in the FSU ecomic environment, resung in di tn n PSUtrde and payments sstems, a p Shift in reaive prices, lo of incomtransfers from theUnion budget, and shorge of imported energy. It is estimated that GDP fell by 21% in1992, bringing the cumlve fal in output since 1990 to nearly 35%.

5* '^

PART I

15. As shown in Figures 2.1 and 3.1 the industrial sector accounted for 21% ofemploymet and 38% of National Income in 1991. Overal, industry has suffered more thanagicultue from the shortage of fuel and raw meals and other shocks noted above.Capacity udlizaton has plummeted in the consumer goods and defence electronics industresand in heavy industry. Industrial output fell by 11% between 1990 and 1991, and in 1992was 30% lower than its level in 1991.

16. Terms of trade fa. According to a receft study,7 Moldova will experiencethe worst terms of trade fall in the FSU. If trade in 1991 had been valued at world prices, itis estimated that the terms of trade shock would have approximated 16% of GDP. Energyimport dependence is the root cause of the severe fall in Moldova's terms of trade. inaddition, almost all the raw materials and other inputs for industry - apart from agro-processing - must be imported, at increasing cost as prices move to world market levels.The massive iwnrease in the pnces of energy and other inputs in 1992 caused trade deficits inalmost every sector, except proessd and non-processed agricultural products, light industryand mahinery. Expenditue on enrgy imports amnounted to R40 billion in 1992, comparedto R1.4 billion for the full year 1991 and it is estimated that energy imports rose from 14%of the value of total imports in 1987 to 55% in 19.8 Yet energy prices are stl well belowinternational levels.

17. FalU in dmad, Consumer spending cuts as unemployment began to rise andreal imes fell sharply has reduced FSU demand for Moldovan products such asrefigators and washing machines, while the sharp drop in demand for military productsfrom CMEA countries and from the United Sovet Command has renforced indusrialdecline.9 It is reported that a further blow has reulted from the prvision of EC credits toRussia tied to the purchase of BC goods. This has hurt Moldovan eports of wine and foodprocessed products to one of its biggest adtional markets.

18. Furthermore, the growth of inter-enterprise aras and the deterioation of theinter-republican clearing system bave hit Moldova badly. In patalle with the reducdon anddislocation of trade, Moldovan enterprises, ike their ccuneprs in other FSU countries, arenow reactng to credit shortages by resisting the slipment of raw materils ao interediate

71 See Taff "How Moving to World PiceS Affect the Terms of Trade in 15 Countries of the FormerSoviet Union". World Bank Working Paper WPS 1074, Jauary 1993.

A in 1991, Moldova imported 3.6 million tons of peziolnum products, 4.2 million tons of coal, 3.9thousad cubic meters of naal gas and 0.2 million tons of LPG.

2/ Much of Moldova's defence industry produces advanced electronic products, however, which couldbe converted to civUilan uses.

6

t't r : h: 0 >X:-~...-~

PART I

goods until payments have been cleared through their bank accounts. The result has been todeprive many industnies of inputs even while markets still existed for their products, thuscompounding the decline in trde.

19. Despite the shocks to the economy that have already been expericed,structural change so far is limited; - though there are some notable exceptions, including indefence conversion. Moldova can expect to hold on to some of its traditional FSU markets,especsily in agro-processed products, but will face considerable change in other markets andproducts. While it will be important to halt the fall in output, it will be necessary at thesame time to re-orient production to the new structure of reltive prices and the differentmarket opportunities that will prevail.

l1ade

20. Although Moldova remains highly dependent on trde,' the shares of imporsand exrs in GDP declined from an average of 50% in 1990 to 33% in 1991. The bulk ofMoldova's trade was with the FSU, with Russia and Ukamine jointly accounting for 71% ofimports and 79 % of PSU exports and 61% and 76% of total exports in 1991. In the sameyear, only 4.1% of total exports went outside the FSU, but about 14.3% of imports camefrom extn sources. Trade with the FSU was normally in surplus but Moldova's deficiton trade outside the ruble area was about R1.2 billion in 1989 and 1990 and nearly RIbillion in 1991.

10/ In 1987, the shares of total imports and exports In GDP were 60% and 57% respectively, whilethe shares of FSU imports and exports were 49% ,d 57% respectively.

7

PART I

Table 2 - Moldova: Jaterrepublican, xterna and Tol Trade(millions of rubles)

1982 1987 1988 1989 1990 1991 1992

1. lnterepublicExpots 4077.5 5158.7 4800.3 5186.4 5853.3 7809.0 47841.7Imports of which: 3827.4 4607.4 4986.5 5191.5 4991.6 7237.3 74127.3- Totd energy 1355.0 40800.0Trade balance 250.1 551.3 -186.2 -5.1 861.7 571.7 -30969.6

2. ForeignExports 162.2 227.6 257.2 270.0 323.4 331.8 16038.3Imports 973.2 1066.5 1093.9 1420.0 1469.8 1206.5 20722.3Trade balance -811.0 -838.9 -836.7 -1150.0 -1146.4 -874.7 -4684.0

3. TotdEXpors 4239.7 5386.3 5057.5 5456.4 6176.7 8140.8 48159.6imports 48D0.6 5673.9 6080.4 6611.5 6461.4 8443.8 74558.3Trade balance -560.9 -287.6 -1022.9 -1155.1 -284.7 -303.0 -26398.7

Memo tem:GDP 9321.0 9433.0 9830.0 11218.0 12681.0 24800.0 226700.0

Ig PrEC= gf GDPI. bnterepublic

Exports 43.7 54.7 48.8 46.2 46.2 31.5 21.1Imports of which: 41.1 48.8 50.7 46.3 39.4 29.2 32.7- Total energy 5.5 18.0

Trade balance 2.7 5.8 -1.9 0.0 6.8 2.3 -11.6

2. ForeignExport 1.7 2.4 2.6 2.4 2.6 1.3 7.1imports 10.4 11.3 11.1 12.7 11.6 4.9 9.1

Trade balance -8.7 -8.9 -8.5 -10.3 -9.0 -3.5 -2.1

3. TotalExpots 45.S 57.1 51.4 48.6 48.7 32.8 28.2Inports 51.5 60.1 61.9 58.9 51.0 340 41.8Trde balnce -6.0 -3.0 -104 -10.3 -2.2 -1.2 -13.7

Source: Moldovan autotides and staf estimates.

8

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PART I

NOs «d wmg domlQr. ._~~~~~~~ M~~~~~~~~~~~le14*n: PrIce DadIee

21. ens in Moldova have beenraised in seveaal stages from Novenber 1990when some impored and luxury goods prceswer substantally increased. In April 1991 theprices of most fnal goods (excluding food andsome other consumer goods) rose in line with aprice adjustment of an average 350% throughoutthe PSU. Liberalizobesan in Janu 1992when Moldova freed prices for nost industrial * .products and some consumer goods and .2services. However, wages and input pries we 2were still administed, and the Governmentsubsidized agriculre and food procsing industres to compensate for the adminis lowprices of a number of food products. Energy prices have been sharply increased but remainadmin istered, at least officially; in practe, individual farms and fims are increasinglyseekng their own fuel supphes through private contracts, often with suppli m other PSUcountries. Consumer prices rose 2198 percent in 1992, with te bulk of the rise occuringeary in the year. There was a deoeleto in mid-year, followed by a furth spik with thenext stage of price liberaliation in November 1992. The price of bread was raised from 6to 35 rubles, there were -ge increases in the fixed prices of meat and nilk, and controlswere removed from a number of othe foods." Price icase averaged about 25% permonth in the first half of 1993. However, reail and wholesale margins are still conll,though the Government now plans to remove pri ceilings and mar ontrols and setadministered prices at full cost To this end, the Govenmment raised grain prices to worldmaket levels in July 1993, and in September 1993 rmoved price controls and subsidies oncertain tpes of bread and incras prices on dairy products and the remaing subsidizedbread products. Bread prices now range from 165 to 190 rubles per kdo. Energy and cditfor agriculture are no longer subsidized, and the only industial goods stl subject to pricecontrol are consumer durables in which Mooa has an FSU monopoyY.I-

22. W=s. Although an indention law has been on the books since January1992, it has never been implemented. Instead, the Government has raised the minimumwage at iregular intervals. In January 1992, the minimum wage was raised from 165 rublesper month to 400, to 850 rubles in April, and to 1,700 mbles in November, accompanyigthe rise in fod prces, to 3,000 rubles in March and to 7,500 rubles in July 1993. pensiand benefits, which are all linked to the minimum wage, went up in the same proportion.However, changes in wages have consistently lagged behnd price increases: the average al

Ul Eggs, vgetable oil, sugar, cream and ice cream, most saus meats, and sardines.

J Telvisons, wasing mahines, res, irons, deletic kes, and ffr.

9

PART I

Table 3 - M oldv: Movd ly Varations In the CPI and WPI h Ixes(in pceont)

WnPI IL faCI RCtIkl

1991 Jan 50.9 18.2 19.SFeb 7.7 12.7 12.5mar 6.0 2.3 2.1Apr 38.2 44.6 46.9May 2.6 3.7 3.3Jun 1.8 0.7 0.7Jul 3.0 -0.7 -1.0Aug 0.3 -1.8 -2.2Sep 10.4 0.9 0.6Oct 8.9 4.3 9.1Nov 6.2 6.2 5.5Dec 8.4 12.1 11.3

1992 Jan 508.8 240.1 196.3Feb 49.0 59.5 33.5Mar 8.5 14.2 9.3Apr 19.3 21.8 15.7May 32.5 8.9 9.2Jun 6.0 5.9 6.5Jul 2.8 4.5 6.6Aug 10.5 6.7 5.7Sep 12.9 11.8 11.2Oct 22.5 19.7 18.6Nov 37.2 40.7 33.6Dec 24.6 25.8 23.0

1993 Jan 53.9 37.1Feb 33.4 28.0Mar 20.9 25.0Apr 19.9May 17.7Jun 19.2

Sourc Tnhe Stat. Department of Stattcs1/ For bndustri products.

10

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K ... . .. ..

PART I

wage dedined by 33% in 1991 and another 42% during 199, a far shaWer fall than thate gprienced in Russia.'3 The Govenment also operates an incomes policy, whereby the taxdeductible component of wage costs for the purposes of calculating enterpise proft tax islimited to four times the minimum wage times the number employed. This form of incomespoicy should be revewed so that it does not pendize firms with a high pporion of sledwodeem

23. As a small member of the ruble area, Moldova has had a largely paive andaccommodig monetary policy. Shortage of ruble banknotes, exacerated by the rapid riein prices in early 1992, prompted the authorides to introduce tidr own coupo 4 in June1992, which were accepted by the popuaton and circulated at pardty wth and alongside theruble. Moldovan bank deposits, however, tade at a 40-50% discount against Russian bankdeposits because of blockages in the intra-FSU payments ystem and Moldoa's curetacunt deficit with Russia. Responding to the Russian currenc swap, in August 1993 theMoovan authorides withdrew Russian ruble banknotes with denominaions above 100 rfrom cruaon, and estabfished a Moldovan ruble at an inidal rate of 1.3 to the Russianruble. The next stage in the intoduction of an official Moldovan currency is the adoption ofthe ku, planned for late 1993.

24. In addition to ruble shortae, there was also asevere ex post crit cunch inthe first half of 1992 with a real decline of 72%. TIght monetary codions were rdaxedsomewhat at half year, reflcting seasonal prtiities, resutding in an overall deline in realcredit of 52% in I992.

25. Real crdit to enterpss shak by 50% in the fst eight months of 1992,during wich tme enWteprise amra mounted to 37 billion rubles. In October the FSU-wideoperations to clear inter-enterpie arrears resutted in an infusion of 12 bilion ruble inMoldova - paid to clear net amounts after nter-enterpie compesatio, however, notexended in advance. Ther was a furter much larger credit exnsion in Novebes, ofaround 38 billion rubles, with the indexation of working capital financed hrough the budget.

Wl By thend of 199 the Moldovan real wage was at 39% of Its 1990 level, while I Russa itwa88% of is 1990 levd.

WAI Management of tho coupons hs given the NBM some pactice in moetary Issue wich w bhepful when the new curcy s Itroduced. Enbling eslaion has been passed and suppies ofthe new ucy, the kem, have aready bee pried ready fbr issue In law 1993.

11

PARTI

This added an amount equivalent to 15% of GDP to the fiscal deficit in 1992. WhIk somecoWmapemaon jor nion was clearly needed to preen a catastrophic fail in enterpriseouWt, It was wonunate ta the oppoatny wvs not taken to cond Wn the allocationaccording to measures of enterprise restnrutwng and protabllJ. Prices, which haddecelerated sharply i the summer and harvest months, then rose more rapidly in the lastfour months of the year.

26. Moldova is vulneable to demand developments in Russia and Ukaine. Theexpanion of credit in the fall of 1992 in those countries resulted in a surge in unofficialexports and hence depledon of Moldova's consumer goods, as purchasers from across theuncontrolled border with Uaine took advantage of the lower price level in Moldova. Also,the introduction of the kabovanets in Ukraine led to an influx of nible into Moldova. Wbilethe country remains in the ruble area, therefore, it will be in its Interest to coordinatemonetary policy with other ruble area countries and allow wages and prices to rise to similarlevels. If others are not maintning tight policies, there is no incentive for Moldova to doso. But its sucoess to date in holding wages and prices below those pvailng in its tradingpartners is a good siga of the prospects for futue compettiveness.

3. The consequences of th shocks for tut. imes and maostaiit

27. OuWuLt While some of the trect shocks - such as the drought and thecontlict with Tansnistrda - can be regarded as exceptional, Moldova's plummeting GDPrefects not only these transitory eavent but also the dechne in ouWut and trade throughoutthe FSU, and a projected fall in the terms of trade which is among the wost in the FSU. Inthe medium-term, trade within the FSU may reover, but is unlikly ever to reach the polky-engineered levels of previous years; and tie fall in the terms of tade entails a permelowenng of income to which Moldova will have to adjust Only when sustained growthemerges will the country begin to move up towards previous levels of welfare..

28. Adverse relave price changes also entail a shift in the composition ofeconomic activity. Hence the country should regard at least some part of the declines inactivity that have been forced by grain and fuel shrtages as a pemanent featur, acceptingthat higher prices for these inputs in the future - and cianging relative pries in genal - willrequire both an adjusment in the composiion of activity and more efficient investment andtechnology.1 5 In this sense, the cdsis has both highlighted and accelerated neededadjustment.

1/ For Instance, lower levels of actvi In te livestock sector and cloe of Inefficiet wt.

12

Jt

PART I

29. Incme The overall income distribution has bowme more comprsd. Asthe crisis bepn, 4% of families ha per capita incomes below 50% of the average, while80% of all families had per capita incomes between 50% and 150% of the average. In 1991,14% of workers and collective farmers' families were poor, defined as having per capitaincome per month of up to 65% of the avenge (0 rubles); another 14% of workr' and21% of collective farmers' families fell within the rich group, defined as having per capitaIncome of S00 rubles per month, or 1.5 ffmes the average at that time.16 Soaring prices havedepresd aR real incomes by an estimated 40% on average during 1992. As poorer famileshave been dissaving recently, current consumption and living standards are less disersdthan in the past.

30. According to Moldova's household budget survey, povety is assodated withfte number of children per family and the youth of the family. Sources of income for thepoor are approximately 60% wages and one third income tansfers. The real income ofworkers and civil servants is declining fster than that of collective famers, who have wagesat industial levels and also have incomes from privat farming (and in kind).

31. Declining levels of inome and of service quality and availability are nowpushing more of the population into poverty. The Social Fund i unlily to have the mcometo cover commitments in 1994, a number of enterprises cannot continue to pay familyallowances and provide health services, vaccines are scarce and vaccination progmsdelayed. A greater degree of benefit targeting appears inevitable, while it will also beimporant to assure vaccinaion and other primary health servic.

32. Macreconomic stakIily. Poor revenue yields compromise the Govemment'sefforts to attain macreconmic stability, finance the refom program, and maintain socialprotecon. The autdhdtes contained the fiscal deficit on a cash basis for most of 1992 byslashing public investment and compresing rea wages, and also by runing up subtdalarrears,'7 but it rose to 21% of GDP by end-1992, largely because of the indexation ofworking capital for entrprises. The deficit was financed by credit from the banking system.Cuts in investment cannot be sustained indefinitely without compom g umre gowth,however, and domestic arre and reliance on bank credit risk destabilizing the realeconomy and nascent financial sector. Furthermore, efforts to cushion the fall in rea wageand benefit levels across the board are having two main effects: genertion of inatonarypressues, and intolerable strains on the budget, both leading to m nomic instability.

JW More than 14% of the population is in the poor group as poor families have 4 members onavreage while fimilies In the medium group have 3 (workers) and 3.4 (farmers), and the rich bave 2and 2.7 respectively.

Aund 60% of cash expitures in the firt half of 1992.

13

PART I

33. Economic stabilizan while renaining within the ruble zone is problematicunless Russia stabilizes, and even then subsantal macreconomic coordination would berequired. Even now, with a disdnct Moldovan ruble, the country will face continuinginflation and high fiscal deficits in the near future if it does not introduce appropriatesupporting policies. Before the new cunency is launched, it will be crucial to put in placefirm monetary and fiscal policies coupled with structural reforms that will promote arecovery in output witin a stable macroeconomic framework.

14

*, - . .d. - , * -

II. THE RESPONSE TO THE NEED FOR STRUCTURAL TRANSFORMATION

1. The Government's ref9rm pogmm; initial measures

34. Parliament adopted the concpt and main principles of transition to a marketeconomy in successive sessions during 1990 and 1991.'1 Since then, the program has beenelaborated in further laws and decrees, has been discussed with leas in the business andacademic community, and has undergone several revisions. The Action Progrm for 1992-95was adopted in March 1993. The main objcives of the program are staten to be a radicaltransformation of the management of aU economic activity, reduction of the sA of stateprpert ownership, together with simultaneous demonopolization of manuing, supportof private property, formation of market infrasucWte, orientation to the world economy andchange in the fimctions of govenment bodies. The main Lasks are set out as: halting theeconomic decline; privatization and demonopolization; crating the conditions for a broadrnge of entpreurial activity; developing a reliable social safety net; improvements in thefinancial-budgetary system; measures to attract major foreign capital, technology andexpedence; and stramlning the sucture and functions of the exeutdve. Prce and wageliberlizaton is also envisaged as part of this drive to transform the economy.

35. The Govenment also set out the context in which the reform program is to beraized. It emphasizes the need for civil accord, democratzation of society and the rule oflaw, pluralism and adherece to European and international conventions and agreements,tugeer with membership in the international instutions. Finally, it underlines theimportance of disarmament and the creation of a demilitarized state, and firm adherence to amarket economy.

2. The efforts to stabilize fte economy

36. Moey and cedit control-or lack of it-was lagely determnd exeny bythe Central Bank of Russia, but is now coming under natioa control. Domestic credit isfurther driven by Government dircton, the growth of inter-enteprise credit arrears andextension of bank credit beyond prdental levels. At the same imes Moldova is vulnerableto demand developments in Russia and Ukraine. The expansion of credit in the fal of 1992in those countries, together with widesead price and wage contrls in Moldova, resulted ina surge in unofflal exports and hence dtion of Moldova's consum goods, as

B/ luhe Concept for Achieig a Transition to a Market Ecmomy, July 25, 1990; and ihe BasicPrinciples of the Progrm for Switcing to a Mars Economy, November 20, 1990. A fiurherprogram on agarian reform and socio-economic rual development was adopted on February 15,1991.

15

-I .

PART H

puhase from across the umcontroUed border with Ukrine took advantage of cheapergoods. The introduction of the karbovanets In Ukraine led to a further infx of rubles intoMoldova. Hence, if it w re to remain in the ruble area, Moldova would have an incentiveto allow wages and prices to rise to the levels of its tading partners, and the authoridtescoud be drawn into compedtive monetary expanion. The prosects for stabilization in theruble area are thefore poor and the authorities are now moving to introduce a newcurnc, the U, in ate 1993. As a frs step, the authorities are using Russian rubles onlyin denomiatons of 100 rubles or less, and, since August 1993, are quoting a separaeflexible rate for the Moldovan ruble (iniially 1.3) against the Russian ruble.

37. In preaation for the new currency, the auihoities have moved to elishthe NBM as a cental bank with the potental authority to exercise instruments of monetarypolicy. In the meantime, much remains to be done to develop instruments of monetarycontrol, such as discount rate policy and reserve and ratio requiremnts, and improvecapacity for prudential supersion. Moldova's monetary and financial sector arangemtae still largely those of a command economy, and directed credit is still the norm.

38. In the interim before the new currency is issued, the Government has beenmaking effors to coordinate monetary policy with other ruble area countries. Moldova hasparticipated in aUl the meedings of cen banks of the FSU and was a sgnatory to theagreement on the ruble area It has made bilateral agreements with other FSU sates aimedat improving the payments and clearing arangements and trade nks. Most recety,Moldova sgned a bilaUea agreement at a twhnical level with Russia coverig monetarypolicy, coupons, the conduct of setflements and crespondent accounts, and the introductoof its own currency.

39. Monetary cwrdination in practie has been patchy. Moldovan interest rateshave only recently moved to the same level as those in Russia, while the allocation of creditis subject to a substantal degree of Govenment intemrention. According to Govenmentpolicy gudelines, the NBM decides on a cas by case bais the amount and ums of

financing for the ban (Including a-stipulated on-lending rate), depending at least in parton the ulimate purpose of the lending. NBM refiacing rates were 20% for most of 1992,while commercial bank lending rates were within a ceilng of 25%, but some were as low as10% and 11% respecively. In some cases, partcuarly in the agricultu sector, there wa afurt subsidy to bring the inters rate down to 3%, with the difference being fumded fromte Government budget.L9 Over half of NBM edit to commercial banks was on con ltms lower than 20%, and on-let at even lower rates, some as low as 3%.

12I /the fir 9 mouths of 1992, credk of 2.8 billion rubles was charged at 3%, out of a tota 4.6billion rubles credit exned to the agiculal sectr.

- ~~16

.. . . . . ................................................................................ ".................................................................................................................................. ..

,', 4,: &'*S4g . .z i t e ,',-, ,', ' j-: e < ; j X _

PART n

40. In September 1992, the NBM doubled refinancing and on-lending ras, andthre were further increases in November 1992, and March, June, and August 1993 whenthey were raised to 170%, during a staged alignment with Russian rate. Preferential ateshave now been eliminated for new lending, blt about two-thirds of fte total creditoutstanding from the NBM is on preferential terms, entng large budget subsidies. It wiulbe important to ensure that all refinancing occurs at market rates, and that ose rtescontinue to move towards positive real levels.

41. Recognizing the need for a well-functioning and moden financial system, theNBM has steamlined the domesic payments system and is starting to introduce newaccounting praces in banks. These reforms will need to be intensified in the near futre.

42. xchang rae ad murncy. The authorities elinaed the investment($1=15 rubles) and commercia ($1=55 rubles) rates in 1992, but, until August 1993,ctr-tinued to use tie Moscow Interbank 1'oreign Cunrency Exhiange (MEFCE) rat of the

itrad Bank of Russia for surrender purposes. The authorities have been aware for sometme that, unless Russia stabilizes, continued membership of the ruble area would beincompatible with macoeomic stabion and have decided to introduce their newcurrency before the end of 1993. Parliament has adopted most of the necssary legislationand stocks of the ku have been printed. In the interim, the authorities established theMoldovan ruble at and initial rate of 1.3 to the Russian ruble in August 1993, in respons tothe withdrawal of Russian rubles from circaon, and thus aready have a defbcto newcurrency.

43. Macroeconomic policies needed to spport a new currecy ae not yet fuly inplae, however. It wiLl be imt for the Moldoan auorities to use the breathig spacebefore the new currency is officialy introduced to stenghen monetary, fiscal and financialcontrol, and to build up reserves to the extent possible. The aut will alo need todetermine the exchange rate regime to be established: fixed, floadng, or crawling peg. Inview of the risks the new currency would fAe, a fixed at coid be hard to defend, givenMoldoa's low level of reserve; a flot or a crawling peg could be more appropiate.

44. Fiscal policy is the instuent over whch the Governmentbaa most leve, at leag i prnciple. Unfotunaty, te mo to new tax intmets in19January 1992 was made without suficient prepaion. Teething problems with the new -sysm, together with poor compiance eseciy by new enteresises enterprises situatedin te Tnsnitr region, resulted in a fall in retrns to 19% of GDP in 1992 from over

35% in the pevio year. Meanwhile te tax base has declined, with GDP fling over 35%drxfing 1991 and 1992, so that tax renue in absolute terms is also shaply down. With the

17

PART I

shrt in revvenue, excep A expenditure on te Trannistria conflict, the loss of transfersfrom the Union budget, and, most damagingly, the indexation tirougb the budget of woridngcapitl to enterpises in November 1992, together with th doubling of the minimum wageand benefi d to it, the fiscal deicit on a cash asis rose to an emated 21% of GDPin 1992.

