Document of The World Bank FOR OFFICIAL USE ONLY ReportNo.-46822-MD INTERNATIONAL DEVELOPMENT ASSOCIATION INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY FOR THE REPUBLIC OF MOLDOVA FOR THE PERIOD FY09-FY12 December23,2008 Moldova Country Management Unit Europe and Central Asia Region The International Finance Corporation IFC Department for Southern Europe and Central Asia This document has a restricted distribution and may be usedby recipientsonly inthe performance oftheir official duties. Its contents may not otherwisebe disclosedwithout World Bank authorization. The date of the last Country Assistance Strategywas December 14,2004 CURRENCY EQUIVALENTS Moldova Leu(MDL) October 2008: US$1= MDL 10.3 FISCALYEAR Government: January1-December 31 ABBREVIATIONS AND ACRONYMS AAA Analytic and Advisory Activities AER Annual EvaluationReport ANRCETI TelecommunicationsRegulator BEEPS Business Environmentand Enterprise Performance Survey CAS CountryAssistance Strategy CBA Cost BenefitAnalysis CEM CountryEconomic Memorandum CEP CompetitiveEnhancementProject CFAA CountryFinancialAccountabilityAssessment CFM MoldovanState Railway Company CGAC CountryGovernanceand Anti-Corruption CIS Commonwealthof Independent States COA Court of Accounts CPAR CountryProcurement Assessment Report CPIA CountryPolicy and InstitutionalAssessment DFID UK Departmentfor InternationalDevelopment DFGG Demandfor Good Governance DPL DevelopmentPolicy Lending DSA DebtSustainabilityAnalysis EBRD EuropeanBank for Reconstruction and Development EC EuropeanCommission ECA Europeand Central Asia EFA-FTI Educationfor All Fast Track Initiative EGPRSP Economic Growthand PovertyReduction Strategy Paper EMAP EU-Moldova Action Plan ENP EuropeanNeighbourhoodPolicy EU EuropeanUnion FDI ForeignDirect Investment FIAS ForeignInvestmentAdvisory Services FLEG ForestLaw Enforcement and Governance FSAP FinancialSector Assessment Program FSU Former Soviet Union GDP Gross Domestic Product GEF GlobalEnvironmentFacility GNI Gross NationalIncome HBS HouseholdBudget Survey ICT Informationand CommunicationTechnologies IAS InternationalAccounting Standards IBRD InternationalBank for Reconstruction and Development IDA InternationalDevelopment Association IFC InternationalFinance Corporation IF1 InternationalFinance Institutions IMF InternationalMonetary Fund IOM InternationalOrganizationfor Migration I-PRSP Interim PovertyReductionStrategy Paper IUCN InternationalUnion for Conservation ofNature JSAN Joint StaffAdvisory Note 11 JSDF Japanese SocialDevelopmentFund mcm ThousandCubic Meters MDGs Millennium DevelopmentGoals MEY Ministry of EducationandYouth MIGA Multilateral InvestmentGuaranteeAgency MOE Ministry of Economy MOF Ministry of Finance MSME Medium, Smalland Micro-enterprises MSTQ Metrology, Standards, Testing, andQuality MTEF Medium-TermExpenditureFramework NBM NationalBank ofMoldova NBS NationalBureauo f Statistics NCFM NationalCommission for FinancialMarkets NDS National Development Strategy NGO Non-GovernmentalOrganization NPV Net PresentValue OSCE Organisationfor Security and Co-operationin Europe OECD Organisationfor Economic Co-operationand Development PAD Project AppraisalDocument PAR Poverty Assessment Report PBA PerformanceBasedAllocation PCRM Party of Communists of the Republic of Moldova PEFA Public Expenditure andFinancialAccountabilityAssessment PER Public Expenditure Review PFM Public FinanceManagement PIP Public InvestmentProgram PFR PublicFinanceReview POPS PersistentOrganic Pollutants PPF Project PreparationFacility PRGF Poverty ReductionandGrowthFacility PRSC Poverty Reduction Support Credit PRSP Poverty ReductionStrategy Paper QAG Quality Assurance Group RISP Rural Investmentand Services Project ROSC Reporton the Observance of Standards andCodes SAC StructuralAdjustment Credit SCAs Savings and CreditAssociation SDR SpecialDrawingRights SIDA SwedishInternationalDevelopmentCooperationAgency SME Small andMediumEnterprise SOE State-ownedEnterprise SRA State RoadAdministration TA TechnicalAssistance TTFSE Trade andTransport Facilitationin SoutheastEurope UNDP UnitedNationsDevelopmentProgram VAT Value-AddedTax WBI World Bank Institute WTO World Trade Organization IDA Vice President Shigeo Katsu IFC Vice President Europe and Jyrki I.Koskelo Central Asia and Global Financial Markets Country Director Martin Raiser Director Southern Europe and ShahbazMavaddat Central Asia Task Team Leader Melanie Marlett Task Team Leader Kaikham Onedamdy ... 111 FOR OFFICIAL USEONLY This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. This CPS was prepared by a team that included Dawn Roberts, Erwin Tiongson, Carolina Odobescu, Asa Giertz, Ivan Velev, Lawrence Bouton, Jana Kunicova, Paul Bermingham, Martin Raiser, Iaroslav Baclajanschi, Alexander Pankov, Rekha Menon, Suzy Yoon, Andrei Busuioc, Anatol Gobjila, Bogdan Costantinescu, Dejan Ostojic, Elena Nikulina, Svetlana Proskurovska, Gloria LaCava, Valerie Stadlbauer, Menahem Prywes, Jong A. Choi, Victor Burunsus, Matthias Grueninger, Pierre Olivier Colleye, Sergiy Kulyk, Elena Corman, Maria Vannari, Sandu Ghidirim, Takao Ikegami, Andreas Schliessler, Ala Pinzari, Scherezad Latif, Keta Ruiz, Anush Bezhanyan, Ana Maria Mihaescu, Michael Edwards, Juan Navas-Sabater, Zoran Anusic, Arcadie Capcelea, DoinaVisa, Alexei Ionascu, Anna Wielogorska. iv COUNTRY PARTNERSHIPSTRATEGY FOR MOLDOVA TABLE OF CONTENTS Executive Summary ....................................................................................................... vii ICountryContext .......................................................................................................... 1 A Political Context ......................................................................................................... .. 1 B. RecentEconomic Developments................................................................................ 2 C. Macroeconomic ProspectsandDebt Sustainability ................................................... 4 D Poverty Profile............................................................................................................ 6 . E. Progresstoward the MillenniumDevelopment Goals................................................ 8 F. Governance and Anticorruption ............................................................................... 10 I1 CountryPrioritiesandDevelopmentChallenges . ................................................. 12 A. Country Development Program................................................................................ 12 B Structural and SectoralIssues: Progress and Challenges......................................... . 14 . .......................................................................... A. Implementationof the last CAS ............................................................................... I11 BankGroupAssistance Strategy 22 22 B. ProposedWorld Bank Group Country PartnershipProgram ................................... 28 C. Partnerships.............................................................................................................. 37 I V Managingand Monitoringthe CountryProgram . .............................................. 39 A. Results-BasedMonitoringand Evaluation............................................................... 39 B. Managing Risks........................................................................................................ 41 Boxes. Figures.and Tables Box 1: 2006 Revisions to the HouseholdBudget Survey 7 Box 2: CAS Completion Report LessonsLearned ......................................................... ................................................ 26 Box 3: 2008 Client Survey Findings ............................................................................. 28 Box 4: Milestones for Donor Coordination and Harmonization .................................... 