Documentof The World Bank FOR OFFICIAL USE ONLY ReportNo. 28556-MD INTERNATIONAL DEVELOPMENT ASSOCIATION COUNTRYASSISTANCE STRATEGY FOR THE REPUBLICOF MOLDOVA November 12,2004 ECCU2Country Unit EuropeandCentralAsia Region This document has a restricted distribution and may be usedbyrecipients only inthe performance o ftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization. The dateofthe lastCountryAssistanceStrategy ProgressReportwas May 2002 CURRENCYEQUIVALENTS (Exchange Rate EffectiveJune 30,2004) Currency Unit = Lei Lei11.95 = US$l.O US$1 = Lei0.08 FISCALYEAR January 1-December 31 Vice President: Shigeo Katsu CountryDirector: Paul Berrningham TeamLeader: EdwardK.Brown CoreTeam: Lawrence Bouton, Kazuko Ogawa, Sergiy Kulyk,LuisAlvaro Sanchez, Maya Sandu, Elena Nikulina, hushBezhanyan, Elena Chesheva ABBREVIATIONSAND ACRONYMS AAA Analytical and Advisory Services AML Anti-Money Laundering BEEP Business Environment andEnterprisePerformanceSurvey CAE Country Assistance Evaluation CAS Country Assistance Strategy CDCF Community DevelopmentCarbonFund CDD Country Driven Development CFAA Country Financial Accountability Assessment CFT Combating the Financing of Terrorism CEM Country Economic Memorandum CDD Community Driven Development CIS Commonwealthof IndependentStates COA Court ofAccounts CODBS Cost ofDoing Business Studies CPAR Country ProcurementAssessment Review CPM Communist Party o fMoldova CPPR Country PortfolioPerformanceReview EBRD EuropeanBank for ReconstructionandDevelopment DFID Departmentfor Intemational Development DPL Development Policy Lending ECA EuropeandCentralAsia EGPRSP Economic Growth and PovertyReduction StrategyPaper EU EuropeanUnion FDI Foreign Direct Investment FSAP Financial Sector Assessment Program GDP Gross Domestic Product GEF Global Environment Facility HIF Health InvestmentFund IBRD Intemational Bank for Reconstructionand Development ICA InvestmentClimate Assessment IDA Intemational DevelopmentAssociation IDF Institutional DevelopmentFund IFC International FinanceCorporation .. IF1 International Financial Institution IMF International Monetary Fund IOM International Organizationof Migration JSAN Joint Staff Advisory Note JSDF Japanese Social DevelopmentFund MDG MillenniumDevelopmentGoals MTEF Medium Term ExpenditureFramework NGO Non-Govemmental Organization NPV Net Present Value OED Operations and EvaluationsDepartment OECD Organization for Economic Cooperationand Development PCB Polychlorinated Biphenyls PCF Prototype CarbonFund PFM Public Financial Management POPS PersistentOrganicPollutants PPG Public and Publicly Guaranteed(debt) PPP PurchasingPowerParity PRSC Poverty Reduction Support Credit PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction StrategyPaper PSD Private Sector Development QAG Quality Assurance Group RISP Rural Investmentand Services Project ROSC Reportson the Observationo f Standardsand Codes SAC Structural Adjustment Credit SDR SpecialDrawingRight SIF Social InvestmentFund SIDA Swedish Intemational Development Agency SME Small and MediumEnterprises SPA Social and PoliticalAnalysis SPM Social Protection Management STI Sexually Transmitted Infection TB Tuberculosis TTFSE Trade and Transport Facilitationin SoutheastEurope UNDP UnitedNations DevelopmentProgram UNICEF UnitedNations Children Fund UNFPA United Nations Fundfor Population Activities USAID United States Agency for Intemational Development VAT Value Added Tax WTO World Trade Organization COUNTRY ASSISTANCE STRATEGY FORTHE REPUBLICOFMOLDOVA Tableof Contents EXECUTIVE SUMMARY ............................................................................................................ i I INTRODUCTION........................................................................................................... 1 I1 .. COUNTRY CONTEXT .................................................................................................. 1 A PoliticalEconomy and Social Context......................................................................... 1 B Moldova's Transition Experience ................................................................................ 2 C Poverty inMoldova...................................................................................................... 3 D Macro Economic Performance. Prospects. andRisks.................................................. .... 5 i Recent Economic Performance ....................................................................... 5 ii 6 iii Medium-TermProspectsandRisks................................................................ ... Extemal Environment...................................................................................... 7 E Structuraland SectoralDevelopments......................................................................... . 9 i Private Sector Development............................................................................ 9 ii Infrastructure ................................................................................................. 10 11 F GovernanceandCorruption....................................................................................... . iii HumanDevelopmentandSocialProtection.................................................. ... 13 G Cross-Cutting Issues................................................................................................... 15 I11. . COUNTRYDEVELOPMENT PROGRAMAND ISSUES....................................... 16 A Country Priorities andAgenda ................................................................................... 16 B Feasibility ofEGPRSPImplementation..................................................................... .. 17 I V . BANKGROUPASSISTANCESTRATEGY ............................................................. 17 A Implementationo fthe Last CAS................................................................................ . 17 i Lessons from OED Evaluations and Other Reports..................................... 17 ii .. IDAPortfolio ManagementandPerformance ............................................. 18 iii IFCandMIGAPortfolioManagementandPerformance............................ 18 iv.. CAS Preparation: Participatory Process Followed .................................... 19 B ProposedAssistance Strategy..................................................................................... . 20 i Strategic Context ........................................................................................... 20 ii Scenarios and Triggers .................................................................................. 20 iii ... Monitoring and Evaluation............................................................................ 27 iv v.. Partnership and Coordination........................................................................ 27 V . ManagingRisks............................................................................................. 28 CONCLUDINGREMARKS ........................................................................................ 29 BOX Box 1: HIV/AIDS- A Growing Concern ................................................................ 12 FIGURES Figure 1: 4 Structure o f ScheduledPPGService, 2004-2015............................................ Moldova GDP Changes and Poverty Rates (1997-2002) ................................ Figure 2: 8 TABLES Table 1: Moldova: Absolute Poverty and Inequality Statistics, 1997-2002.................3 Table 2: Moldova: Selected Macroeconomic Indicators, 2000-2004........................... 5 Table 3: Indicative IDA Lending andNon-Lending Services FY05-08 .................... .24 Table 4: HighCase Triggers........................................................................................ 25 ANNEXES Annex Al: Key Economic and Program Indicators -Change from Last CAS Annex A2: Country at a Glance Annex B2: Selected Indicators of IDA PortfolioPerformance & Management Annex B3: Bank Group Program Summary Bank Group Fact Sheet -IBRD/IDALending Program Bank Group Fact Sheet -IFC & MIGA Program Annex B4: Summary of Non-Lending Services Annex B5: Poverty and Social Development Indicators Annex B6: Key Economic Indicators Annex B7: Key Exposure Indicators Annex B8: Operations Portfolio Annex B9: CAS Program Matrix Annex B10: CAS Summary o f Development Priorities ATTACHMENTS Attachment 1: Debt Sustainability Analysis Attachment 2: Portfolio Status Attachment 3: Linkto MDGsand Country Status vis-&vis MDGs Attachment 4: CAS Consultations Process EXECUTIVESUMMARY 1. Moldova's last full Country Assistance Strategy (CAS) for FY99-01 was presented to the Board o f Directors in May 1999. IDA had initially planned to prepare a full CAS for Board discussion in FY02, but decided to wait until Moldova's full Poverty Reduction Strategy Paper (PRSP) was ready. Instead, an interim Progress Report, discussed by the Board in May 2002, was prepared to provide the basis for continued lending and analytical work during FY02-03. The Government completed and approved its Economic Growth and Poverty Reduction Strategy Paper (EGPRSP - Moldova's version o f the PRSP) in June 2004. The EGPRSP and JSAN were discussed at the Board on November 11, 2004. This CAS sets out the lending and non-lending support to Moldova for the period FY05-FY08. It has been prepared in consultation with the Government o f Moldova, representatives o f civil society, the private sector, and development partners active in Moldova. 2. Moldova's transition to a market economy has been difficult, with high vulnerability to external shocks, a volatile internal political environment, and mixed reform implementation. After declining by more than 60 percent since independence, the Moldovan economy has finally rebounded, with growth averaging 6.7 percent over the last three years. While impressive, Moldova's growth performance remains largely consumption-led, drivenmainly byremittances from abroad. With a per capita GDP o f only US$542 and a poverty headcount o f 48 percent, Moldova i s the poorest country in Europe. The Government considers poverty reduction, and in particular achieving the Millennium Development Goals (MDGs), its major challenge and has undertaken extensive consultations in developing its poverty reduction strategy, the EGPRSP. The EGPRSP aims to achieve over the medium-term (2004-06): (a) sustainable and inclusive economic growth; (b) reduction o f poverty and inequality and increased participation by the poor in economic development; and (c) human development. Meeting the MDGs will require sustained long-term economic growth that disproportionately favors the poor. This calls for policies to maintain macroeconomic stability and improve the rural economy. 3. This CAS is set against the backdrop o f a difficult policy environment. The policies and actions proposed in the EGPRSP reflect a significant departure from past unfulfilled policy commitments and policy reversals. It will take some time, however, to ascertain the level o f the Government's commitment to the reforms articulated in the EGPRSP. As a result, the CAS takes a cautious approach. It will mainly support interventions at the local/community levels in rural areas and small cities-the two areas with the highest concentration o f poverty-employing a Community Driven Development (CDD) approach. These interventions will focus directly on helping Moldova achieve its MDGs, and will consist o f selected interventions to improve the quality of and access to social services-ducation, health, social protection, and community infrastructure. It will also support the Government's effort to implement reforms to eliminate the bottlenecks to growth identifiedinthe EGPRSP-improvements inthe business environment andpublic sector governance. The CAS recognizes that these are areas where the perception gap has beenthe widest andpast efforts at reforms have been less successful. Active dialogue with the Bank and development partners in these areas i s ongoing and successful policy actions will allow the Government to demonstrate its sincere commitment to reform. Success also would lead to greater donor support. 4. Over the period FY05-08, planned new lending under the base case will total US$90 million. Progress in implementing the benchmarks outlined in the EGPRSP, including a solid track record in achieving improvements in the business environment and public sector governance, sustained over a period o f 12 to 18 months, would trigger a high-case lending scenario. Under the High Case, IDA will be in a position to resume support o f structural reforms, possibly through development policy lending and complementary investment credits, with an additional US$47 million in lending. The - 11- .. Bank's non-lending program is tailored to provide the analytical underpinnings for lending, and would include studies to improve pro-poor targeting o f IDA resources. 5. A number ofmeasurable improvements are expected by the end o fthe CAS period, including: 0 An increase insocial assistancetargetedatthe poor from 60 percentto 85 percent; 0 Improvements in the quality o f basic (primary and lower secondary) education, and an increase in primary school net enrollment in rural areas from 96 percent to 98 percent and upper secondary from 28 percentto 35 percent; 0 Greater involvement o f civil society inpublic policy, increase in civil society participation in delivery o f social services, and monitoring o f government programs; 0 Lowering o f the cost o f doing business to South Eastern Europe standards in the area o f customs clearance, time and cost o f registering a new business, and obtaining licenses and permits; and 0 Lowering o f perception o f corruption in government, by a reduction in single source procurement from 45 percent to 20 percent o f the total number o f contracts, and from 51 percent to 15 percent o f the total value o f contracts. 6. The current portfolio will contribute to attaining the CAS outcomes. New IDA lending is designedto complement ongoing operations in achieving these results, with an emphasis on providing assistance to the poorest segments o f the population, and on supporting greater transparency in the handling o f public funds and a better business environment. In addition, a number o f new GEF operations will support the Government's actions to address environmental MDGs. 7. IDA'Snon-lending program, which aims at providing the analytical underpinnings for the investment operations, will focus on: (a) an in-depth assessment o f the economy, through a Country Economic Memorandum (CEM), and updates on a number o f fiduciary assessments - FSAP (Financial Sector Assessment Program), ROSC (Reports on the Observation o f Standards and Codes: Accounting and Auditing), CPAR (Country Procurement Assessment Review), CFAA (Country Financial Accountability Assessment); (b) sectoral policy notes to inform and guide lending in agriculture, social assistance, health, education, disaster management, private sector development, local government and community development, and legal empowerment as well as a People's Voice initiative to enhance civic engagement; and (c) PRSP and poverty assessment updates. 8. The implementation of this CAS faces a wide range o f uncertainties, derived from the Government's capacity and commitment to implement the EGPRSP, fiscal pressures, a volatile situation in Transnistria, the forthcoming elections, and changes in the external economic and political environment. Thus, it i s possible that the country might not be able to achieve the reform track record necessary to advance to the HighCase scenario. The design o f the CAS deals with these eventualities insofar as direct budget support from IDA only would be considered ifthe country meets the high-case triggers, including satisfactory implementation o f the EGPRSP. In addition, a CAS Progress Report (mid-term review) would be undertaken after 24 months o f implementation to evaluate progress, to assess the continuing relevance o f the strategic thrust o f the program, and, if necessary, to adjust the program to new and emerging realities inthe country. The indicative lending and AAA programs will be subject to periodic reviews with the authorities to ensure continued relevance and alignment with the EGPRSP. Proposed Agenda for Discussion by the Executive Directors The Executive Directors may wish to discuss whether the base case provides adequate support for the EGPRSP and the MDGs. The Executive Directors also may wish to discuss whether the focus on governance and improvingthe business environment as the triggers for the HighCase is appropriate. COUNTRY ASSISTANCE STRATEGY FOR THE REPUBLIC OFMOLDOVA I. INTRODUCTION 1. This Country Assistance Strategy (CAS) sets out the World Bank Group's planned lendingand non-lending support to the Republic of Moldova over the period FY05-FY08. It is aligned with the priorities detailed in the country's Economic Growth and Poverty Reduction Strategy Paper (EGPRSP - Moldova's version o f the PRSP). The CAS has been prepared in consultation with the Government o f Moldova, representatives o f civil society, the private sector, and development partners active inMoldova. 2. The key challenge for Moldova is to sustain and improve upon the recent gains in economic growth and poverty reduction by committing to and sustaining a consistent policy reform and governance improvement agenda. The overall objective o f this CAS, therefore, i s to assist Moldova in reducing its high level o f poverty, the highest in Europe, by: (a) promoting conditions for sustaining growth and employment creation; (b) improving access to social capital and services, and community infrastructure; and (c) improving public sector governance and combating corruption. 3. Plannednew lending over the period FY05-08will total US$90 million for the base case, and will consist o f selected interventions to improve the quality o f and access to social services and community infrastructure, foster a good investment climate, and address public sector governance issues. Progress inimplementing the benchmarks outlined inthe EGPRSP, including a solid track record on improvements in the business environment and public sector governance, would trigger a high-case lending scenario. Under the HighCase, IDA would be in a position to resume support o f structural reforms, possibly through development policy lending and complementary investment credits, with an additional US$47 million in lending. The Bank's non-lending program i s tailored to provide the analytical underpinnings for lending, and would include studies to improve pro-poor targeting o f IDA resources. 4. A CAS Progress Report (mid-term review) will be undertaken after around 24 months o f implementation to evaluate the continuing relevance o f the strategic thrust o f the program and, if necessary, to adjust the programto new and emergingrealities. Inaddition, the indicative lending and analytic programs will be subject to periodic reviews with the authorities to ensure continued relevance and alignment with the EGPRSP. 11. COUNTRY CONTEXT A. PoliticalEconomy and SocialContext 5. Background. The Republic o f Moldova, geographically situated between Ukraine and Romania, has a population o f about 4.2 million (of which 601,700 reside in Transnistria) and a territory o f 33,800 km2. Moldova has few natural resources and it i s almost entirely dependent upon imports for its primary energy requirements. Given its endowment inrich agricultural land and a temperate climate, the country has relied heavily on agriculture throughout its history. Currently, agriculture and ago-processing activities account for roughly 30 percent o f Moldova's GDP and a significant part of the population i s still directly engaged in the sector. Ethnic Romanians account for approximately 64 percent o f the population, the rest being o f Ukrainian, Russian, Gagauzian (Turkish), Bulgarian, and other origins. - 2 - B. Moldova's TransitionExperience 6. Difficult Initial Conditions. Moldova's transition to a market economy has been difficult. Following the collapse o f the Soviet Union, Moldova faced one o f the deepest and most prolonged recessions among the transition economies. As with many o f these economies, independence brought an end to the system o f subsidies and transfers from which Moldova benefited. This large systemic terms o f trade shock was exacerbated by the effects o f anumber o f other initial conditions. Among these were an obsolete industrial sector integrated into the Soviet economy, inadequate institutional development and capacity, and a dependence on agriculture that, with the demise o f its energy intensive irrigation system, left the economy exposed to adverse weather-related conditions. These conditions were compounded by a mixed record o f structural reform implementation and exposure to a number o f external shocks. As a consequence, in the 13 years since independence, per capita GDP has dropped by more than 55 percent and poverty has grown significantly, accompanied by an increase in inequality. Indeed, the incidence o f poverty inMoldova i s now the highest inEurope. 7. Transnistria. Independence also generated internalpolitical conflict. The civil war that erupted in 1992 left a separatist government incontrol o f the eastern territory o f Moldova known as Transnistria. Transnistria contained a significant part o f Moldova's industrial base, making Moldova even more dependent on agricultural production and imported energy and creating a fractured customs space with important implications for smugglingand tax revenue mobilization. 