45. Aware of the worseningrevenue situation, the Government ________________________

introduced a fiscal padkage in the s.condhalf of 199. Te package included a six-fold increase in the pice of bread (fromabout 6 to an average of 35 rubles per kilo)and large incases in the adinstprices of the few consumer commoditiesremaining uwder price, control (oil, Mik,meat products) and also of fodder. Thefull-year effect of these messures was -_sestmated to be a reduction in the budget m _ deficit of 3.5% of GDP. The auftoritiesalso reduced the scope of the super-profit Fig. 3 Moldova: Stao oo m Budget

tax, and in January 1993 implemetaed xreoms esblishing a land tax, elim ng most tax breaks and raising the taxtion of

oindustries sigicaty from 1.5% to thw standad rate of 32%. Howve, sectoraldistordons in tax burden rain: the land tax on farms, originally intnded to bring in

enue eqivalent to the profit tax of 32%, is actually raising raeue at an equivalent rateof about 25%, and is likely to fil further. Abfliton of conoessional ax rates wiU big adouble benefit in both fisa and efficiency terMs. How , where th Socl Fundcontiibution rate frm the enterprise wage fund is concerned, it would be prefable to lowerthe 45% rate on industial enterprises, rther than ra the 30% rate on fming enteprsAs the higher rate impedes adjustment and discourages emplyment it Is liely to ower taxreeue overall and ince claims on expenditue.

46. Furher measures to restrctor public expenditure and aise revenue are now,esseatial to prepae the ground for stalizaton and the.new cency On the tax front,reforms in ta policy, ng of the tax adminiaion, and tfie i 0troduction of aCustoms ad rn will be need.

