Table of Contents Acknowledgements .......................................................................................................... 4 Executive Summary .......................................................................................................... 5 Sustaining Macroeconomic Stability ............................................................................. 14 Fostering Growth and Competitiveness ....................................................................... 20 Enhancing the Business Environment and Market Competition................................. 30 Fostering SMEs and Strengthening FDI Linkages........................................................ 34 Reforming the State-Owned Enterprises ...................................................................... 37 Promoting Digital Development ..................................................................................... 40 Enhancing Financial Sector Stability and Governance ................................................ 44 Reforming Moldova’s Justice Sector ............................................................................ 48 Increasing the Productivity and Competitiveness of Agriculture................................ 52 Safeguarding Fiscal Sustainability ................................................................................ 56 General Property Taxation and Public Property Management..................................... 60 Strengthening the Asset Declaration and Asset Recovery .......................................... 63 Addressing Energy Security and Promoting Efficiency............................................... 66 Enhancing Water Security and Service Delivery .......................................................... 70 Improving Efficiency of Road Sector Financing ........................................................... 75 Strengthening Environment Protection and Disaster Management ............................ 78 Strengthening Education Outcomes and Skills ............................................................ 82 Enhancing Labor Markets and Closing the Gender Gap.............................................. 85 Achieving a Sustainable Social Protection System ..................................................... 89 Improving the Efficiency of Health Service Delivery .................................................... 93 Figures Figure 1. Real GDP Growth, Percent ........................................................................................... 14 Figure 2. Growth Volatile and Decelerating, 2000-19, Percent ................................................ 14 Figure 3. Contributions to Growth, Percentage Points ............................................................... 15 Figure 4. Remittances, Percent of GDP ....................................................................................... 15 Figure 5. Structure of Growth by Sector, 2010-18 ...................................................................... 15 Figure 6. Total FDI inflows, 1995-2017, Percent of GDP .......................................................... 15 Figure 7. Twin Deficits and Debts, 2013-18, Percent of GDP .................................................. 16 Figure 8. Average Maturity on New External Debt Commitments, 1995-2017, Years......... 16 Figure 9. Labor Market Performance, 2009-17, Percent ........................................................... 17 Figure 10. Real Wage Growth, 2012-18, Percent....................................................................... 17 Figure 11. Employment by Sector, Percent of Total ................................................................... 18 Figure 12. Real Output per Worker, 2010-18 (ln) ....................................................................... 18 Figure 13. Total Assets of the Banking Sector, 2013-18 ........................................................... 18 Page | 2 Figure 14. Bank Nonperforming Loans, 2010-18, Percent of Total Gross Loans.................. 19 Figure 15. Recovery in Confidence, 2013-18 .............................................................................. 19 Figure 16. Growth Accounting, 1995-2016, Percent .................................................................. 20 Figure 17. Value Added per Worker in 2016, Constant 2010 US$ .......................................... 20 Figure 18. Labor Productivity 1995-2017, (Output per Worker, ln) .......................................... 20 Figure 19. PISA Scores, 2015, Age 15......................................................................................... 21 Figure 20. Reorientation of Foreign Trade, 2000 and 2017 ...................................................... 22 Figure 21. Export Structure, 2000-16 ........................................................................................... 23 Figure 22. Adjusted Market Shares Decomposed by Technology, 2006Q2-2016Q2 ........... 23 Figure 23. Export Growth Decomposition, 2006-17 ................................................................... 23 Figure 24. Export Duration and Decomposition, 2010-17 ......................................................... 23 Figure 25. Product Sophistication, log, 2010-17 ......................................................................... 23 Figure 26. Gross Capital Formation, 2010-17 Average, Percent of GDP ............................... 24 Figure 27. Logistics Performance Index, 2018 ............................................................................ 24 Figure 28. FDI Stock Per Capita, 2017, Current US$ ................................................................ 25 Figure 29. ICT and the Global Innovation Index ......................................................................... 26 Figure 30. Exports of High-Technology Products and of ICT Goods and Services, 2017 ... 26 Figure 31. Use of ICT by Firms (2015) ......................................................................................... 27 Figure 32. World Governance Indicators, 2018 .......................................................................... 27 Figure 33. Most Binding Constraints, 2009 and 2013 ................................................................ 27 Figure 34. Selected Global Competitiveness Indicators, 2017-18 ........................................... 28 Figure 35. Average Percentage Differences, Private Firms and SOEs, 2010-16 .................. 29 Figure 36. Performance of Economic Entities by Ownership, 2015......................................... 29 Tables Table 1. Moldova: Key Macroeconomic Indicators, 2014-20 .................................................... 16 Table 2. Selected ICT Indicators ................................................................................................... 27 Boxes Box 1. Free Economic Zones in Moldova .................................................................................... 25 Page | 3 Acknowledgements This report was prepared under the guidance of Satu Kahkonen (Country Director), Anna Akhalkatsi (Country Manager for Moldova) and Gallina Vincelette (Practice Manager, Macroeconomics, Trade and Investment). It is the product of a collaborative process led by Sanja Madzarevic-Sujster (Senior Country Economist) and Marcel Chistruga (Economist), with the following country team members: Aanchal Anand, Fabrice Bertholet, Elvira Broeks, Andrei Busuioc, Arcadie Capcelea, Lucia Casap, Volkan Cetinkaya, Galina Cicanci, John Bryant Collier, Seidu Dauda, Guilherme De Aguiar Falco, Sandu Ghidirim, Anatol Gobjila, Alexei Ionascu, Mariana Iootty, Olivera Jordanovic, Stela Leuca, Elena Lungu, Eva Maria Melis, Amitabha Mukherjee, Natalie Nicolaou, Cesar Niculescu, Denis Nikolaev, Koji Nishida Georgiana Pop, Laura Pop, Felicia Pricop, Siddhartha Raja, Natasha Rovo, Constantin Rusu, Susanna Smets, Julia Smolyar, Janssen Teixeira, and Vahe Vardanyan. The team also benefitted from the guidance of Faruk Khan, Feng Zhao and Baher El-Hifnawi (Program Leaders). The Policy Notes also benefitted from inputs and comments from several international and bilateral partners, among them UNDP led by Valeria Ieseanu (Assistant Resident Representative); UNFPA; WHO; UN Women; ILO; IMF, UNICEF led by Desiree Jongsma (Representative) and Margarita Tileva (Deputy Representative); the EU Delegation team led by Marco Gemmer (Head of Operations); the Embassies of the United Kingdom, Sweden, and Germany; the Swiss Cooperation Office led by Caroline Tissot (Director); and EBRD led by Angela Sax (Head). Individual contributors are duly acknowledged in sectoral notes. Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development (the World Bank) of the World Bank Group. The findings, interpretations, and conclusions expressed here do not necessarily reflect the views of the Executive Directors of the World Bank or the governments that they represent. The World Bank does not guarantee the accuracy of the data in this work. Page | 4 Executive Summary Over the last two decades, Moldova has achieved major development results: with average annual growth of 4.6 percent since 2000, poverty has decreased dramatically, and the growth has also benefitted more citizens: Inequality, as measured by the Gini Index, has declined from 36.4 in 2000 to 26.3 in 2016. Macroeconomic stability has been maintained despite the 2014 banking crisis, and monetary and the exchange rate policies have led to a declining inflation protecting the living standard of Moldova’s citizens. The country has benefitted from its unique assets, such as a strategic European location and growing global integration. The authorities’ focus on investment policy put the country on investors’ map: commitment demonstrated in investment promotion and the level of service and attention that was given to investors led to attracting manufacturing FDI. They on the other hand helped reorient exports towards more technology-intensive products and allowed for a stronger contribution of exports to growth and employment generation. Moldova has also significantly reformed its business environment, ranking today 47th of the 190 countries measured on ease of doing business. There was also effort to improve the quality of human capital. The education system reform led to improvement of student learning outcomes in Moldova, as measured by the Program for International Students Assessment (PISA), although there are still major gaps in learning outcomes that need to be addressed. The preprimary enrollment rates increased substantially, and labor force participation rate increased to historical highs, albeit at 43 percent still comparatively low. Yet, the growth model, propelled mainly by consumption and remittances, has been volatile, and unsustainable, and is losing strength. The volatility results not only from reliance of the economy on worker remittances from abroad, weather-dependent agricultural products, and foreign capital inflows, but also from its exposure to both external and internal shocks. Because remittances are declining, while capital inflows are expected to stagnate, the country needs alternative growth engines fueled by exports and investment. 1 Growth rates have already fallen short of the national aspirations (in the new National Development Strategy at 5.5 percent) and are slowly declining. Moldova’s convergence to European income levels has been disappointing. GDP per capita in 2017 at PPP US$6,803 was almost five times below the average for Europe and Central Asia (ECA). Structural challenges, especially population aging, emigration, and stagnant productivity, are holding the economy back. 2 Moldova’s volatile sources of growth have built external vulnerabilities. Despite the recent decline, gross external debt at 65 percent of GDP in 2018 remains particularly high for a lower middle-income country, and this is especially true for the private sector debt. Non- debt creating FDIs have financed two-thirds of the current account deficit over the last few years, but despite exports growth and high remittances current account deficit widened in 2018 to above 10 percent of GDP, while FDI dropped dramatically, from 12 percent of GDP in 2008 to less than 2 percent in 2018. The 2014 banking crisis, that costed the country almost 12 percent of 2014 GDP, caused a rise in public debt and a loss in investor confidence. This, along with the large state-owned companies, has depleted the fiscal space needed to upgrade much needed infrastructure, further strengthen the education outcomes, and support companies to innovate and integrate into global supply chains. Despite a positive macroeconomic outlook, there are considerable downside risks for sustainable growth in Moldova. These risks relate to: 1 World Bank. 2019. Moldova: Country Economic Memorandum (CEM)—Rekindling Economy Dynamics. World Bank: Washington, DC. 2 World Bank. 2016. Moldova: A Systematic Country Diagnostic. Page | 5 (i) Fragile fiscal situation. The 2018 tax reform and capital amnesty package (“fiscal package”) and the expected increases on the expenditure side (wage bill, social benefits and recalculation of pensions) threaten to reverse the fiscal consolidation gains of 2016-17 and put pressure on fiscal sustainability over the short term. Inefficient public spending, contingent liabilities and demographic vulnerabilities put pressure on fiscal policy in the long term. Further, debt sustainability requires reducing dependence on foreign financing, together with lengthening the average maturity of domestic debt and deepening the secondary market, which would help reduce domestic debt roll-over and interest rate risks. (ii) Still unresolved weaknesses in the financial sector. Despite strengthening of the regulatory framework after the 2014 bank fraud, the financial sector is still fragile and underdeveloped to provide important impetus to private sector growth. Further efforts are needed to strengthen financial institutions and their management and reduce interest rates through improved financial sector efficiency. Finally, despite its relatively small size, the fast growth of the non- banking financial sector calls for attention by the regulators and supervisors. (iii) Weak competitiveness. While growth prospects remain positive, with a continued, albeit slow, normalization of financial conditions, growth is projected to further moderate to 3.6 percent by 2020, lower from more than 4 percent in the past three years. Moldova trails the ECA region by about 35 percentage points in the governance indicators ranking, while both the World Economic Forum Global Competitiveness Report and the World Bank-EBRD Business Environment and Enterprise Performance Survey report issues with antimonopoly policy, contract favouritism and corruption. Exports, despite recent diversification and a larger pool of greenfield FDIs, remains small and still tilted to lower-value-added production, while productivity is low and decelerating. Moldova’s productivity is decelerating, and labor productivity is one of the lowest in Europe, which further reduced its growth potential. So far growth has been fueled by worker remittances from abroad, while capital deepening and labor contribution to growth have been declining or stagnating. Total factor productivity has been even negative. There are several reasons for this: (i) Large state footprint in the economy. The government regulates a wide range of prices and retail margins, resulting in inefficient allocation of resources and high costs. Since price ceilings may reduce quality or innovation, prevent more efficient firms from competing, and encourage abuse of market power or rent- seeking, less distortive alternatives should be considered. SOEs in Moldova are active in at least 19 out of 30 sectors where private participation is economically viable and their assets represent close to a third of GDP. Yet, they have lower production per employee, lower and declining productivity, and they are a fiscal drain. (ii) Limited pool of available labor to work and skills needed by the market. Firms complain about difficulty in finding workers with suitable skills, while the current education system still produces only 60 percent of students with basic cognitive skills despite the recent improvements. Half of the 15-year-old students do not possess basic proficiency in mathematics, and bit less in reading and science. Over half of the working age population does not even engage in the labor market: the inactivity rate in 2017 stood at 53 percent (as a percentage of total population aged 15–64). With declining demographics and emigration, increasing participation rates and labor productivity is urgent. More than 17 percent of population in the latest 2014 census was over the age of 60, and that share is rising. This adverse demographic puts pressure on pension and health spending, Page | 6 while reducing domestic savings rates. Emigration of young people is amplifying the problem: at about 30 percent of the labor force, Moldova’s emigrant population is among the largest in the world. With current trends, by 2050 Moldova will lose a fifth of its population. (iii) Despite investment promotion, low exports and a limited value added of the export basket. As a small open economy, Moldova needs to compensate for its size limits and extend its market through exports. The composition of Moldova’s goods export basket has shifted in the past decade, with machinery, vegetables, and other food increasing in importance at the expense of textiles and furniture. Yet exports remain low at 18 percent of GDP, and the trade with the EU is constrained by inability to meet EU standards. The FDI could contribute more to national development if there are more domestic spillovers and if of higher value added. Further, the Logistics Performance Index ranks Moldova behind neighbors due to infrastructure, tracking and tracing, and logistics competence: the median time an export transaction takes in Moldova is almost 12 times higher than in the EU and neighboring Romania and Ukraine. (iv) Unlevel-playing field due to governance, business environment and competition constraints. The removal of these distortions in resource allocation promise to bring high growth dividends. Easing entry into business, improving transparency, conflict of interest, procurement and competition rules, and strengthening the rule of law are necessary to attract more FDI, in particular greenfield investments, as well as encourage domestic investments that are currently low. They are particularly low for new technologies and innovation which would help economy to make a leap in competitiveness and convergence. Increasing prosperity as expected by all Moldovan citizens will require new sources of growth. The growth in remittances that fueled private consumption so far will continue to slow, so growth and jobs need to come from private sector investments and exports that would boost productivity. Government has an important role to play to enable the new growth model: (i) It needs to unlock the assets held by vast number of loss-making, low-productive state-owned companies, and strengthen the competition policy at home to allow private sector firms to compete and grow. Business environment and the rule of law need to be further strengthened, and access to foreign markets through connectivity and trade policy ensured to boost exports. No small economy has reached the higher income status without exporting more and compensating for its market size. Agriculture, still a large employer in the country and a fiscal drain, needs to increase its efficiency and exports. (ii) It needs to safeguard macroeconomic and fiscal stability and continue strengthening the fragile financial sector. Increasing efficiency of public spending while mobilizing and broadening the tax base would help with keeping debt low. Efficiency improvements in sectors like transport, water and energy are urgent to increase the quality of service, modernize the sectors and their management, and ensure efficient use of limited budgetary resources and water endowments. This is particularly critical in the country of high vulnerability to climate change, where the present cost of inaction on climate adaptation is estimated at 6.5 percent of GDP. (iii) Further investments and efficiency improvements are needed to ensure social service and education are delivered in high quality to all citizens. Despite progress more efforts are required to further optimize the school network, increase access to preschools and improve the quality of primary and secondary education. Bringing women, idle youth and adults into jobs, encouraging more internal Page | 7 migration and professional mobility of workers, would help increase labor contribution to growth. Policy and delivery system improvements should continue to reduce fragmentation and strengthen targeting of the social assistance benefits, while inefficiencies observed in the hospital and specialized out-patient care need to be addressed given increased demand for care to chronic and aging patients. Widening external and fiscal imbalances are risks to Financial sector is stabilized, but still fragile and sustainability underdeveloped. 80 4 70 2 60 0 50 -2 40 -4 30 -6 20 -8 10 -10 0 -12 2014 2015 2016 2017 2018 External Debt Public debt Fiscal balance Current Account Balance Source: World Bank Governance Indicators Source: World Bank Governance Indicators Low gross capital formation is partly due to… …a large presence of poor performing SOEs. Gross capital formation, 2010-17, Percent of GDP Average percentage differences, private and state- owned firms, 2010-16 Source: World Bank staff calculation Source: UNCTAD Moldova trails its peers on governance, control of …while easing entry, improving competition rules, and corruption and the rule of law… strengthening the rule of law are necessary to attract more FDI. FDI Stock Per Capita, 2017, Current US$ Source: World Bank Governance Indicators Source: UNCTAD Moldova’s citizens aspire to rising income levels and convergence of incomes with the middle- and high-income countries. To achieve this, future governments are thus confronted with two pressing overarching challenges: sustaining stability and reviving growth. This requires a three-pronged strategy: (i) boosting productivity and private sector growth; (ii) increasing sustainability and improving resource management; (iii) strengthening Page | 8 human capital and social inclusion. The rationale is clear: there is still close to 15 percent of population living under the middle-income country poverty line (US$5.5 at PPP), which motivates many young Moldovans to seek their future abroad. While the country recovered from the 2014 bank fraud, the cost of this policy failure crowded out public resources that could have been used to improve the living standard of its citizens, people endowments as well upgrade the country’s infrastructure. Institutions and judiciary need to regain the trust of citizens and businesses through enshrining the rule of law, a zero tolerance to corruption, and focus on strengthening sustainability and reviving growth. The summary of policy priorities below could serve as a guidance on sequencing and policies needed across the three-pronged strategy. Three-Pronged Strategy to Sustain Stability and Revive Growth •Fiscal Policy Productivity and •Property Taxation and Management Private Sector Growth •Education •Asset Declaration and Recovery •Labor Market •Energy Sector •Business Environment •Social Protection •Water Sector •SMEs and FDI Linkages •Health •Road Sector •SOEs •Environment and Disaster •Digital Connectivity Management •Financial Sector •Justice Sector Human Capital and Sustainability and •Agriculture Social Inclusion Resource Management Summary of Key Policy Priorities SHORT TERM (1 year) MEDIUM TERM (1-3 years) Productivity and Private Sector Growth Business Environment • Revisit price control policies based on in-depth • Cut top tariffs and eliminate price controls. market assessments to identify the root causes of • Obtain EU market opening for Moldovan products of unusually high prices in Moldova. animal origin, by passing laws that allow incineration • Advance the implementation of digital tools for of animal waste, by accreditation of national businesses, including online business registration, laboratories and by streamlining customs logistics and online depository of business financial statements, valuation. and online issuance of permits and licenses. • Intensify efforts to reduce corruption in government • Upgrade the state aid registry and make it public. services and procurement, by digitizing services and underlying registries, and by adopting transparent procurement mechanisms. SMEs and FDI Linkages • Promote upgrading of firm productivity by stimulating • Improve access to electricity, water, innovation, and exports rather than supporting telecommunications, and transport networks and re- traditional business models. balance labor market legislation to allow for supportive • Support the entry of firms into global markets with input systems. programs on export readiness and improving export • Encourage technology and knowledge spillovers from standards. FDI by promoting FDI in upstream sectors, stimulating • Actively involve Investment Agency in FDI promotion investment in research & development, encouraging and develop investor aftercare services to promote the interaction of foreign and domestic firms, and FDI. implementing supplier development programs. Page | 9 Summary of Key Policy Priorities SHORT TERM (1 year) MEDIUM TERM (1-3 years) State-Owned Enterprises • Define for each enterprise and state dominated sub- • Accelerate the divestiture, restructuring or liquidation sector an explicit ownership rationale and objective of SOEs. and adopt the timebound plan for reform of SOEs. • Build institutional capacity of ownership agency to • For each SOE publish audited financial statements, enable fulfilling new functions of central SOE performance results, and evaluations to promote the ownership. accountability of SOE boards and management. • Professionalize the SOEs’ boards, and track SOEs • Strengthen SOEs corporate governance. performance. Digital Development • Implement the infrastructure sharing law, through • Implement specific programs to train un- or definition and enforcement of associated regulations. underemployed people and boost digital skills. • Increase competitive pressures on the market • Promote rural broadband connectivity in ‘white zones’. through regulatory actions. • Support digitization of SMEs through targeted • Consider restructuring of Moldtelecom, including its programs in partnership with Moldova’s IT industry. privatization. Financial Sector Stability and Governance • Ensure MICB exit special supervision and new • Increase coverage of the deposit guarantee fund and shareholders in Fincombank and Energbank are fit strengthen the capacity of DGF. and proper. • Strengthen the financial infrastructure through reforms • Address weaknesses in the insurance sector by in corporate insolvency, developing a personal enforcing existing regulations and enhancing insolvency law, upgrading the collateral registry, and regulatory, supervisory and legal framework. strengthening the credit information sharing system • Step up asset recovery efforts, in particular in foreign and financial services consumer protection. jurisdictions and prioritize the monitoring and • Consolidate the Savings and Credit Associations supervision of the implementation of AML/CFT (SCA) sector and establish deposit protection for SCA measures related to the voluntary declaration members. process. Justice Sector • Adopt a medium-term plan to improve enforcement • Define the requirements for an integrated enterprise- of judicial decisions, and a prosecution service level resource management system, i.e. HRMIS and reform. FMIS. • Review the current plan to reorganize the judicial • Address the uneven distribution of judicial services map to identify further streamlining, cost savings and and judges' workload by deploying courts' financial improved integrity. and human resources according to population and • Develop a realistic, costed and sequenced Justice projected case inflows. Sector ICT Strategy and Implementation Action Plan. • Develop and publish criteria and procedures for hiring, • Quantify the volume of arrears built up by justice promotions, awards and bonuses for judges, system and announce a time-bound action plan prosecutors and their staff, to increase internal and (agreed with MOF) to reduce/eliminate and prevent external trust in the justice system. build-up of such arrears. Agriculture • Revise the spending on subsidies, shifting the • Set-up a proper mechanism (i.e. information system) spending towards smart subsidies and smaller of evaluation and assessment of the subsidy fund producers, particularly in higher value-added spending. agriculture. • Build capacities for sustainable and productive • Implement food quality and safety programs that aim agricultural practices, including climate adaptation to reach international standards. measures. • Promote professional education and agricultural extension services to improve access to knowledge. Sustainability and Resource Management Fiscal Policy • Rationalize tax expenditures and state aid. • Streamline direct taxes and boost indirect taxes. • Report publicly contingent liabilities from SOEs and • Improve efficiency of social spending and improve take actions to reduce those risks. public investment management. • Apply fiscal rules more effectively and prudently. • Develop domestic capital market and deepen the secondary market. Property Taxation and Public Property Management • Improve collection and enforcement of property tax • Improve state land management by registering and revenues. creating an inventory of publicly-owned properties, Page | 10 Summary of Key Policy Priorities SHORT TERM (1 year) MEDIUM TERM (1-3 years) • Update property valuations and link revised resolving disputes, and building capacity to manage valuations to property taxation. public land. • Enable mobile/mCloud payments to lower the costs • Improve coverage and review property tax rates and of property tax collection. tax relief to broaden the tax base. • Introduce valuation of publicly-owned land and property and use the valuations to determine the optimal use of such assets. Asset Declaration and Recovery System • Verify asset and interest declarations in a timely and • Fully implement the new legal framework on asset credible manner. declaration to prevent and fight against corruption. • Issue guidelines for declarants on the beneficial • Devote efforts to tracing the proceeds of crime linked ownership of assets which should be reflected in the to the banking fraud in foreign jurisdictions, leveraging asset and interest declarations. all available international cooperation avenues. • Increase openness of the e-Integrity system by making available for the public use the machine- readable data from asset and interest declarations. Energy Sector • Align energy regulation to best European practices, • Diversify electricity supply through renewable energy including adequate methodologies to recover large and interconnection with the European electricity grid investments. also to establish a transparent and competitive • Mobilize funding in modernizing heat and power electricity market in Moldova. generation of District Heating, which is at the end of • Increase the share of renewable generation through a its operational life and needs urgent modernization. robust competitive bidding process in a manner • Complete the ongoing Energy Efficiency Options consistent with grid stability and tariff affordability. Study to identify the financing instruments to improve • Diversify gas supply by finalizing Ungheni and energy efficiency. Chisinau pipeline and creating a level playing field for different sources of gas. Water Sector • Analyze Moldova’s water security risks under • Strengthen water management agency, including different scenarios to prioritize interventions, policies information management, enforcement of regulations, and investments and better understand trade-offs. and planning functions, and enhance inter-agency • Develop a national water and sanitation investment coordination to optimize benefits from different water plan and financing framework with increased uses. efficiency and cost recovery. • Secure a multiyear investment budget for water and • Identify priority areas for irrigation & drainage sanitation that targets lagging rural areas, prioritizes investment to expand high-value irrigated agriculture high-impact wastewater polluters, and improves with export focus; modernize irrigation institutions coherence and accountability for existing funds. and improve financial position of the sector to reduce • Implement priority measures in river-basin flood and fiscal burden. drought management plans, restore watersheds and environmental flows, improve dam safety and introduce risk management tools. Road Sector • Prepare necessary amendments to the legal • Modernize maintenance practices by introducing the framework to ensure any new investment in the mid-term and performance-based maintenance sector is accompanied by adequate maintenance contracts while the current maintenance activities are funds. limited to one-year contracts. • Undertake rigorous prioritization of investments in • Enable the Road Fund allocation based on long-term the sector considering the significant existing IFI- maintenance planning. financed contracts. Environment and Disaster Management • Harmonize environmental legislation and regulatory • Make the Environmental Agency fully functional and framework in line with the Association Agreement create the agency responsible for the management of and the Chapter Technical Barriers to Trade of the chemical substances. DCFTA. • Implement the Forest Institutional Reform Strategy • Develop an action plan for expanding protected and a long-term program on forest regeneration and areas which would also include institutional capacity rehabilitation. building for their management. • Strengthen natural disasters preparedness and • Operationalize the EPR scheme for hazardous, response. plastic and medical waste. Page | 11 Summary of Key Policy Priorities SHORT TERM (1 year) MEDIUM TERM (1-3 years) Human Capital and Social Inclusion Education • Optimize the school network to improve funding • Increase access to preschool education in rural areas efficiency. and for disadvantaged children. • Improve the internal and external quality assurance • Improve the learning outcomes of students in primary mechanisms, including professional accreditation of and secondary education and improve teacher vocational and higher education programs. training and adapt teaching methods to provide • Include performance indicators in vocational schools students with relevant life- and job-skills. and university financing mechanisms. • Increase the labor market relevance of higher and • Develop a national lifelong learning strategy and vocational education and training by improving promote continuous learning. curriculum and involving employers in the occupational profiles and qualification standards review process. Labor Market • Reform the Labor Code to reduce firing and hiring • Reduce the costs and increase the benefits of rigidity and facilitate non-standard flexible working formalization through online registration of workers arrangements while ensuring social protection during and better access to credit for formal firms. unemployment. • Strengthen policies and mechanisms to motivate and • Revisit the rules of maternity and parental leave and facilitate the training providers to improve their service improve the availability of childcare services for delivery for skills formation/upgrade and foster private children under 3 years. sector’s contribution to skills formation and labor • Facilitate worker internal mobility by detaching market intermediation. benefits from location. • The National Employment Agency to implement new • Abolish the list of banned jobs and professions for set of Active Labor Market Programs, including via the women, adjust the curricula of educational operational and technology changes required for more institutions and support women entrepreneurship. efficient service delivery. Social Protection • Adjust eligibility parameters of the targeted social • Continue rationalizing category-based benefits on assistance programs in coordination with other behalf of targeted cash transfers. income support policies to prevent decline in • Invigorate introduction of a new business model and coverage and to maintain benefits adequacy. service delivery standards in the local social • Revisit the list of documents required to apply for assistance departments, including through a targeted benefits and expand set of active labor functional National Social Assistance Agency, and market programs to social assistance beneficiaries to enhance the institutional capacity and authority of the help reduce their reliance on cash transfers. Social Inspectorate. • Speed up the retirement age increase and/or revisit • Sign bilateral social protection agreements with the benefit package with a basic pension component recipient countries for Moldova`s labor migrants and complementing a smaller insurance-based pension. ensure enforcement of the agreements already • Enhance pension revenue base by revisiting signed. preferential contributions treatment of various groups • Continue transforming military pensions into a more of contributors. predictable, transparent and fiscally sound program. Health Sector • Selectively contract health care providers to optimize • Rationalize the hospital sector to increase efficiency resource use as well as increase technical efficiency and to receive higher value for money on public health of public health spending. spending. • Prioritize primary health care services, and continue • Strengthen emergency preparedness and response investments in Youth Friendly Health Services, capacities. including through fully implementing the • Promote the integration of a universal progressive performance-based financing of these services, and Home Visiting programme as part of the primary strengthen the outreach to most vulnerable groups. health care system, and establish robust services to • Strengthen and harmonize the national health address needs of children with disabilities and information and the eHealth system. mechanism for early detection of development delays. Page | 12 Policy Notes Sustaining Stability and Reviving Growth • Sustaining Macroeconomic Stability • Fostering Growth and Competitiveness Productivity and Private Sector Growth • Enhancing the Business Environment and Market Competition • Fostering Small and Medium Enterprises and Strengthening Foreign Direct Investment Linkages • Reforming the State-Owned Enterprises • Promoting Digital Development • Enhancing Financial Sector Stability and Governance • Reforming Moldova’s Justice Sector • Increasing the Productivity and Competitiveness of Agriculture Sustainability and Resource Management • Safeguarding Fiscal Sustainability • General Property Taxation and Public Property Management • Strengthening the Asset Declaration and Asset Recovery • Addressing Energy Security and Promoting Efficiency • Enhancing Water Security and Service Delivery • Improving Efficiency of the Road Sector Financing • Strengthening Environment Protection and Disaster Management Human Capital and Social Inclusion • Strengthening Education Outcomes and Skills • Enhancing Labor Markets and Closing the Gender Gap • Achieving a Sustainable Social Protection System • Improving the Efficiency of Health Service Delivery Page | 13 Sustaining Macroeconomic Stability 1. Over the last two decades, Moldova has achieved major development results: with average growth of 4.6 percent since 2000; poverty has decreased dramatically, and the poverty rate at the lower middle-income country (LMC) threshold of $3.2 a day (2011 PPP) declined from 69 percent in 2000 to just over 1 percent in 2016. Growth has also been inclusive, with income growth for the bottom 40 percent of the population outpacing the average. 3 Inequality, as measured by the Gini Index, has similarly declined from 36.4 in 2000 to 26.3 in 2016. 2. The country has benefitted from unique assets, such as a strategic location and growing integration into the international market. Yet Moldova’s convergence to European income levels has been disappointing. GDP per capita in 2017 (at PPP) was US$6,803, far below the average for Europe and Central Asia (ECA) of US$33,522. Structural challenges, especially population aging, emigration, and stagnant productivity, are holding the economy back. 3. The growth model, propelled mainly by consumption and remittances, has been unsustainable and is losing strength. The economy has not yet recovered from the 2014 banking crisis, which cost the country almost 12 percent of 2014 GDP and caused a rise in debt and a loss in investor confidence. This, along with the large state-owned companies, has eaten up the fiscal space needed to upgrade much needed infrastructure, strengthen the human development outcomes, and support companies to innovate and integrate into global supply chains. Future governments are thus confronted with two pressing overarching challenges: sustaining stability and reviving growth. This requires a three-pronged strategy: (i) boosting productivity and private sector growth; (ii) increasing sustainability and improving resource management; (iii) strengthening human capital and social inclusion. Highly Volatile and Decelerating Economic Growth 4. Since 2000 growth in Moldova was higher than the Europe and Central Asia (ECA) average of 4.4 percent but lower that the 5.9 percent average for Lower-Middle Income (LMC) countries (Figure 1). Although Moldova has so far generally performed well, its growth has been exceptionally volatile. As discussed in the Moldova Country Economic Memorandum (CEM), 4 volatility may undermine average growth by reducing returns on investment and heightening uncertainty, which discourages investors. The volatility results not only from reliance of the economy on weather-dependent agricultural products, but also from its exposure to both external and internal shocks. Nevertheless, growth rates fell short of the aspirations expressed in the Moldova National Development Strategy (NDS). 5 While real GDP increased by 4 percent in 2018, projections for the next few years are for even lower growth, making the path to convergence with average European incomes even more difficult (Figure 2). Figure 1. Real GDP Growth, Percent Figure 2. Growth Volatile and Decelerating, 2000-19, Percent Source: Moldova Statistical Office, World Bank staff calculations. 5. Consumption has been the primary driver of growth, although the contribution from gross fixed capital formation increased in the last few years (Figure 3). Despite FDIs attracted in the past, net 3 For the latest period (2011-16) the shared prosperity premium (or the difference between the growth of the bottom 40 and average growth) equaled 2.4 percentage points. 4 World Bank.2019. Moldova – CEM: Rekindling Economy Dynamics. World Bank: Washington, DC. 5 Growth aspirations were 6 percent in the Moldova 2020 National Development Strategy (NDS) and 5.5 percent in the Moldova 2030 NDS (2018). 14 exports contribution to growth remain low or even negative. Imports growth fueled by domestic demand outpaced still nascent export recovery. While EU integration helped increase exports, the country still lags its competitors. Consumption instead has been fueled by real wage growth and remittances, averaging 25 percent of GDP during 2000-17 (Figure 4) 6. Figure 3. Contributions to Growth, Percentage Points Figure 4. Remittances, Percent of GDP Note: With the GDP revision, remittances declined to 16 percent of GDP in 2017. Source: NBM, Moldova Statistical Office, World Development Indicators. 6. From the supply side, growth is mainly driven by manufacturing, trade and construction. The share of agriculture has on the other hand slightly decreased, a pattern of an early transition economy (Figure 5). The transition away from agriculture has not come without cost as job market became less inclusive: rural residents, women, the poor and youth were the most affected. 7 One of the driving forces of this transition were FDIs. Since 2000 Moldova has gradually become more open to FDI; though inflows slowed after the global crisis. Moreover, the country still lags its competitors in its ability to attract foreign investments: net FDI, as a percentage of GDP, is in fact lower than in peer countries, although higher than the LMC average (Figure 6). Figure 5. Structure of Growth by Sector, 2010-18 Figure 6. Total FDI inflows, 1995-2017, Percent of GDP Source: NBM, Moldova Statistical Office, World Development Indicators. External Imbalances Increased 7. Not only is growth losing strength, but its sources built external vulnerabilities. Despite the recent decline, mainly attributable to the strong appreciation of the nominal exchange rate amid renewed capital inflows, gross external debt at 65 percent of GDP in 2018, especially of the private sector, remains high for the lower middle-income country. Non-debt creating FDIs have financed two-thirds of the current account deficit over the last few years, but despite exports growth and high remittances current account deficit widened dramatically to above 10 percent of GDP in 2018 while FDIs remained low. 8. Important consolidation on the fiscal side took place since 2015, which reduced the risk of twin deficits (Figure 7). Consequently, public debt declined to 30 percent of GDP in 2018. Yet, relative to its 6 The GDP revision from 2010 has assessed to reduce this number by about 4 percentage points. 