The year 2022 was one with multiple challenges for the Republic of Moldova. The country was rocked by an unprecedented economic and energy crisis. BANI.MD made a list of the most important events that marked the economy of the Republic of Moldova in 2022.
The Republic of Moldova obtained the status of a candidate country for the European Union
On June 23, 2022, the European Commission decided to offer the Republic of Moldova, along with Ukraine, the status of a candidate country for EU accession1, thus giving it, for the first time, a clear European perspective. This has propelled Moldova-EU bilateral relations and Moldova’s European integrationist agenda to a qualitatively higher level: our country is incorporated into the European Enlargement Policy, which helps it differentiate itself, already in a categorical manner, from other participants of the Eastern Partnership. The offer of candidate status to the EU was made as a package with Ukraine.
Increasing external financial assistance
Following the war in Ukraine started by the Russian Federation, the Republic of Moldova was directly affected. it is about the energy and economic crisis. As a result, the authorities turned to external financial support. According to the Ministry of Finance data at the end of the 3rd quarter, of 2022, 9.6 billion lei were collected from the state budget, and by the end of the current year, approximately 2 billion more lei are to be collected. A major problem with these amounts is that most of them come in the form of credit, with the share of grants being only 20%. Even if the level of external state debt remains within normal limits, the difficult economic and social conditions in which our country finds itself dictate the need to increase the share of grants in external financing – a message that must be actively promoted among development partners.
Increasing energy independence
In the context of the increase in world prices for energy resources and the risks related to the supply of natural gas from Gazprom and electricity from the left of the Dniester, the Government started an active agenda of reforms in order to diversify energy supplies and capitalize on vulnerable energy sources. Thus, for the first time since independence, the Republic of Moldova began to store natural gas, being an indispensable element of the country’s energy security. At the same time, the state enterprise “Energocom” was authorized for the procurement of natural gas and electricity from the market, a fact that allowed the diversification of energy sources.
Rampant inflation and the economic crisis
The negative shocks of 2022 (Russia’s military invasion of Ukraine, energy crisis, drought, and rising import prices) translated into stagflation: economic recession estimated at around 3-4% on the background of average inflation of around 30%. The recession was driven by 3 major factors: the war in Ukraine, which led to the loss of markets in Russia, Ukraine, and Belarus, undermined logistics and value chains and most importantly affected investment and consumer sentiment, ( the drought that undermined agricultural production, and so affected by the increase in the price of agricultural inputs (especially fuel and fertilizers), and the harsh tightening of monetary policy that, while preventing further inflation, further worsened access to credit. was mainly determined by the increase in the import prices of energy products, agri-food, and construction materials.
Reforms are taking place
External successes resulting in increased donor assistance and EU candidate status have failed to translate into domestic achievements. Thus, a series of systemic reforms have either been postponed. It is about the territorial-administrative reform, the reform of the local public administration, and the reform of the pension system. The ones moving at a snail’s pace aim at justice reform, public administration reform, public sector payroll reform, public finance management reform, digitization, or state enterprise reform.\
The budget deficit deepened
In 2022, the budget deficit was about 14.6 billion lei or 5.2% of GDP, and for 2023 the Government plans an even bigger deficit – 18.5 billion lei or 6% of GDP. Against the background of the economic crisis, inflationary shocks, and a restrictive monetary policy, the promotion of an expansionary budget policy with high budget deficits becomes a necessity. In fact, in 2022 it allowed negative shocks to be cushioned and, despite unprecedented challenges, a milder recession was recorded compared to other years (2009 or 2020). However, the main problem with budget deficits during this period is that they are not sustainable for at least two reasons: they are mainly financed by preferential external financing (which is temporary by definition), while domestic financing is limited and expensive, and the state promotes an irrational policy of taxation of income obtained from investments in state securities; and these are mainly caused by the increase in social obligations that generate, in the chain, other obligations in the future whose honoring will be increasingly problematic.
Exploding poverty rate
The economic and energy crisis that stimulated the galloping inflation generated an increase in costs for the population, respectively which generates an increase in the poverty rate of the population. Estimates show that the poverty rate will advance to 27% in 2022 compared to 22% previously. The increase in the poverty rate will put additional pressure on the public finance system, aggravating the problem of the budget deficit.
Investments collapsed
The avalanche of economic shocks and the 2022 crisis has substantially reduced investment activity. According to the latest NBS data, in the first 3 quarters of 2022, the volume of investments in fixed assets, in real terms, decreased by 9.2%, and for the whole year, the decrease could be over 10%.