ECONOMY
Moldova remains the poorest country in Europe. It is landlocked, bounded by Ukraine on the east and Romania to the west. It is the second smallest of the former Soviet republics and the most densely populated. Industry accounts for less than 15% of its labor force, while agriculture's share is more than 40%.
Moldova's
proximity to the Black Sea gives it a mild and sunny climate.
This makes the area ideal for agriculture and food processing,
which accounts for about 40% of the country's GDP. The fertile
soil supports wheat, corn, barley, tobacco, sugar beets, and soybeans.
Beef and dairy cattle are raised, and beekeeping is widespread.
Moldova's best-known product comes from its extensive and well-developed
vineyards concentrated in the central and southern regions. In
addition to world-class wine, Moldova produces liqueurs and champagne.
It is also known for its sunflower seeds, walnuts, apples, and
other fruits.
Like many other former Soviet republics, Moldova has experienced economic difficulties. Since its economy was highly dependent on the rest of the former Soviet Union for energy and raw materials, the breakdown in trade following the breakup of the Soviet Union had a serious effect, exacerbated at times by drought and civil conflict. The Russian ruble devaluation of 1998 had a deleterious effect on Moldova's economy, but economic growth was steady from 2000 to 2005, averaging 7% after years of recession since independence. Economic growth slowed in 2006 (4.8%) and 2007 (3%), brought on by strained relations with Russia and a series of consecutive shocks--a two-fold increase in gas prices and a politically-motivated Russian ban on Moldovan wine imports in 2006 and a severe drought in 2007.
Moldova
has made progress in economic reform since independence. The government
has liberalized most prices and has phased out subsidies on most
basic consumer goods. A program begun in March 1993 has privatized
80% of all housing units and nearly 2,000 small, medium, and large
enterprises. Other successes include the privatization of nearly
all of Moldova's agricultural land from state to private ownership,
as a result of an American assistance program, "Pamint"
("land"), completed in 2000. A stock market opened in
June 1995.
Following the economic difficulties caused by the Russian currency crisis of 1998, inflation dropped to 4.4% in 2002, the lowest level since Moldova's independence. However, inflation spiked again to 15.7% in 2003 and never fell below 10% over the following years, rising as high as 14.1% in 2006 and 13.1% in 2007, one of the highest in the region. While relatively stable in recent years, the local currency has been appreciating because of a weakening U.S. dollar and pressure from record remittances from Moldovans working abroad. Reforms to the National Bank of Moldova in 2006 changed the central bank's policy priority from currency stability to price stability (fighting inflation). The National Bank of Moldova has the difficult task of sterilizing the money supply to contain stubbornly high inflation.
Moldova continues to make progress toward developing a viable free-market economy. Tight fiscal policy resulted in a slight deficit of 0.3% of GDP in 2007. The Moldovan economy continues to depend greatly on remittances sent from Moldovans working abroad. These inflows have increased to over $1.2 billion a year.
Privatization results in recent years were not significant. With mass privatization over, the government has been mostly selling state-owned residual shares in companies and focusing on efficient management of state assets. Total proceeds in 2007 amounted to $16.7 million. State-owned residual shares in 33 companies and one land plot in Chisinau were privatized in 2007. The government postponed indefinitely privatizations in the power, banking, telecommunications, and agribusiness sectors. In 2007, Parliament passed a new law, introducing new approaches to privatizing and managing state-owned assets. As the European Union expanded to Moldova's border, 2007 saw record high inflows of foreign direct investment (FDI). However, cumulative FDI since independence is only $1.81 billion, far below the country's needs. Sporadic and ineffective enforcement of the law, corruption, economic and political uncertainty, and government interference discourage greater FDI inflows.
Spurred by soaring consumption and higher energy prices, imports have been growing more rapidly than exports. The country lacks diversification in terms of sector development and export markets. In 2007, the country's trade deficit was $2.3 billion (compared with $1.6 billion in 2006).
In 2005, Russia enacted a ban on Moldovan agricultural products and in 2006, it banned imports of Moldovan wines. Although Russian President Putin announced an end to the wine ban in November 2006, actual resumption of wine exports came a year later. The November 2007 resumption of wine exports to Russia was a positive development, but full recovery of trade volumes will take time. The wine ban was particularly painful because, prior to the ban, Moldovan wines accounted for one-third of the country's exports and 80% of wine exports went to Russia. The Russian wine ban further widened the country's trade deficit. Moldova's exports to Russia declined by 47.6% in 2006 and total exports dropped 3.6%, resulting in a trade deficit of 47% of GDP. Some Moldovan wineries were successful in finding new, alternative markets for their products in 2007. The current Central European Free Trade Agreement (CEFTA) and EU autonomous trade preferences are incentives for further market diversification.
In January 2006, Russian energy giant Gazprom temporarily cut off natural gas
deliveries to Ukraine and Moldova--which is almost completely dependent on its
neighbors for energy--and subsequently doubled the price of gas to Moldova. The
prices of Russian gas increased to U.S. $170 per one thousand cubic meters in
2007, U.S. $192 in the first quarter of 2008, and U.S. $212 in the second
quarter of 2008. The prices will increase until 2011, reaching parity with the
average EU price.
The International Monetary Fund (IMF) and World Bank resumed lending to Moldova in July 2002, and then suspended lending again in July 2003. In early 2006, Moldova reached agreement with the Paris Club on rescheduling Moldova's foreign debt. In addition, in the spring of 2006, the IMF reached an agreement with the Moldovan Government for a Poverty Reduction and Growth Facility designed to bolster foreign reserves against external shocks with a 3-year, $180 million program that includes a new IMF loan to the National Bank of Moldova.
Moldova suffered from a severe drought during much of 2007 which caused hundreds of millions of dollars in agriculture sector losses and prompted concerns about food availability. In response to a request for assistance from the Government of Moldova, the United States provided $350,000 worth of seed to drought ravaged farmers in time for fall planting.
GDP (2007 preliminary): $4.5 billion ($3.4 billion in 2006; $2.9 billion in 2005; $2.6 billion in 2004).
GDP real growth rate (2007): 3.0% (4.8% in 2006; 8.6% in 2005; 6.5% in 2004).
Per capita GDP (2007): $1,259 ($950 in 2006; $890 in 2005; $766 in 2004; $540 in 2003).
Natural resources: Lignite, phosphates, gypsum, arable land, and limestone.
Agriculture: Products--vegetables, fruits, wine and spirits, grain, sugar beets, sunflower seeds, meat, milk, eggs, tobacco, walnuts.
Industry: Types--processed foods and beverages, including wine and refined sugar; processed fruit and vegetable products, including vegetable oil; dairy and meat products; tobacco items; metal processing and production of machinery; textiles and clothing, shoes; furniture.
Trade (2007): Exports--$1.342 billion (of which 50% went to the EU countries and some 40% to the former Soviet Union): textiles, clothing, foodstuffs, wine, and machinery. Major markets--Russia, Romania, Ukraine, Italy, Germany, and Belarus. Imports--$3.690 billion (of which 45% came from the EU countries and 36% from the former Soviet Union): gas, oil, coal, steel, machinery and equipment, chemical products, textiles, foodstuffs, automobiles, and other consumer durables. Major suppliers--Ukraine, Russia, Romania, Germany, Italy, and China.
Currency: Moldovan Leu (plural Lei).
Exchange rate: Leu/US$ (2007): average 12.13; 11.32 (end of year 2007); 13.13 (average in 2006); 12.60 (average in 2005); 12.33 (average in 2004); 13.94 (average in 2003).
