- Basic data
- Public finances and the state budget
- Banking system
- Tax system
By 2019, Moldova showed improvement in most macroeconomic indicators, with GDP growing by 3.6% in 2019. COVID-19 and the drought in 2020 significantly worsened Moldova’s macroeconomic outlook, the total GDP decline in 2020 was over 8%. In 2021, GDP grew by 7.4%, with agriculture contributing significantly to the growth. In 2022, relatively high economic growth of 4.1% was predicted, but this favorable outlook was changed by the start of the war in Ukraine. Its consequences are a security and economic crisis, the loss of markets in the East and an increase in prices. The first estimates after the start of the war predicted GDP growth of 0.3%, the May estimate of the World Bank predicts a decrease in GDP of 0.4%.
According to cheeroutdoor.com, the average annual rate of inflation in 2021 was 5.1% and inflationary pressures increased in 2022. In April, the annual inflation rate was 27.07% and is likely to rise further. Food prices increased by an average of 21% year-on-year. The prices of food products, energy and services are increasing the most. The overall unemployment rate in 2021 was 3.2%, which is a decrease from 2020. The specificity of Moldova is a strong dependence on remittances, the transfer of funds in favor of natural persons from abroad, remittances in 2021 made up 12% of VAT. As a result of the economic sanctions imposed on the RF, the volume of remittances from the RF is expected to decrease by approximately 50%.
Moldova has long relied on external financing, limited budget resources are supplemented by support from external partners, in the amount of hundreds of millions of euros, apart from the IMF, this is mainly the EU, the World Bank, the EIB and the EBRD. The Moldovan economy is oriented towards agriculture and is dependent on the export of agricultural production. Of the total area of Moldova, 62% is agricultural land, almost 21.5% of the population was employed in agriculture in 2021. Agriculture in 2021 saw a significant increase of 49% compared to 2020, plant production accounted for 75.5% of the growth. In 2021, agriculture accounted for 10.4% of GDP, combined with the food industry, agriculture accounts for approximately 16% of GDP. Agricultural and food products accounted for approximately 32.5% of Moldovan exports.
The main areas that traditionally determine the growth of the industrial sector are the automotive sector, construction and the food industry. Industrial production in 2021 increased by 12.1% compared to 2020, the growth was mainly influenced by the mining and processing industries. The GDP structure is gradually turning towards services at the expense of industry and agriculture. The tertiary sector now accounts for almost 54.1% of GDP and employs half of the workforce (47.5%). It is driven by insurance, legal consultancy and telecommunications, the ICT sector is also growing.
As a result of the war, the economic situation worsened, export and import logistics with the CIS countries were disrupted and traditional supply chains were lost, all against the background of rising global energy and food prices. The most significant is the suspension of Moldova’s trade with Ukraine, Belarus and Russia. The stoppage of Moldovan exports to the Russian Federation will primarily affect the agricultural sector. A deepening of the trade deficit is expected in 2022, although the EU countries remain the main trading partner, but the share of exports to the CIS countries was 14.8% in 2021, the share of imports 26.5%.
|GDP growth (%)||3.6||-8.2||7.4||4.1||3.6|
|Export of goods (billion USD)||2.1||1.9||2.1||2.4||2.4|
|Import of goods (billion USD)||5.4||4.9||5.8||6.4||6.6|
|Trade Balance (Billion USD)||-3.3||-3.1||-3.6||-4||-4.2|
|Industrial production (% change)||2.1||-8.2||12, 1||5.3||3.3|
|OECD export risk||07.VII||07.VII||07.VII||ON||ON|
Source: EIU, OECD, IMD, Statistics Office MD
Public finance and state budget
|State budget balance (% of GDP)||-1.5|
|Public debt (% of GDP)||33|
|Current account balance (billion USD)||-1.2|
After years of fairly high performance, Moldovan public finances came under severe pressure in 2015-16. Fraud in the banking sector and economic recession have increased public debt and undermined investor confidence. The crisis associated with the covid-19 epidemic deepened the weakening of public finances and macroeconomic stability, there was an increase in government spending, mainly thanks to measures to mitigate the effects of the pandemic. In 2021, an energy crisis hit Moldova and caused a significant increase in energy prices. After the start of the war in Ukraine, there was an influx of refugees, which puts additional pressure on the state budget. The International Monetary Fund will provide Moldova with USD 558 million, and the EU will also provide financial resources for economic recovery in the amount of EUR 600 million. Other international donors and institutions are helping to deal with the influx of refugees.
