Moldova by nyut545e2



       Country Strategy

                             TABLE OF CONTENTS

I.     Recent Economic Developments and Outlook
       a.     Recent Economic Developments 2005-2006
       b.     Forecast for 2007–2010

II.    Review of Country Strategy

III.   Overview of BSTDB Portfolio

IV.    Priorities

Table 1:      Basic Macroeconomic Indicators at a Glance
Table 2:      Gross Value Added Structure by Sector of Economic Activity (%)
Table 3:      Remittances and Foreign Direct Investment
Table 4:      Trade with BSTDB Member States
Table 5:      BSTDB Strategies and Performance (1999-2006)
Table 6:      Current BSTDB Portfolio - BoD Approved Operations

     Table 1:     Basic Macroeconomic Indicators at a Glance
     Country Long Term Foreign Currency Sovereign Risk Rating: S&P: NR | Moody’s: Caa1 | Fitch: B-
                   INDICATOR                       2000      2001           2002        2003        2004       2005         2006          2007
                                                                                                                          (estimate)   (forecast)
Population (beginning-year; million)                 3.63      3.63            3.62        3.62          3.6        3.6         3.59         3.39
Average exchange rate (MDL / USD)                   12.43     12.87           13.57       13.94       12.33      12.60      13.1319         13.45
Inflation rate (CPI Avg.; %)                        31.2%      9.6%            5.2%      11.6%       12.4%       11.9%
Average monthly earnings (Nominal, USD)             32.81     42.26           50.95       63.89       89.48     104.66          n.a.          n.a.
GDP at current prices (MDL million)                16.020    19.052          22.556      27.619      32.032     36.755        43.339       51.665
GDP at current prices (USD bn)                      1.288     1.481           1.662       1.981       2.598      2.917         3.291        3.841
GDP / capita (in crt. prices; USD)                 353.63    407.79          458.69      548.38      721.07      811.5        887.25     1,132.44
Real GDP growth (%)                                  2.1%      6.1%            7.8%        6.6%        7.4%       7.1%         4.0%           4%
Unemployment rate (ILO definition; eop; %)           8.5%      7.3%            6.8%        7.9%        8.1%       7.3%          n.a.          n.a.
Industrial output growth (%)                         7.7%     13.7%          10.8%       15.6%         8.2%       7.0%        -6.0%         4.0%
Agricultural output growth (%)                      -3.3%      6.4%            3.4%      -13.6%      20.8%        0.8%        -4.0%         4.0%
Remittances - Current transfers, net (USD m)       210.76    230.32          241.76      304.87      366.36     569.62        588.37       570.60
Direct foreign investment in the country (USD m)   127.54    103.44           84.05       73.75      148.94      198.7        180.00       200.00
Consolidated budget balance / GDP (%)               -1.0%      0.0%           -0.5%        1.6%        0.4%       2.1%        -0.5%        -1.2%
Gross external debt (USD m)                        1725.5    1680.9          1821.4      1936.1      1898.1     1996.5       2,501.0      2,851.1
Gross external debt / GDP (%)                      133.9%    113.5%         109.6%       97.7%       73.1%       68.4%        76.0%        74.2%
Goods: Exports (f.o.b.; USD m)                     476.75    564.64          659.70      805.09      994.07    1104.58        990.00     1,350.00
Goods: Imports (f.o.b.; USD m)                     -770.30   -879.70       -1,037.50   -1,428.10   -1,748.24   -2296.08    -2,670.00    -2,960.00
Trade balance (exp. fob. - imp.fob.; USD m)        -293.55   -315.06        -377.80     -623.01     -754.17     -1191.5    -1,680.00    -1,610.00
Trade balance / GDP (%)                            -22.8%    -21.3%          -22.7%      -31.5%      -29.0%     -40.9%       -51.0%       -41.9%
Current account balance (USD m)                     -98.19    -26.79         -20.01     -134.79      -53.08     -241.66      -716.58      -595.80
Current account / GDP (%)                           -7.6%     -1.8%           -1.2%       -6.8%       -2.0%     -8.28%       -21.8%       -15.5%
Forex reserves (excluding gold; eop; USD m)        222.64    228.53          268.86      302.27      470.26     597.45         775.3       720.00