8. Mixed Reform Implementation. Moldova was viewed as an early and successful reformer. Macroeconomic stabilization was achieved relatively quickly and a number o f important first generation reforms were undertaken, such as trade, price, and exchange rate liberalization. The momentum behind these initial reform efforts, nevertheless, was not maintained and Moldova's reform experience has since followed a decidedly stop-and-go pattern. For a brief period following the 1998 Russian financial crisis, a weak coalition o f pro-reform parties succeeded in implementing a number o f important, reform measures, including rationalization o f the energy sector, pension reform, land privatization, and WTO membership. The political consensus backing the reformers, however, was fragile and the government failed to develop broad pro-reform constituencies. Political infighting among coalition partners, popular discontent at falling living standards, and the slow and unsatisfactory outcomes o f the reforms, combined with the growing and pervasive level o f poverty, led to the decisive victory by the Communist Party o f Moldova (CPM) inthe 2001elections. 9. The current CPM Government blames the sharp rise inpoverty on the structural reforms undertaken by previous governments and accuses these administrations o f being highly corrupt. The electoral platfom o f the current government promised, among other things, to increase salaries and pensions, halt corruption associated with the privatizationo f state-owned enterprises, and control the price o f basic commodities and utilities. The economic recovery that began in 2000 has allowed the govemment to partly deliver on many o f its election promises, thereby bolstering the support o f its base constituencies. The Government has followed a more dirigiste approach, creating barriers for business and rent-seeking opportunities that have exacerbated corruption. It also has reversed some earlier-completed privatization deals, as well as some accomplishments o f past programs o f reform. These actions have created a difficult environment for policy dialogue, both internally and withthe IFIs. 10. Several additional factors have contributed to this difficult policy environment. Most important, the resumption o f growth has convinced the Government o f the effectiveness o f its interventionist policies. However, the suspension o f both the IMFprogramand IDA'Sadjustment - 3 - credit (SAC3) point to a significant perception gap. The collapse o f these programs has also had an effect on the attitude o f other donors and there i s a significant risk that Moldova, with its hesitant efforts at reform, will end up isolated from the international community. The forthcoming elections in early 2005 are likely to inhibit any immediate progress on the reform agenda. However, the actions proposed in the EGPRSP and the announced interest in a closer relationship with the EU, represent a change in policy direction and open a window o f opportunity for productive dialogue, possibly closing the perception gap. This window o f opportunity may widen following the 2005 elections. C. Poverty inMoldova 11. Moldova i s the poorest country in Europe. Per capita GDP (2003) was US$542, and US$2,428 inpurchasingpower party (PPP) terms (2002). Depending on the measure o f absolute poverty used, between 40 and 50 percent o f Moldovans are poor and the majority can be considered extremely poor (see Table 1). Furthermore the depth o f poverty remains quite substantial. The poverty gap, reflecting the total resources needed to eliminate poverty by bringingthe consumption of the poor upto the poverty line, amounted to about 7 percent o f GDP in2002, or onaverage about 16.5 percent ofthepoverty line for eachpoorperson. Table 1. Moldova: Absolute Poverty and Inequality Statistics, 1997-2002 1997 1998 1999 2000 2001 2002 Poverty Measures Incidence 47.4 61.6 71.2 70.6 62.4 48.5 Gap 16.5 25.1 29.7 28.9 24.0 16.5 Extreme Poverty Measure Incidence 37.5 51.7 61.3 60.9 52.0 37.8 International Poverty Line ($2.15 PPPper day) Incidence 43.4 57.7 67.6 67.1 58.4 44.6 Inequality Measures Ginicoefficient 0.35 0.37 0.35 0.34 0.36 0.34 90/10 decile ratio 9.9 11.1 9.6 9.3 10.0 9.0 12. Who Are the Poor? There are sharp divergences in poverty by location and demographic characteristics. As elsewhere in the CIS, poverty rates in large cities have been lower than rates insmall towns and among the rural population. Unique to Moldova, however, i s the fact that even in large cities, over one-quarter o f the population i s poor and one-fifth i s living inextreme poverty. As inmany other transition economies, large households are more likely to be in poverty than small households. Similarly, households with many children and elderly persons are more likely to be poor. Households headed by people over 50 years o f age are less likely to be poor than those headed by people o f 30-49 years o f age, a reflection o f several co- factors, such as returns to experience in employment and pension income as well as household size. Poverty rates are lowest for people in households in which the head has some higher education, but one-quarter o f these households are poor. Consistent with patterns for households with more children, poverty rates are higher among children than among adults. Across economic activities, households in which the head i s engaged in agricultural activities (mainly hired agricultural workers) are at higher risk o f poverty. Infact, two-thirds o f households headed by hired agricultural workers are poor. Where household heads are self-employed, household poverty i s less likely. This latter category, however, i s relatively scarce throughout Moldova. - 4 - 13. Poverty I s Strongly Linked to Economic Growth. One o f the key features o f poverty inMoldova is its stronglinkto economic growth(see Figure 1). Followingthe regional financial crisis in 1998 and the severe Figure 1:Moldova GDP Changes and contraction in the Moldovan economy, poverty rates increased Poverty Rates (1997-2002) dramatically, reaching 71 percent 20 1 i 80 o f households in 1999. Conversely, between 2000 and 2002, with the turnaround in economic growth, poverty fell from 71 percent to under 49 percent o f the population. The strong link to economic growth -10 I ` 0-- highlights the vulnerability o f the population to poverty. Inthe event o f another sharp economic downturn, a substantial fraction o f the population i s vulnerable and will likely fall into poverty. Sustaining economic growth, therefore, will be key to reducing poverty over time. 14. Coping with Poverty. While growth has been the driving factor in reducing poverty, social insurance programs also have contributed to poverty reduction. Social insurance programs reduced poverty by between 5 and 11 percentage points, owing to their high coverage. In contrast, social assistance programs, which are meant to be direct instruments o f poverty alleviation, failed to make significant gains because of lower coverage, poor targeting, and a mismatch o f benefit levels with needs. Besides government assistance, international migration has been a central coping strategy, even though it has high social costs and poses significant personal risks for many. With more than a quarter o f the Moldova's working age population abroad, there has been considerable disruption inpersonal lives and family relationships, as more and more Moldovan children, especially inrural areas and small towns, live without their parents. 15. Inequalities in Access to Social Services Are Acute. While economic growth in Moldova has been pro-poor, reducing poverty rates across all locations and demographic characteristics, the emerging inequalities in access to health care and education are changing the distribution o f economic opportunities and will lead to increased future welfare differences between the rich and the poor. While the utilization o f health care services by the rich has increased, the poor simply forego health care unless it i s absolutely critical. The continued bias o f public spending in favor o f hospital care results in regressive public expenditures on health care. These changing utilization rates across income categories also reflect the increasing importance o f informal payments needed to obtain health care services, payments that the poor cannot afford. The low utilizationrates by the poor are likely to lead to poorer health outcomes, affecting productivity and placingfuture welfare at risk. 16. Ineducation, participation in the compulsory level of schooling has been remarkably resilient, the main exception being pre-school enrollment. However, the poor are less likely to seek post-compulsory education. The persistent disparities in enrollments starting from the final years o f compulsory schooling and continuing into university education mean that attainment gaps - between rich and poor, and rural and urban populations - are not closing. Given that households with higher education are increasingly more likely to be better off, and since they are better able to invest in the education o f their children, the persistent disparities at higher levels reinforce a process which transmits poverty from one generation to the next. - 5 - 17. Pathway out of Poverty. Well-paid employment i s a strong pathway out o f poverty in Moldova, but job creation has been much lower than job destruction. High rates o f job destruction are typical intransition countries; butnewjobs need to be created at a faster rate. The services sector in Moldova has yet to emerge as a significant provider o f formal sector jobs, and its share in employment has fallen steadily - a sharp contrast with other transition countries. Those who fail to avail themselves o f the opportunities typically turnback to subsistence farming for their livelihoods, or migrate to other countries in search o f employment. The new private sector i s the only source o f employment growth in Moldova, increasing its employment by 4 percent per year. These firms account for only a small share o f non-agricultural employment. The primary factor behindthe lowjob creation i s the highcost o f doingbusiness. D. Macroeconomic Performance, Prospects, and Risks i. Recent Economic Performance 18. Turnaround in Growth. Moldova was the last country in the CIS to see a return to positive growth. After falling by more than 60 percent between independence and 1999, cumulative growth o f more than 20 percent has been recorded since 2000. Inthe last three years, growth has averaged more than 6.7 percent. A number of factors have contributed to Moldova's improved economic fortunes: (a) as a result o f the prolonged economic recession, capacity utilization in firms that continued to operate was very low thus allowing production to expand with little additional investment; (b) important structural reforms, including pension reform and ~~ the privatization o f two-thirds o f the electricity distribution system, Table 2. Moldova: Selected MacroeconomicIndicators, 2000-2004 that were carried out at the end o f ---- 2000 2001 2002 2003 the 1990s began to have positive NominalGDP ($ million) 1,288 1,481 1,662 1,958 2,594 impacts on the economy; (c) the Real GDP growth rate (percent) 2.1 6.1 7.8 6.3 7.0 recovery o f demand in Moldova's CPI Inflation (annual average, percent) 31.3 9.8 5.3 11.7 10.8 main CIS trading partners has Primary FiscalBalance (cash) allowed Moldova to slowly (percent o f GDP) 3.2 4.1 0.4 2.7 2.9 recapbe export markets lost Overall Fiscalhlance (cash) -3.1 -0.1 -1.8 0.6 -0.7 following the 1998 regional (percent o f GDP) financial crisis; and (d) a marked Current Account Balance ( ercent ofGDp) -9.8 -4.6 -3.1 -7.3 -7.2 increase in real wages and ;projected pensions, combined with a sizable Source: IMF Article IV staff report, December 2003, National Bank c inflow of workers' remittances, Moldova and World Bank StaffProjections. 19. Fiscal and Monetary Policy. The recovery in growth has also benefited the fiscal accounts. A robust increase invalue added tax (VAT) collections and lower interest expenditures (reflecting both lower interest rates and the accumulation o f interest payment arrears on external debt) resulted in a fiscal policy that has remained relatively tight over the last three years, with a primary surplus (cash) averaging 2.6 percent o f GDP since 2000. The key fiscal challenge continues to be external debt service. In 2003, scheduled public debt service amounted to US$136 million - about 45 percent o f central government revenues. With external budgetary financing scarce following the expiration o f Structural Adjustment Credit 3 (SAC3) and with the suspension o f the IMF's Poverty Reduction and Growth Facility (PRGF ), debt service payments to bilateral and commercial creditors (with the exception o f the Eurobond) were halted inAugust - 6 - 2003.' After declining to single digit levels in2001-2002, inflation increased noticeably in2003, reaching 15.7 percent by year-end, partly as a result o f unusually large increases in food prices (related to the poor harvest) and a sharp increase inpublic utilityprices. 20. Remittancesand the Balance of Payments. While exports have grown rapidly, the growth inimports has been faster and has accelerated rapidly inrecent years. As a result, already massive trade deficits have deteriorated further, exceeding 30 percent o f GDP in 2003. These large trade deficits have been only partially offset by growing inflows o f workers' remittances, leading to a widening current account deficit.2 Remittances have thus become a major source o f domestic financing, contributing about 25-30 percent o f GDP and fueling the domestic demand and the rapid growth in imports. Despite central bank intervention, the lei appreciated by 5 percent against the U S dollar innominal terms, and by considerably more inreal terms, over the course o f 2003 and 2004. ii. ExternalEnvironment 21. The disintegration o f the Soviet Union had a profoundimpact on the Moldovan economy and its external trade relations. Yet, unlike many o f the other transition economies, Moldova has not significantly diversified its trade patterns. Exports are still concentrated ina few commodities and are still predominantly destined for the CIS market. The high dependence on the Russian market exposed Moldova's vulnerability to regional trade shocks. When the regional financial crisis hit in 1998, Moldova's exports fell by half. With the strong regional recovery, particularly inthe Russian market, Moldova's export performance rebounded. While EUimport restrictions on key Moldovan exports (i.e., wine) hinder market access, a number o f domestic policies negatively influence the ability o f exports to penetrate overseas markets. Removal o f these barriers will be aprerequisite for the successful expansion o f exports to the EU. 22. Moldova's economic vulnerability to the external environment also extends to the fiscal sphere where it has become increasingly dependent on the taxation o f imports for fiscal revenue. The taxation o f imports provides almost half o f total tax revenues, primarily via the VAT and the excise tax on imports. Since the massive growth in imports has been driven largely by consumption, any slowdown in consumption that also curbs imports will have significant fiscal implications. 23. The EGPRSPhighlightsEuropean integration as a fundamental focus o fMoldova's long- term development objectives. The EU has also stepped up its interest in Moldova - with the concept o f the "new neighborhood" policy Eramework - as Moldova will constitute the EU's new border with the accession o f Romania in 2007. Deeper integration into Europe, however, has a number of important policy implications, such as the harmonization of legislation on standards, customs, andbanking, as well as the willingness to accept politicalreforms demanded by the EU. ' With Moldova's suspension of debt service payments to Gazprom at the end-2001, and to bilateral creditors in August 2003, external payments arrears reachedUS$69.9million at end-2003. During 2004 arrears were reduced to USs25.2 million as a result of the Gazprom and Hewlett Packarddebt buy-back. The large unrecorded inflow of workers' remittances creates uncertainties regarding the actual size of the current account deficit. Recent data revisions have resulted in an improvement in the 2003 current account deficit from 11.2 to 7.3 percent of GDP. This correction, however, still leaves some US$] 30 million innet errors and omissions, most likelyreflecting further unrecorded inflows of remittances. - 7 - iii. Medium-TermProspectsandRisks 24. Medium-Term Growth Prospects. A number o f the factors that have contributed to economic growth inMoldova are likely to persist over the CAS period but are unlikely to sustain the current growthmomentum over the mediumterm. Indeed, the EGPRSPi s quick to recognize that Moldova's consumption-led growth experience does not provide the basis for the sustainable growth needed to rapidly reduce poverty. While large inflows o f workers' remittances can be expected to continue, it i s unlikely that the past rate o f growth o f these inflows will be sustained. The growth impetus from past structural reform efforts has not been reinforced by new structural reform efforts and the business and investment environment has remained poor and unstable. Foreign investment in Moldova has declined from over 10 percent o f GDP in 2000 to around 3 percent o f GDP in 2003. At less than 16percent o f GDP, gross investment remains low even by regional standards. The limited extent o f domestic savings implies that Moldova will continue to depend on external financial resources. Under the assumption that efforts to implement the economic development program articulated in the EGPRSP fall short in the near term, that no new external budgetary financing from the development partners i s forthcoming, but there i s no further deterioration inthe policy environment, GDP growth inthe base case i s expectedto fall to 6 percent in 2004 and then average 3 percent over the medium term. Inthe event, however, that the policy or business environment further deteriorates or that Moldova i s confronted by a contraction in remittances or export demand, then a further decline in economic growth can be expected. 25. Debt Sustainability. Moldova's external debt has grown from almost zero inthe early 1990s to an estimated US$1.7 billion (89 percent o f GDP) at the end o f 2003. This indebtedness was driven by large and growing external current account deficits inthe second half o f the 1990s (which averaged 9.7 percent o f GDP) and the sharp nominal depreciation o f the lei in the aftermath o f the Russian crisis. Public and publicly guaranteed (PPG) debt at the end o f 2003 was about 52 percent o f GDP. Domestic public debt (all short-term) was about 15 percent o f GDP. The net present value (NPV) o f PPG debt is composed mostly o f claims by multilateral institutions (56 percent) - including the World Bank (30 percent), the IMF (15 percent) and the EBRD(8 percent) -andbyParis Club creditors (24 percent), other official bilateral creditors (2.4 percent) and commercial creditors (18.7 percent). According to the indicative policy-dependent debt and debt-service thresholds, Moldova's NPV o f debt and debt service could be considered as sustainable in a range o f 200-250 percent and 25-35 percent o f revenues, respectively. As shown inAttachment 1, the NPV o f debt to revenues, however, is projectedto fall below the indicative range only in 2007 while the debt service-to-revenue ratio i s projected to remain below the threshold only from 2011. It i s estimated, however, that with the application o f traditional debt relief mechanisms, such as a stock o f debt operation on Naples terms from Paris Club creditors and comparable action by other official and commercial creditors, Moldova's NPV debt ratios will fall below the required cutoff thresholds for consideration in global debt relief initiatives, such as HIPC.3 26. With its large public debt service burden and the absence o f external budgetary support, Moldova has not remained current on its external debt service obligations. In 2003, Moldova closed its fiscal financing gap by accumulating additional interest and principal arrears (US$38.9 million or 2.0 percent o f 2003 GDP) on its extemal debt to Gazprom and bilateral and commercial creditors. These arrears constitutednearly one-third o f the total interest and principal due (US$136 million) in 2003. In June 2004, Moldova bought back the US$115 million To be eligible for HIPC debt relief, the ratio of the NPV o f public and publicly guaranteed debt to exports of goods and services mustexceed 150percent (see Attachment 1). - 8 - Gazprom promissory notes and accumulated arrears at a discount, with funding obtained from the National Bank o f Moldova. A number o f other debt buy-backs and restructuring have also taken place. These operations significantly reduce the debt servicing profile, on a commitment basis, over the next three years. 27. As Attachment 1 (Debt Figure2: Strudureof scheduledPFGDebtService,2004-2015 Sustainability Analysis) shows, under the (us6mllam) .. -. --..- - - __ __ base case scenario the NPV o f PPG external debt i s expected to fall below the sustainability threshold (200-250 percent o f Government revenues) in 2007 while debt servicing will remain above this threshold (25-35 percent o f Government revenues) until 2011. The analysis points to problems with liquidity and not solvency. As shown inFigure 2, over the CAS period scheduled debt service for the public sector remains heavy (between US$lOO million and US$120 millionuntil2007). Given this debt 2W 2035 2006 2037 2008 2004 2010 2011 2012 2013 2014 2015 servicing profile and the expected absence o f significant donor financing, the Government will need to rely on sizable primary fiscal surpluses and domestic sources o f financing to cover its external debt obligations. Given the expected slowdown in the economy, as well as planned reductions inpersonal and corporate income tax rates over the 2005-2007 period, the Government risks not meeting its ambitious revenue targets. With elections scheduled for early 2005, it also will be difficult for the Government to satisfy both its domestic expenditure commitments, including those needed to meet the MDG targets, and its external debt-service obligations. Without significant external debt restructuring, it i s likely that the government will be required to issue more state securities, obtain inflationary financing from the National Bank, and accumulate additional external payment arrears to bilateral and commercial creditors. A credible strategy to address the debt problem, however, would involve securing traditional debt relief from the Paris Club (which would require an IMFprogram), sustainable growth andprudent fiscal management, and demonstrated track record o f reform as a basis to seek additional donor resources, including budget support. 