38 Figure 1: GDP Growthandthe Poverty Rate: 1997-2007 .............................................. 6 Figure 2: Summary ResultsChain for Moldova ............................................................ 29 Figure 3: Core Monitoring and Evaluation Indicators. FY09-FY12 .............................. 40 Table 1: Moldova: Macroeconomic Framework. 2001-2009 .......................................... 3 Table 2: Public Debt BurdenIndicators ........................................................................... 5 Table 3: An Overview of Poverty inMoldova ................................................................. Table 4: ProgressToward Achieving MDG-Selected Targets and Indicators ................9 7 Table 5: SelectedPortfolio Results under the Three CAS Pillars .................................. 25 Table 6: Planned Bank Group Lending andNon-lendingActivities .............................. 35 Annexes Annex 1: Moldova and the MDGs ................................................................................. 43 Annex 2: Moldova Country Governance and Anti-Corruption Strategy ....................... 45 V Annex 3: Moldova Country Assistance Strategy Completion Report ........................... 57 Annex 4: Moldova CAS Results Scorecardand Moldova Country Program Self- Assessment ...................................................................................................... 94 Annex 5: CPS Results Matrix ......................................................................................... 96 Annex 6: Development Partner Support to Moldova's 2008-2011National Development Strategy (NDS) ........................................................................ 103 Annex 7: Standard CPS Annexes A1:Key Economic & Program Indicators-Change from Last CAS .................113 A2: Moldova at a Glance ..................................................................................... B2: Selected Indicators of Bank Portfolio Performanceand Management .........114 116 B3: IBRDADA Program Summary .................................................................... 118 B3: IFC Investment Operations Program ........................................................... 119 B3: MIGA Outstanding Exposure ...................................................................... 120 B4: Summary ofNonlending Services ............................................................... 121 B5: Moldova Social Indicators ........................................................................... 122 B6: Moldova Key Economic Indicators ............................................................. 123 B7: Moldova Key Exposure Indicators .............................................................. 125 B8: Committed and DisbursedOutstanding Investment Portfolio ..................... 126 B10: CAS Summaryof Development Priorities .................................................. 128 vi REPUBLICOF MOLDOVA COUNTRY PARTNERSHIP STRATEGY - EXECUTIVE SUMMARY i. As Moldova approaches middle-income status, the country needs a sustainable growth strategy, recognizingthat it is unlikely that remittance flows- which havefueled consumption-ledgrowththe lastfew years-will continueto grow very rapidly. Although migration and remittances will likely be key drivers o f growth and development over the CPS period and for some time to come, Moldova needs to create the conditions for remittances to be used as productively as possible, such as through strengthening financial intermediation and improvements in the business environment, to allow Moldova to increase private savings and investment. .. 11. This results-based Country Partnership Strategy (CPS) aims to assist in laying the foundations for inclusive economic growth in Moldova. This will require addressing three interrelated challenges: (i)improving economic competitiveness to support sustainable economic growth; (ii)minimizing social and environmental risks, building human capital, and promoting social inclusion; and (iii) improvingpublic sector governance. These three areas constitute the three pillars of this CPS for FY09-FY12 and are consistent with the Government o f Moldova's National Development Strategy (NDS) 2008-201 1. iii. Moldova'smacroeconomicperformanceunderthepastCountryAssistance Strategy (CAS) hasbeen robust.The authorities have established a good track recordof macroeconomic stability, with cumulative growth over 2004-2007 o f about 25 percent. The economy has beenresilient to a number o f external shocks, including sharp increases in natural gas prices, a Russian banon importing wine from Moldova, and a drought in 2007 that reduced agricultural production by an estimated 30 percent. iv. The last CAS period has been characterized by political stability, with increasing political pluralism and a competitive electoral process. The current President, a member o f the Party of Communists o f the Republic o f Moldova (PCRM), will complete the maximumtwo terms in2009. The Transnistria conflict has continuedto weigh on the country's development, but reunification is a high priority of Moldova's NDS, and continued efforts towards a resolution are expected given its importance for both economic growth and European integration. v. Moldova aspires to join the European Union over the longer term, and the country has been receiving increasing and more coordinated financing from Europeaninstitutions. In2007, the EU arrived at Moldova's border with the accession o f Romania. In 2008, due to the successful implementation of the EU-Moldova Action Plan, autonomous trade preferences went into effect, and discussions are now underway on a new legal agreement with the EU. vi. Despitethe ongoingeconomic growth and politicalstability, the reductionin overall poverty appears to have stalled, at least between 2004 and 2005. Recently released numbers from the Government suggest that the absolute poverty rate and the extreme poverty rate have fallen to 25.8 per cent and 2.8 percent, respectively in2007. A more systematic assessment led by the Poverty Assessment team is now underway o f the vii drivers of these recent developments. Moldova's economic recovery moved 40 percent of the population out of poverty between 1999 and 2004; however, the delay in restructuring farms has reduced the income-generating opportunities for individual farmers and contributed to rising rural poverty at least through 2005. The analysis of the trends after 2005 is constrainedby a statistical break inthe series. vii. The Moldovan economy remains vulnerable. The large inflow of remittances has underpinnedrecent consumption-led growth but also exposes the economy to risks of a regional downturn. Already there are signs that migrationmight have slowed and some workers might have returned. Ongoing increases iu natural gas prices necessitate adjustments in an economy that is still inefficient inits energy use. The sharp rise in food prices and the global financial crisis are potential risks which could negatively impact the economy. Future weather-relatedevents pose a continuing risk to the agricultural sector. viii. Flexibility will be central to the World Bank Group's approach to allow for adaptation to changing economic and political contexts. Since Moldova's per capita income recently exceeded the IDA threshold, the country i s entering atransition period- possibly moving to lending from the IBRD. The Bank's country program will therefore adjust the use of instruments as appropriate, likely investing less inprojects and more in analytic and advisory activities over time as would befit a middle income country. Following Parliamentary elections, the designation of a new government is expected in mid-2009, and collaboration with the new government could warrant some changes. ix. This CPS