     Last updated on November, 2006


 Data for items 1, 5, 8, from National Bureau of Statistics of the Republic of Moldova
 Data for items 2-3, 9, 15, from National Bank of Moldova
 Data for items 4, 10-11, 14 from National Bureau of Statistics of the Republic of Moldova & National Bank of Moldova
 Data for items 12-13, 17-18, 21 for 1995-1996 from IFS, IMF; from 1997 on from the National Bank of Moldova
 Data for item 23 from IFS, IMF, August 2006

I.     Recent Economic Developments and Outlook
       a.      Recent Economic Developments

Following a decade of deteriorating macroeconomic performance Moldova has
succeeded in stabilizing its economy by launching a set of structural reforms, aimed at
stimulating economic growth and at the same time initiating a process aimed at
establishing an effective social protection system.
Upon Moldova's independence in 1991, the very substantial energy subsidies provided by
the Former Soviet Union, as well as guaranteed markets for a variety of agriculture and
livestock products, were brought to an end. The replacement of the latter with market-
determined terms of trade was the source of some distress initially, to the extent that it
brought about a substantial decline in incomes and by 2000, per capita GNP had declined
to only 40 % of that of 1990. Most Moldovan households were thus pushed below the
poverty line.
In the period following independence, Moldova responded only slowly to the rapidly
increasing price of energy imports. This resulted in energy-related quasi-fiscal deficits
that were financed, in large part, through decapitalization of the asset base (owing to a
lack of maintenance and investments in energy infrastructure). It also gave rise to an
accumulation of debts, mainly in the form of payment arrears. Consequently shortages in
electricity and gas supply developed, contributing to an eventual accumulation of large
external debts and to the postponement of much-needed maintenance and investment
outlays in the country’s energy infrastructure.
Following a challenging initial transition stage the overall picture of Moldova’s economy
that has emerged in recent years is more encouraging. Nevertheless, the economy overall
continues to face serious bottlenecks. Specifically, the country’s basic infrastructure
(particularly rural roads and gas distribution) remain inadequate to provide the
necessary linkages between the different sectors of the economy. Moreover, the
"invisible" economy is officially estimated at about 23% of the visible one.
In an effort to overcome these difficulties, structural reform efforts have been stepped up
since the outset of 2005. Such efforts include an initial functional review of the public
administration, drawing of an inventory of state assets and an assessment of the
privatization process, as well as preparation of a public finance management reform,
with World Bank support. Furthermore, formal trade barriers and administrative hurdles
related to business registration, licensing and tax administration have been reduced. The
so-called "Guillotine Law", adopted in February 2005, in the context of the current
administrative reform program, is expected to help further reduce red tape. Some
progress has also been made as regards the telecom sector, which was fully liberalized in
2004. These positive developments notwithstanding, inflation continues to be high and
may become an impediment to the economy’s healthy long-term growth. This is to the
extent that fast domestic credit growth and strong foreign currency inflows have exerted
significant pressure on domestic prices and inflation thus stands at double digits.

       Economic Growth
The macroeconomic performance of the Moldovan economy since 2003 has been by-and-
large satisfactory, essentially on the back of high levels of worker remittances which have
been the main driver of economic growth.
Real GDP grew by 4.6% year-on-year in the 9 months of 2006, even though industrial
output suffered from Russia's ban on imports of Moldovan wine — Moldova’s prime
export commodity.
Meanwhile, fiscal performance has improved, pursuant to strong indirect tax receipts and
thanks to the government’s commitment to a prudent fiscal policy which has made it
possible to sustain consolidated budget surpluses, thus providing a stronger base for debt
servicing. Social indicators have also improved, mostly due to the remittance-financed
safety net. Still, weak investment activity overall, raises concerns over the long-term
sustainability of economic growth, given the outstanding need for industrial
diversification and modernization.
Moldova enjoys favourable conditions for further development of its agricultural sector,
which continues to drive the economy at large. Currently, agriculture maintains the
position of the key sector of the country’s national economy and – together with the food-
production industry – agricultural production accounts for over 32% of the country’s
GDP (2005) and for a considerable share of its export volume. Indeed, agro-industrial
enterprises constitute the nucleus of the Moldavian economy, being involved not only in
the agricultural goods production, but also in transportation, storage, and sales.
Furthermore, Moldova’s agro-industry sector provides employment for some 537,000
persons. The country’s food production industry accounts for some 59% of total exports
(2005); comprises for more than 1000 enterprises and is fully-supplied with local raw
materials. While thus providing a focused base for economic development, this typical
“Dutch disease” structure renders Moldova’s economy at large, vulnerable to fluctuations
in global commodity market conditions, which carries the risk of generating a downturn
in Moldova’s GDP growth, should global demand for Moldova’s agro-industry products
As a result of this structure, the industrial base remains narrow and heavily dependent on
the food & beverages, which account for over 44% of total industrial production.
Furthermore 47% of the food & beverages sector is concentrated in the production of
wine alone. This dependence on agriculture and agro-processing is expected to continue
in the foreseeable future, particularly as massive investment in industrial infrastructure is
needed to generate the much-needed diversification away from agriculture-related
economic activity. Such dependence on agriculture adds to other outstanding risks
stemming from high energy prices, and emerging labour shortages.
Moldova’s growth record since the outset of the current decade also suggests that in order
to achieve sustainable economic growth, there is an evident need to rebuild infrastructure,
particularly rural roads and gas distribution facilities.