28. The EGPRSP and Improved Growth Prospects. Implementation o f the EGPRSP, including policies to improve the business and investment climate, reduce corruption and further structural reforms, could improve Moldova's medium-term economic prospects. An improved business environment should encourage an increase in foreign and domestic investment and a channeling o f workers' remittances away from consumption towards productive investment. The establishedreform track record would also unleash financial support from the donor community. The financing needed to implement the EGPRSP could be met by a combination o f Paris Club rescheduling and external budgetary support from donors, including IDA development policy lending. As indicated inthe EGPRSP, under this HighCase scenario, growth will be higher, in the order o f 5 percent per annum over the CAS period. 29. Economic Vulnerabilities. The Moldovan economy remains vulnerable to external shocks. The main driver o f the economy will continue to be consumptiodworker remittances. However, the large trade and current account deficits that accompany such a growth strategy will not be sustainable unless economic policies trigger a larger domestic supply response. In addition, the dependence o f the economy on the agricultural sector leaves it exposed to a number o f weather-related shocks. Moldova also suffers from excessive dependence on a limited number - 9 - o f trading partners and commodities. This leaves Moldova vulnerable to adverse economic developments inits main trading partners, particularly Russia. E. Structuraland SectoralDevelopments i. PrivateSector Development 30. Weak Business Environment. The poor business and investment climate in Moldova constrains private sector development and i s a major impediment to sustainable growth and poverty reduction. The Moldova Investment Climate Assessment (ICA) confirms that although in recent years some positive changes were observed, particularly in the areas of business registration and licensing where substantial legislative and administrative changes were introduced, the existing regulatory environment and its implementationremaininadequate and are at the core o f the poor investment climate and limited foreign direct investment (FDI) inflows! Firms consider themselves to be constrained by the heavy and costly regulatory burden, such as business licensing, permits, registration, inspection, certification, and standardization. Moreover, the regulatory burden inMoldova tends to be comparably greater than in other CIS countries o f similar income levels. 31. Limited Trade and Transport Facilitation. The total logistics costs in Moldova, estimated at 22 percent o f GDP, are the highest in Europe and significantly impede the country's participation in international trade.' The main issues related to the high logistics costs are the poor shape o f the transportation infrastructure, corruption at the border, lack o f transparency o f custom procedures, and overly complicated and numerous documentary requirements - all o f which reduce the competitiveness o f export and make the country less attractive to foreign investment. 32. ConstrainedAgriculturalSector. Inaddition to the poor business climate and limited access to finance, the agricultural sector i s confronted by a number o f other key constraints. The slow restructuring o f the ago-processing sector, continued state control o f key agri-business industries and ad hoc government interventions in domestic and export markets perpetuate marketing inefficiencies and limit competition that depresses farmgate prices. Without further reforms in agro-processing, returns to investments at the farm level will remain weak, farm productivity and agricultural wages will remain low, and farmers will continue to pursue a subsistence-oriented coping strategy. At the farm level, despite substantial progress in land reform and despite legal and institutional impediments to the development o f the land market, the continued threat o freversals inlandprivatizationprevent the emergence o f genuinely restructured and consolidated farms, which would form the basis for recovery and growth. The combination o f low returns and weak growth performance in agnculture hampers the development o f the non- farm economy and the creation o f viable off-farm employment opportunities that could pullrural dwellers out o f poverty. The vulnerability o f the agncultural sector to natural disasters, including floods, droughts, ice storms and landslides, further complicates the agncultural recovery process. 33. DegradingEnvironment. Inappropriate agricultural practices, unsustainable loggingfor fuel wood and building timber, and unsustainable hunting and harvesting, contribute to the In 2004, Moldovapassed a new Law on Investment providing equal treatment to foreign investors and guaranteeingprotection against expropriation. Total logisticscostsinEUcountriesare 10-16percent of GDP. -10- degradation o f soil and biodiversity resources and increases the vulnerability o f the poor to these natural disasters. The low level o f forest cover (10.3 percent o f the land area) i s recognized as a contributor to erosion, floods and landslides. Limited access to insurance mechanisms, savings and credit services, or drought-proofing agricultural technologies inhibits the ability o f the rural population to manage and mitigate the respective risks. Agricultural pollution and Persistent Organic Pollutants (POP) stockpiles, in particular obsolete pesticides and Polychlorinated Biphenyls (PCBs) in the energy sector contribute to significant pollution o f land and water resources, including ground waters. Lack o f access to clean, affordable heating services on the part o f most rural households contributes to indoor pollution, while a dilapidated energy infrastructure produces outdoor pollutionthrough excess carbon emissions. 34. A HealthyFinancialSector with EmergingRisks. The banking sector i s comprised o f 16 banks and represents the overwhelming portion o f the financial sector. Non-bank financial institutions, capital markets and the insurance sector remain largely underdeveloped, if not embryonic. Overall, the banking sector i s reasonably well regulated by the National Bank o f Moldova, which has a comprehensive prudential framework inplace. Competitionamong banks for loans and deposits has intensified considerably in the past five years, pushing down interest spreads as banks have increased their total assets threefold to nearly 40 percent o f GDP in 2003. Dollarization o f the banking systemremains high, with nearly half o f total assets and liabilities in foreign exchange. The banking systemi s concentrated inthe largest 6 banks. Key vulnerabilities include the growing role o f the Government in the banking system and the relatively large number o f banks with controlling ownership stakes offshore. The private sector remains confronted by highborrowing and transaction costs with bank lending based on collateral rather than the cash generation capacity o fbusinesses. 35. Anti-MoneyLaundering(AML) and Combatingthe Financingof Terrorism(CFT). Although Moldova enacted its first anti-money laundering law in 2001, it i s still struggling to effectively operationalize its Financial Intelligence Unit. In many respects, Moldova still lacks appropriate legal tools that would enable officials to identify, investigate, prosecute, and prevent money laundering or terrorist financing, while sufficient capacity does not yet exist in the court systems, prosecutors office, among law enforcement/police officials, or financial sector supervisors to implement a coordinated and effective AML/CFT regime. The recent FSAP indicates there i s still a significant need for implementation o f fundamental legal tools to address ML/FTas well as training andcapacitybuilding. ii. Infrastructure 36. One o f the main risks for sustainable economic growth and reduction o f poverty stems from the continued deterioration o f the basic infrastructure (roads, water, sewerage, and the housing stock) and the poor financial situation o f the energy sector. The lack o f investment in and deferredmaintenance to an agmg infrastructure will continue to limit access to safe water and sanitation, contribute to unhealthy living conditions, degrade the environment, and reduce Moldova's competitiveness. Attracting quality foreign investments, creatingjobs and increasing productivity will be more difficult without improvements to the basic infrastructure and the reliability o f the energy supply. The main issues ininfrastructure are the following: Energy-need for consolidationof reforms. A slow adjustment to the post-independence realities left the energy sector with large accumulated debts and deteriorating infrastructure due to a lack of maintenance and investment. While significant reforms were undertaken under previous governments, includingthe establishment o f an independent energy regulatory - 11- agency (ANRE), the unbundling o f the vertically integrated power utility and the privatization o f three out o f five electricity distribution companies, under the current government reform efforts have stalled. The mainrisks include the institutional weakness o f ANRE, the incomplete regulatory framework (particularly related to the cross-border electricity trade) and the unfinished privatization agenda. Access to an affordable energy supply is increasingly difficult in many rural and small urban communities where district heating either does not exist or where the centralized heating systems collapsed when it became clear that they were not economically viable. Water and Sanitation-in perpetual financial crisis. The infrastructure o f the Apa Canal (the water and sanitation utilities) has deteriorated and the majority o f these utilities are in perpetual financial crisis due to low collections, low tariffs, andhighwater losses. Moreover, about 40 percent o f the water inthese systems fails to meet sanitary, chemical, or biological criteria. Purchase o f safe water represents a disproportionate level o f household expenditure, which increases the burden on the poor. Transport-extensive but deteriorating. The existing road network, albeit extensive, has been poorly maintained and no concerted effort has been made to address the needs in line with the changing trade patterns. Moreover, reform o f the management and financing o f the sector has been slow. The state road administration still operates on the old model, with no segregation o f the planning, contract awards and supervision functions from the implementation o f civil works, thus impeding the development o f a strong private road construction industry and the efficient use o f the scarce state resources for road maintenance and rehabilitation. Degrading Housing and Communal Services. The housing stock was privatized after independence; today it i s deteriorating rapidly owing to lack o f maintenance. The inexistence o f organizational capacities for homeowners to undertake collective action, combined with lack o f funding and an unclear legal framework, constrains the abilities o f households to take action to improve their immediate living conditions. Telecommunications-emerging but weak institutional framework. While certain progress has been made in developing the information and communications network infrastructure and services, their reliability, security, and sustainability remain weak owing to a lack o f competitive safeguards and limited private sector investment. Service bottlenecks createdby the still state-owned MoldTelecom, and weak institutional capacity are responsible for the continued low levels o f access and connectivity. iii. HumanDevelopmentandSocialProtection 37. The health, education, and social protection systems in Moldova have suffered from the economic decline and stalled policy reforms. Ingeneral, the quality o f services has declined and the system has been unable to address emerging needs. Despite some reforms undertaken before 2000, the provision o f health care, education, and social protection continues to face daunting challenges. - 12 - .Health-incomplete reforms. Moldova has succeeded in reversing the population's deteriorating hkalth status, but health indicators continue to lag far behind Box 1: HIV/AIDS A GrowinPConcern - those in other European countries. Considerable progress has been made The HIV/AIDS epidemic i s escalating after a period o f in reducing excess health low prevalence. As in other CIS countries, HIV/AIDS infrastructure, shifting resources into in Moldova was at a low level (prevalence less than primary health care, and restructuring 0.001 percent) during the first ten years o f the epidemic service delivery. The reform program, (1987-1996). However, from the mid-1990s onward, however, remains incomplete with a HIV infections have surged. As o f January 1, 2003, need to further reduce excess capacity 1,688 HIV-positive persons were registered, and 36 people had died o f AIDS. Since 1987, HIV/AIDS in the hospital sector, shift to a prevalence has increased more than 25 times to reach financing mechanism that provides 0.2 percent among adults o f the 15-49 age group, incentives to improve the efficiency ranking fourth in the CIS. Injecting drug use (IDU) i s and quality o f care, and introduce currently the main mode o f HIV transmission, measures that improve access to accounting for 82 percent o f all reported cases. Yet, essential care. Today, accessbarriers to transmission through unsafe sexual behaviours i s also health care remain significant and are on the rise, especially among young people, strongly correlated with poverty levels, constituting about 14 percent o f the reported cases. as public expenditures remain skewed Coupled with high levels o f STIs, this presents a in favor o f inefficient and expensive significant potential for change inthe dynamics o f HIV infection. hospital care. The growing dependence on out-of-pocket expendi&es has led to an increasingly skewed distribution of .health care utilization infavor o f upper income groups. Education-emerging inequalities. Although access to compulsory schooling (grades 1-9) i s high across income groups, disparities begin to emerge towards the end o f compulsory schooling as poor and rural children are more likely to drop out before completing the cycle, and thus less likely to continue to upper secondary and university. Although Moldova compares favorably with other CIS countries inbasic education enrollments, upper secondary enrollments are substantially lower and reflect to a large extent the much lower continuation rate onto this level by rural and poor children. The fiscal adjustment in the aftermath o f the Russian crisis was accompanied by increased out-of-pocket financing including through informal private contributions. Low perceived benefits relative to the costs (including the opportunity costs) o f continuing with education appears to be the primary reason why poor and rural families do not continue with schooling. Secondary education i s expensive for poor households, and even at the compulsory level out-of-pocket costs are not negligible, yet public expenditures on education do not especially favor the poor. There is some evidence o f improvements in the quality o f education (as measured by student performance), but challenges remain and inequities persist: many children still do not perform well on tests o f basic literacy and numeracy slulls; resources in schools are still lacking, and the gaps in .performance between urban and rural students are widening. Social Protection-need for better targeting. Pensions. The 1999 reform o f the pay-as- you-go pension system has met some o f its short-term objectives, such as making pension payments on time, in-cash (as opposed to in-kind),and without the need for budget transfers. Pension reform, however, remains incomplete and the general pension law i s not being fully implemented. There are a number o f outstanding policy issues to be addressed, including inter alia: (i) pensions o f farmers and the self-employed; (ii) reform o f disability and the the survivors insurance; and (iii)pension privileges for certain categories o f the population and certain sectors. Although the administration o f the social insurance system has improved in - 13 - the last three years, outstanding issues still need to be addressed. These include: (i) moving fkom a system o f awarding pension benefits based on stated wages to one based on contributions actually paid; (ii)significant delays in the introduction o f the individual accounts system; and (iii) development o f financial management and the IT system. Social Assistance. Some success in improving the targeting o f nominal compensations for the increased energy costs was achieved in 2000 during the energy reform, but existing programs still rely heavily on categorical and discretionary targeting approaches, and as a result 43.6 percent o f benefits go to the non-poor. The targeting o f social assistance benefits needs significant improvement to effectively target the poor population. Social Care Services. The quality o f the social care services has deteriorated, owing to lack o f resources and poor management practices. The system in Moldova i s still dominated by expensive institutionalhesidential care, concentrating on providing living conditions and medical care, rather than social integration and social care. It i s not flexible enough to quickly adapt to newly emerging and changing needs (street children, drug users, trafficked women, etc.) nor does it allow disadvantaged groups to receive services within their families and community. F. GovernanceandCorruption 38. Moldova inherited weak institutions andhas not yet succeeded inbuildinga modem state. As a consequence, ample opportunities for corruption abound. The civil service ispoliticized, the management o f public funds has improved but still lacks transparency and efficiency, local governments have limited capacity to carry out their extensive mandates, the judicial system i s not trusted, and civil society has yet to emerge as a significant voice in the country. Not surprisingly, corruption inMoldova is perceived as being very high. The Business Environment and Enterprise Performance Survey I1 (BEEPS) reports that nearly 60 percent o f respondents consider corruption to be a "moderate" or "major" constraint to business, the highest in the region. Excessive regulations, bureaucratic discretion, and associated corruption affect the competitiveness o f the economy, put downward pressure on wage rates, and drive people either to emigrate or to join the shadow economy, unofficially estimated at between 30 and 50 percent o f GDP. 39. Weak Civil Service. Although new civil service rules were introduced officially in 1995, Moldova has yet to internalize the notion o f a politically independent, merit-based civil service. Instead, the current public administration represents a mixture o f old bureaucratic structures, rules and procedures with some new institutions developed under earlier but currently stalled reforms. Chronic political instability and volatility have worsened the initial lack o f institutional capital, while the politicizationo f the civil service has led to a highturnover o f staff, chronic policy discontinuity, a deterioration in operational efficiency, the erosion o f institutional memory, and very low staffmorale. 40. ImprovingPublicFinanceManagement. Inthe last few years, the basis for improved public expenditure management has begun to emerge. The EGPRSP process and efforts at developing a Medium-Term Expenditure Framework (MTEF) have brought attention to policy prioritization, strategic planning, and the allocative efficiency o f public resource management. Also, public finance management has been strengthened, with real progress achieved in developing the treasury system and improving debt management. This progress serves as a good basis upon which to continue improving the financial accountability fkamework inMoldova. The budget formulation process needs to be consolidated to provide a comprehensive view o f public -14- revenues and expenditures, and greater coordination i s needed within the Ministryo f Finance, the revenue authorities, and the spending agencies to improve cash management. The internal and external control frameworks are weak and the existing internal audit organizations need to move from ex-post control and inspection activities to an audit model that i s supportive o f improving the overall control environment. 41. Wavering Local Government Reform. Moldova's local governments share many o f the same financial management capacity constraints as the central government. Two attempts to reform local governments have not produced significant success. In 1998 a new territorial administrative system aligned Moldova with the European Charter o f Local Self-Government, creating 11judets, plus the city of Chisinau. The current government reinstated the previous system o f 36 rayons. Central to both designs i s the preponderant problem o f the imbalance between the responsibilities and resources assigned to local governments. This, plus weak local administrations and negligible civil society involvement, further reduces the ability o f local governments to effectively deliver on existing mandates. As a first step at redressing this flaw, a fiscal cadastre has been introduced that allows local governments to increase revenues and reduce dependence on the central government. 