therefore reflects a strategic transition from the previous CAS through a two-step process. The first stage involves scaling up interventions and programs that are working well within the existing portfolio during FY09 and FYlO. During the second stage, interventions will be defined in more specific terms for the remaining years of the CPS period. This approach allows the Bank some flexibility to adjust the portfolio as needed inresponseto issues emerging after the upcoming elections or as a result of a regional financial crisis. Second-stage interventions will be clearly \ described in the CPS Progress Report, and the timing of this report will be advanced if appropriateto ensure that refinementsto the country program are timely and effective. x. The CPS foresees a lending program of two to three operations per year-at least one of which would be budget support. Commitments will total approximately US$45-$50 million per annum, with the specific country allocation being determined annually through IDA'Sperformance-based allocation system. The Bank will consider additional financing to existing operations within the current portfolio and support for projects with regional or global goods components. Investment operations will build on the Bank's track record and comparative advantage vis-a-vis other partners and focus in those areas where other funding can be highly leveraged. xi. Moldova is a strategic priority for IFC, and IFC will increase its investment activities and advisory services in the country. IFC's main goal i s to support private sector development, focusing in particular on the financial sector, agribusiness, healthcare, and infrastructure modernization. IFC will collaborate closely with IDA especially inthe infrastructureand health sectors. ... V l l l xii. The Bank's work on governanceand anti-corruption will be consistentwith the Bank's recently approved corporatestrategy.Country ownership and leadership is requiredfor the Bank's program to make a decisive difference during the CPS period and improve Moldova's standing on various comparative governance measures. The Bank will also work with other stakeholders, civil society and the private sector to ensure reform efforts by the authorities are supported and deepened by greater demand for good governance. xiii. Effective implementation of this CPS will require strong coordination with other development efforts, and monitoring and evaluation activities will capitalize on opportunities for increased harmonization. Indicators from the NDS have been incorporated into the results framework where appropriate and the Bank will rely on country data systems and unified reporting systems where feasible. The Bank will monitor fiduciary risks, implementation capacity at the central and decentralized levels, external shocks, and political economy risks. xiv. The ExecutiveDirectors maywish to considerthe following: Whether the lessons learnedfrom the previous CAS period have been sufficiently reflected inthe CPS; Whether the CPS has identifiedthe relevant development challenges and whether the pillars o f support underthe newprogram provide the appropriate response; Whether the CPS sufficiently supports the Paris and Accra Declarations for the streamlining of development assistance; Whether the risks identifiedby the program are realistic and whether the proposed remedies are credible; and Whether the program makes optimal use of the resources available to the World Bank Group inorder to respond to Moldova's needs. ix I.COUNTRYCONTEXT A. PoliticalContext 1. During the last CAS period (FY05 to FYOS), Moldova experienced political stability, with increasingpolitical pluralism and a competitive electoral process. The Party of Communists of the Republic of Moldova (PCRM) won a majority of the Parliament's seats in the 2001 election, and Parliament, in turn, elected a communist President. The PCRM majority and President remained in power after the next round of scheduled elections in 2005-seen as free and fair by the Organization for Security and Cooperation in Europe (OSCE) and others. The Prime Minister appointed in 2001 served for seven years. The next parliamentary elections are scheduledfor 2009, at which time the incumbentpresident is expected to stand down having served the maximum two terms. In 2007, opposition parties took over a number of regional assemblies from the PCRM, demonstrating that the local elections offered genuine choice. In addition, the number of women elected as mayors has grown from 16 percent (2003) to 19 percent (2007), and in 2008, a woman was appointed as Prime Minister of Moldova for the first time. 2. Despite this stability and progress, the Transnistria conflict has continued to weigh on the country's overalldevelopment. Relations betweenthe two sides have been tense since Transnistria declared independencefrom Moldova in 1990. Becausethis eastern territory contained a significant part of Moldova's industrial base, this conflict has forced Moldova to be even more dependent on agricultural production and imported energy. It also created a fractured customs space with implications for customs and tax revenue mobilization. Following a brief conflict in 1992, a ceasefire has been in place; however, efforts to forge a permanent settlement under the auspices of a multi-country group have made little headway in recent years. Direct dialogue between Chisinau and Tiraspol occurred in April 2008, and continued efforts towards a resolution are expected using the 5+2 format-with the main participants including the central government in Chisinau, Transnistria, OSCE, Ukraine, and Russia, and the two observers including the EUand U.S. Reunification is a high priority of Moldova's National Development Strategy (NDS) given its importance for both economic growth and European integration. 3. In the internationalarena, Moldova aspires to join the European Union over the longer term. Moldova has strengthened its relations with the EU, and both parties agreed to objectives specified in a three-year EU-Moldova Action Plan (EMAP) signed in 2005 within the framework of the European Neighborhood Policy (ENP). In 2006, the European Commission (EC) established a delegation in Chisinau. As of January 1, 2007, the EUhas arrived at Moldova's border with the accessionof Romania. In2008, due to the successful implementation of the EU-Moldova Action Plan, autonomous trade preferences went into effect for Moldova, providing for the duty free access of Moldovan products to the markets of EUcountries. 4. Moldova has been receiving increasingand more coordinated financing from Europeaninstitutions. EU support inMoldovahas beendirected inparticular at building capacity in public administration, reforming social assistance and primary health care, developing a reform strategy in the energy sector, improving the business climate, especially export capacity, and improving the rule of law, the independence of the 1 judiciary, and respect for human rights. Joint Moldova-EU efforts have also focused on border management and confidence-building measures for Transnistria. Moldova has recently become the first ENP country to sign on June 5, 2008 a Pilot Mobility Partnership to strengthenthe country's capacity for migrationmanagement. 5. Discussions are underwayon a new legal agreementwith the EU. The Council of the EUhas noted positive achievements inthe process of political and economic reforms under the first EMAP and welcomed Moldova's active alignment with the Common Foreign and Security Policy Declarations. Important progress has been achieved in facilitating visa procedures while controlling illegal migration and in increasing trade access to the European market. The Council has highlighted those areas where ongoing efforts must be prioritized to strengthen democracy and the rule of law, ensure respect for human rights, reinforce efforts against corruption, and improve the investment climate. 