        Table 2: Gross Value Added Structure by Sector of Economic Activity (%)
         Sector                      2004            2005            2006*
         Agriculture                      20.5         17.0          N/A
         Industry                         19.9         20.3          N/A
         Construction                       4.0        4.2           N/A
         Services                         58.3         60.8          N/A
         Total                            100                100          100
        *) Estimates based on data for the first half of 2006
        Source: National Bureau of Statistics of the Republic of Moldova & National Bank of Moldova

        External Position
Moldova’s external position remains precarious. Indeed, the current account deficit
deteriorated significantly in 2005, owing in large part to the impact of higher energy
prices. Energy (particularly fuel oil) imports rose in value terms by about 50 % in 2005
(about 3.5 % of GDP), while export growth slowed. The said slowdown reflected
periodic episodes of trade disruption with Russia, which is the main recipient of
Moldova’s wine exports.
Moldova’s structural trade deficit—which stems essentially from its narrow export
base—will likely cause the country’s current-account deficit to remain high, for some
time yet. Still, such risks on the country’s balance of payments position are mitigated by
the likelihood that unrequited transfers (primarily technical aid) will continue to generate
a sizeable surplus, and that inflows of remittances from abroad will remain substantial.
These factors continue to be of paramount importance for Moldova. An important
challenge in this respect lies in the fact that inflows of foreign direct investment (FDI) are
not expected to stage a significant increase and the Eurobond market will remain difficult
to tap for some time yet. Financing from multilateral credits will probably remain the
main funding source for investment.
In the meantime, Moldova’s external debt outlook has continued to improve. External
debt has declined as a share of GDP, from over 113,5 % in 2001, to about 68,4 % by
end-2005, owing largely to strong economic growth and real exchange rate appreciation,
as well as to prudent borrowing and several favourable debt-restructuring arrangements.
Following approval of the IMF Poverty Reduction and Facility on May 5, 2006, Moldova
secured further relief through a restructuring agreement with its Paris Club creditors.

Table 3: FDI inflows                                                                    (USD millions)
    2000            2001           2002           2003             2004         2005           2006
      210.76         230.32         241.76         304.87           366.36       569.62         588.37
      127.54         103.44          84.05          73.75           148.94         198.7        180.00
Source: National Bank of Moldova

The table below reflects Moldova’s relations with countries members of the Black Sea
Economic Cooperation Organization.

          Table 4a: Trade (Export) with BSTDB Member Countries (USD million)
   Exports (USD
                        1999       2000     2001       2002      2003      2004      2005
 Albania                    0.5       0.0        0.3       0.2       0.5       0.6       0.5
 Armenia                    0.1       0.2        0.4       0.8       2.2       2.7       2.2
 Azerbaijan                 0.6       0.4        0.3       1.1       1.0       1.2       3.7
 Bulgaria                   5.3       3.6        3.7       3.4       6.2       5.5       7.6
 Georgia                    0.0       0.2        0.7       0.4       1.1       2.1       5.2
 Greece                     5.8       2.4        2.7       3.1       3.7       3.4       4.8
 Romania                   41.2      37.8     37.9       56.7      90.2      98.9     111.7
 Russia                   191.4     210.0    247.0      238.9     308.4     353.3     347.5
 Turkey                     2.9       2.0        2.3       4.1       7.2     12.3      24.7
 Ukraine                   32.6      35.5     57.2       61.4      56.1      64.8      99.9
   Total BSTDB            280.5     292.1    352.4      370.1     476.7     544.9     607.9
   Total Exports          463.4     471.5    565.5      643.8     789.9     985.2    1,091.3
Source:National Bank of Moldova

