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FY 1997 Assistance to the NIS Request: $ 27,000,000
Introduction.
The Government of Moldova is committed to the process of reform and transition to a market economy initiated in 1991. One of the smallest and the most densely populated of the New Independent States (NIS), Moldova has emerged from the shadows of communism and begun the arduous task of building a democratic nation and market-
based economy. Since the collapse of the Soviet Union, Moldova has faced divisive ethnic conflicts, a series of natural disasters, and the social hardships accompanying societal transformation. Despite these obstacles, the country is pushing ahead with political and economic reform and adopting peaceful solutions to its ethnic and security problems, including granting the largely Russian population of the conflict-plagued Trans-Dniester region broad autonomy. For the first time since independence, Moldova will register positive economic growth in 1996.
Over the last eighteen months Moldova has made significant progress in establishing the macroeconomic and policy framework needed for the transition to a market economy. The successful introduction of the new currency, the leu, was accompanied by a firm stabilization policy which has reduced inflation to under two percent per month, a fiscal deficit of approximately four and a half percent of gross domestic product (GDP), and a real GDP growth of about three percent in 1995. Price controls and trade restrictions have also been eliminated in tandem and privatization has accelerated markedly since mid-1994. In addition, efforts to modernize the banking sector and introduce payments disciplines are being made, along with progress in rationalizing social benefits and providing for dismissed workers.
The Development Challenge.
Moldova has set a positive example for its neighbors and has become a force for hope and prosperity in the NIS. In spite of these encouraging signs, many of Moldova's authorities remain philosophically skeptical of market forces. Progress on structural reform is unlikely to be as fast as desirable until that mind-set changes. Moldova must now address remaining weaknesses in its financial policies and accelerate the process of structural reform.
Regarding debt, the country's external official debt is $652 million as of March 1996, about 42% of GDP, and is growing steadily. A significant share of the total debt burden is for energy imports, primarily gas from Russia, with current debt arrears of $330 million as of February 1996. Moldova is almost wholly dependent on imports for its energy requirements and inputs for its industries. Analysts indicate that exports need to be encouraged to help reduce external indebtedness. Debt rescheduling privileges will begin to expire in 1996-1998, significantly increasing the debt servicing burden during this period. In 1996, the Ministry of Finance drafted a new law that will allow the government to manage and regulate all official debt, including internal, external and sovereign guarantees to economic agents.
USAID expects that Moldova will have the institutional and other resources to continue its own transition. Current plans are to phaseout Freedom Support Act (FSA) assistance within the next several years.
Other Donors.
Data from Moldova's Ministry of Economy as of February 1996 indicate that there are approximately 80 projects ongoing under foreign technical assistance, about half of the planned target of 157 projects in the country's 1995 two year technical assistance program plan. The chief donors in 1995 were EU-TACIS, USAID, GTZ of Germany, and the UNDP.
FY 1997 Program.
The United States is working with Moldovan officials to promote land and energy sector reform, improved agricultural capacity, improved fiscal performance through better tax administration, establishment of a treasury function, bettercustoms administration, and bank system reform, including better supervision. Moldova has a strong potential to become one of the first NIS countries to achieve sustained economic growth, but Moldova can succeed on its course only with the substantial support of the United States and the international donor community.
Strategic Goal: Economic Restructuring
Strengthening efforts at macroeconomic stabilization and accelerating structural reform are the most important economic policy challenges facing Moldova. The USG goal is to help increase the productivity of the economy and thus to increase foreign investment. USAID activities assist in the privatization of state-owned assets and development of the institutions necessary to support a market economy. Without USG support it will be extremely difficult for Moldova to create a fully-functioning market economy.