6. Moldova has demonstrated the stability and capacity to implement a broad range of economic development initiatives,but much remains to be done to sustain economic growth and poverty reduction. With a population of about 3.8 million and a Gross National Income (GNI) per capita of approximately $1,090 in 2007, Moldova remains a relatively low-income country. Those who are actively engaged in the political process remain relatively few-largely because the middle class is still small, civil society i s fragmented, and many youth are emigrating. Moving forward, Moldova must consolidate the results from structural reforms needed to establish vital policies and institutions, and accelerate the second generation of reforms to provide long-term opportunities to young Moldovans. B. RecentEconomicDevelopments 7. Moldova's macroeconomicperformanceunder the past CAS has been robust. The authorities have established a good track record of macroeconomic stability, with cumulative growth over 2004-2007 of about 25 percent. The Government has maintained a prudent fiscal stance, recording small primary surpluses in most years. Inflation has been the main macroeconomic challenge in recent years, and with the support from an International Monetary Fund Poverty Reduction Growth Facility (PRGF), the Government has pursued a tight monetary and fiscal policy stance. However, in the wake of recent global economic turbulence, a growth slowdown is emerging as the new macroeconomic challenge for Moldova. Overall, the macroeconomic framework currently in place i s broadly satisfactory (Table 1). 8. The economy has been resilientto a number of recentexternalshocks. In2006, Russia banned the import of wine from Moldova, which accounted for about a quarter of all Moldovan exports and 10 percent of GDP. Meanwhile, Moldova, a net importer of energy, also confronted sharp increases in natural gas prices, which tripled from January 2006 to July 2008. In the summer of 2007, the agricultural sector, directly representing about 14 percent of GDP, was severely affected by a drought with losses in the sector estimated at nearly 30 percent of production. Moldova's economic growth fell to about 4 percent in 2006 and more moderate growth persisted through 2007, reflecting the impact of the drought. Despite weaker than expected overall performance, growth in non-agriculture GDP continues to be strong at 9 percent last year. Through the first half of 2008, growth 2 has reboundedstrongly, andthe economy is projectedto expandby 6.5 percent in2008. Table 1. Moldova: Macroeconomic Framework, 2001-2009 Actual [ Estimated1 Projected 2001 2002 2003 2004 2005 2006 [ 2007 [ 2008 2009 Real GDP growth ("h) 6.1 7.8 6.6 7.3 7.5 4.8 4.0 6.5 3.5 CPI Inflation(average, %) 9.8 5.3 11.7 12.5 11.9 12.7 12.4 12.8 7.8 Exchange rate (average, MDL/$) 12.9 13.6 13.9 12.3 12.6 13.1 12.1 10.4 11.0 Real effective exchangerate, % -1.2 -6.1 -6.1 12.8 -1.1 0.6 7.0 11.4 -0.2 Revenuesand grants, Oh of GDP 29.2 29.6 34.0 35.4 38.6 39.9 41.8 40.3 39.7 Expendituresand net lending, % of GDP 29.4 31.5 33.3 34.7 37.0 39.6 420 40.8 41.2 (of which): % of GDP Wages 7.8 8.2 9.2 9.1 9.2 9.8 InterestPayments 4.2 2.2 2.1 1.9 1.2 1.0 1.2 1.2 1.3 Primary balance (cash), % of GDP 4.1 0.4 2.8 2.6 2.6 1.2 0.9 0.6 -0.2 Overall balance (cash), % of GDP -0.1 -1.8 0.7 0.7 1.3 0.2 -0.2 -0 5 -1.5 Current account balance, % o f GDP -2.4 -4.4 -6.6 -2.7 -10.3 -11.8 -17.0 -18.9 -19.2 Gross official reserves(months of imports) 2.1 1.9 1.7 2.1 2.2 2.2 2.7 3.3 3.2 Total external debtiGDP, % 105.1 100.8 87.7 63.8 56.2 56.9 54.1 43.8 490 External arrears (millions $US) 17.5 42.9 86.1 50.6 56.0 0.0 0 0 0.0 0.0 Debt servicekxports of GNFS, % 24.6 27.9 18.7 21.0 16.5 18.8 13.7 14.8 15.4 Debt serviceicentral govt. revenues, % 59.5 52.8 34.7 25.2 17.7 11.8 8.I 6.9 4.9 Sources: Moldovanauthorities and IMF and Bank staff estimates and projections. Fiscal accounts are for those of the general government 9. There have been encouraging signs that Moldova's previous model of consumption-driven growth may be broadening, with other drivers of growth increasinglyplayinga moreprominentrole. Sincethe beginning ofthe recovery in2000, economic growth has averaged 5.5 percent per year and has been driven in large part by consumption and construction activities supported by massive inflows of workers' remittances (amounting to about a third of GDP in 2008). There is some evidence that remittances are increasingly flowing to business investment activities rather than consumption and housing construction alone. Private investment has risen from about 14 percent of GDP in2003 to 31 percent of GDP in2007, and foreign direct investment (FDI) flows have grown sharply over this same period. FDIrepresented about 10 percent of GDP in2007, muchhigher than that of other countries inthe region (though cumulatively and in per capita terms, Moldova still lags well behindits neighbors). Public investment has also generally increased inrecent years. 10. The global economic crisis has significantly clouded Moldova's economic outlook. Moldova could be severely affected by a slowdown in remittances inflows and FDI inthe wake of a regional recession. The current account deficit has widened inrecent years (from 10 percent of GDP in 2005 to 17 percent in2007), as a result of higher energy prices, the ban on Moldovan wine exports, strong remittance-driven import demand and increased FDI-related activities. As a result of the expected regional slowdown, Moldova's current account deficit i s projected to widen further in 2008 to around 19 percent of GDP. Overall coverage of the current account deficit by FDI and long-term capital remains high at about 90 percent. Reserves have been rising, suggesting that total capital flows have beenmore than sufficient to finance the current account deficit, leading to an accumulation o f reserves (from 2.2 months of imports in2005 to nearly 3.3 monthsprojected in2008). 11. Despite recent global financial turbulence, Moldova's own financial sector 3 appears to be well positioned to weather the impact of the ongoing crises in world financial markets. The high degrees o f capitalization and liquidity as well as reasonably good asset structures provide a sizeable cushion against potential systemic shocks. The Government's commitment to a flexible exchange rate regime will help soften the impact o f external shocks. Nonetheless, the growth outlook for 2009 i s uncertain at best. (In December, 2008, the IMF projected a 2009 growth rate o f 3.5 percent.) The expected real appreciationo f the exchange rate also creates pressures on the economy that will needto be addressedby policies to support further improvements inproductivity and competitiveness. C. Macroeconomic Prospectsand Debt Sustainability 12. The Moldovan economy remains vulnerable. Four areas in particular present continuing risks: Global uncertainties. Although estimates to date suggest a strong rebound o f the Moldovan economy following last year's agricultural-driven slowdown, the recent global financial shocks could negatively impact Moldova, including through a growth slowdown among its main trading partners and among the host countries o f Moldova's migrant workers. The heavy reliance on remittances exposes the economy to risks o f an external downturn. These risks are compounded by the lack o f product and market diversification in trade flows. However, remittance and FDI-driven imports are likely to slow down as well, thus mitigating the net impact on the balance o f payments. Energy prices. As per the agreement reached with Gazprom, energy prices will continue to increase untilthey reach market (i.e. EU) levels by 2011. InJuly 