91601 IDA at Work Moldova: A Country Ready to Make a Great Leap Forward F acing the need for a sustainable growth strategy, Moldova has been working with the International Development Association (IDA) to address its main development challenges through increased economic competitiveness, promotion of human development and social inclusion and increased effectiveness of the public sector. Although it is still the poorest country in Europe, Moldova has greatly reduced its poverty rate from 70 percent in 1999 to about 30 percent today. Increasing economic opportunities has become a top priority and Moldova was among the top ten global reformers in the Doing Business 2010. Challenge Moldova is a small land-locked agricultural country with population of 3.6 million and a gross domestic product (GDP) of about US$6 billion (2008). Almost one-third of GDP is accounted for by remit- tances. The country imports almost 100 percent of its energy and is energy inefficient. Public sector is bloated and inefficient. The business environment is improving, but it is still poor compared to its neighbors: while Moldova was one of the Doing Business top ten reformers in 2010, it ranks 94th overall. The global economic crisis gave urgency to reforms since in 2009, all sources of growth— export, remittances and investments—were severely undermined. GDP growth dropped from 7.2 percent in 2008 to 6.5 percent in 2009. Remittances fell by 37.4 percent in U.S. dollar terms in 2009. Crisis and pre-election spending also opened an unsustainable fiscal deficit of 6.4 percent of GDP in 2009. Moldova cannot rely only on migration to drive its future growth. A second growth engine needs to come from revitalizing and diversifying exports. Moldova is prone to natural hazards. It faced simplifying business registration and licens- severe drought in 2007 and devastating ing procedures and creating a sound basis for floods in 2008 and 2010. The floods caused financial reporting and auditing in the corpo- the displacement of population, destruction rate sector. A 2006 law has mandated a review of transport, social infrastructure and hous- of all existing legislation and developed ing, and loss of crops and livestock. Climate the capacity for applying regulatory impact vulnerability and effects of climate change assessment methodology to new legislation. will likely lead to an increase in the severity and frequency of weather-induced disasters. Through IDA involvement, Moldova has main- tained an active dialogue with the World Bank Economic difficulties are complicated by and demonstrated its commitment to reform. political volatility and civil conflict in the This dialogue has resulted not only in steady breakaway region of Transnistria. IDA commitment, but also greater support from and involvement by other donors. Approach Results Country strategies in Moldova have supported implementation of the reforms agenda to The Social Investment Fund (MSIF) has been establish self-sustaining growth based on one of Moldova’s greatest development suc- increased competitiveness, particularly in cesses. The Fund has empowered poor com- agriculture; emergence of a service sector; munities and vulnerable populations across and improving the country’s human resources. the country to take a role in managing their In 1997, Moldova became an IDA-only coun- development needs. About 932,000 people try, with much of the assistance focused on (over a quarter of the country’s population) the infrastructure and human development. have benefited from MSIF subprojects. For A community-driven development approach example, there was an increase in student has been used to direct IDA support to local attendance by 5 percent during winter as a interventions in areas with the highest result of the installation of central heating. concentration of poverty. In combination, Indirect benefits accrue through the 26,000 IDA-supported activities helped Moldova temporary jobs created, providing around 2 improve the quality of and access to social million person-days of work. services, such as healthcare and education, and significantly reduced the spread of AIDS. The Education for All—Fast-Track Initiative This approach has also allowed IDA to help project supported renovation of 65 kinder- Moldova improve and strengthen community gartens and provision of teaching materials infrastructure. to 600 preschool institutions—42 percent of the national total. IDA has also helped the government’s efforts to eliminate bottlenecks to growth, The Competitiveness Enhancement Project in particular, through the trade facilitation has assisted 150 companies to date (with improvements and improvements in busi- another 100 applications pending) to improve ness environment. Two notable ways IDA has quality standards, leading to increases in helped strengthen the private sector include product quality and improved sales. The 2 project also supports reform of the regula- ency on the PFM issues include development tory sector and through this, over the last of the internal control and audit system and five years has contributed to a reduction of implementation of the financial management regulatory compliance costs for enterprises information system, integrating budget plan- by 35 percent. ning and execution processes and operations. Moldova jumped 14 places in the World Bank IDA Contribution Group’s Doing Business 2010 rankings, from 108 in 2009 to 94 in 2010. Moldova was among IDA efforts are aimed at helping Moldova the top ten global reformers on the ease of address the crisis and development needs. starting a business, registering property and The recent lending includes additional financ- paying taxes. ing for the Competitiveness Enhancement Project (US$24 million) to provide credit to The Rural Investment and Services Project Moldovan exporters; the Social Investment has assisted in the creation of 1,700 new busi- Fund II (US$20 million) to create jobs and nesses in high-value agriculture, livestock and build community infrastructure; the Rural small industries, creating 7,000 new jobs. Investment and Services Project (US$10 mil- lion), which