42. Judicial Reform-Restarting Stalled Reforms. An effective judiciary can play an important role in reducing corruption, improving the business environment, and contributing to growth. The Government has introduced several reforms inthe legal andjudicial sector; the tiers o f the court system were reduced from four to three and new Civil and Civil Procedural Codes were introduced. The continuing agenda includes: improvement in the legislative drafting o f economic matters; development o f the legal education system; restarting o f the reform o f the court system; promoting o f the development o f the market for legal services, including access to justice throughpro bono services; and strengthening o f the enforcement o f court rulings. Given the dispersed understanding o fjustice (Ministry o f Justice, judges, prosecutors, attorneys-at-law, notaries, bailiffs, the legal academic community, NGOs), there i s a need to engage stakeholder participation to reach common understandings. Inaddition, for any real positive improvements, the independence o f judges and entire judicial system from the undue influence o f political, business, and corporate interests should be at the core o f the reformagenda. 43. Emergingbut Weak Civil Society. The last two years have witnessed a major surge in civil society activity, and today close to 3,000 civil society groups/ NGOs exist in the country, many o f them established with the support o f external assistance. The relationship between the civil society/NGOs and the Government has been guarded in the recent past, owing in part to mutual suspicion. Recently, however, under the aegis o f the EGPRSP process, there has been a rapprochement, engendered first by the creation o f Participation Council6 and second, by the extensive consultations with the stakeholders. In addition, the monitoring and evaluation arrangements being proposed under the EGPRSP include civil society groups. Thus, the leadership i s beginning to involve civil society groups in the local, regional, and national discourse. The ParticipationCouncil was created in October 2001 with the aim of ensuring the inclusive participation of all stakeholders in the process of EGPRSP development and implementation. It includes representatives o f the civil society, academia, and the private sector, as well as representatives o f central and localpublic administration. - 15 - G. Cross-CuttingIssues 44. Key Gender Issues. Economic hardships accentuated gender bias inhealth, education, and employment. Deterioration in health conditions and increasing mortality among men, attributed to suicide, alcoholism, drug use, cardiovascular disease, and other stress-related illnesses, led to a widening o f the gap in life expectancy to 8 years between men and women. Between 1990 and 2000, primary school enrollment rates for both sexes rose at all levels. At the higher education level, however, female enrollment significantly outpaced male enrollment, increasing fkom a female to male ratio o f 0.92 in 1990to 1.29 in2000. However, during the same period female employment took a down turn. While currently high at 50 percent o f total employment, it dropped from 60 percent at the beginning o f the 1990s. Moreover, transition has deepened gender-based job segregation, with women heavily concentrated in lower-pay and lower-skilled sectors o f the economy.' Also, regardless o f education, women are found in lower leveljobs andor lower payingjobs.* 45. The erosion o f state subsidized services, such as childcare, left women with the double burden o f both professional work and increasing household responsibilities, leaving them with less time for training, andor work, and thus leading to lower paying jobs.' Women's reproductive health has also deteriorated. The proportion o fpregnant women with anemia i s at an all time higho f 45 percent since the beginning o f the transition, and it i s the highest inthe region. Inadequate nutrition, along with poor living conditions and lack o f financial resources for personal hygiene, has contributed to a highmaternal mortality ratio o f 28 per 100,000 live births. 46. Moldova i s a major country o f origin and transit for the trafficking o f women and girls to the Middle East, the Balkans, and other European countries. The International Organization for Migration (IOM) estimates that at least 10,000 women a year go abroad with hopes o f finding employment and the local Moldovan news media estimate at least 100,000 young women are held as sex slaves abroad. Moldova i s also a leading supplier o f underage girls to Russia for sexual exploitation: the Government estimates that 5,000 girls are traffickedto Russia annually." 47. Youth Issues. Youth (16-30 years of age) make up about one-fourth o f the population, and are leaving Moldova in massive numbers, due to poverty and exclusion. The youth in Moldova lack assets in three interrelated dimensions: (i)economic-assets leading to income generation; (ii) social-access to information; associative life activities, social capital activities, and free-time activities; care and guidance; and (iii) participation in decision-making. Youth poverty also covers other dimensions related to the transition age o f youthhood: isolation, vulnerability, powerlessness, and idleness-due to lack o f free-time activities and safe spaces - all o f which encourages risky behaviors such as drug addiction or engagement in illegal activities. These phenomena tend to be particularly acute in rural areas and small towns, where spaces for youth activities and services disappeared during transition. "Women 2000, An Investigation into the Status o f Women's Rights in Central and South-Eastem Europe and the Newly IndependentStates," Intemational HelsinkiFederationfor HumanRights, 2000. "Human Trafficking in Southeastem Europe: The Case ofMoldova," World Bank, 2004. "Women 2000, An Investigation into the Status of Women's Rights in Central and South-Eastem Europe and the Newly IndependentStates," Intemational HelsinkiFederationfor HumanRights, 2000. loFor all figures on trafficking see "Human Trafficking in SoutheastemEurope:The Case of Moldova," World Bank, 2004 -16- In. COUNTRY DEVELOPMENTPROGRAMANDISSUES A. CountryPrioritiesandAgenda 48. Key Characteristicsofthe EGPRSP. The Joint StaffAdvisory Note (JSAN)" identifies four characteristics o f the EGPRSP, namely: an inclusive participatory process, an adequate poverty diagnostic, a three-pillar strategy, and an alignment with the MTEF. The EGPRSP process, endorsed by the government, was inclusive as it involved stakeholders and civil society at the national, regional, and local levels. It provided for a wider participation within the government and contributed to better coordination among donors. The poverty diagnostic, based on the recent household budget survey, provided an adequate basis for formulating an anti- poverty strategy. The three-pillar strategy o f the EGPRSP called for sustainable and inclusive economic growth, reduction o f poverty and inequality and increasedparticipation inthe economic development o f the poor, especially the most vulnerable groups, and improved human resource development. Finally, the MTEF sector strategies in education, health, and social protection reflect the priorities identifiedinthe EGPRSP. 49. Three-Pillar Strategy. The first pillar underscores the importance o f maintaining macroeconomic stability, improving the business environment, and acceleratingprivatization and structural reforms. A high priority is attached to improving the business environment and investment climate to reverse a decline ininvestment while continuing reforms in agriculture and infrastructure and improving governance. The second pillar seeks to strengthen human resource development through improving the quality o f and access o f the poor to education and health. The third pillar underlines the need to strengthen social protection and inclusion through continuation o f pension reform, improving targeting o f social assistance, and improving labor market flexibility. The links o f the EGPRSP to the MDGs and Moldova's status v i s - h i s the MDGsare presentedinAttachment 3. 50. Board Recommendations for Strengthening the EGPRSP and Addressing the ImplementationRisks. The EGPRSPand the JSAN were discussed at the Board onNovember 11, 2004. The Boardnoted that the EGPRSP i s comprehensive and contains critical actions that over time could help foster sustainable economic growth and poverty reduction. They noted a number o f priority areas for strengthening the EGPRSP during implementation. These areas include: (a) improving the macroeconomic and fiscal framework by aligning spending plans more closely with realistic projections o f fiscal revenues and identifjmg all sources o f financing necessary for their implementation; (b) improving prioritization through strengthening the poverty impact analysis o fproposed EGPRSPmeasures; (c) improvingmonitoring and evaluation by strengthening domestic capacity, and focusing on outcome indicators inpriority areas; and (d) addressing external vulnerabilities through effective implementation o f structural reforms and broadening o f the economic base. 51. The Boardnoted with concern several critical areas where current policies do not match those articulated in the EGPRSP. These include slow progress in implementing structural reforms, increased government interventions ineconomic activity, and the unsustainable medium- term fiscal framework. The Executive Directors noted that these actions may limit the scope for IDA concessional assistance, and urgedthe authorities to rectify these policy actions, especially " Republic o f Moldova: Poverty Reduction Strategy Paper and Joint IDA-IMF Staff Advisory Note, October 18, 2004 (Report No. 29648). - 1 7 - in the areas of state monopolies, licensing and regulation, land consolidation and agriculture subsidies, targeting o f social assistance and privatization. They underscored the need for the authorities to demonstrate a good track record o f implementation. They look forward to clearer signs o f govemment ownership o f proposed reforms, and encourage the authorities to engage stakeholders and citizens in monitoring and providing feedback and evaluation o f the EGPRSP implementation. B. Feasibilityof EGPRSPImplementation 52. The EGPRSP presented by the Government provides a basis for IDA assistance. The extensive consultation process followed during preparation and the readiness o f the Govemment to accept comments and suggestions signals a significant improvement in the capacity and willingness o f the Government to engage a broad range o f stakeholders in frank and open dialogue. The results also show that a significant constituency supports the EGPRSP. 53. Despite these important developments, however, it i s necessary to stress that implementation o f the EGPRSP could prove difficult. The EGPRSP implies a significant departure from the policy actions undertaken during the last three years, with a continuing wide gap between declared intentions as set out in the EGPRSP and actions on the ground. The political environment i s fragmented, with strong special interests that resist moves to reform and greater transparency. It is therefore possible that some o f the actual policies adopted and implemented by the Government and Parliament may deviate from the intent and content o f the EGPRSP. 54. The international community has an important role to play in supporting Moldova's advance towards an open market economy and alignment o f its institutions with European practices. Since sustaining such support would be difficult in an environment o f mixed policy implementation, IDA will work with other donors to monitor progress in implementing the EGPRSP. The planned CAS Progress Report would provide an opportunity to review implementation performance and to consider possible changes to enhance the program. IV. BANKGROUPASSISTANCE STRATEGY A. Implementationofthe LastCAS 1. LessonsfromOEDEvaluationsandOther Reports 55. The Bank's program in Moldova has benefited from several evaluations and analyses over the last two years. The Operations Evaluation Department (OED) undertook a Country Assistance Evaluation (CAE) inmid-2003, reviewing the outcome o f 1993-2002 programs.'2 The Quality Assurance Group (QAG) reviewed the Analytical and Advisory Services (AAA) program. Inaddition, an analysis o f the political economy and its implications for IDA lending, including a series o f private sector and business environment studies, has been undertaken. Reviews o f the business environment include the Cost o f Doing Business (2001 and 2003), an Investment Climate Assessment (2003), and ECA-wide Business Environment and Enterprise Performance studies (200 1and 2003). Committee on Development Effectiveness: Moldova Country Assistance Evaluation, May 14, 2004 (Report No. CODE 2004- 0036). - 1 8 - 56. The CAE report identified a gap between, on the one hand, the goals o f the various programs, which were considered relatively consistent and appropriate, and, on the other, the unsatisfactory development outcome. Itnoted that past strategies underestimatedthe difficulty of the transition and made less than candid assessments o f the emerging political and social risks. Both OED and QAG pointedout the importance o f internalizing evolving political realities inthe Bank's work. This suggests a need to test reform commitment and ownership before hrther development support lending canbe considered. 57. Both OED and Q A G noted that the AAA program would have benefited from a core integrative macroeconomic piece-such as a Country Economic Memorandum or a Development Policy Review-that included an analysis o f the implications o f the Government's approach to economic management and a presentation o f policy options. QAG rated individual pieces o f the AAA work satisfactory, but found that the overall AAA program was implemented inan ad hoc manner. 58. In preparation for a new CAS, an internal Country Portfolio Review found that investment operations have performed well, but have had limited impact in securing broader sectoral improvements. The review recommended: (a) a more frank evaluation o f political risk, and greater flexibility in project design to adapt to these risks; (b) to focus the CAS on key thematic bottlenecks (e.g., poor business environment and governance issues) that inhibitproject performance, with benchmarks to determine government commitment; (c) no further adjustment lending in the absence o f proven reform track record; and (d) better integration o f analytic work withthe lendingprogram, and fuller participationby affectedcommunities. ii. IDA PortfolioManagement andPerformance 59. As o f mid-October 2004, the Moldova portfolio comprised 11 ongoing investment operations with net commitments totaling US$146.2 million (including one GEF-funded grant o f US$5 million), of which US$106.2 millioni s undisbursed. The average age o f the portfolio is 2.9 ye&, with 2 projects more than 6 years old. Infrastructure accounts for about half o f the portfolio, with operations in human development, private sector development, and rural and agricultural development constituting the other half. The portfolio generally i s performing well with only one problem project (Social Protection Management). A summary o f the status o f the portfolio canbe found inAttachment 2. 60. Annual Country Portfolio Performance Reviews (CPPR), chairedjointly by the Bank and the Government, have been held regularly over the last 3 years. The last CPPR inJanuary 2004 broadened participation to include NGOs and development partners and most o f the agreed actions have been implemented. Highlights include the establishment o f an inter-ministerial Technical Committee to monitor project execution; workshops on disbursements and procurement; and plans for monitoring and evaluation training for project and government staff. iii. IFC andMIGA PortfolioManagement andPerformance 61. Since Moldova became a member in 1995, IFC has committed US$72 million o f its own funds and arranged US$25 million in syndications in the power, telecommunications, agribusiness, SME, and financial sectors. Inaddition, IFC also has supported technical assistance projects in banking, tourism, wineries, food processing, and leather industries. It continued to provide additional long-term financial resources to commercial banks for on-lending to local corporations, SMEs, and individuals. The country's difficult business climate has had a - 1 9 - dampening effect on foreign and domestic investment, making it difficult for IFC to develop and support new projects. Going forward, IFC will maintain its support in helping develop private enterprises, for example by providing long-term funding through local banks, and through assistance with attracting foreign strategic investors. It will also pursue opportunities to support infrastructure development. Recognizing that investment projects in Moldova require comprehensive technical assistance, IFC will continue to combine investment operations in strategically targeted areaswith various non-investment andtechnical assistance operations. 62. Moldova has been a member o f MIGA since 1993. MIGA guarantees have facilitated approximately US$63.7 million o f FDI, inthe power, financial and real estate sectors. Ithas also been involved in mediating disputes (in the power sector) and provided technical assistance to formulate and implement strategies for attracting FDI, with advice and tailored assistance to public and private organizations in image-building, sector-targeting, outreach and information dissemination. MIGA's online information service has 153 documents for Moldova pertaining to investment opportunities and other related legal and regulatory issues. iv. CAS Preparation: Participatory Process Followed 63. Stakeholder consultations were undertaken during the preparation o f this CAS. Those consulted include the Presidency, the Govemment (central and local levels), the Parliament, the business and financial community, civil society/NGOs, the media, think-tanks, academia, trade unions, opposition parties not represented in Parliament, and donors (bilateral and multilateral). The consultation process helped to create stakeholder contact groups to enlarge the sphere o f Bank cooperation and civic engagement, which should help facilitate CAS implementation. Three different large stakeholder groups were engaged in a series o f 8 roundtables and meetings: (a) the Govemment; (b) the business community; and (c) selected civil society groups and organizations from various parts o f the country (NGOs, academia, think tanks and research institutes). A CAS website, with an electronic discussion forum, was launched to provide added scope for dialogue with stakeholders, and most consultation events were taped and transcribed. Summaries o f the events were posted on the CAS website in two languages, English and Romanian. The electronic discussion forum i s ongoing, with suggestions and questions posted on the site. Attachment 4 summarizes the feedback obtained duringthe consultations. 64. Suggestions from stakeholders complemented feedback from the EGPRSP process and shaped this CAS. Stakeholders welcomed the consultation process initiated by the Bank, commenting that this was long overdue. They expressed concerns about the limited involvement o f civil society groups/NGOs indevelopment discourse, repeatedly mentioningthe important role they can play. Other issues raised were: (a) the need for a better business environment; (b) corruption; (c) direct financing o f beneficiaries to circumvent state bureaucracy; (d) infrastructure development, education, health, and a legal framework; and (f) the need for greater transparency inGovemment/IFIrelations. A follow-up phase of CAS consultation will involve validation and continuing dialogue on the development challenges facing Moldova. This will be initiated following Board discussion o f the CAS. -20 - B. ProposedAssistance Strategy The overall objectiveof this CASis to assistMoldovainpromoting sustainable growth and reducing its high level ofpoverty by: ... Promotingconditions for sustaining growth and employment creation Improving accessto social capital and services, and community infrastructure, and Improvingpublic sector governance and combating corruption. i. Strategic Context 65. This CAS reflects the current country context, the EGPRSPframework, andthe country's EUaspirations. It also draws heavily on the 2002 CAS Progress Report, the lessons learnedfrom the OED Country Assistance Evaluation, the Country Portfolio Performance Review, the Poverty Assessment, and a recent analysis o f the political economy and its implications for IDA lending. Ittakes a long-term view of the Bank's assistance to Moldova. Meetingthe MDGs, as stated in the EGPRSP, will require sustained long-term economic growth that disproportionately favors the poor. This calls for policies to maintain macroeconomic stability, improve the rural economy and better target social assistance. Under the current constraining financial and institutional environment, the challenges facing Moldova are daunting and will require long-term commitment from IDA and other development partners. 66. This strategy is set against the backdrop o f a difficult policy environment. The policies and actions proposed in the EGPRSP reflect a significant departure from past unfulfilledpolicy commitments. It will take some time to ascertain the level o f the Government's commitment to the reforms needed to support the EGPRSP. Against this background, the CAS mainly will support interventions at the local and community levels, employing a CDD approach that relies on the strong involvement o f communities and local government authorities. In addition, it will support the Government's efforts to eliminate the key bottlenecks to growth that were identified inthe EGPRSP-improvements inthe business environment andpublic sector governance. The strategy recognizes, however, that these are areas where the perception gap has been the widest and past efforts at reforms have beenless successful. 