2008, the price reached US$253 per mcm, which compares to US$SO per mcm in December 2005. Declining oil prices inthe latter half o f 2008 as well as an appreciating exchange rate could help moderate the expected increase in domestic natural gas prices. Nonetheless, the price Moldova pays for natural gas i s expected to increase further relative to its current level. This will force further adjustments in an economy that i s still inefficient in its energy use, and the impact will fall disproportionately on the poor. Foodprices. The impact of rising global food prices is likely to affect negatively the urban poor, who do not produce their own food. Also, insofar as government policy discriminates against net food producers, higher costs could undermine agricultural development. The sharp rise in food prices has fueled inflation through the first part o f 2008. The rebound inthe domestic agricultural sector has contributed to a slowdown in food price inflation since then, along with falling global food prices. Climate change. The 2007 drought will have persistent effects on the agriculture sector. The impact o f 2008 flooding i s not yet clear. Future weather-related events pose a continuing risk to the sector and, hence, overall economic growth and price stability. 13. The debt outlook is favorable with a low risk of debt distress. Moldova's ratio of total external debt to GDP declined from about 124 percent in2000 to around 54.1 percent in 2007. External public and publicly-guaranteed debt excluding debt of state-owned enterprises fell from 61.5 percent o f GDP in 2001 to around 20 percent o f GDP at the end o f 2007. According to a recent Debt Sustainability Analysis (DSA) conducted jointly by the IMF and the World Bank, the public debt and debt-service to revenue ratios are well within the relevant thresholds in the baseline and "historical" scenarios (Table 2). Despite 4 severe external shocks, the Moldovan authorities have maintained a prudent fiscal policy stance, which combined with strong economic growth has led to steady improvements in the debt situation. In addition, there are encouraging medium-term prospects for official donor assistance, mainly due to commitments (largely in the form o f grants) by donors at the Consultative Group meeting in 2006, thus boosting Moldova's debt sustainability further. 14. Moldova's borrowing in the near term is forecast to be largely on concessional terms, but external debt is likely to become less concessional over the longer term. With steady economic growth, Moldova's GNI per capita income (US$1,090 in 2007) recently exceeded the International Development Association (IDA) threshold o f US$1,065.' The possible transition to lending from the International Bank for Reconstruction and Development (IBRD) will carry important policy implications for Moldova to manage external debt effectively while addressing public investment needs. Of particular urgency i s the need to invest in critical infrastructure and state assets-such as roads, hospitals, and schools-without threatening debt sustainability or increasing public revenues. Table 2. Public Debt Burden Indicators Thresholds Weak Medium 2007 2008-2027 ' NPV of external debt in percent of Exports 100 150 46.8 16 GDP 30 40 21.8 8.4 Revenues 200 250 54.2 26.2 External Debt Service in percent o f Exports 15 25 3.9 1.1 Revenues 25 30 7.5 2.4 'Policy-dependentthresholds as used in thejoint IMF-World Bank LIC DSA framework for weak or medium performers. Moldova's ratings have recently improved to medium, with classifications based on three-year moving averages Simple average. Source: Joint Bank -1MF Debt Sustainability Analysis, February 13, 2008 15. The large size of government is limiting economic growth and should be reduced.2 While the fiscal deficit has been kept under control, public expenditures and revenues have grown rapidly (by nearly 10 percentage points o f GDP over the last 5 years, The operational cutoff for IDA eligibility for FY08 is a 2006 GNIper capita of US$1,065 usingAtlas methodology. * An in-depthdiscussionis providedinthe mostrecentPublicExpenditure Review (PER). Republic of Moldova: Improving Public Expenditure Eficiency for Growth and Poverty Reduction. World Bank Report No. 37933-MD, February2008. The PERdiscusses a numberof issues includingthe linksbetweenthe growth implicationsof a large government; the low expenditureallocations to important items such as road maintenance;inefficiencies in major expenditureitems (suchas education spending) and options for improvingefficiencywhile creatingfiscal space; and other issues. 5 primarily on social spending, including the pension and health insurance funds) and are now quite high relative to other countries given Moldova's income level and institutional development. The creation o f fiscal space by further increases in revenue mobilization i s not a desirable option given that revenues are already 8 percentage points o f GDP higher than the average o f countries o f similar income levels. To accelerate growth, Moldova will need to focus reform efforts on increasing the efficiency o f public resource use to yield increased space for public investment spending while leaving room for the private sector. In addition, specific reforms to reduce the civil service will need to be developed and implementedinthe near term. Public expenditures are currently projected to remain steady inpercent of GDP through 2009. D.Poverty Profile 16. Moldova's economic recovery moved 40 percent of the population out of poverty between 1999 and 2004 (Figure 1). This poverty reduction was broad-based and represents the largest decline (in percentage terms) among countries in the Europe and Central Asia (ECA) region over this period. However, the reduction in overall poverty stalled between 2004 and 2005 owing to an increase in rural poverty (Table 3). Due to distortions and imperfections in agricultural output and input markets, agricultural producers are receiving less for their outputs and paying more for their inputs relative to international parity prices than they should. Figure 1:GDPGrowth and the Poverty Rate: 1997-2007 (Moldova METmeasureofpovertyrate) 20 80 Poverty rate 70 15 Change in I3BS between2005 & 06 I 60- F 10 0) 5 s5 2P 0 50 40 e L 5 8 - z o 30 $ & 20 -5 10 Realc8P growthrate -10 0 17. Methodological improvements in the Household Budget Survey (HBS) prevent direct comparisons between data from 2006 and those of previous years. Some effort i s now underway to create a comparable series between 2005 and 2006 using recently developed statistical techniques (Box 1). The data for 2006 and 2007 are, in principle, comparable. The preliminary poverty headcount for 2007 for Moldova as a whole was recently made available (Figure 1 and Table 3) and these data suggest that poverty may 6 have fallen between 2006 and 2007 (Figure 1 Box 1. The 2006 Revisionsto the Household and Box l).3 systematic assessment A more Budget Survey o fthis trend i s underway. The sampling frame, sampling methodology and the questionnaire of the HBS, the main source of 18. The welfare consequences of recent data for measuringliving standards, were all economic shocks are not yet well substantially revisedin2006 to make the survey understood. The recent drought, wine ban, morerepresentativeand improvethe and the continued rise in food and energy measurementof consumption. These prices could have significant poverty methodologicalimprovementsprevent the analysisof povertytrends through2006. The lack implications. For example, the relative food of comparabilitycouldbe addressedinpart by scarcity in the country has led to a marked applyingsome new methodsrecently developed spike in food inflation, which i s currently the by World Bank staff, the so-called Small Area main contributing source to the Consumer Estimates(SAE). The aim is to predicthousehold per capita consumption in a later roundbased on Price Index inflation. Year-on-year food price a model of consumption estimatedusing an inflation i s estimated to have risen to 24 earlier round, to ensure that the definition of percent in May 2008, with bread, fi-uit, and consumption is the same across two, otherwise milk prices rising by 20, 56, and 24 percent incomparable, surveys. Preliminarywork has respectively. For this same period last year, been initiatedto apply the same methodologyto food price inflation was about 5 percent. A the 2005 and 2006 surveys.The initialresults suggest that poverty may have fallen somewhat recent policy note on food price increases in over this period, but this requires further and ECA simulated the likely poverty impact o f more systematic verification. rising grain prices inthe region and suggested that the poverty headcount in Moldova could Source: Ferre, Celine, 2008 "Updating Poverty increase by almost 3 percentage point^.