Moldova’s Public Debt Problem

Finance Minister Victoria Belous considers Moldova’s public debt to remain at an “acceptable level” and argues that it should not be a subject of “speculation”. We take a closer look at why the situation is, in fact, somewhat more complicated and why it is still a cause for concern, particularly over the long term

The issue of Moldova’s public debt is increasingly surfacing both in critical statements by opposition politicians and in the analysis of even relatively moderate experts. As a result, the authorities are forced to reassure the public. For example, in a recent television appearance, Finance Minister Victoria Belous noted that the public debt remains at an acceptable and manageable level, arguing that the main problem lies only in what the borrowed funds are being spent on. Formally, there is some logic to the officials’ reasoning: the republic’s public debt-to-GDP ratio is indeed well below critical levels, especially when compared with the world’s major debtors: 38.1%, versus more than 200% in Japan, for example, or 123% in neighboring Ukraine. At first glance, there is no immediate threat to the country’s financial stability at this stage. However, if we dig a little deeper, we find one unpleasant feature of our debt portfolio: the speed at which it is growing. And this is where the situation looks considerably less reassuring. Suffice it to say that by mid-2021, when the PAS party came to power, Moldova’s public debt stood at around 75 billion lei, whereas today it is steadily approaching the 150 billion mark. In other words, in just five years, the state has borrowed as much as it did over the entire preceding three decades of independence. Clearly, if public debt continues to grow faster than the economy each year, its currently quite acceptable ratio to GDP may quickly cease to be comfortable. This raises the key questions to which the authorities need to find convincing answers: why is public debt growing at such a pace, what are these funds being spent on, and will the country’s economy be capable of servicing this debt in the future? The dynamics of recent years show just how dramatically the situation has deteriorated. Even as recently as the previous decade, we were not accumulating debt at anything like the current pace. In 2017, for example, Moldova’s public debt stood at around 51.7 billion lei, rising to 52 billion in 2018 and 52.8 billion in 2019. In other words, over those three years, the total amount of debt barely changed, with the cumulative increase amounting to just over 1 billion lei. By contrast, in the first eight months of 2026 alone, it increased by 15 billion lei. To be fair, it should be noted that the explosive growth in public debt began before the current political forces came to power, but it had an understandable cause: the pandemic, which became an economic shock on a global scale. PAS also had to contend with a global crisis, whose epicenter was located just beyond our borders: the war in Ukraine, which continues to this day. Starting in 2022, Moldova faced an energy and inflation shock, rising spending on social support, and the need to take emergency measures to stabilize the economy. These circumstances objectively required higher government spending and, consequently, new borrowing. On the other hand, Moldova is far from the only country to have been affected by these external factors, yet we have consistently shown negative, or at best stagnant, dynamics across many of the most important economic indicators. This brings the quality of our public administration squarely into question, with one of its increasingly notable features being precisely its reliance on extraordinary borrowing as a permanent element of fiscal policy. What is even more troubling, and what the finance minister was hinting at, is that the state is increasingly having to borrow not so much to finance major investment projects as to cover the current budget deficit, which has also become chronic and reached record levels under PAS. The structure of domestic debt is also revealing. In August 2026, the share of public debt carrying a floating interest rate reached 62.5%, exceeding the established benchmark of 60%. Even more troubling is the maturity structure of domestic government securities: 95.8% of their total volume consists of obligations with maturities of less than one year, against an established maximum of 90%. This means that the government is becoming more sensitive to fluctuations in interest rates and is being forced to regularly refinance substantial amounts of outstanding debt. An even more serious issue is the price Moldova is paying to finance its deficit. In 2025, the weighted average interest rate on government securities placed on the domestic market stood at around 9%, more than four percentage points above the previous year’s level. During the first eight months of this year, the rate increased further, reaching 9.56%. At such high interest rates, public debt begins to compete directly with the private sector for available capital while simultaneously driving up the government’s own expenditures. The logic is simple: why would an investor put money into a risky production project with a long payback period if they can secure a good return in less than a year simply by purchasing government securities? As a result, debt-servicing costs, according to economist Veaceslav Ionita, are already consuming nearly 7 billion