67. Each operation supported under this CAS will be based on sound stakeholder analysis, and in collaboration with the authorities and local institutions. The Bank will also involve, as appropriate, civil society in the design and implementation o f lending and non-lending services. It is hoped that this approach will help broaden the constituency for reform and help monitor implementation o f both the EGPRSP and the CAS. Lastly, the CAS moves away fkom the input/output based program o f the past to a more results-based strategy, designed on the principles o f effective Government ownership, anchored in the EGPRSP, and based on true partnership with the Bank and other development partners. The results-oriented framework for this CAS andits linkage withthe EGPRSPispresentedinAnnex B9. ii. ScenariosandTriggers 68. This CAS defines two scenarios: a Base Case and a HighCase. The Base Case reflects the current country context and Moldova's Performance-Based IDA Allocation. Over the four- year CAS period (FY05-08), the Base Case lending envelope will be SDR63 million (US$90 million equivalent). The HighCase provides about 50% more resources, for a total envelope o f -21 - SDR96 million (US$137 million equivalent). The lending and analytic programs described below represent current intentions. Within the overall Base and High Case parameters, and consistent with the overall goals o f the strategy, both may be adapted to take advantage o f emerging opportunities or unforeseen constraints. A full review o f implementation progress will be conducted after a periodo f around 2 years. 69. The BaseCase focuses on three pillars, which are aligned with the medium- to long-term poverty reduction priorities detailed in the EGPRSP. These are: (i) promoting conditions for economic stability, growth and employment creation; (ii) improving access to social services, capital and community infrastructure, as well as minimizing environmental risks; and (iii) improvingpublic sector governance and combating corruption. 70. Added emphasis will be placed on learning through joint consultative processes (involving the Government, the Bank, development partners, and stakeholders) to improve policy dialogue, build consensus, and give greater voice to the citizenry to foster heightened public accountability. The indicative lending and AAA programs (Table 3) will be subject to periodic reviews with the authorities, to ensure continued relevance and alignment with the EGPRSP. Additionally, a mid-term review (CAS Progress Report) will take stock o f advances in the implementation o f the EGPRSP and evaluate the track record in policy reforms, including fulfillment o f triggers for the High Case. Based on these assessments, the review could suggest necessary modifications to the Base Case. Pillar 1. Promoting Conditions for Economic Stability, Growth, and Employment Creation 71. The CAS consultations with the business community, the Trade Diagnostic Study, and the Investment Climate Assessment Study all point to the high cost o f doing business as a binding constraint to the development and expansion o f the private sector (in particular SMEs) and job creation. To this end, the CAS will target actions to reduce the cost o f doing business by assisting the Government in simplifying bureaucratic controls and time-consuming approval procedures, and streamlining enforcement to reduce business harassment. Complementary attention would be given to actions to improve corporate governance, broaden financial intermediation, and improve the maintenance o f basic infrastructure to facilitate investment and economic activity. In addition, the CAS will support the development o f the rural economy, where most o f the poor live, and will place emphasis on removing internal barriers that limit the export capacity o f the country. 72. Lendingand Non-LendingSupport. The Bank will seek to improve the understanding o f the sources o f and impediments to growth in Moldova. A Country Economic Memorandum, currently under preparation will build on previous and current analytical work (Trade Diagnostic Study, the Investment Climate Assessment, Poverty Assessment, and Sector Strategy Notes). It will explore policy options for sustainable growth, as well as measures needed to mitigate underlying social and economic risks. In addition, the Bank will support dialogue on financial and private sector reforms, including the development o f measurement instruments (surveys, focus groups) to gauge improvements inthe business environment. InFY04, a Financial Sector Assessment Program (FSAP), an Accounting and Auditing Assessment (ROSC), and a Country Financial Accountability Assessment (CFAA) were completed. Follow-up technical assistance will beprovided to support improvement inthe financial accountability framework inthe country, including the need to refine the AMLEFT regime. If requested by the Government, the Bank would provide technical assistance for restructuring and management o fpublic debt. - 2 2 - 73. IDA will support efforts to improve Moldova's competitiveness and employment creation. Assistance will be providedto establish an institutional framework that reduces the high cost o f doing business, particularly deregulation, and limit arbitrary practices in the use o f state power. It will build on the successful efforts to regenerate the rural economy through pro-poor growth investment mechanisms, an agricultural advisory network and business development (under the Rural Investment and Services Project (RISP I)) by supporting the next phase o f the adaptable program lending on rural investment-RISP 11. Support for the next phase will be contingent on continuing the implementation of reforms inthe agriculture sector. Pillar 2. Improving Access to Social Services, Capital and Community Infrastructure, andMinimizingEnvironmental Risks 74. Critical for sustainable growth and poverty reduction, the CAS supports actions to strengthen human, social, and physical capital. IDA assistance will focus on the targeting o f social assistance to better reach the poor and to facilitate their access to quality health, education, and social protection services. Similarly, IDA assistance will seek to address the deterioration in critical infrastructure, such as housing, public utilities, and transportation. IDA also will assist the government in mitigating significant health risks derived from ground water pollution. Lastly, assistance will be provided to address the serious risks posed to rural communities from weather-related events. 75. Lending Program and Non-Lending Support. Achieving the MDGs will require targeted attention to selected population groups and to specific factors that foster poverty. Following up on the recently completed Poverty Assessment, the Bank will continue its efforts to help the Government improve its knowledge of the characteristics and causes of poverty. In addition to improving existing household surveys and creating a poverty map for Moldova, this effort will better enable IDA to support the implementation o f the EGPRSP and provide needed inputsfor other IDA-financed operations. 76. While primary education coverage i s broad inMoldova, quality i s poor and resources are particularly scarce in rural areas. Further analytical work and investment inrural education will be undertaken. IDA is already helping Moldova address its health MDGs through the ongoing Health Investment Fund project. In collaboration with the Global Fund to Fight Aids Tuberculosis and Malaria, IDA i s providing funding for an HIV/AIDS project. Building upon past reforms, IDA will support the Government to improve access by the poor to health services, to better integrate support at the community level, and to identify those areas where a greater effort i s needed to achieve the health MDGs. IDA will assist the Government in evaluating the current social assistance system and developing a strategy to improve targeting, particularly cash benefits and nominal targeted compensation. The development o f the institutional basis necessary to target social assistance to the truly poor will be an important element o f IDA assistance. 77. One o f the greatest challenges Moldova faces inreaching the MDGs i s inthe provision o f adequate water and sanitation services to the population. IDA i s already supporting this effort through a Water Supply and Sanitation Pilot Project, and a GEF Agricultural Pollution Control Project, which pilots support to agricultural, livestock and land management techniques to reduce nitrate contamination o f groundwater. IDA will increase its support in this area by assisting the Government with the implementation o f its National Water Plan. IDA assistance will focus on medium-size towns and villages where the problem with potable drinking water and inadequate sanitationi s most acute. - 23 - 78. The CAS supports the EGPRSP effort to improve the environment. IDA will seek support for additional GEF resources, focusing on improved wetland and flood management, ecological restoration and forestation activities, capacity building for management o f protected areas, biodiversity monitoring and enforcement. Since the poor have increasingly turned to the use o f "dirty" fuels under the impact o f the energy adjustment, IDA will utilize GEF resources to help adapt technologies for energy conversion and conservation. IDA has taken a leading role in the early implementation o f the Kyoto Protocol and can be an important partner in efforts to develop Moldova's carbon trading market through new project development, capacity building and the replication o f best practices. Among the environmental issues supported under this CAS i s strengthening the capacity for Persistent Organic Pollutants (POPS) management, public awareness, and improved pest management for crops. 79. The CAS attaches particular importance to building a culture o f local community involvement in public issues by strengthening community capacities to make decisions, and organize and manage funds to improve the quality o f basic social and economic services in the participating communities. IDA, through the two social investment funds (SIF Iand SIF II), has already had notable success in this area. To build upon this success, IDA will seek to develop institutional mechanisms to enable civil society to interact with public officials to improve the delivery o f public services and enhance the overall quality o f governance. It will support the strengthening o f local government capacity to undertake the new responsibilities placed on these governments under the decentralization reform program and to position them to better involve local communities. Pillar3. Improving Public Sector Governance and Combating Corruption 80. Improving public sector governance and combating corruption are o f paramount importance for the implementation o f the EGPRSP. Within the broad agenda o f issues covered under this topic, IDA will place emphasis on improving transparency and accountability in the management o f public funds, expenditure programming, and evaluation practices. It will support greater involvement o f civil society in exercising accountability over public action and the delivery o f public services, focusing attention in particular on community-driven development and stronger local government ownership and leadership. 81. Lending and non-lending support. IDA'Sassistance will focus on strengthening the programming and management o f public resources. This will include assistance to the Government to: (a) institutionalize the Medium-Term Expenditure Framework (MTEF) by building the capacity to develop sector programs based on realistic and prioritized resource allocation; (b) strengthen budget management through a modernized treasury system; (c) strengthen the public finance control fkamework; and (d) introduce a system o f Continuous training to assure sustainability. IDA will maintain analytical underpinnings in this area through updates o f the CFAA and the CPAR. and will review advances inprocurement reform. 82. The recently completed Justice Sector Assessment will enable the Bank to engage the Government, as well as other stakeholders, in a dialogue on legal and judicial reforms in Moldova. Ina context where justice i s delayed and/or denied either by a lack o f political will or by financial constraints, community-driven demand for greater access to justice needs to be promoted and strengthened. The CAS will seek to help the poor advance their legal interests, take actions to secure or enforce their rights, and improve their well-being. Ultimately, legal empowerment o f the poor will increase consciousness on legal and judicial reform issues in Moldova, and increase the demand for the rule o f law, as well as placing pressure on formal institutions to reform. -24 - Table3. IndicativeIDA LendingandNon-LendingServices FYOS-OS(Base CaseUS$90 million) FY05 FY06 FY07 FYOS Operations US$ m Operations US$m Operations US%m Operations US$m PublicFinance RISP I1 15 SocialAssist. 10 Water & 10 Management 10 PrimaryHealth Sanitation RuralEducation 10 Care 10 I I Local Gov't. 10 I I Competitiveness I5 Hazard 10 Community Mitigation Rural Infrastructure areas (PSD) Total I 10 I Total I 30 Total 30 Total 20 Non-lending (AAAIGEFI CEM 1 CASProgressReport CAS Agriculturenote Poverty Assmt Update PRSPUpdate PovertyAssmt EducationNote PRSPUpdate Housing Update Reconciliation DisasterMgt Note RehabilitationNote PRSPUpdate through Education SocialAssistance Note FSPPSD Legal Local Gov't. /CDD FSAP Follow-upTA PER EmpowermentTA PublicProcurement CFAAUpdate HealthNote (JSDF) (IW FSAF'Follow up TA CFAA Follow up CPARFollow up MacroMonitoring PolicyNotes 83. The High Case would be triggered by the benchmarkspresentedinTable 4, which have been discussed and agreed with the Government. The intent of these benchmarks i s to provide a basis for IDA to evaluate the progress made in critical areas that would justify a High-Case scenario. Progress on these triggers would be reviewed regularly, and the CAS Progress Report would evaluate readiness to move to the High Case. Under the High Case, IDA will consider development policy lending (DPL). Among the areas on which such an operation might focus are the critical actions needed to create modern market institutions, with emphasis on policy measures to strengthen the business environment and corporate governance, foster the development o f SMEs and the agricultural sector, increase exports, attract foreign investment, and secure the adoption o f new technologies. Consistent with the EGPRSP, the DPL would advance the anti-poverty program from a policy perspective and also through the budgetary resources it would provide. The DPL might also focus on public administration and civil service reform, particularly on policy decisions that are needed to advance the modernization o f the government apparatus. This might include policy development capacity, pay reforms, staffing rules, code o f conduct behavior, assignment o f responsibility and accountability, anti-comption, and the functional reorganization o f the Government, as well as the framework for dialogue between the Government and civil society, procurement practices, and access o f the poor to judicial and legal services. Based on the Progress Report conclusions and satisfactory attainment of the High Case triggers, IDA would consider funding additional investment operations consistent with the priority actions under the EGPRSP. - 25 - Table 4. High Case Triggers I How and when Benchmark Current value Target value :heindicator (indicate time) w i l l be measured 2004l2005 Priority actions. ieport from spelled out in the 3ovemment and EGPRSP's annual .eviewwith implementation plan. jtakeholders: clivi1society, and ievelopment >artners, includingIFIs. 2. Maintaininga stable Primaryfiscal surplus The 2004 budgettargets a The annual macroeconomic framework (commitmentsbasis) of primaryfiscal surplusofthe 3udget and andfiscal discipline. general government in general govemmentof nonthly treasury 2003 of2.3 percentof GDP. (commitmentsbasis) of2.4 mthe execution percent of GDP. The 2005 >fthe budgetwill budget shouldtarget aprimary measure fiscal surplusofthe general achievement of govemment(commitments basis) the budget o f at least 2.5 percentofGDP. targets. Accumulationofnew The Governmentshoulddevelop The planto deal externalinterest and a satisfactoryplanto dealwith the with external and paymentarrears of $44.5 accumulationof externalarrears domesticarrears million in2003. Stock of and the stock ofdomestic arrears shouldbe domesticexpenditure by end-2005. incorporated into arrears stands at 1.2 the MTEF. percent of GDP. 3. Public Sector reform Currentlythere is no (a) All govemmententities apply The State and Governance. control of procedurefor the provisionsof the Regulation Chancellerywill appointmentof civil #192 for filling vacancies for collect (a) Civil Service Reform servants to vacant civil servicepositionsbelow informationon positions. deputyministerand submit recruitment The Govemment enforces quarterlyreportson the proceduresfrom the Regulationon open, recruitment decisionsto the State ministries and competitive, basedon Chancellery. govemment professionalmerit, (b) All CS vacancies are publicly agencies prepare recruitment ofcivil servants. announced andfilled through an and makepublic open competitiveselection consolidated All civil service institutions process. reports on complywith Regulation# (c) The govemmentestablishes recruitments of 192(March 1,2004) and fill an appeal system, allowing to civil servants vacant civil serviceposition reviewindividual complaints accordingto the are filled through an open relatedto observationofthe new newrules. On competitive selection. recruitment procedures. quarterlybasis. (b) Strengthen public Currentlybudget- Financial Management. executingagenciesreceive Cash availabilitystatements are MoF and line informationon cash issuedbythe Treasury on abi- ministries will TreasuryMoFprovides availabilityfrom the weeklybasis. provide budget-executingagencies Treasuryonlythrough information with ashort-termcash individual inquiry.The regardingthe availabilityforecasts (2 lack ofpredictabilityo f cash availability weeks or 1month) to prevent cash availabilityreduces reports. undertakingunfunded effectivenessof commitments. operationalmanagement. (c) Public Procurement In2003, SSP accounted By June-2005, to 40% ofthe total Monthly reports I for 45% ofthe total number of contracts andto 45% publishedby the Increasedcompetitionfor numberof contracts of the total value o f contracts, NationalAgency - 2 6 - iublic procurementcontracts awardedand51% ofthe includingutilities. or Govemment ISevidencedby: total Lei value of contracts 'rocurement awarded, including NAGP) on A decline inthe use of contracts for utilities mblic Single Source services, representing rocurement Procurement (SSP). about 30%ofthe total, Ierformance. where SSP i s enforceddue to the supplier's monopoly position. An increaseinthe use In2003, OpenTendering By June-2005, to at least 30% of vionthlyreports of OpenTendering. accountedfor 19%ofthe the numberof contracts and40% jublishedbythe total number of contracts of the value of contracts. VationalAgency awarded and28% of the 'or Govemment total Lei value of contracts 'rocurement awarded. NAGP) on Jublic xocurement Jerformance. 1. Improvingthe business environment: fa) Facilitate the entry of newfirms, functions and exit. i) Reducelicensingand Licensingcosts (2002) = Licensingcosts= $550 EarlyWaming inspectioncosts. $683; Inspectioncosts Inspectioncosts = $1,000 System(every 6 (2002) =$1893. month) + Cost of ii) Reducingthenumber Number of inspections Number of inspections(ECA avg. DoingBusiness o f inspectionsper (2002) per yeadfirm= 20. level) per year/per firm= 12. Survey(annual). enterprise per year. (b) Reduce interference of Time betweenentrance of Consistentwith the target values Monitoring state agents in the activities truck into the inland agreedunderthe TTFSEproject system ofprivate andpublic terminal and its exit from import clearancetime at the implemented companies. the terminal after the terminalwill bereducedto 200 underthe TTFSE releasesof goods was minutesby the end of2004. Project. Reduceimport clearance benchmarked at 500 time at TTFSE pilot inland minutesin 2002. terminal of Chisinau 5. Improving Social Somenewprivilegeswere Gradualeliminationofthe old Monitoring Protection reintroducedrecently, privilegesas per 1998reform through includingreductioninthe agreement. Any newprivileges continuedpolicy Pension reform age ofillegibilityfor shouldbe financed fromthe state dialogueand motherswith many budget. SPMproject children, andworkers in supervision hazardousconditions. Implementationof individual account system. Award of Calculationof Pensionbenefits are not pension benefitsbasedon pensionbenefits linkedto individual contributionsactuallypaid and basedon actual contribution. recordedinthe individual contributionpaid accounts. as of January 2005. 6. Agriculture Continuedadherenceto the Monitoring MemorandumofUnderstanding throughpolicy on Agriculture. dialogueand RISP I& 11. -27 - iii. MonitoringandEvaluation 84. IDA'S proposed lending program includes continued support for improvements in Moldova's monitoring and evaluation capacity through the Public Financial Management project, IDFgrants, AAA and cross-cutting elements ofvarious investmentelements. 