7 World Bank. 2016a. Moldova - Poverty Assessment 2016: A Jobs Diagnostic for Moldova. World Bank: Washington, DC. 15 level of per capita income, human development and government efficiency, Moldova’s ratio of government consumption to GDP is high. The recent policy decisions to cut tax rates, introduce fiscal amnesty, increase public sector wages and pensions have also increased fiscal imbalance by at least 1.5 percentage points of GDP a year and temporarily discontinued the access to foreign concessional budget support (see Policy Note on Safeguarding Fiscal Sustainability). The increased vigilance is needed to address recent fiscal expansion costs, improve spending efficiency and strengthen revenue collection. 9. Over the medium term, debt remains sustainable; however, the authorities need to safeguard access to capital and reduce rollover risks. Given the lack of access to the capital market, the public external debt is still mostly long term and held by multilateral and bilateral donors on concessional terms. Over the medium term, external debt is expected to decline as exports underpinned by FDIs reduce current account deficit. While maturity of external debt has declined over time, getting close to the average maturity for comparators as the country decreasingly relies on the concessional debt (Figure 8), half of private external debt is short-term, which also poses rollover risks. Figure 7. Twin Deficits and Debts, 2013-18, Percent of Figure 8. Average Maturity on New External Debt GDP Commitments, 1995-2017, Years Source: NBM, Moldova Statistical Office, World Bank staff estimates. Table 1. Moldova: Key Macroeconomic Indicators, 2014-20 2014 2015 2016 2017 2018 2019f 2020f Real GDP growth (percent) 5.0 -0.3 4.4 4.7 4.0 3.4 3.6 Composition (percentage points): Private Consumption 4.9 -2.3 2.5 4.5 3.2 2.8 3.1 Public Consumption -0.2 -0.1 0.1 0.3 0.0 0.2 0.0 Investment 2.0 -2.3 0.3 2.6 4.2 1.6 1.4 Exports 0.3 0.8 3.1 3.5 1.6 1.4 1.9 Imports (-) 2.0 -3.6 1.6 6.1 5.0 2.6 2.8 Consumer price inflation (percent, p.a.) 5.1 9.7 6.4 6.6 3.0 4.7 4.8 Public revenues (percent of GDP) 31.8 30.0 29.0 30.2 30.5 29.6 29.5 Public expenditures (percent of GDP) 33.3 31.8 30.5 30.8 31.4 32.3 31.6 Of which: Wage bill (percent of GDP) 6.9 7.2 6.8 7.0 6.8 6.6 6.5 Social benefits (percent of GDP) 10.1 10.4 11.9 12.0 12.7 12.8 12.7 Capital expenditures (percent of GDP) 7.1 5.4 3.4 3.4 3.3 3.2 3.2 Fiscal balance (percent of GDP) -1.5 -1.9 -1.6 -0.6 -0.9 -2.7 -2.1 Primary fiscal balance (percent of GDP) -1.1 -1.1 -0.4 0.5 -0.1 -1.7 -1.1 Public and publicly guaranteed debt (percent of GDP) 27.2 29.6 36.9 32.7 30.5 31.0 29.9 Of which: Domestic (percent of GDP) 7.0 6.7 14.8 13.6 13.2 12.0 13.5 External (PPG, percent of GDP) 20.2 22.9 22.1 19.1 17.3 19.0 16.4 Goods exports (percent of GDP) 19.1 19.5 19.2 19.2 17.8 .. .. Goods imports (percent of GDP) 51.1 46.9 45.0 45.7 42.1 .. .. Net services exports (percent of GDP) 1.3 1.7 2.8 3.3 0.9 .. .. 16 Trade balance (percent of GDP) -32.0 -27.4 -25.8 -26.6 -24.3 -25.0 -25.2 Remittance inflows (percent of GDP) 20.7 18.7 17.1 16.1 14.8 14.2 13.7 Current account balance (percent of GDP) -6.0 -6.0 -3.5 -5.8 -10.5 -5.4 -5.7 Net foreign direct investment inflows (percent of GDP) 3.2 2.7 1.0 1.5 1.8 1.7 1.6 External debt (percent of GDP) 67.9 78.3 76.7 72.0 64.6 64.9 65.2 Gross official reserves (months of imports) 4.2 4.3 5.9 6.2 5.6 .. .. Nominal exchange rate (MDL/US$) 14.0 18.8 19.9 18.5 16.9 .. .. Real effective exchange rate (% change) -1.2 -0.8 5.3 4.5 9.9 .. .. Real private credit growth (percent, period average) -3.6 -1.0 -4.7 -3.6 6.9 .. .. Broad money (annual percentage change) 5.1 -2.3 9.1 9.1 7.8 .. .. Nonperforming loans (percent of gross loans, end of period) 11.7 14.4 16.4 18.4 12.5 .. .. Unemployment rate (percent, period average) 3.9 4.9 4.2 4.1 3.0 .. .. Youth unemployment rate (15-24 years, percent, period average) 9.8 12.8 11.2 11.8 7.4 .. .. Labor force participation rate (percent, period average) 41.2 42.4 42.6 42.2 43.3 .. .. GDP per capita, PPP (current international $) 5,984 6,027 6,379 6,803 7,168 7,426 7,686 Poverty rate at US$5.5/day, PPP (percent of population) 18.3 16.1 16.4 16.3 14.7 13.2 12.3 Sources: Country authorities, World Bank estimates and projections. Note: Poverty rates are based on Moldova household budget survey (HBS). Limited Growth Impact on Job Creation 10. Both employment and labor force participation rates are below ECA and LMC averages. The 2017 labor force participation rate (as a percentage of total population aged 15–64) was 47 percent; the average for LMCs was 60 percent and for ECA 68 percent. The official unemployment rate is quite low, however (Figure 9). Due to the low participation rate and the low retirement age, the number of inactive adults has in fact been going up, and together with the aging process puts further pressure on the already high dependency ratio, burdening pension and health systems. Emigration and remittances also feed reluctance to participate in the labor force, as does increasing enrollment in higher education and engagement in home production. Among the bottom 10 percent in rural areas, on average remittances contribute a higher share of total income than agricultural income and pensions. 8 While net job creation remained negative for a long time since the 2008 global crisis, 9 the situation is changing over the last few years. Rising real wages (Figure 10) have exacerbated the problem, by raising unit labor cost and depressing labor demand. Still, average wage in PPP terms of the Moldovan manufacturing worker is less than a half of those in Slovenia, Poland, or the Czech Republic giving it a comparative advantage along the global supply chains. 10 Figure 9. Labor Market Performance, 2009-17, Figure 10. Real Wage Growth, 2012-18, Percent Percent 44 8 15 43 7 14 42 6 13 41 5 12 40 4 11 39 3 10 38 2 9 37 1 8 36 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 7 6 Employment to population ratio, 15+ Labor force participation rate, 15+ 5 Unemployment rate, percent of labor force - rhs 2012 2013 2014 2015 2016 2017 2018 Source: Moldova Statistical Office, World Bank staff calculations. 8 Cojocaru, A., and M. Matytsin. 2018. “Moldova Poverty and Shared Prosperity Update 201.” Other Operational Studies 30468. Washington, DC: World Bank. 9 World Bank. 2016a. Moldova - Poverty Assessment 2016: A Jobs Diagnostic for Moldova. World Bank: Washington, DC. 10 World Bank.2019. Moldova – CEM. 17 11. Over the last few years, most of the jobs created are middle-skilled in retail and service sectors. Over 42 percent of new hires in 2016 was in the group of middle-skilled workers, followed by 23 percent in the skilled and semi-skilled blue-collar workers; some 18 percent were highly-skilled workers. 11 The structure of employment has changed dramatically over the past decades (Figure 11) with agricultural sector losing one-third of the jobs. A large share moved to the service sector, although low-productivity agriculture, family-owned farms, absorbed the rest. Jobs have moved towards sectors with higher productivity (Figure 12). Moreover, both industry and service sectors have experienced higher wages and a stronger wage growth than agricultural sector which bodes well for living standard of the active labor force. Figure 11. Employment by Sector, Percent of Total Figure 12. Real Output per Worker, 2010-18 (ln) Source: Moldova Statistical Office, World Bank staff calculations. Though Financial Stability Improved, Financial Sector is Vulnerable and Underdeveloped 12. Since 2010, the National Bank of Moldova (NBM) has been allowing more exchange rate flexibility and has pursued a policy shift towards inflation targeting. This has been helping to restore the external balance and price stability and to mitigate the effects of both internal and external shocks. Its policy has also helped rebuild the buffers eroded by the banking fraud in 2013–14. 12 13. While the legal, regulatory and supervisory framework for the financial sector improved after the 2014 bank fraud, the sector is still exposed to risks in terms of integrity, governance, and financial safety net. The National Bank of Moldova (NBM) undertook significant reforms in terms of bank governance, the NBM powers, and a resolution of problem banks. Three largest banks underwent special diagnostic audits and were placed under special supervision due to suspected risks from unsound practices. Based on the audit findings, the NBM suspended large blocks of shares of these banks. Two of the banks have been acquired by strategic investors, and the NBM has authorized an investor to purchase the remaining third bank, which remains under a special supervision. Figure 13. Total Assets of the Banking Sector, 2013-18 In addition, large blocks of shareholders in two other banks have been ordered by NBM to sell their shares. It is important to ensure new bank shareholders are fit and proper. Meanwhile, progress on recovering assets from the fraud has been disappointing and integrity of the sector was set back by the launch on voluntary declaration. Furthermore, the Deposit Guarantee Fund for the banking sector has significant shortcomings including low deposit coverage and limited capacity. 14. Today banks are well-capitalized, profitable, and liquid; however, high share of Note: The financial development index database provides data on the non-performing loans remain a concern. degree of development of financial market and institutions in terms of Financial intermediation is low, and the banking depth, access and efficiency. sector is shallow relative to the size of the Source: IMF, NBM, World Bank staff calculations. 11 Rutkowski, Jan, Victoria Levin, and Ali Bargu. 2017. Missing Skills: Results of the Skills Module of the Moldovan Labor Market Forecast Survey. Washington, DC: World Bank. 12 Moldova went through a disruptive bank fraud, which cost the government about MDL12 billion (almost USD1 billion), or 12 percent of the 2014 GDP. Since it coincided with a downturn in Russia, the result was a severe macroeconomic shock and a loss in confidence in the domestic currency. 18 economy. In 2018 total bank assets amounted to around 90 percent of total financial system assets. Since the bank fraud, total system assets as a percentage of GDP have plunged (Figure 13) although domestic deposits have rebounded to a pre-fraud level. Banks have become more profitable, and the average total capital adequacy ratio is well above the 10 percent minimum, reaching 26.5 percent in January 2019. Nonperforming loans have increased due not only to the stricter classification but also because the loan portfolio has been shrinking (Figure 14). Despite the recent decline, nonperforming loans are above the average for regional comparators and LMC countries, respectively, 10 and 6 percent in 2017. The aggregate liquidity position causes concerns over potential monetary risks, and the current liquidity ratio at 55 percent remains high and increasing. To cope with abundant liquidity, in 2018 the reserve requirement was increased to a record 42.5 percent. 15. While the non-banking financial sector is small and fragmented, it poses several risks to both stability and governance. The non-bank credit organization sector is very small but has been growing rapidly, especially given the curtailed credit supply in the banking sector in the aftermath of the crisis. There are concerns over the regulatory and supervisory framework for this sector in addition to protection of consumers of Saving & Credit Associations. The insurance sector, while small, suffers from a large number of insurers at a high risk of insolvency which show signs of weak payment capacity and should be addressed through enforcing existing regulation as well as tighter regulation and supervision. 16. Financial intermediation is further hampered by inadequacies in the financial infrastructure including the insolvency framework, credit information sharing system and secured transactions. Sound insolvency and creditor/debtor regimes, credit reporting, and consumer protection, are vital for facilitating greater and more efficient access to finance as well as safeguarding financial stability. The financial infrastructure suffers from weaknesses in the insolvency legal framework (including absence of a personal insolvency framework), in the reach of the credit information system as well as implementation gaps for asset- based lending, which is predominantly used by SMEs. Figure 14. Bank Nonperforming Loans, 2010-18, Percent Figure 15. Recovery in Confidence, 2013-18 of Total Gross Loans 20 Moldova ECA Lower middle income 18 16 NPLs (%total loans) 14 12 10 8 6 4 2 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: NBM, World Bank staff calculations. 17. Though the capital market is small, since 2013 the authorities have taken major steps to build it up. To promote investor confidence, the government and the financial sector regulators should continue working to communicate the importance of capital markets and to increase transparency. Continuing problems are access to finance for both enterprises and individuals, and the ability of the financial sector to mobilize and effectively channel savings to productive investment. For example, in 2017 the number of ATMs per 100,000 adults (36.71) was far below the ECA average (70.7). However, despite Moldova’s many weaknesses, confidence in the domestic currency and in the economy, has rebounded to a pre-fraud level (Figure 15). (See Note on Enhancing Financial Sector Stability and Governance). 19 Fostering Growth and Competitiveness 18. Moldova’s growth challenge is in its declining productivity growth and stagnant Figure 16. Growth Accounting, 1995-2016, Percent contribution of labor. Increases in total factor productivity that powered growth rates between 5-6 percent in the first five years of the 2000s have fallen to about a third of their earlier levels (Figure 16). Total factor productivity has experienced a decline more pronounced decline following the 2008 and the 2014 bank fraud crisis, although its rate of growth has been decelerating since 2005. This is due to the inability of the economy to shift resources from low- productivity sectors to high productivity sectors, to shift resources within sector to higher productivity uses, and for firms to use innovation to seize new market opportunities. Although movements of workers from less to more productive firms have sustained growth, firm-level productivity has Source: NBM, Moldova Statistical Office, World Bank staff stagnated. 13 estimates. 19. Moldova’s productivity is decelerating, and labor productivity is one of the lowest in Europe (Figure 17). So far growth has been fueled by worker remittances from abroad: at about 30 percent of the labor force, Moldova’s emigrant population is among the largest in the world. Remittances are high, but their contribution is expected to stagnate: not only growth of remittances has slowed down in the last decade, but also will likely diminish further as the attachment of next-generation migrants will likely loosen. 14 Both capital deepening and labor contribution to growth have been declining or stagnating. Capital deepening is discouraged by the large footprint in the economy of state-owned enterprises (SOEs) and the relatively high cost of finance, 15 while lack of skills needed by the market as well as limited pool of available labor to work hamper growth potentials. As a small open economy, Moldova also needs to compensate for its size limits and extend its market through exports. There were major advancements in this area, but further efforts are needed to diversify exports and increase its value added. And finally, governance, business environment and competition policy need to ensure level-playing field for all market players which promise to bring a high growth dividend. Competition has failed to drive growth as more than half of the manufacturing markets are either monopolies, duopolies or oligopolies. 16 Figure 17. Value Added per Worker in 2016, Constant 2010 Figure 18. Labor Productivity 1995-2017, US$ (Output per Worker, ln) Source: Moldova Statistical Office, WDI Increasing Activity and Addressing Skills 20. The contribution of labor has been stagnant due to low labor participation and employment. Labor productivity is below ECA and peer country averages (Figure 18), although it has risen relative to its 13 World Bank. 2019. Moldova – CEM. 14 World Bank. 2016. Moldova – SCD: Path to Sustained Prosperity. World Bank: Washington, DC. 15 World Bank. 2009. Moldova – CEM. 16 World Bank. 2019. Moldova – CEM. 20 2000 level. For a small landlocked economy, higher productivity can be achieved mostly by making its labor more productive, exporting more, attracting FDI, and levelling the playing field for domestic firms. 21. With declining demographics, increasing participation rates and boosting labor productivity will be necessary to boost convergence to higher living standards and to support a new model of growth. Demographic trends are probably the most alarming for Moldova. The fertility rate has hit a historic low, as has the dependency ratio for young people. Both are below the ECA and LMC averages. The population is aging; the average dependency ratio for old people is a record-high 14.8 percent, still below the ECA average but much higher than the LMC average. Notably, the old-age dependency ratio is higher for the bottom 10 percent of the welfare distribution than for the top 60 percent and the gap has been widening, which will make it harder in the future to sustain shared prosperity. Emigration of young people is also troubling: emigration from Moldova is higher than from LMCs generally. According to World Bank population projections, if current trends continue, by 2050 Moldova will lose a fifth of its population. 22. Moldova’s employment and labor force participation rates are below ECA and LMC averages. The inactivity rate in 2017 (as a percentage of total population aged 15–64) stood at 53 percent; the average for LMCs was 40 percent and for ECA 32 percent. This directly reflects the lost labor contribution to accelerate growth in the country. Those detached from the labor market for a longer period of time reduce their employability given declining relevance of skills for the private sector. 23. Mismatches in the labor market are already present, while skills the education system develops are not encouraging. On the one hand, as the World Bank reported in 2017, 17 firms complain about difficulty in finding workers with suitable skills. On the other, workers report a lack of correspondence between education and jobs. Although results of the OECD Program for International Students Assessment (PISA), demonstrate an improvement in the learning outcomes for Moldovan students since 2009, recent data show that 40 percent of Moldovan students lack basic cognitive skills. Some, 50 percent of the 15-year-old students do not possess the basic proficiency in mathematics, along with 46 percent in reading and 42 percent in science. Across the distribution, the poorest group continues to have lower educational endowments: the share of people with university degrees in the top 60 percent is almost triple that of the poorest 40 percent— and in recent years there has been no obvious convergence in education between the two groups. Figure 19. PISA Scores, 2015, Age 15 24. The labor market is fragmented and highly gender-biased. Although the country 550 performs relatively well in terms of gender 500 equality, ranking well ahead of its comparators 450 at 26th in the Global Gender Gap Index (2016), gender inequalities persist. The wage gap is 400 still significant, with women earning 13 percent 350 less than men. Yet, a 15-year-old female 300 performs consistently better across math, 250 reading and science than its male colleague OECD Estonia Romania Moldova Moldova Moldova (Figure 19). Moreover, the labor market is female male segregated, so that women are concentrated in poorly remunerated public-sector jobs, with Math Reading Science only a minority involved in productive work. Source: OECD 25. Moldova has barriers to importing labor while close to one-third of the labor force works outside the country. According to the CBR Labour Regulation Index Dataset, 18 Moldovan labor regulation is primarily concerned with regulating dismissals and is more pro-labor than any of the four major OECD countries (France, Germany, the UK. and the USA). This contributes heavily to labor market rigidities and the shadow economy, undermining competitiveness. Nevertheless, only 13 percent of firms in the BEEPS survey regard the regulations as constraints, which suggests that the laws are not enforced and there are gaps in implementation. Increasing the Global Market Share 17 World Bank. 2017. Moldova – Assessment of firm-level skills demand and engagement in skills development. World Bank: Washington, DC. 18 CBR Labour Regulation Index, https://www.repository.cam.ac.uk/bitstream/handle/1810/256566/cbr-lri-117-countries- codebook-and-methodology.pdf?sequence=1&isAllowed=y 21 26. Moldova is a small economy that is moderately open when compared to comparable countries. Yet it has been unable to fully realize the benefits of trade by boosting productivity and economic growth. Due to high import penetration, Moldova’s trade openness, at 113 percent of GDP in 2017, is moderately high. Yet, the quality of its export basket is limited. 19 27. The trade policy seems to be pro-trade, with tariff regime being liberal. The simple average most-favored-nation applied tariff is among the world’s lowest. Given its relatively low tariffs, on the “trading across borders” Doing Business indicator, in 2018, Moldova ranked 35th among 190 economies, and it has a wide range of regional trade agreements. 20 It has also signed a number of preferential trade agreements with advanced industrial economies, including the United States, Canada, and Japan. 28. Exports towards EU countries have gained importance as Moldova becomes more integrated with Europe (Figure 20). Meanwhile, exports to the Commonwealth of Independent States (CIS) have halved. Over the last ten years, Moldova has diversified its markets considerably; in 2017 the number of export destinations rose from 48 to 67. Moldova relies far less now on markets in the CIS, shifting toward other European countries. Exports to CIS fell from 39.5 percent in 2003 to 20 percent in 2017. In recent years, almost 30 percent of all goods exported by Moldova went to Romania, now its largest trade partner. New markets, such as China, Egypt, Saudi Arabia, and Turkey, have also emerged. However, there is ample scope for further diversification and trade ties with more distant markets. Figure 20. Reorientation of Foreign Trade, 2000 and 2017 Source: NBM, World Bank staff calculations. 29. While Moldova’s average tariff is below that of the EU, its trade with the EU is constrained by its inability to meet EU standards. The lack of standards is a particular problem for agribusiness exporters. For example, black caviar is certified as acceptable to the EU, but eggs for processing are only now getting certification, and as yet eggs for consumption and meats do not comply. The apple varieties accepted in the EU are not those traditionally produced in Moldova. The country must also meet EU standards for post- harvest sorting, calibration, packaging, and storage; producers need to keep working to improve these processes. 30. Between 2006 and 2016 Moldova’s export basket experienced a quality upgrade but is still tilted toward lower-value-added production. Exports have been dominated by services (IT, transport, and tourism); agri-food products; textiles and furniture (Figure 21). Moldova has relied on food and other resource- based products to drive market penetration, which is still low. Comparing the change between 2006 and 2016 with other countries reveals Moldova’s relatively small increase in market share and its reliance on primary products and low-technology manufactures (Figure 22). 21 However, the composition of Moldova’s exports has shifted in the past decade with machinery, vegetables, and other food products increasing in importance at the expense of furniture and textile. In recent years, coaxial cables and other electric conductors were the main export product due to a handful of foreign firms investing in the country after it signed the DCFTA. 19 World Bank. 2016. Moldova Trade Study – Note 1. Analysis of Trade Competitiveness. World Bank: Washington, DC. 20 Moldova has 14 active Regional Trade Agreements (RTAs), including the Deep and Comprehensive Free Trade Area (DCFTA) with the EU, Georgia, Ukraine, and Turkey. A trade treaty with China has been announced. 21 World Bank. 2019. CEM. 22 Figure 21. Export Structure, 2000-16 Figure 22. Adjusted Market Shares Decomposed by Technology, 2006Q2-2016Q2 Source: UNCTAD Source: Measuring Export Competitiveness database. Note: Changes in adjusted market share net out the effects of the mix of products exported and new the distribution of trading partners. 31. While most of Moldova’s export growth consists of more sales of the same products to the same markets, product diversification has been growing. The increase in market destinations explains the export growth observed in recent years (Figure 23). In fact, new products accounted for 61 percent of export growth in recent years. However, Moldovan exporters do not last long (Figure 24). According to the latest Trade Study, the probability of an exporter surviving beyond the first year is less than 50 percent. Those that do survive and are integrated in the global markets tend to be the more productive firms. Figure 23. Export Growth Decomposition, 2006-17 Figure 24. Export Duration and Decomposition, 2010-17 Source: WITS. Source: WITS. 32. The sophistication of Moldova’s exports has not changed much since 2013 and is low when compared with the region. The sophistication of its Figure 25. Product Sophistication, log, 2010-17 exports has stagnated at a low point since 2013 (Figure 25). However, the quality of its top product exports has improved, especially bottled wine, apple juice, car seat parts, coaxial cables, walnuts, and spirits. 33. Dominating services exports have been transport, ICT, and travel. Between 2000 and 2010 services exports grew faster than goods exports, though the situation has since reversed. Between 2010 and 2017 services increased on average by almost 7 percent, while merchandise exports increased by 9.2 percent. Services have considerable potential to drive export growth, especially ICT, transport, and tourism. Source: WITS. 23 34. To generate jobs and heighten competitiveness, services are central. 22 For instance, Moldova’s ICT sector now employs about 22,000 workers, and net exports of computer and information services have more than doubled since 2011; in 2017 reaching 11 percent of all services exports. Still, in terms of the number of ICT goods exported, international databases count only 5, far below regional peers. In many countries, spillover effects from such sectors as financial and business services, health care, and tourism are likely to be an important driver of productivity. Although Moldova compares well with peer countries, however, to make the ICT a growth driver, the country must first address issues like skills shortages; upgrade ICT- related education; and simplify labor law. 23 35. Exports of transport services are undeveloped because of trade barriers and procedures and infrastructure inadequacies. Transport accounts for 37 percent of total services exports. Moldova’s roads and railways have been poorly maintained, with a few exceptions to accommodate changing patterns of commerce and trade. Road transportation is particularly time-consuming and deserves concerted efforts to build infrastructure and expand capacity, particularly at the border with Romania (see Road Financing Note). Railways need significant track maintenance and rehabilitation to speed access from the EU to the closest ports. With huge cargo capacity needs and two poorly-operational airports (Chisinau and Marculesti), airfreight exports are almost nonexistent compared to regional peers. Compounded by the 48 hours required for documentation, compared to less than 2 hours in EU, the median time an export transaction takes in Moldova is almost 12 times higher than in the EU and neigboring Romania and Ukraine. 36. Moldova needs to upgrade its existing obsolete infrastructure. The share of investments in Moldova’s GDP is marginally worse than in the region as a whole and trails the country’s income-group peers (Figure 26). At the same time, the Logistics Performance Index ranks Moldova behind neighbors, and its worst scores are in infrastructure, tracking and tracing, and logistics competence (Figure 27). Ukraine and Romania are far ahead of Moldova on all analyzed indicators, which makes it harder for Moldovan companies to compete. Figure 26. Gross Capital Formation, 2010-17 Figure 27. Logistics Performance Index, 2018 Average, Percent of GDP Source: UNCTAD Source: https://lpi.worldbank.org/international/scorecard/radar/254/ C/MDA/2018/C/ROM/2018 Boosting Foreign Direct Investments and Enhancing the Innovation System 37. Moldova needs to improve its investment climate and reduce the costs of doing business. Like exports, FDI usually brings with it new technologies and management innovations. Moldova must now focus on easing entry into business, fairer competition, and the rule of law if it is to attract more FDI. Currently it is far behind in attracting FDI, which can be a significant source of productivity growth by helping domestic industries to get closer to the international technology frontier. The basic premise related to FDI spillovers is that foreign firms are technologically superior and can transfer knowledge and innovations through interactions with domestic firms. Foreign ownership is generally associated with better performance in terms of productivity. 24 In Moldova, the latest Enterprise Survey revealed that about 64.6 percent of foreign firms 25 22 McKinsey Global Institute. 23 World Bank. 2019. CEM. 24 World Bank. 2019. CEM 25 Foreign firms are defined as firms with 10 percent or more foreign ownership. Using a stricter measure of foreign ownership (with 50 percent or more foreign ownership) reveals that 81 percent of foreign owned firms invested in R&D compared to 6 percent of domestic owned firms. 24 compared to 4.2 percent of domestic firms spent on research and development. A skilled workforce also helps companies to develop and adapt modern technologies to their production process. On average about 50 percent of the workforce employed in foreign companies has a university degree compared to about 28 percent among domestic companies. 38. In the last decade, FDI per capita in Figure 28. FDI Stock Per Capita, 2017, Current US$ Moldova was among the lowest in the region (Figure 28). In recent years gross FDI dropped dramatically, from 12 percent of GDP in 2008 to less than 3 percent. The banking fraud further suppressed FDI. Some investments reported as FDI may be Moldovan resources channeled back through other countries. A high share of FDI from the Netherlands and Cyprus has gone to lowering intra-company loans and equity and increasing reinvested earings. After the banking fraud, the latter is the main source of FDI in Moldova. Thanks to recent dynamic investment in Free Economic Zones (Box 1), FDI is now increasingly going to manufacturing (21.4 percent of the 2017 total, as opposed to 28.9 percent that went to financial and insurance industries and Source: UNCTAD. trade), but the stock is still modest compared to peer countries. 26 39. Greenfield investments are rare. Over the last decade, Moldova received only 85 greenfield projects—less than half the number received by the next lowest recipient, North Macedonia, and only a small fraction of the 2,264 projects in Romania, the highest comparator recipient. 27 Only lately are the majority of greenfield investments related to FEZs and associated with export diversification. According to the National Strategy for Attracting investments 2016–20, 28 investments in electrical machinery, chemicals, clothing and footwear, and technical, optical and medical equipment generate more exports than traditional sectors. Box 1. Free Economic Zones in Moldova Moldova currently has seven free economic zones that offer investors numerous benefits, such as tax incentives. The FEZs do not adhere to the existing state aid framework and according to the Association Agreement with the EU, Moldova must align all state aid schemes on Free Economic Zones until 2024. Fiscal incentives for firms resident in FEZs are to be considered as operating aid, which is in principle prohibited by the state aid framework and may distort allocation of economic resources. In addition to the FEZs, Moldova also has nine industrial parks, one international airport, and one free water port terminal that offer similar benefits. In recent years, FDI has generally been linked to FEZs. With exports from the FEZs amounting to 25 percent of all merchandise exports in 2015–17 and a five-fold increase in employment, FEZs are viewed as important gateways for technology transfer, skill upgrades, and spillovers to the economy. However, international experience has raised questions about the spillovers, productivity and competitiveness gains from FEZs. For instance, the skills needed to perform most tasks relate to less value-added stages of production and tend to be repetitive manual operations. For instance, the top 10 exports with the lowest added value in China include electronic components, telecommunication equipment, office equipment, and electronic elements and devices. (Koopman, Wang, and Wei 2008). The highest domestic value-added exports are agricultural, hemp textiles, metalworking machinery, and steel processing exports. This validates the 2016 World Bank Trade Study of Moldova that found few dynamic gains from FEZs. Nonetheless, the recent dynamism of the FEZs shows that when policies are supportive and infrastructure obstacles overcome, businesses are more productive. This is particularly important for logistics and customs procedures. Lengthy customs and import licensing procedures erode a firm’s productivity. Extending to the rest of the country effective FEZ institutions and policies, especially those related to customs and business facilitation, might foster growth Source: World Bank CEM, 2019. 40. The FDI could contribute more to Moldova’s development if there are more domestic spillovers and if of higher value added. There are low spillovers from the current pool of FDIs. Encouraging 26 World Bank Trade Study. 2016. and CEM. 2019. 27 World Bank. 2019. CEM 28 https://mei.gov.md/sites/default/files/snaipe_2016-2020_eng.pdf 25 the development of domestic suppliers, and training of workers could help linking domestic companies with investors in the zones through supply chains or sub-contracting. Encouraging business networks and clusters between the zones and the rest of the territory by developing a full range of technical and support services; developing technical and support services to encourage clustering and networking among residents of the zone and the rest of the economy could help with increasing the value added for the economy. Yet, attracting the FDIs for the downstream exports (high value-added stage of production) requires strengthening skills and the rule of law in the country. Upstreamness, that is average distance from final use, is negatively correlated to the relative financial development, skill endowment, and rule of law of the country, which is a proxy for the strength of contracting institutions. 29 41. While innovation per se is less critical for factor-driven economies, technology absorption and transfer processes may explain lagging export and FDI performance and the lack of positive externalities. The quality of human capital is a serious problem for absorbing innovation and technology (see the Education Policy Note). As a consequence, relative to the EU there is little innovation in Moldova and it produces few intangible assets. Moldova thus has one the lowest rankings in the Global Innovation Index (GII) and its share of ICT capital and its returns is the lowest except for Albania (Figure 29). As a result, Moldova exports few high-technology products and ICT goods (Figure 30). Figure 29. ICT and the Global Innovation Index Figure 30. Exports of High-Technology Products and of ICT Goods and Services, 2017 Source: Global Innovation Index. Source: WDI. 42. Long-term policy and funding neglect have rendered much of Moldova’s research infrastructure obsolete and prevented modern industry–science linkages. After peaking at 0.55 percent of GDP in 2005, by 2017 spending on R&D had dropped to 0.3 percent (Table 2). Given emigration and brain drain from Moldova, the number of researchers per million inhabitants is far below those of peer countries. The share of the population with tertiary education is relatively high but new doctorates per 1,000 population aged 25–34 years are less than 20 percent of the EU average. Moldova has difficulty in attracting and retaining foreign students and researchers; the education offered by local universities does not meet market expectations and conditions are generally unattractive. Low R&D investment keeps research infrastructure undeveloped, although some ICT networks and databases are available to researchers. 43. Production of intangible assets and exports of high-tech products is highly correlated with business investment in human resources, R&D, and ICT infrastructure. Many Moldovan businesses do not use ICT in everyday business operations. Employed persons using internet and computers on a daily basis is very low in Moldova, while the web presence of Moldovan companies is only 25 percent that of German use and 50 percent of Romanian and Ukrainian (Figure 31). Researcher density in the business sector is also the lowest in the region. Moldova has 73 researchers employed by business enterprises per million inhabitants. 30 On average, businesses are responsible for only 20 percent of all R&D spending, while in most EU countries (except Romania and Bulgaria) they average more than 40 percent. The number of Moldovan researchers is also decreasing. 44. Moldova still has a long way to go to catch up with dynamic middle-income countries in terms of translating its modest R&D effort into economic gains. In Slovenia, 32 times more technicians work in R&D than in Moldova, which helps explain the latter’s inability to develop new products and production processes. In the past ten years, Moldova has applied for only 26 patents at EPO and USPTO--the lowest number in the region. Its spending to develop entertainment and artistic originals that can be copyrighted or 29 Antras et al. (2012) 30 UNESCO Science Report – Towards 2030, file:///C:/Users/WB333070/Downloads/235406eng.pdf. 26 licensed, to design new financial services products, new architectural and engineering designs, or R&D in the social sciences and humanities is almost nonexistent. Table 2. Selected ICT Indicators Figure 31. Use of ICT by Firms (2015) Scientific R&D Industrial and Patent Trademark expenditure design technical applications applications (% of GDP) applications journal articles High income 2.5 1388927 332200 1636136 1411361.95 IBRD only n/a 1564421 791415 1525233 917780.4 Low & middle income 1.4 1556008 794610 3437693 891992.786 Middle income 0.6 1555702 793822 1481102 886566.598 Upper middle income 1.8 1480038 749872 2909919 713399.095 Euro area 2.1 106987 124290 344787 410882.8 Lower middle income 1.4 75664 43950 639016 172760.366 Moldova 0.3 155 902 4291 295.4 Source: UNCTAD. Source: UNCTAD. 45. If it is to transition to an innovation-driven economy, Moldova has no choice but to engage in fundamental reforms and to steeply increase business R&D. Moreover, businesses need stronger incentives to invest in R&D, rooted in a business-friendly environment that is conducive to a thriving market economy. That in turn will require the country to battle corruption with determination and eliminate oligarchic ownership and control structures. Strengthening Governance and Competition Policy 46. In order to advance to efficiency-driven economy, Moldova should concentrate on reducing distortions and encouraging fair competition. A well-functioning market economy with competitive markets is crucial to compete in global trade. Effective complementary policies for competition, market regulation, and investment in human capital are necessary to open up trade successfully. For that Moldova needs to address its institutions, the large presence of the state in the economy, and vested interests. 47. Moldova is not rated highly on the effectiveness of its administration (Figure 32). The World Bank governance indicators specify particular shortfalls in control of corruption, the rule of law, regulatory quality, and government effectiveness generally. Moldova trails the ECA region by about 35 percentage points in the governance indicators ranking. In both the World Economic Forum Global Competitiveness Report and the World Bank-EBRD Business Environment and Enterprise Performance Survey, 40 percent of businesses now identify corruption as their top concern (Figure 33). The Cost of Doing Business Study demonstrated that government interference in business activity has soared. Only 6 percent of companies believe that the laws treat businesses equitably—and 44 percent mention that the laws are applied selectively. Figure 32. World Governance Indicators, 2018 Figure 33. Most Binding Constraints, 2009 and 2013 Source: World Development Indicators, World Bank. Source: World Bank and EBRD, BEEPS database. 48. Underdeveloped and politicized institutions encourage unfair competition and undermine competitiveness. The regulatory power of the state is seen as being used for unfair competition. According 27 to the Global Competitiveness Index 2017–018 (GCI), Moldova scores poor on effectiveness of antimonopoly policy; a few companies dominate the internal market. It also ranks low on favoritism by government officials and lack of domestic competition (Figure 34). Among countries in the region, Moldova’s rankings on most of the GCI indicators are very low. There is clear evidence that the large presence of the state in the economy is harmful for competitiveness and productivity growth. Competitiveness suffers from (i) a large SOE sector; (ii) lack of effective state aid policy; (iii) price controls and anticompetitive restrictions; and (iv) poor enforcement of antitrust mechanisms. 31 Countries with less regulation of product markets tend to be more productive and competitive. Figure 34. Selected Global Competitiveness Indicators, 2017-18 Source: World Economic Forum. 49. The number, and impact, of SOEs in Moldova is double to triple those of neighboring countries. 32 Its SOEs are active in at least 19 sectors where private participation is economically viable; the OECD average is 14. SOEs employ 7 to 24 percent of the labor force and their assets represent 14 to 32 percent of GDP. Yet they have lower production per employee (Figure 35 and Figure 36), and slower productivity growth. Finally, between 2010 and 2016 the growth of total factor productivity (TFP) of foreign- owned firms has outpaced by 3 pp both state and municipal enterprises and domestic private firms. 50. Although markets tend to be more concentrated in small economies, Moldova is a clear outlier, and there are sectors that can be efficiently covered by private sector. According to BEEPS (2013), 47 percent of manufacturers exhibit oligopolistic behavior and another 12 percent are monopolies and duopolies. In at least half of the economic sectors in which they operate, SOEs have more than 50 percent of the market share. Most of those sectors would benefit from more private participation. For example, in addition to network industries, SOEs are engaged in wine production, motion pictures, telecommunications, tobacco, gambling, pharmaceuticals, urban passenger transportation, and food and beverage manufacturing. The majority of SOEs are loss-making and require substantial government aid. Some of the largest SOEs receive financing through loan guarantees or benefit from tax expenditures and subsidies not available to private companies, and repayment rules are lenient. SOEs can also benefit from write-offs of tax arrears and other liabilities, which allows them to keep prices artificially low, to the detriment of private firms. 51. State aid is four times larger than the EU recommends. In 2016–17, it consumed more than 4 percent of GDP, compared to averaging less than 1 percent in the EU. State aid benefits companies or sectors through exemptions, rebates, deferrals, rescheduling, or forgiveness of taxes. Horizontal and regional development aid, as a rule, does less harm to the competitive environment and is therefore more acceptable than sectoral aid. 31 World Bank. 2019. CEM. 32 World Bank. 2019. CEM. 28 Figure 35. Average Percentage Differences, Private Figure 36. Performance of Economic Entities by Firms and SOEs, 2010-16 Ownership, 2015 Source: World Bank. Source: Moldova Statistical Office. 