MOLDOVA - BRIEF PRESENTATION 
I. MONETARY REFORM (1993-1997) 
    1. INTRODUCTION 
    2. BUILDING-UP INSTITUTIONAL FRAMEWORK 
        Banking Environment 
        Introduction of the National Currency 
        The Development of Commercial Banking System 
    3. MONETARY POLICY 
        Credit Allocation 
        Interest Rates 
        State Securities 
        First Anchor - Control Over Monetary Supply 
        Second Anchor - Exchange Rate 
        Foreign Exchange Regime 
    4. CONCLUDING REMARKS 
II. UNSUSTAINABLE FISCAL POLICY (1993-1997) 
    1. INTRODUCTION: FISCAL POLICY AND MACROECONOMIC STABILISATION 
    2. FISCAL POLICY AND THE STRUCTURAL REFORMS IN MOLDOVA 
        2.1 Determinants of Fiscal Policy 
            2.1.1 Tax Revenues: A Malfunctioning Tax System 
            2.1.2 The Expenditures: Policy Inertia 
        2.2 Fiscal Deficits between 1993 and 1998 
        2.3 Budget Deficit and Aggregate Demand 
    3. FINANCING THE BUDGET DEFICIT 
        3.1 Central Bank Direct Credit : Money Printing 
        3.2 Domestic borrowings : Shallow Markets 
        3.3 External Borrowing : Towards a Debt Crisis 
        3.4 Arrears : How Much the Population Can Bear 
    4. SERVICING THE DEBT 
    5. CONCLUSIONS AND POLICY RECOMMENDATIONS 
        5.1 Sustainable Policies 
        5.2 Fiscal Reform 
III. THE CRISIS OF 1998: CONSEQUENCES AND POLICY RESPONSE 
INTRODUCTION 
    1. CHANNELS OF CRISIS DISPERSION: PRESSURES ON BALANCE OF PAYMENTS 
        1.1 Current Account 
        1.2 Capital Account 
    2. CONSEQUENCES OF THE CRISIS AND RELATED POLICY DILEMMAS 
        2.1 Monetary Consequences 
        2.2 Fiscal Consequences 
        2.3 The Impact on Real Sector 
    3. IMPULSES FOR FURTHER REFORMS 

Abstract:

The introduction of Moldovan leu has been accompanied by a monetary stabilisation policy that proved to be one of the most successful among FSU countries until 1998. The leu showed a remarkable stability and the rate of inflation was brought down to around 10% in 1997. However, fiscal policy was driven by inertia and pressure groups, reflecting the slow path of structural reforms and the general weakness of the state. Loose fiscal policy in turn reduced the determination in reforming the state structures. Arrears and netting-out operations led to the development of a non-payment culture. At macroeconomic level, expansionary fiscal policy led to high absorption in the economy that was not met by the supply side response due to the impeded restructuring process, which fuelled imports and deteriorated the trade balance. The ultimate result of the policy mix was the rapid accumulation of external debt and expenditure arrears. The unsustainability of both internal and external position of the state led to the inevitable financial crisis.
The turmoil that followed in 1998 the crisis in Russia was therefore only a catalyst that speeded up the collapse of monetary stabilization. The capital account losses (capital flight) brought the country to the verge of default. The abrupt and probably persistent loss of major export markets will affect the real economic activity over a longer period. At the same time, the Russian crisis may create a window opportunity for accelerating Moldovan reforms. A critical situation makes the public and policy makers more likely to accept the painful measures that are necessary to revert the negative tendencies accumulated in recent years, while the large external debt makes the country fully dependent on the co-operation with international organizations, especially the IMF. Indeed, the new cabinet of young and liberal reformers voted in March 1999 initiated a more energetic program of reforms. Similarly, the decline of exports to Russia forced Moldovan enterprises to search new export possibilities, many producers trying to enter non-traditional western markets by struggling to enhance competitiveness and finding market niches.

The remainder of this paper is organised in the following way. The first chapter describes the introduction of the national currency and signs of monetary stabilisation observed in Moldova in years 1993-1997. The second chapter discusses the impact of erroneous fiscal policy on the Moldovan economy in the same period. The third chapter depicts the developments of the crises of 1998 in Moldova and draws conclusions about the possible scenarios for next years. Background information about Moldova is reported in the appendix.