: ; : .. . ~~~~~~18

~~~~~~~~~~~~~, * , Y .'. -'

PART IH

3. Erorams f p t iv fi i t

47. The Parliament has passed a number of laws required for private sectoractivity including: company law.20 eacted in early 1992, which provides for a variety ofWestern company organizational suces and set out a clear and simple procedure foresablishing new earprises; a bankruptcy law (mid-1992); and property law,21 recgnizingthe right to private ownersiip in all types of prper, including land, and permitting leasesof al prperty up to 99 years. 1lans were in hand to prepe a new Civil Code andCommercial Code by March 1993 (until then, the contactual regime was to be govemed bythe FSU Civil Code). Although much of the legal framework is now in place, some lawswill need con rable vion, incuding the bankrptcy law and the foreign investment law,which does not provide the potection most foreign investors tequire.

48. Even more impotant is the need to develop implementation capacity as soon -as possible. The courts and the legal establishment are unfamilia with a private sectorenvironment and may also be insufficiently indepedent of Govrnment. It will theore becrucia to develop an idepen court system with pecialized commercial courts, andpromt the fwoation- of an independent legal profession. Capacity within Government willalso need to be reinforced so as lo continue drafing leglsation and regulations needed forprivat ector development.

49. In plel with legal reform, entry resticoms for private sector activity havebeen temoved with -th exception of some areas reat to defence and a limited number of

armaceutica products. Equality of teamt for SOEs and private firms i asued underthe Employment Iaw regu io and in the corporate tax sytem, and the private sector is inpincpe able to leae spa and equipment from SOEs with surplus capay (te wasmgrked gowth in pive sector eang In 1992, but access to space is sl smewhatconstrained).Prvat sector trade ascions have emerged, such as the Union of Lesseesand Entprenem ("A fored i 1990 and the Scient and hdusti Union (SIU) whichfollowed in 1991 with, te aim of lobbying for pivate sector develpment.

-2W --l Joint Stock Law and the Law on Entepren and Enterpris

2f The,Loud Code, Law on Property, and the Lea Law.

19'

PART H

50. Stae enupdses in Moldova have, in the past two years, experienced agrowing degee of freedom in rnning themselves, given te inita relaxaidon of the stateorder requirements (since tightened) and the new ability to fix output prices, obainindependent sources of inputs and develop employee policies. There are some instances ofefficient and crave reonse from public enterpris to these new conditions; some havealready sought foreign joint venture partner and are adjusdng wel tq the new environment.In many cases, however, the new freedom is a mixed blesing for managers brought up in aproduction-oriented system where most decisions concerning pricing, sources of supply andsales were the responsibility of Govemment agents outside the enterprise, and indeed outsidethe country.2 In this respect, Moldova is in a similar position to alI of the other FSUcountries: the central planning syste has been largely abandoned, leaving a vacuum wheremangement responsibilites have not been well defined nor autonomy adequately tempered

by acounmtability. Control by owners and shareholders b not being exercised; nor, ingeneral, is financi oveit from fte suppliers of funds in the bankig sector.

51. In addition, enteris face declining markets together with an unreliableinerepublcan payments system and long delays in payment in domestic as well as externaltrade. The growth in bart te and the need to find countepart goods required by tadingpartnes has rised otnsaction costs substantially.

52. . During the lag two years, there has been exhauve discussionOf amachs to privaton in Modova, but ilemention of privatization, except in thearicull sector, is only just beginning. Plots of land have been distributed to individualsfor private use, and State and collecdve farms are being converted into joint stockcompai, whose mmbers receive title and have the right to take out thr shares in theform of land and equipment. Agricultural input supply, distribution and marketdng systemshave yet to be privatzed.

53. Objectives, methods, and lines of r it for tmhlmentng eprivatzation progrm outside the agricultre sector have been s y revised. The1993/94 progam recently passed by the Padiament envisages t about 1,600 SOE3 willbe transfered to the public, mainly trough a system of public auctions. Por each

D Over 90% of Moldova's laWr gnerprs were all-Union enterprises, dircted fiom Moscw,whch were ationalized in October 1991.

fAssets are being valued according to afiomula base on book values (this method riskm beigeremely misleading, but It is not cea that it could feasiy bwImprove given the distrons adunceantie n the economic environment).

20

PART H

enterpript thee is a Privatzation Comitssion which, where large enteps are conerned,will spend several months preparing the enteprise for privaton.

54. The prime objective of the Government is to achieve widespread Moldovanowhip of asse to be privatzed. To that end, the an i to distribute a base value ofpatrimoni bonds (vouchers) to all cities, supplemented by additional patrimonial bondsbased on length of service in employment. Distribution began in September 1993.Patimondal bonds are non-trdable, but shares acquired with them will be tradable sightaway. In the initial stages of privatization, tnere will be limited privatization for cash, bothfor any cuency (37 SOEs) and hard ency (7 SOEs). These cash pivatzaions, ofwhich the first he were held on September 11, 1993, cover unfinished building sites andbankrpt enterprises only. At later stages, cash may be used to buy any remaining sharesthat have not been sold for patrimonial bonds as wel as other SO0s excluded from the 1993-94 progam.

55. The Government intends to distinguish between the privatization of small scaleunits and the share offerings for medium and large SOEs. In order to acceleteimplementation, there will be streandined aucion procedures for the unit privaions, withthe first auction timed for the fal of 1993. In parallel, the Govnment intes to preparethe way for the privatization of medium and lare enteprises, while proviing someinctives for existng managers and employees to maina the value of assets and thebusines in the inteim. Man ent d employees will be permitted to use theirpatrimonial bonds in advance of the aucdon sale to buy, in total, up to 20% of book value.For privatizaon of food processing entepis, 50% of te sha wil be ditributed free tothe far which have suppl them in te past. These shares will pass directly to theindividual members and not to te colective farm as an entity.

56. T privaon progam is being implemed by the State Dqetment ofPrivatzoaon', which already has a network of regional agene collecting information onl9ca enterie. A massive publcity campaign is plaed. To complete the process, the(overnment neods to issue reguations on transforming the leg stats of entariscs so thatshar can be offered for sale. Legisaon for financial inter-medaries is also in peartn,with the aim of setting up invesment funds before auctions for medium and lare SO#sae begin. A rgltory fmewo* wil also be established in order to prevet potetafraud associated with such finacial vehicles.

57. The curent law iulates that pivatzed et s must cotinu tb prvideasy social servic provided in the past by that enterpise. ITis stp on will scourgeprivate investor, wil be hard to enforce, and b likldy to ead to deteriration in servicesoffered. It will be importnt to revse the law so aso establish that socia assets and

21,. . .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

PART H

services are part of the social protecon system and not disposable assets attached toentrprises, and rvive fte divestiture program as soon as finances permit2

58. Iur.oyjng cormte. gQ rnacc=.g At the same time, the Government isexaminig ways of improving corporate governance for pubhic enterprises, including those tobe privatzed at some stage in dhe future as well as those to be retained in the State sector(electricity utilities, some R&D insdtutes and some of the large food processing firms). Inthe meantime, corporate governance arrangements are somewhat opaque. At present, mostenterpnses have an Administrative Council made up of branch Ministry representatives andworkers' representatives. The Managing Director, with day to day esponsibility for theoperations of the enterprise, is appointed for a five year term by the Ministry. As managers'conts are weak and unclear, much depends on Ministries' intepreation and discretion asto how managers' perfonnance is judged. Financial reporting systems and objectives areloosely defined and need considerable strengthening.

59. Work has begun on developing contol mechuisms for hes enteprises withina governance framework where Government, as owner, will seek to maximize dividends.Furthe arrangements being considered include the development of financial reportingsystems and controls, and the establishment of Administrative Councils comprisingprfessionals such as lawyers and business people as well as representatives of the BranchMinistry. The selection process and functions of representatives of the AdministrativeCouncils will also be defined.

4. Effort to prMot trade and restor eternlbanc

60. REMl mant in State tading. The great bulk of trade continues to beconducted within the ruble area through bilateral barter arangements and is almost totallystate-controlled. In the early stages of the transition, the State conta that opered amongall-Union enterprises, and covered almost 100% of their production, were relaxed whenMoldova took over the enterprises in October 1991 and were replaced by a "tax-in-kind%,whereby Government sequestered a much smaller proportion of output than in the past inorder to participate in inter-Stat contract and barter trade. Since then, State orders havebeen reinstated in line with the intensificaion ughout the FSU of quantitative restictosand state tading, and the Government's economic progm for 1993 envisages that statecontra will be employed agAin. In addition, state control of agricultu input sales anddistibudon was reinforced in the emeency caused by the drought.

2& Ihe Governamet stated a divestte program for such social services, which has gound to a haltfor lack of local authority financing to take the services over.

22

PART I

61. Global quotas for quarterly production of over one hundred items are set,within which domestic market requirements are determined, and then amounts are set forexports to both PSU and non-FSU countries. There are separate limits for inter-stateagreements, barter transactons, and hard curncy exports. FSU export quotas are allocatedby republic and firther sub-divided according to whether expts will be sold by entaprisesor by government agencies. Significant restraints on exports remain, although prohibitionson export were removed in August 1992. However, a prohibition on exports of eightcommodities was re-imposed in December 1992 and export aes on both FSU and non-FSUtrae were re-introduced in February 1993, having previously been abolished.

62. All exports are subject to Ucensing and require Customs declarations. Officiallists define products that can only be exported for hard currency and those that can only beimported or exported under state monopoly. Export licenses are only issued to firns whichwill guarntee to deliver products to the domestic market.

63. The Government's inability to secure substantial amounts of foreign exchange,despite the foreign exchange surrender requirement,2 hints at the effective independencefrom the authorities of the enterprises involved in trade outside the FSU.26 Despite the Stateorder system, enterprises that trade within the FSU also appear to enjoy a large degree ofindependence in trms of finding their own suppliers and negodating prices. Enterise-to-enterpise links are growing, especially where fuel imports are conered; a number ofMoldovan enterprises send rpresentaives to other republics to do individual deals for fuel.

5. ,

P&t and CrediUvrthne

64. Moldova is discussing the FSU zero option, which would leave it fiee ofobligations to srice past FSU debt in reu for abandoning its claims on FSU assets.Meanwhile, Russi is servicing Moldova's share of the USSR debt by agreement.Apparently the information on the external assets of the USSR which wod enable Moldovato determi its position is not yet available, but it is likely that the external assets of theFSU are highly illiquid and subject to extreme valuation problems. An early deiso isdesirable as lack of clarity on this issue will impede assessments of creditwortiness. At thisstage, the Government has accumulated a m y $90 million ii n c y debt.

X1 The foreign exchage surrender requkement was reduced fhom S0% to 35% of export eangs inMay 1992.

2i1 Some private expots to the hard urreny area have begu to emerge through joint ventures.

23

PART n

65. In Pebnrary 1993, th IMP approvd a CCPP angement in the amount of13.5 million SDR to compnat Moldova fo¢ emergency cereal impor. A World Bankemergency drought recovery loan was approved by the Board In March 1993 for the amonmtof US$26 million and a rehailiaion lan is in peparation.

24

IaL THE ROAD AHEAD

1. 3te GovemmntS re mm: 1

66. Looking at thw progmrm and at progre so far, it is evident Xt, if theprogram is to be successful, stronger policies will need to be formulated and actions willneed to be enbanced. At the most fundamental level, some reflecdon is stil required on theconstitutional principles that define roles and functions in democratic liberal insdttutions.These consideratons start at the level of the definiton and separtion of power amonglegislature, executive and judiciay, which are not always cleady dis ed in Moldova.This has prtical implicadons for the reform program. f tfie Govemnment is to bearultimate responsibility for the success of the progran, ParLament must not run componentsof the refom program directly, bypassing the executive. An independent judiciary andspialized courts are needed to safeguard individual rights, enforce cona-dcts, and enabledispute resolution. Both the Government and the Parliament must witdraw from diectingand funding economic activity and switch to a facilitating role instead. And the otherinstitutions needed to underpin a bealizd economy must be allowed and encouraged todevelop: in particular, the National Bank of Moldova must be pemitted greater autonomyand commercial b should be fre of polidcal and admisrtive intervention.

67. Institutional capacity must also be developed to make the new systems work.Moldova already has the advantage of having a relatively efficient and well-n Govenmentadministation; now the administration will need to be re-oriented to new fiuntions, whichwill require redefinition of roles and responsibilities, and considerable training andretraining. It will be important to ase btan ncy and accountabilit when newstructr and procedures are developed, and to promote public confidence in the newdemocratic system of govemment by catng appeal procedures and divulging informatn.

2. The kes to restoring income

68. The authorities' objective must be to halt the output fall of the last two years,while moving to stabilize the economy by improving fiscal programming and control,developing instruments of monetay policy, and building an effective fincial sector andpayments system. These reforms wil set the foundations for fte introduction of the newMoldovan cuncy and a significant tightening of monetay policy at that stage. While it isa priority to halt the fall in output, it wil be necesry at the same time to re-oriwproduction to the new stuce of reltive pdce and the different market opportunities thatwill prevail, crating the conditions for gwwth. For this to happen, it is impotant to nwveaway from a centally planned economy to create an enabling envronment for privatemarkets, put in place the in and other underpinnings of suestainabl growth in thefuture, and safeguard the welfare of the most vulneable in the populon. Even aside fromthe disruption in the trade and payments systems and other disloCation asid with thetransition, Moldova is suffering a terms of trde fall that implies a sharply lower standard of

25

PART III

living for the populadon as a whole. Adjusftent to is loss of weare needs to be faclaedby protecing th poorest and establishing the conditons for real grawth as speeiy aspossibk.

69. At the present stage of trantion, however, these objectdves will be bard torealize. Required reforms and institution-building measures are considered in tun: first inthe macoeconomic field (paraghs 70-106), and second, strctural reforms (pans 107-169).

CTeado of IL sable maWNn0m0c enviment

70. Key to the effective conduct of macroeconomic reform policies is ardefinition of roles of the main economic agencies and reinforcement of their capcity. Inparticular, the National Bank of Moldova must be free to develop mto a central bank andexercie aU the funcdons that entails, and the Mnistry of Finance will need to withdrawfrom the allocaton of credit and fen exchange, focusng rather on buiMing its capacty tomonitv, and forecast the economy, to program and -conrl expenditure, includn pubicinvestment expendiue, and to reinforce the tax adinistion.

71. Macoeconomic stabilty after the itroduction of the new cuncy wil higeon success implementation of monetary and fiscal polcy togehr with appropriate extnalsector policy. In paticular, dght fiscal policy will be essential to ensr that the newacur y remains stable in value. Oterwis, it will not prove posble to finance the fiscaldeficit in non-iatonary ways and the comtry will enter a cycle of inlatio and currencydepreciation. Measus need to be put in place immediaey to secure the fiscal discipnerequired Icm the cuncy is isued. The ingredients of a sound mac onoic policy arediscussed in turn below.

(i) F j1 2GoY

72. . 1 r in fiscal poliy are to shore up revenue collections and cutsubsidies. In due course structural reforms will also be needed on both mrenue andexpenditure ides of the budget and in the assignation of centra and local governtrevenues and expenditure responslies.

73. Re veue The four main surc of remue are the VAT, exci te, thecorpore income tax, and personal income tax. (As noted below, renue from these txesis assiged in varying propons to State and local budge). here are alo minor taxes onfoign trade, cooperatives and soci or , and veic, and enrps paycontribudons to the Social Fund to cover penion and othe benefit payw'mts. Despite somerecet imprvements, the system is stll handicapped by exempdons and diffeential rates

26

PART ill

wich complicate its admini n, encourage avoidance,-create allocative distionsbetween sectors, and reduce revenue yield overall.

74. The highest priority is to raise tax collecdons by strg inge taxadminitration and imprving tapayer Informaton, education and pto deal witthe new structure, which was ntroduced wit Little lead-up preparaton over the last twoyears. A unique txpayer number should be introduced, tax requirements codified andpublised, the tax rIon computeized, and ang prorams set up for taxasessors and inspers. Taxpayers are lky to need advice on their new obliaon (manywill be paying tax individually for the first time) and on the accounting requits foraccurate VAT and pfits tax assessment.

75. Amendments should be made forthwith to tax rates, coverage, and concesswith the aim of catng a simpler, more uniform and more equiable system; using,however, the currt badc structure. The differential profits tax rate of 52% on banksshould be eDiminated, and tie single corporate income ta rate should be the same as the toprae of personal income tax, so as to ensure tax neutrli y between differnt forms ofbusn acdvity and to prevent tax avodance through tiorortion (or failure toIncorporate, dependig on the reave rates of persona and corporate income tax).Dffentdal sector contribution rates to the Social Fund should also be eiLminated. Theexcess profits tax (defined as axation on profits exceeding the industry average by more than10%), which has already been reduced, should now be removed.

76. The VAT rate is now 20%, with concessional rates of 14% and 15% chargedon some food and other items. Ihe top rate should be lowered as soon as feaible andcomprehensie coverage of te VAT should be restored. In Septmber 1993, Moldovaste to chge VAT and customs duties on imports from outside the FSU, thebyremovig a disoron according to source and creating an incentive to pacipat in theformal tax system in order to claim tax due. This should expand revenue collecions overalleven tough taxes on inputs net out. The authorities should now implement zer-raiing ofexports for VAT purposes, and, in te longer run, should consider moving from the presentodgin basis for VAT to a destnaton system (see dicusion in Trade section).

77. As a medium-term objecdve, the Government will need to review thealocation of taxes to budgets at different levels, and consider introducin of revenueequsization arrangemens where local responsibilities are exceeded by revenue source. Thiswfll be prtiulady important once entprise responslbilifies for social services begn to beshifted to local budgets. no exisg system i briefly deibed below.

78. The fiscal system includes the Republican (or central government) and localbudgets as well as the tree extra-budgetary funds: the Social Fund, the Social Assia

27

PART 1R

Fund, and the Privazaion Fund. The State budget coven both the RepubEcan (central)government budget and the local government budgets for cities and districts. At present,excise taxes and foreIg trade taxes are the only taxes whidch go soley to the Republianbudget; all other main categories of taxes are split in varying proptions between centnal andlocal governments. For insance, VAT renue is split 20130/50% among the Republican,cities and district budgets resectively; districts retin 100% of personal income taxes whilecities rtain 70%, with the residue going to the Republican budget Ependitureresponsibilities awe also shared between cental and local leves, with local bodies responsiblefor financing local expenditures, some subsidies to enteVises, and the greater part of healthand education expenditure.

79. The allocation of revenue sources and expenditure obligatons among differentlevels of government will need revision in the light of: changes in tax policy; economicresructring; and privatization of arger enterprises, most of which carry out social functionson a substandal scale. Transfer of these r bities to local budgets will impos a heavyburden and will also require exrte which local bodes may not have. Such transfers willprobably have to be nfgoiated case by case, and local bodies wil have to stengthen theircolctdon capacity, makdng sre that enterprises pay tax due in full, if they are to finanoenew soci obligations. It will be importnt to abol concessional corpt tax rates onagricultural entrpriss and strngthen ollectdon capacity, so that tax yields to localautrities in country dirces wiDl be sufficient to cover the social services for which theywill becom responsible.

80. Net chnges in fiscal position among levels of governmt are bard to preitas they will be the rsult of elimination of subidies, new tax sources, and, in many cases,new p i The Govemment will need to define carfully rights to pecfic revenuesources and expenditure obligations, and will also want to adopt fiscA equalizati principleson a8 tansparent basis where ew expediture oligations exceed revenue capacity.

81. Bn. The immediate priities are to aboli emaning topublic enteises, and to concentre availle fiscal resources on essentl heat and otherservices, social assistance those most in need, and i c maintance. If thecapital stock necessry for economic growth is not adequatey maintained, it will deterioraebeyond the point where repairs are feasible, and large nw invesmts will be required.

82. At present, analysis and contrl of Govenment expdture are conmpicated bymeasurement problems, maki it bad for the authrties to get a fil picture on the basis ofwhich to redraw prioities. For instance, that part of public investment expeditu that is

2Z/ Budgetary subsidies to enterprises were still about 18% of Stae expenditue in 1992.

28

PART l

fiaced by bank credit is not nomaly Included in recorded govenment exenditure. Norare the implicit subsidy on concessional interet rates for agricuture ad intest payments onexternal loans (prsenty a minor item but likldy to grow tridly). If central bankexpendiure of a quasi-fiscal kInd were included in goverment expenditure, fte total wouldbe much greater and the deficit would be a higher pportion of GDP. Similarly, it appeasthat the Social Fund will have bee in deficit by 1 billion rubles In 1992, because of budgettnsfers to the Fund for the payment of chilen's allowances that did not take place. Foral tse reans, it is dif£cult for the authorities to get an accurte picue of totalexpenditure or expenditure by economic and functional categor;os. With that caveat, itappears that social expenditu made up 50% of tota expenditte in 1992, or 11% of GDP.

83. After immediate action to cut subsidies, her will be a need for deerreforms so as to lessen and rationalize expenditue presures, and reduce the grwth ofarer and claims on ctl bank cedit. Expenditure wil have to be p d morersticaly relative to revenue forecasts. This will mean placing expendiue plas In amacroeconomic context which includes a tax forecast. New pubHic investments should ingeneral be deferred in favor of maintenace and rehailition (as noted above), but whereinvestment expditur is concerned, the authorities will need to use a medium-termforeastng framework to ensure that te investment contrbutes apprprate. capacity, andalso that the debt ericng and curent costs associated with the investment proect can be

in foture budgets.

84. The Government must also be ppared to rprogrm expenditure in the cowseof fth y if revenue falls below forecast lvel Givn the vo ity of the economicsltua:,an, tee is likely to be a need to adjust expenditure flows frequently durin the courseof the year in th light of revenue trends. This in tr requires r exendiue riortiesand already developed ideas about what to cut first - and how to do it. This scrutiny and eorderin of prionites su be undertaken for current exediture and as for Ivestmtexpenure. At pret, the inciaon to finish capit projects that were halted nmdwaybecause of te outbreak of the conflict or becue of eveue s l durig 1991 and 1992is oftn aLowed to ovemride the order of prioities based on real economic or social benefit.There will be occins when it i more economic to leave a project unfinished than tocomplete it, tansfiering the resources available to a higher priodty activity.

85. Development of a full multi-year public invement program is a high priority.At present, budgeng is done on a current year basis, which rlts m a number of prqects.beg abaned at late stages when costs are higher and resces becom inadequatDevopment ofa comprhenive investment pogrm will eqre a mao micframwork and for cacity, ddinidtion of sector pioriies, a thorough evaluation ofMinst' insment prposas in the light of their new roles in a libealized economicenvironment, calculation of coo and benefits, and aso financi (budget and debt)

29

PART III

implications of each project. Substantial gearing up in both the control and sector Ministrieswill be needed to achieve this objective.

86. In its expenditure planning, the Government also needs to include a program toclear its arrers to domestic suppliers. As this will result in additional chargs to the budget,it can only be done in stages as revenue collections improve. Some offsetng reductions inexpenditure will also occur as subsidies are eliminated, including, in particular, interest ratesubsidies. These the budget cannot afford; they also distort the real cost of economicactivities. Significant savings in govemment expenditure should also be available throughpublic procurement refonns, which will act both as an economy measure and a stimulus tocompettion.

87. There will be a radical change in the composition of Government expenz5itureas interest subsidies and operating subsidies to enterpzises are eliminated and the relativeemphasis shifts towards infrastruc needed to underp private sector development, socialinfrastructure,services and benefits, and the administrative activities needed to support thefuncdons of a modern administration: one that monitors, facilitates, regulates and taxes ratherthan playing a direct role in economic advity. Current income mainuance expenditure willstill be a substantial proportion of total expenditure but will be better targeted; responsibilityfor income repacement at higher levels may be transferred to the private sector.Rtionaization of social expenditure will require careful attention to the actual incidence ofpoverty and the distribution of current expenditure by age and income class.

88. In the longer run, the Govemment will want to reduce its relince on centralbank credit and explore different methods of financing the deficit. However, bonds may notbe attractive until real interest rates become positive and government financial instmmentsattain credibility. Banks may be the principal bond-holders initially as the adverseexperience with frozen Sperbank deposits could deter the public from holding Governmentpaper.

(ii) Mqu y licy and financial se

89. The effective conduct of monetary poilcy in the fte will require not only awell-functioning central bank with a reasonable degree of autonomy from Government, butalso &,commercial bankdng sector that bases decisions on risk and profit criteria, and anefficent intrrepublican payments sysntm. Moldova needs to move rapidly away from theexisting system of centraly directed credit allocation, widespread interest s dies and asingle bank monopoly over household deposi, to create a modem financial sector. Someactions (paragrhps 91-95 below) should be taken or at least initiated immediately, whileothers form part of the medium-term perspective for refonn.

30

. . . . .

PART III

90. While stll in the ruble area, Moldova's role in monetary policy was essendtallypassive (although the authorities were supplementng ruble issue from the Centa Bank ofRussia with their own coupons). Movement towards a new currency has now outaceddevelopment of the instruments of monetar policy and financial intermeion that will beessential if Moldova is to achieve macroeconomic stability once the new currency is issued.In the financial sector, there is an important role for the nascent central bank to play inreducing risk within the system, enforcing prudential regulations, and moving to introducefinancing auctions in order to replace the system of directed credits.

91. The top pri is to contain spialling risks in the fnancial system4 Badloans are building up, concealed by opaque accounting systems and the common practice ofcredit rollover and interest capitalization. Portfolio risk will only increase as economicrestucturing progresses and an increasing number of enterpnses find themselves unaLle toservice loans. As this process will be draatialy accentuated when monetay and fiscalpolicy are tightened in prepartion for the introduction of the new currency, it is impertiveto act now to protect the financial sector from collapse. Purte lending must be conditionedby past repayment pzrformance, and in due course by risk and credit evaluation, while limitson lending to single borrowers and to shareholders must be enforced. Loan loss provisionsshould also be built up. Otherwise te bankdng sectr risks widespread ilures withconcomitant heavy charges on the budget.

92. For new lending, the autoities have now eliminated all toselected sectors and industries, so that all economic activities will face the same cost ofcaital. However, the bulk of outstanding a-edit is at pteferential ates, and it will beimportant to ensure that refinancing occurs at market rates. The NBM has already moved inthis direction, with the first refinancing auction held in September 1993.

93. As re interest rates remain highly negative, the NBM should continue toraise standard rates towards positive real levels. Once the country has its own currency, itwill be important to maintain the same stucture of interest rates irespective of the intendeduse of funds.

94.: In the short run, the NBM should also rise and enforce capital stndards onbans, to limt the vuneraiity of banks todeaut and reduce futre charges on thegovernment budget should banks need to be liquidated and/or recaitlized. The requiredcapital/asset aio should be raised with a phase-in period for existing banks to at least theBIS capital adequacy guideline df 8%, and preferably 15% during the tanstion period.

95. These measures should be takei in parallel with increasing finacial disciplinein the enteprise sector. Until capacty is built up in the financial sector to evaluate risk andprofitability and extend credit accordingly, credit demands of existing public entpises are

31

PART III

lkely to drive credit alocation. It will therefore be useful to insist on greater financadispline within enterprises, so as to timit unreasonable crdit demands and peent firthdewioation in bank portfolios, while moving at the same time to develop financia sect"capacity. Reining back the credit demand of existing public enterprises will also reducecrowding out of the growing private sctor.

96. Mm rolof the etalbo. To play its proper ole fte N needs asubsttiall1y greater degree of autonomy than it has at psnt. Althgh legaly independentin pinciple and eporing only to Parliament, the NBM is in practice subject to governmentdecrees relating to directed credit. The Government has also issued laws on the indexationof woring capital, financed directdy through the Government budget and indirtly throghloans fom the NBM to the Government (the most recent workiag capital indexaton added15% of GI)P to the fiscal deficit). It will be imporftnt to define and ackmowledge sepateroles for the Government and the NBM in the economic sphere. As a fis step, theGovernment, a reesented by the M stry of Fmance, will need to withdraw from activeparticipon in the bani system. It would also be helpfid if the Parliament were to acceptthat a reasonable degree of cental bank autonomy is needed.

97. Once apit roles have been defined, the NM and commercil banklnglegislation can be moderized accordingly and corresponding s can be assigned.Altough it is crucal for the development of a moder financial sector in the medium-term topas responsibility for credit management from the Mnstr of Finance to the NBM, anxd forhe Government to desist from then on from sectoa and preferental direction of credit and

on-lending, in pcice it will taWe time to build up the institutional capacity to developalteaive methods of crit allocation, and to train staff who are capable of using risk andprofitability criteria.

98. The NBM will also need to aume fll responsbiity for the _anagment offorein exchange, a function which was untl rcentdy carraed out in the Miisty of Finace.Meanwhile, the NlB will need to witdxraw from its residual role as a commercial banknmking loans dily to commercial enterprises.28

99. The NBM will need to condaue to impos rese requiem for prndentialreasons and so as to improve its capability to manage the money supy. Reg ons andreporting requements should be tightened and supe oy and insetoncapstrengtheed. Bank supriso must be authorized to mandate povisos for possible etlosses, write-offs, and suseio or non-accrual of interest o non-perfaming asset.Safeguards on aconcted lending must be improved, and lending lmits will need to be

- Those are large loars, pimrly In the ene sector-, here lendi by commeral bank woudhave viol NBM regulato on lending to a single borrower as a she of capita.

32

@ > t . - : 2 - 32 - -- - - - -: > =~~~~~~~~~~~~~~Ž

PART lf

reduced and enforced. The NBM will need lga powers to move against wuound banks,including the right to impose penalties, suspend dividends, order unsafe pratcs to stop, andremove icompetent or fraudulent magement To malk these reforms work, the NBM willneed an intensive soff tining program, and will also need to review the salaries it pays.

100. Domestic reouce mobilization in the financial sector will be severelyhampered by unaactive interest rtes on deposits and restrictions on acces by depostors.Development of domesc resource mobiliztion will be aDl the more important since Moldovawill bave to rely largely on its own resore to start reqcoy and gowth. As a fist step,the Government should move qickly to explore and implement opto to restructue theState Savings Bank. It is also a high priority to promote the development of independent andWell-funioning prvate sector financial istitutions so as to mobilize savngs and provideeficient intemiediation.

101. But these measur will be not be fully effecve unless the links betweebanks and enpies are cut. Moldova has not seen the proli on of new bans, many ofwhich have been cated solely to lend to their ownen, which has occured In other pSUctries. Howeve, lending limits on credit to owners are frequently exceeded and anumber of bank are angerously eposed to a few large enepises to which theycustomarily lend. In this situation, higher interest rates are ikely to be met only by highercredit demand, rather a ronal on of demand. On the other hand, if the creditafety valve were abruptly shut off, there would be widevread entprise failurs, with

ow- bank failures, and the u for both the real economy and the naciasystem would be disastrous. To take accout of te Interdependence of banks andentepie, a staged disengement is needed.

102. The main lines of such a d ement would be as follows. Publicentepises would no longer be penritted to buy shares in banks ad would divest themselvesof existing dares over a set period, preferably before being privadzed. Any furtherindeaion of woking capital would be condional on ente perfo ncti relatingto comaion d to movement towads profitai. In parallel, enterpi wodneed to replace production rget with pofitabiity oljecves, resect financial lmits ontheir acdvities, clear existing arrears and place time limits on new arrars, and establiconitent accounting prctc and finmcial reportng. Meanwhile the bank will need toimprove their capacity to evuate credit and rsk. Finay, State bank would be restrucuedand privadied or closed down.

103. Tle question arises of how to deal WXt the laWe umber of exitng un dloans in the system and the potfios of any banks that fail. Introduction of depoitinsurce would be unwise, for rasons of moral hazad and because there would be nofundiWn for it. However, as reladve pries contiue to change and inktst rates re, a large

33

PART MIl

number of enterpises will become unprofitable, and ba neither can nor should condiue toextend credit to thm indefinitely. In principle, exicit budget subsidia coud be ued toshore up the enterses while they are restructured or privaized, or in some casesliquidated, but present and future fiscal capacity is most unlily to permit this approach.Some choices wll need to be made about how to give financial support while entpies arewound down or uned arund, whether on a case by case basis by individual bank, whichwill place a serious burden on their balnce sheets and opeting accounts, or by arestructuOng agency. in either case, evety effort will need to be made to contain theultmate cost to the Government budget so as not to compromise bili and rwovery.

104. It will be important to begin building capacity now in both the NBM and thecommeri sector for the next phase of financial sector development. Ts wil require (1) aconsit and transparent system of accounting, auditing, and fianci disclosure to beadopted at both enterprs and bank levels to peit asssment of the solvency of thebaing system and is borrowers; (ii) firther work to automate the domestic inrbankearing system and broaden its coverage to all the banks, bilding on the ovements tat

have alhady been made in domesc interbank clearing procedures and in developing aninterbank mart; (iii) an intensive staff trining program to make the new systems work andconduct basic tas (for instance, opeing lett of credit, deang with centaccounts in Wester banks). Tained staff will also be needed to assess balane she,evluate new lending proposas, and manage portfolios.

105. The Govemnment and the NBM will also want to continue thi eforts toimpve inter-repqblicen clearing arangements, which are i subject to staial delas.

106. In parallel, measures will be required to improve the legal framework withnwhidch the baks operate Impentation of eist laws on repayment of los and onbankruptcy are needed, as are a law on collatea and registration of collateral agm ts.A collatel law would also help improve private sector a to credit market. Te taxrae on banks should be reduced from its cumnt level of between 40% and 55%, dezadingon the bank, to a uniform levd of 32%, in line with the taaion of other enteprises.

An e enviment fo teivt sector and efficient uc sector

107. _=g I M. FPurther laws will be needed, including the lawon ng d collateral (teferred to above) which will not only faciitt mely ownershiptasfer but also asit new businesses in obtaning credit from commercial banks andsuple. The bankruptcy law should be amended to allow for debtor r and fora change in the order in which credis are compensaat demployment and m al r bties of compnies wi also need to be clarified.The foeign invesmt law may requir review to check that it offers sufice pwtcion to

,34-

PART I/

fteign investors but does not give too much scoe to loca authoriies to grnt advangesbynd the nrmal law, eecally in tax breaks and tax holidays. In general, guaantaesother than those potectng aght naionon should not be needed: normal legalprotections and obgations should suffice.

108. Certificaidon andicing. The cu. arangements for establishing a newbuiness in Moldova, while not unduly restitve in terms of prohibiting areas of pnvatesector activity, do nonetess Involve licensing procedures which are tme consming andleave open the possibility for coruptin. Activities which reqire l;cens include reailng,

tism, publishing, medicine and managemt consultancy as well as educational acdvities.Some of these procedures can involve several Ministies as well as compliance withmunicipa reguions. The Govemnment should move to a system of cerficaton to begranted automatkcaly to all applicants in conpliane with transparent standards, and restrictlicenses to areas such as TV or radio where there is a clear reason why volume must becontrolled. The Government should also sepaate the crfication and Liceng funcons inMinsries from other administraive and policy fincdons and ensure equal treatment forpublic and private entrprises.

.09. Bslshing kdent lega and UgaUM ons Ihe coou and thelel establishment are unfaila with a private sector env nt ad may also beinsufficintly indepeent of Government. It will be impnt to develop an independentcort system with specalized commercial cous, and promote the formaton of anindeendent legal profession. Capacty within Government will also need to be reinforced soas to continue drfting legison and regulations needed for private sector d nt. Atth samne time, there is a need to develop an independent accunancy and auditing professionat can -monitor pefrmane# and provide cost-effecte and timely assistance to new

buinesses.

(i) EsIitaQon of ommate edae

110. Me iT medite e is to enable economic agen to build onMoldova's comparative advantag by removg restictions on exports and ensuing that thetrade regime be transt and cle. Hrd cuency expors will be crucial given the needto gate foreign exchange reserves to spport the introduction of the new cuncy and toservice debt. To this end, the removal of quotas for hard curency export and theimprovment in export liesing procedures i mid-1993 were mnjor steps forwad. Licensesre now granted a year at a time ter than for each trade opaton, and, in August 1993,

the number of items subject to mlcensing and quotas was halved. Hard curencyexports will be crucial given the need to serove debt and to generate foreign exchangereses to suprt e intoducton of the new curency. The ri vilf now is to ensrethat Hoesing procedures are as cear and simple as possible, minmizing delays and

35

PARTrl

oportunies for rent-eeng. A finlheir pdif is to remove all quotas on FSU expor.The proportion of trade covered by Stae contacts wi need to be reduced as rapidly as thepraces of Modoas PSU trading partne permft. Concurrently, th State's direct role intrdg should be phased out to facilitate entepisto enterie contact; at the same time,procureent procedus for state tadng will need to become more tnspart andcompetitve. Ihe Government intnds to remove export taxes by end 1993. It will beimportant to remove enaidng export quot obligations and, whee impots are stilladmnstred, replace quotas and lcee with tarffi.111. Moldova se inWration in the world tradng community and wisbes tobecome a member of the GATI. In Septmber 1993, the authritieplaced the previoushighly disersed stuctue of import tariff rates (mging from 0 to 1000) by a low and fairlyuniform tariff on non-FSU imports, with most rates in the 15-20 percent range. This taifflevel is advisable, given that sections of Moldovo agiculture and industry may need amodate level of proecon for a tradtional period (paruadarly once the protcicrently afforded by the exchange rate disppea), and given the presdng need for revenuefor macroeconomic puposes. DifIrential excise tax ts could stll be used onluxwy goods and goods wi significant social or costs. Dpnding on thebuoyancy of ote renue sources, the ff could be lowered at a later stage. Next theauthorities will need to determin the import tff which will aWply to PSU import, sinCethe country lready fa positive taiff ates in FSU countries.

112. The authorities have begun to rationaize the application of VAT. At present theVAT is appied on some variant of the origin principle in many countries of the PSU, but isgenelly applied on the destnaton priciple outside it. This means that VAT was not leviedon import fiom outside the PSU, whibe inpor from inside the PSU entred Moldova atVATinclusve prices, and at a high ate of 20%. The authorities are now imposing VAT onimpor from outside the FSU so as to prvide ntral VAT dteatent of all gods, inportedand domestic. The Goverment will now also want to ense that eorw to desnationsoutide the PSU are zeo-raed for VAT, as they will be subject to VAT In the country ofsale, in line with western practice. Zro-ring is preferable to eampdon becae taxes paidearier in the production proces can be reimbursed. This will not be practicable in theimmediate fure, althougb it should be posible to reimburs taxes paid in Moldova. In duecourse, te autoities should consider moving to a VAT based on te desinadon principle.

113. Te surender reqmnt for hard crency export receipts has been reducedfrm 50% to the curent level of 35%, and is now cdactd at the official Moldovanexche re, thus removing the implic tax imposed by use of the Ruxan MIPCE rate. (InAugust 1993, the Moldovan ruble was officiay quoted at 1.3 the Russian ruble). The- athorities should now adopt a timetable for removing the srnder requirement altogethe,eognizing at it rflecs epectatdons about financi and foeign exchange markts wich

should disppearo m econom stabilion is achied and the finacial set

36

N ~ ~ ~ ~ ~ ~

PARTm

develops instruments in which depositors can have confidence. The NBM will need toensure that tere is a funcoing foreign exchange market to which all enterprises haveaccess.

114. E=. Market development and strengthened access to Russianmarkets, peciSaly for food, will be a critical component of a stategy of export-led growth.Within the former Soviet Union consumers know Moldovan pwducts and readily acceptthiem. As the Russian economy recovers, demand for Moldovan fruits, vegetables, andwines will increa. However, a number of difficulties impede the country's access toRussian market, including export restrictions and licensing irm ts. With the curentunceainties in the busine environment in Russa, it is not easy to idenf reiable busiessparters to market Moldovan products and tranfer earnings in a timely fashion to Moldova.After introducton of the Moldovan leu, mechanics of conversion of the two currencies maypresent problems in the early period.

115. The importance of the Russian market and difficulties in retining adequateaccess to it will require nommercial solutions more innovative than reliance on stte adingand indicative lists. Moldovan processors and private wholesaers will have to establishstog commercial links with wholesalers and large retailers in Russia. Retention of staetg of agricultral products i er for Russian enaergy impedes mat developme,

and handicaps Moldovan expots in the increasingly competive markets that they will soonfae.

116. Mldovan products will be under ineasing compeiton within the formerUSSR 'Retention of the Russ market will require improvements in marketing, packging,and quality control. Modest investments in these areas should pay off well, and betterposition Moldova to compete outside the former USSR.

117. Diversification of trading partn will be importunt in the long run, and-expot to the West will Inrea. At present, however, Molovan products are eeallyunknown in markets of Central and Westemn uope. Moldovan exports to nontrditonaparners now are so small, and markting problems assocated with ePaion so great, thatnontraditonal sales other a crss border trade with Romnia are unliky to be a

gnificant source of growth soon. Even increae tade with Romania will rquiresificant impovement in border controls on both sides, and reduction of delays, in order tofitate trade especialy in periable goods (see betow).

37

PART HI

118. The Moldovan government's role In export enhancement should be to reduceor remove barrie to exports, including stae orders and state tading, clarify and smplfyexport licensing procedures and clearng arangement, and provide market information.This implies that the government's role in direct investnent and trade should be extremelylimited.

119. Effective institutional underpinning is needed to help Moldova diverify itsexport products and markets and become an open tading nation. To promote thisdevelopment, an agency that could provide informadon on makets and help establish tradingcontc would be useful. This agency need not be within Govenment

120. There is an urgent need for reform of Customs if Moldova is to facilitateextnal trade, develop accurate statistics for policy-making, and collect revenue. Acomplet new orgniation needs to be set up on the eastern border with Ukraine (thisprocess is just beginnng). At present, immigrtion and Customs facilides on both sides ofthe external borer with Romania are a barrier to trade. Delays can be as long as severaldays, which makes the export of perishable goods highly risky, ris the cost of exporungoverall, and is discouraging to investors. Stining of procedures and methods and stafftraining are a very high prority. As well as facilitang trade, the Customs organizaion willneed to serve a stisticl fumction, monitoring an ' reporting on export and import volumesand values. It will also need to oollect revenue, which will require adapted systems andspecily tained staff; and it will need to provide space for the agncultural inspectrat.

121. Where FSU trade is concemed, the major barrier is the inter-republicanclearing and payments system. Moldova wil need to find ways of acceerating payments,perhaps in the immediate future on a bilabteral basis with its main tading partners, as well asby participating in a FSU-wide system, which will, however, tawke longer to develop.

122. A The strategy for adjusment and gowth of Moldovanagnculture must build on the secor's coniderable export potential in horicultual products,both raw and processed. Several components of the shtategy will be imortant.

123. Changes in the strucue of production will shift resources from products nolonger profitable under new market conditions and toward grain, fruits, vegetables, wine, andspecialty products. Horticulural products, both raw and processed, have traditionally beenimportat in production and exports. Moldova thus benefits from a strong fuudation in asubsector with conparative advantage under the curent and fture price stcture.

124. Moldova also, however, has a liveock sector that is overdevdoped in thelight of future higher relative prices for feed and probably reduced feed availalihty. Thecontaction of the livestock industry is already under way and is acceleted by the drought

38* X.

PART m

and concomitant loss of much of the corn crop in 1992. As the new relative price stuctureis a pemanent feature of the new agricultual economy, ratwr than a transitory resut of thedrought, herds shondd be ullod accordingly. Curent expendiues, investment, and resarchwill have to shift away from intensive livestock production and toward fuits, vegetables, andwine.

125. Substantial new investment in production, processing, and marketing ofhorticultal products will be required. Future growth in products will come primarily frominvestment in improved yields and better proesing, and only secondarily from expandedarea. Private investment in food processing, including foreig investment, depends criticallyon the success of macroecomic stblzaton, while investment in production at the farmlevel depends on clarity and security of property rights. Borrowers and lendes must haveconfidence in the relaive stability of the macnom environment, but small localinvestors are likely to move more quickly even if the environment is somewhat uncrtainthan will larger domestic and foreign investors. Evidence of accelrated spontaneou acdVityin the private sector will be a factor attcting larger foreign investor.

126. Mobilizion of private household savings on a small scale in rural areas willinitally be the most important source of investment in agro-procsing. The most promisingsource of early investment is neither the state nor the large international private investor.Budgetary pressure on the state as the sources and uses of revenues change will precludemajor state progms of reinvestment in food procesing, and conditions conducive toattracing foreign investment are not likely to be established soon. Early investment is morelikely to come frn many ral households seeking productive use and adequate retr tosmall sums. The pace of investment will depend critically on early development of financialinsttutions serving rural people, rapid tranufer of small business and nal services into thepivate sector, and secure protecdon of propety nghts of owners of small bwiness.

127. The density of settlement and relative prosperity of many rural communitiescreate conditions for suessful opetion of small bans and credit unions seinghouseholds. Many households already own some equity in the faom of housing, 98% ofwhich is privately owned in rural areas. The potential for enhanced investmt acvity onthe part of households is substantial. In order to realize that potential, finncialintennediaries sving households must be developed quicldy.