52. State aid and investment incentives are not adequately monitored; nor are they evaluated ex- post. The ex-ante 33 and ex-post evaluation of aid is necessary to determine whether the scheme has achieved its goals and also to limit market distortions of trade and competition. For Moldova, clarifying the policy objectives of state aid and collecting detailed firm-level data would make it possible to assess whether state aid is effective and how it affects markets. Indeed, with state aid of about 1 percent of GDP going to SOEs that provide backbone services, it is imperative to ensure transparency and accountability. However, with launch of the state aid portal, reporting and monitoring are improving. It is essential to generate enough transparency to guarantee that state aid in Moldova does not distort competition. 53. There are also questions about whether price controls in trade distort free market frictions and restrictions. Given regulatory distortions and lack of competition, consumer prices of food products appear to be higher in Moldova than in OECD countries. The government regulates a wide range of prices and retail margins, resulting in inefficient allocation of resources and high government costs for sustaining the policy. About 13 products and a wide range of retail margins 34 are regulated. The government also controls margins on both prescription and nonprescription medicines. Since price ceilings may reduce quality or innovation, prevent more efficient firms from competing, and encourage abuse of market power or rent- seeking, less distortive alternatives (e.g., removal of import restrictions, anti-monopoly measures) should be considered. 54. Competitive neutrality is central to a country’s transition to the market economy and crucial for effective allocation of resources by sector and firm. Competitive neutrality implies that (i) in a given market all enterprises, whether public or private, domestic or foreign, are subject to the same rules, and that (ii) no market players receives any competitive advantages not available to all actual or potential competitors—such as government aid to SOEs because of the ownership links. Given the significant SOE footprint in the economy, giving them a competitive advantage can seriously distort the market. When numerous SOEs are active in the market, it is necessary to guarantee that they will be guided by the same incentive framework as private players. Otherwise, their competitive advantage can limit the capacity of private players to enter or expand; reduce incentives for productivity growth and job creation; and give SOEs direct or indirect benefits not available to private firms 35. 55. If Moldova wants to accelerate its convergence with the middle- and high-income countries, the three-pronged strategy is needed: to safeguard stability, revive productivity and private sector growth, and strengthen inclusive growth. The Policy Notes that follow provide a summary of policy challenges and recommendations across 18 policy areas fitting into the objectives of the three-pronged strategy of safeguarding stability, reviving productivity and private sector growth and strengthening inclusiveness of growth. 33 In addition to a significant amount of aid missing from the total officially reported for 2016, the Competition Council reviewed and authorized only 2 percent of the total reported value. 34 The sectors affected are health care and medicine, transportation and storage, agricultural and food processing, electricity, water and sanitation, gas supply, and retail sale of petroleum and tobacco. 35 OECD. 2011. Competitive Neutrality and State-Owned Enterprises. 29 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Enhancing the Business Environment and Market Competition Key Messages Moldova is making significant strives to reform its business environment, and the Doing Business ranking acknowledges these achievements. Insolvency procedures; dilatory procedures for construction permits and electricity connections–both of which are linked with new investments, need further improvements. The Cost of Doing Business survey also identifies private sector concerns: government inspections, unfair competition, skills shortages, labor regulation, and access to finance. Despite numerous free trade agreements, trade logistics are holding back the trade development, and indicative prices used for customs valuation reduce the competitiveness of domestic goods. Food safety infrastructure for products of animal origin also does not allow for export accreditation. The government procurement is being viewed as non-transparent and unattractive for financial management reasons. The government continues to interfere heavily in markets through high SOE presence, state aid, and regulation of prices and profit margins for a number of products. Moreover, these activities are apparently ineffective—prices of these products are higher in Moldova than in comparator countries. Key Actions • Revisit price control policies based on in-depth market assessments and design reforms to boost competition. Upgrade the state aid registry and make it public. • Reduce state presence in markets where there is no evidence of market failures that would require government interference. Alternatives to SOEs, such as public-private partnerships, should be explored in markets where government presence may be justified. • Develop on-line business registration. All government entities without exception should perform electronic issuance of business permits and licenses, to leverage the new electronic one-stop- shop. Government business services and registries should all be digitized, tax service in particular. Strong central monitoring of inspection reforms is necessary to ensure that incentives and institutional behavior of inspectorates are changed. • Create an online repository of businesses financial statements. • Streamline customs logistics and obtain accreditation of national laboratories for EU exports. • Cut top tariffs and eliminate restrictions on trade in services to improve the trade regime. • Intensify efforts to reduce corruption in government procurement to allow all firms open access to government contracts and promote the use of digital procurement and open contracting to increase transparency of awarding and commercially attractive conditions of public tenders. Where Moldova Stands Now process is cumbersome and prohibitive for firms. In 2017, several laws were amended to Entry, Exit, and Operations streamline the process by cutting eight steps in company liquidation. However, as yet there is no Moldova’s progress on upgrading the quality evidence of reform’s impact in practice. Its effects of its business environment has been need to be studied to identify ways to further uneven. According to the Doing Business 2019 optimize the process. report, Moldova currently ranks 47th of the 190 countries measured on ease of doing business. The Global Competitiveness Index 2017/2018 Its worst rankings are in getting construction underscores Moldova’s poor performance in permits (172nd), getting electricity (81th), competition policy, the extent of market enforcing contracts (69th) and resolving dominance, and the burden of government insolvency (68th). Over the past several years, regulation. Of the 14 ECA economies, Moldova Moldova has enacted several reforms to reduce had the lowest score in many GCI dimensions. barriers to business entry and now ranks 14th According to the Cost of Doing Business Survey, among all countries in starting a business, even between 2010 and 2017 the cost of entry and if online registration is not available yet. Firm exit operation in Moldova improved but all other however has been a chronic problem—the elements worsened. Particularly, worrying areas Moldova Policy Notes | Enhancing the Business Environment and Market Competition 30 were problems with uncertainty, unethical also raise concerns about Customs valuation of practices, access to finance, and labor market goods and the application of indicative pricing. issues. Firms reported spending more time Despite WTO requirements, the application of dealing with authorities, which had gone down to valuation method 6 is common and not properly 7.9 percent in 2016 and 2017 but rose to 10 explained to companies by Customs, making the percent in 2018. The annual Cost of Doing costs of trading less predictable. Business survey continues to report that Moldova’s trade in recent years has been businesses see inspections as designed to marked by growing trade flows with the EU, create unfair advantages for competitors. The which is now the destination for over 65 percent government has begun to reform inspection of Moldova’s exports. However, not all the bodies, reducing their number from 58 to 18 and country’s products enjoy the same export regime. adopting risk-based rules for planning and Products of animal origin cannot access EU conducting inspections, but how well the reform markets unless the country has EU accreditation, is working in practice must be monitored to make which depends on adopting measures and sure institutional behavior and incentives systems to ensure compliance with EU food change. The reform will require strong central safety standards. One such measure is passage government supervision and management. of laws that allow, e.g., incineration and co- The reform of permits and licenses has incineration of animal waste, development and significantly reduced the number of permits accreditation of laboratory testing methods, required, and an electronic one-stop-shop for disease monitoring. So far, food safety issuing permits was launched in July 2018. infrastructure and the capacity of Moldovan Building on this significant simplification and authorities to apply processes that meet EU technology breakthrough, the government now requirements are not adequate, greatly reducing needs to make sure that its institutions use the the prospects of Moldovan food businesses to system effectively by switching to electronic export to the EU. procedures and to deter duplication of processes Domestically, Moldovan companies perceive by manual by-passes. access to government procurement as being The transparency of businesses continues to non-transparent, with government contracts be an issue. There is no database, public or going to companies that are politically affiliated. private, that investors and business counterparts Moreover, lack of advances and late payments can consult to evaluate the quality of possible by the Government for such contracts make them Moldovan business partners. Although a new law unattractive from financial management on accounting and auditing mandates creation of perspective and cause firms to go into additional a public repository of financial statements, that debt and bankruptcies or increase prices to offset has not yet begun. Such a repository would these effects. This may create a situation where significantly advance business transparency, the government ends up paying higher prices facilitate commercial links, and open new than the market can provide. The government avenues for local businesses in search of foreign procurement system requires additional markets and partners. assessment to identify the ways for making it an effective tool in private sector development and Trade and Access to Markets in increasing the effectiveness of government Moldova’s trade openness (proxied by the spending. sum of exports and imports as a share of Competition and State Aid GDP) surpassed that of regional peers, but the last decade has seen trade integration Market competition continues to be a decelerate. In general, the trade regime is open: challenge for the development of the private Moldova has signed free trade agreements sector. In at least half of all sectors, SOEs (FTAs) with more than 40 countries, including control more than half of the estimated market one (DCFTA) with the EU28 member states. share. Their extensive presence underscores the Despite some progress in tidying up trade need to assess how their activity is affecting operations, however, there are still problems with market outcomes. SOEs have (i) a legal excessive border inspections, unclear and monopoly of railroad services and infrastructure, unpredictable requirements, and a high degree postal services (basic and parcel), and gambling; of staff discretion. Inefficient logistic services that (ii) a de facto monopoly on electricity raise costs and create delays and unpredictability transmission; telecoms backbone infrastructure in international trade are also a concern. and land lines; water collection, treatment, and Importers particularly complain about clearance supply; passenger port terminals, and road and release of goods in consignments by several infrastructure, and (iii) significant participation in importers consolidated into one shipment. They markets for electricity import, generation, Moldova Policy Notes | Enhancing the Business Environment and Market Competition 31 distribution, and retail; Internet services; air sector. In business entry, the missing step is transport and urban passenger services; waste making business registration available on-line. In management; and several manufacturing particular, this can facilitate registration of sectors, such as pharmaceuticals, certain foods businesses by members of the diaspora and (bread and wheat flour), beverages (wine), and foreign investors. The government should glass (bottles). continue to use its electronic one-stop-shop for permits and licenses—and make sure all its SOEs are spread through sectors already entities are issuing documents online with no served by the private sector. The Moldovan manual by-passes. Allowing on-line mechanisms government competes directly with the private to function routinely in all entities will bring huge sector even though there are no significant signs benefits in optimizing government bureaucracy, of market failures that would justify public eliminating opportunities for corruption, and investment. State competition with the private smoothing interaction between public and private sector requires special attention because of its sectors. potential negative effects on attracting investments needed to ensure sustainable Building on reform of the government inspection growth. system, authorities must ensure that it is properly implemented, and in particular that incentives Moldova provides state aid on a large scale. and institutional behavior change. Remuneration On average, for 2014–16 total Moldovan state and incentives for inspectors need to be aid constituted 4.3 percent of GDP; the European reviewed and performance indicators identified Council recommends that state aid from EU to make sure that inspectorates direct their members be less than 1 percent of GDP. State efforts to achieving the intended impacts. Central aid helps to lower the operational costs of firms, supervision of inspection system operations diminishing incentives for them to innovate, and needs to be reinforced in terms of both IT to some extent favors individual companies and systems and personnel, granting the latter specific sectors over economy-wide horizontal sufficient powers to ensure that the reforms are schemes. There is also the risk that sector- not lost or reversed. oriented aid may disrupt the efficient allocation of resources across sectors. In 2014–16, almost 22 Moldova should revisit the relationship between percent of all reported Moldovan state aid had a local and central public authorities, for business sectoral focus (versus EU 3.2 percent). Tax permitting, to make sure that efforts of the central incentives tend to be poorly targeted, without government to streamline its interactions with clear objectives, and their performance businesses are not lost, or annihilated, at the unmonitored and poorly managed, thus distorting local level. Local procedures for issuing competition. 36 construction permits need special attention to keep them aligned with new legal requirements. Price controls are another area where the Local authorities must build on central market impact effects should be carefully government IT achievements and have the assessed. The Moldovan government regulates political will to implement changes uniformly retail margins and prices in several sectors, such throughout the country. as essential foods, fuel, and pharmaceuticals; however, how the government monitors Creation of a public repository of company compliance or verifies wholesale costs is not financial statements is a priority for attracting clear. Moreover, despite the control of margins of investment and facilitating links of domestic socially important food products, Moldovans still companies with each other and with foreign pay about 53 percent more for them than partners. Besides commercial and investment comparator countries—controlling margins benefits, transparent and publicly available where there is information asymmetry between financial information will greatly benefit regulator and market players leads to inflated governance in the private sector, lowering costs to overcome the margin restrictions, and corruption. ultimately to higher final prices. Moldova should now follow up on the business How Moldova Can Enhance its liquidation reforms it has already passed. Their Business Environment impact needs to be assessed to verify how they contributed to business dynamics and what still Entry, Exit, and Operations needs to be done. The possibility of clear and Moldova should build on what recent business simple exit will help attract the investment capital climate reforms have achieved to make that Moldova so much needs. conditions more encouraging for the private 36 World Bank. 2019. Moldova – CEM. Moldova Policy Notes | Enhancing the Business Environment and Market Competition 32 Trade and Access to Markets service in regulated industries where there is already private investment. Making sure that its Moldova should further streamline trade logistics engagement with the private sector is to make sure its companies can easily trade transparent and driven by objective competition across borders and respond to foreign demand principles, the government could take advantage for its products. The country should re-assess its of the laws governing public-private partnerships trade and transport corridors and logistics and approved in 2008 to promote greater inclusion of consider how customs can facilitate trade. the private sector. Streamlined customs procedures are essential, especially for risk-based border inspection, Comprehensive market assessments of the processing of mixed consignments, and post- effectiveness and efficiency of price controls are clearance audits. Enabling electronic trade by needed to identify possible reasons for high simplifying customs procedures for small prices in Moldova. A reduction by 10 percent of parcels, particularly for export, should be a price-cost margins may lead to a 5 percentage priority in supporting small businesses and start- points increase in labor productivity growth 37 ups. Authorities should further revisit their (See Note on enhancing Business Environment customs valuation practices and apply valuation and Market Competition). Current limitations on methods as per WTO rules, making the currently margins and profitability must be reviewed applied valuation method 6 more of an exception simultaneously with assessment of mechanisms rather than the default method. for monitoring wholesale acquisition prices and of the costs of their administration. Similarly, it Access to foreign markets must be ensured for would be advisable to review restrictions on firm all Moldovan products, with export of products of market entry and ability to compete, such as animal origin a priority, given the importance of burdensome requirements to import. agribusiness for the economy. Food safety infrastructure needs to be raised to European The Competition Council should continue to levels. It will be especially important to pass laws advocate for public authorities to move away permitting incineration and co-incineration of from sectoral to horizontal forms of state aid, animal waste resulting from animal breeding and which are more likely to spur sustainable processing; develop and accredit laboratory investment (e.g., support to SMEs, R&D, job testing methods to meet European requirements; creation, regional development, and and implement national animal disease environmental protection). The government monitoring and prevention plans. Exports would should review tax incentives and budget further be promoted by such initiatives as cutting expenditures to ensure that the tax system is remaining tariff peaks and liberalizing key efficient and effective. This would also prevent utilities. discrimination against eligible firms based on state aid rules. Establishing a state aid registry A sound system of government procurement can with detailed information from government be a significant stimulus for private sector bodies that provide aid is also essential to development and at the same time a source of generate the transparency necessary to better efficiency of government spending. The guarantee that state aid does not distort elimination of corruption from the system of competition. A follow-up step would be to attributing government contracts, including upgrade the database with more powerful through use of open contracting and digital functions and make it available to the public, procurement platforms, enforcement of fair boosting accountability. (See Note on competition and proper financial management Strengthening Governance of SOEs; on mechanisms in government procurement are Safeguarding Fiscal Sustainability). priorities. This Policy Note was produced by the World Bank to inform policy debate Competition and State Aid in Moldova. This note was prepared by Galina Cicanci, Guilherme De Aguiar Falco, Georgiana Pop, Mariana Iootty and Seidu Dauda with An investment climate becomes dynamic when contributions from Eliza Niewiadomska and Andrei Rogac (EBRD) state involvement in business operations—as The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the both a market player and regulator—is neutral to World Bank or the Governments they represent. competition and is not a barrier to private sector For any questions regarding this note, please contact participation where that is feasible. The moldova_contact@worldbank.org. government needs to think strategically about THE WORLD BANK MOLDOVA OFFICE: how to leverage the private sector to boost http://www.worldbank.org/en/country/Moldova 37 World Bank. 2019. Moldova – CEM. Moldova Policy Notes | Enhancing the Business Environment and Market Competition 33 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Fostering SMEs and Strengthening FDI Linkages Key Messages Small and medium-sized enterprises (SMEs) in Moldova are neither productive or diversified, and the products they export are not sophisticated. Its export survival rates are low. Despite being open to international trade, Moldova has not been able to fully realize its benefits and has yet to translate increasing exports into productivity growth. Deficient backbone and input services—not to mention corruption—are significant barriers to firm productivity and competitiveness. Access to finance is problematic: there are no real alternatives to bank financing, capital market instruments are almost nonexistent, and most firm investments are financed by internal funds. This further erodes productivity and perhaps decisions to export. Export-oriented innovative FDI that successfully links to local firms can promote growth and job creation. Yet despite preferential tax treatment and other state support measures for firms resident in special zones, there have been no spillovers from these zones to the rest of the economy. Furthermore, the share of FDI in Moldova’s GDP has been steadily declining. Key Actions • Promote upgrading of firm productivity. Priority should be given to stimulating innovation, growth, and exports rather than supporting traditional business models. • Improve access to electricity, water, telecommunications, and transport networks and re- balance labor market legislation to allow for supportive input systems. Continuous efforts are required to cut corruption at all levels. • Support the entry of firms into global markets. Because firm productivity and foreign trade are mutually re-enhancing, give priority to helping SMEs with programs on export readiness and improving export standards. • Build up and deepen the financial market to support firm investment and growth (see Financial Sector Note). • Actively promote FDI and ensure that its gains materialize by an open and effective dialog with investors to identify reforms for removing obstacles to attracting and retaining investments. • Encourage technology and knowledge spillovers from FDI to the rest of the economy by promoting FDI in upstream sectors, stimulating investment in research & development, encouraging the interaction of foreign and domestic firms, and implementing supplier development programs. Where Moldova Stands Now that in SMEs labor productivity is lower than in large companies. 38 Moreover, the contribution of Micro, Small and Medium Enterprises SMEs to total exports has been estimated at just (MSMEs) represent 97 percent of all over half, and the diversification and registered companies in Moldova. The number sophistication of their exports is minimal. The fact of active SMEs in Moldova has been estimated at that few exporters last long may be because their almost 35,000; they are mainly in services, products are not of high enough quality. 39 especially retail and wholesale trade—by far the largest Moldovan industry. SMEs account for 67 Moldova is looking for additional drivers of percent of total employment with the service growth, and growing exports could boost sector again contributing most. In terms of value growth in productivity. Even after almost two added, SMEs accounted for only 61 percent of decades of trade flow averaging more than 120 the total value added, with significant differences percent of GDP, Moldova has failed to translate by sectors. The fact that the share of employment its increasing exports into productivity growth. by SMEs is higher than their value-added means The economy has been unable to shift resources (i) from low- to high-productivity sectors; (ii) within 38 39 SME Segmentation Study, World Bank 2015. Moldova Trade Study, World Bank 2015. Moldova Policy Notes | Fostering SMEs and Strengthening FDI Linkages 34 sectors to higher-productivity uses; and (iii) for and sector). Export-oriented FDIs that have firms that are innovative, to seize new market successful links to the local ecosystem can have opportunities. a positive impact on growth and job creation. But Moldova is experiencing a continuous decline in Entrepreneurs perceive the high cost of credit the share of FDI in GDP—a trend that may as their main business obstacle. Access to reinforce the perception that firms face barriers to finance has become ever more important, in entry and investment. terms not only of cost but also of ability to meet bank standards for borrowers. There are almost Most SME Development Agency programs are no alternatives to bank financing: leasing is rare provided to start-ups via incentive programs and capital market instruments almost and incubators. However, start-ups tend to nonexistent. As a result, almost 70 percent of all remain small rather than grow to medium-size or investments in fixed assets are financed large. Despite several donor support projects, the internally. High reliance on internal funds, like SME Development Agency has continued to high collateral requirements, is associated with focus its support on start-ups than on growing or lower total factor productivity. Lack of access to export-oriented enterprises. Yet evaluation of finance for funding working capital may be matching- grant programs that fund export- reducing participation in export markets, given oriented firm upgrades found that firms receiving their greater risks and longer repayment terms. export-related support achieve better outcomes. 40 Poor factor conditions, especially deficient backbone and input services do major harm The Investment Agency is mandated to attract to firm productivity and competitiveness. investment and promote exports. However, Expensive and poor-quality utilities, especially though recently reorganized, it inherited the inadequate power, water, telecommunication, budget and funding problems of its predecessor, and transport services push up the costs of and its outreach and effectiveness are limited. production and discourage exports. Other widespread problems are access to foreign How Moldova Can Build Up SMEs markets and inadequate marketing, followed by and Ensure FDI Spillovers difficulties, especially for micro firms, in Moldova needs to work on upgrading firm establishing collaboration and links to larger productivity. One priority is to promote private firms, and the dearth of technical expertise in both sector product and process innovation. This can companies and the marketplace (something be done directly by, e.g., incentives like matching SMEs perceive as comparatively a more severe grants for eligible firms based on support operating constraint). programs with proven impact. Since innovators Corruption also suppresses firm performance have regularly proved to be more productive, the and productivity. Moldovan firms that allegedly authorities should identify support programs that make informal payments to authorities are less truly stimulate innovation rather than stimulating productive than their counterparts. re-creation of basic business models. Thus, Development Agency support programs should Not all firms in Moldovan territory enjoy the be redirected to promoting innovation, growth, same conditions. Currently, most FDI-supported and exports. It should also give firms incentives firms are in one of the country’s 7 free economic to offer management training and invest in skills zones (FEZs). Moldova also has 9 industrial in critical areas like corporate financial literacy, parks, 1 free international airport, and 1 free export-readiness, how to meet quality standards, water port terminal with similar benefits. Firms and access to foreign markets. resident in these areas benefit from state support incentives that are not available to firms Moldova should support its firms’ elsewhere in Moldova. Further, there have been internationalization. As productivity and foreign no spillovers from these zones to the rest of the trade enhance each other, helping Moldovan economy, either directly or via the SME support SMEs to access foreign markets should be a ecosystem. Most raw materials used in FEZ are policy priority. 41 Policies that help SMEs to imported and the products exported. The main overcome the main barriers to exporter survival domestic input is local labor. are crucial to growth and diversification. Government support programs should target In Moldova, export-oriented, foreign-owned. upgrading export product quality and improving and innovative firms are far more productive the standards that exports meet. Promoting than other enterprises (controlling for size, age, 40 World Bank, Impact Evaluation of Matching Grant 41 See Enhancing Business Environment Note Facility, Second Competitiveness Enhancement recommendations on products of animal origin. Project, World Bank, March 2019. Moldova Policy Notes | Fostering SMEs and Strengthening FDI Linkages 35 country brands and key export sectors investment, as by building up the current dialogue systematically should continue but draw in a through the Economic Council. The continuous wider number of companies. Targeted assistance decline in FDI as a share of GDP also needs to to SMEs in export readiness and match-making be analyzed carefully for factors that deter FDI. It programs for them should become a priority. may be, e.g., that competition and market regulation policies are ineffective, or that the Productivity depends on well-functioning judicial system does not give investors enough input markets and ready access to electricity, protection to generate investor trust. Here, too, water, telecommunications, and transport anti-corruption initiatives would reduce the cost of networks. Labor market conditions need to be doing business and make investing in Moldova re-balanced by modernizing legislation to give more attractive. firms the flexibility to adjust quickly to structural and cyclical fluctuations in the economy and their The country needs to encourage technology markets. Modern labor laws will bring productivity and knowledge spillovers from FDI and FEZs gains that translate into better jobs. Meanwhile, to the rest of the economy. This can be done by efforts must continue to cut corruption in public promoting FDI in upstream sectors and by entities at all levels to ensure that resources are encouraging the interaction of foreign and directed to growth and development. domestic firms, perhaps by promoting client and supplier relationships. There is also a need to Financial markets must be deep and well- increase the capacity of domestic firms to absorb functioning to support firm investment and spillovers, perhaps by supporting education and growth. In addition to the recommendations of training to improve labor force skills, investment Financial Sector Policy Note, both supply and in research & development, or through supplier demand-side barriers to accessing finance need development programs. to be reviewed. Alternatives to bank financing should be developed, especially for capital market instruments such as corporate bonds, export financing, insurance, and other This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Galina Cicanci. instruments that can spur innovation and enable The findings, interpretations, and conclusions expressed herein do not businesses to invest efficiently. necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. Moldova should actively promote FDI and For any questions regarding this note, please contact ensure that the expected gains materialize. moldova_contact@worldbank.org. This means maintaining an open and effective THE WORLD BANK MOLDOVA OFFICE: dialog with investors to identify policy reforms and http://www.worldbank.org/en/country/Moldova remove obstacles to attracting and retaining Moldova Policy Notes | Fostering SMEs and Strengthening FDI Linkages 36 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Reforming the State-Owned Enterprises Key Messages State owned enterprises play a major role in the Moldovan economy, as significant owners, operators, and employers in vital sectors. They account for about a third of GDP and employ up to 24 percent of the labor force. SOEs in Moldova are active in at least 19 sectors where private participation is economically viable, compared to the OECD average of 14. The SOE sector is characterized by severe inefficiency, considerable losses, rising long-term debt, poor service delivery, low productivity, and inadequate governance. Although the government has begun to address these issues by introducing basic governance arrangements for state and municipal enterprises through new laws and through concentration of their ownership in a specialized central agency that oversees state enterprises, more must be done to improve the governance and efficiency of SOE operations. Key Actions • Define for each enterprise and state-dominated subsector an explicit rationale and objectives. • Adopt the timebound plan and accelerate restructuring, privatization or closure of SOEs. • Professionalize SOE boards by reforming nomination and operational practices, and tracking SOE performance. • Set standard principles of good corporate governance for: relationship between owner and enterprise, owner’s functions and rights, board and executive effectiveness, corporate values and code of conduct, conflicts of interest, social accountability, transactions with related parties, disclosure and transparency of information, internal control systems, external audits, and risk management. • Adopt clear guidelines on how information is to be passed from owner to SOE board members; clarify and define responsibilities of owners, boards, and management to avoid political interference. • For each SOE publish audited financial statements, performance results, and evaluations to promote the accountability of SOE boards and management. • Reduce the state aid to SOEs to ensure transparent and equitable environment with other companies competing at the same market. more productive than SOEs, despite accounting Where Moldova Stands Now for a smaller share of firms. 42 SOEs account for about 10 percent of In addition to 4 percent of GDP in overall corporate sector assets. However, unreliable direct state aid, there is considerable indirect and often unpublished financial data has made it state support to SOEs through exemptions, difficult to accurately assess their performance, rebates, deferrals, and rescheduling of tax validating their weak governance and the fiscal payments which together amount to another 3 risks they present. Moldovan SOEs can be found percent of GDP. Although the net financial in such essential services and industries as position of SOEs as a group is positive, long-term utilities, health care, transport, and energy; they debt and negative profitability trends suggest also perform government administrative their financial performance is deteriorating. services. SOEs employ 24 percent of the labor Concerned about SOE inefficiency and force and their assets account for one-third of underperformance, the MOF sought a GDP. SOEs display much lower productivity levels and growth than their non-state counterparts. In particular, foreign-owned firms are 80 percent 42 World Bank. 2019. Moldova – CEM. Moldova Policy Notes | Strenghtening Management of State-Owned Companies 37 comprehensive analysis 43 of how the SOE sector remuneration of administrators and board performs against the OECD Guidelines on members. Corporate Governance of SOEs and other There are serious questions about SOE international benchmarks. The results identified compliance with legal requirements and fundamental SOE issues and informed the market expectations on transparency and drafting and prioritizing of potential reforms. disclosure. Little if any public information is Responding to the robust assessment available about their finances and performance. recommendations, the Moldovan government The quality of financial information prepared by has initiated a series of ambitious reforms to SOEs is not reliable enough to support improve SOE governance. In 2017, the Public economically sound decisions. Most SOEs are Property Agency took over management of not audited, so unaudited information, of limited numerous SOEs previously overseen by line value, is often used in SOE monitoring and ministries and has begun to tackle problems decision making. associated with possible overlap between SOE Weaknesses in SOEs’ governance are also ownership, management, and regulatory reflected in weak competition policies, which functions. The government has also begun to heighten business risks for firms operating in restructure the legal form for SOEs and have Moldova. The dominance of large SOEs and them corporatized or transformed into public state-owned monopolies in the economy entities. Ultimately, both SOEs and private suggests that these companies are likely to entities would be subject to the same laws and receive preferential or favorable treatment governance arrangements. However, as outlined making it difficult for potential competitors to below, some areas need additional reforms to operate in some sectors. ensure that SOEs operate efficiently and transparently and are held accountable if they do What Can Be Done to Reform SOEs? not do so. Define the rationale for state ownership. The A clear strategy for state ownership policy government could consider adopting an explicit and defined objectives, principles, and SOE ownership rationale and ownership policy, modalities for governing and reforming SOEs stating clearly how state ownership benefits would improve accountability to both the Moldovan society. For instance, SOEs might legislature and electorate. Moldova has no deliver public goods and services more efficiently policy document or law that explains why the or reliably; operate natural monopolies where state continues to own some enterprises, what markets are not efficient; or meet strategic goals the functions are of specific SOEs, and their such as keeping certain industries under national governance principles and requirements. This control. As part of this exercise, the government deters a systematic approach to SOE should decide which of them need restructuring governance and decisions on whether to to enhance performance, which should be closed continue or cease ownership of SOEs or create due to inactivity, and which should be privatized. new ones. SOEs, the market, and the general public need predictability based on a clear Divestiture and restructuring of SOEs. Once understanding of the objectives of the state as the stock-taking exercise is done, the owner. government should adopt a timebound plan for divestiture and restructuring of SOEs. This would Nomination and operations practices of SOE involve liquidation of inactive companies, boards are problematic, and there is little privatization of companies operating in monitoring of their performance. Currently commercially viable markets, and restructuring of most SOE board members are public servants, companies which address market failures but are often active in policy making in the same sectors operationally inefficient. The state aid allocated where the SOE operates. This creates a to these companies should be exclusively tied to perception that they have divided loyalties. It also restructuring aid or a provision of Services of raises questions about the time and the range of General Economic Interest, as per the state aid skills they offer the SOE. There is no way to rules. assess the performance of SOE board members or administrators or to hold them liable for poor Strengthen monitoring of SOE performance. performance. There is also no direct link between The authorities might design an SOE compliance the long-term interest of the SOE and the dashboard and put in place an SOE monitoring system based on performance agreements with each SOE that specify both financial and 43The World Bank with support of the partnership with (http://siteresources.worldbank.org/EXTCENFINREP the UK Good Governance Fund (GGF) REF/Resources/Moldova_SOE_Diagnostics_EN.pdf) Moldova Policy Notes | Strenghtening Management of State-Owned Companies 38 nonfinancial performance indicators. ownership, making owners accountable to other Performance of each SOE should be judged relevant public bodies, and acting as informed against targets set in accordance with objectives and active owners. Establishing an open and stated in the ownership policy and measured competitive process for identifying and against indicators drawn from audited financial appointing board members based on merit and statements and management reports. It is also professional capability would help them fulfill critical that quality and reliability of financial their functions effectively in the best interests of information prepared by SOEs is improved. the SOE. Reinforce and consolidate the ownership This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Andrei Busuioc. function and board practices. The OECD The findings, interpretations, and conclusions expressed herein do not guidelines for SOE governance set aspirational necessarily reflect the views of the Board of Executive Directors of the targets for the state as an owner and recommend World Bank or the Governments they represent. putting in place arrangements conducive to For any questions regarding this note, please contact moldova_contact@worldbank.org. responsible ownership practices. Among these are standardizing the legal forms of SOEs and THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova their operational autonomy and board independence; and centralizing the functions of Moldova Policy Notes | Strenghtening Management of State-Owned Companies 39 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Promoting Digital Development Key Message For the past decade Moldova’s communications sector, especially the Internet market, has been growing. By late 2018, about half of Moldovan households were connected to fixed broadband services, and over half of the population subscribes to mobile services. While the market for connectivity has few entry barriers, it is concentrated, and the presence of the SOE Moldtelecom distorts it. There is also a rural-urban broadband divide, and fewer Moldovans are connected at higher speeds than citizens of EU member states. Moldova’s information technology (IT) and IT-enabled services (ITeS) are growing briskly and exports have reached a considerable volume. One major constraint on growth of the sectors is the limited talent pool, partly because university and technical education is of uneven quality and partly because so many professionals and young people have emigrated. Also, the general digitization of businesses across sectors is still nascent. Key Actions • Implement the infrastructure sharing law, through definition and enforcement of associated regulations. • Increase competitive pressure on the market through more vigorous regulation and restructuring of Moldtelecom, and possibly privatizing it. • Promote rural broadband connectivity in ‘white zones’. • Put in place programs to boost the digital skills of un- and underemployed Moldovans. • Partner with Moldova’s IT industry to support digitization of SMEs via targeted programs. Where Moldova Stands Now Internet connections reach such speeds, and about 50 percent operate at 30–100 Mbps. Moldova’s digital industries—including its electronic communication sector, and the Mobile broadband (MBB) networks—which information technology (IT) and IT-enabled are cheaper and faster to deploy—appear to services (ITeS) sectors—have been performing be the access networks of choice in rural well for the past decade. Public and private areas. Three MBB 3G networks cover 99 percent stakeholders foresee further growth, but also a of the Moldovan population; three 4G networks range of challenges. cover 33 percent. However, because MBB services do not always offer the same speed and Communications reliability as FBB, a mix of both available The communications sector, especially the nationwide is useful; businesses and households Internet market, has been growing steadily. would connect to FBB services; individuals and As of late 2018, about 50 percent of Moldovan temporary applications (e.g. for logistics tracking households were connected to fixed broadband, or field-based staff) would use MBB. FBB is and about as many subscribe to mobile services. especially important for enabling the next Moreover, international rankings of retail Internet generation of digital applications, such as access speeds, typically feature Moldova in the artificial intelligence (AI), advanced top 20 countries in the world. This positions manufacturing, and financial services. Moldova reasonably well globally and sets the The next phase of FBB development is to stage for adoption of such digital services as e- extend networks beyond the economically government and e-commerce. more lucrative urban centers. The current However, there is a risk that Moldova could situation suggests that the market in its current slip behind, especially below the EU, as few form has stabilized—growth rates are low. When people are connected to higher speeds. The EU compared to EU member states with low FBB target for 2025 is for all households to be penetration, the growth rate of penetration of connected to broadband at speeds higher than services in Moldova appears to lag (Figure 1). 