Regarding privatization, the restructuring of the Moldovan enterprise sector has been a top priority of United States assistance to Moldova. With USAID support, Moldova has completed its mass privatization program, with the majority of industrial assets transferred to the private sector. Emphasis is now shifting to post-privatization efforts--assisting newly privatized enterprises to restructure, compete globally, attract both foreign and domestic investment, and promote trade. Thus, in the area of private enterprise, USAID is focussing on strengthening business advocacy associations, improving production and processing technologies in selected businesses, providing additional financial resources for selected local businesses through joint ventures, making available adequate market information to identified pilot enterprises, expanding the share registry, corporate governance, and broker/dealer networks, and developing business and farm advisory centers. One example of USAID's work in this area is the Western NIS Enterprise Fund which recently opened its office in Chisinau and has already committed over $4 million direct investments to five companies. In addition, USAID is also working to promote small business support services through local institutions, demonopolize transportation and distribution systems, and create enterprise restructuring and public information campaigns to inform people of their rights and options in the emerging market system. USAID is also improving the analytical capacity of the Parliament to understand the ramifications of business laws proposed for enactment.
Because Moldova is a predominantly agriculturally-based society and economy, USAID also focuses on agricultural privatization. In addition to wine, the best-known product and the backbone of its exports, other key agricultural products include: grain, soybeans, fruit, vegetables, beef and dairy cattle and hogs. Crop yields are above the NIS average. The food processing industry is of special economic significance. Land reform is the cornerstone of the agriculture privatization program, and Moldova is one of the first of the former Soviet republics to allow agricultural privatization. USAID is helping to introduce legal and regulatory reforms supportive of land privatization. To date, about one-third of the state farms have been converted to joint-stock companies. USAID efforts in food systems restructuring will continue current work which identifies potential U.S.-Moldovan agribusiness partners, and complements the efforts of U.S. Department of Agriculture/Trade and Development Agency business-linkage tours for entrepreneurs interested in trade and the investment opportunities. Enterprise land sales and farm reorganization pilots will be underway shortly. Also, much of the effort in privatization, particularly demonpolization and enterprise restructuring, places emphasis on agriculture and agribusiness.
In the area of fiscal reform, USAID has provided training and technical assistance to the Ministry of Finance staff to improve tax policy, fiscal policy and the management information systems for budgeting practices and design of computer systems. This training has been geared toward making changes in the budget law, and improving budgeting practices and Treasury operations.
In the area of financial reform, with USAID support, the Moldova Stock Exchange is planning all aspects of securities trading: hardware procurement, software implementation, legislation, trading rules, clearing and settlement systems and expanded training programs on customer service and credit issues. USAID has also helped to create a Securities and Exchange Commission, and in June 1995 Moldova opened its first Stock Exchange whereby approximately 100 firms will be traded by mid-1996. In addition, the program is developing a financial sector infrastructure to promote a safe and sound banking system through bank supervision training, the formation of a troubled bank resolution unit in the central bank, and implementation of a new chart of accounts that is consistent with the commercial banks. New activities will include assisting in the adoption and application of internationally accepted corporate accounting principles, and developing indigenous financial and other enterprise restructuring services.
Concerning energy and environment, Moldova imports close to 100% of its energy resources, most of which is gas. Gas imports are an enormous balance of payments burden to the country, and need to be profitably and effectively managed by Moldova's gas distribution companies. MoldovaGas, the state monopoly, has requested the assistance of USAID in restructuring its assets. This restructuring is also being promoted by the World Bank in order for MoldovaGas to qualify for loans. USAID expects to work with MoldovaGas in reconfiguring the State monopoly into a series of competitive companies and provide a corporatization strategy together with new corporate organization plans. The restructuring effort will include training programs in financial management and in financial accounting as well as a procurement plan for management systems equipment. More efficient natural gas use will also be promoted.
Cross-cutting and Special Initiatives
In FY 1997, support for building democracy will be directed toward non-governmental organization (NGO) development, voter education, legal reform, and a resource center for information on election management and administration.
Although parliamentary elections in 1994 were deemed free and fair, Moldova does not yet have a permanent Central Election Commission. Furthermore, the law governing presidential and local elections needs to be revised. USAID provided comments on the draft parliamentary election law used for the 1994 elections. USAID assistance has also increased the participation of media, civic activists, and politicians in shaping the policy debate concerning the election process. Progress in these areas may depend in large part on the results of the next presidential and parliamentary elections.
Due to funding constraints, USAID's assistance to promote rule of law has been modest compared to the progress the country has made. Due to USAID efforts, however, the Moldovan Collegium of Advocates should be functioning by the end of 1996. This group already drafted a Law on the Legal Profession, which, if passed, will allow for the creation of a powerful bar association.