lei, or around 10% of the government’s total revenue. This creates a fairly straightforward chain: the budget runs a deficit, the government borrows money, debt-servicing costs increase, the deficit becomes harder to reduce, and the government borrows again. This is how a debt spiral gradually takes shape. The situation is further aggravated by the limited availability of cheap external financing. For several years, Moldova has made active use of support from international financial institutions, but the structure of external assistance is gradually changing. Grants are becoming relatively less significant, while loans are accounting for an increasing share. Even the widely publicized EU Growth Plan for 2025-2027 consists primarily of loan financing rather than non-repayable funding. It is also worth noting the change in the model of cooperation with the IMF under the current ruling party. Previously, the ECF/EFF program provided Moldova with substantial financial resources amounting to hundreds of millions of dollars. However, the program came to a rather inglorious end last year, with the final two tranches, worth around $170 million in total, left unpaid because Moldova failed to meet its commitments. The new three-year program, agreed in 2026 and based on a different framework, the Policy Coordination Instrument, does not in principle provide for any disbursements. Instead, it serves as a mechanism for monitoring and supporting reforms. In such a situation, the government is increasingly turning to the domestic borrowing market. But domestic financing comes at a substantially higher cost than funding from international institutions, which is available at much more favorable interest rates and with longer repayment periods. Undoubtedly, the decline in external funding is largely driven by objective factors, including the ongoing war in Ukraine, the need to redirect substantial resources toward supporting Kyiv, economic difficulties within the EU itself, and the shift in US policy under the administration of Donald Trump. But whatever the reasons, the result is the same: a larger share of budget expenditures that could previously be covered by grants and relatively inexpensive external financing now has to be funded from domestic resources and new borrowing. Moreover, external circumstances do not absolve the government of responsibility for the quality of its decisions, a point that has been particularly evident in the energy sector. After the previous supply arrangements were dismantled, Moldova opted for diversification and market-based purchases, which, amid the acute crisis, resulted in substantial costs. The consequences are well known: high energy prices have hit households and industry alike, increased the need for government compensation, and at the same time undermined the competitiveness of Moldovan producers. Overall, foreign economic policy remains one of our weak points. The desire to make Moldova an unequivocal partner of Western countries is understandable from a geopolitical perspective, but economies operate according to somewhat different laws and principles. For a small country like Moldova, it would be preferable to benefit from the broadest possible range of external ties, finding markets for its exports, affordable energy, investment, and transport routes. The excessive politicization of economic relations has sharply narrowed our room for maneuver and, ultimately, limited our potential sources of growth. No less important is the issue of recurring government expenditures. For 2026, spending on public-sector wages is budgeted at approximately 32.8 billion lei. The cost of maintaining the bureaucratic apparatus continues to rise, becoming an increasingly burdensome strain on the state treasury. The government intends to begin restructuring and reducing the number of agencies and civil servants. We will see how successful these efforts prove to be. Our main advantage is that there is still time to correct the situation. But the very logic behind the accumulation of public debt needs to change. The process should begin immediately by limiting the growth of domestic debt, extending its average maturity, and moving away from a constant reliance on short-term issues carrying high interest rates. Every new government program should pass a simple test: will it generate an economic return capable of offsetting the cost of the funds raised in the future? In the medium term, Moldova needs a comprehensive review of government spending, from the structure of the bureaucratic apparatus to the numerous subsidies and programs that produce no measurable results. In the energy sector, a balance needs to be found between supply diversification, long-term contracts, and hedging instruments, so that the state does not become hostage to sharp fluctuations in market prices. The main priority, however, is obvious: borrowed money must be converted into economic growth. Infrastructure, energy, industry, exports, transport modernization, and higher productivity are the areas where taking on debt makes sense. Financing ever-growing current expenditures through new borrowing will inevitably lead to disaster, as the government itself, as we can see, fully understands. Moldova’s public debt is indeed not the “No. 1 problem” today. But if action is continually postponed, we may reach a critical level of indebtedness much sooner than the country’s economic policymakers appear to believe.