85. While not formally based on a results framework, the CAS program matrix (Annex B9) articulates a results chain for IDA'Sprogramand augments the traditional monitoring o f progress on inputs and deliveries with a focus on outputs and outcomes that are linked to longer-term country outcomes. It identifies a set o f outcome and output indicators to measure progress. An attempt has been made to quantify these indicators with expected target ranges. In some cases, more qualitative information needs to be derived. Where there are gaps ininformation, IDA will work with the Govemment during the first year o f implementation to identify specific measurements of outcomes. 86. While specific operations have beenproposed that will address the higher order outcomes definedinthe matrix, the CAS will remaindynamic, respondingto changes inthe country and the need to redirect resources, particularly ifthe country should succeed inmoving to the HighCase. At mid-term, the CAS Progress Report will draw on an in-depth examination o f the CAS outcomes and assess whether they remain relevant to the longer-term objectives given changing country conditions. 87. Annex B9 shows the links between the main areas o f the PRSP and the CAS program matrix. Where possible, IDA will use data collection mechanisms that will be used inmonitoring the PRSP, mainly the longer-term outcomes. For other indicators, the PRSP does not provide all the necessary information. This informationwill be obtained either through line ministries or via the execution of proposed or ongoing projects. iv. Partnershipand Coordination 88. Coordination among the key donors-IDA, IMF, EBRD, EU, UNDP, and USAID-has been very close, with several joint/parallel operations. The EGPRSP sets the basis for enhanced cooperation with many donors, including the EBRD, DFID, and EU, now planning their next ' rounds o f support. 89. The Bank and the IMFhave operated under a clear delineation o f responsibilities. As the IMFPRGFprogram expired inDecember 2003, discussion of the programrenewal is likely to be lengthy and difficult. This uncertainty will have direct implications for other donors' assistance, especially for the availability o f funds for budget. 90. USAID has been one of the main providers of technical assistance, but the current program i s set to expire in 2005. Current USAID activities that are likely to continue include post-privatization support for the agricultural sector, strengthening o f local governments, and support for the development o f civil society organizations and NGOs. Prospects for continuationhesumption o f activities in other areas are less certain. The EUMoldova program i s framed inthe context o f the new neighborhood policy, which envisages development o f a specific Action Plan setting out overarching strategic policy targets and benchmarks. The Action Plan covers economic integration, emigration, international crime, energy, transport, and telecommunications and support for civil society. The EU Food Security Program has emerged as the main source o f targeted policy-based budget support. Work on social protection, - 28 - agricultural policies, public financial management, and statistics will be areas o f cooperation with the Bank. Grant-funded budget support has been put on hold following the suspension o f the IMF program. EBRD's recently approved strategy for Moldova supports private sector development in finance, infrastructure, and SMEs. Emphasis on improving the investment climate defines an area o fmutual cooperation with the Bank. The governmentof Japan has been among the active donors inMoldova. Japan has providedsupport for promoting SMEs through its capacity development program to the Agency for Restructuring and Enterprise Assistance Competitiveness and Productivity Center, which served as the Project Implementation Unit for the PSD-I and PSD-I1 projects. The Japanese PHRD Fund has provided a number o f grants to prepare projects in several areas, most recently in public finance management. DFID provided support in the preparation o f the PRSP and will play an important role in monitoring implementation. It has also beenproviding technical assistance for buildinginstitutional capacity indeveloping the MTEF. Inaddition, ongoing IDA-financed projects inagriculture (RISP) and social protection (SIF and SPM) have benefited from DFID contributions. The new DFID country assistance strategy (2004-2007) will focus on improving governance and the institutional environment for poverty reduction, promoting pro-poor sustainable growth, and strengthening conflict resolution efforts. 91. SIDA (Swedish International Development Agency) i s an active IDApartner inanumber o f ongoing projects in several sectors, includingAIDS, Energy11,HIF, RISP, and SIF. The main directions o f SIDA's country assistance strategy, which currently i s under preparation, are likely to remain governance, social inclusion, and economic growth. Their small grant program for NGOsis also likely to continue. The government of the Netherlandshas been a stable provider o f budget support, co-financing US$20 million for the SAC (2001) and the Health Investment Fund (USSlO million). There is current interest for cooperation in supporting public financial management reforms through technical assistance. UNDP has supported the preparation o f the EGPRSP and is playing an important role inits monitoring. It also has taken the lead inhelping the government elaborate the MDGs and in placing them in the Moldovan context. In addition, UNDP i s actively supporting interventions at the central and local levels in capacity building, as well as providing support for civil society groups and NGOs. It will continue to be a major IDA partner in helping Moldova reach the country-specific MDGs. UNICEF's agenda includes support in addressing the health needs o f mothers and children and the expansion o f development practices for early childcare. It i s also IDA'Smajor partner in a number o f projects inthe social sector areas, such as HIVIAIDS, health reform, youth inclusion, and child protection through the SIF. The U N I C E F N B partnership in Moldova i s o f value, and in some cases collaboration i s reflected formally in specific agreements. WHO i s partnering with IDA in supporting health- financing reforms, includingthe implementationo f the health insurance scheme and in supporting immunizationprograms. V. Managing Risks 92. CAS implementation faces a wide range o f uncertainties, deriving from the Government's capacity and commitment to implement the EGPRSP, increasing fiscal pressures, a volatile situation in Transnistria, and changes in the external economic and political environment. It is therefore possible that the program will not advance to the High Case scenario. Critical risks include: 0 Macroeconomicinstability. Fiscal managementwill continue to be a source o f considerable uncertainty. The Government may not be able to contain the fiscal pressures stemming from its own promises, especially given the approaching 2005 elections, and additional fiscal -29 - pressures may arise from developments regarding Transnistria. A fall in remittances may lead to an economic slowdown and lower tax revenues (now heavily dependent on imports), provoking further fiscal difficulties. Loss of Budgetary Discipline and Further Accumulation of Arrears. The absence o f an IMF program and IDA program support may preclude a Paris Club agreement on bilateral debt. Under these circumstances, and with lower levels o f support from other donors, the Govemment will struggle to avoid further accumulation o f foreign and domestic arrears. Reform Stagnation. The current policy environment is difficult. The Govemment has demonstrated uneven commitment to policy reform making it uncertain that it can implement the EGPRSP. It i s possible that this uncertainty will remain after the next election, as clear national consensus for reform has yet to emerge. The most likely scenario appears to be a stop-and-go cycle o freform. External Environment. The transition experience to date has demonstrated the high vulnerability o f Moldova's economy to extemal factors. The concentration o f exports in a few commodities primarily destined for CIS markets, particularly its high dependence on the Russian market, increases significantly its exposure to regional trade shocks. Further, Moldova's increasing dependence on the taxation o f imports for fiscal revenue presents a fiscal risk, as any slowdown in consumption that also curbs imports will have significant fiscal implications. Transnistria. While the crisis with Transnistria can be described as low intensity strife, occasional escalations, particularly during election years, have been destabilizing. Despite ongoing efforts to resolve the crisis, analysts believe that it may continue at a low level o f intensity over the CAS period, but with unpredictableoccasionalperiods o f escalation. 93. Mitigating Measures. The structure o f this CAS i s designed to address these risks by providing incentives to reform. Specifically, higher levels o f IDA and other donor support (including development policy lending) only would be available if the High Case triggers, including satisfactory implementation o f the EGPRSP, are met. The Progress Report review around 24 months into implementation, will enable the Bank to re-evaluate the strategic thrust of the program and to determine an appropriate line o f action. Moreover, the Bank will continue to support broad-based dialogue with all stakeholders in the country and explore ways to facilitate the creation o f pro-reform constituencies. While these efforts may take time to achieve results, they are perhaps the only sure way to help Moldova realign incentives toward achieving sustainable economic growth andpoverty reduction. V. CONCLUDING REMARKS 94. The next four years i s a critical period. Moldova has prepared a poverty reduction strategy with laudable intentions, which now needs to be implemented to promote pro-poor growth and improve the quality o f life o f its people. Under the current constraining financial and institutional environment, the challenges are daunting, and require long-term commitment from the Bank and other development partners. This CAS sets out the support the Bank plans to provide to Moldova over the next four years inits effort to achieve this objective. x " 9 ? 2 h1.9 ?1: 2 l o ! Y 2 " Y 41: Y " 0 9 9 9 H 0 3 3 Y 2 2 h1.Y " \ 9 3 7 % 41: Annex A2 Page 1of 2 Moldova at a glance 11/I 6/04 Europe 8 POVERTY and SOCIAL Central Low- Moldova Asia income Developmentdlamond' 2003 Population,mid-year(millions) 3.6 473 2,310 Lifeexpectancy GNI per capita (Atlas method, US$) 590 2,570 450 GNI (Atlas method, US$ billions) 2.1 1,217 1,038 Average annual growth, 1997-03 Population (%) -0.2 0.0 1.9 Laborforce (%) 0.2 0.2 2.3 GNI per Most recent estimate (latest year available, 1997-03) capita Poverty (% of population belownationalpovertyline) 48 Urban population(% of totalpopulation) 46 63 30 Lifeexpectancy at birth (years) 67 69 58 Infantmortality(per 1,000live births) 27 31 82 Childmalnutrition(% of childrenunder5) 3 44 Access to improvedwater source Accessto an improvedwater source (% of population) 92 91 75 Illiteracy(% ofpopulationage 15+) 1 3 39 Gross primaryenrollment (% of school-agepopulation) 85 103 92 -Moldova Male 86 104 99 __ Low-incomegroup Female 85 102 85 KEY ECONOMICRATIOSand LONG-TERMTRENDS 1983 1993 2002 2003 Economic ratloo" GDP (US$ billions) 2.4 1.7 2.0 Grossdomestic investmenffGDP 55.8 21.7 21.7 Exportsof goodsand serviceslGDP 39.3 52.3 53.7 Trade Gross domesticsavingslGDP 39.8 -3.2 -12.3 Gross nationalsavings/GDP 40.7 15.7 12.5 Currentaccount balancelGDP -7.7 -6.0 -9.2 Interest paymentslGDP 0.1 2.7 1.7 Total debffGDP 11.7 98.7 88.8 Total debt servicelexports 0.4 20.7 9.8 Presentvalue of debffGDP 101.6 82.3 1 Presentvalue of debffexports 152.3 111.7 Indebtedness 1983-93 1993-03 2002 2003 2003-07 (averageannualgrowth) GDP -3.3 -1.8 7.8 6.3 4.5 1 Moldova ~ GDP per capita -3.0 -1.7 8.0 6.5 4.9 ~ Low-incomegroup Exportsof goodsand services 5.9 19.8 20.6 7.5 STRUCTURE of the ECONOMY 1983 1993 2002 2003 Growth of Investmentand GDP (%) 11 (% of GDP) 1 Agriculture 32.5 24.1 22.5 30 T 20 Industry 44.0 23.2 24.7 ~ ~.,: 10 Manufacturing 36.0 17.0 18.4 Services ........ 23.5 52.7 52.8 .20 Private consumption .. 44.3 87.1 94.6 General governmentconsumption .. 15.9 16.1 17.7 Importsof goodsand services .. 55.4 77.2 87.6 -GDI -GDP 1983-93 1993-03 2002 2003 (averageannualgrowth) Growth of exports and imports (%) 1 Agriculture -2.6 3.7 -9.9 Industry -6.1 3.9 13.4 Manufacturing 0.5 2.6 12.8 Services 1.5 7.4 9.5 00 01 02 03 Privateconsumption 7.5 5.2 19.4 Generalgovernment consumption -7.5 21.0 20.4 Grossdomesticinvestment -6.8 19.0 5.8 Importsof goodsand services 9.0 17.1 31.2 Note: 2003 data are preliminaryestimates. *The diamonds show four key indicatorsin the country (in bold) comparedwith its income-groupaverage. If data are missing,the diamondwill be incomplete. Annex A2 Page 2 of 2 Moldova PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 1 Domestic prices infiation (% change) 50 - Consumer prices 788.5 5.3 11.7 Implicit GDP deflator 860.5 10.0 13.9 Government finance (% of GDP,includes cumnt grants) Current revenue 28.8 29.5 31.1 98 99 00 01 02 03 Current budget balance -4.1 0.7 1.4 Overall surpiusldeficit -9.0 -1.8 0.4 1 -GDP deflator +CPi TRADE 1983 1993 2002 2003 (US$millions) Exportand import levels (US$ mill.) Total exports (fob) 451 666 790 I 1,600 - Live animals and animal products 26 39 29 Vegetable products 22 106 120 Manufactures 100 135 197 Total imports (cif) 631 1,052 1,403 Food 39 44 82 Fueland energy 279 218 233 I Capital goods 33 147 214 Export price index (1995=100) 91 93 97 98 99 00 01 02 Import price index (19951100) 103 109 Exports Imports O3 Terms of trade (1995=100) 88 85 BALANCE of PAYMENTS 1983 1993 2002 2003 1 (US$ millions) Current account balance to GDP (%) I Exportsof goods and services 501 870 1,054 Importsof goods and services 705 1,283 1,720 Resource balance -204 -414 -666 Net inwme 0 159 323 Net currenttransfers 22 155 162 Current account balance -182 -99 -181 Financingitems (net) 169 121 214 Changes in net reserves 13 -22 -33 Memo: Reservesincludinggoid (US$ millions) 269 302 Conversion rate (DEC, /ocal/US$) 0.8 13.6 13.9 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) 1Composition of 2003 debt (US$ mlll.) Total debt outstandingand disbursed 278 1,641 1,744 IBRD 28 186 190 IDA 0 145 175 Total debt service 2 230 142 IBRD 0 17 18 B: 175 IDA 0 1 1 Compositionof net resource flows ::143 Official grants 0 155 162 Official creditors 65 -5 -16 Privatecreditors 0 -35 24 :83 Foreigndirect investment 14 117 50 Portfolioequity 0 -27 -20 I E: 438 World Bank program Commitments 86 30 63 A IBRD - E -Bilateral Disbursements 29 26 18 B - IDA D - Other multilateral F Private - Principalrepayments 0 9 11 C - IMF G - Short-term Netflows 29 17 7 Interestpayments 0 9 8 Nettransfers 28 8 -1 ~~ DevelopmentEconomics 11/16/04 Annex B2 Page 1of 1 Moldova: Selected Indicators* of IDA Portfolio Performance andManagement As of 10/18/2004 Indicator 2002 2003 2004 2005 PortfolioAssessment Numberof Projects Under Implementationa 8 11 13 12 Average ImplementationPeriod(years) 2.8 2.8 2.8 2.8 Percentof Problem Projectsby Numbera,c 0.0 9.1 7.7 8.3 Percentof Problem Projectsby Amount 0.0 21.I 6.7 7.4 Percentof Projects at Risk by Numbera , d 25.0 9.1 7.7 8.3 Percentof Projects at Risk by Amount a, 21.I 21.I 6.7 7.4 DisbursementRatio (%) e 22.6 35.8 31.6 3.6 Portfolio Management CPPR duringthe year (yedno) Yes no Yes SupervisionResources (total US$) 856 899 91I Average Supervision (US$/project) 71 82 70 Memorandum Item Since FY 80 Last Five FYs Proj Eva1by OED by Number 11 6 Proj Eva1by OED by Amt (US$ millions) 327.1 111.1 % of OED Projects Rated U or HU by Number 36.4 33.3 % of OED Projects Rated U or HU by Amt 24.6 18.4 a. As shown in the Annual Reporton PortfolioPerformance(exceptfor current FY). b. Average ageof projects in the Bank's countryportfolio. c. Percentof projects rated U or HU on development objectives(DO) andlor implementationprogress(IP). d. As defined underthe Portfolio ImprovementProgram. e. Ratioof disbursementsduring the year to the undisbursedbalanceof the Bank's portfolioat the beginning of the year: Investmentprojectsonly. All indicatorsare for projects active in the Portfolio,with the exceptionof DisbursementRatio, which includesall active projects as well as projectswhichexitedduring the fiscal year. Annex B3 Page 1of 2 Moldova: World BankGroupProgramSummary ProposedIDA Base-CaseLendingProgram a/ As of 10/18/2004 ProposedIDA Base-Case LendingPrograma Fiscal year Proj ID 2005 PUB FIN MGMT TA 10.0 H H Result 10.0 2006 RURAL INVESTMENTSERVICES 2 15.0 H H RURAL EDUCATION 10.0 M M COMPETITIVENESS 5.0 H H Result 30.0 2007 SOCIAL ASSISTANCE PROJECT 10.0 H H PRIMARY HEALTH CARE PROJECT 10.0 M M HAZARD MITIGATION IN RURAL AREAS 10.0 M H Result 30.0 2008 LOC GOVTAND COMMUNITY INFRASTRUCTUI 10.0 H H WATER AND SANITATION PROJECT 10.0 M H Result 20.0 Overall Result 90.0 `1 This table presents the proposedprogramfor the next four fiscal years b/ For each project, indicatewhetherthe strategic rewards and implementationrisks are expectedto be moderate(M), high (H). or low (L) Annex B3 Page 2 of 2 Moldova: IFC and MIGA Program, FY 2001-2005 As of 10/25/2004 2001 2002 2003 2004 2005 IFC approvals (US$m) 30.3 1.5 0.0 10.5 0.0 Sector (%) Finance & Insurance 16.5 100.0 100.0 Information 1.o Utilities 82.5 Total 100.0 100.0 0.0 100.0 0.0 Investmentinstrument(%) Loans 99.0 100.0 Equity 0.4 100.0 Quasi-Equity 0.6 Other 0.0 Total 100.0 100.0 0.0 100.0 0.0 MIGA guarantees (USSm) 63.8 61.1 61.1 62.0 Annex B4 Page 1of 1 Moldova: Summary of Non-Lending Services As of 10/18/2004 Product CompletionFY Cost (US%OOO) Audience a Objective Recentcompletions ADMlPROP RIGHTS REF 2003 109 KG, PD CFAA 2003 98 KG, PS CPAR 2003 131 KG, PS WATER SECTOR NOTE 2003 22 KG, PS POPS EA (GEF) 2003 31 KG, PS BUS ENV TA 2003 69 KG, PS, PD YOUTH INCLUSION TA 2003 20 KG, PS ICA (MOLDOVA-REGION) 2004 110 KG, PS, PD POVERTY ASSESSMENT 2004 290 KG, PS TRADE DIAGN STUDY 2004 227 KG, PS SOCIAL ASST 2004 94 KG, PS SOCIAL PROT DIALOGUE ongoing 200 KG, PS, PD PSlA 2004 145 KG, PS LEG & JUD SECT ASSMT 2004 100 KG, PS ROSCACCT & AUDIT 2004 50 KG, PS CICCG: MOLDOVA CNTRY ASSMT 2004 80 KG, PS Underway GROWTH STUDY (CEM) 2005 242 KG, PS, PD EDUCATION NOTE 2005 100 KG, PS AGRlCULTURE NOTE 2005 120 KG, PS, PD RECONCILIATIONTHROUGH EDUCATlOl 2006 57 KG, PS PSD/FSDTNDIALOG ongoing 260 KG, PS, PD POLICY NOTES ongoing 210 KG, PS, PD CFAA FOLLOW UP ongoing 139 KG, PS, PD CPAR FOLLOW UP ongoing 168 KG, PS, PD COMO-MACRO MONITORING ongoing 424 KG, PS, PD LOCALGOV/COMMUNITY DEVELOPMEN 2005 150 KG, PS, PD PUBLIC PROCUREMENT(IDF) 2006 24 KG, PS Planned CAS UPDATE 2006 70 KG, PS, PD POVERTY ASSESSMENT UPDATE 2006 60 KG, PS, PD PRSPUPDATE 2006 50 KG, PS, PD DISASTERMANAGEMENT NOTE 2006 150 KG, PS SOCIALASSISTANCE NOTE 2006 100 KG, PS FSAP FOLLOW UP (TA) 2006 70 KG, PS CFAA UPDATE 2006 50 KG, PS CPARUPDATE 2007 50 KG, PS PRSP 2007 200 KG, PS, PD HOUSING REHABILITATION 2007 80 KG, PS FSDlPSD 2007 100 KG, PS, PD PER 2007 150 KG, PS, PD HEALTHNOTE 2007 100 KG, PS, PD LEGAL EMPOWERMENT TA (JSDF) 2008 36 KG, PS CAS 2008 50 KG, PS, PD POVERTYASSMT UPDATE 2008 150 KG, PS, PD PRSP UPDATE 2008 50 KG, PS, PD a/ Government, donor, Bank, public dissemination. bl Knowledge generation, public debate, problem-solving. Annex B5 Page 1of 1 Moldova: SocialIndicators Latest singleyear Same regiodincomegroup Europe & Low- 1970-75 1970-75 1994-02 CentralAsia income POPULATION Totalpopulation,mid-year(millions) 3.8 4.2 4.2 0.0 0.0 Growthrate (%annualaverage for period) 1.3 0.9 -0.2 0.2 2.0 Urbanpopulation(%ofpopulation) 35.8 44.0 41.3 65.4 31.9 Total fertility rate (births per woman) 2.5 2.8 1.4 1.6 3.6 POVERTY (%of Population) Nationalheadcountindex 48.0 Urbanheadcountindex Ruralheadcountindex 62.0 INCOME GNI per capita(US%) 590 2,010 410 Consumerpriceindex(1995=100) 267.0 186.9 140 Foodpriceindex(1995=100) 199.0 INCOME/CONSUMPTIONDISTRIBUTION Share of incomeor consumption Gini index 34.0 Lowestquintile (%of incomeor consumption) 6.8 Highestquintile(%of incomeor consumption) 46.8 SOCIALINDICATORS Public expenditure Health(%ofGDP) 3.6 4.1 1.2 Education(%ofGDP) 5.6 4.4 3.4 Social security andwelfare(%of GDP) 7.8 8.8 Net primaryschoolenrollment rate (%of agegrotp) Total 95.0 Male Female Access to an improvedwater source @ofpopulation) Total 92 90 76 Urban 88 Rural 70 Immunizationrate ("9 under 12 months) Measles 99.1 93 57 DPT 93 57 Childmalnutrition(%under 5years) Lifeexpectancyat birth bears) Total 66 68 69 59 Male 63 65 64 58 Female 69 72 74 60 Mortality Infant (per 1,000 livebirths) 31 15 20 76 Under5 (per 1,000 livebirths) 18 25 115 Adult (15-59) Male (per 1,000 population) 321 289 340 317 310 Female(per 1,000 population) 178 173 161 137 259 Maternal(per 100,000 live births) 28 58.0 Birthsattendedby skilledhealthstaff(%) 99 Note 0 or 0 0 means zero or less thanhalf the unbshown Net enrollment ratios exceedlng 100lndicate discrepancies betweenthe estunatesof school-agepopulationandreported enrollment data Source 2002World Development Indicators CD-ROM, World Bank Annex B6 Page 1of 2 Moldova: Key Economic Indicators Actual Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005 2006 2007 Nationalaccounts(as YOof GDP) Gross domestic producta 100 100 100 100 100 100 100 100 100 Agriculture 28 29 26 24 23 22 21 21 21 Industry 23 22 24 23 25 24 24 25 25 Services 49 49 50 53 53 54 54 54 54 Total Consumption 94 101 104 103 112 111 111 111 111 Gross domestic fixed inv 18 15 14 16 17 15 14 13 13 Government investmer 4 2 2 3 1 2 2 2 2 Private investment 15 13 11 14 16 13 12 11 11 Exports (GNFS)b 53 50 50 52 54 50 48 50 52 Imports (GNFS) 69 75 74 77 88 81 79 so 81 Gross domestic savings 6 -1 -4 -3 -12 -11 -11 -11 -11 Gross national savingsc 16 16 15 16 12 13 12 13 13 Memorandum items Gross domestic product 1171 1288 1481 1662 1958 2594 2918 3060 3155 (US$ millionat current prices) GNI per capita (US$,At 410 390 400 470 590 700 810 920 970 Real annual growth rates ("h,calculated from 1995 prices) Gross domestic produc -3.4 2.1 6.1 