Expert-Grup

Country Report. Assessing the Economic Resilience of the Republic of Moldova in the Context of Recent Security Threats

Politici de creștere economicăRealitatea EconomicăThursday, 30 January 20254445 views
Project:
Creșterea rezilienței economice a Armeniei, Georgiei și Moldovei

The Republic of Moldova, having a small and opened economy in transition, has always been exposed to numerous shocks and volatilities. Most often, they were induced by the exposure to the agrifood sector and, respectively, extreme climate events (primarily droughts), low competitiveness and investment attractiveness leading to high current account deficit, as well as weak institutions causing policy instability, corruption and even crises (e.g., the banking crisis following the „1 billion USD fraud” in 2014).

The vulnerability of the Moldovan economy significantly increased since 2020, primarily because of a series of external shocks that aggravated the internal vulnerabilities mentioned above. Namely, the COVID pandemic in 2020, which was paralleled by a major drought, led to economic recession and a high budgetary deficit; the energy crisis that started in the autumn of 2021 caused a 34% inflation in 2022 and a rising poverty rate; the Russian invasion in Ukraine in 2022 made Moldova the most exposed country, after Ukraine, because of geographic proximity and energy dependence on Russia, undermining further the economic dynamics, investment attractiveness and exports. 

The report analyses how the Moldovan economy absorbed these unprecedented shocks, how efficiently the Government responded, what changes these crises caused in macroeconomic policy, and the financial and energy systems of the country. The report contains not only a descriptive analysis of recent developments but also provides analytical insights into the main sources of vulnerabilities and formulates policy recommendations on addressing them.

The analysis was carried out based on the statistical data collected from the open sources of the National Bureau of Statistics (NBS), National Bank of Moldova (NBM), World Bank, International Monetary Fund (IMF) and other reliable sources of data and information referred in the report. Because of lack of reliable statistical data, the report does not cover the Eastern Rayons of the Republic of Moldova (Transnistrian region), which is the territory of the country that is not controlled by the constitutional authorities. 

Domestic and external political developments and their economic impact

Since gaining independence, Moldova's political landscape has been marked by a struggle between pro-Russian and pro-European factions, however the latest direction of the foreign policy points to the European vector. In the first decade of the independence (1991-2000), the country’s foreign policy was focused on establishing itself as an independent state and building diplomatic relations with the international community, while remaining economically dependent on Russia. The next decade (under the rule of the Communist Party (2001-2009)), was marked by balancing the historical ties to Russia to pro-European aspirations. In the early 2000s, Moldova's foreign policy pursued a pro-Russian stance, leaning more towards strengthening relations with Russia and the Commonwealth of Independent States (CIS), representing the main trading partner. However, starting in 2003, after the rejection of the initiative to federalize the Republic of Moldova proposed by the Russian Federation, relations with Russia became more strained, and the country started to explore deeper relations with the European Union (EU). In 2005, with widespread political consensus, the EU–Moldova Action Plan was adopted, officially establishing European integration as a national strategic goal. Moldova’s push towards European integration was resisted by the Russian Federation, who appealed to various embargoes and trade restrictions to destabilise the domestic situation. In response, to mitigate the negative effects of deteriorating relations with Russia, in 2008, the EU granted Autonomous Trade Preferences (ATP) to Moldova.

The 2009 political changes, brought to power a pro-European coalition called itself the Alliance for European Integration (AIE), claiming to follow the EU integration as a source of political legitimacy. In this context, in 2010 the negotiations for the Association Agreement started and in 2014 Moldova signed the Association Agreement with the EU, which included a Deep and Comprehensive Free Trade Area (DCFTA), marking a significant step towards closer ties with Europe. The DCFTA boosted the total exports of the Republic of Moldova to the EU, compensating the losses from the decrease in exports to the CIS. Additionally, as a result of tight bilateral dialogue with the EU, the Republic of Moldova was the first country in the Eastern Partnership (EaP) to secure a visa-free regime for its citizens in 2014. On this background, Moldova was given as an example of the success story of the EaP. Nevertheless, this success did not last too long, as Moldovan European future was undermined by challenges, such as the 2014 bank fraud, political turmoil, unstable coalitions that weakened genuine pro-European path, systemic corruption etc., that led to an oligarchic “captured” state (2015-2019).  

The full country report can be downloaded here:

The country report was prepared by the Independent Think-Tank "Expert-Grup" in the framework of the project "Increasing the Economic Resilience of Armenia, Georgia and Moldova", supported by the Open Society Foundation - EUROPE and CENTRAL ASIA Program, in collaboration with CASE – Center for Social and Economic Research, Warsaw.