Upon Moldova's independence from the Soviet Union in 1991, the government was no longer able to provide adequate social services for the population, and an emergency situation ensued. The international community, including USAID, responded by providing critical humanitarian assistance to temporarily sustain the population. In addition, to meet the most important technical assistance needs expressed by health care providers, medical partnerships are providing health care knowledge so that preventive and curative techniques can be adapted and disseminated.
In order to help make social services work for the people during the country's very difficult economic and political reform and after, USAID supports the institutional development of local non-governmental organizations (NGOs) whose efforts are critical as part of the private sector network of organizations providing social protection services. The number of NGOs in Moldova has increased dramatically since independence and many of these emerging NGOs address the urgent needs of the social sector. Furthermore, in order to alleviate to the extent possible the hardships imposed on the most vulnerable populations during the country's difficult transition, USAID continues to provide humanitarian assistance through local NGOs and social services to meet the critical needs of these groups.
USAID has provided DOD excess property and in-kind donations as humanitarian assistance through local NGOs and social service providers to meet the critical needs of vulnerable populations, including medical supplies, basic living supplies and capital goods. In order to maximize emergency preparedness, USAID has created a stockpileof emergency supplies. To strengthen the capacity of local NGOs to play a vital role in assisting the most vulnerable groups, USAID has trained 130 budding NGO leaders in basic NGO management and sustainability. In addition, USAID is providing small grants to local NGOs working to provide sustainable social protection services to vulnerable populations.
Another of USAID's humanitarian efforts is the response to the 1995 UN Emergency Appeal for the Diptheria Epidemic in the NIS. In this case, USAID provided funds for UNICEF to purchase adult diptheria vaccine, antitoxin, and antibiotics for Moldova. In addition, USAID provided technical assistance to the government of Moldova in planning for mass immunization campaigns and educating the population on the importance of immunization. Preliminary results from this 1995 effort using the USAID purchased vaccine indicate a dramatic reduction in the incidence of diptheria cases.
Through medical partnerships, USAID is seeking to improve the efficiency and productivity of existing health care providers through better clinical and administrative management and organization. The partnerships also train health care policy makers and administrators at all levels of government to make informed choices and rational system changes with respect to delivery system reform. The partners will continue to train operating room personnel in infection control techniques, data collection and team approach management strategies, and to initiate the expansion of the Emergency Medical Services (EMS) training to include police, firemen, and industrial safety personnel. They also plan to expand cardiovascular disease prevention with a focus on rheumatic fever, public health programs and procedural aspects of patient care. The partners plan to create a model to expand the role of nursing in infection control procedures, management skills, education and nursing assessment and intervention, in addition to introducing health promotion programs and encourage ownership to support health care in Moldova.
|
Strategic Objectives |
Economic Restructuring |
Democratic Transition |
Social Stabilization | Cross-cutting / Special Initiatives | Total |
| Privatization | 3,500,000 | 3,500,000 | |||
| Fiscal Reform | 2,100,000 | 2,100,000 | |||
| Private Enterprise | 11,100,000 | 11,100,000 | |||
| Financial Reform | 3,900,000 | 3,900,000 | |||
| Energy | 1,000,000 | 1,000,000 | |||
| Citizens' Participation | |||||
| Legal Systems | |||||
| Local Government | |||||
| Crises | |||||
| Social Benefits | |||||
| Environmental Health | |||||
| Cross-cutting / Special Initiatives | 5,400,000 | 5,400,000 | |||
| TOTAL | 21,600,000 | 5,400,000 | 27,000,000 |
USAID Mission Director, Gregory Huger
Purpose: Increased transfer of state-owned assets to the private sector.
Background: The Republic of Moldova is one of two countries of the Former Soviet Union (FSU) which has completed a mass privatization program, with sixty percent of industrial assets transferred to the private sector. While the Law of Privatization was adopted by the Moldovan Parliament in July 1991, the program did not begin in earnest until February 1994 following Parliamentary elections won by progressive leaders who declared their support for economic reforms, including privatization. Moldova remains one of the foremost reform-minded countries within the FSU and is now poised to initiate essential market reform programs that will create a business environment to attract both foreign and domestic investment.