          Table 4b: Trade (Import) with BSTDB Member Countries (USD million)
 Imports (USD m)        1999       2000     2001       2002      2003      2004      2005
 Albania                    0.0       0.4        0.0       0.0       0.0       0.0       0.0
 Armenia                    0.1       0.1        0.0       0.1       0.2       0.2       0.2
 Azerbaijan                 0.1       0.0        0.0       0.1       0.1       0.1       4.5
 Bulgaria                   9.5      13.6     20.5       20.7      30.1      29.6      29.0
 Georgia                    0.1       0.1        0.1       0.1       0.1       0.1       0.3
 Greece                     8.4      15.0        5.1     13.3      11.5      10.4      10.3
 Romania                   81.5     119.5     93.4       90.4      97.9     164.1     257.3
 Russia                   138.7     119.4    143.9      153.4     182.9     212.3     268.2
 Turkey                    11.8      18.2     19.7       32.7      48.2      69.1      93.0
 Ukraine                   79.1     104.6    152.6      203.6     309.3     436.3     479.8
   Total BSTDB            329.4     391.0    435.5      514.5     680.3     922.2    1,142.7
   Total Imports          586.4     776.4    892.2     1,038.0   1,402.3   1,768.5   2,293.0
Source: National Bank of Moldova

       Table 4c: Foreign Trade by Main Product 2005

                   Sector                 Export                  Sector        Import

        Food products                         36.3     Mineral products               22.0
        Textiles                              17.8     Machinery & equipment          13.7
        Vegetable products                    12.1     Chemicals                      10.1
        Machinery & equipment                  4.2     Textiles                        7.8
        Mineral products                       1.8     Metal & metal products          7.0
       Source: National Bank of Moldova

       Fiscal Balances
Moldova’s fiscal performance has improved pursuant to strong indirect tax receipts in
recent years. Fiscal authorities have adhered to a prudent fiscal policy and managed to
sustain consolidated budget surpluses since 2003, thus providing a stronger base for debt
servicing. Social indicators have also improved. The country’s economic administration
remains committed to a tight fiscal policy. Substantial over-performance on VAT
collections has translated into a stronger fiscal stance (specifically, a surplus of 1.9 % of
GDP in 2005).
In turn, the National Bank of Moldova (NBM, the Central Bank) has stepped up sales of
NBM certificates, as well as making more active use of deposit auctions. Broad money
growth has remained strong and credit and deposit rates have remained high, despite
plentiful liquidity on the T-bill and interbank markets. Moreover, real wages are rising
Fiscal revenue growth is expected to continue being driven by robust indirect taxes. More
than half of the 6½ % of GDP increase in tax revenue since 2002 has stemmed from
VAT, excises and duties, most of which come from imports. This trend represents, in
effect, one way in which a portion of Moldova’s strong remittance inflows is being
channeled to the budget, and thereby to poverty reduction and infrastructure
development. Nevertheless, further periods of currency fluctuation over the period ahead
should not come as a surprise, in view of occasional surges in demand, related to seasonal
factors (such as a rise in fuel imports, in advance of the heating season), which will
probably continue for some time.

       Monetary Policy
Moldova’s exchange rate policy rests upon a free-floating exchange rate regime. The real
effective exchange rate of the Lei (primarily against the USD, the Euro and the Rouble)
has been decreasing moderately since the beginning of 2003. The real depreciation is
evidently steeper vis-à-vis the Euro, while the Lei seems to have somewhat reversed this
trend with respect to the US Dollar since April 2006, recording an appreciation in real
terms compared with end-2002. However, given the Lei’s depreciation against the rouble
and higher inflation in Russia (Moldova’s main trading partner), Moldova would be
expected to manage to sustain exports competitiveness.