7.8 6.3 7.0 5.0 4.0 3.0 Gross Domestic Incom -6.2 1.1 6.3 6.9 5.4 4.4 5.0 4.7 4.3 Real annual per capita growth rates (%, calculated from 1995 prices) Gross domestic produc -3.2 2.3 6.3 8.0 6.5 6.2 5.5 4.7 3.2 Total consumption -12.4 9.8 10.4 7.2 19.8 6.5 6.8 5.0 3.6 Private consumption -10.8 10.8 9.8 5.4 19.7 6.5 7.0 4.8 3.3 Balanceof Payments(US$ millions) Exports (GNFS)b 615 644 735 870 1054 1196 1312 1419 1519 MerchandiseFOB 474 477 567 660 804 904 996 1080 1159 Imports (GNFS)b 813 971 1088 1283 1720 1961 2144 2279 2392 Merchandise FOB 610 768 880 1038 1430 1658 1817 1931 2028 Resourcebalance -198 -327 -353 -414 -666 -766 -833 -860 -873 Net current transfers 87 157 160 155 162 176 193 212 235 Current account balanci -55 -106 -72 -99 -181 -173 -183 -175 -168 Net private foreign dire 40 143 149 117 50 48 76 90 93 Long-term loans (net) 90 105 2 -40 7 1 -16 19 90 Official 87 24 -2 -5 -16 -21 10 29 37 Private 3 81 4 -35 23 21 -25 -10 53 Other capital (net, incl. -27 -95 -68 44 157 166 155 110 25 Change inreservesd -49 -47 -10 -22 -33 -41 -32 -44 -40 Memorandum items Resourcebalance (% of 1 -16.9 -25.4 -23.9 -24.9 -33.9 -3 1.7 -30.7 -30.2 -29.7 Real annual growth rates( YR95 prices) Merchandiseexports (F -14.5 6.6 30.5 3.9 15.5 10.0 8.4 6.7 5.6 Primary Manufactures -8.5 -10.8 5.5 2.8 62.1 0.0 0.0 0.0 0.0 Merchandise imports (( -49.1 29.4 21.4 9.6 36.2 11.1 7.8 5.3 4.9 (Continued) Annex B6 Page 2 of 2 Moldova: Key Economic Indicators (continued) Acaral Estimate Projected Indicator 1999 2ooo 2001 2002 2003 2004 2005 2006 2007 Indicator Publicfinance (as YOof GDPat market prices)' Currentrevenues 30.4 30.7 29.1 29.5 31.1 29.7 29.9 30.2 30.5 Current expenditures 33.0 31.4 27.4 28.8 29.7 27.9 28.5 28.3 28.6 Currentaccountsurplus (+)or dc -2.6 -0.7 1.7 0.7 1.4 1.9 1.5 1.8 1.9 Capital expenditure 3.5 2.2 2.0 2.4 1.o 1.6 1.7 1.8 1.9 Foreign financing 3.5 1.o -2.3 0.6 -1.7 -1.3 -1.1 -0.7 0.4 Monetary indicators WIGDP 20.3 21.9 25.2 28.9 31.2 32.5 33.3 33.9 34.5 Growth o fM2 (%) 42.6 40.3 36.3 36.0 30.7 23.8 19.8 13.1 10.5 Private sector credit growth/ 62.9 90.9 79.8 96.0 119.8 87.1 92.0 100.8 107.3 total credit growth (%) Price indices( YR95 =loo) Merchandiseexport price index 74.0 69.9 63.9 71.9 73.9 76.8 78.1 79.4 80.7 Merchandiseimportprice index 93.4 100.8 92.3 100.4 98.3 104.6 106.3 107.2 107.3 Merchandiseterms o ftrade inde: 79.2 69.4 69.2 71.6 75.1 73.5 73.4 74.1 75.2 Realexchange rate (LCU/US$)' 102.1 112.1 109.4 109.9 105.4 94.9 90.1 90.1 90.1 Real interestrates Consumerprice index (%chang 39.3 31.3 9.8 5.3 11.7 10.8 10.3 6.4 4.7 GDP deflator (% change) 39.8 27.3 11.9 10.0 13.9 11.9 11.4 6.9 5.5 a. GDP at factor cost b. "GNFS"denotes "goodsandnonfactor services." c. Includesnet unrequitedtransfers excluding official capital grants. d. Includesuseo fIMFresources. e. Consolidatedcentd govemment. f. "LCU" denotes "local currencyunits.'' Annex B7 Page 1of 1 Moldova: Key Exposure Indicators Actual Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005 2006 2007 Totaldebt outstandingand 1021 1231 1225 1329 1440 1344 1306 1299 1368 disbursed(TDO) (US$m)a Net disbursements(US$m)" 93 92 1 -46 -14 -21 -39 -6 68 Total debt service(TDS) 211 138 159 230 142 293 245 238 176 (US$m)a Debt anddebt serviceindicators (%) TDO~XGS~ 144.7 159.7 132.2 119.8 99.5 72.6 64.8 60.3 60.0 TDO/GDP 87.2 95.5 82.8 80.0 73.3 55.7 48.1 45.6 46.6 TDSiXGS 29.9 17.9 17.2 20.7 9.8 15.9 12.1 11.0 7.7 ConcessionalRDO 22.8 16.7 16.9 20.2 21.3 23.9 26.7 29.5 30.5 IBRD exposureindicators(%) IBRD DS/publicDS 8.6 15.7 14.2 12.9 20.2 16.6 16.7 18.3 24.3 Preferredcreditor DWpublic 57.6 71.6 51.7 50.8 79.8 56.3 47.2 48.2 61.9 DS (%)' IBRD DSiXGS 2.1 2.1 1.8 1.5 1.2 1.3 1.1 1.1 1.o IBRD TDO (Us$m)d 199 191 181 186 190 173 156 139 122 Ofwhichpresentvalue of guarantees(US$m) Share ofIBRD portfolio(%) 0 0 0 0 0 0 0 0 0 IDA TDO (US$m)d 77 103 113 145 175 190 216 248 280 IFC(US$m) Loans Equityandquasi-equity /c MIGA MIGA guarantees(US$m) a. Includespublic andpubliclyguaranteeddebt, privatenonguaranteed,use o f IMF credits andnet short- term capital. b. "XGS" denotes exports of goods andservices, includingworkers'remittances. c. Preferredcreditors are definedas IBRD, IDA, the regionalmultilateraldevelopmentbanks, the IMF, andthe Bankfor InternationalSettlements. d. Includespresentvalue ofguarantees. e. Includesequity andquasi-equitytypes o f bothloanandequity instruments. Annex BS Page 1of 2 Moldova: OperationsPortfolio(IBRDDDA and Grants) As of 10/18/2004 Closed Projects 13 IBRDllDA Total Disbursed(Active) 46.4 of which has been repaid 0.0 Total Disbursed(Closed) 357.2 of which has been repaid 48.6 Total Disbursed (Active + Closed) 403.6 of which has been repaid 48.6 Total Undisbursed(Active) 104.8 Total Undisbursed(Closed) 0.2 Total Undisbursed(Active + Closed) 105.0 Active Proiects Difference Between Last PSR Expected and Actual supervision Ratlna Oriainal Amount in US$ Millions Disbursements' Project ID Project Name' DO IP FY IBRD IDA GRANT Cancel. Undisb. Orig. Frm Rev'd PO75995 AG POLLUTIONCONTROLS - --2004 S 5.0 4.5 -0.3 PO74122 AIDS CONTROL S S 2003 5.5 5.7 0.8 PO40558 ENERGY2 S S 2004 35.0 36.2 2.7 PO35771 FIRSTCADASTRE S S 1998 15.9 2.1 2.2 0.7 PO51174 HEALTHINVST FUND S S 2001 10.0 3.4 1.1 0.5 PO35811 PSD2 S S 1997 9.0 1.3 1.4 PO60434 RURAL INV & SERVS (APLS S 2002 15.5 5.6 -6.5 -0.4 PO79314 SIF 2 S S 2004 20.0 20.3 0.3 PO51173 SOC PROT U U 1999 11.1 7.6 6.9 PO73626 TRADE & TRANS FACILINS S 2003 7.2 7.1 -0.6 PO74469 WS & SAN S S 2003 12.0 12.3 -0.6 Overall Result 141.2 5.0 106.2 7.5 0.8 Annex BS Page 2 of 2 FY Approval Institution Name Held Disbursed Loan Equity QL+PE Partic Loan Equity QL+QE Partic 2000/2004 FinComBank 2.8 0.0 0.0 0.0 2.0 0.0 0.0 0.0 1997 INCON 5.3 0 0.0 0.0 5.3 0 0.0 0.0 2000 MEC Moldova 0.0 0.1 0.9 0.0 0.0 0.1 0.9 0.0 2000/2004 Moldindconbank 5.7 0.0 0.0 0.0 5.7 0.0 0.0 0.0 2001 UF Moldova 25.0 0.0 0.0 0.0 20.0 0.0 0.0 0.0 200112004 Victoriabank 7.3 0.0 0.00 0.0 7.3 0.0 0.0 0.0 1999/2000/2001 VoxTel 5.3 0.0 6.6 13.2 5.3 0.0 6.6 13.2 Approvals Pending Commitment (Amount in US Dollar Millions) FY Approval lnstltutlon Name Loan Equity QL+QE GT RM Total IFC Total Partlc IFC APPrOV IFCAPPrOV IFCAPPrOv IFCAPPrOV IFC ADPrOV APLroV APPrOV Total Pendlng 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Source: MIS-IFC - *Note: QL+QE includes both Quasi-equity (Loan type) and Quasi-equity (Equity type) products. 1 0 0 0 0 0 0 0 . 0 0 0 0 0 0 f w * b c B u e e e e e e * a e e e a m e e W e a a .9 m Y 3b * B E u h U E m 5 x 3 L Annex B10 Page 1of 1 Moldova: Summary of Development Priorities As of 10/18/2004 Reconciliation oj NetworkArea Country Country IDA Country and PerformanceaMajor Issueb Priority` Priority` IDA Prioritiesd PovertyReduction& EconomicManagement Povertyreduction good targeting high high Economicpolicy fair consistency high high Public sector fair efiiciency/accountability moderate high ongoingdialogue Gender good prevalenceamongpoor moderate moderate HumanDevelopmentDepartment Education fair quality improvement,equal access moderate high ongoingdialogue Health, nutrition & population fair mortality, morbidity, equal access moderate high ongoingdialogue Socialprotection poor protect most vulnerable, targeting high high Environmentally& Socially Sustainable Development Ruraldevelopment poor rural poverty moderate high ongoingdialogue Environment fair ground water moderate high ongoingdialogue Socialdevelopment fair regional imbalances high high Finance,PrivateSector & Infrastructure Financial sector good govemance, transparency high high Private sector fair regulatory framework moderate high ongoingdialogue Energy& mining fair efficiency/viability moderate moderate Infrastructure fair quality moderate moderate a. Use "excellent," "good," "fair," or "poor." b. Indicateprincipal country-specific problems (e.g., for povertyreduction, "rural poverty;" for education, "female secondary completion;" for environment, "urban air pollution"). c. To indicatepriority, use "low," "moderate," or "high." d. Give explanation, ifpriorities do not agree; for example, another MDB may have the lead on the issue, or there may be ongoing dialogue. Attachment 1 Page1of 4 DEBTSUSTAINABILITYANALYSIS 1. This attachment updates the debt sustainability analysis (DSA) conducted at the time o f the CAS Progress Report o fMay 2002.' This DSA i s based on a loan-by-loan databaseprovidedby the authorities for Multilateral and Official bilateral creditors as well as a breakdown by main categories for commercial creditors. 2. As o f end-2003, the stock of total external debt amounted to US$1.7 billion or 89 percent o f GDP, with public and publicly guaranteed (PPG) external debt at US$l.O billion or 52 percent o f GDP (excluding energy arrears). The NPV o f PPGdebt amounts to US$O.9 billion, equivalent to 47 percent of GDP at end-2003. As reported inthe CAS Progress Report, at end-200 1the ratio PPGexternal debt was 67 percent o f GDP, correspondent to 60 percent o f GDP NPV terms. 3. Debt service due on PPG external debt in 2002 and 2003 totalled 58 and 44 percent o f Central government revenue, respectively. In2004, debt service on PPG external debt i s estimated to decrease at 38 percent o f central government revenue (Table 1). With its large public debt service burden and absence o f external budgetary support, Moldova has not remained current on its external debt service obligations. As o f the end o f 2003, external payment arrears, including energy arrears, amounted to US$437 million, or over 22 percent o f 2003 GDP. 4. T o be eligible for HIPC debt relief, the ratio o f the NPV o f public and publicly guaranteed debt to exports of goods and services must exceed 150 percent. In the case o f very open economies, such as Moldova, the alternative criteria o f the NPV o f debt to government revenues must exceed 250 percent. The NPV of debt, inthese cases, i s calculated after the application o f traditional debt reliefmechanisms. To actually receive debt relief, assuming eligibility, a country must have a PRGF program with the IMF that has been on track for at least 6 months. In Moldova's case, however, application o f traditional debt relief results in a NPV ratio below the relevant threshold and, hence, Moldova i s not eligible for HIPC debt relief. CASLendingScenarios 5. Base Case: Under the Base Case scenario, IDA lending for FY 2005-08 i s projected to be US$90 million or approximately US$25-30 million per year. Additional external new borrowing o f the public sector i s mainly at concessional terms. The availability o f external financing, however, heavily depends upon the government performance inthe next 12-18 month. Under the Base Case scenario, it i s assumed that Moldova resumes interest payments on Paris Club debt in 2004, maintains full debt service on Multilateral debt and Eurobonds and reschedules accumulated interest and principal arrears in 2006. Figure 1 shows that the NPV of debt-to-revenue ratio will drop below 250 percent in 2005 as a consequence o f the assumed clearance o f external arrears. The ratio o f debt service to revenue, however, will only drop substantially below the 35 percent sustainability threshold in2011. 6. High Case: A solid track record in achieving improvements in the business environment and public sector governance would trigger a High Case lending scenario, with additional US$47 million in adjustment and program lending in2006-2008. Inthe HighCase scenario, Moldova i s expected to benefit from renewed donor support. Furthermore, Moldova i s expected to fully normalize relations with creditors by the end o f 2005. Additional external new borrowing o f the public sector i s mainly at concessional terms. In addition to the assumption made under the Base Case scenario, the High Case assumes that debt rescheduling on partly concessional terms offered by the Paris Club and Russia on 'MoldovaCAS Progress ReportNo. 24113-MD. Attachment 1 Page 2 of 4 arrears as o f end-2005 and on maturities falling due in 2006-2008. Debt owned to Romania and Turkey are assumed to be rescheduled on concessional terms. Figure 1 shows that the NPV o f debt-to-revenue ratio will drop below 250 percent in2005 as a consequence o f the normalization o f relations with foreign bilateralcreditors. The ratio o f debt service to revenue will permanently drop below 35 percent in2008. Figure 1:NPV of external PPGdebt and debt service -to-revenue ratio, 2003-2014 NPV of external PPG debt-to-revenueratio I 50.0 - External PPGdebt service-to-revenue ratio I --'- 50.0 - 40.0 - Sustainabilitythreshold - - - - - - - - - . . I . 30.0 - 20.0 - 10.0 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Moldovan authorities and Staffextimates and projections. Attachment 1 Page3 of 4 Long-TermDebt Sustainability* 7. The Base Case scenario assumes that Moldova will reach an agreement on the payment o f principal arrears to bilateral and commercial creditors by end-2005. Under this scenario, Moldova's NPV o fPPGdebt-to-GDP ratio is estimatedto be 63 percent at end-2003, falling to 30 percent at end- 2007. The NPV o f PPG debt-to-revenue ratio i s estimated to be 395 percent at end-2003, falling to 189 percent at end-2007. The debt service-to-revenue projections indicate that the government faces debt service burden higher than in2003 inthe near future. The debt service-to-revenue i s projectedto be 37.8 percent in20043andpeak at 51.8 percent in2007 as a result o f the rescheduling o f arrears with other bilateral and commercial creditors. 8. Inthe HighCase scenario, Moldovaisexpectedtoreachanagreement withthe ParisClubonthe reschedulingo f debt at terms comparable with other CIS countries4 and to reschedule external debt owed to Romania and Turkey at concessional terms. As a result o fthe rescheduling, Moldova's fiscal sustainability will improve. The NPV o f PPGdebt-to-GDP ratio i s similar with the Base Case scenario. Debt service as a percent of revenue, however, i s projected to remainbelow 35 percent for most o f the period, peaking at 36 percent in2007, comparedto 52 percent inthe Base Case scenario. 9. Determiningifthe above ratios signal problems with sustainability o f Moldova's debt burden i s extremely difficult. Each o f the indicators has its merits andlimitations insignaling potential debt servicing interruptions, suggestingthat they shouldbe usedin~ombination.~ A growingbody o f empirical literature provides some guidance to assess how these indicators compare to thresholds o f debt and/or debt service that are associated with a highprobability o f debt distress or adverse growth implications inlow-income countries.6 A keyresult o f this literature i s that debt thresholds should be established inlight of the quality o f a country's policy's and institutions, suggesting that countries with stronger policies and institutions can sustain higher debt and debt service ratios. Onthis basis and given Moldova's fast accumulation o f arrears inthe past, the difficulties inmaintaining future primary budget surpluses and the low tax base, the levels o fthe debt and debt service-to-revenue ratios are cause for concern inthe short and mediumterm. 10. According to the indicative policy-dependent debt and debt service thresholds', Moldova's NPV o f debt and debt service could be considered as sustainable ina range o f 200-250 percent and 25-35 percent o frevenue, respectively. However, the NPV o f debt-to-revenue o f Moldova i s projectedto fall below the indicative range only in2007, while the debt service-to-revenue ratio i s projected to remain steadily below the range only fiom 2011. This section i s basedon thejoint IMFIIDA paper, Debt Sustainabilityin Low IncomeCountries - Proposalfor an OperationalFramework and " Policy Implications", February2004. The government bought out promissory notes that were handed over to Gazpromwithin the framework of the restructuring of Moldova's debts for natural gas in 1999. The total amount of the securities that had been bought out reached US$ll5 million. The par value of the promissory notes was US$90m, and the rest of the amountis a debt for their servicing. The terms appliedare similar to Naples terms. For a more extensive discussion of the pros and cons of individual indicators see, "Debt Sustainability in Low Income Countries- Towards a Forward-Looking Strategy," IMF 2003, SM/03/185. See, for example, Kraayand Nehru (2004); Patillo et al. (2002); and Cohen (1997). 'Thethresholds depend on the Country Policy and Institutional Assessment Index (CPIA) and indicate approximately a 25 percent probability of debt distress at that level (see thejoint IMFIIDA paper, Debt Sustainabilityin Low Income Countries-Proposal for an OperationalFramework " and Policy Implications," February 2004). Attachment 1 Page 4 of 4 Conclusion 11. Moldova's NPV o f debt-to-revenue ratio i s estimated to remain above sustainable levels until 2005 both inthe Base Case and HighCase scenarios. The high level o f external debt resulted from the accumulation o f arrears and new borrowing from multilateral and bilateral lenders. Under both the base cases the NPV o f debt-to-revenue ratio does not fall below 200 percent until2007. Inthe Base Case, debt service i s projected to remainwell above 35 percent o f revenue until2009. Moldova's prospects for long- term debt sustainability are hampered by low fiscal revenue and dependence over external financing. To reduce the risk o f future debt distress the Moldovan authorities must implement their development strategy and obtain continued concessional support. Furthermore, the Government has to carefully assess the impact o fnew lending on the medium-term capacity o fpayment. Table 1. Moldova: External Debt Sustainability Indicators, 2003-14 ' (Inpercentage,unlessotherwiseindicated) 2003 2004 2005 2006 2CQ7 2008 2009 2010 2011 2012 2013 2014 NPV ofdebt-to-GDP ratio For total debt 84.5 65.8 60.9 56 8 49.0 42.0 36.5 31.8 31.4 30.6 29.6 28.7 For Public and Publicly Guaranteed(PPG) debt 62.9 44.2 38.2 34.5 28.1 23.0 19.1 15.7 15.2 14.8 14.3 13.9 NPV ofdebt-to-expomratio For total debt 157.4 135.5 130.6 120.2 101.6 85.4 72.7 61.8 60.2 57.5 54.8 52.2 For Public and Publicly Guaranteed(PPG) debt 117.1 91.1 82.1 73.0 58.3 46.7 38.0 30.5 29.1 27.8 26.4 25.3 NPV ofPPG debt-to-revCnUeratio` 395 4 278.1 240.4 216.8 176.5 144.5 120.1 98.5 95.6 92.8 89.8 87.3 Debt service-to-expom ratio 12.9 7.5 18.2 28.1 25.5 21.6 19.5 9.9 10.5 10.2 9.6 PPGdebt senice-to-expom ratio 12.4 6.5 10.3 17.1 13.9 11.0 9 7 3 5 3.3 3.2 2.9 PPGdebt service-to-revenueratio ' ... 37.8 19.0 30.4 51.8 42.9 34.6 31.3 11.4 11.1 10.9 10.1 NPV ofdebt-to-GDP ratio For total debt 84.5 65.4 60.2 56.7 50.2 43.9 38.2 33.2 32 2 30.6 29.0 27.5 For Public and Publicly Guaranteed(PPG) debt 62.9 43.9 37.5 34.6 30.0 25.7 21.9 18.5 17.6 16.6 15.7 14.9 NPV ofdebt-to-exports ratio' Fortotal debt 157.4 132.1 124.5 112.9 95.8 80.0 66.4 55.2 51.3 46.8 42.6 38 7 For Public and Publicly Guaranteed (PPG) debt 117.1 88.5 77.7 68.9 57.1 46.9 38.0 30.7 28.0 25.4 23.1 21.0 NPV ofPPG debt-to-revenueratio ` 395.4 275.8 236.0 217.5 188.3 161.8 137.4 116.2 110.4 104.6 98.8 93.7 Debt service-to-exportsratio 13.3 7.7 147 208 19.7 17.4 15.0 7.8 7.9 7.3 6.6 PPGdebt service-to-exports ratio ' ... 12.8 6.7 7.3 110 9.7 8.7 7.3 2.9 2.7 2.5 2.2 PPGdebt service-to-revenueratio ... 39.7 20.4 23.0 36.2 33.5 31.3 27.7 11.5 11.2 10.8 9.9 AssumingNaple terms treament on ParisClub and Russiandebt PPGdebt senice-to-revenue ratio ... 42.2 20.7 23.1 35.3 32.9 30.5 27.0 10.6 10.2 9.8 8.9 Memorandum i t e m (In millions o f U.S.dollars) Base Case Scenario Expom of goods and services' 1054.1 1172.1 1265.2 13444 1414.3 1488.7 1568.0 1652.3 1741.2 1834.9 1933.6 2037.6 Gavemment revenues 312.3 383 9 431.8 452.9 466 8 481.2 496.0 511.3 529.8 549 0 568.9 589.4 GDP 1963.8 2413.8 2714.9 2847.4 2935.2 3025.6 3118.9 3215.0 3331.4 3451.9 1576.8 3706 2 ExpoN ofgoods and Services' 1054.1 1195.6 1311.7 1442.6 1584.8 1740.7 1916.6 2109.9 2322.7 2557.0 1815.0 3098.9 Governmentrevenues 312.3 383.9 431.8 457.2 480.5 504.9 530.6 557.5 588.9 622.1 657 I 694.1 GDP 1963.8 2413 8 2714.9 28748 30209 31745 3335.9 3505.5 3702.9 3911 3 1131.5 4364.1 Exchangerate (Leu per U.S dollar), e.o D 13.2 ... ... ... ... ... ... ... ... 'Sources:to Moldovian authorities and stafiestimates. Refers public, publicly guaranteedand private ungaraateedexternal debt I t assumes interestpaymentson Pans Club debt in 2CQ4 and 2005; debt buyback onoutstandingdebt and arrearsdue to Gazprom and Hwlen-Packard; filldebtsewiceonMultilateraldebtandonEurobonds;principalandinterestarrearsaccumulationonallotherloanstoend-2005;arrearsreschedulingin2006 `NPVofdebt ofdebt inpercentofthree-year averageof expomofgwds and services. NPV in percentofcurrent year governmentrevenucs.I trefers to public, publicly guaranteedexternal debt. Debt servicedue as apercentatgeof currentyear exportso f goods and services. I t assumes debt resmcturing as reported infootoote 3, debt rescheduling onpartly wncessional t m offeredby the Pans Club and Russiaon arrearsas o f end-2005 and on maturities falling due in2006,2007 and 2008 included; and concessionaldebt reschedulingover three years ondebt due to Romania and Turkey 'Asdefinedin at 0 percent interestrate. IMF Balanceof PaymentsManual, 5th edition, 1993. Revenuesare defined as cenual govemmmt reve~ues,excluding grants. Attachment 2 Page 1of 2 MOLDOVA: PORTFOLIO STATUS 1. As o f mid-October 2004, the Moldova portfolio comprised 11 ongoing investment projects totaling US$146.2 million (including one GEF-funded grant o f US$5 million), ,of which US$106.2 million i s undisbursed. The average age o f the portfolio i s 2.9 years, ranging from 3 credits approved in FY04 (Energy 11, Supplemental Credit for Rural Investment and Services Project, and Social Investment Fund11)to 4 projects over 6 years old (Private Sector Development 11,FirstCadastre, Social Investment FundI, Social ProtectionManagement) and expected to be completedinFY05. The Youth Inclusion and Credit approved inFY04 failed to get ratification from Parliament due to the opposition from the leading Communist faction. The loanwas cancelled inAugust 2004. 