100 Mbps. In Moldova, only 7 percent of all Moldova Policy Notes | Promoting Digital Development 40 Figure 1. Fixed Broadband Household Penetration fixed broadband provider has over 50 percent Trend and Projections, Percent market share, with the top three accounting for almost 90 percent of the market. A major distortive factor in the market is the presence of state-owned Moldtelecom (MTC). Because multiple efforts to privatize it have failed, the company still has a sizable market share. MTC also owns much of the passive infrastructure (e.g., ducts), especially in rural areas, and does not allow access to competitive operators on technical grounds, even though the regulations promote sharing. Often, too, MTC is given preferential treatment, such as being awarded a mobile telecoms license without Source: TeleGeography GlobalComms data. contest and at a low entry fee. Its tariffs cannot be regulated by the industry regulator, but rather Targeting rural areas not yet connected could require government approval. bring a second round of growth. About 70 percent of the population uses the Internet, but MTC also has significant social obligations 61 percent of all fixed broadband (FBB) is in the which, despite their importance, are not capital and other urban areas. Almost 22 percent sustainably designed. Reorganizing the of rural localities have no fixed broadband company to separate social business lines while Internet access, and in many others where renewing the effort to privatize could promote networks are present, speeds are less than 30 competition and allow private investment in rural Mbps; the Moldova Digital 2020 strategy, like and urban connectivity. Explicitly defined and many other countries, sees 30 Mbps as the funded programs to attain social objectives can baseline for user needs today. There are two boost their sustainability. Efforts should therefore possible reasons for the limited penetration and focus on reducing the costs of network adoption of FBB networks in rural areas: (i) deployment to open new markets, adopting Service providers see the business case for measures to increase competition, and offering those areas as unviable because of the higher incentives that improve market outcomes. costs of deploying networks and perhaps lower IT and ITeS sectors revenue because users do not see broadband as attractive or affordable; (ii) There may be hold- The growth of Moldova’s IT and ITeS sectors ups to competitive service provision. has been steady, and a considerable volume of its exports are ICT services. However, the The affordability of broadband remains an links between IT firms and the cross-sector issue in Moldova, even though such plans are digitization of businesses are still tenuous. World comparable to international averages. New Trade Organization data show that in 2016 the users, especially those who are less well-off, may country’s net exports in telecoms, computer, and be finding the unavailability of reasonably-priced information services reached US$78m. Per entry-level broadband plans a barrier. Almost 60 capita, these exports have more than doubled percent of Moldovans not connected to the over the past decade, while about 22,000 people Internet report that they cannot afford the access were employed in ICT. The IT industry alone device. Entry-level broadband plans cost over 5 employs about 7,000 workers, and half of those percent of GNI per capita, the highest relative work in the software industry. Many such well- price among Eastern Partnership (EaP) paid jobs are available for highly skilled workers. countries. Although an improvement from previous years, it is still much higher than the UN There are clear opportunities for growth; the Broadband Commission’s proposed target of 2 EU-Moldova Association Agreement could percent of GNI per capita. Moldova’s low GNI per help to grow trade links, and global industry capita may also explain why entry-level analysts are beginning to take an interest in broadband plans are relatively unaffordable and the country. Many stakeholders agree that IT why the market has yet to develop much beyond jobs could more than triple over the next decade, urbanized areas. if the business climate, infrastructure such as IT parks, and skills training programs keep up. The connectivity market has low formal Growth has been stimulated by a vibrant and barriers to entry, but it is concentrated. There well-organized private sector, support from the are over 100 Internet service providers (ISPs). public sector, and the increased visibility of But just two of the three mobile operators share Moldova in the global IT industry. The almost 85 percent of that market, and the largest Association of Information and Communications Moldova Policy Notes | Promoting Digital Development 41 Technology Companies (ATIC) has been a students to digital technologies, these are ad hoc significant contributor. The number of digital and not fully integrated into the curriculum or startups has been increasing rapidly in recent teaching system. years. Interviews with stakeholders suggest that Not much information is available on the supporting IT professionals and graduates to set ‘horizontal’ use of digital tools and up businesses in Moldova could encourage them technologies in such other sectors as to remain in the country. banking, tourism, and agriculture. Data However, the current scarcity of talent could suggest that Moldova’s businesses have been hold the Moldovan IT industry back, slow to adopt digital technologies. In the most especially compared to regional peers. IT recent Enterprise Survey of Moldovan firms with industry representatives predict that skills five or more employees, for example, only about problem will get worse as technological change 60 percent had websites or use e-mail to transact accelerates, shifting client demand and the skills business. 44 It is perhaps significant that in terms needed. Concerns are growing that many of ICT goods as a share of all goods imports qualified (especially young) professionals are since 2010, Moldova’s share of about one-third is leaving the country; some estimate that half of lowest among comparator countries and is their technical employees who resigned in the significantly less than Central European and past few years have emigrated. Baltic averages. Although they realize the need to address the How Moldova Can Promote Digital skills constraint, few local companies invest Development in training current staff, either from limited means or little interest. Though private sector In support of digital development, the efforts coordinated by ATIC and supported by the government has adopted the Broadband government are seeking to remedy this, more Development Program for 2018–20, the effort is needed. Strategy for Increasing the Competitiveness of the IT Industry for 2015–21, and the Digital To promote growth of the IT industry, a Moldova 2020 strategy. Building on these “startup visa law” has simplified access to programs and recognizing the importance of the Moldova’s labor market for qualified IT private sector in the communications and IT and specialists. Private sector stakeholders are not ITeS sectors, the following actions to promote sure how well this will attract international digital development are recommended. workers but recognize it as a step forward. The Ministry of Economy and Infrastructure is Communications defining an ICT industry competitiveness The primary policy objective should be to roadmap through 2023. In addition to improving increase access to high-speed broadband infrastructure, it will focus on skills development, (100 Mbps+) while ensuring affordability (entry- the business and startup ecosystem, and level broadband priced at less than 2 percent of investment promotion. Meanwhile the Ministry of GNI per capita). This builds on the current targets Education aims to upgrade school ICT curricula for 2020 of broadband penetration rate of at least and infrastructure. The number of graduates in 60 percent of households and connecting every ICT-related fields—about 6,500 annually—is settlement with a municipal office to fiber higher as a share of graduates than in Bulgaria, Internet. The recommended way to attain this is Hungary, or Romania, though smaller than the to reduce the costs of network deployment and EU or OECD average. encourage competition in the market. In the short Employers and industry representatives are term, this would be supported by the following: critical of the quality and relevance of skills • Apply the infrastructure-sharing law of graduates in meeting their demand. Some comprehensively by defining regulations and policy restrictions also limit the potential for enforcing them. The law to encourage closer industry-academia collaboration: IT sharing of infrastructure and reduce the industry professionals are not allowed to formally costs of broadband network deployment was teach at universities even part time unless they passed in 2016. It can be implemented fully have advanced degrees and pedagogical through coordination of public agencies or certification. A focus on improvements in higher SOEs that own property or telecom-ready education alone cannot make up for weaknesses infrastructure, such as municipalities and in primary or secondary schooling. Although utilities; creation of a digital infrastructure efforts are increasing to expose younger map; simplifying the permitting processes; 44In the Czech Republic the finding was 90 percent and in Poland over 80 percent. Moldova Policy Notes | Promoting Digital Development 42 and reinforcing the capacity of ANRCETI, the • Promote entrepreneurship, innovation and electronic communications regulator, to applied ICT skills by including these subjects enforce the law. in the curricular and extra-curricular education at the medium and higher • Use regulation to increase competitive education level. Support development of pressure. It will be important to strengthen children’s innovation and ICT skills, building the process of market analysis and ex ante on existing initiatives, including increasing of competition regulation by ANRCETI, and to the awareness of younger students and their reinforce its mandate. families about digital skills and jobs • To further increase competition, restructure • Increase the relevance of education curricula MTC and consider privatizing it. Create a by engaging the private sector and industry strategic plan for the company’s corporate in the development and delivery of ICT restructuring and market repositioning so courses. Promote partnerships with IT sector that it can meet the challenges of competition businesses/professionals to provide higher and technological convergence. If there is a education students with opportunities such case for privatization, in addition to adopting as innovative labs or IT mentorship, to a short-term, low-cost, high-impact strategic increase relevance of skills upon graduation. plan to generate rapid improvement in its performance, it will also be necessary to • Continue and scale-up current collaborations define the parameters for a successful of the public and private sectors, supporting privatization in terms of, e.g., target the IT industry to improve quality and shift to ownership structure, pace of the transaction, higher value-added products and services. and investment requirements. • Undertake short-term programs to quickly • Promote rural broadband connectivity in train un- and underemployed people to find ‘white zones’. Identify geographic areas work in digital industries, e.g., through virtual where it will not be possible to provide IT parks, in IT and ITeS firms, and in IT commercial service within a reasonable time applications in other sectors. (e.g., three years), and work closely— through a process that is open, competitively • Support digitization of SMEs. Identify pilot neutral, and transparent—to define a sectors to test training approaches for program to reduce the risk for private businesses and individuals to develop and investors to expand access in those areas. improve their digital competencies and skills; set up a program—possibly implemented by IT and ITeS ODIMM, the SME development agency and Moldova has an opportunity to position its IT ATIC—to link local IT expertise with and ITeS sectors for robust growth and businesses to identify and implement digital creation of more inclusive digital jobs across upgrades, potentially with a focus on SMEs. the economy. This calls for continued support to This Policy Note was produced by the World Bank to inform policy debate digital industries to make them more inclusive in Moldova. This note was prepared by Siddhartha Raja, Elena Lungu and Stela Leuca with contributions from Dumitru Vasilescu (UNDP). and promote innovation and entrepreneurship; The findings, interpretations, and conclusions expressed herein do not advancing digital literacy and skills beyond the IT necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. industry, for both the current and future workforce; and accelerating the digitization of For any questions regarding this note, please contact moldova_contact@worldbank.org. businesses so that they can increase their THE WORLD BANK MOLDOVA OFFICE: productivity, access to markets, and innovation. http://www.worldbank.org/en/country/Moldova In the short to medium term, therefore: Moldova Policy Notes | Promoting Digital Development 43 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Enhancing Financial Sector Stability and Governance Key Messages Since the financial sector crisis in 2014, the banking sector relative to the size of the economy remains smaller than it was, and banking activity has not been normalized. Progress on recovering assets has been disappointing. The fragile integrity of the financial sector was also set back by the launch of voluntary declaration and fiscal stimulation. One large bank (MICB) still remains in special supervision. The authorities have taken major steps to restore the stability and confidence of the banking sector and have tightened bank supervision and regulation to align with EU directives. Although the sector is well-capitalized, liquid, and profitable, non-performing loans (NPLs) remain high. The financial safety net for the banking sector is also weak. In the insurance sector, a significant number of insurers are at high risk of insolvency and there are concerns over the regulatory and supervisory framework for non-bank credit organizations (NBCOs). Inadequate protections for consumers and incomplete financial infrastructure, especially related to insolvency, secured transactions, and credit information-sharing, are additional hurdles to financial intermediation. Key Actions • Safeguard banking sector stability and integrity by: (i) ensuring MICB successfully exit special supervision and shareholders for the other two banks are fit and proper, (ii) operationalizing the new banking regulatory and supervisory framework; (iii) assessing the NPL resolution framework; (iv) strengthening the bank deposit guarantee fund, (v) accelerating efforts to recover assets, especially those in foreign jurisdictions; and (vi) monitoring and supervising the implementation of AML/CFT measures in the voluntary declaration process; • Strengthen non-banking sector stability and governance by: (i) assessing the institutional set up and capacity of NCFM; (ii) enforcing and tightening regulation and supervision in insurance sector; (iii) strengthening protection of financial services consumers and supervision of NBCOs with special attention to AML; (iv) consolidating the savings and credit associations (SCAs); and (v) establishing deposit guarantee for SCAs members. • Strengthen financial infrastructure by addressing weaknesses in insolvency management (reforming corporate insolvency, drafting a personal insolvency law); upgrading the collateral registry; and enhancing the credit information sharing system. Where Moldova Stands Now banks were well-capitalized (26.5 percent average risk-weighted capital adequacy ratio); Banking Sector Stability and Integrity liquid (more than half of assets are liquid); and profitable (11.6 percent return on equity). The bank fraud in 2014, the ensuing However, nonperforming loans (NPLs) have liquidation of three large banks, and the risen, in part because after 2015 the National weakening macroeconomic conditions in Bank of Moldova (NBM) tightened loan recent years, have taken toll on the financial classification. In end 2018, NPLs constituted 12.5 sector. The fraud revealed inadequacies in bank percent of total loans. While this is down from the governance and transparency. It not only created 18.4 percent in 2017, it is much higher than the significant fiscal liabilities but also undermined 2015 level (10 percent) and represents a source the confidence of investors, external lenders, and of risk to banking system stability. depositors. In response to the pressures that ensued, banks restricted lending and had to meet Resolution of the ailing banks is proceeding higher loan loss provisions. Four years later, the apace. In 2015–16, special diagnostic audits sector has not fully recovered. Despite 4.6 were conducted in the three largest banks, percent growth in banking assets in 2018, total Victoriabank (VB), Moldova-Agroindbank assets amounted to just 43.4 percent of GDP in (MAIB), and Moldindconbank (MICB), which 2018, far below the level in 2013 (76.3 percent). together account for 65 percent of total banking sector assets. The audit results led NBM to While the banking sector has been suspend shareholding rights in all three and stabilizing, NPLs remain high. As of end 2018, place them under special supervision. In January Moldova Policy Notes | Enhancing Financial Sector Stability and Governance 44 2018, Bank Transylvania purchased a 39.2 Non-Banking Financial Sector percent stake in VB, and the bank exited special Although the non-bank credit organization supervision in August 2018. In October, a 41.09 sector is still small, it has been growing percent stake in MAIB was purchased by an rapidly, with households and SMEs increasingly international consortium, led by EBRD, and the served by 187 mostly small commercial micro- bank exited intensive supervision in April 2019. credit institutions. However, there are concerns In January 2019, NBM authorized Doverie United about the regulatory and supervisory framework, Holding to purchase a majority stake in MICB. In as well as consumer protection. Although large April 2019, NBM extended the mandate of numbers of complaints are being filed about the temporary administration of MICB until October abusive terms, the Consumer Protection Agency 2019 until a supervisory board is appointed. lacks sufficient capacity in financial services. Furthermore, in January 2019, NBM suspended There is a risk of over-indebtedness on the retail some of the rights of a large block of consumers serviced by both banks and non- shareholders in Fincombank and Energbank and banks—a risk aggravated by deficiencies in the ordered them to sell their shares. credit reporting system. Thirdly, there are also The authorities have improved the legal and concerns regarding public savings. NBCOs are regulatory framework for the banking sector, not allowed to take public deposits and must be including with regards to bank governance, bank financed with equity or shareholder loans. resolution, and NBM powers. In 2017 NBM Anecdotal evidence indicates that at least some introduced the Law on Bank Activities, and in of these institutions may be taking advantage of 2018 the Regulation on Internal Governance and a loophole in the legislation and that they are mis- Risk Management. Thus, the new legal regime selling shares to the population and collecting governing bank regulation and supervision has their savings (promising substantial returns) to been aligned more closely with EU requirements fund their lending activities. and the transition to Basel III. Savings and Credit Associations (SCAs) The Deposit Guarantee Fund for the Banking provide affordable financial services to rural System (DGS) has low coverage and limited areas. However, the sector is highly fragmented, capacity. DGS coverage will be increased from with 272 small entities with no access to modern MDL 20,000 to MDL 50,000 in 2020, equivalent technologies or effective financial protection to 1.2 times GDP per capita, well below level in tools. SCAs have no deposit protection scheme regional peers (5 - 18 times). While DGS has and the services provided by apex organizations been accumulating reserves adequately (albeit are under-developed. Meanwhile, the National insufficient for an expanded coverage), its Commission for Financial Markets (NCFM), the structure is limited and staff is untrained. DGS is regulator, has no effective mechanisms to unprepared to engage in bank resolution actions intervene when entities are in distress—the other than as a mere paybox to depositors of stabilization fund has not yet been established. failed banks, and even so, depending on the size The insurance sector is underdeveloped with of the bank, its capacity may be insufficient. many insurers at high risk of insolvency. In These concerns are exacerbated given that 2016 insurance penetration was only 1.0 percent Moldova in process of setting up a resolution of GDP. The market is dominated by non-life fund in 2020 under the administration of DGS. insurance, especially by compulsory Motor Third Investigation of events leading to the fraud, Party Liability (MTPL) insurance, which accounts which is estimated to have costed US$1 for 50 percent of gross non-life insurance billion, was also launched. The final report was premiums written. For the last five years, the non- submitted in March 2018; so far, however, efforts life insurance market has been stagnant due to to recover the stolen assets have been modest. sluggish economic growth, low incomes, lack of The asset declaration regime, which is seen as a public trust, and fierce price competition to build deterrent for those wishing to enrich themselves market share by the 16 insurers. A significant by working in the public sector, has undergone a number of insurers are at high risk of insolvency series of large-scale reforms. Electronic filing and and show signs of weak payment capacity. True verification of declarations has been launched financial condition is likely to be worse: minimal and the institution responsible for system regulatory requirements for insurer solvency, management reorganized. However, the recently provisioning, and valuation of assets means that adopted legislation on voluntary declaration solvency is likely overestimated. In July 2019, as represents an obstacle to effective asset required by the Association Agreement with the declaration—which would require that assets EU, the MTPL market will be fully liberalized. held by officials and family members are justified Without stabilization measures, liberalization is by their incomes—and makes it harder to recover likely to trigger unsustainable price competition stolen assets. Moldova Policy Notes | Enhancing Financial Sector Stability and Governance 45 and further jeopardize the already precarious conduct. Furthermore, approved reorganizations financial position of the sector. fail to implement operational changes for firm rehabilitation. As a result, returns to creditors are Capital markets are shallow. Domestic low, which adversely affects access to finance. government debt was about 5 percent of GDP until 2016, when it shot up to about 17 percent of Moldova has two credit bureaus, but they do GDP due to recognition of government not exchange information, partly because of guarantees issued to NBM for the emergency technical aspects. Parties seem unwilling to loans provided to banks during the crisis and communicate although they are legally required subsequent conversion of the loans into long- to do so. Reporting to a credit bureau is still not term government bonds. (Maximum maturity of mandatory for all market participants, especially regular government securities is just two non-bank lenders and SCAs, which reduces risk years.) 45 The secondary market is thin with appraisal capacity and drives up both NPLs and banks as primary dealers and investors. The consumer protection concerns. Moldova Stock Exchange (MSE) is illiquid and There is a big implementation gap regarding turnover has been less than 1 percent of GDP for asset-based lending. Although lending secured the past years. It lists only shares because no by movable collateral exists, (mostly for corporate bonds have ever been issued. Market equipment, machinery, and other tangible capitalization is 3 percent of GDP with only 32 assets), other categories e.g. accounts companies listed. The MSE is not equipped to receivable and inventory are rarely used. Despite contribute to capital market development while numerous recent legislative reforms, there is a the Chisinau Stock Exchange, created in 2012, is implementation gap preventing efficient use of not yet a viable alternative trading platform. legal provisions that enable the use of movable Financial Intermediation assets as collateral. Even though the Civil Code recognizes various forms of security and allows Financial intermediation is low. Deposit financial institutions to register security directly penetration is low with bank deposits amounting with the collateral registry, these options are not to 39.5 percent of GDP (2016), similar to peers, being used optimally which increases transaction but the ratio of private credit to GDP is 26.7 costs and deters financial institutions from using percent of GDP vs. ECA average of 41.3 percent. asset-based lending for SMEs. In addition to the impact of the fraud, financial intermediation is undercut by poverty, rurality, How Moldova Can Build Up its and informality. Corporate credit demand is Financial Sector limited by the relatively low share of large firms, a high share of foreign-owned firms, and use of Banking Sector Stability and Integrity non-bank financing. The coverage of DGS should be increased The 2014 fraud slashed credit supply, while its capacity should be strengthened especially for SMEs. High NPLs, minimal with the trained staff and adequate procedures, access to long-term funding, and a preference for manuals and methodologies. DGS must be able government securities further undermined banks’ to have a “single customer view” to effectively ability to finance the real economy. payout depositors in case of a bank failure, rather than merely relying on the instructions of the Financial Infrastructure bank liquidator. Institutional strengthening should Inadequacies in the financial infrastructure, be accompanied by public awareness to improve such as insolvency management is also a confidence in the banking system. In addition, barrier to financial intermediation. The main due to the resolution fund to be set up in 2020, tool for debt resolution is the 2012 Insolvency DGS will need a substantially more robust and Law, which is widely used despite structural sophisticated structure to ensure that sound fund deficiencies. In particular, it does not offer management and availability during resolution. adequate incentives for reorganization, such as Authorities should safeguard financial sector granting priority to new funding; consequently, stability by ensuring that MICB successfully there is little use of restructuring techniques in exit special supervision and ensure fit and support of long-term business rehabilitation. proper shareholders for the other two banks. There is also consensus that the liquidation Furthermore, while NBM has undertaken much- system is often used as a substitute for private needed reforms in banking regulation and enforcement and there are no adequate supervision, operationalizing new regulations mechanisms to monitor and counter fraudulent and supervising banks to ensure compliance 45 In March 2018, the Ministry of Finance issued the inaugural 5-year government bond. Moldova Policy Notes | Enhancing Financial Sector Stability and Governance 46 are necessary. Similarly, after adopting BRRD- requirements and enhance supervision of capital compliant bank resolution laws, it is essential to adequacy and solvency, reserving, asset adopt the necessary supportive regulations. As valuation, and allocation of expenses. NCFM NPLs rise, a holistic assessment of resolution should also enforce existing solvency regulations mechanisms is needed to address gaps and and take appropriate actions with regards to facilitate credit growth of credit. There is a need insolvent companies. It is also necessary to to enhance the quality of property appraisals to address gaps in auditing, governance, and improve assessments of collateral. transparency by amending the Insurance and MTPL laws, and to ensure consistency with the More aggressive efforts are needed to Civil Code, as recently amended, which has recover assets stolen in the 2014 bank fraud. several insurance provisions that deviate from Building on the results of the Kroll audit, priority international best practices. Finally, in the should be given to recovery of fraud proceeds medium term the NCFM should shift from from foreign jurisdictions. To preserve the compliance-based to risk-based supervision. integrity of the financial sector, which was crippled by the “laundromat” and bank fraud Authorities should accelerate efforts to cases, it is necessary to deploy monitoring and develop capital markets, e.g., by developing supervisory measures, and if necessary investment and pension funds and government sanctions, to respond to any AML/CFT lapses in and corporate bond markets; listing government voluntary declarations. and corporate bonds on the stock exchange and adopting rules regarding market integrity. NBM has several options for partly mitigating Privatizing SOEs could enhance market liquidity the threat to financial sector integrity posed and attract foreign portfolio investment. by the voluntary declaration process. NBM Improving corporate governance and could (i) analyze information received by financial encouraging listed companies to transition to institutions on voluntary declaration transactions IFRS will promote transparency and attract more and based on the results carry out on-site and investors, both foreign and local. off-site supervision; (ii) ensure that applying AML/CFT measures to the voluntary declaration Financial infrastructure process is a priority area of review under the Reforming the 2012 Insolvency Law and supervision process for all financial institutions; improving the implementation of the law by and (iii) ensure that bank managers and boards judges and administrators, are critical to address commit fully to good governance practices. NPL resolution and improve credit risk. In Non-Banking Financial Sector parallel, the authorities should draft a Personal Insolvency Law so that consumers could TThere are effective actions NCFM can restructure their debt based on principles similar undertake in the sectors it supervises. NCFM to those in the Insolvency Law. should finalize the registration of all nonbank lenders, identify the beneficial owners of the It is critical to introduce tools allowing SMEs to firms, and set supervisory objectives for this leverage their movable assets. To support this, industry. AML and consumer protection it is essential to modernize the collateral registry (including retail savers) should be the main to enable financial institutions to fully take priorities. In addition, the authorities should advantage of the new provisions recently amend the NBCO law to disallow any form of introduced in the new Civil Code. savings mobilization from non-qualified investors Finally, the credit information sharing system and to foster the consolidation of the sector. The should be strengthened. The use of credit authorities should also reinforce regulation and bureaus must be mandatory for all lenders for supervision of SCAs, establish an effective safety loans above a small minimum size, in addition to net (including effective liquidity and stabilization enforcing the current law and ensuring that the funds and deposit protection scheme), and two credit bureaus exchange and integrate identify effective mechanisms for intervening in information. entities in distress. Consolidation and integration of the sector should be fostered to enhance This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Natalie Nicolaou with contributions governance, internal controls, and external from the UK Embassy and Iuliana Stratan (EUD). supervision and promote efficient operations. An The findings, interpretations, and conclusions expressed herein do not assessment of NCFM’s institutional setup and necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. capacity should be conducted, aimed at For any questions regarding this note, please contact strengthening the regulatory framework and moldova_contact@worldbank.org. supervisory capacity of NCFM. THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova To address challenges in the insurance sector, NCFM should tighten regulatory Moldova Policy Notes | Enhancing Financial Sector Stability and Governance 47 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Reforming Moldova’s Justice Sector Key Messages A well-functioning justice sector is critical for ensuring good governance, reducing corruption, and delivering public services efficiently. In Moldova, however, pervasive state capture undermines trust in justice institutions. Despite numerous new laws and strategies, the lack of results on the ground from justice and anti-corruption reforms has fueled public disappointment. Entrenched interests resist efforts to make the system more transparent, accountable, and predictable. Moldova now needs to consolidate its justice system to reduce corruption, ensure that justice services are efficiently provided, and remove access constraints for vulnerable groups and rural populations. Key Actions • Surveys of court users in 2017–18 identified clear user priorities: tailored information, better enforcement, and procedures fair to all regardless of income. • Improve justice access, efficiency, and integrity by leveraging IT and judges’ specialization for smarter court consolidation, easier access for the vulnerable, reduced corruption, faster case processing, and cost savings. • Designate a single court with jurisdiction across Moldova for small-value high-volume civil enforcement cases with online filing capability. • Adopt a medium-term plan to improve enforcement of judicial decisions, and a prosecution service reform. Where Moldova Stands Now also dependent on donor funding for implementation and required justice entities to Despite a decade of reforms of the justice prepare development and funding plans aligned system the lack of public trust and a troubling with JSRS priorities. Assessments of JSRS internal picture call for credible actions: in a progress in 2015 and 2016 showed mixed detailed 2017-18 survey of court users, 46 56 results. In 2017, the Ministry of Justice (MOJ), percent of respondents reported either no with contributions from justice sector change or a deterioration in the work of courts. stakeholders, began to update the JSRS design Only about 20 percent of citizens considered the for 2018–21 but the announcement of elections courts fair and impartial, and almost 50 percent in early 2019 put the work on hold. While drafting of lawyer-respondents shared their clients’ is likely to resume after the 2019 elections, concerns. Among businesses, 68 percent did not Moldova’s current justice challenge is simply to expect court proceedings to be fair, 75 percent act on reforms already approved, track progress, thought that in recent years corruption has either and report to the public on the results. remained the same or worsened, and 25 percent Despite official commitment to a well- of businesses knew someone who had paid functioning justice system and recognition bribes. Moreover, 72 percent of judges felt that it will be critical to reducing corruption unsafe and, like prosecutors, judges see risks to and delivering public services efficiently, efficiency and integrity arising from current court pervasive state capture still infects the organization, management, procedures, system. Oligarchic interests and elite reluctance outdated information systems, and poor to reform a political system continue to define premises. Citizens ranked justice reforms fourth Moldova’s political economy. in order of importance nationally, behind only health care, pensions, and education. A 2016 law kicked off an ambitious judicial reorganization on January 1, 2017. Previously, Moldova’s ambitious 2011–16 Justice Sector there were 48 first-instance courts and several Reform Strategy (JSRS), extended to 2017, courts of special jurisdiction. The 2017 law did not yield the expected results. This is merged most courts. The specialized first- partly due to frequent changes in government but instance Military and Economic Courts were also to the emphasis on process rather than on closed and the five Chisinau municipal courts actions and results on the ground. The JSRS was 46 2017–18 Surveys of Court Users, conducted by the World Bank in collaboration with the MOJ and SCM. Moldova Policy Notes | Reforming Moldova’s Justice Sector 48 were merged into one. Each court in Moldova fair trial is perceived by the general public as now has at least nine judges. The cost of the being the most violated human right. 47 consolidation of the judicial network is an Access to justice for vulnerable groups— estimated MLD1.18 billion (US$60 million). The especially women and girls—is a major government expects the investment to pay off in concern. Access constraints for vulnerable 17 years (court optimization is expected to groups and less mobile rural populations, generate annual savings of MLD45.3 million). combined with longer distances to courts and few The reorganization can generate more savings if if any transport options, have heightened coupled with other efficiency improvements. concerns about the ongoing court consolidation’s Figure 1. Judicial Map as of January 1, 2017 adverse effect on access. Rural and remote areas account for 57 percent of Moldova’s citizens and 84 percent of its poor. The justice system for children remains reactive with very low application of diversion measures. The lack of specialized justice personnel (prosecutors, judges, lawyers), including in child and family- related cases, and cases related to sexual violence, is a serious concern for professional adjudication in the best interest of the child. Developing preventive and reintegrative services for children is not prioritized at the local level. Court Budgeting and Expenditures In 2010–16, in both nominal and real terms Moldova’s spending on justice went up. Yet its real spending is the lowest in Europe. Salaries account for about two-thirds, consistent with Source: MOJ. international patterns. Between 2010 and 2015, the justice wage bill rose by 170 percent. Constraints on Performance Figure 2. Justice Sector Capital Spending 2010-16, Despite numerous new laws, justice and anti- MDL corruption reform implementation has stalled; key reforms are compromised from within the system. Entrenched interests resist efforts to make the system more transparent, accountable, and predictable and oppose a more rational, performance- and demand-based distribution of its resources. Appointment and promotion of judges do not strictly follow the prescribed criteria and rules. Prisons are a sensitive issue: investigative reports have documented how organized crime and property capture appear to be led from inside prisons. If reforms are to succeed, state capture and corruption—the main barriers to improving the quality of justice—need to be addressed first. Source: MOF. Little on-the-ground progress is seen by Capital spending is erratic; in 2015 it dropped citizens and businesses. A coherent steeply after increases in investments and coordination mechanism among law repairs in previous years. The fact that the wage enforcement and justice institutions is missing bill went up steadily suggests that courts and the both at the national and local levels. Men and Superior Council of Magistracy (SCM) have women, particularly from marginalized or particular difficulty in long-term planning for minority groups, are not able to claim their rights capital spending. Spending on operations, and access to justice effectively. The right to a including capital repairs, has gone down since 2013 as the budget squeeze continues. 47 2018 Human Rights Perception Study (English), rary/effective_governance/percep_ii-asupra- http://www.md.undp.org/content/moldova/en/home/lib drepturilor-omului-in-republica-moldova.html Moldova Policy Notes | Reforming Moldova’s Justice Sector 49 Strengthening Human Capital Moldova plans to modernize its justice information systems, but that will not be easy Judges’ performance evaluation and or quick. Advances in technology and good management need to be more transparent, practices from neighboring countries suggest accountable and rule-based. Performance Moldova could use smarter ICT-based solutions management is addressed in a 2012 Law on the cost-effectively to address the capture, Selection and Performance Evaluation of corruption, and performance issues identified. A Judges, which gives the SCM primary priority for Moldova’s justice reforms is to responsibility for evaluation and requires it to set strengthen sector ICT capability and applications detailed criteria for performance. Judges are to increase efficiency, transparency, access, and subject to regular performance evaluation every accountability. three years. At the request of the SCM, in 2014 the Organization for Security and Cooperation in A central ICT challenge for the court system Europe and its office for Democratic Institutions is an advanced cloud infrastructure that lacks and Human Rights assessed the effect of the requisite support. Its numerous stakeholders, law. The report expressed “concerns with the objectives, and activities are not aligned under a fairness and transparency of the system, single ICT strategy umbrella. The result is that including lack of consistency in grading, justice sector ICT is fragmented, and the insufficient reasoning for Board decisions, and a organizational structure is complex. Funding for perceived subjectivity of grading”. ICT is not aligned with outcomes or user priorities, and annual allocations complicate Appropriate incentives for justice personnel, medium- to long-term planning. There is no if well-designed, could mitigate some allocation for maintenance, support, or upgrading corruption and human resource management of current systems. The justice system as a (HRM) challenges. According to the JSRS, whole lacks enterprise-level information and despite the new HRM system, low civil service communications technology architecture to salaries remain an issue. Past wage increases support high-quality, efficient resource sought to promote judicial independence and management, data transmission and storage and reduce judicial corruption. Over 2013-14, judges information security. In addition, limited current received 100 percent salary increases and in resources and capacities are scattered across 2015 and 2016, 10 percent increases. The MOJ organizations, further reducing effectiveness. reports that since 2010 it has replaced one-third of judges to reduce corruption. However, citizens Physical Facilities and firms are skeptical that corruption has been The 2016 law on judicial reorganization has reduced much, and unless credible punitive led to little change on the ground: courthouses measures against corruption are taken in remain crowded and short of hearing rooms, and parallel, salary increases alone will not help. lack clear signage, elevators, rooms for Quality and professionalism of justice sector (defense) lawyers, canteens, and toilets. Access personnel requires sustained attention. 