^ Profiles between2005 and 2006: A Case Study of Moreover, spendin? on food represents close to 60 percent of the expenditures o f the poorest households -underscoring that the welfare impact o f food price increases could be significant. Table 3. An Overview of Poverty in Moldova I 2000 2001 2002 2003 2004 2005 2006* 2007* Source: National authorities *These numbers are not strictly comparable with data from previous years as explained in Box 1 The official reporton poverty inMoldova in 2007 is not publicly available as ofthis writing and no other povertynumbers are available beyondthe overallpovertyheadcount.The Governmentrecently sharedthe 2007 micro data and Bankstaff are now analyzingthem. 4Alam, Asad, Sanjay Kathuria, and Olga Vybornaia.2008. "Rising FoodGrains and Energy Prices inECA: Some Economic and Poverty Implications, and Policy Responses" (mimeo). Republicof Moldova Ministry of Economy and Trade, 2007. "Poverty and Policy ImpactReport 2006," (Chisinau: Ministry of Economyand Trade). 7 19. Poverty in Moldova still remains very much a rural phenomenon. Notwithstanding the technical issues of comparability of HBS data over time, the government's latest Poverty Measurement Note suggests a poverty profile that is broadly consistent with the World Bank's previous Poverty Assessments. About a quarter of the population is poor and about 70 percent of the poor live in rural areas, according to the 2007 HBS.The urban poverty headcountis 14percent while the rural poverty headcount i s 31.3 percent.6 Consistent with previous findings, many of the poor are among pensioners, farmers and agricultural workers. Poverty among farmers reflects limited economic opportunities in rural areas and in the agriculture sector. In addition, poverty levels rise with the size of the household (number of household members), particularly those with young children. In fact, child poverty i s higher than adult poverty: in 2006, child poverty stood at 27.4 percent comparedwith 25.8'percent for adults. E. Progresstoward the MillenniumDevelopmentGoals 20. Moldova is working to achieve the Millennium Development Goals (MDGs) and has adapted targets and indicators based on the national context. In 2000, the Republic of Moldova along with other 191 countries of the world committed to achieving the MDGsby 2015. The first adjustment of these goals to fit Moldova's situation was done in2004 and resultedina number of specific targets and indicators which have beenfurther refined inthe following years. Reaching these targets is part of the medium-and long-term strategy of government as articulated in the 2008-2011 National Development Strategy. Moldova has made some progress towards achieving the MDGs, and targets for 2010 and 2015 were revised during the NDS consultation process with both central public authorities and a number of national and international organizations (Table 4). The full list of adjusted national target MDGs are presented inAnnex 1. 21. Moldova has made significant progress in achieving Goal 1-eradicating extreme poverty and hunger. Giventhe recent improvements to the methodology for the Household Budget Survey, a new baseline has been established for poverty reduction in 2006, and further progress is expected to reach the 2010 and 2015 targets. Good progress has also been made toward implementation of measures seeking to reduce child and maternal mortality rates. The under-5 mortality rate (per 1000 live born) fell from 18.2 in 2002 to 14.0 in2006, and the maternal mortality rate (per 100,000 live born) dropped from 28.0 in2002 to 16.0 in2006. Changes inmethodology have resultedinnew baselinesbeing set for both indicators, and Moldova expects to achieve the new targets set for 2010 and 2015.7 6 The 2006 urbanpoverty rate is much higher than that of previous years. This could be due to methodological changes, but could also be due to energy price increases. Increases in energy prices are likely to have affected mostly urbanhouseholdsconnectedto energy sources. The ruralpoor, in contrast, were likely to have greater access to cheaper, and dirtier, sources of fuel. 7 The Ministry of Health is applying anew methodology recommendedby the World Health Organization wherein a live birthis defined as a birth after 22 complete weeks ofpregnancy and a childweight above 500 grams. Previously, abirthwas consideredlive after the 30* complete week of pregnancy and a child weight above 1,000 grams. 8 - - -- Table 4. Progress TowardAchievingMDG-SelectedTargets and Indicators Baseline * Target Target 2o06 for 2010 for 2015 1 Proportion of peopleunder the absolute poverty line 30.2 (2006) 30.2 25 20 12 1 Enrollment rate ingeneral secondary education(gross, %) 94.1 90.5 95 98 1 Rate of literacy ofpopulation aged 15-24years (%) - . . - . , 99.5 (2006) 99.5 99.5 99.5 Goal 3: Promotegender equity and empower women 1 . Women's representationas mayors 18 (2007) 18 (2007) --- 25 Women's representationas membersof Parliament 22 (2005) 22 (2005) -_- 30 1 Incidence o f HIVIAIDS (per 100,000 people) 10 (2006) 10 9.6 8 1 TB associatedmortality (per 100.000 Deoule) ,. . . , 16 18.6 15 10 < , Goal 7. Ensure environmentalsustainability 1 Access to improved water source (% ofpopulation) 38.5 59 65 1 Access to improved sanitation facilities (`?Aof population) 41.7 45.0 51.3 71.8 18, Develop a 1 Youth unemploymentrate (YO) 18.1 17.1 9 5 Source: The Republic ofMoldova The Quality of Economic Growth and Its Impact on Human Development, United Nations Development Programme 2006 and National Development Strategyfor 2008-201I,Republic of Moldova 2008. * The baseline year for establishing targets is the same as the initial MDG report (2002), except for cases where the estimation methodology was recently modified. 22. Achieving the objective on HIV/AIDS remains a serious challenge despite strong policy efforts. Policies related to curbing the spread o f HIV/AIDS have been formulated in the National Programme on Prevention and Control o f HIV/AIDS and Sexually Transmitted Infections for 2006-2010, which was approved by the Government in 2005. The National Programme includes a broad set o f measures on preventingthe spread o f the infection with special attention to children and youth, effective surveillance o f the epidemiological situation, development of testing systems, and medical and social care of people living with HIV/AIDS. To date, Moldova's response to HIV/AIDS has been exemplary incomparison to that o f other countries inthe ECA region. The World Bank has recently developed a tool based on existing indicators and data sources to measure countries' responses to the epidemic. A benchmarking study using this tool-the Composite HIV/AIDS Response Index-indicated that Moldova was the top performer among 14 ECA countries. Moldova's policies were particularly effective for treatment and 9 national programs and less so for prevention.' F. GovernanceandAnticorruption 23. The quality of governance in Moldova remains a significant challenge to economic growth and poverty reduction. An unfavorable external environment characterized by frozen conflict, recurrent external shocks, and a delicate two-vector geopolitical balance betweenthe EUand Russia exacerbate this challenge. The picture that emerges from the extensive analytical and diagnostic work conducted by the Bank and other donors reveals significant governance obstacles and limited prospects for quick wins. The main crosscutting issues related to governance in Moldova are described below; the specific sectoral obstacles and their relevance for development are covered through this CPS document. A detailed analysis o f Moldova's governance and anti-corruption, including fiduciary and country systems and Country Governance and Anti-Corruption (CGAC) strategy appears inAnnex 2. 