2. Infrastructure comprises almost half o f portfolio in the sectoral composition (water supply, energy, cadastre and Transport and Trade Facilitation in South Eastem Europe (TTFSE)), while human development (health, social protection, Social Investment Fund, and AIDS Control), private sector development, rural and social development (Rural Investment and Services Project (RISP), and Global Environment Facility (GEF) constitute the other half. 3. There i s currently one problem project in the portfolio; Social Protection Management, with major implementation delays in key components due to weak Govemment commitment to pension reforms, with some reversals in already agreed actions. These have undermined the development objectives o f project, leading to an unsatisfactory rating. Active dialogue i s ongoing to address the problems. Overall, the portfolio i s performing well, with implementation o f most projects proceeding smoothly. However, a number o f projects, may not be able to attain sustainable outcomes, if timely interventions are not undertaken to improve the quality at exit. In addition to the Social Protection Management project, the General Education, Cadastre Development, and Private Sector Development I1 projects, all closing inFY05, face policy and institutional challenges that may undermine sustainability o f the investments. 4. Inpreparation for the new CAS, the Bank undertook a strategic review o f Moldova portfolio in October-November 2003. The objectives o f the review were (a) assess the development effectiveness o f the portfolio, its overall riskmess and alignment with the existing CAS, (b) identify major processing bottlenecks and recommend measures to facilitate and accelerate implementation of projects, (c) identify strategic management issues and propose recommendations that will help focus the supervision effort in the years ahead. 5. The review found out that IDA'Sintended lending activity in Moldova has been generally well aligned with the three pillars o f the CAS (macroeconomic sustainability and growth, private sector development and public sector reform). However, despite the good match between project and CAS objectives, the contribution o f the portfolio to the CAS measured in terms o f impact and outcome has been modest. 6. Overall, ownership i s considered weak although it varies substantially fi-om project to project, and across the various levels o f government. SAC I11was poorly supported at the most senior Government levels, while the SIF enjoys broad support at local as well as central government levels. Ownership tends to be weaker when reforms supportedpose a significant challenge to vested interests. 7. Lack o f institutional, economic and/or financial sustainability was identified as the major issue for the portfolio. Among the main reasons are: (i)poor governance, lack o f ownership, and institutional weaknesses, (ii) overall poverty level and low level o f cost recovery from users and beneficiaries; (iii) the the weak fiscal situation o f the Govemment, which can only assure low levels o f cost sharing followed by Attachment 2 Page 2 of 2 low levels o f operations and maintenance financing after projects are completed; and (iv) poor structural reform environment. 8. Findings and recommendations of the strategic review o f the portfolio served as a basis for the annual Country Portfolio Performance Review (CPPR) conductedjointly by the Bank and the Moldovan Government in January 2004, with broad participation o f the Bank, Government, Project Implementing Units(PIUs), donors andrepresentatives of civil society. The CPPRwas heldina format different from earlier review meetings, in a more participatory manner whereby three discussion groups looked at systemic issues that are impeding successful implementation and reaching development objectives, and focused on outcomes and sustainability o f the entire portfolio. The issue o f more effective coordination and decision-making, among stakeholders and among government agencies, was also discussed. The CPPR's new format was considered a success, and started some important discussions among stakeholders about ownership, impact on the ground and the need for better coordination o f efforts to ensure the development effectiveness o f the country assistance program. InApril 2004, the Bank and the Government agreed on an Action Plan to put into practice the recommendations of the CPPR, including holding regular joint Govemmenthnk reviews (every 3-4 months) to look at the key issues in the portfolio and track implementation o f the action plan. Capacity building o f the clients in procurement, disbursement and monitoring and evaluation, and regular meetings o f all Project Implementation Units (PIUs) are intendedto addressthe issues and bottlenecks that impede successful projects implementation. 9. Activities already taking place as a result o f the CPPR include video conferences with the Loan Department to clarify disbursement issues, the first Trimestral Review meeting inJune 2004 to take stock o f implementation o f the Action Plan as well as review the status o f individual projects, and a training course now under implementation for project staff to strengthen M&E. InOctober 2004, the Government established a Technical Committee for Monitoring and Evaluation o f IDA-financed Projects, which i s chaired by the Ministry o f Economy and is comprised o f high-level officials from various ministries and agencies. The Committee had its first meeting in October to discuss issues relating to several ongoing projects and decide on how to resolve outstanding problems. 10. Among the areas identifiedto enhance outcomes and sustainability are institutionalstrengthening and capacity building, key governance issues, more realistic outcome and sustainability objectives, promoting the Community-Driven Development (CDD) approaches, and increasing ownership at various levels o f government and civil society. Continued close monitoring and corrective actions by the Government and the Bank on the interrelated issues o f development outcomes, sustainability, risks, are planned to ensure expected outcomes. For ongoing and new projects, closer attention will be paid to the monitoring and evaluation (M&E) aspects o f a project, including the selection o f appropriate M&E indicators for measuring development outcome. 11. With decentralization, Procurement and Financial Management Specialists have been posted in the Regional Office in Kyiv, which has facilitated quick responses and better cooperation. The Loan Department's processing o f withdrawal applications was decentralized to the Moscow-based regional hub starting January 5, 2004. The initial analysis o f the effects o f this decentralization i s encouraging - the average processing time for a withdrawal application has been reduced by 4.5 days in the first 3 months since the decentralization. Attachment 3 Page 1of 2 MOLDOVA:LINKTO MDGsAND COUNTRY STATUSVIS-A-VIS MDGs 1. The EGPRSP recognizes the strong link that exists between economic growth and poverty reduction. Between 2000 and 2002, an average growth rate o f 5 percent allowed for a reduction in a poverty headcount from 71 percent o f the population to just under 49 percent o f the population. T o achieve the MDG goal o f eradicating extreme poverty, the EGPRSP envisages a move away from the current consumption-led growth paradigm towards a more sustainable growth platform that emphasizes a more enabling and deregulatedbusiness environment, leading to increased investments and exports. The EGPRSP suggests that growthrates between 5 and 10percent are feasible. As the analysis underlying the recent World Bank poverty assessment suggests, a sustain annual growth o f 3 percent will be sufficient for Moldova to achieve the MDG target o f halving poverty by 2015. The table below compares the current situation inMoldova with the ECAregion as well as world averages onthe MDGs. 2. The vital role that education plays in changing the quality o f economic growth i s highlighted in the EGPRSP. Despite the hardships endured in the last decade, Moldova has managed to maintain high levels o f participation in the compulsory years o f school. Net enrollment rates in the four years o f primary school are about 97 percent, while enrollment rates inlower secondary school are also high at 92 percent. With regard to the MDGs, a Moldova specific target i s under consideration that stipulates universal access for all children duringthe gymnasium cycle (i.e., compulsory cycle. grades 1to 9). The EGPRSP and the associated Education for All initiative have established a number o f targets, including increasing enrollment o f children 3-5 years old to 75 percent, and 6-7 years old to 100 percent, and reducing disparities betweenurban and rural areas to less than 5 percent, andreducing disparities between the disadvantaged groups and median population. These targets also include ensuring that all children have access to basic education (1 year compulsory pre-school, and 9 compulsory grades for gymnasium) that i s o f highquality. Challenges to achieving these targets arise from less than universal attendance for the first and last years o f compulsory schooling and from differences in the quality o f education for urban-rural areas. Improving the quality o f educational services and enhancing access to education, particularly by the poor and disadvantaged groups, are among the issues the EGPRSP hopes to address. 3. Moldova has succeeded in gradually reversing the population's deteriorating health status since the mid-1990s. Under age 5, mortality has been steadily declining, from 25 per 1,000 live births in 1990 down to 18.3 in 2002, while infant mortality has declined fiom 23.9 per 1,000 live births in 1994 to 14.8 in2002. MatemalmortalityinMoldovahas declined from 52.9 deaths per 100,000 livebirthsin1993 to 28 in 2002 and has remained relatively stable since. However, compared to the outcomes achieved in other European countries, and even some CIS countries, Moldova continues to lag behind inmany health indicators. The EGPRSP recognizes that further deepening o f the reforms in health care would be required to achieve the MDGs inMoldova. Moreover, increased access, particularly for the poor to basic health services, as well as improved quality and standards o f medical services, would be required to achieve the MDGs. Over the longer term, the effective implementation o f mandatory medical insurance i s the principal means by which Moldova will seek to reform the health care system and improve health care. Attachment 3 Page 2 of 2 4. The health o f the population i s also affected by inadequate access to quality water supply and sanitation. The EGPRSP estimates that, as a result o f the deterioration in the water and sanitation infrastructure, over 50 percent o f the population is usingwater that does not comply with sanitary norms. For rural areas, this estimate extends to nearly 70 percent o f the population. Sanitation and wastewater treatment are also inadequate, with only 55 percent o f the population in urban areas having access to a public sewage system. The EGPRSP has set out to develop and modernize the water supply and sewage systems in 156 localities and to develop 93,300 rural wells. Moldovaandthe M ennium DevelopmentGoals World Situation Situationin ECA hrrent Situationin Moldova From1990to 2001the From 1990to 1999the n2002, theproportionofthe and 2015 the proportion proportionofpeople from proportionofECA's people )opulationliving on less than ofpeopleinextreme low andmiddle income livingon less thanUS$la day JS2.15 per day (PPP values) povertyandwho suffer countries livingonless than increasedfrom 1.4percentto 5.1 vas 44.6 percent. form hunger. US1aday fell from 28 percentandfor those livingon percent to 21 percent,but less than US2 from 6.8 percent progresswas uneven. to 20.3 percent. 2. Achieve universal In2001/2002, 88 percent of In2002, theprimarycompletion n2002, the ratioofnet completionofprimary the world's primaryschool- ratefor ECA regionwas mrolment inprimaryeducation educationby 2015 for age childrenare enrolled. estimatedto be93 percent. nMoldovawas 93 percent. bothboys andgirls. The net enrollment ratio in gymnasia increasedfrom 87 iercentin 1999to 88 percentin !002. 3. Eliminategender There i s agender gap of 7.6 In2001/02, girls' enrollmentsin During 1999-2002,the net ratio disparities inprimary percent inthe primary primaryand secondary ifgirls enrollmentwas and secondary education educationgross enrolment educationas percentageofboys' :omparable with that ofboys. by 2005 andfor all rate. accountedfor 97percent. 4t the universitylevel, female levelsby 2015. mrollmentwas 6-7% higher I :hanmale. 4. Reduceunder five The mortalityratewas 81per Under-fivemortalityrateper Under-fivemortality rateshave mortality rates by two- 1,000 live birthsin2002 1,000 livebirths decreasedfrom been graduallydecreasing thirdsbetween1990and comparedwith 95 in 1990. 44 in 1990to 37 in2002. [from25 in 1990to 18.3 in 2015. 2002). 5. Reducematernal In2000, therewere an In2000the estimatednumberof Maternalmortalitydeclined mortalityratebythree- estimated403 maternal thematemaldeathsfor the from52 deaths per 100,000 live quartersbetween1990 deaths per 100,000 livebirths. regionwas 58 per 100,000 live born childrenin 1993 to 28 in and2015. births. 2002. 6. Halt andreverseby In2001 theprevalencerate of InECAthe number ofHIV InMoldova, the HIV infection 2015 the spreadof HIV/AIDS among adults infectedpeopleincreased from rate is around5 per 100,000. HIV/AIDS, malaria, and aged 15-49was 1.27percent. 30,000 in 1998to 1.5 million in TB incidence(at 84per other diseases. 2003. 100,000 people) has doubled since 1990. In2000 about 80 percentof In2000, about 91percentof In2002, the proportionof sustainabilityand access the populationhad access to ECA's populationhadaccess to populationwith access to water to and improvedwater water. safe water. and sustainableaccessto an source. improvedwater source was 92 and 38.5 percentinurban and rural areas respectively. Landareas coveredby forest is The proportiono f land area 10.3 percent. coveredby forest is 40 percent. Attachment 4 Page 1of 2 CAS CONSULTATIONSPROCESS SUMMARY FEEDBACKFROMCIVIL SOCIETYAND BUSINESSCOMMUNITY "Thefact that we have all met here can be considered a success, because in this way, the WorldBank gets closer to the entrepreneurs, and this should be the beginning of the collaboration between the WorldBank and the entrepreneursof theRepublic of Moldova." A Partichantat the World BankConsultations 1. The Civil Society consultations included representatives o f academia, non-governmental organizations, non-parliamentary political parties, the media, and trade unions. The discussions were lively and heated at times, manifesting a wide variety o f concerns and interest as describedbelow. 2. A strong pitch was made for increasing the role and participation o f NGOs in development discourse. They requested specifically to be informed on the Bank's relations with the Government, and to have regular consultations with the Bank on World Bank-financed operations--"Only access of the civil society to adequate information will help us influence, in one way or another, the Government in implementing the projects under the CAS. If we don't have access to this information, we obviously cannot help in any way to improve this strategy." Further, they expressed the desire that more Bank resources be channeled directly to NGOs in rural areas. "The Bank should not only consult with civil society, but also start working directly with it through different projects andprograms". 3. Concerns were raised regarding the weak legal framework, especially for businesses. "Citizens and business need more equitable legal representation; access tojustice needs to be more commonplace, and attorneys and NGOs need to be empowered". As a corollary, concerns about corruption and the need for transparency were raised. They requested support to establish transparent systems o f transactions; reduce the cost o f doing business; remove internal barriers that limit export capacity by influencing government policy and eliminate corruption. Further, they requested support to buildthe capacity o f civil society groups and to support competent NGOs to consolidate and sharpen their skills in engaging local authorities and communities inrural areas 4. The discussions also centered on issues o f social protection, social services, and the environment. Specific concerns were raised on the needto improve the quality o f education inthe rural areas, as well as the need for technical assistance for the creation o f vocational schools to stem the tide o f out migration. Further, concerns were raised regarding the poor quality o f emerging institutions o f higher learning and the need for Bank assistance in addressing the problem. Bank support was also requested for improvements in medical services. On the environment, participants indicated that "the biggest ecological problems are in the rural area and it is very important that the strategy of the World Bank be oriented towards the rural area, including support to ecological and rural tourism". 5. Finally, participants would like the World Bank to contribute to making the conditions for the democratic process more propitious. They voiced the concern that "...it is only through reforms, a state of law, judicial independence, and a liberalized economy can we evolve as a democracy". They also want the Bank's assistance in integrating with the EU "..this would solve theproblem of poverty and of Transnistria and lead us into ourfuture ",participants said. 6. The Business Community consultations included participants from the private (both local and foreign entrepreneurs), the Banking and financial sectors, and state owned enterprises. The key message that emerged from the discussions was that the main goals o f the CAS should be to initiate and support the second wave o f reforms inMoldova. Attachment 4 Page 2 of 2 7. A strong pitchwas made for Bank support for private sector development, particularly support for SME development and private investment promotion inthe country. The Bank should "help bring direct foreign investments into the country for private sector development and not by giving credits to the authorities " 8. Of concern to many participants was the development o f rural areas. Diversification o f business and micro financing were proposed as a means o f eradicatingrural poverty, with support from the Bankin the form o f start-up capital and replication o f modern cooperative structures in the agricultural sector. Participants expressed the view that productivity o f the workforce i s dependent upon many factors, such as the quality o f education, communications, modern health services, an improved natural environment, investments in hydroelectric and thermoelectric power stations; all o f which they said are critical for povertyreduction inMoldova. 9. A number ofparticipants made a strongpitch for Bank support for infrastructure rehabilitation, in particular the rehabilitation o f the 25-30 year old infrastructure. "Without the improvement of roads, we cannot speak of economic growth and poverty reduction. A serious support is needed for the transportation domain ". Some participants argue, however, that such support mustbe channeledthrough the private sector and civil society, not through the government and state enterprises. 10. Participants expressed the view that the country needs economic stability and long-term sources o f credits with l o w interest rates to the private sector to promote growth. In this regard, a number of participants voiced the concern that continuous modifications o f tax laws and changes in taxes pose serious impediments to emerging businesses. Further, they indicated that the complex regulatory procedures, requiring several documentations for each transaction, dissuade investors and make the cost o f doing business exorbitant. Participants also expressed concerns about export barriers. "Export barriers, either legislative or of other kind, are not set in an objective manner in Moldova". They also raised concerns that external barriers to exports were major impedimentsfor Moldova exports. "Unfair competition in traditional and emerging markets curtails serious growth efforts ", said participants. They expressed the need for Bank support to implement international acceptable standards for Moldovan exports. 11. On governance, consistent with views expressed by the civil society, participants felt that corruption i s a major obstacle. "The law has to be equal for everybody. n e Bank can make the Government become more transparent throughfinancial, political, and structural pressure". They also indicated that governance o f Bank-financed operations have in thepast been weak, and welcome recent efforts at closely monitoring the portfolio. 12. Public debt was also a concern. "The World Bank could help with the relief of Moldova's debts, but impose some conditions on the Government". Knowledge was expressed as important. "Our county needs knowledge. We need skilled technical assistance in order to improve and increase thepotentials of our national capacity of analyzing andforecasting ". 13. Overall, the business community views the Bank's strengths as disseminating the experience o f developed countries and assisting in establishing trade networks. "Public information, education, and communication on political, judicial, and economic issues are much needed for getting the peoples' supportfor reforms. 14. Finally, they expressed the need for a continuous dialogue with international financial institution (IFIs). It was their hope that continuous flow of information between the IFIs, Moldovan business community and civil society would more readily assist the country in accelerating the transition to a market driven economy.