       Banking Sector
The Moldovan banking sector is at the beginning of a new stage of market structural
changes. After the "natural selection" carried out for several years by the National Bank
through a policy of capital increase, "forced" consolidation of local banks and legal
exclusion of weak, exposed-to-risks actors from the market, a process of consolidating
the local banks, with the view of their entering into direct competition with foreign
operators, is now under way. Thanks to this process, the banking sector is now staging
more steady growth, in line with a more favourable economic outlook. There is a need to
secure greater access to loans, both from the viewpoint of procedures and costs, as well
as a need for investment, mortgage, and other loans for longer terms.
The current tendency of Moldova’s local banking market to open-up to foreign equity
participations and partnerships, would need to be accompanied by larger investments on
the part of shareholders, aimed at further development and at the extension of the range
of bank products, as well as implementation of new technologies and know-how. There is
also a need to reduce operating expenses and increase the quality and efficiency of
services. In order to be able to face the expected increase in competition in the period
ahead, local banks would also have to adopt more flexible and dynamic approaches and
attain international banking standards.
Despite outstanding structural challenges, Moldova’s financial stability indicators remain
generally strong. Capital adequacy and liquidity ratios are sound, NPLs remain well
under 10 % and banking system profitability is robust. But dollarization remains high at
over 40 % of deposits (slightly less than 24 % of which are denominated in Euros), while
monetization and financial sector development, remain modest, but not totally out of line
with Moldova’s level of per capita income.
The current high levels of profitability in the sector as a whole, suggests that entrance by
foreign banks over the years to come, might increase competition, prompt better service
quality and put downward pressure on interest rates. The Moldovan legal framework
accommodates the entry of foreign banks. Results are evidenced by the fact that over
recent years several western European banks have established a presence in Moldova.

       b.      Forecast for 2007-2010
Moldova’s future monetary and fiscal policies should aim for a measured pace of
disinflation. The current economic program envisages an inflation objective of 12 % (y-o-
y) in 2006, declining to 8 % by 2008, despite continued high and rising inflows of
remittances (up to an estimated US$1.3 billion a year, by 2008) and foreign aid. While
monetary policy will likely shoulder the impact of the disinflation effort, the country’s
thin financial markets will likely limit the Central Bank’s ability to sterilize large
volumes of foreign currency inflows.
Looking ahead, Moldovan authorities are committed to modernizing the tax
administration system, with the underlying aim of improving the efficiency of tax
collection, by reducing compliance costs and by relying to a greater extent on indirect

means of assessing fiscal obligations. To the extent that these measures are duly
implemented, they should contribute towards achieving higher fiscal revenues.

       Challenges & Opportunities
Despite evident improvements over recent years, important challenges remain.
Specifically, privatization has lingered in the past two years and privatization attempts in
key areas such as energy and wineries, were either postponed or failed to attract sufficient
interest. Reforms in the energy sector and municipal infrastructure sector have also
advanced, but there is an apparent need for acceleration. Even though commercial
lending volumes continue to grow, there is limited access to long-term finance for
investment projects.
While in the short run GDP growth is likely to continue, achieving long term prosperity
will remain significantly dependent upon renewed efforts to implement deeper
institutional and structural reforms, while at the same time strengthening institutional
capacity-building and improving the overall investment climate. This would require more
intensive macroeconomic stabilization efforts and substantial acceleration of the
structural reform process.
Moldova would also need to reduce its economy’s dependence on the agriculture sector
and on the food industry by diversifying both its production base and its export markets,
with greater focus on high-value-added products.
With respect to the future privatization agenda, the remaining state-owned power
generation assets and energy distribution entities would need to be privatized and
modernized. The municipal infrastructure is in need of substantial restructuring and
The “Industry Development Strategy”, currently under implementation, provides for
establishing private pension funds, venture funds, and other types of entities that will be
able to operate on the capital market, attract savings of the population, and invest the
proceeds in developing the country’s industrial base. Victoriabank has launched its own
"deposit certificates" that offer an interest return to the depositor, while at the same time
providing the possibility to sell the certificate under the market conditions to another
entity without loosing the interest already received. As such instruments become more
widespread, they would be expected to gradually instill some deepening into Moldova’s
emerging financial markets.
The broad medium-term economic objective of Moldova is to create the conditions that
are necessary for promoting durable, private sector-led growth, aiming at increasing the
disposable incomes of the population.