USAID Role and Achievements to date: USAID assistance played a critical and instrumental role in supporting the Republic of Moldova throughout the course of its privatization program, during which two-thirds of the Republic's non-
agricultural economy, including 1,139 medium and large scale enterprises, 732 shops and 364 health care and other objects were privatized. The program was extraordinarily popular, with approximately 95 percent of the eligible population participating. Concurrently, the appointment of the Minister of Privatization, a dynamic and energetic reformist leader, signaled Moldova's strong commitment to this process. USAID has provided technical assistance in the corporatization process of small, medium and large enterprises prior to privatization. This assistance has entailed the valuation of property subject to privatization; performance of open outcry auctions and public tenders of small scale objects and nationwide share subscription auctions for large and medium scale enterprises; the establishment of 115 bid collection sites nationwide to ensure individual participation and the operation of the national Data Center for Republican Auction. USAID assistance was also instrumental in the creation of the Share Registry Coordination Unit responsible for preparing and consolidating an accurate record of privatized enterprises with more than 300 shareholders, subsequently transferred to one of 27 independent share registries to insure safekeeping and maintenance of the records for purpose of corporate governance and dividend issuance.
Description: USAID assistance in 1997 will focus on providing technical assistance to the Ministry of Privatization to support cash auction sales of the remaining state shares in privatized enterprises. In addition, USAID will continue to provide support for privatization of urban and agricultural land.
Host Country and Other Donors: The Moldovan Government has created and staffed a private enterprise restructuring agency, which receives training and technical assistance through EU/TACIS and financial support in the restructuring of weak enterprises from the World Bank.
Beneficiaries: Beneficiaries include the 95% of the population that participated directly in the mass privatization program, and employees and managers of small to large -sale firms who exercised preferential rights to ownership in their own enterprises.
Principal Contractors, Grantees, or Agencies: East-West Management Institute is the primary implementor of USAID's mass privatization program, and Booz Allen & Hamilton is implementing land privatization. Carana Corporation is working in demonopolization efforts and the cash-sale privatization of the fruits and vegetable distribution network. Mendez England Associates is providing public education, publicity and public relations on all privatization activities.
Major Results Indicators*:
Percent of land owned by state of parastatal entities
Percent of business assets in state-ownership nation-wide
Percent of GDP attributable to private sector activities
Percent of housing privately owned in specific locals
* These are illustrative indicators. ENI Missions are in the midst of the complex process of developing measurable country-specific indicators and targets, which will be completed by June 1996.
Purpose: Increased soundness of fiscal policies and fiscal management practices.
Background: One of the critical changes necessary for the successful transition of centrally planned economies is greater transparency in the fiscal estimation process so that policy decisions based on that information can be informed. Moldovan officials have been receptive to technical assistance and have pursued a number of reforms in government financial management, particularly with respect to changes in the budget law, improved budgeting practices and the establishment of a Treasury. There has also been a program to establish a government securities capability which has met with some success. These efforts are, however, constrained by lack of computer equipment needed to fully implement many of the changes.
USAID Role and Achievements to date: A USAID-funded project has provided tools and training to Ministry of Finance (MOF) staff in the areas of tax policy, fiscal policy and Management Information Systems. Among other things, it has supplied assistance in the areas of budget classification and design of computer systems. Another team composed of a budget policy advisor and a legal advisor has been working with the Parliament. Under USAID funding, the U.S. Treasury has provided both resident and short-term advisors to the MOF, including a budget/treasury advisor, a government securities advisor and short-term legal and data processing advisors.
Description: As a result of USAID technical assistance, we expect to see a functioning treasuring system at the central level and the beginnings of a similar development at the regional level. Technical assistance to the MOF should result in a more rigorous system of budget formation at the Ministry of Finance, using reasonably sophisticated fiscal modeling. We also expect that in time, government securities will finance an ever increasing part of the government budget.
Host Country and Other Donors: he British Know-How Fund is providing assistance to the MOF in budgeting and the IMF is providing more general macro-economic advise in line with the Article Four Consultation.
