Uncertainties around pandemic will keep economy below potential, WB

Uncertainties around the evolution of the pandemic and the political environment will keep the economy below potential. GDP is estimated to rebound to 3.8 percent in 2021, assuming favorable conditions including a successful rollout of vaccines. The economy is expected to gain momentum underpinned by the recovery in disposable income in part powered by resilient remittances, the positive fiscal impulse (higher public wages and transfers), and an accommodative monetary stance. Depressed global demand, combined with the recent drought, is expected to contain exports. Robust imports supported by the recovery in domestic demand will be a drag on growth. Most sectors are expected to bounce back, with agriculture leading after a bad yield in 2020, says the World Bank’s Moldova Economic Update that is quoted by IPN.

According to the WB, economic growth in 2022 is expected to be similar to that of 2021 and is expected to only reach potential in 2023. All sectors will enjoy a rebound as consumer and investment confidence strengthens on the back of more favorable external conditions, dovish monetary stance and expansionary fiscal policy.

Inflation is expected to remain lower than the NBM corridor of 5 percent +/- 1.5 pp in 2021-22 but to pick up as the recovery strengthens. Poverty, as measured by the US$5.50 PPP/day poverty line, is projected to increase 3.6 pp to 14.2 percent in 2020.

The fiscal measures introduced to mitigate the impact of the pandemic are expected to keep the fiscal deficit at around 4 percent of GDP in 2021, higher than historical averages, but less than what was planned in the state budget law, partially because of lower external financing and low absorption capacity. Going forward, the fiscal stance is expected to be challenging as businesses struggle and households suffer from weak labor market conditions. As a result, public debt is expected to steadily increase, but remain relatively low by international standards.

The outlook remains subject to substantial downside risks and the fragile recovery relies on the successful rollout of the vaccine. Domestic risks relate to political instability, institutional weaknesses, and political constraints and authorizing environment to implement reforms of the judiciary and structural reforms. Advancing long-term structural reforms on the background of economic recovery measures and political turmoil is of paramount importance. The capacity to mitigate the impact of the crisis and support economic recovery will critically depend on external financing, particularly a successful negotiation of the new IMF program. Also, going forward, Moldova will need to address the inequality of opportunities and accelerate private sector-driven job creation. Finally, as shown by the severe drought episode in 2020, the economy is highly vulnerable to extreme weather episodes.

The economy has gained some momentum on the back of the easing of COVID-19 restrictions. Affected by the pandemic and a severe drought, economic activity plummeted in 2020, with GDP declining by 7 percent. The main drivers of GDP decline were household consumption, which also declined by 7 percent, followed by investment and inventories. In 2021 the economy has started to rebound gradually, but most of the short-term indicators remain in negative territory.

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