24. Moldova's success in addressing corruption has been uneven. Compared to a sample o f former Soviet Union (FSU) countries, Moldova performs better or i s on par on several performance indicators. (Annex 2, Figure 1). However, Moldova remains an outlier on "unofficial" payments for civil courts, public education, and public health. One-third o f the population believes that corruption has increased under this government. The same survey found that 70 percent of the population view corruption as widespread; 78 percent believed that corruption had recently worsened in Moldova, and 64 percent indicated that corruption was "normal and inevitable." Institutions perceived to be the most corrupt included the police, customs, judiciary, prosecutors, and ministries while the least corrupt were the National Statistics Office, mayoralties, military, and local councils. 25. The institutional structure lacks sufficient checks and balances. Moldova is constitutionally a parliamentary democracy, in which the President i s elected by parliament. However, political power has remained concentrated in the Presidency, facilitated by a strong majority o f the PCRh4 in the parliament. Checks and balances are insufficiently developed between the executive and the legislature, and the judiciary remains weak. More generally, Moldova, like many other former Soviet Republics, is struggling with the legacy o f a vast bureaucracy enjoying significant discretionary power. This stifles entrepreneurship and slows the demand for economic reform that would come from a vibrant private sector. Large outward migration by the young and well-educated has further contributed to reducing demand for change. 26. Barriers to competition impede the development of the private sector. The review of governance arrangements in selected sectors reveals institutional flaws and invasive special interests that distort the policymaking environment and hamper Moldova's growth potential. The relatively low quality o f physical infrastructure, the high bribe tax (3.5 percent o f contract value), cumbersome licensing procedures, excessive authorization requirements, and proliferation o f fee-for-services to public authorities and commercial organizations all contribute to a business environment that remains among the most 8CompositeHIVIAIDS Response Index: Benchmarking Eastern Europe and Central Asia Country Performance in the Response to HIV/AIDS. World Bank, June 2008. 10 challenging in the region. For example, in the Doing Business Dealing with Construction Permits indicator, Moldova ranks 158th out o f 176 economies and requires twice as many procedures as the average for OECD countries. 27. The Governmenthas taken measures to modernize the anti-corruptionpolicy framework. Since the beginning of the anti-corruption reform in year 2000, the government has driven a broad range o f legislative initiatives and institutional reforms: , passage o f an Action Plan and a new anti-corruption law (2004-2005); adoption o f an EU- Moldova Action Plan and an anti-corruption framework anchored inthe Economic Growth and Poverty Reduction Strategy Paper (EGPRSP); promulgation o f an Anti-Money Laundering Law and strategy (2007), Anti-Trafficking Law and Action Plan (2007); ratification o f the 2008 European Convention for Combating Human Trafficking, and adoption o f a New Guard Law (2007). Moldova also opted to establish a specialized agency, the Center for Combating Economic Crimes and Corruption, which however i s perceived as politicized and targeting primarily low-level corruption and crime. 28. The Government recognizes governance and anti-corruption as a significant challenge and has achieved encouraging progress in some areas. This includes modernization o f public sector governance institutions responsible for public finance, macroeconomic management, and the supreme audit institution (Court o f Accounts), which should help deter and prevent opportunities for corruption. The new procurement law passed in 2007 also aims to rectify some o f the corruption problems inpublic procurement. Inaddition, the second stage ofthe comprehensive regulatory reform (Guillotine 2) aims to rationalize and mainstream the system and establish among others a single and transparent licensing system. 29. Despite these achievements, significant governance challenges remain as government commitment has wavered. Between 2004 and 2007, the government implementation effort slowed down. This i s reflected by the deteriorating country ranking on the Transparency International (TI) corruption index, placing Moldova at 109thplace in 2008 (down from 79 in 2006). Public administration reform initiated in 2006 has largely stalled. The National Development Strategy (NDS) signals a renewed government commitment to combat corruption and accurately identifies as priorities judicial independence, judicial system consolidation, curtailing the extensive powers o f the General Prosecutor's office, and preventive anti-corruption. 30. Moldova's European aspirations require full attention to governance and institutionaldevelopment issues and a sustainedcommitment to improvingthem over the longterm. The CGAC Strategy accompanying this CPS, elaborated inmore detail in Annex 2, emphasizes continued engagement on public sector and public financial management reforms on the supply side o f good governance, but recognizes that progress may continue to be gradual. Therefore, to deepen the impact o f supply-side interventions, the CGAC Strategy also foresees a program o f analytical and advocacy work to support the demand for good governance. In doing so, it builds on an analysis of the main drivers of Moldova's political economy. It emphasizes in particular the importance of using remittances for productive investments, reducing the brain drain and enhancing competitiveness through improved opportunities for agri- and rural business development, and the role o f public accountability for improved public service delivery. The CGAC 11 Strategy also contains interventions to strengthen the capacity for public sector planning, budgetingand performance-based management as the foundation for streaming increasing donor assistance through the budget. This will strengthen country ownership and leadership o f the good governance agenda and ultimately leverage donor resources for significantly greater development effectiveness. 