128. In the next stage of land reform and farm r ing, it will be imprta topromote the privation of small scale processing capacity, light industry and svicescurrently within the state and collecdve farms (see Part m, parah 134).

39

PART II

129. Indu gogo. The indusrial soctor in Moldova, although smaler as ashare of the economy than industrial sectors in Russia, Bebrus, Ukraie, or Amenia, isnonetheless an important element of the Govement's reform prgm. Statgy for thissector must include reform of corporate govenance, a comprehensive and achievableprogram for privazation, a clear delineation of the role for Sta-owned enterpises, acomplementary program for atation prio to privatization, and policies dedgned topromote competition and demonopolization.

130. ip n . Tne skill level in Moldova is sophiscedand cost-effecive compared to a number of FSU republics and Bastern European countriessuch as Romania and Bulgaria. The level of tary educadon in Moldova is high and it isestimated that over 12 percent of the labor force has had post-seonday oducain. Thedevelopment of a high-technology defence industry in Moldova is testimony to ths skill baseand every eft must be made to retain these skills thugh the development of a defenceconverion program. At the same time, wage levels averaging 15,000 rubles per month inthe industral sector, coupled with good productvity levels, phce Moldova in a stongcompetitive postion. Howeve, inexpensive and skilled labor is a necessary but notsufficent condWon for developing an industri strategy. In addition, close attention must begiven to the proceng of raw materials, such as baic foodstuffs produced locadly, fromwhich there is an opporuty to generate real added value. Furthermore, producing lowquality products at low prices for the FSU markets is unky to be a ssaiabe approach inthe medium term as tese FSU economies will graduaHly expose their consumers to highquality Westen products. At an early stage, Moldovan manuftures should be seekngways to upgrade packaging, quality standards and marketing, with the assistan of Westernjoint ventue parters wher possible.

131. . a fr gh o. Moldovan industry has very tte alternative but toseek sustainable growth through exports given the very smal domestic consum base andthe nature of much of its heavy industry. n light of the proximit and size of the PSUmarkets and the tradidonal link with these teritories, it would be nealisc and undesiablto ignore ese cusomers. These linh should be mained and sgthened resvctive ofany docision relaWd to the introducton of a national currency. At the same time, it will beimpora for industialists to seek new maket in Eastern Europe, Africa and the MiddleEast, as well as in the West, if a substantial fall in sales of Moldovan pwoducts is to beavoided in the short term.

132. jse strategic dos on ieia i. Some firms appear to beliethat they will be able to remain competve inteationly, asning that raw matials suchas cotton or leather hides will continue to be purchased or bartered from the FSU at belowworld prices and that Moldovan products will then be able to undect the prices ofcompetitors in Western mrkets. However, Central Asian FSU countries are raising the

40

PART il

prices of cotto other raw materiaws upon which much of their economy depends.Industrialists will need to face up to these tends and to base decisions concenin producdonand invenents on internaional prices for inputs and outputs.

133. Enterprise reform combines the issu of private seor development industrialstategy, public enterpise goveace, and paan. On prment plans, pizan willlead this promess, but a change of ownership on its own is not enough. Ation wiRl also beneeded to the competitive environment and to corponde govenance both before and afterprivaizaton. And ownersip change is not just a assignment of title to a structr ofactivity that itself will remain unchanged - a mothat seems to be fairlywidesread. Changing incentives, market and prices, and new form of management, willgenwrate substantial change in the composition of activity and the pOpulaon of entrprises.During the transition period it is inevitable that a number wll fail and new eneprises willemerge.

134. Privadzation In its commitment t use a consistent approah for allprvazaons, the Government may have delayed the procs Howev, there are legimtereasons to devie traat, uniform proceures in which the publc can have confidence,as there are fears that the nomenclata and the mafia wiU dominate the process.Nonetheless, the Government recetly decided to permit small scal privatiions to goahead by auction in the immediate future, concentrting on businesses in the small retail anddistrbution sectors with a maximum book value of one million rubles (to be revalued to 17million rubles). The first auctions took place on September 11, 1993. Privadtin of theentire large enterpdse sector will take longer, wisely, the authorities are planning to select anumber of firms for which pivatiin should go ahead quickly, witout waft untiarrangements have been made for all enuprises. They have aLso allowed some enutprto be leased, permitting pvat sector mangers to take over, but the leglity of the operationhas been dubious in some cases.

135. It would be helpful to expose the staff of the State Privazaion Department tothe approach used to privadzadon in ater countries, through semna and visits. Inparticular, it would be useful to consider ass spinoff, when an entpri conins a varietyof productive and unproductive asets, so that the private inveo is not Vmelld to take(or leave) both. And, if the pdvatizaton progmm is not to be discredited, it will beimportant to close hopelessy uneconomic enterprises, rahe than offload them naunsuspecing domestic buyers. The law enifing buyers in these c to claimcompensation if the enterprises goes bankrupt should be widrawn. Both thae appwrach(spinoff and closure) will require a certain amount of information on -the financial situation ofenterprises, which should be collected by the privaon commission.

41

PART 11

136. Priorties for eary pnvatztion are the uiput supply, dibution andmarlting sems in the agricultue sector. Agriculue will rmain the lead sector ineconomic recovery but the scope for growth and Wtade is presny undermined by rigid statsystems which control inputs and Limit the distribution of fresh produce even domticay.During the coporatzion and privatzaion of state and collective farms which is now goingahead, it will be advisable to move small food prcesng units, light industry and servicesout of the large farm entities and privatize them. It will also be important to attrc foreigninvetors and joint venture pars into food pmcessing for export, an ara in whichMoldova has good prospects.

137. Eacili=hfisinxJazn Atrcting foreign inveamt will assist theenterpre reform rategy of Moldova for the following reasons. Foreip technology andcapl will help revitalize enterprise performance, while joint venture parters can assist inpenetting non-tditional mabets beyond the FSU. In addition, new investors from abroadcan bring manageri innovations from the West. However, the Government will need todecide whether it wants foreig investnent. As it stads, the law define a number ofspecal procedures which are likely to create obstacles for foreign investors. In general,foreign and domestic investors should be subject to the same legal requi , and careshould be taken to avoid special fiscal or other concessions for foreign investor; assunceson repatriation of profits and safeguards against natonlization should suffice.

138. Siacml ions of ent . Many largr Moldovm entps provide andfund social services on a considerable scale. For instnce, one large textile and garmentconglomeate owns and oeates s schools, two hospitals, and extensive receatinalacilities as well as providing housing for over 5,000 workers. Many agr-entrpris

provide soial services in the villages where they ae based. Ihese obligaos will have asignificant short term fnancial impact on the opeation of the enterprise in an increasinglycompettive envirnment, impede close when an enteprise is bankrupt, and will comlicatpivatzation, partcularly if foreign capital or access to external markets is requred fromjoint venture parters. Arrangements will need to be made for a gradual transfer of sociafunctions to cental or local govenment budgets, or at least to lrify the time horizon overwhich this rensility will continue (see also Fical section). Bntpris on the ist forearly privaizaton should be a priority for divestiture.

139. Houing ri. About 70% of the housing sock is already in privatehands (almost 100% in rural as), and the Government is now prssig ahead withprivatizing the 350,000 dwellings still in public ownerip. The legal fmewok is alreadyin place whereby siting tenants will reeive a defined atea of spc per person fiee, with anaddiional space allowance depending on years of work. Space above dat limit can beacquired for payment. An estimated 75% of units can be privatzed without payment and

42.

5 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~c ., , .m

PARTM

thde privadtitons are now under way, while those cases requiting part payment wil startat tbe end of 1993.

140. So far, attention to privadtion has exceeded the focus on dfficmigamome genealy, whether in public or private sectrs. The punuit of inureased efficiency inthe entepise sector will require changes at two levels: within the enteprises and within theframework in which they operate. Many of the framework reforms have already beenlaunched (see Part U, secdon 3 above, and Part m, secdon 2) but it will be necessay todeepen thes reforms and also to go further, attending in particular to entry and exitprocedures and to mortae and collateral laws. It will also be important to ovetcome therecessionay and inflatonry tendencies of an economy dominated by monopoly, fis byliberaiing tade policy, and second by breaking up monopolistic stctr when enterprisesare esructred and privatzed. This is particularly Important whre the domesdc market isconcned, as FSU monopolies will be undernined in any case as trade diversifies andbecomes more open.

141. It will also be important to create a discplined financial envirment. Aspresures created by share market activity will take time to develop, it is all the moreimportant that the supply of bank finance should increasingly be conditioned by

Itwo and risk considerons, and that limits should be placed on entepises'ability to accmulate arrears, both to banks and to other enterprises (see Finanial Sectorsecdon).

142. T g stok of the enterprbe sectr. Although the Government of MoldoWahas bee acte in devloping laws for the deelopment of a private sector and derbletught has been given to dhscrete elements of privaizadon, there is as yet no broad statefor reform of the enterprise sector overall. In partcular, given the need to alocate scaceresourc in an efficient manner, and the prctcl impossibility of tackling all enterprIsimultaneousy, it will be necesary to set piorities for action. To do this, the Govenmentdwuld screen enterprses using criteia based on the need to genate expots and net newpivate sector invesunent, and to inae the drain on the budget from subsidies toenterpises. Tis exercie would sot enteises into the folowing four broad categorie. (a)those enterpdses to be priaed in the ort term which require no further acton; (b) thosentpises which will not be privaized in the short term and require coatizton andfinancia controls; (c) thos enterprises which are to be retined in the State sector for theforeseeable futre and require improved maagement and possibly some rs ig; (d)those enterprises which bave no 10ng term future and should be lquidtd a a mater of

143. emrlg gautonomy.zitb wI.takijtS. At the same ime, measur willneed to be ta to improve corporat governance in both enWprises awaiting ptizton

43

PART il

and those to b retned in the State seco. Although Parliament has now approved the1993-94 privation program, privaiation of large and complex enteses wiil nearilytabe me. Meanwile the level of output and efficiency in both agrictre and Industry will

rgely be determined by what happens in the public enterpie in hos sectors.

144. IMpM MOM 2MAM. It will be important to begn the prgram ofcoporatiztion of al SOEs as soon as possible, transforming them into joint stock companesand ituting boards of directs that will be elected by the a s. Tig forthose who seore on boards will be desirable, and the proces as a whole will taoe time. inthe immediate future, it will be essental to impose finacial controls and apell outnant nsibities and obligations more clearly, and intoduce sancions for poor

performance into managers' employment contr. Managers should also be askd to drawup financial pans, and where appropriate, privatzaton plans for their enterises.

145. CarifO the role of th Ministries. State orgizations such s the Minries ofAgriculre and Industry will have to change fundamentally as the country moves to a marktbased economy. The emphasis will move from opaon issues to monitoing, regltionand the provision of support in marketing. The Ministry of Industry is aready plannng toreopnize its fions around the functions of c n and monitng, i orations and marketing and statistical reviews. Broad policy, including the establishment ofthe regulatory fanework will rmain the provie of the State but wilnceiy need totak into account the needs of private as weul as pubLic enterprse. These changes should beset in motion soon, and dmilar principles should be applied to other inistries

146. hk*m= fiy mQSlorng of AM Although the enterprise reformstg implies that the State's direct involvement in industry will be mimized, there i8 aegitmate need to monitor enterprise prfoce in the light of objecies agreed by theBoards of SOEs. ntemationally accepted acounting and auditing standards should beadopted to fcilitate this process.

147. mp_s har budget cong -as . The Govemnt ha madesiifiant progress with its announcmet in 1991 that State funds would not be madeavailable for dire subvendons tb SOEs. It also intends to raise the cost of capital toenterpis. However, enterpriss have been largely insuated from the budget constrait byan acrosthe-board indation of worlkng capital, generalid dearance of £a (and theability to accumulate furtier arrears), access to a chep credit supply from banks *ty own,and, in some case, by the abiity to chare monopoly prices There bave been fgwexamples of signficant redundancies in the industrial sector despite the falls in proucn

44

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PART i

and capaity utzaton, widt firms preferring to intoduce short-time Wordng.29Govenment must be prepared to allow liquidations or unemployment to occur in cases wheremarkt forces suggest that there is no other option. It wil be poiat to enwe ta anyfather compensadon for Inflton or arrears clearanc is not across-the-board but Iscondioned on eterprise pejfomuce.

148. Eug 1a. The Government abolished theintermediary/regional tade enteprises in October 1999), iniating the demonopolluton ofthe trade sector. Progess had also been made in demonopolizing the construction swctorthrough the entry ad grwwth of pinvate construcon companie. However, competition inthe domestic market in Moldova continues to be constrained, in part by the lage size ofenterpre and the high degree of vertcal and horizontal integraion. It will be impornt toincrease compedtion in the domesftic market and there may be a need to establish a de-monopolization agency to deal with this important element of enterprise reform. In the caseof enterpdses expordng the bulk of thei products, however, allowance should be made forthe economies of scale that may be required to compete with foreig firms in in onalmarkets. In paallel, trade policy should be as open as possible to promote coetition inMoldova.

(iii)

149. Moldova has greater labor market flexibiity than some other PSU counties.Labor tunover in the past was, and sti is, unusualy high.at 20%, although geograpbicmobilit in the labor market was low, constrained by a housing shotge and by povision oftied housing and other fringe benefits linked to the enteprie. Downward wae flexibility isnow wieread, with enteprises enforing wage cuts in line with short-time wokng andunpaid vacatons. Change is also beginning to erode the extnt to which the labor market isadminisd. School leavers are no longer requied to take as jobs for their first threeyear in employmert, and job suty has been eliminated. The chalnge now is to deepenreforms so as lo create a greater degree of labor market flexibility. Inital raeae shouldinclude remova of the power conferred on Government authorities and on unins t delaydismissals for a period of six months, and the obligation on employers to pay for tainng.The authorities am moving to privatirt the 30% of housing stll in public ownerip and&removing the propiska law; but even when it is removed, lack of houing wil sti be aconstat on labor moblity.

150I UW M ui. Ope unemployment has not rise Freatly becueGoemment policy is to minimize dimissa, there is still some opimism that the present

XI However, one firm reduced its workforce through natiral ation from 7,000 to 4,500 over atwo and a half-year period, and has recenty laid off 200 workers.

45

PART III

situaton will prve temporary, and many optises cannot afford severance pay. Firms arethrefore keeping workers formally on the payroll, even if tey are not in fact paid or arepaid only for so-time working. With tis status, workers condnue to receive non-chbenefits from the enterpre, which include medical services and also housing in many cases.The next stage is actual swverance, under which the enterrse must continue to pay wagesfor two to thee months. People cannot register as unemployed if they are on swvece pay.

151. Some of the worst off in the populaton are workers who are paid less than theminimum wage for prolonged periods, but who are not eligible for unemployment benefit ifthey leave the enterprse voluntarily. The enterprise in many cases cannot afford to sackthem because of the cost of giving evce pay. The result is a sWlemate which alsoinhibits adjustment in the economy. It would be advisable to change the eligibility rules suchthat worker would be entitled to benefit if they left ticr employment after a defined periodin which they had received less than the minimum wage. It may also be useful to amend theprovisions governing serance pay.

152. Although unemployment in the past was largely hidden, employment officesexisted in orde to place scwol leavers and because of the relatively high rate of laborturnver. These offices are now attemptig to place the rising number of diplaced workersand other job-seekers, with a declining degee of success as ime goes on (90% sucoess ratein 1990, 50% in 1991, and 30% in 1992). Unemployment is likely to rise sharply in thenext f-w years as r ig proceeds In the economy, so it iS a high prority to upgadeemployment offices and introduce computed systems to reister job seers, rcordemployer needs and vacanc, and match people to jobs. Employment offices could also;elpfully provide counselling and identfy tining needs so that job seekers can be referedto the appropriate trining or service.

46

PART IJI

Table 4 - Unemploye ud Kclivglp dBenft amn, EMupIJNyMe FErnd(January to October, 1992)

:ut Y

Unemployed 1649 100

Women 1244 75.4People with higher education 911 55.2

Dismissals (restcturIng) 1196 72.5Dismissals (closures) 167 10.1Graduatng students 178 10.8

Blue collar workers 746 45.2White collar worke 903 54.8

Sourw: Minity of Labor and Social Affairs

153. In the face of general disr4pton in output and employment pattns which willentail rapidly rising and persistent unemployment, the audwtries can help the tOnprocew and lower the socia co assoated with it dmmough an active labo madket policy.The authorities should epand prwision of small-scale public wor and sices, job-relawdtraining, and possbly introduce employment subidies to help place disadvantaged workersand long-term unemployed people, who nisk progresve deteioraton in tir huma capitaland confidence the longer they are unem ployed. lining provision wil need to be upgadedsubstially to help speed adjusment by providing new skis reqired in the marketeconomy such as accountancy And computg.

-154. As in other.PSU countries. there is evdence hat women are takng the bnrntof the cisis in the labor market. Women fonm qusarte of unempoyed people onben@f1t which impFt that tey are an even igher popo thof e dissed (ic tris a faiily income te on unmployment.beneft). Their plmn es in wjobs arc- wer, se thie number of women among the long-term employed is growing apidly.Women ppear be less ti represented it the new sectors of dynmigrowth: cgm atives, leasing, and joint vente These. ctrs wi need to be taken intoaccount When labor market policy and employment codons are riewed, so as to prevent

k-]i pattern of cumulatve disadvantag merging. Antion will need to be focsed on

.. r . . .47 .

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PART II

enabling women to continue to take an activerole in the labor nwaket, if Moldova istodrawon all its resources and talents.

155. WacUit Th= e Govemnment has moved from a set wage tariff in whichthiere was a basic minimum wage and also rates for different occupational categories, relatedto four differet levels of work complexity and eight occupational categories. To give anidea of the rang e: when the basic minimum wage was 85#. rubles per month, the minimumfor the highest rated occupation was 2650 rubles. There is now a system, designed toprovide a transition between the comnmnd and market economies, whereb jie rates areindicative minima only, and the intention is to move to a market-determined system in 1994.While the Government may wish to iceep a basic mi*nimu wage, It would be advisable toefimi,wae the scale above It, leaving it to employers and woikers to negotiae appropdatemarket ime and rewwni high produciviry an a woiker and enterprise basis.

156. Wages also include, a non-cash component comprising access to training,housing, free medcal services, child care on enterprise premises (or a cash equivalet),subsidized meals, and other services. If the non-cash component is taken into account, thewage structure is somewhat lmesscmprcssed, with big and more productive enterprisesproviding a higher level of benefits and distributing them unequally acros employees. Asinflton reduces the purchasing power of the wage, thesw fringe benefits grow in importane.Since they represet an obstacle to labor market mobility, and also to privatzation, becausenew buyers may be unwillng to take on extensive social obligations, it would be advisable toprivatize some socia responsibilities (e.g. housing) and transfer others to agenciesunconnected with the workplace and fund them from central or local government budgets(als see section on Enterprise Reform and Fiscal). Detacment of social services and fringebenefits from enterprises will be a long proces, especially as fiscal resources are lmnited.Planning shoul d teefore star now.

157. The Government operates an inommes policy whereby wage paymentsexceeding four time the miunmum wage times the numbers employed are not tax deductible.An incomes policy is justfied give the need to restrain cost pressre for stabfiliainfpurposes, the existence of monopoly conditions, and differential access to credit, - whichmean that there is not necessarily any correspondence between financial ability to pay highwages and real productivity. In addition, some enterpise are deaiaiigso as tosafeguard wage payments. However, the form of this policy should be revised, as itpenalizes companies with high-skiled worker.

48

PART H

CHART 1Transfer Payments, 192

Sikokn *W Mdouly (8.9%) Budgt Soea A (6.1%)

EuVOOymsi Fund (0.1%)%

Mi,2 SubsPa (32.8%)

yAPo* 11 bra ito

(39.9%)

CHART 2

Sodal Fund ExWendItures 1992

Siomesa and M8J (14.7%)/

aniploymint Fund (0.2%)

Fuamiy AflOWanoe (18.8%)

Age and Disabiftl Peaimo (663

49

PAtrT II

158. Like other FSU countries, Moldova provides a wide range of berefits for oldage, invalidity, short tenn sickness, unemployment, pregnancy, death, children's allowances,and student stipends, together with health care services. In 1992, 60% of expwenditure forthese purposes was made through the budget and 40% by the Socia Fund, togeteamounting to half of all expenditures. Food subsidies added an esimated 3.7 billion rublesin 1992.

159. Old age pensions, at R9 billion in 1992, are by far the lagest item, absoringover two-thirds of al benefit expenditures. At 28% in 1992, the ratio of people aged 55 andover (women) or 60 plus (men) to the worldng age population indicates that Moldova doesnot have a particularly elderly population by Western FSU or centrl European standards'.However, all these counties have high dependency ratios due to their low retrement ages(60 for men and 55 for women), together with numerous exemptions to the retrement age,the inclusion of years of higher education when caculating length of service, and universalcoverage.

160. Large-scale job losses have yet to occur but the system of social protecion isalready hard pressed to cover claims under the existing sucture and coverage (includingprovision for unemployment benefit intoduced m early 1992). Likely develpments in thenext year and theraer, including labor shedding by enterprises and a contiuing fall in realincomes, will ady aggrvate this situaton, pusidng the Social Fund and the govenmuentbudget fiuther into deficit. Unemployment is likely to ise sharply and to remain high for atleast five yeasn, judging by expeience with economic resnrurng in ot counties.Immediaction W is needed to pie socidal assistance for those most in need and to makesavings elsewhere in the system, introducing sharpe targeting.

161. The authorities have already explored various aproaches to expenditurereducdon. Income tesdng has been intoduced for family alkowances and unemploymentbenefits, but unfortunately in such a way as to introduce an arbitruy element andconsiderable inequity. The authorities now feel that it woud be preferable to abandon thepresent income-tesdng method. Possible altr atives include an abatement system, oraxation of benefits. The autities aWe mpsed a ceiling of twice the minimum wageoa pensions, although the celn was lifted in January 1993 for speci categaies of

AQ( For Russia the corresponding pensionerlworking age populadon ration was 34% In 1989; forBeha 34% in 1989; and for Rumania 34% in 1990.

50

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. -.- -.- - -- X -- . -' - -l -.- --. ; *

PART I

pensioner". Additional savings would derive from abating or eliminating pension payments tothose who are sil in employment, but this measure is unlikely to yield a great deal's.

162. The most substantil savings can be found by cutting back on supplementslted to work history and income, preferably abolishing tem completely. The base level

of benefit shoud also be delinke from the minimum wage: the minimum benefit is currentlyheld equal to the minimum wage, with a szeable number of benefits above that level (theaverage pension is just under 150% of the minimum wage). To alleviate poverty, it wouldbe more effective to award flat-rate cost of living adjustments for all beneficiaries, rtethan incrse the minimum wage, which raises the remnunerton floor for the economy as awhole as well as feeding straight through to the stucture of benefits. Until furtherinformain is availae, it would probably be advisable to retain childe's and familyallowances, as household survey findings, and also resch elsewhere, indicate that povertyis corrlated with family size. Sharper targeing will require an accurate means ofidentifying those who are most in need and an effective system of delivery of benefits. Untilsuch a system is in place, it could be advisable to retain the bread subsidy and introduce abread coupon system for the chapest type of bread.

163. Moldova currently has a Soi Support Pund, which distrbutes one-offpayments of cash and in kdnd assstance at the local level to bene who are identifiedas being in special need. This system appes to work masonably well in its present limitedforn, but its resources are small and thinly spread, and its financing uncertain, so that it isunlikely that it could be readily transformed into a genera system of sodal assstance. As ahigh priority, the authorities will want to set up a more adequate social safety net to ensreassisanc rehes the very poorest (often social pensiones, who recive half the minimumpension) and ose with no other means of support. As an interim measure, it would behelpful to maise the social pension to the level of the basic minimum pension.

164. At present, a considerable number of enterprises run social servies relating tohealth, education, child catre and holiday facilities (see paragrph 156 above). This socialrole is lioely to provide an obstale to commeialization and privatizaon of entrprises,especially as, according to the privatizaton law, privatied enteprise must continue to runthe social servces they operated before privatizaon. Tere is also a sgnficant rik thatsocial assets and services operated by entprises will deteiorate. In some cases they have

Sf Ihe specil categories ate: war peansio, invalids of ceain types, people aged over 70, andvicims of political represion. About 100,000 pensioners are aected by the ceiling, of whom about26,000 are in one or other of the special categories.

21 In the fist quarr of 1993, pensions paid to those in work were abated by 50%. twev, thisrule affected only 25,000 people, as recorded employment among pensioners wont do*o sarply.

51.-

PART III

already done so. The Govemment iniiated a progam for the divestittue of entelpise socialsorvices in nual areas, under which scees would be transferd to local auhoitides andfinanced by local budgets, but this program has ground to a halt for lack of resources andbecause entprs are unwilling to reinquish asets and facilties, even when they are nolong supying services. It will be important ensure that enterise social serices arenow decreed to be part of the oveall sysbem of social protection and dealt with on that basis,with fdoral trnsfer to local governments as rsources permit.

165. After these initial measures have been taken in order to cope with immediateneeds, the next pgrity will be to address the adverse fiscal and efficiency impacts of thecurrent sucture of socal protecton. The current aimngements, whereby he majority ofsocial benefits are delivered though the Social Fund, and largely funded by enteprisecontributions (with some budget subsidy), are already at the limit of viability. Thecontribution rae on enterprises is higher than elsewhere in the FSU," and has beenfrequently changed, reducing enterpre' ability to plan and to maintain economic activityand employment. In addition, different sectoral contribution rates (45% for industil and30% for agricultural enteprises) distot allocative choices and profitabiliy. Mhe potentialclaim on the budget in the future is also high, at a time when fiscal revenue is already fallingfar short of expenditue claims and claims are about to rise shaply. The rising fiscal deficitis aready a desabilizing force. It is therefore important to restuur the system within asmaler envelope that will entail lower fiscal and non-we labor costs.

166. At the same time, the authorities will want to decide what role the governmentshould play in income suppprt and how to distinguish s %si. or the reief of need,from the provision of what is effectively soci1 mm=, related to contributions and worlhistory, which does not necsily coespond to need.

167. In codering social in pvion in the longer-term, the authoritiesmay want to bear in mind the exprience of OECD countries, which indicates that socialinsurance progams tend to generate high non-wage labor costs without povding fullcoverage at an adequate level for the popultion as a whole, and tend to be disadvantageousfor women. This can lead to pressure for subsdies from geal evenue or for the creationof a subsidiary assistane schdeme, raising budget costs.

I Ibe contruons re for eterprises was 60% of the wage bill In the first half of 1992, reducingto 45% in the second half of that year.

52

'~~ ~ ~~ ~ -. ,. ' -I O

PART II

168. A number of options is available. The provision of social insurance could bemade wholly a personal responsibility, or left to worker-employer ngotation and provison.

e latter option has disadvantages, as it can undermine labor mark flebilty if benefitsare not portable. Also, at a time of widespread economic restrucwting, it is partiularlyundesiable to tie benefit entidtlemen to the performance of specific finns or industries.Displacd workers may have to fall back on social assian if their firm goes bankrupt andthe insurane scheme is not sufficiently well-finded. This is a charactrsc problem ofemployment-related schemes. They can generally cope with change at the margin, but notwith large falls in their financial base accompanied by lare increases in claims. Hence thesocial assist and social inuwrance schemes are not independent and should be dedgnedwith that in mind.

169. One option which the authorities may wish to conider is to retin ondy theprovision of minimum income maintenance and family allowances in the public sectr, whilesplitting off social insurance to a separte public agency, which would administr the schemeand ensure portability of benefit entitlement between jobs. Employers could still be expcto contribute, but preferably at a lower and uniform rate, and the contribution rate fromemployees would have to rse. Risks from resructug could be pooled over the economyas a whole. Directions for the future will need to be established after further study.

3. The role of foidg borrowing and extnal assistance

.ExImal financing nae

170. During 1992, the country focused on borrowing to obtin exceptional cerealimports to make up the deficit caused by the drought, and inputs for the spring and winterplanting asons in 1993. Most of this assstance from the European Communite took theform of short-term credits for grain impr at an inrest rate of LIBOR +3.125%, yienga rate of 10.3% in the first half of 1992. During the very diffiut 1993 year, foreignfinancing for dought relief continues to be an important component of the short termassitance progam. Moldova will need to muster assistance f*oi both bilateral donors andmuliat organii to enable it to refinance and spread this burden over a morerealistic repayment pid.

171. Two soenarios have been develped as a basis for assessing Moldova'screditwortiness. Under the first scenario, a credible mreomic stabiliion programis put in place in 1993/94, accompanied by a comprehensive progam of structural reform

bI Including an EC commercal loan of 27 million ecu of which It Is estimaed that 20 milon wasdrawn by the end of 1992, using about 1S.S m for cereal and the remainder for medicines.

53

PARTIII

Ttis allows a progressive reduction of inflation (to 4 pent by 1995), an appreciation of thereal exchange rate (which is currendy highly underval by refe to purchasing powerparity) begining in 1993, and the restoion by 1995 of positive GDP growth, afterprecipitous declines since 1990. In the second scenario, the implementation of thestabiizatn and reform programs is delayed to 1995/96 due to political factors. PositiveGDP growth is not restored until 1997, inflation remains above ingle digits until the sameyear, and the real exchange rate appreciation does not oocur untl 1995.

172. Both cases assume a 28 percent decline in the terms of trade with the FSU in1993 as energy import prices rise to 57 percent of world levels (fron 21 percent in 1992).In 1994, energy prices are assumed to reach 90 % of world levels. Only in the firstscenario, however, it is possible to contain debt service to export ratios within reasonablebounds. Moldova's creditworthiness therefore hinges on early movement to stabilize theeconomy and the adoption of effectve structral reforms.

173. It is estimated that the financing gap may amount to US$35 million in 199335,and to approximately $141 million in 1994 (see Table 5). Moldova's finaning needs will besubstantial in the next five years as energy prices ise to world levels, as economicstr occurs, and essential invesment and ln tamkes place. The country

will need exceptional financing from the donor community over ths period before exportearings overtake import requirements. Once this phase is over, it wil be well positioned totrade with the PSU, Easten Europe, and the rest of the wold, and is lily to beome fullycreditworhy. However, the dming of these developments does indicate a need for long-temlending, and for some degree of concessional financing, tapering off after appoximately fiveyea-

174. Now tat Moldova is beginning to borrow externally, the Govemment wilwant to ensure that it has a well artiulated set of objecives and order of prorities againstwhich it wishes to borow or receive grant assin This applies to all browing andgrant money, whether for techWical assistance, public investmeat projects, or policy-basedlending. Othw it will find tha its extraly financed activities tend to be determined byexteal views and interests, and there is a risk that financig will go t lower piorityactivites. A well-defined program is also helpful so as to avoid duplication and enswe thatall support has been well utilized. Where echical assistance is concerned, the authioities

I bhis calculation taks into o excqional financg twg debt consoldaion of $71.3mfrom Russia ad a new loan of $27.9m, als from Rsia.

54

> .. ... . a . < . .. ~~~~~~~. . .. . . . .-

PART III

~(mfilso of US$, unless otherwise specfied)

1991 1992 1993 1994

ExDorts 4646.0 867.8 808.7 903.04466.0 682.8 648.7 713.5

External 180.0 185.0 160.0 189.51mports 4642.5 904.7 1027.5 1118.0

FSU of which: 3986.8 700.0 719.1 839.2-Energy products 711.0 327.0 431.8 557.7

Ex 655.7 204.7 308.4 278.8

Trade balance 3.5 -36.9 -218.8 -215.0

Net Services and Trnsfers -33.0 -2.0 1.7 -21.2

Current Account Balance 3.5 -38.9 -217.1 -236.2

Capital inflows 25.0 34.0 153.1 75.3Converdble area 34.0 105.1 86.0Direct foreign invesuent 25.0 17.4 30.0 36.0Medium & LT, net 16.6 75.1 50.0Short term, net 0.8 0.0Contribution to Int'l. -0.8 0.0

OrgnzationNon-convertible area 48.0 -10.7Disbursement 1/ 27.9 0.0Amortization 0.5 -10.7Intorentmrprise arrears 19.6 0.0

Errors and omissions 167.0 -9.1 1.8 0.0

Overall balance 195.5 -14.0 -62.2 -160.9

Change in net reserves (- Increase) -195.5 -14.0 27.2 19.5}:inancing 0.0 50.7 32.1

Gross Official Reserves -2.4 -31.6 -12.6NBM Corresponden accounAs 9,672.0 18.7 -29.6 0.0DMB Net Foreign Assets -2.3 -5.2 0.0Debt conversion (net) 21 0.0 42.9 0.0

Fiancing Gap 0.0 0.0 35.0 141.4

Memo item.Ruble per US$, avg. 1.75 94.0 969.0 1914.0

Sources: Moldova authorities and staff etmes.1/ A new loan to be extended by Russia In tbe amout of 35 biUlo rbles.2/ Technical credit from Russia transformed into a govenment loan.

55

PART ill

should develo an action program to support their rform programu, identify the insttuton-building technical assistance required to implement it,, and set priorities within thatTechnica assistanc is likey to be desirable in the real sectors, as well as in support ofpolic eform, anid should also be included in the overall TA program. At the same time, aspart of the reform of Government expenditure progrmming and control, the authorities willwant to establish a medium-term public investnmnt program containng high-return prqectsin line with secto sftrtegies and priority investmet needs. These programs can then bediscussed with prospective donors and lending agencies so as to detemine appropriateactivities for their support within the Govermentes overal requirments.

17$. The implications of externa borrowing for futur debt servicing and for theGovernment budget will need to be worked through and incororated in the order ofpriorities struck by the Government. The Government may want to seek cnsoafinancing or put off some large discrete projects until its debt servicing capacity icess

56

ANNEX ON ENMRONMET

1) Although Moldova b a rich agrculal country, it has sedous problems ofresource degradaton and pollution whidch are a tra to th envionment and to health, andalso to suained growth In agriture, where the country's comparative advantge ies.

2) W Mte. oldova is a country sarce in water rsources. Average annualpreciptWion is low and the two major rivers - the Prut, bordeing on Romania, and theDniestr, forming the border of te disputed area of Tasnista - are heaily polluted.Moldova is downstream from Ukraine, and the two rivers are already polluted fromdomsic, agricultural and industrial sources in Ukrine when they enter the country. On theMoldovan side, the most important source of water pollution is agrochemical runoff,exacerbatd by wase from feed lots. In the southiem part of the Prut basin, te are alsodedts of nineral salts and oil, which seep into the Prut causing polluion problems andunuiual ecological condidons. Industrial poUution draim into the Dniest, which is the mainsource of drinking wate for the Moldovan capital, Chislnau, and for the city of OdesThis water supply was furtier polluted by petroleum products and runoff from damagedindustial enterpses dung fte conflict over Ihns Further south again, eforts toncrse the capacity of lakes for irrigation purposes have reuted in salinization,

contaminang iigation and drinlkng water and adding to pollution in the Danube riverbasin.

3) S1. Moldova's soil ha some unusual chemical feaur, with a high level offluoride in the northwest, an iodine deficit in the north, and a angnese deficit in otherregons. Reportedly, these c, combined with heavy applicaton of minelfertilizers polluted with tae of heavy metals, have led to sange reactions and ctonsand humus content has declined by about 40%,, with a negive balance of nitrogen andphosphorus. Purte work will be needed to check whethr the agricultl so, which isbasically highly fertile, has suffered some cntaniation rom heavy metas and pesticidesand the extent to which this is a seriou problem. Erosion may also have become aproblem, with cosequent loss of topsoil and landides: some vilages have been hit bylandslides arising from ineasng insility of the land.

4) Ak. Air pollution is a less problem overall than water and soil degrdation,but there is marked air pollution in the nrthem city of Rybnica, and also in Chisinau, Belts,and the Tispol region. Except in ara of heavy industry, domescally-erated airpoflution is not a serious problem, but Moldova is vuble to exterly-geneatd,transborder air pollutin. Officials are conerned inh pardculr that there may have beenradionucide containation fom Chernobyl and pollution due to the oil fir in Kuwait

S) A Cdog ggWO. noThe main sources of agriculal pollution are animalWsas products fom feed lots, poor stoage fcis for fertilizer,3 and exteive pescideuse with little control over applicto volume and iming. A switch to safer pesticides can

F Perizer Is delivered in bulk and stred on the ground with little cover or protection agai nt-off.

57

ANNEX ON RNVIRONMENT

be expected once Moldova is able to import from the West, and high rtes of pesicideaplication should be checled against forign maket norms. Recently, application rateshave been declining under economic pressure and regulation is getting stricter.

6) Officials are concerned that agnculdtual pollution may have damagig effectson health, citing relaively high infat mortaity, cancer frequency, miscarriages, immunesygem destucion and reduced Life expcancy. The frequency and incidence of theseconditions should be checked as soon as possible. It would be beneficial to switch to moreenvim entally sound agricultural pratice in geeal, including education and regulations onpesticide use, secure fertlizer storage, and eforestatin and erosion control.

7) kdustfim o . The production processes fbr Moldovan manufa ofcement-asbesos products create both air and water pollution. The main power plant haspoor pollution control, emitting carbon wastes and 12,250 tons of particulates per year Otherserious sources of indusrial pollution are scrap-metal processing, and the production ofartificial leather, glass, building materials and tactors.

8) Muniaws and drinldng wA. L ger mandtowns have biological waste water tement plaints of standard Soviet design. Problemscommonly arise from sludge handling and deots. Properly treaed, sludge could be usedas an agricultural fertilizer as it has very little heavy metal contnt.

9) Drinking water plants also follow standard Soviet desig, with chemicalprecipitation of organic matter and pollutants. There is no automation or process monitoir;gat the dnking water and wate water plants. The technical standard varies and mainteanceis ofta poor. All plants are overstaffed by Western standards, and water and sewagecharges are far below cost.

10) Ertoyj d uinatenston. Extensive cultvation in Moldova hasseverely reduced the natal habits and hence biodirity is low. There is now a 'redbook" on edangered plants and animas, and one of the nature reser is closed to visitors.Only 9% of the itory is forested, of whlch 7% is se forests and 2% mged bycollecive farms. Until 1990 forest management was oriented to commercial production;since then, attention has hied to soil protection and nature consevadon. Authoities planan action program to reforest part of the marginl agricultural land, with the aim ofinceasng forest area to 25-30% of the wbole territory. However, this ret appearssomewhat abitray; it would be prable to maoe protecton from eron and landsidesthe primary objective of the reforestaion progam.

11) Smmmu inilIn. Moldova has a range of enviromentl inutions,of which the main one is the Stae Depament for the Protection of the Envionment andNatual Resources, which was created recently and asigned the fnctns previously coveredby the Ministries of Forestry, Water Resources, Geology and Elogy. It reports toPaliament hough the Ecological Commission and is not part of the Govemment. In t

58

sX ' i 1 * ;, ; r 9 ;' * * s X ;& s~~~~~~~~~~~~~~~~~~~~4

ANNEX ON ENVIRONMENT

past, the corndgig bodies were attached to production-oriented ministries and had litteinuence of authofityO oranizational modes ae under disussion, icluig thJapamese model, in which the Environmental Agecy is under the Pdime Minister.

12) The department has a netwok of ten ren n and forestryeension sece. It has the authofity to ass5ss the envimental impact of all constructionprojects, and to ect project whidh do not qualify under existng Scviet stands (it is notentily cla how ths veto works). Poludn ontrol and supevision b card out by theenvironmental inspectorats, stad by 350 inpec in head office and ten judes (regionaloffices). These offices oversee industrial and agricultural entepri and the sewage ystemof villages and towns, and give technical advice. Each enteprise has an agreement orcontr tat sts lmits for air eXm , water discharges and level of soil cont io.If the limits are exceeded the inspecto can impose fines, which go to the State EclgiFund for enonmenal ovement and protcdon project and scientfic studies. The statdeartment has an affiad reserch body, the Insiute of Ecology, to which it transf10% of its budget. The budget of the stte department i a fixed 0.5% ofthe nationalbudget

13) Judet offices will be key units in the present plan to revise and reorganz thepresent n system of enviromnental monitoring and controL Water qualit dataad monitoring are reprded as padculary unrliable. Under this plan, five monitngstons and labora will be set up on the Prut river, in cooperton with the Romannenvironmental audhdties. s border area was previously inaccesible under the PSU.

14) There is an Academy of Science, whichbis responsible for a number ofisdtutions in all fields of naual science. Pundng comes frm the nadonal budget andrvenues from spcal prjects initiated by enteprie in industry and agrcuture. Two non-governmental organizations are also active in the environmental field: the Movement ofEcoogists, which uder envionmtal educaion and information, and the Party of90l1gists.

15) {aws an . The Government is keen to distane the newadministraon and environmental policy from the legacy of te forme Sov Union. It hasdecded to adopt EC emental standards and is studying the Roian eimelsategy. In devloping leg on, Moldova has looked to Japan and the United States andhas been asdsted by the Institute of inteaonal Law on the ironmene Ll n onair polluion and wife was adopted in 1981, tnere is now a water code, and a new law isbeing drafd on gneic pesraton. The authoides are also daevopg new legislaon onfory and sois. Th Government has indicad strong iatee in developing andEnvirnmental Sector study and a National Environmental Pln with spot from the WorldBank and the donor community.

16) PaDrant included a secto n the environment in the p ion law,stipatig tat foress ad wat cannot be privatd (with the oeption of artL fish

59

r~~~~~~~~~~~-

ANNEX ON ENVIRONMENT

ponds) and the use of natuml resources wil be licensed. ne Government will pay for theclean-up of pat polution.

17) ja=juWaag_ mia Moldova has signed the Convention on ClmateChange in Rio and wants to cooperate with the EC on these isues. It has agreements withUkraine on tfie management of the Dniestr, with Ukrine and Romania on the Prut, and withUkraine on the laks in tfie Danube delta. More needs to be done, however, tD develop abinding system of obligations under these treaties.

Technical aLuIstance may be reqchred In the folowing areas for errom l eformand Jitituton bulding:

18) Strengt heningf EaztmentohIle status and function of fteDepartment/Ministry should be reviewed in order to delop an nizatioal system withproper enforcement authority and capacity. Its reoa/district offices wil also need to bestengthened and proided with necessary equipment for control and monitoing.

19) Revising the pollution cd e and fine -gem. The water supply, wase waterdcharge and waste treatment charges, together with other enonmental fees and finesshould be gradually raised in order to cover the real cost of tie srvices provided and theenvironmental dmag incud.

20) Revising fte ystem of enfnmental standards. A flexible system ofenvironmental standads for ambient water and air quality, as weU as technologically basedcrteria and standards, should be developed. The standards shoild be realisdc and graduallystrengthened, with compliance with EC standards as the goal.

21) EabliWn a ys of enneatal montong ad a_There is a speci need for teccal assistance and equipment for environmental monitoringand establishment of an environmental infomaion systemn.

22) Reducing the pllution lkad fom feed lots. invimental coerns should beincluded in the process of restucturing and reducing the indusil mimal production sector.Environmental standards and tehncal criteria for this type of prodwcon should also bedeveloped.

23) &= g the e of and e contl, A priacdon plan for rfstation d erosion control should be devloped. The concept of theEcological Fund as a financing instution for this purpose should be furth elaborated.

24) contrl of etide use and food contminatio. Acompplan and insutioal famework for regula qualty control of agrcltu products shoudd beestabBlsed. Techncl assistance should be poided for equipment and taminig.

1. - - .- v - -.- -. .; . . ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ "

i -4 i

ANNEX ON ENVIRONMENT

25) gRedng the use of atoS I production and uiizaion of buldingmawteas should be modified to avoid the disea of asbestos or to reduce its toa us

26) judmwgi th prgrMM of proectng Danube rive bas In.cludeMoldom as a regular Task Force member of the Environmental Progam for Danube RiverBasin. Already completed is the Pre-investment stdy of Prut river, including the Moldovanpart of the catchment area.

.1

61

ANNEX ON ENERGY

a) k _kgwIlnnn=U &Zffim, Moldova is dependent on imports forvitually all of its energy needs. The continig breakdown of the trading system of theformer USSR and increasing energy ir'port prices are tius forcing diffcult adjustments onthe Moldovan economy. Tradiidonally, Moldova recived supplies of oil products and coalfrom Ukaine's refineries and its coal industry. However, Ukfaine is not receiving enoughoil from Russia to meet its own needs and therfore is not exporting to Moldova. Exports ofcoal from Ukbaine to Moldova are falling as well, but not as drascally as oil products. TheMoldovan govenment has sought government to government import agreements with Russiafor oil products, coal and gas,3 but the volume being committed will not neet all of itsneeds; moreover, these commitments only imply a right to approach individual suppliers.

b) Table 6 summarizes energy imports in 1991 and 1992 (esdmated). Gasolineand diesel imports are the most seriously affected this year, expectd to fall by 40% and28% respectively from 1991 to 1992. Gasoline for private cars is currently unavailable fromgovernment outlets, bus schedules are curtailed, and domestic automobile traffc has beenreduced considerably. Preference in supplying oil products has been given to agriculture,especially during the most active seasons. Based on data available from the centralgovernment, aggregate oil product imports in 1992 are expected to be down by only 13%compared to 1991 because reductions in gasoline and diesel imports have been offset byhigher 'mazut" (fuel oil) imports. Coal supplies and gas deliveries are both expected to bedown by about 20%. LPG supplies, primarily for cooking, were very eratc in 1992.

C) About 1.5 million households use coal for heatirg in the winter, and there isconcern about the availability of supplies and the quality of coal available; recent suppliesfrom Russia are of much poorer quality than traditionally supplied coals, eg. anthracite, butare cheap. Authwitis say anthracite is too expensWi now to purchase; they are trying topurchase coals which domestc consumers will be able to afford at full import prices.

d) For the most part, the Government is being pragmatic, allowing privateenrpeneurs and individual enterpnses to import oil products (primaily the higher endproducts, rather than mazut) and col by buying directly from individual suppliers in Rusiaand other fonner Wnion republics rather than relying solely on the government trading arm(the State Asscation for Fuels). The State Fuels Association is exploring the possibility ofleasing its soline sions long term to oreign oil companies (two foreign oil companies arestudying proposals) as a way of attring other sources of gasoline and diesel.

e) Estimated electricity production in 1992 is about 10,000 mkWh, down by 20?'from that produced in 1991, primarily because of fuel shortages.' Electricity exports toRomania and Bulgaria have' been cut back (Moldova will supply elticdty to these countresonly to the extt they provide fuel); some domestic rationing bas been occurring, primarily

.'' It is al dis ing a supply contra fr ps with T-r"nist.

. Coal gndairem are all usd in erma)hra l,el ty produton.