45 shortcomings leave users poorly informed, and percent of court users believe that justice not treated well. The child-friendly hearing rooms professionals are not sufficiently qualified, 48 in courts and prosecution offices are not while the quality of judicial decisions is assessed compliant with international standards. to be the weakest element of the judiciary. 49 The MOJ estimates that it needs about US$60 new approach to professional training of judges million (MDL1.5 billion) to reorganize the and prosecutors, championed by the National judicial map as originally envisaged. The Institute of Justice since 2017, could potentially estimate covers new construction, renovations, improve the quality of justice services. extensions, furniture, and equipment; however, it Nevertheless, additional efforts are required to underestimates the true cost of consolidating the improve the quality of legal reasoning and court network (e.g., Moldova has no energy develop non-technical skills required by effective efficiency standards yet for courthouses and justice professionals, based on a comprehensive related physical infrastructure, and none of its training needs assessment and modern training courts comply with national or international fire evaluation tools. protection standards). The estimated cost does Justice Sector IT Systems not include the costs of upgrading ICT, any land acquisition that may be needed, or demolition of 48 49 2018 Survey on Public Opinion about the Justice Soros-Moldova. Assessing the First Year of System in Moldova (Romanian language version), Moldova’s Implementation of the Association Agenda https://www.justitietransparenta.md/rezultatele- – Progress and Opportunities in the Political Sphere. sondajului-privind-opinia-publica-despre-sistemul- Working paper. Chisinau: Soros-Moldova, 2016. judecatoresc-din-moldova/ Moldova Policy Notes | Reforming Moldova’s Justice Sector 50 obsolete buildings. However, funding is yet to be improving integrity, including designating a identified, and no donors have yet committed to single court with jurisdiction across Moldova financing court infrastructure. for small-value high-volume civil enforcement cases with online filing capability, and How Moldova Can Strengthen its announce a revised action plan 52 with costing, Justice Sector Performance implementation schedule, and milestones. - Initiate or expand targeted programs to The findings from the 2017–18 court user improve access to justice for vulnerable surveys can significantly contribute to policy groups, such as women, girl children, and reform design and implementation. For juveniles, and minorities, in collaboration with instance, the most important reforms for citizens civil society and development partners, and were specialization of judges, simpler and faster publish the results every quarter. procedures for small cases, and reform of courts - Address performance and corruption feedback and prosecution. Survey feedback from citizens, captured in the 2017–18 Surveys of Court firms, and justice employees, combined with data Users through targeted actions (such as analysis, discussions with policy-makers, and prosecution of officials for corruption) and reports from development partners such as the publicize progress annually. EU, DfID, USAID, and others, should inform the minimum agenda for justice reform: 50 3. Improve justice sector ICT and physical facilities to facilitate user access, make 1. Strengthen citizen and business trust in more information available to them, and the justice system by making the work of reduce manipulation and corruption. courts, prosecution, advocates and - Announce milestones and indicators to track notaries more responsive and transparent. progress on improving justice ICT systems for - Publish the findings of the 2017–18 Surveys of the next three years, based on a review of the Court Users on SCM and MOJ websites; previous findings on ICT issues that identify 5– announce actions to address the findings; and 10 priorities for improvement. repeat the surveys every two years to track progress. 4. Strengthen human and financial resources - Announce and implement a medium-term to modernize the justice system. action plan to improve enforcement of civil - Address the uneven distribution of judicial judicial decisions, so that locked-up private services and judges’ workloads by deploying capital is freed up, the government can courts’ financial and human resources on the recover moneys owed to it, and businesses do basis of projected case inflows. not have to use unregulated private debt - Quantify the volume of arrears built up by the collectors. 51 courts, prosecution, and MOJ and announce a - Annually publish basic justice sector statistical schedule for action (agreed with the MOF) to data, including the 2017 Justice-at-a-Glance eliminate and then prevent build-up of arrears. indicators developed with World Bank support. - Locate financial resources and establish a - Announce a time-bound program for reforming strong management team for a 5–7-year the prosecution service, without amendments justice system modernization program to laws or draft laws contrary to the opinion of (covering courts, prosecution and the MOJ). the Venice Commission or limiting the powers This Policy Note was produced by the World Bank to inform policy debate in of prosecutors to combat high-level corruption. Moldova. This note was prepared by Eva Melis and Amitabha Mukherjee with contributions from Alla Skvortsova and Alexandru Cocirta (UNDP), Sergiu Rusanovschi (UNICEF), Schaeffer Fabien (EUD), and Kate Whyte (UK 2. Improve justice access, efficiency, and Embassy). integrity by leveraging IT and judges’ The findings, interpretations, and conclusions expressed herein do not specialization for smarter court necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. consolidation, easier access for the vulnerable, reduced corruption, faster case For any questions regarding this note, please contact moldova_contact@worldbank.org. processing, and cost savings. THE WORLD BANK MOLDOVA OFFICE: - Revise the current plan to reorganize the http://www.worldbank.org/en/country/Moldova judicial map, to identify opportunities for process streamlining, cost savings, and 50 51 For details, see the World Bank 2018 Justice Sector In the 2017–18 survey 72 percent of businesses Public Expenditure and Institutional Review of using private debt collectors reported poor Moldova, and the Justice-at-a-Glance (English, performance. 52 This will include learning from regional peers (e.g. Romanian): http://documents.worldbank.org/curated/en/docsearc Croatia, Azerbaijan) about combining technological h?query=p158938. advances and specialization to yield cost savings without affecting access. Moldova Policy Notes | Reforming Moldova’s Justice Sector 51 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Increasing the Productivity and Competitiveness of Agriculture Key Messages Agriculture is vital to Moldova’s economy, contributing 11 percent of GDP, 32 percent of employment, and 45 percent of exports. But its low productivity limits incomes and inhibits on-farm investments. Key public services in agriculture, such as education, research, and extension services are weak, outdated, and underfunded. The vulnerability of agriculture is amplified by the acute volatility of output caused by weather-related shocks and perpetuated by the lack of effective weather mitigation tools and services. Trade integration with the EU generates both opportunities and challenges for Moldova’s agricultural producers. Enhancing compliance with EU requirements for food safety and quality will improve market access and help Moldova to compete domestically with increasing agricultural imports. Key Actions • Build farmers’ capacity for sustainable and productive agricultural practices, especially climate adaptation measures. • Support penetration into markets, both domestic and external, for higher-value products, particularly animal production. • Revise the existing subsidies by promoting smart subsidies and set-up a mechanism for evaluation of the impact of the subsidies. • Promote agricultural education and extension services to improve access to knowledge. • Launch food quality and safety programs to reach international standards. • Emphasize innovation to attract more young people into the sector. Where Moldova Stands Now particularly vulnerable to weather. Droughts, floods, and soil erosion are among major climate- Agriculture is vital to Moldova’s economy. In driven problems affecting Moldova. Severe 2017 it accounted for 11 percent of GDP and weather every two to three years since 2007 has employed up to 32 percent of the labor force. had a devastating effect on most crops (Figure Together with agro-processing, it generates 2). The volatility is also partly caused by about 18 percent of GDP. The sector is a net underdeveloped measures for mitigating exporter and a major earner of foreign exchange; weather-related risks, limited access to irrigation, agro-food products comprise over 45 percent of low adoption of such modern agricultural Moldova’s total exports. Clearly, agriculture technologies as drought-resistant crop varieties continues to be both a driver of economic growth and anti-hail protection, and a lack of innovative and an avenue for reducing rural poverty. insurance schemes. However, low productivity limits farm Figure 1. Share of Agriculture in GDP and incomes and heightens sector vulnerability. Employment, Percent The current share of agriculture in employment is 40% nearly triple its share in GDP (Figure 1), which 35% implies that labor generates much less value- 30% added in agriculture than in other sectors. 25% Agricultural labor productivity is only 40 percent 20% of average national productivity. As a result, 15% agricultural incomes remain modest; in 2015 10% poverty was much higher in rural areas (14.5 5% percent) than in urban (3.1 percent). Moldova’s 0% 2010 2011 2012 2013 2014 2015 2016 2017 exposure to shocks is amplified by the climate- related shocks that affect agriculture. % employment % GDP High output volatility is a serious threat to Source: NBS. agricultural development. Crop production is Moldova Policy Notes | Increasing the Productivity and Competitiveness of Agriculture 52 Climate change is expected to exacerbate the provided by existing education and research impacts of extreme weather. A 2014 World institutions. That would be a less than optimal Bank study found that changes will lead to scenario for the delivery of essential knowledge variations in temperature and rainfall patterns, to farmers, as these entities do not have a wide- and that over the next 40 years the effects of spread physical presence in the rural space and climate change on Moldova will become more lack the resources and skills to provide effective severe. Without decisive adaptation strategies, extension services. most yields will plunge. Trade integration with the EU generates Figure 2. Agricultural Output Volatility, 2007–17, opportunities as well as challenges for Percent Moldova’s farmers. In 2014, Moldova signed 180 the Association Agreement with the EU and the total 160 related Deep and Comprehensive Free Trade crops Agreement (DCFTA). This gives its agro-food 140 sector a great opportunity to both compete in the 120 largest market in the world and reduce its reliance on the traditional but unstable Russian 100 market. Indeed, since 2014 Moldova’s exports in 80 general and agro-food exports in particular have been increasingly directed to the EU (Figure 3). 60 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 The share of agro-food exports to the EU shot up from an average of 35 percent before DCFTA Source: NBS. (2010–13) to over 55 percent after (2015–17). Education, research, extension, and other But Moldova’s agro-food sector needs to move public services that are critical to supporting faster if it is to compete even domestically with sector development are lacking quality and EU imports. are not effective. Due to systemic deficiencies Figure 3. Moldova’s Agro-Food Exports, 2010–17, and outdated methods, agricultural education US$ million and research institutions offer little value to the sector. Underfunded, with dilapidated 1,200 inventories, inadequate resources, and aging 1,000 staff, existing research institutes are in survival 800 mode. The risk of irrelevance is particularly 600 critical because they still operate in isolation from 400 the private sector and the international R&D system. Education and training in agriculture are 200 confronted with similar problems, and there is a 0 severe mismatch between the qualifications 2010 2011 2012 2013 2014 2015 2016 2017 students acquire and those the labor market MD agro-food exports, total needs. Inadequate services for farmers, poor MD agro-food exports to EU infrastructure and underdeveloped utilities make it acutely difficult to retain young people in Source: NBS. agriculture and in rural areas. The agro-foods Moldova exports to the EU By 2018 provision of extension services had have little value added. Among them recently significantly regressed. Until 2018, these have been dried fruits and nuts, cereals and services were provided through a network of sunflower seeds, wines, juice concentrates, and regional and village-based consultants of the vegetal oils—standardized commodities sold in National Rural Development Agency, for which bulk. The next challenge for Moldovan producers public resources had been allocated since 2002. in becoming competitive on EU markets is to add This system of service providers was established more value to exports. with the World Bank, SIDA, and DFID support Compliance with EU food safety and quality and, despite some limitations, has built a solid requirements is at the core of the EU-Moldova track record of engagement with thousands of DCFTA and looms large on Moldova’s agenda. farmers of all types and sizes. In 2018, the Since creation of the National Food Safety Ministry failed to select an extension service Agency in 2013, the Government of Moldova has provider for the next 5-year period, so the service been pursuing an ambitious agenda for is not available. The Ministry has no clear modernizing its food safety and quality position on this, and informal communications management systems in order to align them with suggest that in future extension services will be rigorous international public health standards, Moldova Policy Notes | Increasing the Productivity and Competitiveness of Agriculture 53 maintain domestic market share, and promote • Adopt food quality and safety programs for growth of exports to both traditional and new reaching international standards. markets. Progress to date has been good in many areas but among issues still to be resolved • Focus on innovation and attraction of young are development of the domestic livestock sector. people into the sector. There are still gaps in laboratory diagnostic As agriculture proves to be more and more capacity for monitoring and surveillance of affected by adverse events, the need for animal diseases, despite recent improvements. effective risk management tools becomes There is also a complete absence of programs to critical. Moldovan agriculture would benefit from monitor the quality of raw milk, which a comprehensive risk assessment that would disadvantages domestic dairy producers vis-a- also identify the policy instruments best tailored vis competitors. Another major gap is in to the Moldovan context. Farm-level reforms infrastructure for the management and disposal should be identified, such as farm water of byproducts of animal origin. These gaps are efficiency, adoption of more climate-resilient not only major problems for exports but also seed varieties, crop diversification, and also significant domestic public health concerns. national adaptation and mitigation measures, The “Moldova 2030” National Development such as investment in rehabilitating secondary Strategy calls for more investment in irrigation capacity. It will be important to establish agriculture, expanded export opportunities, the appropriate mix of tools for Moldova’s building up human capital, and identifying agricultural conditions, the most effective division action to respond to climate change. The of roles and risk-sharing between the public and strategy emphasizes enhancing the quality of private sectors, and the appropriate targeting of people’s lives through country modernization and risk management instruments. integration with Europe. It acknowledges the low Building the competitive advantage for productivity and competitiveness of Moldova’s Moldova’s agriculture will require skilled and agriculture. The problem of inadequate human innovative management. Consolidated efforts capital and the exodus of young people from rural are needed to improve the business, marketing, areas is recognized as a major developmental and management skills of domestic producers, challenge. Among other threats are global especially young farmers. In the short term, good climate change, which calls for adopting such technical managers can be recruited adaptation measures as access to more resilient internationally, but that can be costly, and longer- plant varieties, raising farmers’ awareness and term Moldovan-trained management will be training, and using water more efficiently. needed. The government could work together with education institutions, extension services, How Moldova Can Enhance and the private sector on a clear action plan to Agricultural Productivity and Become improve business management in agriculture so Internationally Competitive as to drive the sector forward Transforming agriculture into a modern, vibrant, In this context priority should be given to and market-oriented sector is central to fighting revamping agricultural education and poverty, promoting social inclusion, and reducing adapting the curriculum to meet the urban/rural development divide. A review of contemporary business needs. Reviewing the experience post-accession of new EU both university and pre-university curricula could member states found that agriculture had help place more emphasis on modern business benefited more in countries that gave priority to practices and closer cooperation with the private enhancing competitiveness, modernizing the sector. Agricultural colleges and vocational agri-food industry, and adapting it to EU education and training could add courses on standards. Clearly, Moldova should continue to business administration that are customized for apply a variety of strategies to boost agricultural training middle management and supervisors for productivity and competitiveness. Thus, it might: the agricultural industry. They could also provide on-farm training for the certification demanded by • Generate incentives and build capacities for EU retailers, such as GlobalGAP and other sustainable and productive agricultural private standards—which would also be a good practices, such as climate adaptation way to link more closely with the private sector. measures. The curriculum of the Agricultural University also • Support penetration into markets for higher- needs to be adapted to the requirements of the value products, both domestic and external. market economy, and ties strengthened with companies to organize student placements that • Promote education and agricultural extension offer practical company experience. services to broaden access to knowledge. Moldova Policy Notes | Increasing the Productivity and Competitiveness of Agriculture 54 An urgent priority is to get the extension This Policy Note was produced by the World Bank to inform policy debate in service back up and act as an effective Moldova. This note was prepared by Anatol Gobjila, Felicia Pricop, and channel for delivering knowledge to Marcel Chistruga. Moldovan farmers. If there are concerns about The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the the quality and efficiency of the extension World Bank or the Governments they represent. services delivered, the tenure of the award to the For any questions regarding this note, please contact prospective service provider could be reduced moldova_contact@worldbank.org. from five to three years, with the government THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova meanwhile working on a new model for rural advisory extension services. Development partners could advise on international best practices and provide technical assistance. Still required will be both significant investment and institutional change to ensure that the agricultural and food industry complies with EU requirements. The government must make it a priority to fund and provide practical support for addressing deficiencies in the country’s food safety laboratory capabilities; eliminating quality assurance problems in the milk and dairy sector; and urgently tackling the agenda for animal by- product management and disposal. Addressing these priority themes will create the necessary dynamism for investments that enhance the productivity and competitiveness of the country’s deteriorating livestock sector at both production and processing levels. Moldova must innovate if it is to make its agriculture world-class and competitive and promote better and higher-paid jobs for the rural workforce. The start-up and development costs of truly innovative enterprises in Moldova are expensive because the goal is difficult. An Innovation Fund could be established to provide matching grants and supplementary technical assistance to encourage companies to innovate. The fund could finance the development of new products or markets, the uptake of new technologies or processes, or the building of strategic relations among new value chain actors. Moldova Policy Notes | Increasing the Productivity and Competitiveness of Agriculture 55 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Safeguarding Fiscal Sustainability Key Message Moldova has managed to keep fiscal deficits under control in recent years, largely on the account of lower capital spending and improved tax collection. Yet, efficiency of public finances remains challenging. Relative to its level of per capita income, human development and government efficiency, Moldova’s ratio of government consumption to GDP is high. Going forward, while fiscal discipline needs to be maintained, reliance on foreign assistance in addressing Moldova’s infrastructure needs, contingent liabilities, and social pressures will require more efficient use of public resources. To achieve fiscal sustainability, build resilience to internal and external shocks, and ease dependence on external financial aid, the authorities will have to keep the budget deficit within the fiscal rule and lower. The recent policy decisions to cut tax rates, introduce fiscal amnesty, increase public sector wages and pensions are steps to a wrong direction. Key Actions • Raise the productivity of major taxes; streamline taxes on income, and wealth; strengthen the VAT and excise tax regimes; and rationalize tax expenditure. • Increase local government own tax revenues through property taxation to reduce dependence on intergovernmental fiscal transfers. • Improve efficiency of social spending, state aid, and improve public investment management. • Strengthen monitoring of contingent liabilities from SOEs. • Apply fiscal rules more effectively and prudently. • Launch domestic debt issuance to reduce dependence from foreign assistance, together with lengthening the average maturity of domestic debt and deepening the secondary market to reduce domestic debt roll-over and interest rate risks. Where Moldova Stands Now especially related to VAT, is a serious problem for revenues as it erodes the tax base. As Moldova has managed to keep fiscal deficits discussed in Moldova CEM (2019), the system under control in recent years. Except for 2007 was skewed toward taxes on goods and when the deficit reached 5.9 percent of GDP services; but direct taxes gained importance (Figure 1), deficit was on average 1.2 percent of recently. This bias against employment and GDP by 2018. Government spending has capital accumulation reduces the incentives to declined from 37 percent in 2007 to 31 percent in create jobs, while low taxes on consumption 2018, mostly on the account of declining public discourage savings. The VAT fraud, tax investments (as a percentage of GDP). The exemptions, and inefficient collection latter, which relies mainly on external sources, mechanisms deserve more attention, as poorly was severely affected by the spending cuts designed, and not systematically monitored, tax following the 2014 bank fraud. It has not fully incentives undermine productivity growth. 53 recovered yet. Efficiency of public finances remains Reforms of tax administration have challenging. Not only does Moldova collects prevented steeper fall of revenues despite more revenues than its peers, it also spends declining economic activity. Moldova collects more. Relative to its level of per capita income, more tax revenues (19 percent of GDP) than human development and government efficiency, peer countries (13 percent ECA average in Moldova’s ratio of government consumption to 2016), but there are still inefficiencies in GDP is particularly high (Figure 2). Spending on collections. The proliferation of tax expenditures, social protection, education and health account 53 World Bank. 2019. Moldova – CEM. Moldova Policy Notes | Safeguarding Fiscal Sustainability 56 for almost two-thirds of the overall spending. The classifications undermine transparency. For aging pressures on social sector spending will example, after 2008, spending on road intensify. With increasing dependency ratios, maintenance executed through the Road Fund despite the beneficial impact of the 2016 reforms, was classified as “capital transfer within country.” there are still concerns about pension system If the classification were corrected, capital as a sustainability since the 2018 cut in the share of GDP would be revised downward. How contribution rate. well capital spending aligns with NDS priorities also raises concerns: Although budgeted Figure 1. Government Revenues, Expenditures and Balance, 2007-18, Percent of GDP spending is generally consistent with strategic 40 3.0 objectives, actual outlays are less so. This gap 35 2.0 implies project implementation problems. 1.0 30 Figure 3. Public Investment and Capital Stock, 2015, 0.0 25 -1.0 Percent of GDP 20 -2.0 15 -3.0 -4.0 10 -5.0 5 -6.0 0 -7.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e Revenue Expenditure Balance Source: MoF, World Bank, World Bank staff calculation. Figure 2. General Government Final Consumption Expenditure, 1995-17, Percent of GDP Source: IMF, World Bank staff calculations. Going forward, while fiscal discipline needs to be maintained, reliance on foreign assistance in addressing Moldova’s infrastructure needs, contingent liabilities, and social pressures will require more efficient use of public resources. 56 The law on public finance and budget responsibility mandates that as of 2018 the budget deficit should not exceed 2.5 percent of GDP, excluding grants and capital investment projects. Yet, this Source: MoF, World Bank, World Bank staff rule will be hard to comply going forward given calculation. the recent fiscal package enacted in 2018. The Public investment and public capital stock 2019–21 MTBF 57 seeks to promote a prudent are lower in Moldova than in peer countries fiscal policy and a cautious debt profile while (Figure 3). Public capital spending is allocating the necessary resources to social concentrated in few areas, and roads absorb the spending and stimulating economic growth. The most. And although its efficiency score for main short- and medium-term objective is to physical infrastructure is relatively high, except carry out structural reforms, consolidate public for electricity and telephony infrastructure finances and maintain financial stability. Moldova does not perform particularly well However, the recent policy decisions to cut social compared to peer and neighboring countries. 54 contributions and PIT rates for the private sector, The Capital Expenditure Review suggested introduce fiscal amnesty, reduce VAT for the several areas for improvement 55 and also found HORECA sector, increase public sector wages, that inconsistencies in national budget and change the pension indexation lead to a rise 54 56 World Bank. 2017. Moldova – Support to SOEs IMF. 2017. Moldova: Public Investment, Efficiency and Growth: The Case of Moldova. IMF Country Preliminary Diagnostic and Reform Assessment. Report No. 17/399: Washington, DC. World Bank: Washington DC. 55 World Bank. 2014. Moldova–Capital Expenditures: 57 The Medium-Term Budgetary Framework (2019– Making Public Investment Work for Competitiveness 21) is designed to comply with target indicators agreed and Inclusive Growth in Moldova. Public Expenditure during the Third Assessment (March 15–27, 2018) of Review. World Bank: Washington DC. the Economic Reform Program supported by a three- year IMF arrangement. Moldova Policy Notes | Safeguarding Fiscal Sustainability 57 in deficit of 1.5 percent of GDP a year. The social all scenarios, Moldova’s public debt is projected contribution cut should be either reversed or to remain sustainable, although sensitive to adjustments should be sought on the exchange rate depreciation, economic growth, expenditure side (See Note on Achieving a and a sudden call of contingent liabilities. Sustainable Social Protection System). Permanently lower GDP growth could push public debt above the sustainability threshold by To maintain fiscal sustainability, build 2037, with the present value of debt reaching 84 resilience to internal and external shocks, percent of GDP. In alternative scenarios, the and ease dependence on external financial present value of the debt-to-GDP ratio stays aid, the authorities will have to keep the below the indicative thresholds, even in a budget deficit within the fiscal rule and lower. scenario that foresees an increase in Another challenge for the medium term is to contingencies in the banking system affecting make public spending more efficient. In 2018, accumulated energy sector debts. higher and vocational-technical education was chosen for a pilot expenditure rationalization Table 1. Debt Indicators, 2014-18, Percent of GDP exercise to heighten the efficient use of funds in 2015 2016 2017 2018 education by identifying possible nonpriority Total external debt 78.3 76.7 72.0 64.6 Public debt 29.6 36.9 32.7 30.5 savings and spending. The results will inform (including domestic policies for education to be incorporated into the arrears) 2020–22 MTBF and the 2020 budget. External debt 22.9 22.1 19.1 18.2 (PPG) Figure 4. External Debt, 1995-2017, Percent of Domestic debt 6.7 14.8 13.6 12.1 GNI External debt 2.1 2.6 2.2 .. service payments (% of exports) Government interest 0.8 1.1 1.1 1.0 payments (% of revenue) Government loan .. 8.5 7.4 6.8 guarantees Source: MOF, NBM, World Bank. Yet, despite positive macroeconomic outlook, there are considerable downside risks. While growth prospects remain robust thanks to consumer and business confidence, and a continued, albeit slow, normalization of Source: MOF, Central Bank, World Bank staff calculations. financial conditions, growth is projected to further Debt sustainability needs to be safeguarded. moderate to 3.6 percent by 2020, away from Although both public and external debt have more than 4 percent in the past three years. The declined in the last two years, external debt is still 2018 tax reform and capital amnesty package relatively high (Figure 4). Although private (“fiscal package”) and the expected increases on external debt has declined since 2015 (mainly the expenditure side (wage bill, social benefits because overseas borrowing by banks declined), and recalculation of pensions) put further at almost 47 percent of GDP in 2018, it is still pressure on fiscal sustainability over the short unusually high for a lower middle-income term, while inefficient public spending, contingent country. Given the country’s significant liabilities and demographic vulnerabilities expose vulnerability to exogenous developments and the fiscal policy to long-term pressures. persistent problems in the banking sector, fiscal How Moldova Can Safeguard Fiscal discipline is critical to ensure debt sustainability. External sources finance a large part of Sustainability government debt—more as a percent of gross To ensure stability and resilience Moldova national income (GNI) than ECA and LMC requires prudent fiscal policies and public averages. finance efficiency improvements. Among tax The 2017 Joint IMF–World Bank Debt policy actions necessary to promote stability are: Sustainability Analysis found that in all raising the productivity of major taxes; scenarios Moldova’s risk of debt distress is streamlining taxes on income, wealth, and social still low and public debt dynamics are security; strengthening the VAT and excise tax sustainable (Table 1). Once guarantees are regimes; and rationalizing tax expenditure. included, Moldova’s public and publicly Moreover, as highlighted in the Public Finance guaranteed (PPG) debt declined from 45.4 percent of GDP in 2016 to 37 percent in 2018. In Moldova Policy Notes | Safeguarding Fiscal Sustainability 58 Review, 58 fiscal authorities should also act to a top priority recommended in the latest joint make government spending more efficient. This IMF-WB Debt Sustainability Assessment to is particularly the case in social sectors, state aid, reduce dependence from foreign assistance, and capital spending areas. (see Note on together with lengthening the average maturity of Enhancing the Business Environment and domestic debt and deepening the secondary Market Competition; on Strengthening market, which would help reduce PPG domestic Governance of State-Owned Enterprises; on debt roll-over and interest rate risks. Sound Increasing the Productivity and Competitiveness medium-term macroeconomic management is of Agriculture). essential to ensure debt sustainability and To reduce dependence on intergovernmental growth. fiscal transfers, local governments should strengthen its own tax revenues through property This Policy Note was produced by the World Bank to inform policy debate in taxation (see Note on General Property Taxation Moldova. This note was prepared by Natasha Rovo and Sanja Madzarevic Sujster. and Public Property Management). This would The findings, interpretations, and conclusions expressed herein do not require enhancing land registry and property necessarily reflect the views of the Board of Executive Directors of the valuations, as well as strengthening the tax World Bank or the Governments they represent. collection at local levels. For any questions regarding this note, please contact moldova_contact@worldbank.org. The authorities should strengthen monitoring THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova of contingent liabilities from SOEs and applying fiscal rules more effectively. Launching an authentic domestic debt market is 58 World Bank. 2016. Moldova Public Finance Review. World Bank: Washington, DC. Moldova Policy Notes | Safeguarding Fiscal Sustainability 59 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth General Property Taxation and Public Property Management Key Message With respect to property taxation, the contribution of recurrent property tax revenue to GDP in Moldova is only one-third of the EU average, which indicates significant potential for improvement. Among problems depressing property tax revenue are incomplete coverage of properties, lack of up-to-date market-based property valuations, absence of links between property valuation and taxation, and the high cost of collection and enforcement. With respect to public property management, publicly-owned immovable assets (land and property) is an extremely valuable resource because it enables the delivery of public goods and services as well as generating public revenues. A major impediment to effective management of Moldovan public property is incomplete registration and the lack of an inventory. Lack of registration has also caused disputes in Moldova between central and local government claims. Finally, Moldova has an incomplete cadaster and property assessments are not conducted with up-to-date market-values. This directly affects property taxation revenue performance. Key Actions • Update property valuations and link revised valuations to property taxation. • Enable mobile/mCloud payments to lower the costs of property tax collection. • Improve state land management by registering and creating an inventory of publicly-owned properties, resolving disputes, and building capacity to manage public land. • Improve coverage and review property tax rates and tax relief to broaden the tax base. • Introduce valuation of publicly-owned land and property and use the valuations to determine the optimal use of such assets. Where Moldova Stands Now high rates of collection of reported property taxes: it brings in 99 percent of the land tax Capturing all the properties in the cadaster payable by individuals, 96 percent payable by and linking the registry to the taxation system legal entities, 95 percent of property tax on improves coverage and expands the property individuals, and 90 percent payable by legal tax base. Value-based recurrent property taxes entities. However, the property valuations used are important because they broaden the tax base are old, and currently there are no plans to to embrace wealth as well as incomes and update valuations for taxation purposes. consumption. Imposing value-based taxes helps Updating valuations without also reviewing to produce a fairer, more equitable, and more property tax policy at the central level could efficient property tax system. cause average losses in property taxes of US$2.3 million to US$5.4 million a year. This Recurrent property taxes are typically local amounts to 7.2–16.9 percent of annual property taxes. However, central and local government tax collections and 1–2.2 percent of annual own- budgets are inextricably linked through inter- source revenues. governmental fiscal transfers, which means that failure to maximize the revenue potential of local The costs of collection also seem very high, taxes has consequences for national budgets depressing net tax yields. The World Bank and fiscal sustainability. Moldova raises only 0.3 Land Governance Assessment Framework percent of GDP from recurrent (annual) property estimated that Moldova’s administrative costs taxes; the EU average is 0.8 percent. 59 amount to 43 percent of the tax collected. Collection costs ought to be less than 3 percent. To maximize property tax revenues, it is a priority to link property tax policy to updated About 45 percent of the land in Moldova is property valuations. Moldova has impressively publicly owned. Of this, about 25 percent is 59 The World Bank-financed Land Registration and property valuation system so that accurate market Property Valuation Project aims to complete first values can support such purposes as property taxation registrations to increase coverage and update the and real estate market analysis. Moldova Policy Notes | General Property Taxation and Public Property Management 60 believed to be owned by the state and 75 percent update their values by current valuation by local public authorities (LPAs). One of the standards. Properties not yet captured in the biggest impediments to effective management of system need to be evaluated. By supporting state land is lack of an inventory, which is coverage and valuation, the country’s exacerbated by incomplete registration: An property tax revenue performance should estimated 93 percent of publicly-owned land in improve. Updated valuations would also Moldova is unregistered—about 25,000 parcels result in a more fair and equitable tax burden are believed to have been registered but another in line with market values. 330,000 parcels are not. Often, there is no clear • Assess the effectiveness of current tax rates delineation between public and private land, and relief regime. This would be particularly especially in rural areas. prudent when the valuations are updated. The Government of Moldova may wish to Lack of registration can create disputes. revise tax rates and relief policies in line with Moldova has seen disputes between different the updated values. Participation of LPAs in levels of government about who has the rights to such an initiative would be important to the particular properties. There have also been design of a system that takes into account questions related to how property was acquired, the local revenue and equity effects. The whether expropriated or privatized. In rural areas expected impact of such an initiative would privatization was not based on accurate surveys; be higher property tax yields. LPA some households were allocated larger areas participation would also give the process than they were entitled to but have had peaceful more legitimacy. In addition, higher local tax enjoyment of these properties for long enough revenues could reduce the burden of inter- that they could reasonably claim ownership by governmental fiscal transfers. virtue of adverse possession. • Subsequently give priority to property tax In Moldova the World Bank Land Governance collection and enforcement. The results of Assessment Framework (LGAF) identified a the first two strategies would be undermined number of issues with management of state by poor collection and enforcement. While land, including because assets were privatized Moldova has high rates of property tax on disadvantageous terms, land belonging to collection, the administrative cost of state companies was illegally alienated, bankrupt collection is high. To heighten collection companies used state land to pay creditors, and efficiency, the Government could assess the civil servants representing the state on company bottlenecks that confront LPAs. Enabling boards had severe conflicts of interest because mobile payments over the mCloud platform of their association with multiple companies. could reduce the administrative burden. Clearly, there are management deficiencies that need to be addressed. Publicly-owned land and property is an extremely valuable resource for any country. The cadaster is incomplete preventing proper It is needed to enable the delivery of several mass valuation. A decade ago Moldova was a public goods and services, and it can also leader in Europe in development of mass generate significant revenues for state and local valuation to generate up-to-date market-value governments. In order to optimize the utilization property assessments, with plans to expand the of public land, Moldova can reinforce state land process to different types of properties. However, management in several ways: this project was abandoned for many reasons, notably lack of systematic first registration, which • Both national and local governments must left many properties out of the cadaster. have an accurate record of the properties they own, and the rights associated with How Moldova Can Bolster Land them. Delineation and registration both Management and Property Taxation provide essential protection from encroachment and an accurate record of what To improve property tax revenue is owned. This is the first step to an effective performance, Moldova can use a three- program for managing public assets. The pronged strategy. A country’s property tax World Bank-financed Land Registration and revenue performance is a function of coverage Property Valuation Project will fund the ratio, valuation ratio, tax liability ratio (tax rates delineation and first registration of public land and relief), and tax collection and compliance and its valuation, which is an essential first (including collection and enforcement). Moldova step to developing a national policy for efficient should therefore: management of state land. • Improve the coverage and increase the • It is necessary to resolve outstanding number of properties in the tax base and disputes about who owns public land. Moldova Policy Notes | General Property Taxation and Public Property Management 61 Because some such disputes are likely to emerge during the delineation and registration This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Olivera Jordanovic and Aanchal process, the Public Property Agency may Anand. need to create a fast-track mechanism to The findings, interpretations, and conclusions expressed herein do not resolve disputes, particularly between central necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. and local governments. For any questions regarding this note, please contact • Publicly-owned properties need to be moldova_contact@worldbank.org. THE WORLD BANK MOLDOVA OFFICE: valued so that their rental and lease values http://www.worldbank.org/en/country/Moldova can be set with confidence. It is necessary to determine whether properties are being used to best effect or whether they could serve a better purpose and functions. • State land management policy will require building both central and local government capacity, to better equip officials to make decisions and optimize the utilization of state land and property. Moldova Policy Notes | General Property Taxation and Public Property Management 62 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Strengthening the Asset Declaration and Asset Recovery Key Message In the past three years, Moldova has significantly strengthened its requirements for asset and interest declarations by public officials. With the support of the World Bank and other development partners it also overhauled the corruption prevention agency in charge of enforcing the asset disclosure system and other anticorruption restrictions. However, enforcement of the new rules and effective verification of the asset declarations of high-level officials remain an issue. The National Integrity Authority (NIA) needs to demonstrate that it can effectively verify declarations, impose sanctions, and cooperate with other law enforcement bodies that use asset declarations in fighting corruption. The Government and other stakeholders need to address the poor enforcement of the asset declaration regime to ensure that the reform succeeds. Moldovan authorities have made substantial steps to hold accountable those responsible for the banking fraud. Some proceeds of the fraud in Moldova have been confiscated, but the results in terms of tracing proceeds of the crime through other jurisdictions and securing their return have been very limited. Key Actions • Ensure that the new legal framework on asset declaration is fully implemented and that the role of the asset declaration system in fighting against and preventing corruption is credible. Verification of the declarations needs immediate attention and violations must be sanctioned promptly and credibly. • Issue guidelines for declarants on beneficial ownership of assets, which should be reflected in the declarations. • Increase the openness of the e-Integrity system by making available to the public use the machine-readable data from asset and interest declarations. • Devote efforts to tracing in foreign jurisdictions all the proceeds of crime linked to the banking fraud, taking all avenues for international cooperation. Where Moldova Stands Now was selected in a competitive process by the National Integrity Council with a one-year delay Corruption is still one of the main challenges (in December 2017). Of 45 integrity inspectors to the economic and social development of authorized, only 9 have been selected. The NIA Moldova. In the past three years Moldova has has yet to demonstrate its capacity to enforce implemented several measures to strengthen its asset and interest declaration requirements and anti-corruption framework. In mid-2016 anti-corruption restrictions. It has verified only a Parliament adopted important reforms that (i) few declarations submitted under the new law. transformed the National Integrity Commission In 2018, the NIA did successfully launch the into the National Integrity Authority (NIA) with a electronic e-Integrity system for submission new governance model that increased of asset and interest declarations. 