Beneficiaries: The MOF receives advice on tax policy and tax administration and macropolicy, and the Budget Committee of the Parliament receives advice on legislation and macropolicy as well.
Principal Contractors, Grantees, or Agencies: Barents-KPMG is the principal implementor of USAID activities, with additional assistance provided by USAID-funded U.S. Department of Treasury advisors.
Major Results Indicators*:
Amount of budget deficits.
Amount of government budgetary transfers to state-owned enterprises.
Amount of revenues available from cost efficient tax administration.
* These are illustrative indicators. ENI Missions are in the midst of the complex process of developing measurable country-specific indicators and targets, which will be completed by June 1996.
Purpose: Accelerated development and growth of private enterprises.
Background: The emphasis of USAID assistance to Moldova is now on post-privatization since the mass privatization program has been successful. USAID will build on the concomitant components of the enabling environment necessary to support and strengthen the newly developing private sector. It is designed to build the capacity of individual Moldovan professionals, independent firms and nascent industries in fields that did not exist before the transformation to a market economy, and in areas that are essential to ensure that new and developing enterprises become commercially viable.
USAID Role and Achievements to date: Without laws, regulations and policies that are conducive to business activity, the private sector will not be able to grow. USAID is addressing that through strengthening business advocacy associations. Another approach is to improve the analytical capacity of the Parliament to understand the ramifications of laws proposed for enactment. The improved management of business is a key to the creation of viable private enterprises.
Description: In order to improve the management capacity of business, USAID will assist in the improvement of production and processing technologies in selected businesses, the provision of additional financial resources for selected local businesses through joint ventures, ensure the availability of adequate market information to identified pilot enterprises, and the development of business and farm advisory centers.
Host Country and Other Donors: USAID coordinates with the United Nations Development Programme and EU-
TACIS to provide technical assistance and funding for business service centers that help small and medium-sized business managers improve business plans and management skills.
Beneficiaries: Privatized and start-up businesses will benefit directly from these activities, but specific focus will be on restructuring the agro-industrial complex, including foodprocessing, marketing, equipment and services suppliers, as well as light manufacturing, construction and the service industry.
Principal Contractors, Grantees or Agencies: TBD. Peace Corps provides business volunteers to advise the Moldovan managers of the business service centers.
Major Results Indicators*:
Volume of business support services available to private enterprises from self-sustaining local institutions.
Number of private sector business operating and generating employment.
Number of business associations advocating on behalf of private sector initiatives, needs and future growth requirements.
* These are illustrative indicators. ENI Missions are in the midst of the complex process of developing measurable country-specific indicators and targets, which will be completed by June 1996.
Purpose: A more competitive and market-responsive private financial sector.
Background: The development of a strong and dynamic market-based economy requires an effective, transparent and safe financial sector. USAID's strategy emphasizes the creation of a private banking sector together with the creation of a transparent and open securities system. The revitalized banking sector will provide a vehicle to transfer ownership and funds between individuals and enterprises, and capital markets facilitate the restructuring of enterprises and provide them with a flexible source of funds for investment.
USAID Role and Achievements to date: The development of the financial infrastructure in Moldova is continuing at an accelerated pace. The Moldovan Stock Exchange was inaugurated in June, 1995, following a six month USAID effort to train Moldovan professionals in all aspects of the securities market and installation of the necessary hardware and software. To date, 43 investment, 11 trust companies, 27 independent registrars, and 54 broker/dealers and consulting companies are active in the stock exchange. Moldova was the first NIS country to establish an independent securities market regulating entity with Ministry status. In addition, the Central Bank has converted to a new chart of accounts, and the commercial banks are expected to convert to a new chart of accounts consistent with internationally accepted standards, with USAID assistance, by the end of 1996. Improved banking supervision is a major emphasis, and it has led to the formation of a troubled bank resolution unit in the central bank, with assistance from USAID. This unit has already made its first recommendations for dealing with the largest troubled institutions.