~~~ ~~~ ~~~ ~62b_ ... - . . . . .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~5

ANNEX ON E1NERGY

during winter in the last 2 years when peak demand could not always be met. About 86% ofproduction comes from one plant, Kushurgan, near Tiraspol; the other themal plnts areused pnmarily for the heavier electricity load in winter, supplying heat as well aselectricity." About 50% of the units at the Kushurgan plant are reportedly in need of r£pair(Moldova does not manufacture boilers and urbines domestically); an estimated 25% of thetransmission and distribution lines thoughout the country need repair also.

f) Thle quality of coal supplied to the electic power industry is rater poor:avage ash content is reportedly 30% and the sufr content is 1.5%; the mazut used as anaverage sulfur content of 2%. Such inputs are likly to be affecting the efficiency of electricpower boilers as well as their environmental control

g) About 300,000 flats in uban areas are connected to district heating systems.The total-thermal capacity of district heating sytems is 7,373 thousand Gcal, of which 78%comes from combined heat and power stations, the rest from heat only stations. Built upsince the 1950s, some of the systems now need repair, in particular the hot water lnes whichshow dence of leaking and energy loss; they probably also suffer from design flawstypical of district heatng in the former USSR, with the systems tending to be oversized andenergy inefficient.

h) Electricity geneaion and centrally supplied heat account forover 50% of total energy consumpon. In 1991, the fuel supply of the power/district heatsector was comprised as follows: 30.4% coal, 24% residual fuel oil, 45.2% natural gas, and0.4% other. , Industry and agrculue setors acmunt for about 7% each of total energyconsumption, both of which rely heavily en oil products. he industral sectw is also animportant consumer of electicity (40% of domestc electricity conswuption) and natural gas(25% of demand). Tnsport and houeholds represent 12% and 14% of total energyconsumption respectively.

i) Domestic electricity consumption was reportedly down by 13% thrugh thethrd quarter of 992 and is projected to fall by IS% over e entire year. Apart fom theelectric power industry, though, little informadon is available about recent changes in ergydemand, and there seem to be no adjustments in demand figures cited by governmentsuppliers, aing into account. Clearly eneg shortages, parcuarly of oil products and gas,are a constraint affecting industia output, but it is difficut to gauge to what extent the lakof other inputs ar the major constaint on industial proaction.

j) ED= EL= tEnergy import prices rose dmacally in 1992. The costs ofgasoline and naral gas, for instance, have both risen forty-fold. The cost of coal has risenone hundred-fold. The full costs of oil product and mo oal imports are now passed

AjI Altogether, there are &ns thermal stations wih combined capacity of 2836 MW and two hydrostations wih combined capacity of 64 MW; Moldova also reportedly jointly oprt a hydo staiwit Ukrin on its notihe border.

63

ANNEX ON ENIEWY

truwgh to consumers in Moldova.40 A system of cross sub tn was instited in mid-1992 for natrl gas, eleicity and district heating sales; higher rtes are charpd toindustry in order to rduce the eent of price increases pased on to housholds. In theswrt term, this reduces the subsidy burden of the Government, whle not overburdeningindustry since energy prices are still below world market levels. Over the longer term,however, energy prices to households wil need to be adjusted upwars to reflect theeconomnic values of fuels. Efforts to improve tariff struts generaly and phase inincrase to housholds time should be encorged. In the case of household gas andheating, tariff restrucring will need to be accompanied by a progam to introduce metering,as pri are curntly charged based on number of families and apartment area respectively.

k) Table 7 provides examples of domesfic energy prices in Moldova in 1992 anda compaison with world maket priees. It shows the great discrepancy between world anddomestic energy pnces. For example, domesdc naural gas pries per 1000 m3 (householdand commercial) in Moldova are below 10% relative to liklly economic pric. il productand coal prices are in the range of 30W50% of world market levels.

1) Despite increasing pressures to cushion prices, the Goverment must continueto try to pass on the full costs because it simply cannot afford to subsidize energy anylonger. As an importer, Moldova is in a siuaion where it will have to adjust quicldy tomuch higher energy prices, which will su en conservation over tme. The Govemmentwill want to identify areas of energy inefficiency and introduce measures to overcomephysical and other constrainu to improved conservation, in order to speed the rponse tohigher energy prices.

M) .EM Itsily Energy consumpdon per capita i esimated at 2,270-logmns oil equialent kO) in 1990 and e intsity of GDP at 1.4 )weJUS$.Mdova is not as energy intensive as Russia or its neighbor, Ukaine, which have estmatedeneW innities in the range of 2.2-2.6 koe/US$, but its energy Intensity is higher thanthse for the Baltic states, in the ange of 0.7-1.03. As anothr comprison, the aveenergy intensity for upper midle income countries reported by OBCD for 1991 is 0.6toJUS$. Indeed, there is probably considerable scope for energy consrvaon in Moldova,pardculady in the energy sector itself (eg. lectricity and heat producion and districtheatg. It wil also be important to evaluate further the energy intesity of he agriculturasector becaue of its eonomic sinficance in Moldova.

n) Changes in Coa Sures of Thergy Comanie. T variousgovemment agencies in the energy sector-the State Fuel Association, the Department ofGuification and its subsdiary, Moldovgaz, and the Department of Eecticity-have plans todevelop new corpoa sucues to put themselves on a more commerial bass.Consequently, thy are interested in the expeience of smlar firms in other countries. Ther

l There is a bsidy prvided to handicped people and needy famles fat coal pucha, crssbsidized by the Fuel Assoaon; In 1992 it will rersen a tot subsidy of less tham Rb 60mIllion.

644.

ANNEX ON ENERGY

is an opportumity here for bilatera and inftertional donors to assis thenm in this proces 4ofcommecializ, including support for firmcial planning and tariff rtucui. It is alsoa good time to identify opportnites for improving energy eficiency by changes inopeations and upgg of equipment.

O) 1-InveoM= in neg Suple. Various tradeoffs need to be considered ininvesment plnning in the energy sectr as the captal implicatons of power sector/districtheating rition and investtment plans in petroleum and nal gas supplies are overlyambitious in view of the curet economic situao Improved energy pricing,commecializaion and greater acountability of the stte eney agencies, and introducdon tofinmacial planning in those agencies will assist in bringing greater discipline to invem tplanning.

P) - nohe Moldovan government, under prssure to find supplies, is cderngvarious options to assure itself a secure oil and gas supply, including invsWting in oil and gasfields in Russia. Specifc invStments in ol and gas fields in Russia are now undercdemion or tentaively agreed. It is unclear how fully evaluatd the pwpective fieldsare and whether money is being invested in exploration through apprsal actvities, asopposed to less risky field development. T gov-rnment is also considring undertakingfther explortion and paisal of known domest oil deposits in the southern part of theountry. in its draft reform progrn, however, the govenmnt recognis the role thatpivate agents can play in petoleum exploration and development, as they are better placedto sou the risks involved. Commercial companies also are expenced m unertaknfinacial analyses to evauate the likely economic potential of a field. The Moldovanauthories do not appear to be exeieced in financial planing ad investmnt analyss,which would help them i deciding whether to risk scarce capital in the petroleum sectorr than investing in secrs where Moldova may have more of a compaaive advanage..

q) aTh Moldovan autwities are ilso disussing with Romania an invesmnt in amat refiey, in order to *deep refine" the mazut to get higher vae product. Again, theproosed investment should undergo the scrutiny of a fiacial analysis. More promisng,with less risk, would be aragements to fine crude oil in Romania by pas-througharrangements with underutiized Romanian refinerw, another option the government isconiding.

r) Investments are also planned in the natural gas industry-to epand gassupplies aen from the tansmission lines cossing Ukraine (one of-which goes thoughMoldova before reentering Ukraine) and to extend gas distribution lin within Moldova (toth 50% of coundes now without gas). Molodovgaz's medium term investmt pla call forconsucton of 600 kn of pipelines and annual capital costs of R3-3.5 bilon for the nextfive years, again an ambitiou effort.

