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Moldova - Economy (Notes)

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 only 20% of its labor force, while agriculture's share is more than one-third.

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 has been steady since 2000.

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 5.2% in 2002, the lowest level since Moldova?s independence. However, inflation spiked again to 11.6 % in 2003; 12.4% in 2004, and 11.9% in 2005. The local currency continues to be comparatively stable. The annual average exchange rate between 2001 and 2005 fluctuated between Leu 12.50 to 13.50 to the U.S. dollar. However, the National Bank of Moldova has been forced to intervene actively on several occasions to bolster the currency market.

Moldova continues to make progress toward developing a viable free-market economy. The country recorded its sixth consecutive year of positive GDP growth in 2005, with year-end real GDP growth of 7.1%. This growth is impressive considering that prior to 2000, Moldova had recorded only one year of positive GDP growth since independence. Budget execution in 2005 was also positive, as actual state budget revenues exceeded projections by 0.4%. The Moldovan economy continues to depend greatly on remittances sent from Moldovans working abroad. These inflows are estimated at U.S. $400-500 million dollars annually.

Privatization results in 2005 were not significant; total proceeds amounted to U.S. $5.1 million. Several smaller companies and one winery (Cojusna) were privatized in 2005, but the government postponed indefinitely the privatization of several large state enterprises, including two power distribution companies. Sporadic and ineffective enforcement of the law, economic and political uncertainty, and government harassment and interference continue to discourage inflows of foreign direct investment.

Imports continued to grow more rapidly than exports during the first half of 2006. Moldova?s trade deficit worsened as higher-priced energy imports outpaced the value of Moldovan exports, which have been severely limited by Russia?s ban on imports of Moldovan wine and agricultural products. Moldova traditionally exported between 70-80% of its wine production to Russia.

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 of 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, $117 million program that includes a new IMF loan to the National Bank of Moldova.

Moldova continues to be subject to Russian economic pressure. In 2005, Russia enacted a ban on Moldovan agricultural products, and in 2006 it banned imports of Moldovan wines. The wine ban has been particularly painful because, prior to the ban, Moldovan wine sales approached 15% of GNP, and it exported approximately 80% of its wine to Russia. Although Russian President Putin announced an end to the wine ban in November 2006, Russia continues to delay imports of Moldovan wine. 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 impact has been substantial: Moldova?s exports to Russia declined by 38.9% in the first half of 2006 and total exports dropped 8.5%.

Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions - Moldovan leu Exchange Rates
Notes and Commentary: People - Economy - Government and Political Conditions - Foreign Relations - Relations with U.S.

Facts at a Glance
Current Time
Ranking Positions
Moldovan leu Exchange Rates

Notes and Commentary
Government and Political Conditions
Foreign Relations
Relations with U.S.

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