Description: USAID's assistance in 1997 will focus on the adoption of new laws on joint-stock companies, securities, and on investment funds. USAID will continue to assist the development of self-regulation among market participants, while helping to expand the broker/dealer community and broaden the role of existing investment funds to include raising capital for privatized enterprises through initial public offerings or venture funds. In the banking sector, USAID will focus on training employees of the Central and commercial banks in western banking practices and standards, and supporting the Moldovan Bankers Association in maintaining a self-sustaining banking training center. USAID assistance will continue to help create a professional bank supervision department at the National Bank, focusing in particular on development of an off-site supervision system which will use the work developed on the accounting standards earlier.
Host Country and Other Donors: The banking school is benefitting from support from the German Government in train-
the-trainers, and the National Bank is receiving assistance in on-site bank supervision from the International Monetary Fund in collaboration with USAID.
Beneficiaries: The beneficiaries are the National Bank of Moldova and virtually all the larger banks in the country who have sent employees to the AID-funded training center. By extension, depositors and borrowers from the banking system will benefit, as will firms and their employees that access securities markets and the financial intermediaries - banks, brokerage firms, etc. - that participate in the financial market.
Principal Contractors, Grantees, or Agencies: Barents-KPMG, Financial Services Volunteer Corps (FSVC) are implementing USAID's banking support activities. Capital Markets assistance implementors are still to be determined.
Major Results Indicators*:
--Amount of investment, both from domestic and foreign sources.
--Number of licensed viable private commercial banks.
--Amount of funds for equity/credit provided to small and medium-sized businesses from private commercial banks.
* These are illustrative indicators. ENI Missions are in the midst of the complex process of developing measurable country-specific indicators and targets, which will be completed by June 1996.
Purpose: A more economically sustainable and environmentally sound energy sector
Background: Moldova imports 98% of its primary energy and, although investigating domestic and gas sources, has at present no chance of becoming self-efficient. Moldova has lost its preferred place in energy trade with Russia and must pay close to market prices for Russian oil and gas in hard currency and barter. Primary and secondary energy use is extremely inefficient. Energy demand is expected to fall precipitously over the next decade, and a shift from coal to natural gas in the urban economy is expected. Moldova power plants consume up to 50%of all imported natural gas. The State Department of Energy (Moldenergo, the electricity utility), the State Fuel Agency, State Department of Gasification (managing Moldovagas) have plans to corporatize into stock companies with the further goal of fully privatizing them.
USAID Role and Achievements to Date: USAID, in cooperation with other key donors in the country and in particular with the World Bank, has agreed with the Government of Moldova to provide primary assistance to restructure gas industry. The project activities have only been initiated in 1996 and so there are no achievements to date.
Description: The USAID program in Moldova will focus on three specific areas on energy sector assistance. Restructuring assistance for Moldova Gas Stock Company will improve its financial position, attract investments, privatize and increase efficiency of natural gas use at distribution level. Upgrade assistance of the largest fossil-
fuel power plants (Chisinau CHP#1, CHP#2, Tiraspol CHP) will increase efficiency and reliability, reduce energy consumption and environmental degradation and strengthen management techniques. The US - Moldova Energy Utility Partnership will facilitate corporatization, information exchange, and conduct seminars on restructuring of the energy sector.
Host Country and Other Donors: World Bank, EU-TACIS and EBRD coordinate with USAID in providing assistance.
Beneficiaries: The State Department of Energy, State Department of gasification, Moldenergo, Moldovagas, Fossil-fuel power plants (Chisinau CHP#1, CHP#2, Tiraspol CHP) will directly benefit, and the environment and consumers of energy resource will indirectly benefit from subsequent improvements.
Principal Contractors, Grantees, or Agencies: USAID's energy sector activities are implemented by Hagler-Bailly Consulting, Inc. (HBC), Burns and Roe, and the US Energy Association.
Major Results Indicators*:
Number of improved environmentally-friendly energy technologies
Percent of private enterprises using environmentally-friendly energy technologies
Percent of heat and power plants with energy-conservation measures
Percent of cost savings of selected heat and power plants due to improved environmental technologies
Percent of industries with energy efficiency programs which focus on demand-side management
Percent of total volume of electricity and heating produced and distributed by privatized sources
Percent change in pollution due to the application of environmentally-sound technologies at selected sites
* These are illustrative indicators. ENI Missions are in the midst of the complex process of developing measurable country-specific indicators and targets, which will be completed by June 1996.