was scaled up to add financing to Energy-2 Project has improved heat avail- support small and medium rural businesses: ability (from 0-30 days a year to the entire and a US$25 million Development Policy winter season) of about 35 social institutions Operation supporting recovery and mitigating and 37 residential buildings. Improved heat- the social impacts of the crisis. ing has benefitted 8,400 students, almost 1 million patients/staff/visitors, and 2,200 The portfolio has 10 investment opera- families whose apartment buildings were tions and two full-size Global Environment connected to new boilers. Facility (GEF) projects. Total investment lending commitments amount to US$217.3 IDA supported greater efficiency of public million, of which US$110.1 million remain sector through the Public Financial Manage- to be disbursed. The portfolio is dominated ment (PFM) Project and Public Administra- by projects in the infrastructure and human tion Reform Project. The latter facilitated development sectors. Project performance is consolidation of the central public adminis- satisfactory in terms of implementation and tration bodies around key policy areas (the development objective progress, with the number of ministries was cut from 29 to 24, disbursement ratio consistently exceeding 20 the number of government agencies from percent annually. 16 to 8). The reform also helped increase capacities of the ministries’ policy units to IDA is the leading external source of eco- elaborate priorities and align them with nomic and social analysis. Analytical work the Medium-Term Expenditure Framework delivered in fiscal year 2010-11 includes a (MTEF) supported through the PFM Project. Country Economic Memorandum, a Country In addition to the institutionalization of the Procurement Assessment Report, a District medium-term expenditure planning, the main Heating Restructuring Study, and a Public improvements in effectiveness and transpar- Expenditure Review. The Bank prepared Policy 3 Notes on key economic and social challenges Netherlands, Sida) have looked to the World to address the impact of the economic crisis. Bank to administer multi-donor trust funds The Bank was able to enlist the endorsement for Central Public Administration Reform and and support for the Policy Notes from the support to the Supreme Audit Institution. European Commission (EC), the United Nations These partners have also provided US$5.5 (UN), the U.K. Department for International million as co-financing to the on-going Public Development (DFID), the Swedish Interna- Financial Management Project (US$8.5 mil- tional Development Cooperation Authority lion IDA). The Bank prepared Policy Notes (Sida) and the International Monetary Fund on key economic and social challenges to (IMF), were listed as co-authors. These Notes address the impact of the economic crisis. were instrumental in the preparation of the The Bank was able to enlist the endorsement government’s Economic Stabilization and and support for the Policy Notes from the EC, Recovery Plan (ESRP). UN, DFID, Sida and the IMF, who were listed as co-authors. The Notes were instrumental Partners in the preparation of the government’s ESRP. IDA has leveraged financing and reforms Moving Forward through partnerships with other develop- ment agencies. The March 2010 Consultative The global financial crisis underscored the Group meeting organized by the Bank and need for Moldova to accelerate reforms. Part the European Union (EU) raised US$2.6 billion of the Bank’s role is providing support to in donor support for 2010-2013. The Rural ensure that, in the face of fiscal stress and Investment Support Project and the Moldova resultant spending cuts, the vulnerable are Social Investment Fund attracted the support protected, the economy is further liberalized, of other donors (DFID, EC, GEF, Germany’s and the business regulatory environment is development bank Kreditanstalt für Wieder- improved. The World Bank will continue to aufbau (KfW), Netherlands, Sida, Switzerland, take advantage of the opportunity opened the United Nations Children’s Fund (UNICEF) up by increasing fiscal pressures to improve and the U.S. Agency for International Devel- the efficiency of budget allocations and more opment (USAID)), with additional financing broadly to deepen reforms and articulate the of US$24 million and US$36.4 million respec- medium-term growth strategy. tively. Following World Bank assistance to the government to develop the Land Transport In the short-run, the World Bank’s work with Infrastructure Strategy, IDA became the lead government and other partners will continue donor for the roads sector, providing a US$16 in the context of the National Development million credit, and the Strategy has attracted Strategy 2008-2011 aimed at: (i) enhancing parallel financing from the European Bank economic competitiveness and (ii) develop- for Reconstruction and Development (EBRD), ing human resources, enhancing employ- the European Investment Bank (EIB), the ment, and promoting social inclusion, and European Commission (EC) and Millennium (iii) improving governance and addressing Challenge Corporation (MCC) totaling US$450 corruption, including improved public sector million. Development partners (DFID, the efficiency and effectiveness. 4 Beneficiaries Serghei Stratulat lives in Anenii Noi and is a beneficiary of the Moldova Social Investment Fund II Project. “Access to the drinking water supply network changed our lives. Thus, we have the possibility to consume clean water and also use it for all household needs: we’ve done appropriate modifications to bathrooms and brought modern washing machines.” Galina Glavan lives in Panasesti village in the district of Straseni and is a mother of four. She benefited from the Education for All—Fast-Track Initiative. “With four children, it is very hard to cope with our lives. Every day is the same: cooking, cleaning, washing. We are busy the whole day with the house-related work and they are ... on their own ... The kindergarten means a lot. It is the only hope.” Last updated September 2010. http://www.worldbank.org/ida 5