II.    Review of Country Strategy
Overall, the country strategies reflect adequately the Bank’s mandate and the priorities in
Moldova. They focused on (i) financial sector (originally short term, trade finance with
export; and (ii) project finance (originally stressing on private sector exporters, regional

investments and technical cooperation, later shifting towards manufacturing, transport,
tourism, power/grids, energy efficiency, telecommunications, municipal infrastructure,
privatization, allowing for direct lending down to USD3 million, targeting at least one
operation for 2005-2006.
The strategies were generally consistent among themselves and vis-à-vis the specific
environment in Moldova, with some minor exceptions: (i) it was not very realistic to rely
on sovereign lending under first strategy, given the external imbalance and high debt
burden of the country; (ii) terms such as “creative products” and “non-standard ways”,
referred to in the latest strategy could have been more specific and complemented with a
review of past experience and causes of underperformance.
The country’s portfolio ranks 10th in terms of amounts (approved, signed, outstanding).
The portfolio size and structure indicate a relatively modest performance, only through
the intermediation of local banks, providing trade and SME financing.
Further to the summary presented under Table 1 below, the evaluation concluded that, the
Bank was slow but reasonably effective in terms of building a certain level of financial
sector investment under Strategy 2005-2006.


 CS 1999-2000               CS 2002-04            CS 2005-06            Performance
 Trade Finance/SME/ As     previous, As previous, with CS 99-01: 1 TF line (not
 Financial Sector:  moving        to further focus on signed); CS 02-04: 1 TF
                            medium-term and       financial sector,     guarantee; 1 SME line
 short term, export/SME
                            capital    goods      trade finance and     (cancelled);  CS     05-06:
 focus, several banks
                            imports, focusing     SMEs.                 $3.8M TF line; $3M SME
 with possible equity
                            on “key sectors”.     At    least   one     line; Balkan Accession
 participation TC for
                                                  operation      by     Fund (multi-country, to be
 export        promotion
                                                  2006.                 signed).
 agency.              IFI
 Project Finance:           Smaller      direct   Private      sector   No evidence of “creative
 Post-privatization,        finance     ($5M),    only.         Post-   products”    and   “non-
 infrastructure             manufacturing         privatization:        standard ways”
 (transport,      energy,   transport,            energy, transport,
 telecom)                   tourism, power,       telecom.     Direct
 manufacturing, cross-      energy efficiency,    small       ($3M).
 border, SME, TC. IFI       telecom,              “Creative
                            municipal             products”; “non-
                            infrastructure.       standard ways”.
                                                  IFI co-operation.

          Key conclusions and recommendations
A number of other IFIs are investing in Moldova with higher pace, magnitude, and sector
diversity. For example, EBRD has a portfolio of 26 operations totaling over Euro 200
million and covering a variety of financial and non-financial sectors.
As virtually all active IFIs (EBRD, IFC, IBRD) offer grant-based Technical Cooperation,
the Bank should thoroughly rethink its approach in order to offset apparent disadvantages
and low visibility. BSTDB should enhance cooperation with other IFIs and pursue
innovative marketing.
While the use of IFI lessons learned is gaining momentum at the operations level, use at
higher planes may render higher benefits. A review of the EBRD experience in small
economies has distilled the following key lessons:
•      Carefully targeted approach: The small country size implies limited immediate
       opportunities in many sectors of interest. This required a growth through a controlled
       concentration on those industry sectors where most effective results can be achieved
       in the near- and medium-term, while a long-term view, expressed through persistent
       policy dialogue, was adopted with respect to others.
•      Reliance on strong local partners. Immediate prospects for large-scale FDI inflows
       are modest, thus implying limited opportunities to work with blue-chip strategic
       investors. Ability to identify strong local partners, as well as to work with
       international entrepreneurs, and close co-operation with local banks is crucial to the
       success in small economies.
•      Careful selection of local and international partners. EBRD’s increasing
       involvement in the private sector, particularly SMEs, exposed it to universal risks
       associated with lending to privately held companies and entrepreneurs, some of which
       are more difficult to mitigate in Moldova. Success was based on careful attention on
       integrity issues, management capacity, personality and management succession
       within larger enterprises, as opposed to over-focusing on collateral that may be very
       difficult to realize.
•      Operational simplicity. While careful adherence to principles of prudent lending is
       crucial, overly-complicated structures confuse clients, delay signings, and often result
       in clients’ losing interest, while not always affording additional protection to the

III.      Overview of BSTDB Portfolio
        The Bank has made significant efforts to identify suitable operations for Bank
financing. When necessary, BSTDB financing has been made available via the financial
       As of end-December 2006 the Bank’s portfolio of operations in Moldova amounts
to SDR 6.3 million in 3 BoD approved operations. All operations are signed and SDR 2.9
million are outstanding.