60 The independence safeguards; (ii) strengthened the system covers about 65,000 declarants, who use asset and interest disclosure system by government-issued electronic signatures to log in extending the scope of information to be reported and file their wealth reports. Except for certain by public officials, transitioning to fully electronic confidential data that the law excluded from system of submission, strengthening the public access, declarations are then published verification of their wealth, introducing civil online for public scrutiny. confiscation of unexplained assets; and (iii) significantly increased sanctions for conflict of In May 2018, Parliament passed a new set of interest and other corruption-related violations. amendments to further strengthen the sanctioning of corruption-related offences, Translation of the reforms into action is improve procedures for control of assets and taking a long time. Leadership of the new NIA 60 With the support of the World Bank Support to Asset Declaration Project. Moldova Policy Notes | Strengthening the Asset Declaration System 63 interests by public officials, introduce disclosure The NIA is well-positioned to benefit from not of the beneficial ownership of companies and only electronic filing but also electronic other assets as part of the declaration, and verification, which can cross-check some of the extend the disclosure requirement to staff of the information declared against information in National Bank and Financial Markets Regulator, government registries. In parallel with launching etc. In January 2019, NIA introduced the systematic verification of declarations, based on extended form of the asset and interest its experience the NIA should also review and disclosure with the request for information on reinforce electronic verification. beneficial owners added. The Government should ensure that NIA staff One recent significant challenge to the NIA’s remuneration is commensurate with their tasks work has been the requirement to issue and scope of authority and that the NIA has a “integrity certificates” to electoral sufficient budget to perform its mandate, candidates. Tight deadlines, inefficient including funds for commissioning expert procedure, and minimal requirements for appraisal of assets and maintaining and certificate contents (certificies only that a upgrading the electronic filing and verification candidate who has been a public official was not system. sanctioned for certain corruption-related The NIA needs to demonstrate that it can offences) have undermined NIA’s reputation. effectively comply with the legal requirement that This requirement jeopardizes NIA operations at least 40 percent of the asset and interest because the certificates must be provided for declarations it verifies are those of high-level local as well as national elections. officials. The Moldovan Parliament adopted Law no. To ensure that the NIA gives priority to immediate 180 on voluntary declaration and fiscal enforcement of the anti-corruption requirements, stimulation in July 2018. It was criticized by the it is recommended that the agency review the several other international partners as procedure for issuing integrity certificates to undermining the fight against corruption and the electoral candidates. If preserved, the procedure integrity of the financial sector. Amendments in should be automated as much as possible; and November 2018 addressed some of the initial information on persons held liable for corruption- concerns by, e.g., excluding from the law’s scope related offences should be made public online, current and former public officials subject to the which would eliminate the need to issue any Asset and Interest Declaration Law and their special certificates. family members. However, comprehensive assessment of the impact of the voluntary Issue guidelines on beneficial ownership and declaration law on the asset declaration system other declaration categories. The provisions and the fight against corruption and money requiring disclosure of control over assets laundering will only be possible if Moldovan through beneficial ownership are commendable. authorities share up-to-date statistics (excluding To have full effect, the NIA now needs to clarify personal information) on the number of their application and provide guidelines to declarations submitted, date of submissions, the declarants explaining how different property value of assets declared, and whether any relationships should be reflected in the updated declaration was submitted by a person exempted electronic declaration form. Such guidelines under the amendments to Article 3 of Law could also clarify other requirements that no.180. declarants find problematic; that would ensure full compliance and minimize mistakes in filling How the Asset Declaration System out declaration forms. Can Effectively Promote Integrity and Increase the openness of the e-Integrity Fight Against Corruption system. Information from submitted asset and Effectively verify asset declarations and interest declarations is available on the NIA web- impose sanctions. With recent amendments, site but is not provided in machine-readable the laws on asset and interest declarations are format, which significantly limits its possible use generally in line with international standards and for analytical purposes. Making machine- best practice. The priority now must be effective readable data available will foster its use by civil verification of declarations and imposition of any society, in particular for data analysis and data sanctions necessary. The NIA should promptly integration. That will heighten the transparency complete recruitment of all integrity inspectors and accountability of the asset and interest through an open and merit-based process. It is disclosure system in general. The NIA could also important to thoroughly train the new inspectors improve the search capabilities on its website for on analysis and verification of assets and asset and interest declarations. interests and confiscation of unjustified wealth. Moldova Policy Notes | Strengthening the Asset Declaration System 64 Tracing and recovering assets found abroad cooperation, and mutual legal assistance needs to be made a priority. The Moldovan requests. Moldovan authorities can build on the authorities have undertaken substantial steps previous ARBI and CAN investigations, SPCSB toward holding accountable those responsible for analyses of suspicious transactions reports, and the 2014 banking fraud. In some cases, there the results of the Kroll audit. have been final convictions for fraud-linked It is urgent that efforts to trace assets in foreign crimes and some of the proceeds from the jurisdictions be stepped up—the longer the time underlying crimes have been confiscated. The since the fraud took place, the lower the chances vast majority of the assets recovered, however, of recovery. The Moldovan government should were located in Moldova. ensure that all stakeholders in the recovery More efforts and resources need to be devoted process have the resources they need to quickly to tracing the proceeds in foreign jurisdictions of move the recovery process forward in foreign crimes linked to the fraud. The Moldovan jurisdictions. authorities Asset Recovery Office (ARBI), the national anti-corruption center (CNA), the office This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Constantin Rusu and Laura Pop. for the prevention and fight against money The findings, interpretations, and conclusions expressed herein do not laundering (SPCSB), and the anti-corruption necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. prosecutor’s office need to give priority to exploring all international cooperation avenues to For any questions regarding this note, please contact moldova_contact@worldbank.org. trace the proceeds of crime abroad and ensure THE WORLD BANK MOLDOVA OFFICE: their ultimate return to Moldova. Among these http://www.worldbank.org/en/country/Moldova avenues are Europol, bilateral police-to-police Moldova Policy Notes | Strengthening the Asset Declaration System 65 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Addressing Energy Security and Promoting Efficiency Key Message Over the last 20 years, Moldova has significantly reformed the energy sector through cost-reflective pricing, independent regulation, and promotion of efficient operations and investments; but because there has been no remedy for the oligopolistic pricing of the main supplier, the results have been suboptimal. Moldova’s dependence on energy imports, especially natural gas, exposes it to energy supply security risks. About 95 percent of Moldova’s total primary energy needs are met by imports, mainly natural gas. To improve the security of its electricity supply, Moldova should diversify supply sources and interconnect with EU networks. That would also allow it to access competitively priced electricity and set up a competitive and transparent internal electricity market. Key Actions • Further improve regulation and energy sector governance to incentivize efficiency and investment. This requires aligning energy regulation to best European practices, including methodologies to recover large investments. • Diversify electricity supply through renewable energy and by connecting with the European electricity grid to establish a transparent and competitive electricity market in Moldova. • Increase the share of renewable generation through a robust competitive bidding process that can deliver increased capacity at lower costs while ensuring control over the volume and location of renewable generation in a manner consistent with system stability and tariff affordability. • Diversify gas supply by finalizing Ungheni and Chisinau pipeline and creating in the regulatory environment a level playing field for different sources of gas. • Build on the success of District Heating (DH) sector recovery to make the service affordable and competitive. The major DH challenge now is to mobilize funding in modernizing heat and power generation, which urgently needs modernization. • Complete the Energy Efficiency Options Study to identify financing instruments to improve energy efficiency in the public sector. Where Moldova Stands Now relying on a single source of gas was realized in 2009, when the gas supply was suspended over Moldova’s dependence on energy imports, payment arrears, mainly those of District Heating especially natural gas, exposes it to energy (about US$150 million in principal debt). supply security risks. About 95 percent of Although Moldovagaz still has significant debt Moldova’s total primary energy needs are met by owed to Gazprom, for several years it has been imports, with natural gas constituting 64 percent able to stay current on payment for gas supplies; of total primary energy supply (TPES). Natural but future gas supply to Moldova is still uncertain gas is supplied almost entirely from Russia. because of the risks of Ukraine halting gas transit Moldova has no gas storage capacity and the (about 25m3 billion annually) from Russia. The gas sector is dominated by a single company, transit agreement between Russia and Ukraine Moldovagaz, owned by Gazprom (50 percent ends on December 31, 2019. Russia is plus one share), the state of Moldova (35.3 developing several alternative transit routes percent), and administration of Transdniestria bypassing Ukraine (Nordstream 2, Turkstream 1 (13.4 percent; Transdniestria’s share transferred & 2) to mitigate the threat. under the control of Gazprom). The transmission Any significant reduction in transit volume network operator is Moldovatransgaz, which is a through Ukraine could affect transit through daughter company of Moldovagaz. The risk of Moldova. This will not only impact residential Moldova Policy Notes | Addressing Energy Security and Promoting Efficiency 66 and commercial consumers of natural gas but and residential apartment buildings. On the also District Heating (DH) and power generation supply side, DH has long been the least efficient by both CHPs on the right bank of the Nistru energy subsector in the country, because of its River and by MGRES on the left bank (see obsolete and badly maintained infrastructure, below). The outstanding debt also exposes inefficient management, and inadequate Moldova to the risk of further supply disruption. regulation. With World Bank support, since 2009 the DH in Chisinau has launched a The fact that Moldova has few sources of comprehensive institutional, corporate and electricity imports also exposes it to risks of financial restructuring supported by an security of supply and insufficient investment in modernizing its operations and competition. About 20 percent of Moldova’s improving its finances. 61 While producing notable electricity demand is currently met by domestic results, these efforts need to be pursued to put generation, primarily from Combined Heat and DH on a solid path of operational sustainability Power (CHP) plants operated to meet seasonal and financial viability. DH heat demand. The remaining 80 percent is purchased, some from Ukraine but mostly from Significant progress has been made on the MGRES power plant in Transnistria. Because promoting the diversification of electricity both domestic CHP generation and the MGRES supply through scaling-up investments in plant are gas-fired, they depend on imports from renewable energy. Moldovan authorities are Russia. preparing, with support from EBRD, necessary improvements to the overall policy framework as Over the last 20 years, Moldova has well as the documentation required for the significantly reformed the energy sector to competitive procurement of 113MW of allow for cost-reflective pricing, independent renewable energy capacity in 2019 and 2020 regulation, promotion of efficient operations, through competitive bidding processes. Scaling- and investments. It has also sought to align its up investments in renewable energy will be an law with EU energy legislation and in 2010 joined important means for Moldova to: meet its climate the Energy Community. However, its power change mitigation commitments; increase private system is physically still part of the Russian sector participation in its electricity sector; Integrated Power System/Unified Power System. expand electricity generation capacity and Since March 2017, the Government has had in increase the resilience of its electricity sector by place a formal process for annual procurement of reducing dependency on electricity imports and electricity, based on guidelines agreed with the on generation from the Kuchurgan power plant - Energy Community Secretariat. This process, with solar and wind being the two priority monitored by independent observers, injected renewable sources to be developed in the short some transparency into the country’s contractual and medium term. arrangements for electricity procurement, yet without remedying the underlying issue of How Moldova Can Ensure Security oligopolistic pricing by Ukraine and MGRES due and Efficiency of its Energy Supply to the absence of interconnection with EU networks. To improve the security of its electricity There is a need to further improve regulation supply, Moldova needs to diversify supply and sector governance to promote efficiency sources–including through the promotion of and attract investments. Compared to other ex- further investments in renewable energy Soviet republics, Moldova moved rapidly in 1997 sources–and connect with the EU networks. This to reform the energy sector by establishing an would allow it to acquire competitively priced independent regulator, ANRE. In the 2000s, the electricity and set up a competitive and country privatized most electricity distribution, transparent electricity market in Moldova. which significantly improved technical and financial performance. Regulated energy prices Progress on promoting energy efficiency and were for the most part adjusted to reflect costs, DH modernization has been encouraging but and the Government has never had to provide insufficient. Since 1990, Moldova’s energy massive budget support to the energy sector, intensity has almost halved, a significant factor unlike the authorities in Ukraine, Belarus, and being adoption of cost-reflective energy pricing. Central Asian countries. In 2015 the resilience of Still, Moldova uses more than twice as much tariff regulation was particularly tested when the energy per dollar of GDP than Romania and unprecedented banking sector fraud caused a OECD countries. It has potential for significant sudden, large depreciation of the MDL; tariff energy efficiency, especially in public buildings 61 District Heating Efficiency Improvement Project. Moldova Policy Notes | Addressing Energy Security and Promoting Efficiency 67 increases for natural gas, electricity. and DH then synchronization with ENTSO-E. Depending on soared to reflect the much higher costs of the study outcomes, a prompt decision must be imported energy. Delays of nearly a year in tariff made to either strengthen the domestic adjustments resulted in operators accumulating transmission system, supported by creation of a tariff deficits that still have not been fully transparent and competitive electricity market to recovered. Energy regulation in Moldova must comply with synchronization rigors; or identify now be aligned to best European practices, with and attract new investments in asynchronous methodologies for effective recovery of large interconnection with ENTSO-E to consolidate investments. diversification of supply and establish the electricity market. Whichever decision is made, Diversifying electricity supply by connecting Moldova must comply with the EU Third Energy to the European electricity grid is the main Package. precondition for a transparent, competitive Moldovan electricity market. In 2015 Moldova There is a need to build on the success of the made the strategic decision to connect its power District Heating recovery to make the service transmission system asynchronously with that of affordable and competitive. The remarkable Romania and hence with the ENTSO-E. The first success of the DH restructuring since 2014, phase consists of constructing a Back-to-Back supported by the Bank-financed DHEIP project, station at Vulcanesti in the South (financed jointly made it possible to reverse a downward spiral for by EBRD, the EIB, and the EU) and an overhead DH services in Chisinau (lack of funds for transmission line connecting Vulcanesti to maintenance and investments resulted in poor Chisinau, the main consumption center, and also service caused DH to lose clients, and thus suffer expanding the high-voltage substations at higher financial losses). The successful recovery Vulcanesti and Chisinau. The two projects included complete corporate restructuring and directly address the Moldova Energy Strategy’s optimization (by creating Termoelectrica as the main 2020 objectives by: (i) consolidating single operator); major staff downsizing; Moldova’s role as an energy transit country; reduction of thermal losses and electricity ensuring interconnection to ENTSO-E; and consumption through investments by DHEIP; building the institutional framework to support a improvement in service and client-orientation, modern and competitive power market. To which attracted reconnections and raised sales enable effective operation of the new volume; and a return to operating profitability, infrastructure, the World Bank, with some thanks to overhaul of the tariff methodology (the support from other donors, will also contribute to need to increase tariffs was moderated by the sector reform initiatives for building modern and higher volume). The major challenge for DH now competitive institutions through affiliated is whether it can mobilize funding to modernize technical assistance (TA). By creating conditions heat and power generation, the equipment for for future interconnection with the ENTSO-E at which is at the end of its operational life and an acceptable cost, the Government of Moldova needs urgent modernization to extend it over the will be creating a solid foundation for achieving medium term and replace it over the long term. the Strategy goals so that the country can Over the short to medium term, it would be diversify its sources of external electric power important to complete the Chisinau DH supply, reduce its almost exclusive dependence optimization study to identify least-cost short-, on the two current sources of supply, foster medium-, and long-term investment needs. competition, and limit increases in electric power Based on the study recommendations, it will be prices. necessary to identify investment support for In the short to medium term, the Power Sector modernizing gas-fired CHP plants and Action Plan (PowerSAP) developed jointly by the converting combined heat-and-power generation EBRD, EU, EIB, and World Bank would help to heat-only boilers (HOBs) Vest and/or South to achieve those goals; it is therefore imperative extend the useful life of Source 1 over an 8- to that all PowerSAP actions are implemented 10-year horizon. promptly. It is also important that sector Over the long term, the dialogue and work on DH regulation improves to best EU practices and debt restructuring needs to be resumed to ensure develops instruments for recovering large the bankability of replacing larger CHP units with investments. a new modern CHP, and to identify the Over the longer term, to allow well-informed investments necessary to construct the new strategic decisions for longer-term development, CHP. Moldova must complete the joint feasibility study (not yet begun) for Moldova and Ukraine Moldova Policy Notes | Addressing Energy Security and Promoting Efficiency 68 In addition, investments in increased demand- side energy efficiency also needs to be This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Sandu Ghidirim, Koji Nishida, and prioritized. In this respect, the most promising Fabrice Bertholet, with contributions from Giuseppe Grimaldi and Tiago approach to maximize funding for EE Oliveira (EBRD) investments scale-up would be for The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the Developments Partners to work with local World Bank or the Governments they represent. financial intermediaries. 62 For any questions regarding this note, please contact moldova_contact@worldbank.org. When it comes to gas supply security, THE WORLD BANK MOLDOVA OFFICE: Moldova constructed in 2014 the Iasi- http://www.worldbank.org/en/country/Moldova Ungheni gas interconnector as a first phase in diversifying its gas supply options and reducing or eliminating its dependence on Gazprom. The Iaşi-Ungheni Interconnector between Romania and Moldova became operational in the first quarter of 2015. The pipeline can only supply a small region around Ungheni which consumes 3-5 percent of Moldova’s annual gas consumption. Ungheni and Chisinau, supplemented with a new gas compression station in Romania, could provide much larger diversification benefits. 63 After exploring options for extending the interconnector to the main consumption center in Chisinau, in 2018 the Government issued a concession for construction of the Ungheni- Chisinau gas pipeline to a private investor, the Romanian Transgaz, which committed to finalizing the new gas pipeline by 2021. During the DH Optimization Study, the World Bank launched an analysis of current supply options and regional development trends in order to identify options for diversifying supply, reinforce interconnection with European gas networks, and thus reduce its dependence on a single source of supply. Over the medium term, it will be important to get the Ungheni-Chisinau gas pipeline operating, explore new options to diversify gas supply, and if feasible strengthen interconnection with European gas networks. From the regulatory point of view, it would be important to implement the unbundling guidelines published by ANRE in 2018 with support from EBRD, in order to establish a level playing field in the gas sector across potential sources of gas. 62 The Bank is currently carrying out an Energy which included also the Energy Sector Action Plan. Efficiency Options Study which will issue Similarly to the Powersap, the ENERSAP included the recommendations on sustainable financing and key milestones for reform of the gas sector, among implementation mechanisms for energy efficiency which a proposal for a harmonized gas transmission programs. tariff methodology. 63 At the end of 2016, the EBRD and EIB signed a loan agreement to provide financing for the infrastructure Moldova Policy Notes | Addressing Energy Security and Promoting Efficiency 69 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Enhancing Water Security and Service Delivery Key Message Moldova’s water endowment is mostly derived from its surface water, with high reliance on the Prut and Nistru rivers. It is highly vulnerable to climate change: drought and flood risk is rising, impacting growth and productivity. Investments in storage, irrigation systems, and flood protection measures are needed. Ongoing analysis of Moldova’s water balance show that water security risks are linked to a lack of infrastructure and management rather than absolute water shortages (except for parts of the south). Understanding the potential impacts of upstream water use will be important to manage such risks. Rural areas are poorly served by drinking water and sanitation services because of low investment, inadequate service delivery, and lack of assistance to rural municipalities. The performance of water utilities needs to improve, and their operations must become more viable financially while ensuring that assistance is targeted to the poorest. Public spending in the sector has declined over the past years and stood at just 0.4 percent of GDP in 2017. Finally, although Moldova has made substantial progress in reforming its water and environment institutions, capacities for integrated water resource management in the river basins need considerable work. Key Actions • Consolidate institutional reform, strengthen water management agency and enhance inter- agency coordination to optimize benefits from different water uses. • Analyze Moldova’s water security risks under different development scenarios to assess unmet water demand and prioritize policies and investments. • Develop a national water and sanitation investment plan and financing framework and secure a multiyear investment budget for water and sanitation that targets lagging rural areas, prioritizes high-impact wastewater polluters, and improves coherence and accountability of existing funds. • Increase efficiency and cost recovery in urban areas to mobilize and increase the efficiency of funding. • Implement priority measures of river basin flood and drought management plans, restore watersheds and environmental flows, improve dam safety and introduce risk management tools. • Identify priority areas for irrigation & drainage investment to accelerate high-value irrigated agriculture with export focus; reform irrigation institutions and improve financial position to reduce fiscal burden. • Strengthen transboundary governance for the Nistru and ensure that negotiations are backed by evidence on potential impacts of upstream hydropower development in Ukraine. • Expand information on water resources, including accessibility and sharing of data among institutions; and assess groundwater potential for development. Where Moldova Stands Now reforming its water and environment-related institutions and harmonized laws and Water security is vital to Moldova’s economic instruments with the EU Water Framework development, environmental sustainability, Directive, the country’s socioeconomic and social inclusion. Moldova’s natural water development is still challenged by suboptimal endowment and vulnerability to climate change, management of water resources and emigration of many of its citizens, urbanization, underperforming water service delivery to its regional relations, and the state of its institutions, citizens. information, and water-related infrastructure—all Moldova has a relatively limited water determine the intensity of water security endowment compared to regional challenges. While Moldova has made progress in Moldova Policy Notes | Enhancing Water Security and Service Delivery 70 benchmark. It’s water security risks are high-value export crops (see Note on linked to high reliance on external flows from Agriculture). Irrigation modernization, along with the Prut and Nistru, limited infrastructure, other measures to reduce volatility due to and nascent basin level water management, weather shocks, especially droughts, is critical to exacerbated by degrading water quality. It is facilitate the transition to higher-value one of the most water-scarce countries in the agriculture. Conservation agriculture could also region with total renewable water availability of be effective to increase water infiltration, reduce just over 3000 m3/capita/year, only 400 losses from soil evaporation and minimize m3/capita/year of which is from internal erosion. Previous assessments identified resources. 64 Over 90 percent of its surface water investments in the agriculture and water sectors stems from the inflow of the transboundary rivers as high impact to adapt to climate change. 68 of Nistru and Prut. Compounding the problem is Ongoing water balance analysis indicates that that it only has 738 m3/cap of storage capacity to lack of infrastructure and uptake of modern help manage extremes in water flow. irrigation practices hinders this transition, rather Groundwater reservoirs are reportedly limited than water availability. and often not usable due to high mineralization Poorly organized irrigation services in part or pollution, posing a public health risks for a explain the lack of their uptake and general large share of the rural population relying on this underinvestment in modernization. While source. 65 A comprehensive assessment of 135,000 ha falls under centralized schemes, only groundwater resources is missing. In addition to 35,000 ha can be irrigated due to dysfunctional a few large reservoirs, used for both hydropower status of systems, mostly beyond repair. 69 Of 88 and thermal cooling of heat and power plants, schemes, 11 have been transferred to Water there are over 5,000 small dams used for User Associations (WUAs) established under the irrigation and local drinking water supply. 66 These Water Law. Others remain under management of suffer from siltation and degraded water quality. state-owned enterprises that are reliant on Often, they are not properly operated and subsidies to cover costs 70 and not all WUAs are maintained, nor is their water use and safety performing as expected. Although recent regulated. Canalization of internal rivers and investments in new schemes have had positive degradation of watersheds are increasing flood impacts, 71 there is still a lack of uptake of risk. River basin management plans for both the irrigation services, little willingness to pay, and Prut and the Nistru underscore the need to lack of investments in on-farm modernization. improve the ecological status of water bodies and Along with irrigation investments and restore upstream watersheds. management improvements, it will be necessary Upstream developments on the Nistru in to address incentives, risk mitigation measures, Ukraine need to be monitored to mitigate and access to extension services and to potential water security risk. Expansion of financing. Informal and uncontrolled irrigation hydropower capacity at Novodnestrovsk in from local reservoirs and groundwater remains a Ukraine may negatively affect the flow regime challenge for Apele Moldovei, although currently and change ecological habitats. Irrigation it is improving its water cadaster. expansion upstream in the Nistru and may Another unresolved issue concerning the impact water availability for downstream users, productive potential of water is the use of especially municipal and industrial use and groundwater as supplemental irrigation. irrigation use in the south of the country. 67 Because large volumes of groundwater are Agriculture is a potential driver of poverty highly mineralized, using it for irrigation may reduction; better irrigation services will thus irreversibly destroy certain types of soil. be essential to accelerate its transition to Regulations are being drawn up to control such 64 FAO Aquastat 2014. basin, multi-stakeholder involvement, and 65 World Bank (2018) Beyond Utility Reach? Rural transparency. 68 World Bank (2016) Moldova Climate Adaptation Water and Sanitation Service Delivery in Seven Countries of the Danube Region. Investment Planning. The ongoing World Bank- 66 EIB (2014) Flood Assessment Technical Assistance. supported Water Security Diagnostic and Future 67 With support from the Swedish embassy, the Outlook will assess trade-offs and possible synergies possible environmental and social impact is being in future investments and interventions. 69 SDA (2018) National Assessment of Irrigation assessed. The results will be critical in informing negotiations to formulate a new treaty. Unlike the Schemes. 70 Assets being transferred to the Public Property current agreement, among other provisions, the new treaty should incorporate elements of good Agency. 71 Such as under the MCC Compact. governance for transboundary waters, such as protocols for sharing data, management of the river Moldova Policy Notes | Enhancing Water Security and Service Delivery 71 usage, but state-of-the art exploration and field systems and the Association of Local measurements would be necessary to quantify Governments is now offering technical support to the potential of treating groundwater for drinking local self-governments on compliance with laws or supplemental irrigation use without negative and regulations. A more flexible approach in effects on the environment. allowing various sources to be used for drinking water can help to achieve cost-efficiencies, while Both drought and floods are major risks in maintaining safety standards. Moldova, impacting economic development and productivity. The estimated annual loss in Poor water, sanitation and hygiene situation crop production due to drought is US$20 million, in social institutions is negatively impacting assuming drought occurs every 7 years. Since Moldova’s human capital outcomes. A 1995, Moldova has suffered 11 droughts, and UNICEF survey of the water and sanitation with climate change it is assumed that intervals conditions in preschools 74 revealed that around between them will narrow. In 2010, floods on both 41 percent of preschools have latrines located in the Prut and the Nistru recorded damages to the school yard, not connected to water supply property and income equivalent to 0.15 percent and without washbasins. 75 One third of primary of GDP. The drought and flood management and/or secondary schools lacks basic water and plans now being drafted will incorporate both risk sanitation services and almost one in two has no maps and mitigation measures. Also, Moldova hygienic handwashing facilities. 76 has more than 1,200 km of flood defenses, and While service coverage in towns and rayon there are concerns about their safety. Flood centers is better organized through regulated protection and mitigation measures have been water utilities, there is scope to both improve identified for priority investment, but funds have operations and to expand wastewater not yet been allocated. services to curb pollution. In urban areas Moldova faces a challenge of achieving corporate utilities, owned by local governments, sustainable water and sanitation services for are the main vehicle for service delivery. all Moldovans, especially in rural areas where Government has pursued a policy of the population is declining. Despite recent regionalizing service providers, though results so progress, Moldova has the widest urban-rural far have been mixed. Although service access, gap and the lowest access across the Danube reliability, and quality are satisfactory, region, 72 with 90, 79, and 70 percent of the operational cost recovery and non-revenue water population accessing publicly provided piped still do not meet acceptable benchmarks and water, flush toilets and public sewer connections there is space for efficiency improvements for a in urban areas, compared to 31 percent, 13 large share of Moldova’s utilities. 77 Realizing percent and 1 percent in rural areas, efficiency gains in urban areas will be necessary respectively. 73 In rural areas, those connected to to create fiscal space to mobilize public funds services are mostly served by local municipal and concessional loans to expand services in operators. Despite best intentions of local public lagging rural areas and to invest in wastewater, administration and local water operators, their starting with priority polluters of surface water access to finance and technical assistance is such as Soroca city. limited. Decentralization without adequate The water sector spending amounted to 0.4 transfer of resources has left the rural population percent of GDP in 2017. Since 2014, there is a reliant on limited services or self-supply solutions decline in spending, and expenditures are using shallow wells. This poses an unacceptable inadequate to meet sector needs. Around 80 health risk to rural households: as of 2015, 82 percent are capital investments, the majority percent of wells did not comply with chemical or executed at the local level through the National microbiological parameters, such as those for Environmental Fund. In 2017, around two thirds nitrates and e-coli2. New regulations for water of public spending went to the water and safety planning have been adopted for smaller sanitation sector, with remaining funds for 72 World Bank (2015) Water and Wastewater Services which does not correspond to the standards on nitrates in the Danube Region: A State of the Sector. and fluorides content. One in four children is exposed 73 From Household Budget Survey (2015), elaborated to increased concentration of boron. One in six in World Bank (2018) Beyond Utility Reach? Rural children is exposed to the risk of contracting acute Water and Sanitation Service Delivery in Seven diarrheal diseases due to the consumption of microbial Countries of the Danube Region. contaminated water. 74 UNICEF (2016) Assessment of Water Quality, 76 WHO/UNICEF (2018) www.washdata.org. 77 www.danubis.org Sanitation and Hygiene Practices in Preschool Institutions of the Republic of Moldova. 75 One in eight children in preschools is exposed to risk of water-related infections due to consumption of water Moldova Policy Notes | Enhancing Water Security and Service Delivery 72 irrigation and drainage, water management, and investments in hydraulic and on-farm other communal investments. A large share of measures. official development assistance is not recorded in • Increase efficiency of utility sector and the central government budget. If accounted for, expand assistance to service providers in this would augment water sector investments by rural areas and local governments. about 40 percent in 2017. 78 The lack of a • Introduce risk management tools for floods comprehensive overview and coherence in the and droughts. sector investment program is a major bottleneck. • Strengthen transboundary governance The “Moldova 2030” National Development arrangements; ensure that negotiations for Strategy calls for more investment in water the Nistru are backed by evidence on security. The new country strategy emphasizes potential impacts of hydropower Moldova’s development challenges in the water development in Ukraine. sector and proposes measures linked to the • Expand information on water resources, Sustainable Development Goals that promote including accessibility and sharing of data water security. Among them are universal among institutions; carry out assessments delivery of services such as water and sanitation on the potential of groundwater for by 2030; ensuring the right to a healthy and safe development. environment, protected from flood and droughts; Investment and budget management curbing pollution; and offering opportunities for • Develop a national water and sanitation productivity growth through a resilient and investment plan and financing framework. adaptive agriculture sector. • Review public funding and secure a How Moldova Can Enhance Water multiyear investment budget that is inclusive Security of rural areas, improves coherence of existing funds and supports accountability. Moldova needs to embark on a more holistic and • Invest in wastewater treatment in priority multisectoral programmatic approach for locations to stop pollution of surface water. managing the country’s water resources, risks, • Identify priority areas for investment to and services, both rural and urban. Actions going expand irrigation of high-value agriculture. forward need to emphasize: • Informed by river-basin flood and drought i) Strengthening of national planning and management plans, increase funding of prioritization for infrastructure and priority measures; restore watersheds and addressing financial viability; environmental flows; and improve dam safety. ii) Consolidation and further reform of sector institutions and governance arrangements; Incentivize private sector investments and climate-conscious behavior iii) Coordinated implementation of measures at • Ensure complementary measures in the basin level. agriculture to encourage farmers to invest in Priority actions to enhance water security modernization and adoption of climate need to evolve with the following priorities: resilient agricultural practices; Institutional strengthening and strategic planning • Explore eco-based tourism along Prut and • Strengthen coordination mechanisms and Nistru linked with river restoration; consolidate institutional reform and capacity • Promote citizen engagement in the water development of the water management sector through various mechanism, including agency including for information campaigns and educational and media management and basin planning. actions. • Continue Water Security Diagnostic to This Policy Note was produced by the World Bank to inform policy debate in understand opportunities, risks and unmet Moldova. This note was prepared by Susanna Smets, Elvira Broeks, Felicia Pricop, and Irina Capita with contributions from Larisa Virtosu (UNICEF), water demands of different development Ulrich Kleppmann (German Embassy), and Carolina Tissot Baranzini scenarios and identify priority (Swiss Cooperation Office). interventions. 