Moldova recorded a budget deficit of 1.5% of GDP in 2021, in May 2022 the state budget was adjusted and the deficit increased by 28.1% to 7.1% of GDP. Higher commodity prices, especially food and energy, further support inflation and weaken the scope for supporting the economy. Financing the deficit is problematic given the significant increase in public debt, which may reach 37.3% of GDP in 2022. The deficit of the current account of the balance of payments increased substantially in 2021 compared to 2020, and in relation to GDP, the current account reached -11.6%. The government’s ability to secure international funds to fight the crisis and support the economy is essential for public finances. The condition is maintaining successful reforms in the banking sector, reducing fiscal risks by reducing the volume of expenses and improving their efficiency, simplifying the tax system with less tax preferences and strengthening tax administration. The standard VAT rate in Moldova is currently 20%.
The Moldovan banking sector has basically stabilized after the shocks that hit it after the so-called theft of a billion in 2014. The theft of a billion corresponded to about 12% of GDP and in 2015 caused an economic recession and devaluation of the local currency. Based on the recommendations of international partners, the government and the National Bank of Moldova (BNM) proceeded to gradually reform the banking and financial system. One of the demands was to increase the transparency of the ownership structure of Moldovan banks. The state, on the basis of a law from 2017, bought shares in the so-called system banks in order to allow strategic foreign investors to enter them. In the following years, it was possible to complete the entry of significant foreign investors into the four largest banks, according to BNM data, in 2020, 86.63% of bank assets belonged to international investors. Law on the National Bank of Moldova No.
The main regulator of the banking sector is BNM, which in accordance with the legal order is a formally independent institution. The Moldovan banking system consists of BNM and commercial banks. In 2021, there were 11 BNM-licensed banks operating in the Republic of Moldova. The following four banks can be considered the most important banks: Moldova Agroindbank, sa, Moldindconbank, sa Victoriabank, sa and Mobiasbancă OTP, their combined profit reached 87% of the profit of the entire banking system in 2021.
In 2021, all 11 banks were profitable, with a profit of USD 4 million more than in 2020. Total revenues increased by 15.1% compared to the end of the previous year, while total costs increased by 6%. As of December 31, 2021, the return on assets and return on capital was 2%, respectively. 12.3%, which is an increase of 0.5% and 3.6% from the end of the previous year. During 2021, banks continued to maintain liquidity indicators well above regulated limits. In connection with the effects of the war in Ukraine, there has been an increase in risks and uncertainties and there is a tightening of monetary policy, BNM responded in March 2022 by increasing interest rates by 2%. Furthermore, it was decided to maintain the ratio of mandatory minimum reserves from funds in freely convertible currency at the current level of 30% of the calculation base.
The tax system consists of national and local taxes and fees. The largest share of budget revenues comes from the following taxes:
- Corporate income tax and natural persons (legal persons – 12%, in free economic zones (SEZ) – 6%; natural persons – 12% according to the amount of income, dividend tax is 6% for residents and 12% for non-residents;
- Value Added Tax (standard rate of 20%, reduced rate of 12% on restaurant and hotel services and 8% on basic foodstuffs, some medicines and agricultural products);
- Consumption tax (the amount of consumption tax is different, with a quantity and value component);
- Tax on banking income and the business of insurance companies;
Other taxes are also applied, such as real estate (land) tax, road tax, tax on the use of natural resources. There are tax and investment incentives (small businesses, businesses in the IT sector, businesses in SEZs). Investment projects in SEZs, depending on the amount of capital invested, get 3-5 year tax holidays and 10 years of guaranteed stability in case of changes in legislation, a uniform tax of 7% of turnover applies to residents of IT parks, etc. Tax benefits are also available for farmers and businesses that increase the number of employees. The Tax Law is available at www.fisc.md.
In 2021, new measures were introduced to respond to the effects of the COVID-19 pandemic and the situation in drought-affected agriculture. The new measures aim both at reducing fiscal pressure and at new subsidy mechanisms to support economic recovery. In particular, there was a unification of income tax rates, a reduction of the income tax rate to 12% for legal professions, a reduction of the income tax rate from 15% to 12% for the HORECA sector and a change in the VAT regime in agriculture.
In 2022, in connection with the war in Ukraine and the introduction of a state of emergency, extraordinary measures were taken and the list of goods exempt from VAT was expanded. The measure mainly concerns some basic types of food.
The Czech Republic has signed an agreement on the avoidance of double taxation with Moldova. Moldova has not signed the OECD Multilateral Instrument (MLI).