65

ANNEX ON ENERGY

Table 6 En:g Imports, 91 and Projected 1992

1991 1992 (est)

Oil Producs (Total) 3.58 3.17(million tons)

Gasoline 0.72 0.36Disl 0.99 0.71Residual Fuel Oil 1.65 1.95

Coal 4.19 2.06(millon tons)

Naurl Gas 3.87 3.4(thousand m3)

LPG (milon tons) 0.2 0.15"

gi 1is may wOt be reached bea_ supis have boweatic. Total delis by m.14992 w-43,900 to". .

> W t 4 X - n ->c

ANNEX ON ENERGY

TABKE 7 - Eue Plmces

DomescConsumer Pzs Word Pdces World Priceskdu/mcmcd in Ptr k

GoHle 24-27,000 200-230 60-69,000(per to)

Diesel 17,000 180-215 5465,000(per tn)

Fuel oil 11,000 80 24,000(per ton)

Naural gs 2-3000 1200-1300 150-20D 45-60,000(Ie 000 m3)

LPG 7,800 250-300 75-90,000(per ton)

cool 3-8,000 3-8,00 35-50 11-15,000(per ton)

heatng 3000 21 35-62 11-18,600(per Goal)

Electcity 3000 600 50-65 15-19,500OMh)

4Z Boe sales taes In th aw of oil products and sawal gas.

T The prices o il p_rot as and coal a ncative bordt pdes plu mans for tasport orInf srctur costs.

r The excan rt used hee I Rb 300 to the US$1.00. Obvkudy, the exhan re selctedwil affct the se of b. gap bawee domeic and world pices.

67

ANNEX ON ENERGY

TAKLE 8- Enev Iaports, 19-94(m,ios Of UTS$)

1992 1993 1994(prject) (Ovected)

Total Energy Imports 327.0 430.9 557.7

Coal 34.6 61.6 66.0Volume ('000 tons) 2060.0 2500.0 2250.0Unit Price (Svton) 16.8 24.7 29.2

Naturl Gas 31.4 115.2 219.0volume (mn cubic metrs) 3435.1 3113.0 2801.7Unit Price (($*/'00 cubic Ietrs) 009.1 37.0 78.0

Fuel Eey 261.1 254.1 273.0volume (OOO-toa) 3101.7 2467.9 2221.1unit Price $/toin) 84.1 103.1 123.1

Headng Oil 137.4 115.0 122.0Volume ('000 tons) 1952.5 1500.0 90.6unit Price"($/to) 70.4 76.7 1.0

Diesel Fuel 71.4 .82.0 89.0Volume ('000 tons) 699.8 690.0 540.0Unit Price (S/ton) 102.0 136.7 165.7

Benzene -44.3 49.1 53.0Volume ('000 ons) 364.6 300.0 270.0Unit Prioe (S/ton) 121.5 163.7 195.9

Other Fuel Energy 8.0 8.0 9.0Volume ('000 tos) 84.8 67.9 61.0Unit Price (S/ton) 93.8 118.0 141.0

Source: Molovanauhii and MP sff.

"--V.~~~~~~~~~0.

1. E=Wwndffmn

1.1: Population and Demographic indicators, (in thousands)1.2: Percnge Structure of Population and Demorhic Indicators, (in percent)1.3: Employment By Secor, (m thoiusnds)1.4: Perceenage Distribution of Employment By Secoor, (in percent)

2. a l Accunt

2.1: Net Mateial Pduct at Current Prckes (MPS Methodology), (millions of rubles)2.2: Net Material Product at ConStant Prices (MPS Methodology),

(millions of 1983 rubles)2.3: Implicit NMP Deflators, (1983= 100)2.4: Growdt Rates of Jmplicit NNP Deflators, (in percent)2.5: Gross Output at Current Prices, (milions of rubles)2.6: Gross Pixed Investm at Current Prices2.7: Gross Fixed Investment at Constant PriceS2.8: IndustrI Production by Sector, (millions of 1983 rubles)

3. BalanWI of ftw

3.1:. Balance of Payment, (millions of curt US dollars)3.2: Inrepblica, Ee' and Totd Trde, (millions of rubles)3.3: Geographical Distribution of Interrepublic Trade at Domestic Prices,

(millions of current mbles)3.4: Geographical Distribution of Extrarepublic Trade3.5: Total Breakdown by Commodity Gtoups, (millions of rubles)3.6: Total Trade in 1991, Brekdown by Commodities, (millions of rubles)

4. Bunie P

4.1: Geneal Govrenment Budget, (millions of rubles)4.2: State Budget, (millions of rubles)

S. M aom

5.1: Monetary Survey, (millions of rubles, end-of-period)5.2: Balance Sheet of National Bank of Moldova, (millions of rubles, end-fpiod)5.3: Deposit Money Banks Monetay Accounts, (millions of rubles, end-of-period)

6. AulJ

6.1: AgrIcutura Prdction at Consta Pmce, (mWilo of 1983 rubles)6.2: Total Agricltal Ouput and Avefg Yilds, (housands of tO1S)6.3: Net Materia Product of Agriciture6.4: Animal Husbandry6.5: Cuanging Structure of Agriut In 19806.6: ChaguIng Structre of Agriculturt n 1991

7. P d

7.1: Monthly Vaiation In the CPI, WPI an Reta Prc Indices, (i percent)7.2: Monty Wage Indices, 1991-92

TaM* 1.1 - liotpm, P%4t44A ad OSWW c it tMat@i 7/ZtQ.. ,,,........... *0. . ,,, ..... .... ... ,..... , ,__.... . .....

1970 1979 190 15 199 19 19 1992.......................... ., .......... * ........ ........ ,,........

Tnmuw of Poso_ 1/t 0 T A L 356. 3947.4 4011.0 4214.0 4347.0 4ML.0 431.O 4351.0P.pulstlm Ogmity (P suwhqs) 105*9 117.1 119.0 123.0 129.0 129.4 129.4 139.1Nate 183.L3 165.4 13W.2 23.7 2058.2 201.6 208.0 20Umie 1^936 3089.0 21U.8 2212.4 2280.8 2290.4 2281.0 227.0t*Ui "1130.1 1551.0 15.A t117.0 2.0 2MA.0 207.0 202.0Rural 108.8 233.4 2438.6 2 0 n11. 30.0 2314.0 2328.0

EthweityNoldwvus 2365.5 522.4 285.6in*ralnIan 53.6" 560.5 S".9Raim -414*0 SOS4 Sell0o. 34L. 359.2 378.2

Total Lao POGO 113.0 =LO 20 3.11.0 361.0 3211.0 Z40.0 2610.0rUn 16 27.0 16.O 1S.0 11.0 11.0 1.0 20.0 20.

Over Verkfig me 78.0 60.0 a.0 87.0 68.0 61.0 1080 100.0Of' Acti Aw 161.0 233.0 2M.0 2=.0 23.0 237.0 mo.0 391.0

Amal Pputasrn Char" t*mmwAmb) 52. 43.6 40.6 1S.0 -1.0 -10.0Natrala Inwass 4.3 58.0 44. 45.0 52.7NipaIw, 9.6 5.4- -3.6 .30.0 .35.7

&Aa" u tpputatlsreut (a) -1.6 0.1 0.0 0.0

_xpasa Lfe Lt L at 811r ywis) 45.6 0.6 6.4 d.0 6LSWale 6a4 62.4 65. 65. 06.0Piet. 40.6 66. 69.5 *4" 71.8

Sium: ft. stat 0.pawmt of statlat.a.IssO t Hidyea.

TdbLe 1.32 -Ness Pon coop Stnatmw of bputln &W _bslpes Indlett_

*970 9979 198 l0 190 1ow 19C 199 1*st Ot T A 1/ 1111.0 100.0 1QQ.0 1QO.0 108i.0 160.0 1.0 160.0

Is .A 47.1 47. 4U.5 47J 4.5 47.7 47.7f_tl 55.4 539 5.7 53. 52.7 53S S2. 53

m1.7 39.5 396 45.1 "A.8 47.1 4.9 46. 40.7 40A4 5.9 532 53.9 5$.1 53.4

EtImloityNoldwu 64.6 63.9 64ukraininu 14.3 14.3 13.8

wawsm 11.6 12.8 13.0oter 9.6 9.1- 6.7

otd Lborw Fe 5..4 S9.2 59.1 5J 5.1 55.7 56.5 565WlAr 16 0.8 0.4 OA 0.3 04 04 0.5 0.over lVorkfeS W La 2.0 2.1 2.1 1. 1.9 2.S 2.Of Active 50A5 56.6 s5.7 55.1 54.0 5.6 53.5 554. .,_.... _.._................*..... .....

Sweet The uSe *"warm of stistics.1/ id-year.

te 1.5 - WWWwt to,'m by Stew,-veralo, In thwiou} t

CAuuumt ewieg ..................... 29 ........................ 3........ 7 /2m1905 19i o w *9u 193 190 1991 1992

......... 0 ........ ......... . .. 0. ... . .... . . 0* ........... O.

TMAL UftYT 1/ 20Z0 2082.0 208.3 2wr7.5 291.0 207.0 r70.0 2050.0

IAIAIAL SIF ml 1609.8 1603.0 19.3 1561.5 1530.0 152.0 155.0 151.00hrAstry 432.0 430.0 435.0 435.0 4U6.0 46.0 421.0 415.0Cuvt1nrtin 147.0 146.0 150.0 147.0 165.0 172.0 153.0 140.0ArfaAtw 752.0 742.0 725.0 700.0 71T.0 7.0 7.0 74.0van"r" 5.4 5.3 5. 5.2 4.8 4. 4.0 4.0Trmupsrt 74.0 73.o 69.0 67.0 52.0 51.0 48.0 52Ca1ecstaz 20.4 20.3 19.9 19.3 18.8 19.0 19.0 20.0Trab 8 .twr me ovlc seeviom 179.0 106.4 18s.0 tU.0 181.4 176.4 164.0 157.0

mRIAL OCFo 471.0 419.0 493.0 SOL0 S11.0 519.0 519.0 s51.r_mwiug aeu mwmt.tl sevIce 45.0 47.0 51.0 57.0 55.0 .0 65.0 8dwlr, rar & c dwenq* 30.0 30.0 31.0 30.0 30 3.0 29.0 5.0mMn 2/ 205.0 27.0 213.0 219.0 227.0 m.o 21.0 m5.0

stb cu s1cal seuItY 103.0 103.0 107.0 111.0 113.0 115.0 116.0 110N*iw & R W 8stftatutas 6.0 6.0 .0 L0 9.0 9.0 9.0 9.0oinsi 30.0 3o.0 34.0 34.0 320 24.0 35.0 35.0OUte muute_hal sevIce 50.0 51.0 49.0 47.0 43.0 60.0 41.0 1.o0

...~~-*....................... ...................................... * v. ................... ....... ........ ...... 0.............

8macs The sts kpm_wtt of Stetistic.If totIso .~sWeuW Int pusuwt whsidI.ry serlAtwuf.2/ Intusl e 1n wt are.

Te 1.4 *Oedma Permntum bi*Wk*fom of EmwM by Lesoor

"a 1915 197 i 193 10 1o" 1"O, ............ .... w....... .. . ....... . .... .. ... _

TOTAL WLuT1 1/ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

NMIAL oCr 77.4?? 77.0 76.4 75.5 *71.6 74.9 74.9 74.8sap" 20.6- 210.7 20.9 21.0 21.3 22.0 0.5 202Curtnctmn 7.1 7.0 7.2 7.1 7.9 8.3 7.4 6.8A uturo 36.1 356 34.8 33.9 34.1 32.5 35.7 36

hr,5W 0. 03 0.3 035 0.2 0.2 0.2 0LTrs_put 36 3.5 3.3 3.2 . 2.5 2.3 2.5loomostlz t1.0 1.0 1.0 0.9 0.9 0.9 0.9 1.0Tvsd wd saw mUreloerts .6 9.0 9.0 9.1 LT 8. 7.9 7.7

UuII*I SECTOR 22.6 3.0 3. 3L 21.4 20.1 0.1 5.2Saligo ad mlepstl ierwvl 2.2 2.3 2.4 2. 2. 2.2 .1 3.2Smiewo,' rs.ro s4dmwlpt 1.4 1.4 1.5 1.5 1.5 1.6 1.4 1.

mottIm 2 - 9.9 9.9 10.2 104 10.9 11.2 10A 10.9$leth ewe, oesI efrty .5.0 4.9 5.1 5.4 S. 5.6 5.6 5.?gu*Im fInuwS & greit Itvuuti 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0A4Geveruwo 1.4 1.6 1.6 1. 1.S 12 1.7 1.7Odor rm tl rIe 2. 2.4 2.3 2.3 1 29 2.0 4.9

. ................ .......

Lmc t eWte Oq0rtmI of stattles.if lastude e_oWs*t In persut wffdfry I"teurw.2/ nlescutsmda.

2J lncieudtve0..1) e

Tbt* 2 .1 N W o bw3 bet N et Prodt at Ceru Prisem c n.tedgow)(atll $na of nm"e)

............. . ......... ........ ,_ .......... ....... . ,.......

Ia tt It o t19 1 t g " 1100 " tB n "a. "f199e Ieu t9~~~~............ ... go ... , ,.. ... .0*0 ..... ....... ...et Usteriet prcat 51 610 7U4105 7TM T6 453 71. TM, 1 . 27I No 19m1

by originsAgrviUtwe 17n 176 15 a7m5 710 21n 27 am V3 331 393 76 75ofS §ich:foretry r 6 6 6 5 8 5 8 .6 9 . 9 U 1'Seth1stry aM 3sis 3459 35U 350 33V7 3100 35 5" US Si 409 O"4 5

of dI.h: Cwmtrustfmn 434 45 44 00 S 5 77 SW 0 62 1M6 13trwinpt & C cAM ion 14 16 4 194 204 206 21 a1 331 M $116 452 71Tre 105 1096 11ff 13 187 71 W 7 W7 #IT 071 nnO0 lerNtst SOVICs 31 30 32 36 31 39 47 49 65 It J9 105

By FPlat USs

_uua~tlm 4450 4749 4891 5"U 526 " 9 1 M1 616B 460 7? 15140Ptevift Cm tten 4054 41 430 '450 46 46 40 1SW MS 411 47 1Goveament Caumpttwn 446 46m 5W 549 516 611 446 SY4 655 15 an 1W

invait cebsaatetrl) 116 1416 21 1u " 1 19 1"a me 20" m0 51let Fixsd Il-s_PMt W4 06 746 M IOU1 104 91 1 11 1347 120 15Swestr in l,wiss 373 M 133 1Z04 W? 30 1 2V$ M M1 W 342

Trede Uauwe 29 .5 13p 746 43 .81 4919 4.09 -PS -956 .364 .15

As PW.nta Shereof Ns:

Iht lnll et Prit 10.0a 0 100.0 100.0 10.0 lo"010"Lo100 1. 0 1000 100 10"L.0 10

Agricm lttw 30.1 3.6 3.6 1.3 .8 3.1 3. 3.T 374J 40.1 41.6 41.8 39,of smiehs Form" 0.1i 0.1 0.1 0.1 1 0.1 0.1 i 01 0.1 0.1 .L1 0

Sn*mry 49.7 NA 40 45.8 45.5 S0.9 45.6 49.7 45. 4.3 43.4 445 43at Aigc wCtounttin 7J 6.9 6.6 6.4, 7J LS a7 9.1 9.3 10.0 9.0 6.9 7

Trsu t & Cm,imtins 3 2.7 27T 3.7 2.? 3.3 3.3 3.1 4.0 $. 4.8 3.8Teedn 16.9 17.8 1.3 15.7 16*.. 1.1 11.5 9.9 9.6 9.9 92 9.4Othr Ntt Ser 1 1.S 0.5 O. 0.5 0.5 0.4 .6 L.T 0.7 0.9 1.6 0.6 -.G

By FlrmS Uun

c ti ?S 55 77.1 6.9 41 46A .9 "T. n.9 m9 .4 SLYwte m 47.7 0.3 o t6 6J.71 # .5J WV.9 46.8 MA 76. 7 4 7* 13 73 9

gwArftmt tonat 7J 7 7.4 7.2 7. 9.3 9 9V4 9.4, 9.t 9.2 6$_w tt utlm) 19.7 5.0 3.24.2 24.0 . VI 8 13 ALI1 3.1 n.5 VAgot FIxd Investment 13.4 11. 10.5 10.9 1L1 13 17. 17.8 16.3 18. LaoSIaesVS in lwm3wie5 6.3 11.7 1?7 1.2 13A J 14.7 3. 104. 12.6 7 19.5

Trred Salons 5.0 .0.1 2.0 9.7 1. 4.2 -. 4 -1.2 -11.9� -. 0 -L9 -LSSe......................... .. ...... ....

Tile 2.2 3- Nssw.s Mt 1 Mt itl PFed at C mtw tilce's tof Retbsdslq)(dilww of 191 nbes) 7/2M~~~~~~~..... .... . .. . ..**...

1W 1915 1967 194 196 1996 -99 19~~~~~~~~~~~~~~~~~........,.-.Wet Neterl Pi"t 641f 7513 7606 775 8416 89t 6801 55

Artds so" 39 m am 3 2a" 156 14of uhicl$ Ftry a a a 9 9 6 5

1u~atry s~u SW 361 3641 4m 6701 3sia usof .AIdu: cumtnueln 631 614 656 MA 713 l10 15 544

to iwupet a Commosetlm 11 51 1 3 3m UP 21Trods w 35 46 41 496 5 "4OUIS UfwsterIn oi egsw 415 415 399 WM 30 *5 3oUr _tti wS m .

0o4"Clo Nos sm 6 7"0 H ^Priwist 0m61m 4957 NW6 56 55o 468 6199 5SW .

I"s " CSssotiu 61 " 6 M 06 747 81g9 106om* Cem IM) 114 am 1591" 15 no 1496 ..lrarmm .m osas liutet 7 10s 3ay 6Ms 9W 5g5 Su

Trade Setsims 79 'US 15 419 '55 '21 -115 .

11* Nato St l dPrgt 7.9 1. 1.J 8 '1.5 -18.0 -21.3

Sd bgtm0 *3A $A r- A -uof tAfebt fP*wy 0.0 0.0 6.0 1. 0.0 -353 -16Y

of .6ich COFv.tlmTru & Commoloettsu 55 -4.3 5.1 3.1 -29. '15.9

Trade LO 1S3 9.7 11.1 13J -9.1Oi'- Nht.'t* 1 S*veS -0A -17.7 6.5 4. -4L.7 7.6

Q_Cwum~lm 6 La 5.9 LT 3.7 09Private C.m 3.V 3.7 6.3 9.0 18 *53

bwr.inmsCuua~~1m 5.6 46 3.0 7.3 9.6 33.AInwsXM (aumsI.tt@ 53.6 291. 31J 7.6 -291 36.3

et fixed Imago" -118 36.0 -ei -3A 321J -39A .tere In lw"rlie au 115.6 M. 3.1 104.2

Truk "an" '355J -141.5 -45 5.0 *fS.S 8...... .. .00....... 0 ... ,

sewe Ve Ste 1herw of slafet".

, . . . ............................................................. .~~~~~~~.

O~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 ..

j~~~~~~~~~ ~..... ..... ..... ..... ......

wooli onz's emot seo uoo 9"00 gart mingoaaj ml minjson ag Gs'i m's- two Iwo. sw's rn's suMOWua PUSd 3

"0 961'? ILl'S US'S AMOO are M*63'S lW' (wRSIItS) 3untwdami' sW's rn-S. WC' or*' Mw swo' 'm4dAW'm aIinJM6

Se o1' U63I 031 6WS isWS 9WO SM6'S v*SjrASI Ogw41

MAWps3 OAU"3rg As

" S&O' OWIl 9*t00 *90'?. 5'S. WA'S S f6 U'0 63SJI"' 9* USl WO' 560's "6*0 I00"0 000S ar& 0' WS1Rtinn A m3

U4_J _19fal As

ESO'S AU't Ofla DWO' 86O 590' IWO' 46'S* 3oItd lOlmoma"w3

IOA/.s ~~~ ~ ~i (0' J

o * * ----0 ..... - -- .. - - ---- ...... d--------- .'................. _--

*- SW* 0* 00-t GM -" -OSt a"° ult M$

*-~ ~ ~ ~ ~ ~~~G00 dOM I;jjR 19ASPIN0 *0" - 1' *M

Table 3.4 oidewe Grow"h at of Zwticit VW eistetrsIn percent).

,........................ O.............. ......... .0 .......................

190 198? 19U 1989 1990 1991 1992...................... ................................................

Not Material Proauet *1.2 1.9 0.7 3.3 15.9 142.1 1204.6

By 1nXAtrial Orgivn:

Agriul¢ture 1' 1.0 0.S 3.2 13.1 48.0 176.1 999.6lttmr / a2.r 4.? -1.2 -$.I -6.1 1^4.7 12t2.r

Transport & Ciunicetihz 0.5 0.0 0.0 5.0 $0.1 8.oTreds -0.5 -2.2 *9.2 4.1 -5.9 149.3Other Ntrel services 21.3 26.7 41.9 16.5 76.6 *24.0

by lmpe#iture Category

Cowwpttou -0.5 -0.2 1.3 2.2 10.4 9LS6PIf'wte tnien -0.4 .0.2 1.4 2.3 11.2 112.0

ewrtuumcc simtin -1.3 03 0.2 1.6 4.7 11.0n _esawt (acemletlon) .21.1 -0.6 114 7.8 17.5 86.8Fied apitatl -11.7T 13 S.5 6.2 14.0 106.6Oer 3S.9 -14.? 35.4 9.4 24.0 67.6

............................................. .............

no" o t of ist.1nIiSiis *wsstry.2/ Includes cmwtrustie.

)~~~~~~~~~i

UK* 2.5 * Wotdat Grow Otut at CuPront Price(in mitlim of rubles).. **.**...... .... e ....... ............

1960 1961 193 193 198 1935 196f 197 19 1909 1990 1991 191...................... ................ ......... ........**S** *_ t* .... l *

6orw output 13920 1434 16? 179 13371 1723 173 1ST 148 20134 229 4U2 "$0Ostarll Iron $010 181 9451 10290 10673 1044 1076 1O93 1127 11u 1316 237m

Not Produt 5910 6140 7104 753 769 6537 699 7190 M6 nt 94 1653

-ree ouput 8165 8ft0 978 1016 1051 1061 105 102 1085 113 1169 2600 MUterial tout W1 573 6 7401 7589 7 741 76 90 M6 9O 17892

1t1 Pr t 250 232 29M 3015 295 50 W 25 21 26 M1 35 7

ropen Outp 3135 327 M93 6653 4512 4167 4630 6470 6633 f 52 6 49 11337 11101Mat*eal IwVt 1417 151 1422 1154 17 2013 190.I 1a" 1W 17 2161 3514ftt Prodst *I1 115 509 2699 V76 2154 V7O9 241 27S0 3311 395 79=

anstructionGre" at 4*A 1033 105 113 11 1s1 1442 15t2 19 1429 1730 In$ 253 3411Matere finput 649 8 65? 7 9 M 9 "9 94 934 VA 120Nat Product Z43 642 46 491 53 577 609 45 67 36 81 12M

Trasport uui Commisationare" am""t 34 36 39 405 409 473 50 47 PA s 72 129

aterifat iqt, 161 161 196 201 19r 256 2O 52 2 258 310 S:met PrAout 163 16 195 204 205 217 231 221 292 317 452 7

etaift Trade OM cateringtross Output 360 380 39 397 417 422 441 47n sz usa "a 1

amrtsilhipu 4a 72 7 a a5 92 97 110 12 125 la 2NotProduc 2 306 31 31 32 330 304 361 403 43 499 95

*mlost* _m¢p. Tradare" output 40 41 0 Ts 76 19 St 8 a 3 at 645Mmte ialtupat 7 6 10 IS I0 12 1s n l 14 17 TONot Prseat 53 53 55 61 6 6 0 4 44 79 7 15n

ross oupt 116 112 116 123 125 132 147 11 13 179 57 40fte1riatlep 31 24 32 33 34 42 36 34 21 43 48 74OR "*At 8a 86 90 91 90 111 8 92 13 209

Forai" n Tadro0 Ait 5 4151 M 73 6 304 "I 199 146 164 36 w

54 46 1 79 75n 756 304 2M0 199 146 14 94

ron"outpa 9 8 6 6 12 12 12 13 14 13 22Neterteltrout 2 2 3 3-- 3 4 4 4 5 5 4 9

et Prodm, 7 6 5 5 5 8 6 a a 9 9 13

an"sOUpt 4 46 47 51 47 n 7I 79 11 141 17750-trfat 14 15 15 15 16 9 29 45 a 97 1........ *. ........... .... . ... . .... ............ .# ...... .. .......NatProut 30l 31tt 32t 36 31 6 9 5 6 79 80 1

.~~~~~~~~~.Seiou Th tt aprm fSttsis

O . ,.~~~~~~~2

L" 1.,0 1.490 1,lU 1,741 2.00" 2.00 2,0" 2,2:i 2,.3 t. 2.400 2,47 3, G:

VAN" W~ I.M I.M 1,0"X0 1.M5 S.4?* I,M 1,30 1.4V *.W LM 1,." 2,0 2,

MetR_A 2/ 2 14 14 a 40 AS 9 2 3

rean 2. 2 2 a 2 a 1 2 2 2t

<>_ X~~~~~~i Vx VJO vlk us 1a m m : 2711 2" 2w 4

WOLM BOA 3011 4gs 43 6> 3 U4 in an X,2 an m M

Sam =1 = 20 320 AUl 437 "2 4V 45 IM= lt m 19e m :1 2101 33 AM MG AS 3|0 SP 1

MON4 bo S J4 me733 73 .1 n. n.4 w^ esa o a s ", Z4.4 t~~~~~~. 2L1. Z .3 2 2f IL7 0.0 1.3 21 3.0 L 2.1 .4

-er2t ~~~~~0.0 0.0 0.0 0.0 0.0 0.1 Q.t 3.0. W. US0 2.3 14 "1-omm U 3s.6 S* W* =4 3L 32.7 2.0 3" 3L 2" 3 LSA

"maw ~~~~~~~~0.0 0.1 0.1 0.2 0.1 O.t 0.1 0.2 0.0 0.1 0.1 0.1 A0,~~~~~cnrl -- 7 2. . 3.4 34 2.4 Wt U. LS LO UX LI Ut 2a

-b 29.3 M.* I0. 11. LS 9.1 Lb 0.0 &S U 0.6 4. M

-Fdal _W 3L1. VA. :1K 2L 2LO O 3.6 V2 3L 34.S =. 3L ;I.

cd I& 33. 12 3L2.I$ I$ 14.0 4 D,9 U.3 VA M4 LO 2s.7

$=Mt aw awe OVUM" et at . .. i

Vd=to noSa N"at ,

,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 . . .