79 The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the • Modernize irrigation institutions and improve World Bank or the Governments they represent. sector financial position by reforming state- For any questions regarding this note, please contact owned enterprises and implementation of the moldova_contact@worldbank.org. water law and WUA development; increase THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova 78 79 Analysis based on BOOST data, and OECD This diagnostic is supported by World Bank and database. expected to be finalized by September 2019 Moldova Policy Notes | Enhancing Water Security and Service Delivery 73 Moldova Policy Notes | Enhancing Water Security and Service Delivery 74 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Improving Efficiency of Road Sector Financing Key Messages Ensuring adequate transport connectivity and mobility is vital for economic growth and development. The National Transport and Logistics Strategy 2013–22 improved decision making and strategic planning in Moldova’s transport sector. By 2017, the network condition had improved significantly. However, the quality of the roads is still inadequate. The roads subsector consumes the largest part of the transport budget. Every year Moldova spends about 1 percent of GDP to maintain its road network. Yet maintenance of primary roads has been substantially underfunded and the cumulative impact is worrisome. The efficiency of the financing for roads can be strengthened by improving administration of the Road Fund. Key Actions • Prepare necessary amendments to the legal framework to ensure any new investment in the sector is accompanied by adequate maintenance funds. • Modernize maintenance practices by introducing the mid-term and performance-based maintenance contracts while limiting the current contracts to one year. • Enable the Road Fund allocation based on long-term maintenance planning. • Rigorously prioritize road investments considering the significant existing IFI-financed contracts, which are progressing slowly given the limited capacity of State Road Administration and limited local resources (labor and materials). • Increase the capacity of local contractors to execute complex rehabilitation projects, and prepare them for performance-based maintenance contracts. Where Moldova Stands Now Allocating sufficient funds to local and rural roads is an anti-poverty priority. Almost two- Moldova currently has a reasonable amount thirds of Moldovans live in rural areas. However, of transport infrastructure: one international such investments should be done in an efficient airport, one primary international river port, 5,850 manner. Since most jobs in Moldova are in urban km of national roads, 3,494 km of local roads, areas, adequate transport connectivity and and 1,157 km of railway tracks. mobility is crucial for economic growth and However, the condition of the roads and development. For instance, it has been proved efficient management of the infrastructure is globally that limited access to transport far from acceptable. Moldova’s roads carry 96 decreases the probability that women will percent of passenger traffic and 74 percent of participate in the labor market by 16.5 percent, freight; rail carries just 1.5 percent of passenger which can have significant impact on the traffic and 25 percent of freight. Currently, about economy. 80 Policymakers must also take into 1.5 million passengers use Chisinau Airport and account different mobility needs and travel about 119,000 tons of cargo are transshipped patterns. through the Giurgiulesti Port. Roads consume the largest part of the In recent years national roads have received transport budget. Moldova spends about 1 a large amount of investment, mainly percent of its GDP annually to maintain the road financed by international finance institutions network. Because the Road Fund represents a (IFIs), which have committed €429 million for large share of public investments, efficient and national road rehabilitation. The World Bank has transparent use of its resources is critical. contributed another US$80 million to rehabilitate Over the last four years, the condition of the 150 km of local roads. road network has seen major improvement. In 80 International Labor Organization. Moldova Policy Notes | Improving Efficiency of Road Sector Financing 75 2013, only 26 percent of the network was significantly exceed the cost of the maintenance assessed as in good or fair condition, but by 2017 required to maintain that value. this had increased to almost 66 percent. 81 Table 1. Road Fund Execution, 2015-19 However, in 2018 the Global Competitiveness Million 2015 2016 2017 2018 2019 Index 82 compiled by the World Economic Forum, MDL projection ranked Moldova at 130 out of 140 countries for Road Fund 1,063 1,015 1,447 1,330 1,400 road quality—down 23.6 points from 2017. Revenue Collection The improvement and proper maintenance of Road Fund 1,038 1,000 1,079 1,072 1,077 the Priority Road Network of Moldova is a Budgetary Allocations major objective of the National Transport and Road Fund 641 1,000 1,779 1,682 1,790 Logistics Strategy (NTLS). The Strategy provides transfers comprehensive estimates of the spending Transfers to 641 1,000 1,079 972 1,024 required to maintain the national network for SRA 2013–22. However, the funds transferred to the Transfers to ---- ---- 700 710 766 Road Fund have been considerably less than the LPAs Strategy targets (Figure 1). Arrears 229.6 100 Figure 1. Road Fund Financing, NTSL and Road Source: State Roads Administration. Fund Transfers The Government has in 2018 launched a massive program for maintenance and current repair of selected local roads—the Good Roads for Moldova Program (Table 2). About 1,200 km of local and community roads and streets are in the program. Although LPAs oversee management of local and community roads, the State Roads Administration was coordinating the program, which diluted its capacity to manage the primary network; meanwhile, Road Fund financing for the core Source: State Roads Administration, network has been reduced. It is advisable for investment in roads to be rigorously prioritized, Decentralization has affected administration considering that the significant IFI-financed of road infrastructure. In 2017, management of contracts are progressing slowly and the SRA 3,494 km of local roads was transferred from the has limited capacity. State Road Administration (SRA) to local public Table 2. Good Roads for Moldova Program authorities (LPAs). The transfer of the assets has been complemented with about 42 percent share 2018, 2018, 2019, of the Road Fund resources to be transferred and Mill MDL approved executed projections budget budget used directly by LPAs to maintain and repair local roads. Road Fund funding Maintenance of the primary road network has allocated for 492 492 500 been substantially underfunded and the Good Roads for cumulative impact is troubling. The economic Moldova Program 84 cost of poor maintenance is borne primarily by Additional State users and service providers in the form of higher Budget operating costs. For example, when a road is allocations for 1,200 1,200 1,000 allowed to deteriorate from good to poor Good Roads for Moldova condition, every dollar saved on maintenance Program increases vehicle operating costs by $2 to $3. 83 Source: State Roads Administration. Maintenance is also important to investment strategy because the loss in capital value of The Road Maintenance Reform Action Plan infrastructure caused by lack of maintenance can has brought some improvements. The 2012 Government Decision Nr. 244 on “Reform of the 81 83 Notes on the Economic Evaluation of Transport In 2017, 3,494 km of local roads were transferred from the State Road Administration to local public Projects, World Bank, January 2005 84 Annex 2 of the Government Decision nr.225 from authorities to manage; this has influenced the figures related to condition of the roads 12.03.2018 82 http://reports.weforum.org/global-competitiveness- report-2018 Moldova Policy Notes | Improving Efficiency of Road Sector Financing 76 Road Maintenance System” was the legal basis efficient planning and execution of for the reorganization and provided an action maintenance activities (current contracts are plan for 2012–17. Consolidation of the 38 district limited to one year); and (ii) introduction of the road maintenance enterprises into 12 new performance-based maintenance contracts, companies, which began in 2011, is now which are usually for 3 or more years. completed and the 12 new companies are fully operational. This should help reduce operating • Allocate Road Fund resources based costs. on a long-term maintenance plan. Sound maintenance management and methods will How Moldova Can Enhance Road sustain the utility and economic effectiveness Sector Financing Efficiency of road assets. That involves life-cycle planning of maintenance resources and To advance the road maintenance reform action efficient delivery of the work. Maintenance plan, the following actions are recommended: investments should be prioritized within an integrated Road Asset Management System • Prepare necessary amendments to (RAMS). the legal framework to require that any new capital investment in the sector be • Build up the capacity of the local accompanied by adequate maintenance construction industry. For efficient road funds. Predictable Road Fund transfers would maintenance and construction in a competitive permit the Ministry of Economy and market, there is a need for contracting firms of Infrastructure and SRA to manage road assets all sizes to undertake projects ranging from strategically. Historically, most of the funds minor maintenance to large-scale major road were allocated starting in October—too late in construction. To achieve the full benefits of a year to allow the SRA to plan efficiently. Late using the private sector, the workload allocation also creates a disproportionate contracted must be of adequate size, and workload near the end of the year and realistic competition between local contracting underutilizes funds because it misses the firms offering competitive prices needs to be construction season. As soon as they are established. Experience with work on current collected, the funds must be transferred for IFI-financed contracts in Moldova utilization. A mechanism should also be demonstrates that the country’s local introduced to transfer unutilized resources of contracting capacity is inadequate. the Road Fund into the next budget year. Amending the law to create a dedicated This Policy Note was produced by the World Bank to inform policy debate in Treasury account exclusively for Road Fund Moldova. This note was prepared by Elena Lungu with contributiosn from Octavian Costas (EBRD). transfers is recommended. The findings, interpretations, and conclusions expressed herein do not • necessarily reflect the views of the Board of Executive Directors of the Modernize maintenance practices by World Bank or the Governments they represent. using medium-term and performance- For any questions regarding this note, please contact based contracts. Two actions are necessary moldova_contact@worldbank.org. to assure continued progress in road THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova maintenance: (i) introduction of mid-term maintenance contracts, which will allow for the Moldova Policy Notes | Improving Efficiency of Road Sector Financing 77 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Strengthening Environment Protection and Disaster Management Key Message Moldova’s sustainable development is adversely impacted by natural hazards that with climate change will become more frequent and more severe. Additional issues are inadequate financing of the environmental sector, inefficient governance, land and forestry degradation, and poor management of waste and chemical substances. While the legislative approximation with the EU directives and regulations is underway, enforcement is poor because the institutions necessary are inadequate or even nonexistent. Moldova requires action on climate resilient development. Moldova has rich soils, but continuous land degradation is eroding the productivity of its agriculture. Low forest cover magnifies soil erosion, floods, and landslides, and results in large areas of degraded land. The country’s forests are not well-managed, and there is considerable illegal harvesting of timber and firewood. Few areas are protected; their expansion would help conserve natural ecosystems. Moldova needs to be better prepared to respond to climate disasters; that will entail building up subnational command structures and facilities and purchasing modern equipment, promoting up-to-date policies, improving warning systems, and increasing awareness of environmental threats. Key Actions • Continue harmonizing environmental legislation and regulation with the Association Agreement and the Chapter on Technical Barriers to Trade of the DCFTA. • Continue reforming the Environmental Agency to make it fully functional and create an agency to manage chemical substances. • Implement the Forest Institutional Reform Strategy, prepare a National Program for participating in the EU4Environment program and ensure efficient management of community forests. Prepare a long-term institutional and human capacity forestry program and start reorganizing forest-related institutions. Design and launch a long-term program on forest regeneration and rehabilitation to ensure forest sustainability. Plan an agenda for forestry research to provide direction and address the possible impacts of climate change. • Prepare and implement a national wood energy program. • Adopt an action plan for expanding protection to at least 8 percent of territory, which would include building institutional capacity to manage protected areas. • Strengthen natural disaster preparedness and response. • Consider resilient rural and green urban development. • Operationalize the EPR scheme for hazardous, plastic and medical waste. Where Moldova Stands Now significant decline or a slight increase in precipitation, depending on the region. Climate Moldova is one of the countries in Europe and change is expected to heighten the frequency Central Asia that is most vulnerable to and intensity of most extreme events and such climate change, based on many social and natural disasters as droughts and floods, economic indicators, and it is confronted by hailstorms, torrential rains, late frosts, and heavy numerous adaptation challenges. 85 Climate winds. It will also present new climate-related models predict future rises in mean temperature pest and disease challenges. 86 of more than 2 degrees by mid-century, and a Climate change is already having widespread 85 According to the widely used Notre Dame Global Europe and Central Asia (behind Turkmenistan, Adaptation Index (ND-GAIN, http://index.gain.org/), Uzbekistan and Tajikistan) (January 2017). which summarizes a country's vulnerability to climate 86 World Bank. 2016. Republic of Moldova – Moldova change and other global challenges in combination Climate Adaptation Investment Planning Technical with its readiness to improve resilience, Moldova ranks Assistance. Report No: ACS18562. as the fourth most climate vulnerable country in Moldova Policy Notes | Strengthening Environment Protection and Disaster Management 78 impacts. The future projected climate warming the projected annual cost to agriculture of climate will only create multi-dimensional risks, which will change is about US$700 million. 91 affect country’s economy and society. Effective Continuous land degradation is causing a response can combine adaptation and decline in agricultural productivity. Moldova mitigation, and the Sustainable Development has agricultural land resources that are critical to Agenda 2030 is a window of opportunity to the livelihoods of many, including highly identify operational approaches to tackle climate productive black soils (about 70 percent) and a change. The country needs to start investing in high agricultural utilization rate (more than 75 transforming its industries, energy, transport, percent). However, low forest coverage, poor agriculture and forestry systems. land management, extensive use of pesticides Environmental laws are not being enforced. and other chemicals, and use of saline ground In recent years Moldova’s Parliament has water for irrigation all exacerbate soil erosion, adopted several laws that are very important for floods, and landslides. As a result, large areas of the environment (e.g., on waste, use of agricultural lands are totally degraded, and chemicals, EIA, and SEA). They have yet to be agricultural productivity has seen significant enforced, and so far, they have had little impact decline. Land privatization and parceling, lack of on Moldovan quality of life. In June 2018, the crop rotation and other anti-erosion measures, Government approved creation of the and failure to use best practices for soil Environmental Agency, which is responsible for conservation have complicated the prospects for implementing the environmental laws; and for efficient management of land resources (see issuing permits and authorizations, Agricultural Policy Note). environmental assessment and monitoring, and The present total cost of inaction on climate management of the shared environmental adaptation is an estimated US$600 million, information system. The agency is not yet fully equivalent to 6.5 percent of GDP. By 2050, the functional. direct costs of climate change (the decrease in Agricultural sector is acutely sensitive to production plus the increase in damage and the weather and periodically it is seriously costs of prevention) are expected to be at about affected by droughts and other weather US$1 billion—70 percent of which will be phenomenon. The severe drought in 1994 incurred by agriculture, which faces the biggest caused a decline of 30 percent of GDP and 26 challenges. The estimated cost of implementing percent in agricultural output. 87 The 2007 the CCA Strategy and its Action Plan is US$200 drought, with estimated agricultural losses of million, while the annual cost of inaction would be about US$1 billion, accounted for 23 percent of US$61 million. As yet, climate change adaptation Moldova’s GDP. 88,89 Climate change is expected measures are not part of the Moldovan budget. to exacerbate existing challenges in the sector: Climate change will become a significant for instance, land degradation and soil erosion problem for Moldovan forests as well. During the are projected to worsen—in 2015 about 37 2010–39 period, forest health will worsen percent of all agricultural land was already considerably: in the north, for instance, areas degraded to some degree; the productivity of susceptible to die-back will expand by about 15– most crops could well decline by 10–30 percent. 25 percent. 92 The annual opportunity costs of The 2015 summer drought, which was inaction are an estimated US$40 million and will unprecedented in its severity and the amount of gradually increase over the next few decades. territory affected, devastated both agriculture Weak forest management aggravates the and cattle herding and is thought to have problems of Moldova’s forest resources. contributed to a rise in rural poverty, especially Although forests cover just 12 percent of among small to medium-size farmers. 90 By 2050, Moldova’s land area (such a small amount 87 World Bank 1995. Moldova Agriculture Sector from crops and US$195 million from livestock) and the Review. Report No. 12581-MD. World Bank, portion of the increase in damages and losses that can Washington DC. be attributed to the increased frequency and extent of 88 UNECE. The Republic of Moldova: Third extreme events (roughly US$270 million). Environmental Performance Review. 2014 92 By 2040–69, the deterioration will be spreading http://www.unece.org/index.php?id=35481 southward. The impact is expected to be greatest in 89UN. 2012. Moldova Situation Report – 2012. the south, which already has the least forest cover, at (http://www.un.md/drought/2012 /Moldova Drought 8 percent of land area, followed by the center, which SitRep2012_1.pdf) has the most forests, 209,000 ha, or 15 percent of total 90 FAO drought assessment. land area. 91 Calculated from the difference in future production under the climate change and no-climate change scenarios (roughly US$430 million—US$235 million Moldova Policy Notes | Strengthening Environment Protection and Disaster Management 79 contributes to soil erosion, floods, and landslides utilizing innovative, climate-smart technologies, and results in large areas of degradation), the engaging public and private sector in planning rate of illegal timber and firewood harvesting is and implementation of green urban solutions. very high—official estimates put the annual Moldova has made significant progress in harvest at about 400,000 m3, but total annual setting the regulatory framework necessary consumption of fuelwood is estimated at for implementing a modern integrated waste 1.1 million m3. The result can only be continuous, management system based on prevention and serious forest degradation. a circular economy inclusive of chemical waste The small area covered by protected areas in as well as addressing persistent organic pollutant Moldova requires prompt action to better (POPs) stockpiles and waste legacies. However, conserve natural ecosystems. It is urgently the country faces significant implementation necessary to act on biodiversity conservation barriers. Data available indicates that in 2016, strategies by expanding and consolidating the waste generation in the country was 1.4 million protected areas in the north and center. This will tons consisting of 1.1 million of mixed municipal make it possible to achieve the 2020 target of 8 solid waste and the rest of hazardous waste percent of total Moldovan territory specified in the based on EU/Basel Convention classification. Second National Biodiversity Strategy and Action Plan. For the long term, adaptation measures for How Moldova Can Better Protect the sustainable development should be based on an Environment and Manage Disasters integrated landscape approach to protecting Short-term actions: biodiversity. 93 • Recognize Moldova’s increasing climatic Climate and disaster risk management and risks in national policy documents, and emergency response need reinforcement. adequately fund them; perhaps undertake a This requires bolstering sub-national command follow-up to the cancelled Climate structures, facilities, and equipment, and Adaptation Project, with activities that reflect ensuring that local first responders, authorities, up-to-date priorities. public services, and businesses are well prepared. It will therefore be necessary to • Implement the Forest Institutional Reform Strategy and separate the management, modernize policies and institutions as well as control, and regulatory functions, and raise awareness, all supported by better warning enhance the regulatory and monitoring systems, cross-sector and cross-border capacity of the forest authority. collaboration, and local action. While the State Department for Emergency Situations has been • Submit a request for a new GEF 7 project improving, its technology is still outdated and that will scale up sustainable land connections and coverage in some parts of the management activities so as to prevent land country are minimal. degradation, increase carbon stocks above and below ground, intensify soil productivity, Moldova follows a global trend of growing and reduce pollution of the soil by agricultural urbanization 94 with cities increasingly chemicals. contributing to environmental degradation. In • Adopt the Air Protection Strategy. Moldova 43 percent of the population lives in • Clarify the functions of the subordinated urban areas, and by 2030, it is expected that only institutions within the purview of the Ministry Chisinau will host over 50 percent of all urban of Agriculture, Regional Development and population putting even more pressure on city's Environment, in the context of further infrastructure and services, while also creating development of the Environmental Agency. considerable social and environmental • Reform the National Environmental Fund to challenges. The municipalities have the greatest enhance its transparency and effectiveness impact on environment. During 2000-13, the and clarify its focus on pollution prevention. biggest increase in Moldova’s greenhouse gas • Instruct both central and local public emissions, both in absolute and relative terms, administration on the responsibilities as they were observed in the transport sector, followed result from the Law on Environmental Impact by the residential sector and the commercial and Assessment, Law on Strategic public sectors. There is an obvious need to Environmental Assessment, including the improve current urban practices, focusing inter assessment of health impacts and alia on sustainable transport and mobility, cooperation with the health administration. 93 agricultural shelter belts; and 70,000 ha buffer zones Moldova’s potential for landscape restoration has been estimated at about 300,000 ha, of which 125,000 for rivers, lakes, and other types of land. 94 It is expected that global urbanization will rise from ha are severely degraded agricultural land; 10,000 ha 47 percent in 2010 to 60 percent in 2030 (UN Habitat). Moldova Policy Notes | Strengthening Environment Protection and Disaster Management 80 • Consider partner institutions support for soil preparation, planting, and combating soil supporting climate actions in line with diseases and forest pests. resilient development objectives assumed • Prepare and launch a long-term under the Paris Agreement through afforestation/reforestation program, promotion of climate-smart agriculture and establishing fast growing wood energy forestry practices in communities, targeted plantations, and rehabilitate or create climate education in schools and further agricultural shelter-belts. climate change mainstreaming into sectoral • Draw up a plan for expanding protected policies. areas to cover 8 percent of the country and • Scale up biodiversity mainstreaming into for building institutional capacity to manage territorial and urbanization plans (started them. under the GEF 6). The successful practice of • Strengthen natural disasters preparedness developing passports, more detailed and response by improving sub-national information and respective monitoring of command structures and facilities and species in nature sites (Ramsar sites purchasing modern equipment; updating currently being formed and those protected policies and institutions; increasing public areas planned in the future) should be awareness, and attention to programs. continued and replicated. • Enhance the national dialogue process Medium- and long-term reforms: related to climate change adaptation and mitigation, including involvement of LPAs • Increase funding for environment; and create and private sector. effective mechanisms for a comprehensive • Implement the Government Action Plan for reform of pollution charges. DCFTA Chapters 16 and 17 of the • Further improve the inter-sectoral Association Agreement and Technical cooperation and awareness of environment Barriers to Trade Chapter. as a cross-cutting issue; mainstream • Prepare and carry out a national wood environmental protection requirements into energy program for a target afforestation other sectors and fields. area using short rotation, high-yielding forest • Build up the capacity of the Ministry of energy crops that are suited to the projected Agriculture, Regional Development and climate change impacts. This could Environment, and other relevant institutions dramatically increase the supply of legally- to adopt and enforce harmonized laws; and sourced fuelwood and alleviate the pressure introduce modern management practices. on forest resources from illegal harvesting. • Support the Environmental Agency to make • Develop a strategic forestry research agenda it fully functional and ensure that it is to address possible impacts of climate adequately funded in the budget. change. Inventory and mapping of • Create an agency for the management of the biodiversity especially at PAs level is also an chemical substances and ensure an effective important area for research while applied implementation of the Law on Chemical GIS research would facilitate a cross- Substances. sectoral landscape approach to forest • Transpose the Industrial Emissions Directive research. 95 in line with provisions of the Association • Operationalize EPR scheme for WEEE, Agreement and engagements under Energy plastic and medical waste. Community. • Continue elimination of POPs stockpile • Prepare a national program for participating legacies. in the EU4Environment: Eastern Partnership – Forest Program with a strong focus on strengthening country’s capacity to control This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by John Collier, Arcadie Capcelea and illegal logging and ensuring efficient Cesar Niculescu with contributions from Virginia Bilici (Swedish Embassy) management of community forests. and Inga Podoroghin (UNDP). • Prepare and launch a long-term institutional The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the and human capacity program for forestry. World Bank or the Governments they represent. Use a GIS-based forest management For any questions regarding this note, please contact information system to support monitoring. moldova_contact@worldbank.org. • Enhance Moldova’s technical capacities by THE WORLD BANK MOLDOVA OFFICE: http://www.worldbank.org/en/country/Moldova investing in special agricultural equipment for 95Moldova Climate Adaptation Investment Planning Forestry Development; and National Strategy on TA 2016; Forestry Policy Notes 2015; Moldova Soil Biodiversity 2015-2020. Conservation and Biocarbon Fund Community Moldova Policy Notes | Strengthening Environment Protection and Disaster Management 81 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Strengthening Education Outcomes and Skills Key Messages Over the past decade, Moldova has made progress in improving the efficiency of its primary and secondary school network. However, challenges related to equity, access, inclusion, quality and relevance of education remain. Comparing to other countries in the region, access to preschools and the quality of primary and secondary education remain low. These challenges are especially daunting for children with a disadvantaged background. Skills mismatches represent a major obstacle for both employers and graduates, especially for youth making the transition from school to work. Nevertheless, recent qualitative research identified that youth face not only skills challenge, but also lack of opportunities and resources. Key Actions • Continue with the school and university network optimization. • Increase access to preschool education in rural areas and for disadvantaged children. • Improve the learning outcomes of primary and secondary students. • Ensure that higher education and vocational education and training (VET) are relevant to the labor market by improving curricula and involving employers in reviewing occupational profiles and qualification standards. • Give more attention to internal and external quality assurance mechanisms, such as professional accreditation of higher education programs. • Incorporate performance indicators in vocational schools and university financing mechanisms. • Make VET more demand-driven and practice-oriented, thereby enabling students and job seekers acquire skills needed on the labor market, and strengthen the role of the private sector in delivery of VET. • Improve teacher training and adapt teaching methods to provide students with relevant life- and job-skills. • Formulate a national lifelong learning strategy and promote continuous learning for all Moldovans. Moldova’s Education System: Status efficient. As a result, the average student-teacher and Major Challenges ratio for grades 1–12 has risen from 10.8:1 in 2012 to 11.9:1 Nevertheless, there is room for Although there has been some progress in more progress in this area: While the school-age the preschool enrollment rate in recent years, population (ages 6–18) has fallen by 47 percent access to preschool in rural areas needs since 2000, the number of primary and special attention. In 2017 net enrollment for secondary schools has gone down by only 21 children aged 3 to 6 in rural areas was 71.7 percent (330 closed and reorganized). percent. Young Roma children and children with disabilities are least likely to be enrolled. The With internal efficiency of the educational decentralization process, which shifted the system improving, the priorities now should responsibility for financing preschools from be its quality and equity. On quality: 40 percent central to local public authorities, resulted in of Moldovan students lack basic cognitive skills. severe underfunding of preschool education and Though student learning outcomes in Moldova, no facilities in 250 localities. as measured by the Program for International Students Assessment (PISA), have improved In the past decade, Moldova has improved the since 2009, 50 percent of 15-year-old students efficiency of its primary and secondary still do not have basic proficiency in mathematics; network, but challenges remain with regard nor are 46 percent proficient in reading or 42 the quality and relevance of education. The percent in science. Where equity is concerned, country has been working since 2014 to optimize the PISA results in science reveal a gap its school network and make the system more equivalent to almost 3 years of schooling Moldova Policy Notes | Strengtening Education Outcomes and Skills 82 between high- and low-income students of 15 84 percent of them in public institutions. In just years of age. The gap between students living in two years, the university student population has rural and in urban areas is equivalent to 1.5 years fallen by almost 20 percent. The country currently of schooling. Moreover, despite robust progress has 29 higher education institutions, of which 19 on inclusion, resulting in a four-fold increase in (65 percent) are public. Almost all have less than the number of children with disabilities or special 2,000 students, and only two have more than education needs in regular schools since 2012, 10,000 students enrolled. It is projected that by still some 709 children with disabilities are in 2020 universities will lose another 8 percent of special schools. For those in mainstream their students. schools, at the moment, major challenges for Moldova’s higher and VET education successful inclusion and quality learning systems do not meet labor market demands. outcomes are teachers’ limited capacities to Though university graduates have better provide efficient individualized support and employment and earnings prospects than those schools largely lack relevant technologies for with less education, they lack many job-specific such a support. skills: for instance, about 43 percent of those In general, the education infrastructure in university graduates who are employed report a Moldova is suboptimal. This is especially true mismatch between their education and their jobs. for accessibility for children with disabilities, the Firms believe that curricula are outdated and physical condition of learning spaces, and irrelevant to occupational profiles. access to water and sanitation. Few Skills mismatches are a major challenge for kindergartens are prepared for children with Moldovan employers. Limited availability of disabilities, rural schools often lack indoor toilets, skilled workforce reportedly ranks third among and vocational schools struggle with outdated constraints to expanding their businesses and learning environments. More than 60 percent of tend to force firms to reconsider their Moldovan children are at risk of illness because development plans. For about 40 percent of of the poor quality of the water in their schools. Moldovan firms skills deficits are a major or A disproportionate number of young severe constraint on growth—one of the highest Moldovans (ages 15– 29) are not in education, percentages in the Europe and Central Asia formal employment, or training (NEET): In region. Private sector companies are already 2017 this proportion reached 29 percent, which contributing to skills building programs and their was more than double the EU average of 12 financing, but there is need for a robust percent. An estimated 9 percent of Moldovan mechanism to scale up these efforts. adolescents (ages 15–19) and 30 percent of Labor market information for students and youth (20–24) were NEET with pronounced rural- job-seekers is weak. If unaddressed skills- urban and gender discrepancies: 35 percent of related decisions will remain deficient and will youth in rural areas and 34 percent of girls were exacerbate the extent of future skills NEET. 96 The longer they are idle, the less mismatches. employable they become. Currently there are no programs to tackle the needs of NEETs and to The Government is working on a lifelong support their integration on the labor market. learning strategy. With the population shrinking and an expected reduction in the share of the In vocational education and training (VET), working-age population, it is vital that Moldova’s recent progress in optimizing the network of workforce be equipped with adequate skills. A institutions has not yet improved youth well-developed lifelong learning system could employability. Between 40 and 50 percent of make a significant difference. VET graduates choose not to look for work or have been discouraged from participating in the Developing Moldova’s Human Capital national labor market. To address this issue, the for Growth government introduced in 2014 a pilot dual VET (dVET) programs with employers’ direct To address access challenges to preschool involvement in the development and delivery of education, a new funding formula should be programs. By 2018, 14 percent of VET students introduced and implemented. It needs to be chose the dVET path, while employability of supported by legislative changes that would dVET graduates has been higher. require local authorities to adequately finance preschool education and ensure universal Enrollment in higher education in Moldova access; including for children with disabilities, has been declining for 13 years. At present, Roma children, and children from rural areas. only 65,543 students are enrolled in universities, 96 National Bureau of Statistics 2018. Moldova Policy Notes | Strengtening Education Outcomes and Skills 83 In primary and secondary education, the with the participation of employers. Internal and emphasis should be on quality and equity external quality assurance mechanisms, such as while continuing to address school and professional accreditation of programs, should university network optimization. In addition to be developed and involvement of employers and continuing efficiency reforms, current policies employees in the education process should be directed to strengthening the strengthened. Internationalization should be application of the competency framework of recognized as a potential force to raise the curricula and improving the quality of teaching, quality of education programs. University teaching conditions and the students’, teachers’ financing mechanism should be based on and school assessment systems to ensure equal performance indicators. These access and quality education services for all recommendations are relevant for the VET children. Pre-service and in-service teacher education as well. training should be adjusted to align with Lifelong learning should be incentivized to international best practices, including by address the challenges confronting both the developing soft skills and competencies to employed and the unemployed. Universities, support children and young people transition into and VET institutions, which currently have no adulthood. To further strengthen quality of significant role in the lifelong learning market, education and in line with the provisions of the should be given incentives to provide short-term National Strategy on Strengthening Parental adult training programs, especially considering Skills 2016-22, stronger considerations must be the declining student population. placed on engaging parents as partners of teachers contributing to strengthened learning Labor market information for students and outcomes for children, adolescents and youth. job-seekers need to be enhanced. Career guidance and professional orientation services The VET system needs to be modernized with should be strengthened, and the policy-making an emphasis on building digital skills. The would benefit from accurate measurement of curricula should be increasingly demand-driven skills demand and supply. There is need to and practice-oriented. In this regard, the support the modernization of the NEA and cooperation between the VET schools and the strengthening career advisory services for private sector should be further strengthened, students to connect supply and demand. including through options like dVET, whereby more than half of the training is carried out in companies. The ICT programs offered in vocational schools should be modernized and This Policy Note was produced by the World Bank to inform policy debate in incentivized. Second chance education and e- Moldova. This note was prepared by Lucia Casap, Janssen Teixeira and Denis Nikolaev with contributions from Liudmila Lefter and Larisa Virtosu learning programs should be developed and (UNICEF),Stefan Butscher and Cretu Viorica (Swiss Cooperation Office), Valeria Ieseanu (UNDP), and Rita Columbia (UNFPA). offered to early school leavers, children and adolescents with disabilities, and those from The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the disadvantaged families to increase their chances World Bank or the Governments they represent. of inclusion and employability. For any questions regarding this note, please contact moldova_contact@worldbank.org. Policies for higher education should give THE WORLD BANK MOLDOVA OFFICE: priority to enhancing program quality and http://www.worldbank.org/en/country/Moldova labor market relevance. Occupational profiles and qualification standards should be drawn up Moldova Policy Notes | Strengtening Education Outcomes and Skills 84 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Enhancing Labor Markets and Closing the Gender Gap Key Message An aging population and a shrinking labor force may be dampening Moldova`s prospects for sustainable growth. Low rates of both labor force participation and employment accentuate the demographic risks. Though the gender difference in labor force participation is relatively small, the share of women who are inactive has been on the rise. If it is to respond effectively to the demographic challenge, Moldova needs a steady increase in both labor force participation and labor productivity. To increase participation, aside from adopting policies to promote competitiveness and job creation, the country must also review and perhaps revise labor regulation, taxation, and productive use of remittances. Investing in education and skills-formation is at the core of improving job quality and preparing Moldovans for productive jobs. Key Actions • Reform the Labor Code to reduce the rigidity of firing and hiring and facilitate non- standard flexible work arrangements while ensuring social protection during unemployment. • Implement a specific regulatory and tax treatment of internships and apprenticeships for youth. • Revisit the rules for maternity and parental leave and make available more child care services for children under 3. • Facilitate worker internal mobility by detaching benefits from location. • Reduce the costs and increase the benefits of formalization, e.g., through online registration of workers and better access to credit for formal firms. • Abolish the list of banned jobs and professions for women, adjust the curricula and support women entrepreneurship. • Strengthen policies and regulation to motivate training providers to improve their programs for skills formation and upgrading, and nurture private sector contributions to skills formation. Implement the system for recognition and validation of non-formal and informal learning, particularly for returned migrants. • The National Employment Agency needs to undertake new active labor market programs, e.g., via operational and technology changes required for more efficient service delivery. • Strengthen the role of the private sector in labor market intermediation. • Empower the Labor Market Observatory to produce gender-desegregated labor market and training information to enhance career guidance and better align education with labor market needs. Where Moldova Stands Now to shrink by 29 percent, or 1.2 million people, and the share of people 65 and over will triple to 30 An aging population and a shrinking labor percent. Moreover, the low labor force force are serious threats to the country’s participation (LFP) rate has made Moldova’s development. Moldova, one of the fastest-aging dependency ratio the highest in the region as countries in Europe, has been suffering losses of measured by the ratio of inactive to active population and labor force because of low and adults. 