Why Chisinau Seeks the IMF’s Help Again?

The widening budget deficit, uncertainty over external inflows and the high cost of domestic borrowing are forcing the authorities to seek renewed cooperation with the IMF, despite the failure of the previous program  

Vladimir ROTARI, RTA: Today, the latest International Monetary Fund mission, which has been here since October 21, is wrapping up its visit to Chisinau. Its work took place against the backdrop of some rather unusual statements from our leadership. Prime Minister Vasile Tofan insists that there is no urgent need to borrow from the IMF, and that the proposed cooperation program will not include loan financing in its initial phase. However, the government by no means rules out the possibility of returning to the IMF in 2027. It is worth recalling that the previous program was brought to a rather unsuccessful close in October last year, as the final two reviews were never completed. As a result, the country missed out on around $170 million. Significantly, the problem lay less in the failure to meet quantitative targets than in protracted reforms of public financial management and the state sector, as well as insufficient progress in tackling high-level corruption. In other words, the shortcomings concerned precisely the areas in which the PAS had been promising a major breakthrough for several years. The previous program helped maintain macroeconomic stability during the energy crisis, the war in neighboring Ukraine, and other upheavals. But the fact that it remained unfinished essentially highlighted the limits of the ruling party’s capacity for reform; after five years in power, it is once again discussing the tax system, the efficiency of state-owned enterprises, and the quality of budget planning with international experts. Although this list of problems bears a suspicious resemblance to the one the current administration faced when it first took office. Economic trends are no less telling. Despite significant amounts of international aid and constant talk of modernization, the national economy is not demonstrating growth rates capable of ensuring increased prosperity and a sustainable expansion of the tax base. The IMF estimates GDP growth in 2026 at just under 2%. Export opportunities remain limited, deep imbalances in foreign trade persist, and labor emigration undermines the long-term prospects for production. One of the key problems, acknowledged even by officials directly responsible for the relevant policy areas, is that the inflow of external resources is not translating into the emergence of independent sources of growth. In recent years, these funds have primarily supported consumption and helped offset current budget imbalances, while their impact on productive capacity has remained limited. External circumstances have undoubtedly played, and continue to play, an important role, but it is becoming increasingly difficult to attribute all the country’s difficulties to them alone. As a result, Moldova’s debt obligations have increased significantly during this period. At the end of 2021, the national debt stood at 77.7 billion lei, or 32.1% of GDP. By mid-2026, it had reached 142.8 billion lei, meaning it had nearly doubled. As a percentage of GDP, the situation does not look quite as dire, a point the authorities constantly emphasize. Nevertheless, the rate of growth in the country’s loan portfolio is accelerating, and that is a fact. Even if the current figures do not in themselves indicate an imminent debt crisis, the significant increase in the amount of debt is prompting experts and opposition politicians to offer critical assessments of the effectiveness of borrowing and, in principle, the economy’s ability to generate additional sources of repayment. The issue has become particularly acute as financing conditions change. In the first half of the year, the state budget deficit reached 9.2 billion lei, more than half of which, 5.1 billion lei, was covered through net borrowing via government securities. In other words, the domestic market has become one of the main sources of financing the budget gap. The September budget revision reduced expected grant inflows by 837 million lei and cut expenditure on externally funded projects by almost 1 billion lei. This, too, is a revealing development. The price of this financial safety net is proving to be rather high. At the auction on 15 October, six-month Treasury bills were placed at an annual yield of 11.07%, while one-year bills carried a rate of 11.70%. These are relatively high rates. By comparison, concessional loans from international institutions typically offer significantly longer repayment periods and more favorable terms. Moldova’s Ministry of Finance, meanwhile, has to raise part of the required funding for periods of just six to twelve months, then regularly find the money needed to repay or refinance the securities it has issued. The larger the share of such short-term obligations, the more sensitive the budget becomes to interest rates and shifts in creditors’ sentiment. According to official data, in August, the short-term portion of the domestic public debt already accounted for about 45.6 billion lei out of a total of 58.2 billion. This is yet another illustration of the significant need for constant refinancing. Domestic borrowing, of course, has the advantage that the government does not assume additional foreign exchange risks. But this convenience comes at the cost of the harsh interest rates prevailing in the local financial market. Combined with a budget deficit and uncertainty regarding external revenue, short-term borrowing creates a vicious cycle in which more resources must be spent not on new projects, but on meeting existing obligations. Moreover, high interest rates on government securities can make lending to the government more attractive to banks than financing the real sector. For an economy that is already suffering from a lack of investment, this situation can become nearly fatal. Against this backdrop, Chisinau’s interest in a new IMF program becomes obvious, even if it does not initially provide for any disbursements. As early as May, the two sides reached an expert-level agreement on a three-year framework for coordinating economic policy, which still requires final approval by the IMF’s Executive Board. Such a program could serve as a signal of confidence to other international lenders, making it easier for Moldova to access external financing. It would also entail specific commitments: strengthening tax administration, improving the efficiency of public financial management and gradually reducing the budget deficit to 3.5% of GDP by 2029. However, fiscal discipline has a downside, one we have already encountered in the form of tax reform. According to the Ministry of Finance’s calculations, it is expected to generate around 5.1 billion lei in additional revenue. Yet the long-term risks are obvious: in an environment of weak economic growth, a heavier tax burden threatens both businesses and consumers. The authorities seek to justify the changes by arguing that they are needed to make the tax system fairer and create resources for an economic breakthrough. However, the overriding priority is fairly obvious: to bring in more money here and now to fill an increasingly difficult budget shortfall. I assume the authorities will manage to reach an agreement with the IMF, as there are opportunities for continued cooperation. But will the next IMF program be a step toward an economy finally capable of financing its own development, or will it merely provide the government with a few more years of relative financial calm? For all of us, the answer to this question will be of almost existential importance.