    Table 6: Current BSTDB Portfolio - BoD Approved Operations1
                                                                                            in USD
    #        Operation             Borrower               Type         Amount (US$)        Date of BoD
1         Financial sector Mobiasbanca                                     3,951,000          01/10/2005
2         Financial sector Procredit Moldova       SME Credit line         3,000,000          10/02/2006
3         Financial sector Balcan Accession Fund   Equity Investment       2,538,000          10/08/2006
          Total                                                        Million 9,585,000

    IV.        Priorities for 2007 – 2010
    The BSTDB will focus in the next four years on providing financial support to financial
    institutions and medium sized companies engaged in particular in export generating
    activities. The Bank will also explore possibilities to expand financing of projects in
    infrastructure, including municipal infrastructure.
    With the Bank committing to raising the level of commitments (signed operations) for
    2007-2010 it is estimated that an indicative number of about 4 to 8 operations for SDR 23
    million (about SDR 5.75 million per annum on average) will be approved by the BoD. Of
    these, operations amounting to about SDR 20 million are expected to be signed.

    Areas for BSTDB Financing:
    Although over the last few years there has been some progress towards the improvement
    of the business climate, private enterprises still face a number of difficulties in obtaining
    long-term funds to finance their investment plans. There is a persistent need of medium-
    term funds in particular for companies in manufacturing. While project finance is mostly
    covered by other IFIs, such as the EBRD and IFC, corporate finance is still in need of
    In pursuing its mandate BSTDB will be seeking to finance projects, which are considered
    to have adequate developmental effect for the country. The Bank aims to provide
    financing in accordance with the country needs and the priorities in the Bank’s Business
    BSTDB supports the economic development in Moldova, in particular by providing
    financial assistance in the following areas:
    Trade finance is necessary to provide financing for increasing exports and expanding
    regional trade. Financing to exporting companies may help improve competitiveness and
    content of value added in exports.

        As of December 31, 2006.

Most of the BSTDB’s trade finance program will be executed through financial
intermediaries. By working through financial intermediaries, the Bank will also support
the development of Moldova’s financial sector.

Financial sector – The Bank will work to increase competition within the banking
system, contribute to the corporate development of banks and, in specific cases, support
emerging SMEs. In product terms, the Bank will consider the possibility to:
•      Provide a lending and trade finance facility involving several local banks.
•      Provide support in the development of the private banking sector through specific
       facilities with existing private banks.
•      Consider the possibility of participation in the share capital of selected banks.
•      Coordinate and cooperate with the IFIs in context of financial sector development.
The Bank will seek to extend cooperation with new partner banks and will promote new
financial instruments, such as mortgage financing or leasing.
On the equity side, the Bank may consider investing in leasing companies and mortgage
banks. The Bank will explore opportunities to support, through loans and equity
investment, the emergence of the non-bank financial sector.

SME sector – BSTDB will seek to identify suitable financial intermediaries for the
purpose of addressing the financial needs of SMEs in Moldova. The Bank will continue
to pursue investment opportunities in the enterprise sectors without limitation and
including food processing, manufacturing, retail and property sectors.
Larger, well performing companies will be provided direct financing.

Manufacturing – The Bank will support private sector development in Moldova with a
particular emphasis on promoting regional cooperation with BSEC countries. This
includes modernization of the food processing industry, diversification into higher value
added and export oriented industries, and support of intra-regional investment.

Infrastructure - There is a need, included in the Government’s program, to rehabilitate
the main national road network and modernize the railroad corridors of international
importance. Another important infrastructure project is the electrification of the railway
from the border with Ukraine to Bender, Chisinau, Ungheni, border with Romania.
Public utilities, in particular water supply and sewage, are to be developed with strategic
partners as the state can not invest as much as it would need.
Moldova's is strongly dependent on imported energy resources. This makes the use of
local sources, including renewables, a necessity. The Bank will therefore seek to support
such investments, however the possibility to implement renewable energy projects
remains weak due to limited regulatory support and insufficient capital resources.
In the energy sector the Government is looking for partners to invest in power plants in
Chisinau. The proactive marketing will be focused on the following areas, however the
Bank will pay due attention to other areas too:

•      Projects involving construction of new or rehabilitation of existing energy
       transportation infrastructure.
•      Projects envisaging upgrading, modernization and expansion of energy
       infrastructure which facilitates generation, production, distribution and sales of
•      Projects, which lead to greater energy efficiency.
The Bank will consider providing loan financing to private ICT operators, including
mobile telephony and cable TV and seek opportunities to participate alongside suitable
strategic investors in financing the energy and telecom sectors.


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