97 decreasing fertility and losses in high net Moldova`s LFP and employment rates are far emigration. By 2060 the population is expected 97 World Bank. 2017. A Human Rights-Based Approach to the Economic Security of Older People in Moldova. Moldova Policy Notes | Enhancing Labor Markets and Closing the Gender Gap 85 below the ECA regional averages: In 2017, Mothers of children under 5, especially infants only 42.4 percent of the population over 15 years (up to 2), face a significant LFP penalty. If were in the labor force, and only 40.6 percent employed, mothers of infants are more likely to were employed (women: 38.1 percent; men: 43.1 work informally, mainly as unpaid family workers percent). 98 The low employment rate is both a in rural areas, and with shorter hours. Having two cause and a consequence of high emigration. In or more children of pre-school age also lowers 2013, conservative official statistics stated that female LFP and employment, most likely due to about 14 percent of men and 8 percent of women a lack of childcare facilities and part-time "child- of working age were employed or looking for jobs friendly" jobs. 101 Among women employed, the abroad. Between 2000 and 2014 the share of share with those with children is lower by 23.3 economically active Moldovan adults (aged 15 percent than for those without. Moreover, in 2017 and up) who had or were looking for a job abroad the gender pay gap was 13.5 percent and was rose from 8.4 to 27.7 percent. With adjustments wider in better-paid sectors like IT (35.4 percent) for international migrants, 99 the Moldovan LFP or finance (39.2 percent). 102 and employment rates exceed 50 percent, Among the reasons why productivity in though they are still lower than in most transition Moldova is among the lowest in the region are and more developed European economies an economy dominated by agriculture, high Low unemployment masks a depressed labor informal employment, and education and market. The unemployment rate was 4.1 percent skills shortfalls. Half of all Moldovans still live in in 2017 (women: 3.3 percent; men: 4.8 percent). rural areas (57.1 percent), and about one-third of Because job opportunities were scarce, many the labor force works in agriculture--a sector workers, especially men, withdrew from the local where productivity is lower than the national labor market to work abroad. Unemployment average and those of peer economies. 103 More among young adults aged 15–24 is a more efficient firms are raising productivity by shedding pressing problem, having reached 11.8 percent rather than creating jobs. While productivity is (women: 13 percent; men: 10.9 percent). increasing somewhat, a growing share of jobs is in less-productive firms. In general, firms find it The LFP gender difference is relatively small very difficult to create decent jobs and improve but the share of inactive women has been on productivity. 104 the rise, and the gender pay gap has not narrowed. Moldova`s LFP gender gap of 6.3 The gender gaps in business ownership and percentage points is well below Europe and entrepreneurial activity are large. Women are Central Asia average (20.7 percentage points). losing ownership and control over businesses to However, since 2000 the LFP and employment men who are expanding their firms, probably rates for women have deteriorated faster than because of indebtedness, poor access to equity those for men. Inactivity has gone up, especially capital, and lack of knowledge about how to among youth. Close to 30 percent (28.9) of youth expand their businesses. 105 in Moldova are NEETS—neither employed nor in Moreover, informal employment is an important education or training. Among the younger and segment of the Moldovan labor market; in 2017 well-educated, NEET shares are higher among more than one in three workers were employed women (34.8 percent) than men (23.2 informally. Notably, over 80 percent of the percent). 100 Often family obligations, such as workers informally employed lived in rural taking care of children and other family members, areas. 106 There are clear differences between explain the inactivity of women aged 25–44. 98 106 National Bureau of Statistics. Informal employment comprises all persons who 99 The NBS classifies all international migrants as during the survey reference week had any of the inactive individuals when calculating key labor market following types of job: (1) Own account workers or indicators based on the Labor Force Survey (LFS). employers in informal sector enterprises; (2) members 100 ILO. 2016. Labour market transitions of young of cooperatives of informal producers (3) contributing women and men in the Republic of Moldova. family workers, whether employed in formal or informal 101 World Bank. 2018. Moldova Labor Market Gender enterprises; (4) employees in formal and informal Inequality. sector or as paid domestic workers in households, 102 ILO. 2017. Wage regulations and practices in the who were in one or more of the following situations: Republic of Moldova. their employer did not pay social contributions for 103 World Bank. 2018. Promoting Market Competition them; or they did not benefit from paid annual leave for Productivity Growth, background paper for the or paid sick leave; and (5) persons producing upcoming Moldova Country Economic Memorandum. agricultural goods exclusively for consumption by their 104 World Bank. 2016. Moldova Poverty Assessment. own household, if they worked on this for 20 or more A Jobs Diagnostics for Moldova. hours during the survey reference week (NBS, 2017). 105 World Bank. 2018. Supporting Women’s Entrepreneurship in Moldova. Moldova Policy Notes | Enhancing Labor Markets and Closing the Gender Gap 86 men and women who have non-standard jobs. lowest paid in Europe, and 98 percent of its Women enter into non-standard employment beneficiaries are women. contracts more often than men and choose such To reduce informal work, there is a need to less-protected options in order to reconcile work clarify and publicize the benefits of with family responsibilities. 107 formalization. Two-thirds of informally employed How Moldova Can Enhance its Labor wage earners do not want to change their current Market Outcomes jobs. Thus, while there is a role for inspections, some reforms could reduce the cost of To compensate for the narrowing labor force formalization by simplifying administrative and achieve sustainable growth will require a procedures and expanding and publicizing its steady increase in labor force participation benefits, such as access to credit. Enforcement and productivity. Among other things, this will and inspection capacities (including occupational require bringing idle youth and adults into jobs, health and safety) need to strengthen as well. In encouraging more internal migration (including particular, authorities would need to ensure an support for employment reintegration of effective functioning of the current labor returnees and better regulation of legal circular inspection system in line with relevant ILO migration) and the professional mobility of conventions, including by strengthening its workers, and better utilizing their knowledge and capacity. skills. Investing in education and skills-formation To increase LFP will require not only policies for all Moldovans, women and men, is to promote competitiveness and creation of necessary if they are to achieve full, decent jobs but also rethinking labor productive employment and decent work. The regulation, taxation, and ways to use skills gap is attributed to the fact that education is remittances more productively. Also important not relevant to labor market needs and seems for increasing firm entry and job creation will be unable to equip future workers for new job improving competitiveness and transparency opportunities. For it to become relevant will and strengthening the rule of law and the require changes in the formal education system accountability of public institutions. 108 On the (see Policy Note on Strengthening Education supply side, reducing the cost of hiring and firing Outcomes and Skills) and more active and simplifying rules for internships and part-time involvement of the private sector in skills work could help increase labor engagement, formation. Private sector engagement in shaping especially for youth and women. Considering that of the education programs and policies, as well low LFP may partly stem from higher reservation as in their delivery, should be sought to improve wages in the households of emigrants, measures the relevance and alignment of education to support the productive investment of outcomes to labor market needs. remittances and enhance entrepreneurship among returned emigrants or members of The current workforce would benefit from emigrant households could help keep them in the investment in both skills formation and labor market. These measures should include retraining. Training providers that serve the business training and advisory and support adult population can (i) provide remediation for services. Given that such programs already exist, those who did not acquire sufficient skills in it would be important to evaluate them and scale formal education, and (ii) offer skills upgrading for up those demonstrating good performance and those seeking promotion, validation of informal outcomes. skills recognition, or a change of career. The Government can promote and support a system To increase LFP and employment for women, of lifelong learning, strengthen policies and it is important that they have access to quality regulation to motivate and facilitate training child care and after-school activities. It will providers to improve their services, and better also be necessary to revise the system of align training with market needs. maternity and parental leave in terms of duration, replacement rate, and the share of leave for The National Employment Agency (NEA) can fathers. Dropping the list of jobs and professions do a great deal to facilitate jobseeker access banned for women can also help activate them to decent jobs. It should upgrade its capcaities and reduce occupational segregation and the and IT tools to collect and track information on gender pay gap. In Moldova, parental leave is the jobseekers and vacancies to provide more 107 ILO. 2016. Informal Economy in Moldova: A Comprehensive Review. 108 World Bank. 2016. Moldova Poverty Assessment. A Jobs Diagnostics for Moldova. Moldova Policy Notes | Enhancing Labor Markets and Closing the Gender Gap 87 effective skills- and job-matching services. NEA comprehensive, timely, relevant, and gender- interventions are also critical for helping disaggregated information, it will be possible to vulnerable women and men to enter or return to more quickly identify employment barriers and the labor market. The Government has already adjust related policies, incentivize formal work; launched an ambitious employment policy and support the education and employment reform, 109 an essential component of which is to choices of individuals. Having gender-specific revamp current and launch new active labor information on the returns to education and market programs (ALMPs) to make NEA services occupational wage differentials has the potential more efficient and relevant. However, the current to change the occupational aspirations of girls public administration plans to reorganize the and reduce gender labor market disparities. It is NEA and cut its staff by 25 percent. This therefore crucial to support the new Labor Market significantly increases the risks that the policy Observatory and make it fully operational. reform objectives will not be reached. 110 In Finally, to ensure women’s full and effective parallel, the role of the private sector in labor participation and equal opportunities for market intermediation should be strengthened. leadership at all levels of decision-making in The NEA needs to implement the reform political, economic and public life, the strategy, but it needs to be supported both Government should strengthen policies and operationally and technologically to ensure regulatory mechanisms 111 to achieve the targets more efficient service delivery. After the of SDGs 5 and 8, including the target 5.5 which organizational change, the agency should revisit is already aligned to national policy agenda its operational model for supporting delivery of through the Strategy to Ensure the Equality existing and new gender-responsive services. between Women and Men for 2017-21. The revised model would seek for more Interinstitutional cooperation and active civil integrated, beneficiary-oriented business society participation would enable the processes and information management in implementation of the strategy. administering the services. Moreover, greater focus is required to monitor ALMPs implementation results. The goal would be This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Julia Smolyar, Alexei Ionascu with continuous adjustment to increase the efficiency contributions from Irina Cozma (UN Women), Oxana Paierele (Embassy of and cost-effectiveness of ALMPs and improve Sweden), Viorica Cretu (Swiss Cooperation Office), Andrei Darie and Valerie Ieseanu (UNDP), Fabien Schaeffer (EUD) and Ala Lipciu (ILO). the balance between various programs and The findings, interpretations, and conclusions expressed herein do not measures. A recent modernization pilot showed necessarily reflect the views of the Board of Executive Directors of the that slight improvement in NEAs service delivery, World Bank or the Governments they represent. and transfer of responsibility to unemployed For any questions regarding this note, please contact moldova_contact@worldbank.org. through individual job plans accelerated access THE WORLD BANK MOLDOVA OFFICE: to jobs by 5-7 percent on average. http://www.worldbank.org/en/country/Moldova Alignment of education with the labor market should be grounded on solid evidence. Poor labor outcomes stemming from skills and spatial mismatches may be addressed in part through better labor market information. With 109 111 The key principles of the reform are stipulated in the According to the Moldova 2030, there is a range of recently approved Law on Promotion of Employment policy documents approaching different aspects of and Unemployment Insurance. gender equality and one specific policy document 110 ILO. 2017. Assessment of the delivery of covering almost fully fifth SDG area (Strategy to employment services for youth by the National ensure equality between women and men 2017-2021). Employment Agency of the Republic of Moldova Moldova Policy Notes | Enhancing Labor Markets and Closing the Gender Gap 88 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Achieving a Sustainable Social Protection System Key Messages Moldova`s social protection system has been helping the country to reduce poverty and advance shared prosperity. It will continue to be central to mitigating the adverse impacts of growth-promoting reforms on the poor and on vulnerable households. The 2009–17 social assistance reforms attained important results but remained incomplete. Improvement of policy and service delivery must continue to reduce fragmentation and better target social assistance benefits. Further, the 2016 parametric reform put Moldova`s public pension system on the path to fiscal and social sustainability, but its benefits have been undermined by subsequent policy measures as the reduction in the social contribution rate. The fiscal impact of the contribution rate cut is non-trivial and is permanent; it should either be reversed, or adjustments should be sought on the expenditure side. Key Actions Social Assistance • Continue rationalizing category-based benefits to reallocate resources to targeted cash transfers. • Adjust eligibility parameters for targeted social assistance programs in coordination with other income support policies to prevent decline in the number of eligible households and to maintain benefits adequacy. • Revisit the list of documents required to apply for targeted benefits and facilitate enrollment by stronger cadre of social workers and technology. • Invigorate introduction of a new business model and service delivery standards in local social assistance departments, e.g., through a functional National Social Assistance Agency. • Enhance the institutional capacity and authority of the Social Inspectorate. • Target more active labor market programs to social assistance beneficiaries to help reduce their reliance on cash transfers (see Policy Note on the Labor Market). Pensions • Avoid ad hoc pension increases. • Reverse the reduction in the social contribution rate. Otherwise, speed up the rise in the retirement age, revisit the benefit package with a basic pension component to complement a smaller insurance-based pension. • Continue making the military pensions program more predictable, transparent, and fiscally sound. • Enhance the pension revenue base by revisiting preferential contributions treatment for various groups of contributors. • Pursue policies to increase participation in employment and reduce informality (see Policy Note on the Labor Market). • Sign social protection agreements with countries receiving Moldova`s labor migrants and ensure enforcement of the agreements already signed. Where Moldova Stands Now bottom quintile reached almost 100 percent because pensions and other social insurance Social transfers such as pensions and social benefits covered 55 percent of the population assistance benefits are an important source and 98 percent of the poorest quintile. Social of income for the bottom 40 percent of assistance transfers covered 24 percent of the Moldovans and have contributed to their income population and 57 percent of the poorest quintile. growth more than to that of the top 60 percent. In Well-functioning social protection programs 2017, multiple social protection programs should continue to be central to mitigate any amounting to 10 percent of GDP covered 60 adverse impacts of growth-promoting reforms on percent of the population. Coverage of the the poor and on vulnerable households. Moldova Policy Notes | Achieving a Sustainable Social Protection System 89 However, social assistance in Moldova must leaks to people in the top three quintiles. The do more to prevent and eliminate relatively small main anti-poverty program, Ajutor vulnerabilities. There is a growing disparity Social, covers just 7 percent of the total between rural and urban poverty. 112 Children in population. Moreover, 2018, a pre-election year, Moldova are still disproportionately poor, and the saw a rise in the number and cost of categorical rural-urban inequalities are pronounced. In 2015 benefits and ad hoc pension increases that divert the poverty rate for households with three or budget resources from expanding and sustaining more children was 23 percent, the national the adequacy of the means-tested benefits. Such average was 10 percent, and for families with measures are likely to affect recipients of Ajutor one child the poverty rate was just 8 percent Social cash transfers whose incomes are close (Ministry of Economy and Infrastructure 2017). to the eligibility threshold. In the past, erosion of About 18 percent of children in rural areas but the beneficiary base by ad hoc changes in only 2 percent in urban areas lived below the income-related policies pushed many poor poverty line (NBS 2017). Between 2014 and households out of the social safety net and it took 2017 the share of families with children receiving considerable time and concerted efforts for the country’s main poverty-focused social program coverage to recuperate. assistance program, Ajutor Social, went down Pensions from 52 to 41 percent (MHLSP 2018). Coverage of the most vulnerable, especially those in the The 2016 parametric policy measures put poorest income quintile, is limited. 113 Moldova`s public pension system on the path to sustainability. With those reforms, it was To be socially and fiscally sustainable, the projected that by 2020 the system’s deficit should social protection system needs to continue be almost negligible and stay so for the next two reforms to better target social assistance decades. The changes helped ensure system spending and improve the adequacy of pensions stability over the longer term. Critically, the while holding their fiscal cost steady. system was positioned to provide basic social Social Assistance security to its recipients—instead of sliding below 15 percent, the average pension replacement After major reforms, noncontributory social rate would stay in the range of 25–30 percent. assistance attained important results. The reforms launched in 2009–10 helped build up the Unfortunately, the benefits of those reforms financial sustainability and equity of the social have been undermined. Recent measures, assistance system by introducing means-tested such as valorization of existing pensions and cash transfers such as Ajutor Social and the recalculation of the pensions of working Heating Allowance and eliminating inefficient pensioners, have diluted the gains promised by entitlement-based (categorical) benefits. A the 2016 reform. The financing gap in the short gradual expansion of targeted cash transfers to medium term increased by 0.4–1.0 percent of helped double the share of social assistance GDP annually. The most significant threat to benefits going to the poorest 20 percent of the fiscal sustainability is the 2018 reduction in the population from 40 to 80 percent by 2017. social contribution rate. Its cost is far from trivial, Elimination in 2012 of the costly, poorly targeted in that the contribution revenues’ permanent loss Nominative Compensations and in 2017 of is estimated at 1 percent of GDP. This is categorical benefits from the Fund for Social expected to spike the pension deficit in 2019 from Support of Population improved the spending 1.4 to 2.5 percent of GDP, elevating the future efficiency and sustainability of the social safety deficit by 1.5 percent of GDP. World Bank net. simulations suggest that increases in the wage bill, wage employment, or both are not likely to Yet fragmented programs and targeting compensate for the revenue lost. By increasing errors persist. Existing categorical transfers future pension system liabilities, they will mean that about 20 percent of the total social assistance spending, of 1.5 percent of GDP, 112 113 The National Human Development report Cash-based social protection for children in the highlighted the significant gap between absolute urban Republic of Moldova, UNICEF, 2018; “Strengthening and rural poverty in Moldova with 19 percent of the the effectiveness of the social safety net project: rural population living below the national poverty line Consultancy for Ajutorul Social evaluation and versus 5 percent in urban areas. The most vulnerable design”, Oxford Policy Management, 2017; SWOT groups are also exposed to social inequalities in analysis of Child Protection System, Government of education, health, access to quality services, and Moldova, 2014 concluding that “the existing social participation. The urban-rural income gap doubled benefits do not adequately support families with from 24 percent in 2010 to 42 percent in 2015 (UNDP, children”. 2017). Moldova Policy Notes | Achieving a Sustainable Social Protection System 90 exacerbate rather than resolve the fiscal created. However, the innovations have yet to be problem. fully implemented. The Government needs to make the Agency fully operational and allocate How Moldova Can Make its Social enough resources to support enhancements in Protections more Sustainable delivery of benefits and services by local social assistants. Social Assistance Successful practices of combatting benefit It is important to revive social assistance fraud and error should be further exploited reforms. On the policy side, the Government and expanded to prevent leakage of social should return to consolidating categorical assistance to better-off households. The Social benefits in order to budget more for targeted cash Inspectorate, established in 2011 to identify fraud transfer programs. Also necessary is adjustment and error in targeted benefits, has proved to be of Ajutor Social and Heating Allowance program highly efficient. Due to strong risk-based parameters to prevent reduction in coverage and inspection methodology, benefit irregularities benefit adequacy. When setting the programs` were detected in 79 percent of the cases income eligibility threshold apart from CPI growth inspected in 2017. The Government should currently considered, the Government should support institutional development of the Social also account for the impact of other income Inspectorate to strengthen its authority to enforce support measures, such as pension increases its decisions and recover over-payments and changes in taxation. For adequacy of the identified and expand its mandate to cover more Heating Allowance benefits tariff changes should social benefits. also be considered. It would also be important to increase the income disregarded when Pensions determining eligibility for Ajutor Social to strengthen incentives for formal paid Solutions are needed to ensure that the employment. The disregard should be set as a pension system is fiscally sustainable. The percentage of income rather than in absolute contribution rate, the pension benefit and the terms. The authorities also need to intensify their retirement age are interconnected parameters efforts to address child poverty by, e.g., for keeping pension system finances in balance. expanding coverage and raising benefits, in If changes affect one parameter, a policy particular for such vulnerable groups as response in the others should follow. For households with a disabled child, single-parent instance, if the social contribution rate reduction households, families in rural areas, those with cannot be reversed, the retirement age or the more than three children, and Roma families. 114 benefit package needs to be adjusted in response. Moldova is currently transitioning to a As for benefits delivery, the Government higher retirement age, to reach 63 years for both should continue to enhance access of the men and women by 2028. If the contribution rate poor to social assistance. With the World Bank had not been cut, the next age increase could support, the Government has built a modern have been postponed until 2040. Now, to information system that has helped reduce compensate for lower contribution revenues, the benefits processing time and enabled cross- pace of the retirement age increase must checks with public registries to verify beneficiary accelerate, and the new schedule to reach 65 information. But applicants are still required to years would have to start immediately after the submit numerous documents, which discourages current transition. 115 Another structural response some poor households from applying. The would be to revisit the benefit package by Government should revisit the list of documents introducing a basic pension component to required to confirm applicants and use data from complement the falling replacement rates of public registries. The system should also insurance pensions due to the lower contribution advance to telephone and on-line applications. rate, and to recognize explicitly that the pension The Bank-financed project also drafted service program is deficit-financed. delivery standards for local welfare offices and a new operational model to enhance client focus Clearing the pension system of a variety of and efficiency. To help build local capacities, a privileges could help generate additional National Agency for Social Assistance has been revenues and improve transparency. Pensions of military and para-military personnel 114 Committee of the Rights of the Child, Concluding the life expectancy of men at 63 is low. In 10 years, life observations on the combined fourth and fifth periodic expectancy may improve, opening up space for further report of the Republic of Moldova, 2017. retirement age increases. 115 Another possible scenario is to continue raising the male retirement age immediately after 2019 when the transition to age 63 is completed. However, currently Moldova Policy Notes | Achieving a Sustainable Social Protection System 91 add about 1 percent of GDP to the cost of the abolishing flat contributions or reduced national pension system. The pension reform of contribution rates; defining adequate contribution 2016 provided a basis for greater transparency bases; and introducing flexible arrangements for and better governance of the military pension self-employed and agricultural businesses to pay program. 116 However, the Government should contributions. continue to streamline military pensions by (i) aligning their benefit formula with the general This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Julia Smolyar with contributions from one, with an accrual factor that would yield a Xavier Sire (UNICEF). target replacement rate; (ii) gradually increasing The findings, interpretations, and conclusions expressed herein do not the age to qualify for the military pension; and (iii) necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. having clearly defined, transparent, and For any questions regarding this note, please contact predictable liabilities for funding the military moldova_contact@worldbank.org. pensions. In addition, the Government could THE WORLD BANK MOLDOVA OFFICE: enhance the pension system revenue base by http://www.worldbank.org/en/country/Moldova revisiting preferential contribution treatment, e.g., 116 The reform introduced social insurance administration of their pensions from line ministries to contributions for the military and transmitted the the National Social Insurance House. Moldova Policy Notes | Achieving a Sustainable Social Protection System 92 Moldova Policy Notes 2019 Sustaining Stability and Reviving Growth Improving the Efficiency of Health Service Delivery Key Messages Although Moldova’s spending on public health compares fairly with that of other countries of similar incomes, its health outcomes are not as good as would be expected for the amount it spends. With population aging, the rise of noncommunicable diseases, the advent of new technologies, and Moldova’s dilapidated hospital infrastructure, the cost of health care is likely to grow if preventive and low-cost technologies are not expanded. Key Actions • Selectively contract health care providers to optimize resource use and increase the technical efficiency of public health spending. • Prioritize primary health care services and increase their share of public spending. • Strengthen and harmonize the national health information and the eHealth systems. • Rationalize the hospital sector to increase efficiency and to ensure higher value for money in public health spending. • Strengthen emergency preparedness and response capacities in Moldova: a common, efficient, coordinated multisectoral approach comprising all-hazards and hazard specific measures to ensure preparedness for all types of emergencies. • Promote evidence-informed health policy-making and establish a research advisor infrastructure. • Promote the integration of a universal progressive Home Visiting programme as part of the primary health care system, and establish robust services to address needs of children with disabilities and mechanism for early detection of development delays. Where Moldova Stands Now population may have lower productive capacity. The slower economic growth that ensues will The labor market and population aging raise have negative impacts on resource availability concerns about whether the health system is even as the government and society feel more fiscally sustainable. The population is shrinking pressure to provide pensions, health care, and due to low birth rates and continuous emigration the social services older people require. of the working-age population. Decreasing fertility, high net emigration, and longer life Although Moldova’s public spending on expectancy mean that in a smaller population, health compares favorably with that of the share of elderly people will increase. neighboring countries, recent trends raise Meanwhile, Moldova is undergoing an concerns about the growth of out-of-pocket epidemiological transition: chronic diseases are (OOP) payments and the deterioration of rising as the contribution of infectious diseases, financial protection, which affects the poorest as a major contributor to mortality and morbidity, disproportionately. The Government devotes declines. Given the combination of an aging adequate resources to health within the population, a growing disease burden, and constraints of its economic development, but declining national resources, the national public spending on health has been eroding. authorities can expect significant challenges in Between 2012 and 2015, the share of the coming years. By 2060, the population is national budget allocated to health fell from 15.2 projected to drop by 29 percent, 1.2 million, and to 12.6 percent. OOP payments accounted for the share of older people will triple to 30 percent. about 46 percent of total health spending in 2016. Although the old-age mortality rate is high, As a result, the previous gains in financial improvements in longevity will accelerate aging protection of the poor have been disappearing as of the population. The concern is that the OOP spending has been growing; the effect has demographic dividend will be over before been impoverishment. Lack of financial Moldova has reaped its economic benefits; an protection is mainly driven by OOP payments for aging society with a shrinking working-age Moldova Policy Notes | Improving the Efficiency of Health Service Delivery 93 outpatient medicines for all income groups and resources, and to do so using an evidence- especially for poorer households. informed approach. Access to health services for the poorest 20 The authorities need to make outcomes as percent of Moldovans was better in 2012 than well as access a health care priority. In 2017, in 2016. The access decline was most evident in the infant mortality rate (IMR) was 9.7 per 1,000 primary health care (PHC) and hospital services, live births and the under-5 mortality rate (U5MR) which led to a sizable reduction in health benefits was 11.4; both are almost triple the EU averages for the poorest Moldovans. While inequalities in of 3.4 IMR and 4.1 U5MR. The maternal mortality health care services were somewhat reduced, rate of 17.6 per 100,000 117 live births was more utilization rates for both outpatient and inpatient than double the EU average of 8. An estimated services continued to be strongly and positively 20 percent of child deaths, which are preventable correlated with household consumption. if health care is sought and is timely, still occur at home or within 24 hours of hospitalization. Health Figure 1. Out-of-Pocket Health Spending, 2015 insurance coverage has held steady at 86 percent and is lower than EU averages of 93–100 percent. 118 Between 2006 and 2017 vaccination for measles, mumps, and rubella (MMR) slipped from 96 to 87 percent. Access of women and girls with locomotor disabilities to health care facilities and adapted gynaecological chairs remain challenging. A continuing major hurdle to providing quality maternal, child, and adolescent health is the limited availability and high turnover of medical professionals. Non-communicable diseases (NCDs) are a major health challenge, especially among the Source: WHO and World Bank. working age population, with significant welfare and economic costs. Widespread NCD risk Technical efficiency of public spending on factors include tobacco and alcohol health is low, largely because of inefficiencies in consumption, unhealthy diet, hypertension and hospital and specialized out-patient care, which obesity. outside the capital city is usually attached to hospitals. Oversupply of hospital infrastructure Adolescent reproductive health needs more absorbs considerable public resources because attention. Although it is gradually decreasing, much infrastructure is not used well. Long- the rate in Moldova of sexually transmitted postponed rationalization of the hospital sector is infections (STIs) among youth was quadruple one reason for a delay in efficiency gains. that in EU countries. The youth birth rate was 27 Improvements in the efficiency of inpatient care per 1,000 adolescent girls, 2.5 times higher than are mostly expected to follow from reducing the the EU average of 10.5. From 2000 to 2017, the length of hospital stays and providing more day- HIV incidence among young people aged 15-24 care services. Meanwhile, the system will be has almost doubled from 12.2 to 21.4 per seeing more demand to provide care to chronic 100,000 population. 119 Moreover, one-third of patients. young people aged 15-24 were subject to physical, sexual or psychological violence by a Increasing efficiency of public spending is a current or former intimate partner in the last 12 priority to open up fiscal space for health in months. Roma girls in particular continued to be the medium term. Moldova’s allocations to subjected to child marriage and early health care are adequate and not likely to grow childbearing. Among teenagers, 12.5 percent are in the medium term. About 10 percent of GDP is overweight, and 20 percent have a body mass being spent on health care; the Government is deficit. 120 In 2016, Youth-Friendly Health covering almost half, allocating almost 13 Services (YFHS) were established and 41 percent of its budget to health care. With public centers were set up across the country; the funding on par compared to countries at a similar number of Moldovans aged 10–24 who benefited stage of economic development, Moldova now from them went up from about 134,000 in 2016 needs to prioritize more efficient use of those to 163,000 in 2017. However, YHFS still reaches just 25 percent of all adolescents, and of those 117 119 MHLSP, 2017. National Agency for Public Health. 118 120 National Health Insurance Company, 2017 and WHO, 2014. OECD, 2013. Moldova Policy Notes | Improving the Efficiency of Health Service Delivery 94 only 18 percent were from most-at-risk and Selectively contracting with health care especially vulnerable groups. providers based on predefined criteria could immediately optimize resource use as well as Despite Moldova’s capacity on surveillance, increasing the technical efficiency of public early warning systems, laboratory diagnosis spending. Moldova, with World Bank support, and treatment, the country needs to establish a has been working to improve purchasing resilient emergency preparedness cycle for mechanisms for all types of care; options include health emergencies which will enable the country age-adjusted capitation in primary care, case- to align their existing capacities for a timely and mix funding for hospitals, and performance- effective response; identify gaps and channel based financial incentives. As these programs resources to address the gaps; and remove continue, more attention is needed to ensure that bottlenecks to strengthen emergency all providers meet performance indicators. preparedness and response. Adoption in PHC of revised performance-based How Moldova Can Strengthen its incentives could help bring more attention to Health System Efficiency prevention and effective management of NCDs. Benchmarking hospital care providers by Moldova allocates high share of its GDP on achievement of efficiency and performance health, close to 10 percent. Even after the indicators would better inform CNAM strategic decrease of the health spending from its peak of purchasing decisions. However, this would 12.5 percent in 2009, Moldova tops the regional require both passage of regulations to empower ranking. However, the gap between the total and CNAM and full political support. Otherwise, public health expenditures of 5 percent of GDP is underfinancing of health care services will shift the highest in the region. While focusing on even more costs onto patients and increase the improving efficiency of spending, outcomes and financial and other barriers to getting health care. access to health care needs to be tackled as a The Government needs to give PHC services priority. higher priority and a larger share of public Moldova needs to make the hospital sector spending on health care to address the needs more efficient and shift spending toward of patients and improve financial protection. primary health care. Savings on unwarranted Demographic and epidemiological transitions to hospital services can be reallocated to increase NCDs and comorbidities call for better-resourced funding for population-based public health PHC services and public health interventions to services and PHC. Because the Government has reduce the disease burden. Strengthened been giving hospital services priority, their share prioritization should be placed in investing in of public spending on health has been growing. immunization to reduce the child mortality risk In Chisinau, due to their political influence and the cost of hospitalization when there are republic, municipal, and some private providers crises like the measles outbreak in 2018. This will draw almost 20 percent of Compania Naţională require (a) effective public health interventions de Asigurări în Medicină (CNAM) resources, reinforced by cross-sectoral coordination; (b) which reduces the funds available for facilities in well-resourced and high-capacity PHC to deliver other parts of the country. Adequate funding for both preventive and curative services; and (c) public health and PHC interventions is necessary good coverage in the benefit package of if Moldova is to effectively manage and prevent essential services like medications and vaccines. NCDs. This needs to be coupled with a reduction Spending on various inputs necessary for care, of behavioral and other risk factors. Raising the especially for PHC, does not appear to be efficiency of hospital service use by reducing adequate and responsive to the needs. It may unnecessary hospitalizations and managing contribute to lower utilization levels for these NCDs on a PHC level could significantly improve cost-effective services, especially for the poorest health care spending, with the savings used to part of the society. Giving PHC more priority provide more services to the public. The would improve the efficiency and cost- Government should therefore rationalize the effectiveness of health care and give the poorest hospital sector as planned, which will have Moldovans better financial protection. Finally, positive results over the medium to long term. diversifying procurement mechanisms, Meanwhile, it is important to empower CNAM to increasing transparency and efficiency in become a strategic purchaser in the health care purchasing medicines and medical devices, market and facilitate selecting and contracting including for modern methods of contraception, the most efficient providers. Unless efficiency would improve cost efficiency as well as health improves, the Government may not be able to outcomes. secure the resources necessary to meet the Improving PHC performance also deserves health care needs of the nation. more attention. Emphasizing prevention, e.g., Moldova Policy Notes | Improving the Efficiency of Health Service Delivery 95 through targeted work with parents, children, taking corrective actions. The results of the adolescents, and patients at risk of major NCDs, capacity and strategic risk assessment can be may help manage cases without any need for used to guide risk-informed programming that will inpatient care. This work should be supported by catalyze actions to prevent, prepare for and programs for the entire population promoting a reduce the level of risk associated with a healthy life. These should address vaccine- particular hazard and its consequences on preventable diseases, antenatal and perinatal health. care, smoking, alcohol consumption, adolescent Additional resources are also necessary to reproductive health, healthy nutrition, and improve the health information system, improved physical activity. Reduction of the NCD reduce network fragmentation, and promote risk factors would contribute to the substantial cooperation among institutions in exchanging improvement of the health status. These health information. Establishing an effective and interventions include but are not limited to well-functioning eHealth system needs to increase in excise taxes and prices on tobacco, accelerate in order to generate timely data for alcoholic and sugary beverages, enacting and decision making. enforcing comprehensive bans on tobacco advertising, promotion and sponsorship, enacting and enforcing bans or comprehensive restrictions on exposure to alcohol advertising, and reduce salt intake through the reformulation This Policy Note was produced by the World Bank to inform policy debate in Moldova. This note was prepared by Volkan Cetinkaya with contributions of food products. from Angela Capcelea (UNICEF), Viorica Cretu (Swiss Cooperation Office), Igor Pokanevych (WHO, and Natalia Plugaru (UNFPA). The process for strengthening emergency The findings, interpretations, and conclusions expressed herein do not preparedness should follow an iterative cycle necessarily reflect the views of the Board of Executive Directors of the World Bank or the Governments they represent. starting from assessing risks and capacity, For any questions regarding this note, please contact establishing coordinating mechanisms, planning, moldova_contact@worldbank.org. financing and implementing capacity, to THE WORLD BANK MOLDOVA OFFICE: conducting simulation exercises, evaluation and http://www.worldbank.org/en/country/Moldova Moldova Policy Notes | Improving the Efficiency of Health Service Delivery 96