ZlltZ -A& OWN 13VA iowff at Cost&& kI0

(in 4*UAr oat 11 rA,*m)

290 15115 11 115 15 911 1157 115 19161 15213

2.433 2,5 2,63 2,12 3.035 2.2 3.050 3.331 3,450 3.06 3,60 3*m 673

SnmlL k m 1.75s 1.725 I.m 2.W 2.32. 1,674 23 2.050 243 2.322 2.30 3.Su goUM So Su MA e so 5 m 77 an I3=

ust 2V 2 1 a 21 15 a 1 n aplFiobs 1 MA 3 1W 13 g 00 m ? 13101 07

1dsmw 3 3 3 3 3 3 3 7 2 3 3 2_.Aut 65 7701 n 9 74 25 15 75 I 6 76 5 30

ao 23 5 2N2OU3225521320 Wa3V im = c

L p, 671 6 73 00m 3S O I.9W I. 1.2? 1,302 1*5 1.3 272-s m . 3sos .w us sins us m m m 70017 UIt *Od3 330 0 33 31 3W1 43 GM 32 5 8 3l2 S t

mw*h ies in pss1W)

ll**L -0.4 7.4 6. 7.4 -. 0 2.3 6.2 3.0 5.9 -0.4 4.5at ,Mdu

PAN #A -1.7 8.4 86 5.0 -7.0 -1.6 5.0 7.5 7.3 0.6 -137106ow -7.5 13.4 0.3 21 -. 5. 4.0 U.3 34.? 5* -3.3 -3L._h,taSnS2 -1.0 3.6 32.6 -30.7

AP*WAU -4.3 6.0 1. 4 -LG 4. -53 2.7 6.0 L.s 4.0Twepw 0.0 0.0 0.0 6.6 0.0 0.0 33.3 ?1A 55. 0.0 -3.3

0 Ilme" 3.5 31.3 -7.0 -ft.4 10.6 15.0 -21. 3L7 22 -12. -25.O_ 32.3 A 4.04 7.35.3-1 -2L3 0.7 14 32.5 4.9 -13

_Z1aboiaL RAM a.$ 32 2 95. .3 33* LS 9.0.6 2 . -LI 3.6 -2 -1-0_ " 5.4 5.5 7.7 10.5 7.? 233 6.0 1. -. 3 5.0 -1)a_m 0.3 0.8 1.2 6. 32.0 5.7 7. 6.3 23 -. 1 -L.0-

i.ugs TM $W. oqwm at at steiAwt.3/1dm s t* Ston" at 21.21. W. ai *Us.SuciajS aaiL ,

Tbo2.3 - Nst.weS IiAstr1et prodistion by sectortin uitflhen of 1i03 rIoIe 713/93

* ~~~~~~~~.....a....*.... ......... e... **

ALL IEDWYRM 5,647 7,413 9,167 9,2i69 9,713 9,953 10,506 10,364 9.676 6,UZI

NEAIII NOUS? 1,74 2.392 3,323 3,626 3.90 4,l35 4,36 4.591 4,073 2.55Us.t A bmm 250I 239 320 336 324 319 323 302 261 225Electricity M5 239 320 336 321 319 323 302 264 225

NsteUsjsW . ~~ ~~7 32 as 1M III 102 114 110Neohiuw 3Idtilm 59 I'M2 1.58 1,713 1,909 2,017 2.173 2.273 2,391 1.506PuApaidtaPew 20 25 27 7 28 31 27 31 soP.trdmahal 51 14 M2 253 277 319 347 360 27 161

F.restl'yNssd 131 25 32 333 3" 371 366 334 276 207Cuistvustfmn Isteftt W3 322 306 410 437 455 430 441 360 126othr 1a4 10O 130 151 195 27 32 10 32

LISST INOUS? 1,129 1,53 2.37 2,015 2,135 2,54 2,377 2,456 2,141 1,679Tatitles 419 683 84 WA8 695 1,060 1,05 1,132 1,15 S19Clooing 403 i46 72 41 72 714 33 la w 561Laothe & dim 30 0 45 41 53 46 43 46 404 29

FOS INOUTR 2,75 3,46 35 3, 42368 3,630 3,546 3.742 3.57 3,169 2,50Feed peeceesfa 2,26 2,90 3,154 2.099 2,931 2,769 2.386 2,M1 2,400 1,963NWe NWd dairy 41 52 46 71 72 77 37 90 64 33FIsh 9 14 16 19 13 19 19 s1 9 4

(AVerag VrONt Ioe in pesi m ) 1/

ALL SNOUTS 9.2 5.6 4.3 1.1 4.3 M. 56 3.6 -11.1 -29.5

NE1W SINSTi 6.3 6.6 9.1 7.6 6.0 5.A 5.1 -11.3 -3O.4he!h & amerIV L.9 2.1 5.0 -3.6 -1.5 1.3 .6.5 -12.6 .144ESea"sevil 1L.L 2.9 2.1 5.0 -3.4 -1.5 1.3 -6.5 -1I.6 -14A

bgmUurww 14.0 . 33.5 139.4 V.7 4.7 -3.1 11.3 .3Jftifene WuidIng 15.3 11.5 9.2 L.2 11.4 5. L.O 4.6 5.1 -3.10Pulp PadPeW 2.3 3.3 0.0 -3.7 10.7 -12.9 14.8 3.34 .Petroshmlal 25.9 3.9 11.0 9.5 15.2 3.3 5.7 -21.7 _40.6fols"rw'Ilod 6.8 5.0 5.0 1.3 7.3 -1.3 4.9 -23.1 -3.0aginnstutm fterisl 11.A 3 3.3 7.0 44 4.4 *5J 4. -19,6 -43.Othe -121.6 22.0 2.4 16.2 V7 40.4 37J -7?. 21A.

LuhMl UMSNOI 104 7.0 4.9 0CA 5.9 5.7 3.J 343 -0.9 -31.0Toomths 35 4.0 1.3 5.7 IL7 0.5 6.3 2. -29.6CtothIng 6.1 5.6 -44 4.2 -0.6 154 4.9 0.5 -ANJLeathe 6 skew 6.3 2.0 6.0 3.6 -7.7 1.9 -5.7 -12.4 -26.0

FMIODU SNO 7.4 4.6 2.2 54A 1.4 -3.2 5.6 2.0 -17.4 -V7.2rowd prosaslng 5.1 1.6 -3.1 1.2 -5. 3.5 1.? -14J5 -021NeM & daIry 1.6 5.1 6.4 2.5 6.6 13.0 5.1 -26.3 -49.4Ffsh 9.2 2.7 1I. -54 5.6 0.0 -5.3 -30.0 -55A

......... .*.*.............* .... *.....

Source fTe State 0epatmm of smlfIticb.I/ 197 flgowe refer to gym!* fer 1971755 1900 flaee aeV for 197-30; Omd 19Ss figres refer

to 190-U5.

Table 3.1 -Notdva Utwnc of Pa)wmts

199 1992 1993 1994(projected)

Exports 4646.0 867.8 808.7 903.0FSU 4466.0 662.6 668.7 713.SExternt 180.0 185.0 160.0 189.5

iportR 4642.5 904 ? 1027.S 1118.0FSU of whlch: 3986.8 700.0 719.1 839.2

Energy products 711.0 327.0 431.8 S57.7Exte.. t 655.7 Z04.7 308.4 278.8

Trade bolane 3.5 -36.9 -218.8 -215.0

Net Services and Transfers -2.0 1.7 -21.2

Current Account Batance 3.S -38.9 -217.1 -236.2

Capital inflows 25.0 34.0 153.1 75.3Convertible area 25.0 34.0 105.1 66.0Direct foreign Investent 25.0 17.4 30.0 36.0Medium & LT net 16.6 75.1 50.0short trnm net 0.8 0.0Contributihn to Inttl Organzation -0.8 0.0

ion-cwoertible are 46.0 -1O.7Disbursement 1/ 27.9 0.0Amortization 0.5 -10.7Interenterprise arrears 19.6 0.0

Errors and omisons 167.0 -9.1 1.8 0.0

Overall balance 195.5 -14.0 .62.2 -160.9

Cwhnge in Not Reserves C increase) -195.5 .14.0 27.2 19.5INF finmncing 0.0 50.7 32.1Gross Offtfeal Reserves -2.4 -31.6 -12.6m8 Correspndent accouts 15958 18.7 -29.6 0.0M Net Foreign Assets 6286 -2.3 -5.2 0.0Debt Conversin Cnet) 2/ 0.0 42.9 0.0

Financing Gap 0.0 0.0 35.0 141.4....................................... .............................................................. _

Sources: Noldwvn uthorities and staff estfmetes./ A ne loan to be extwdd by kusse In the sot of Ruble 35 b.

2/ Technical credit from Russia transfonmed fnto a goveremnt loan.

MA bR 2 3 - Ns.I_ lftt*ruPM4 LXt6W aW otat TrAS(siWuwOf nMn 7/2/95as

1Igo 197 19J 190 1990 19 1991

2. ForogItlb_t" 1.2 237.6 ? 3.2 270.0 3A4 331.8 10.lawor o13.2 1lt6.5 109.9 142.0 14.6 12.J 2VTraft batmu .1.0 .j 457 .lUj -14.4 *51.,7 -456.

3. twelpieot 9. 5WA .5 54.4 61M? 8U10.8 40.0

lapurts 03.6 5675. 60.4 6611.5 461.4 84"L. 94569.Tr blcm -.59 2974. .112.L -1155.1 -in? .550 .3996.

GOP 921.0 93.0 99.0 11218.0 1266.0 2460.0 226700.0

toP hmM of Sp..... eV .... 0...V...

1. Iaturrqmllow"n 43? 4.7 46. 46.8 "A. 3S5. 21.1Iupmt of Mda, 41.1 4L. 0 46.3 39.4 29.2 2.7

* TOW a wV .5 16.0Treb bat. 2.? 5.8 .1.9 40.0 6. 23 -11.6

3. Uw.IwlLupine 1.7 2.4 2.6 2 2.6 13 7.1lupine 10.4 11. 11.1 127 11 .4.9 9.1Truk bono -LT? .L9 -LS -10.3 -9.0 *3J -2.1

S. .t.tlMOWN a's4. 5?.1 S1.A 4.6 sj .Sv .lapm" 51.5 0.1 61.9 56L. 51.0 34.0 41.6Teds 1 batew o6-0 41.0 .3OA .3. 3L2 . 15 2 -5

len Ngduo ma1ritla ad IW eef ustlmrm.

TK*1 3.3 * Sdo amio4ol"tw 01ir1Wa1m of tmetwrpMis Traf a Dol0mw1 Prism

- 1_u -- t

m" 1191 "it "a i9m1 twa,*n.,*........... .... . .... .... . .... ** **... ....

(Pee' g Suar* d Teut)TOTAL T?ASE 7SO.,* 471.? 77J 74153 1 1a.0o tOs.m ItO.m

AtgudI. 71.4 171.4 46 1144"S 0.05 0.4 0.31 L.10@. 13. 59.? 1. 1.41S .S4 11. 1M

gutull. ~~~~SOL? 515.0 3161 957.0 4.55 5.59 8sit 111

bErnie ~~~~~1654 1I5. 75.8 95.1 1.it I.41 0.11Ogt. ~~~~~~0.9 Sf4 iSA 35.90 0.* 0A6 ijs% Om

Keulse.. 191" in" a 7. 2." M1 Lit S.S 1.00

5A 3Wl. 9. 23.0 0.45 0.15 0AK 041LowS. 150.l 534 IS0. 25.O 1.15 1.1 1.4 0.51L*ttuot 1. 11.6 14. 80.1 1.5 16 La .2s

Usuaste 475.? n315.? 31.8 4W5S 0o.s W5 4.5* M7.TajIkietu, 46.0 100.3 14. 8A. 0ix 0ix 0.5 0.L1

1~a~u1.tur 36.5 1.4 5Ul0 .1 178.4 0.5 m5s 011 231AUthukietrn 166.4 956.5 88.9 152 A "" Sn15 1.5 LA L12

Sweduwiegi 01wqus_ 9.8 @.5 04 0.10 0.n 3o s.3 05...

laia 3.4 * Ibtsive owephtol Otstr.lm ot. txtrullp*c t.(In sittIiw of not

~~~~.... ...... ........... . ... .. *.... ..... , ....... . ... .... o*..... ...... >*,^*

1i9n 199 as ma 1991 ma mi m.... .* .. .... .... ....** .... ........

tnfex) (rdAss) ('shes) tCiAn) (pereuttp Shaf of Tot)TOTAL ?TNAI 331.7 1l63 1206.5 t0OO.tl 10.0 1001.0 100.02 100.C

tIIUMIAL tWlN1T3S 16.2 25.0 s34 9506.9 48.91 1,.T 45.01 45.SAutria 49X.5 U.5 78L6 43.4 14.91 0.a1 6.51 3.1Fs some 6.4 2.7 53.5 32.0 1.91 O.1X 4.2 1.tOsN" 63 M13 1.6 "1. 17.41 4.51 S.4X 134itey 11.2 1482. 19.4 1419.4 3.4 0.9" 1.6 6.1Svituer d .. 137i.6 M.$

440n ~~~~10.0 0. 3.9 17. 3.01 0.011 2.1 C.,Utad K% 16. 57 6.8 54.6 4M.3 0.4" 0." 0.UUItS uts 4.? 8.4 23.0 4W.4 1.43 0.01 19.01 20.)

Cinds 8.1 490.5 53.5 31.5 3.42 M.11 4.42 0.;

.sIa 8.0 319.0 7. 31.3 2.4. 19.71 O."1 O.SIngapsew 8.0 20.9 7.1 .. 24 0.12 0."1 0.;Turky . 3 31O.9 .. 34.3

bu!.p. 12W.1 97W.7 3.7 9*.2 891 61.11 33.1% 48;_ owra 37.2 =3.3 46.1 201. 11.3 14.91. 4.01 tt.!

Casdbslvakla 9.$ 55 53.6 1t L.o 0.A% 4.4 0.Iw6St7 183 ANA 14.4 133.2 5.5 2.X 1.33 1.

8.7 o. . 1. $76.6 3.41 4.71 1.91 1.1Ruinfta 553 610. 61. 4 . 16.711 .38.1X 2.7n 33.

tin nOCm erd Cari1n 4.9 0.0 38.9 1.5X 0.01 3.x 0.'cum 4.9 L0 30.9 ,. 1.5 0.01 2.2 0.z

0 bt n/3.5 245.8 2.5 -119.9 6.3x 1.51; 15.71 5.e ., ....* * **.. .

20.9

........... .. . . .. .. . . . . . . . . ......

. Abl 335 - Nb otdoa Wt roi by ommty 4r_, 1"99

:................. ................................ _ _ ............... ,,,,,.,.,,., ...................... ,.,,,,,,,,,,,..,,,,,,,,,,,.,._ .,.,...................... . ........................................................ ,....................,., ......................... ,,........._.____._.

* * lW lW 19 t90 29 92 fU wwn~~~~~~~~~im in 1d

. . ......... .. ,....... .. . ~.. . ............. ....... ,.. ....................... *w.................... ................. .......................... .. ..................... ...... . . ..

@ N pet gpwt tslowit aqit lw*rt in gort _ot ft dw 9*t topt ft 1m fipt lpwet Id bport I_wt gow1...... ......... *__*,,........ .......................................... ,,., .... ........... ,,... . .................. ..... ,,,,,,,,,., ..................... ,,,,,,.,,,.....................

~~~~~~~~~~~~~~~~~~~~~~~-$ or t -W VD MU I SM 14M 1146 39 MY0 -M lszrn l #ur 3U' 4S

1st Ul' to ti, Af 4* 0 SU -5U14 52 so4 -W 425 4# 0 au21 -a a " -n

tor~~ ~ ~ ~ ~~~~~~~~~~~~~~~~~ ~~ ~~~~~ lpO *t . -5U a a 0 O * * O . O a 0 Q 1§e ~~~~~~~~~~~~~~~0 491 -f o o- o. o weD ' 0 as usn o tno6 0 oM *"

Int*r 1i r . t t1 26 IA tO 22 It 5 14 0 U O O Oo~~~~~~~~~~~~~~~~~~ SU t128 ' In -Im * w 129 ns ou -120 0 M4 -#* O 2614 -2614

fzel~~~~~~~~~~~~~~~~ a 0 11 0 * 10 a 0 0 0 1 .1 O 0 0 ° a a~~~~~~~~~~~~~~~.10 OZ -1211 -t In -in U b 129 -129 0 119 -1" . 0 U6 -l 0 2614 -3*4

Ot"ER ;NO (PU^T) a O .0 a I *1 a O O O O a a O

ffXlbJSitS MEA St t -42 40 3 1 -258 a 322 2M le S M 6 U6 a oIM -tnf41gn~~~~~~~ ~~ ~~ ~~ ~~~~~~ 1 O 9 9 11 -4 It 22 -11 0 3 -3 0 93 .93

le**flc~~~~~~~~~~~~~S lot 291 1 m St st -ins s 311 -gm . 2" _22 6 263 -25? a 1l49 -1t 9#WfEU WTAtt U O 158 -15 a 0 -D In _1112 "2I ff" 815 26 -2St 4s3 2t9 2s

flgn~~~~~~~~~~~~~ ~ ~~ -., o3 a1 la o 2 22 a 27 -V I I O S t 4 o t .1tntelX~~~~~~~~~~~~~~~ In t2 12S a tS -1n a tSS -t5S O ffO t5@ 3 24 -261 *ss ns 25s

canu"CS A PM0LS It9 4 6 _451 t1 Zt n -tM "St 7O n51 *210 t31 - 161*9n3 6 1126 -t?Mfie"|- O ~~~~~~~~~~~~~~~~IIt -110 0 a iZA t4t 4 ISO -10A r 92 -S5 I 60 -S

InterrqUdUc~~~~~~~~~~" so -us SS Su t9 2 m 196 SW -390 '26 SUt -37 tE 9 -M 5 t" _I"IIIE WllOtht W IS66 5"4 %3 IM -W J t061 Mtl OS Ml 616 IS 125 t 2S9 30A4 127S IM9

mftfo -_ V 17n *X D 39 " 1S4 so SO1 _M1 - _90 ar Pt VA t139 202 41 t16l"torr"a"le 93S 1359 -0S4 924 UOt -U t60 *42t -# 1504 -52* 153 11 391 2S"2 12% N t

MO Al PAMt P:M - 2S4 15 t 106 22 -156 112 2U -t* 5@ 2ZU -40 137 37S -M 24 6s3S -M2G foreln 2~~~~~~~~~~~~~~~ 3r X5 r 9 -38 3 36 -5 I t9 tX 2 aS -n o a -6

InteVblte * Ot~~~~~~~~10 2tr -11U tO 22 *110 tO9. 2 -n15 tI 5 U12 tX 350 -215 243 6V -36

Forein a U t1 2 SS *g 32 *31 1 26 -25 a 0 -S r ^7;ltot lowc 69 to -34 68 t9S -i st 19 .tr *9 aS tU6 -20 t69 -101

'~~~~~~~~~~~~~~~~li lug 16ovn tO7S -so9 1Sts u 103 U7X itS. s" -t011 in? ame u"o St2S *foreign,3 431 2400 a 5 0 _W 42 ̂ 4s 13 4 S 496 40 -31 n 7 M 4t6

r l*er X tOX4 ~~~~~~~~~1041 m 306* Mt 9 36t IUV TO tU tilS 9 thl t#Il ttO S"U tlffS St"

a _bi^toa#o

~~~~~~~~~* - *S S*tlXae S

,:* i CX°$|"

., . ,I. f"afff

* , g ,, i,, i|; * ems E

* * * I

-* * * , C, $!f;Z

*> .. a.shsaf -

.. X

* j* i I.§0 "g ~~~~~~~~~~. . e . .....................

* EW C

*~~~~~.S S ..C :

tWe 3.6 - Notda: Togt Trad in 1991, Orkdmn b Caiudites(silt ion of rubti )* -.- --.---....................... .......................................................

Intoer.epslic Trade Fo, *ign Trade Total TradeLUports Iorts Net ExPorts Inqorts Not ExWts Inprt Met

Pam4 14.0 0.0 14.0 36.0 0.0 36.0 SO.0 0.0 50.0Ot11 AND AS' 0.0 1216.0 -1218.0 0.0 0.0 0.0 0.0 1218.0 -1216.0COAL 0.0 14.0 -14.O 0.0 0.0 0.0 0.0 14.0 146.0OTHER FUL 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0FISNS NETALURtOY 6.0 263.0 -257.0 0.0 3.0 -3.0 6.0 2Z.0 aSWoNON.ftRIUS NTALI.t3 3.0 24.0 *36.O 5.0 1.0 4.0 6.0 20.0 .57.0CHEIICAL & PETROLEN 181.0 1069.0 -68.0 7.0 92.0 *65.0 18.0 1161.0 -973.0ACHIINERY A METAL iO 133.0 1136.0 3.0 21.0 160.0 -139.0 1553.0 1294.0 259.0

SAILl. & LU_R tDUSmmy 135.0 350.0 -215.0 2.0 25.0 -23.0 1.O 31.0 23S.0ULDINO MAIItALS "A.0 116.0 42.0 0.0 8.0 -6.0 6.0 124.0 -36.0

LIGHT iSTUT 141.0 1746.0 .110.0 9. 429.0 -330.0 1757.0 2197.0 440.0FOOD PEIWOCTOW 379O.0 4920 ;296.0 i33.0 89.0 44.0 29130 581.0 3U2.OOTHER IHDUSTRItS 573.0 243.0 330.0 10.0 6.0 4.0 586.0 249.0 34.0AItlCUTURI 805.0 146.0 639.0 15.8 35.S -373.0 0.6 S54.8 266.0OTHER 24.0 6.O 16.0 3.0 S.0 -2.0 27.0 13.0 14.0TOTAL 8o.0 735.o 572.0 331.8 1206.8 -675.0 8140.8 8.8 -M30.0. .. .........

Source: The Stat two of Statistica.

Tebtl I.? I t5W: Etrmy tons, 1992-94(million of US$)

................. . ......................... ..........

1992 19 194(projected)

.... ..... *...............................................

aotal Ener 1lprts 327.0 430.9 55?.?

coot 34.6 61.6 6.0Voluw ('000 tom) 206.0 2500.0 250.0Unit price (ton) 16.S 24.7 29.2

Natural Ga 31.4 115.2 219.0Votl (on cbic astors) 3435.1 3113.0 23.7Unit price (Sf'OOfs cubic mets) 9.1 37.0 78.0

Fuel v4rgy 261.1 254.1 273.0Votuo ('000 tan) 3101.7 2467.9 2221W1unit price (t/tan) 84.1 105.0 1A.1

Nesting of 137.4 115.0 122.0vo.w. ($000 taos) 1952.5 150.0 90.6Unit price (S/tan) ?04A rt 1.0

olml fuel 71.4 82.0 89.0Vwo.u ('000 tons) 699.8 600.0 40.0Unit price (S/ton) 102.0 136.7 165.7

3.iuw "44.3 49.1 53.0Volum ("000 ton) 364.6 300.0 270.0Unit price (S/ton) 121.5 1".7 195.9

otheruel fener 8.0 8.0 9.0votuw ('000 tor) 84.8 67.9 61.0unit price (S/ton) 93.8 118.0 141.0

.~~~~~~~~~~~~~~.

Souree NoWdowen authorities aNW INF staff estiastes.

.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ,

. ~ ~ ~ ~ ~ ~ ~ ~ - "

Tabie 4.1 IRt6do: "Wrt Oorn? 6adpt, 1985-91(mUlltows of u")-es)....................... ............ ...... ..... ..............

tM 196 l 1966 1989 190 19" 1992.. * *. ....... .... .........,

1. TOTAL REVENUES 2/ 2740 2732 3014 3300 356 44 603 43956

1.1. Tax Revanus 2513 2348 2686 3115 3518 2911 5525 39t22

Profit tax"s 45 76 87 7?) 757 996 166? 13056 3Incomo tax 160 162 1t 165 O 306 501Turnower ta nd

wise luttes 105 790 114 15s" 1M 1139 262 993Sales tax ad VAT 2 l 294 38 360 1t78Other .266 250 2# 26 4" 372 5 1ns

I .2. NontaJx Revne 113 6 4834

1.3. Tramfres fru th ll- -22? 3 31 1 40 43 10 0Union buget

IJ, TOtAL EXP9ITUS 2655 2660 2911 313 3S70 4106 1 9194

IJ.iI Recurrn Expiture. 2134 23 2am 3005 3554 46 6117 53214

National _obmmki 945 1373 1450 s151 189 2180 a MSocial sph 1090 1172 1300 1421 156 1 3l 2105

-Prices ist 31 31W 11 1Administration 32 31 31 3 40 110 "aLau enforcement ad d,f.' 462 350oter 62 54 42 5 13 1 T M52

31.2. Net lendng 360

11.3. Transers to the aItUMan budget 63 42 132 14 21 24 0

11.4. Capital Expitures 456

.11. GENEA CO_A KIuT 85 52 111 165 256 36 2 *471.... ...... ................. ....... C* ~ ~ **..........

Source 4inistry ot f1nfnw ad 119 staff uatimtes.1/ Actl Jan-lp 1993M; eatudc TranOaeter 1W2/ Includes tranfrer from *lltunlen budget.3/ Includes incp ta .e.

~~~~~~~~~~~~~~~~~~- - . .- U,.

tabl 4.2 - btw SttIis(mlitI.n of r*l6s)

¢Z1ttt ~ ~ tw sw twa~~~~...... ............

TtaWl rwvw 41465 4315Tot a3p6i1wS 4110 "1 913Iuptisj.ftet X5 2 *4~3

wr* of SU

*ovumsoP X35.2 X.$ 19.4Iupu~~1tu.os/E3 38.A U5.S 40.5

Swpltimteflot 2.8 0.0 -a.*1

_amu~m Itua

............................................

Smwo Nt"§totiy of U.,. Nslv.

|i ci ' i ;a 't' ',1 9V -Vm*= '

Table 5.' aolat M* etary Surey(millions of rates, We of period)

............. ......... 0 .................... .. __........ ........ .... ........

1990 1991 1992-01 1992-02 1992.03 1992-04 1993-01............................ 0............ .... ,

Net foreign as s 25 186 2?32 419 115 -69 -Z008

Foreign assets 25 16S 2n2 419 115 -906 -200m* Convertible .24 , 5 18 27 977 4360- ornwon ertible 1I 49 tk. 272 401 -163 -10046 -27?

Claim an Sperbank U.8..R. 4563 610 6610 6247 6214 963 09

Net Doetic Asss 3716 17741 239 41186 936 12916 2005

Dt1edt eredt 3941 17310 313 439 11416 1426 54a- Credit to ernea bo nrt (net) -192 756 2120 325 4369 547 60. Credt to th e-ANh 4133 S400 14797 21277 S3 .451 92975

Other Items (not) *225 431 -597 -413 -21 -130 -340

Brood Nuow 7931 17815 18152 267 4392 81o 90079........................ .......................... ........................ 0........................................................

Sources Notdovan authorlties$ IMP staff estimte.I/ Ref tle the lqat of the rw Ystm of ectoas introdued In ay 192.

Table 5.2 - oova: lalan Shet of Wationl Bin of eW0lds(miiona of notes, ensaf-period)

.. ............*.__*

1990 1W1 12-01 1992M02 1992-03 6/................... *............ .................. ..............................................................................

........Assets

1. Foreign Assets 1 148 4412 *103741.1- Conerible am4mfft 1 11.2- Noncovartibte currenies I/ 1 146 -4412 10375

2. tota Credits tos2.1- Govervunt 2/ -121 477 1394 1343 29492.2 Nnfinuoisl ptlic 1 92 613 1 71022.3- Privtes saw 0 0 0 0 0

3. itorbsccomt (#wnet) 3 12 .525 -2190 262 4249

4. Total clai on o therbnks 110 1141 5282 7411 14301

S. Other asst (net) 40 -142 -1201 951

6. Nmns4/ 3 S 22 189 296.1- ComPas 5/ 146 29156.2- p.sits 3 5 22 23 5S

......---............ -,*--.- ........ ..-.......--... -...........

i/ Reflects the impt of the ns sytem of aouns introd In Noy 1992.2/ includes resticmn, nrsAion fwW, oc and unionn govarWut accomutS.3/ Include local wrrency holdinp, lega reserves, ban Lourn ad other

Ianespmdw_mt and settl_t a" coet.4. Incltude dpocfts ad um wm oy. meo estiate for cIreny In circulation

to wmltw*.5/ Coma er Introduced on Jum 10, 1992.6/ Estimates.

S , .. ,. q,. ,Z

able 5.3 - Moldova: Deposit MoneW Sas Monetary Aceountsamtitons of ruotes, end of perioo)

, .............. , .......... ,. ........ ...... ...................

1990 1991 1M-01 1992-02 1992-03

Net foreign asets 4608 7014 7163 578 7256......... .............

Foreign at 4608 7014 7163 6578 75- ConvwrtibUe .24 14 3 1?. 336- Nriwerible 1/ 49 390 S5G 314 704of whAlon Russia 49 390 549 3314 704

Clalm on Sperbs* U.S.S.R. 4583 6610 6610 624? 6214Foreign liabilities 0 0 0 0 0

It. omtic Ases 3320 9337 9036 1S5W7 Z6916...... S....

Doestic crt 4061 8341 142 21091 43459Credit to W llt 21 -.1 33 318 1472 .619

- Crodit to the ecanebt 4132 8M 139"4 19619 4407N.nffnwiial publ1c 3863 6789 1139? 17172 31645Privet sector 269 1519 2566 244? 2

tntsrbu sceewnts (not) 3f -516 2004 -3493 -339 -1314Other asst (not) -225 -100 -1M -240 -3100

Total dosits 792 16351 1699 21#5 34172................... .. _._..........................

sources Iotdou auhorities; IMF staff estiest".1/ Reflect the tep-ct of the ne satam of ceourats Intmdeed in 1ey 1992.2/ Includ reslicmn, pwimn fund, and lotao ad union governmt .3/ Include local curreny holdings, logl r v, b* lotns d oer

corrspondent and etinnt accoues.

TabI 6.1 -. 4oldom: Agiculturet Prodution(in millions Of 196 n*bie) 7/3/93

1990 198 1986 198 1968 19(9 199 199 199...... ................. *................... ..... ..Se.... . *........

0808 AGRICULTURAL PUOSUCT0O 4,174 4,53 4,990 4,776 4,806 5,058 4,409 3,964 3.32

cRO PRODUCTIO 2.71? 2.742 3,211 2.976 2.86T 3,078 2.53 2.386 2,061Gaftie 252 206 250 240 370 413 311 384 254potatoes 75 100 86 so ST 89 56 56 5Other fodder/roo cele 236 31.0 183 237 23 243 176 20Vegaetabes 412 493 432 386 395 372 36 306 24fruits (sEctudins grape) 50u 524 61.8 74 495 44 476 401 314crame 461 251 57 485 524 484 438 ~in 395Tobago. 51 559 683 615 400 35 31. 338 234sa4arbsots 116 101 124 108 117 196 1In 116 10otwf wer 63 61 45 52 6? ?I 65 42 53other 79 107 172 22 21p 20 160 179 402

LIVESTOC PRUSJCIW 1.457 1.79 1,779 i.m0 1,919 1.99 1.872 1,57 1.261Livestock, of tihtch: 83 1,027 1.012 1.040 1.121 1.167 1,08 m 64?

cattLe 322 39? 387 69 411 402 363 26 29Piga 368 431 40 444 481 5 46? 40 294

sopaNW seats 17 23 18 n 21 3 24 16 14#Poutry 121 171 164 164 20 22 213 177 110

Mfilk 469 554 55 564 59 615 60 S13 451gmg a4 103 10? 10? I12 111 ls 108 02 78vool 24 as 23 24 26 26 26 as 22other 45 81 82 68 4a 61 49 53 63

Growth rates in PM wuit 1/

QRMas asm.tAIAL. PuaOwum 1.? 10.1 -44 0.6 5.2 -12.8 -10.1 -16.2

cmrP PIOUCICR 0.2 17.1 74 -3.0 6.6 -17.6 -6.0 1.U6Groins -4.0 21.4 -'4.0 54.2 11.6 -24.7 23.5 -35.9Potatoe 5.9 -14.0 02.6 -1.? 56.1 MA7. 0.0 5.4Other foddetr/ot crep 76 -46.2 29.5 .1.? 4.3 -27.6 14.8Vegetdabes 3.7 -12.4 .10.6 2.3 -5.8 -1.3 -16.6 -10.6Frufts (excluding grapes) 0.7 23.7 -11.4 -13.8 33.3 27.9 -15.8 -21.7Grape I*11.4 127.1 -14.9 6.0 -7.6 -9.5 .17.4 9.1Tobeuo 1.6 SU. -10.0 .35.0 -1C8 -xi -2.9 -30.8Suserbet *.2. 22.8 -121.9 83 59.0 -3.4A -4.9 -12.9Samf ower -0.A 34 -17. 31. 6.0 *11.3 -343 MAOther 643 40.7 28 3.6 -11.4 -IJ 0.6 1816*

LIVESOCK PRUTIOM 442 -0.6 1.2 6.6 3.2 -5.5 -15.7 .20.Livestock, of Mofb: 4*2 -14 2.8 7.8 4.1 -6.7 -18L7 -21.9

Comte 4.4 -24 0.5 5.7 -2. -9.7 -20.9 -20.2Piws 3.2 -2.6 5.7 8.6 7.9 -6.3 -16.8 -VA.sheep, ad toots 6.2 -21.? 22.4 4.5 9.5 4.3 -33. -12.Poultry 7.2 7.6 0.0 11.4 7.3 .3.J -16.9 -37.9

Milk 3.4 0.2 1.6 5.0 3.9 .2.4 -14.5 -12.ggs 4.2 3.9 0.0 4.7 40.9 -2.7 -3.6 -25.5Vool 0.6 -8.0 4.3 8i 0.0 0.0 -3.6 -12.0Oter 12.5 1.2 -20.7 4.6 -10. -19.7 6.2 18.9.. ….. ......... *......ffl.....…. .. …............l. ..en.... .... …

Sourc: The State oepertinf of Stotistiss.11 1985 figure ref or to evervgs gmowt 19604.

N ~ ~ ~ ~ ~ ~ ~ '~~~~~'~

able 6.2 - Iotdovs: totat Agricuttural Output d AVrage Yields;thousants of toam)

... * _ * ^ ** -v--**-***w-v-^4^**-*w**w@-~~~~~Fitst Half1985 1986 198? 1983 1989 1990 1991 1992

........ ....................................... ...................

Totat Agricultural Output 1/

Grain * oteanweight 2,317 1,994 1952 2,970 3,323 2,539 3,106 1,500Winter Wheat 782 726 712 1,02? 1,130 1,129 1,056 905

IRe 1 1 3 7 4 a 2 1Corn 1,330 90t 750 1,338 1,586 an 1,501 mBarly (winter) 232 223 205 29 327 325 346 232

(spring) 36 48 116 96 118 94 81 86oats 5 3 5 7 7 4 4 3

01(seeds 256 274 246 323 333 2m 2 203Sunftowerseed 244 253 209 269 262 252 1l9 184Soybns 12 20 3? 53 51 24 33 15

Cottn. .. .. ..

agrbeets 2,365 2.413 2,15 2,279 3,612 2,3T4 2,262 1,74Potatos 377 449 304 99 4 295 2 259Pulses 145 73 148 167 147 97 105 ?Vegtables 1,42 1,43 1,2I82 1261 1,177 g99 624

Fruit 1.653 2,424 2,114 1,9m 2,213 1.81 1,471 400Grapes 654 1,22 1.060 1,122 1,0w 940 774 92othger 999 1.202 1,074 865 1,176 901 697 602

Tobacco 133 119 78 67 66 a................. . .......................................................... . ............................

Soc: The State Ohpertmpt of Statistics.I/ Thse data refor to cbemnei*ht an my differ from g *ist.

Tab* 6.3 - .tds a Net w st rel Prat df AgrimAtur

1935 19.1 19A2 1.63 1-84 1965 19. . 19. . 9 19.. 19.. 1991........ ..... o .... ,.. v .. .... , ......... .....

A . mt prie, sittlom otf MtM

tout 1.7IM 1,n5 8,309 2.9 2,705 2,156 2.700 2.61 2.730 3,311 3.90? 7.W22Stt form Sol m 76 842 J63 65 34 7r 641 901 C5 1 741Coaptive fam 961 67n 1.157 1,401 l,601 1.157 1I4A1 1,401 1,406 1.7M 2.26 4.380Private Farm' . 522 m22 390 *5s 441 372 *53 431 40 612 716 1A69othe. .. .. . .9 . .. .. .. .. .. .. ..

P* eavow of totel 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1C0.0S ta Fam U6.7 31.? 33.0 31.2 31.9 29.0 30.9 30.3 304. 27 5.7 22WCo* tiw PM 53.t 1 &50.0 30.1 51.9 51.8 5r S. 53.3 51.5 54.3 56.0 .0PiVat Fam 16a 1. 16.9 16.9 163 174 16. 16.4 17.7 16.5 184 I1.?

At eutaat Oman Eitets of 19 nm

toutl 2.6 3.,W4 3,119 3,05 31, 2,479 307 29M 1,10 3,20M ,570 1,Ut* m7 . 49 109 93 1,01 9 951 901 920 6 6 413

cospartlve rum 1,4? 1, 1.5 1.,37 141 1.51 1,61? -I5j6 15M 1.1 1,4 1,036pritvt rem 40 43 527. 517 516 46 496 66 5 5 4 401O'°-..h. ..r .. .. ... .. .. .. .. ..

Mmml di . as 196a pl"eas in pwat

totcl - -*I. 31.9 -LO 3. -21.7 21.1 -3.4 0.5 743 194 .1L.Sta fV .0 37.4 7.o 6.1 5.9 3 -5. 2L1 -5 7 3ACo atlve Fwm .17.2 32. 14 3. 16L9 22 -8. -24 13.1 -15.0 .30.-rivate FOrm 114 81.? -.1.9 -h, -16.9 16-. -24 8.6 1LI -2t.1 .144

, ~~~~~.. .. .. = .. .. .. .. ..

ma2 th Ustat O*" et oft of St itOtla.

. .. A

IM~~~~~~~~~~~~~~~~

* . -- ~-- o -- S

. §* . 9ll t 0 |^ * l

:!: Es9C: m'$"« .;t

*X a] .. .9

I ., 9 # |§>s 0 5 ..........

* .. . k

Tabl 6.5 * Noldwas ChOwnng Structure ot AgrcutUre In 1980.. n. a S . .... .... *S......* ... ,.* ...

CoUtiw State Cter Pr1n pTotal Fe"S tam ($tt*, :

(klboos}) (sotms) coop.)........... ......... ............. ....... _........

Itud of fa*m 9 so 3 .. .aroeutput n 193 prieg 4,174 2,217 1.19 36 62(In .d1II 198# rtMes)Flad cpital 6035 3,314 2.405 30 .(in ofIt1 19o 3 MSlS)Profit 2s 15 6 ..(in oitt11 190 l)

_mr of les-mkUing form 247 20 4 .. .AS X of Ml Fmrm 25.3 34.5 11.3 *0

ProAmetiongrlu (thuAu_ toe) 2.1 1'm 9 14 Mbarn es (Utemo tamp 2,1 2.69 1 2slefluse (tbowod ttns 250 1n" 3 2Pettoes (thomw ns) 3 1a 1a .. 3flVot"ee 1,t21 64 4 3 122Meet 245 126 5 1 66RUlk 1.19 6 2 2 317

2gg (mIlions) a74 51 54 6 73

cattle (toarnis) 1,176 67? 249 36 212of thickCo 335 13m1 9 2 101

Pigs 1.971 1,215 349 22 1881,1, got 1,160 362 115 2 461Poutry 17.81 1.314 0 527 6.101

Peret of total

Umber of fam 100.0 0.1 39.9 0.0 0.0Gros utput in 1 prfces 100.0 33.1 27.8 0.9 16.3

- eapetal 100.0 35.0 3.9 5.1 0.0its 100.0 6.6 3504 0.0 0.0

Ubsr of Ios_Inwki f .. .. .. ..f..

PrdumtionGreta (tbod tow) 100.0 47.2 225 0S 9.9:uw bwft (eAsamd ton) 10o0 o 6. 1.4 0.0 0.0bafIswere Etbouand ton) 10. 75.6 25.2 0.4 0.8Flot (ouAnd tOO O 2S)Potom (thomd to) 100.0 4.2 4.2 0.0 9.valmmles 100.0 3.2 36.6 0.2 10.0Net 10O 51.4 5.7 *A 21.3

If tlk 10Q.0 57.5 24.2 0.2 16L.am illa 100.0 5., 62 0.7 31.2

Csttla (thosu.ids) 100.0 57. 21.2 3.2 16.0of uhlbs Cow 100.0 40.0 .4 0.6 31.0

PIgs 100.0 61.6 17.7 11.3 9.1She, oats 140.0 30.7 13.1 0.2 6.0Poultry 100.0 7.4 44.3 3.0 45.4

-.............. 0.......... ..... .... . ......................................... *_0*

Sorces The Stt SOprtm of Statistics.

. . \ \ . . *.

5 -R Sz--;-- --o., .,'s

table 6.6 4 ldotva Cheaing 8truCture of Atricuttur* in 1991

. ..........................

CollaStiw Stat Orthe Privtetotal pFm Form (state, Plos

(kIolboa) Uhom) oo.).* .....* .*.

N&sr of form 1.261 66 3w 1716Art" ethouss of hectar") 271S 1675 601 7 4ST

rm Output In 19 price 3,964 2,222 653 29 860(in oIltion 198 ruies)fixed capital 10,353 6,34 3,009 1,002(in oflItin 1M rubiesPofits 3,056 2,01 97 ..9.(in itllfn 198 r'iMe)Nidr of Ioa--nkigr feam 9 1 ..

As s ofll PAtIM 0.? 0.1 2.1 ..

PradatlonGain (tWAsW ton) 3,203 2,1 615 17 436sm_ beste (toun ti) 2,2U 2.23 20 5f latmer (thoud "ml 170 12O S7 2 2

Potets (thoeiW t) 291 9 2 25Veg etee V8 623 156 3 2wNet 36 155 62 2 asNilk 12M no 22 1 2nUP (millIst) 1.061 16 723 7 31Wool (tar) 2 730 252 4 Ion

Cattle (thauzn) 1,001 619 IS0 3 229of Which: Co 297 211 64 1 121

Pigs 1,755 1,1ff 211 22 325_,ep gosts 1.239 299 105 2Poltry 2371 619 11,511 1V 11,9

percent of tot

' - of fm 100.0 5.2 30. 14.0 0.0£ Output in 1983 priti 100.0 5L1I 21.5 0.7 21.7

fixed capitl- 100.0 61.3 29.1 9.? 0.oproits 100.0 6L1 31.9 0.0 0.0usr of tosmking fm .. .. .. ..

Prjdstiengrain (tt _d tUr) 100.0 66A 1.9 0.5 13.7

_ best (thousd tos) 100.0 10.9 0.2 0.0aseflar (thouad tou) 100.0 75. 21.8 1.2 1.2FteX (homad tors) .. .. .. ..Potato thsW turn) 100.0 8.6 3.1 0.7 67Avotlabes ¶00.0 63.0 15.6 0. 20.9Net 100.0 5t.0 20.4 0.? 28.0Nilk 100.0 40.2 17.6 0.1 22.1EUp (millions) 100.0 1.5 6.1 0.7 29.7

cattl (ttiousnnd) 100.0 61. ' 15.0 0.3 22.9of which: Cow 100.0 71.0 21.5 0.3 40.7

Pigs 100.0 6.2 12.0 1.3 18.5Shep, gots 100.0 23.2 8.0 0.2 66.7Poultry 100.0 2.6 48.5 0.? 48.1

. ..................... ....... *..* .........................................

Souce: The State bepetent of Sutistics.

J

Table 7.1 - Noldta Ilnthty Variatots ln the CPU, IPI ondRetstlt Price Zndieeo; (In percent)

WPI U CPS getsti0*....,...... ..... . ......

1M91 Jan 50.9 18.2 19.5Feb 7.7 12.7 12.5War 6.0 2.3 2.1Apr 38.2 44.6 46.9NaY 2.6 3.7 3.3Jui 1.8 0.7 0.?Jut 3.0 -0.7 .1.0Aug 0.3 -1.8 -2.2Sep 10.4 0.9 0.6Oct 8.9 4.3 9.1Nov 6.2 6.2 5.5Der 8.4 12.1 11.3

1992 Jan 508.8 240.1 196.3Feb 49.0 59.S 33.5Nor 8.5 14.2 9.3Apr 19.3 21.8 15.?*By 32.5 8.9 9.2Jun 6.0 5.9 6.5Jut 2.8 4.5 6.6Aug 10.5 6.7 S.7Sep 12.9 11.8 11.2Oct 22.5 19.7 18.6Nov 37.2 40.7 33.6Dec 24.6 25.8 23.0

1993 Jan 53.9 37.1Feb 33.4 28.0Nar 20.9 25.0Apr 19.9Nay 17.7Jun 19.2

...... ............ ,-*........... ................

Source: The State Department of Stat1stfos.1/ For fndustrfal products.

~~~~~~~~~~~~~~~~~~~~~~~~ ..

T4st* 7.2'- *oWews kftthly VW Indies, 1991.9

Av.we " 1 Prtz WWAV- W . map"i_wa isttwi eltI

t¢M. 1990 * 100)

1M Due 10.0 100.0 100.0 1t0.0 100.019" Jt 100.0 119.5 U.?

Fab 100.0 MA ?4mir 109.0 100.0 137.3 3.4 W.Ap 145.0 2916 51.Ow U$.~ ~~~o* M"A m.2145. .3 19.8Jt' 187.0 14.0 209. 406J 71.7Ju l4., w. 79.SAe 145.0 5.1 51.2tos 13.0 145.0 8t.3 4. U0

ftt U~~~15.0 33.9 74.6NWv 145. 35 76.8ons 111.0 145.6 MI.? 678 63.6

1992 J 417.0 4M0.0 m.s 53. 51.6Feb 550 400.0 100. 530 3. 6

09.0 400. 111.6 sk N3TW60 M5.0 1302 54I7 49

-ey 997.o S0.0 uW.? 59i.WJio 8 01114.0 150.0 153. 7J 55.6ad 114.0 0O0 1a.1 15. 53.4Ae 110 50.0 1715.6 l 4.5

Isp 13.0 450.0 3.oi4.Zt S 163.0 n50. 286 ML 37.Aisv 396,0 170.0 53W.8 19. 563ons 437.0 1700.0 $716. 117.7 45.7im amo VX0.0 . ..Fob 30 1700.0No 41" 3000.0

Sawess N.tdw euusl.s, .

'. ;t.;, ' :: ' .

Tabte 7.3 - Moldova: Aual Variations In Price Indices(in per¢ent)

......... ................. ,,.. .................

191 192........ ,,.......... . .. -.--wv..-.........

Cordmer Price IndexAvwrage 91 125End of period 151 2198

Retail Price IndexAvorago 95 615En of period 162 1321

Wholoesale Price IndXAverage 150 261End of period 2X 432

Reel average wage 33 -42................ ....................... ......... ..... ....

Source: the State Dop.rtum of Statiatics.

43---4t

w

IBRD 24285

MOLDOVAo SELECTEDTIES

* NATIONAL CAPtTAL

W / \ YS 4w - RAVASFt ~~~~~~~~~~~ROADS

% / q INTERNATIONAtBOUNDARIES

1.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~5

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> ~ ~~~~ 0 M\ A N I A .'- (Nam

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. 2,5bkM

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q~~~~~~~~~~~~~~~~~~~~~~~~~MW 1993J W