11. COUNTRY PRIORITIES AND DEVELOPMENT CHALLENGES 31. As Moldova approaches middle-incomestatus, the country needs a sustainable growth strategy, recognizing that it is unlikely that remittance flows-which have fueled consumption-ledgrowththe last few years-will continueto grow very rapidly. Although migration and remittances will likely be key drivers o f growth and development over the CPS period and for some time to come, Moldova needs to create the conditions for remittances to be used as productively as possible, such as through strengthening financial intermediation and improvements in the business environment, to allow Moldova to increase private savings and investment. This will require addressing three inter-related challenges: (i)enhancing the competitiveness o f the economy to support sustainable economic growth, (ii)promoting human resource development and the improvement o f public services, and (iii)strengthening public sector management for a more efficient and transparent use o fpublic resources. A. Country DevelopmentProgram 32. The National Development Strategy is the main medium-term strategic planning paper which defines the developmental objectives and will guide the budgetary process over the period 2008-2011. The NDS, the successor to the EGPRSP, was adopted by the Moldovan Parliament in December 2007. It was discussed along with the Joint Staff Advisory Note (JSAN) by the Boards of IDA and IMF in March 2008. Under the NDS, the Government will seek to better prioritize its policies and establish a clear funding mechanism from both domestic and external sources. As with the EGPRSP, the NDS was developed in broad-based consultations with stakeholders and civil society, and benefited from a participatory process that was organized under the supervision o f a Participation Council comprised o f representatives o f all stakeholder groups. 33. The NDS reflects the Government's objective of reducing poverty from a comprehensive development perspective. Consistent with the EGPRSP and the EU- Moldova Action Plan, the NDS i s constructed around five medium-term cross-sectoral priorities (with macroeconomic stability and improved public administration capacity viewed as prerequisites for the achievement o f these priorities): Strengthening democracy based on the rule of law and respectfor human rights principles. This pillar focuses on building trust in the decision making bodies o f government. It aims to improve the participatory process in decision making; modernize and increase the efficiency o f the judiciary and the police; take further reforms to prevent and combat corruption; and improve state border management. Settlement of Transnistrian conflict and reintegration of the country. The reintegration of the country has always been a high priority o f the Government. This pillar seeks to address both the political and economic dimensions of the 12 problem by promoting the development of stronger civil society linkages, demilitarization, and creating the conditions for further economic cooperation between the two banks o f the Nistruby eliminating barriers to commerce. Enhancing competitiveness of the national economy. Covering a number o f cross- cutting issues, this pillar focuses on policies to improve the business environment so as to encourage more investment activity, technological innovation and modernization; promote the expansion of the SME sector; increase labor productivity; improve state asset management; promote inclusion into international networks; address Moldova's deteriorating physical infrastructure; and reduce its energy vulnerability. Human resource development, enhancing employment and promoting social inclusion. Policies under this pillar seek to improve the quality of and access to education services as well as the efficiency o f public spending on education; enhance the quality o f health services through further infrastructure optimization and expanding the coverage of health insurance; promote the efficiency of the labor market; improve youth employability and employment opportunities; enhance the efficiency and targeting o f social assistance; and strengthenthe financial stability o f the pensionsystem. 0 Regional development. With most o f Moldova' poor residing in the rural sectors, this NDS pillar seeks to promote the development of small towns as "poles of growth"; enhance the performance o f the agricultural sector; increase investment in rural infrastructure; and improve the policy framework in the area o f the environment and natural resource use. 34. The NDS builds upon the institutional framework for monitoring and evaluation developed under the EGPRSP. It develops a comprehensive results framework by including a number o f key targets and indicators. Inparticular, the NDS lays out country-specific MillenniumDevelopment Goals with targets to be achieved within the NDS implementation period. As noted in the Joint Staff Advisory Note, the large number o f indicators presented in the NDS will likely stretch the capacity o f the Government to collect and analyze the data and highlights the need for further prioritization o f these monitoring indicators. 35. To implement the NDS, the Government of Moldova will need to continue strengthening the capacity of the line ministries to develop and implement action plans and integrate these plans in the medium-term expenditure framework. The JSAN included the recommendation that greater emphasis be placed on developing robust civil service management capacity; continuing efforts to reduce administrative and regulatory barriers since Moldova is falling behind on a number o f indicators of competitiveness; accelerating efforts to halt the deterioration o f physical infrastructure; and continuing education and health reforms since a competitive labor force i s key to future development and the attainment of the MDGs. 13 B. Structural and SectoralIssues: Progressand Challenges Competitive Market Environment and Sustainable Growth 36. Moldova's industrial output and exports continue to be dominated by traditional, low value-added products, and its current account is chronically indeficit. In 2007, the current account deficit was estimated to be about 17 percent of GDP. Enhancing the economy's global competitiveness-the ability of the economy to participate in global trade and investment networks-is essential for achieving long-term growth. The normalization of trade relations with Russia and the introduction of autonomous trade preferences by the EuropeanUnionpresent an opportunity for promoting export-driven growth. This will be achieved through: (i) raising the quality and quantity of Moldovan exports and promoting deeper integration of exporters in global supply chains; (ii)attracting greater foreign investment inflows to Moldova; and (iii)developing the linkages betweenlocal firms and foreign companies already inMoldova. 37. In recent years, Moldova, assisted by donors, has pursued a reform program aimed at achieving sustainable private sector-led economic growth. Efforts focused in particular on the ,business enabling environment, including: (i)overhaul of business registration system, (ii)streamlining of regulatory regime through the so-called Guillotine exercise for existing legislation; (iii) introduction of Regulatory Impact Assessment (RIA) for new legislation affecting business operations; (iv) modernization of the national system of metrology, standardization, testing, and quality (MSTQ), and (v) provision of fiscal incentives for the enterprise sector. 38. Despite the progress achieved by this reform program, Moldova's standing in global Doing Business ratings remains low relative to its central European neighbors (103 in the 2008 report). The most problematic issues relate to construction permits, trade across borders, paying taxes, employing workers, and protecting investors. Recent enterprise surveys and case study interviews indicate that Moldovan entrepreneursare most concerned about: (i)the burdensome and unpredictable regulatory environment, (ii) insufficient access to long-term finance, (iii)shortage of skilled labor, (iv) insufficient access to knowledge, (v) inadequate MSTQ infrastructure, and (vi) the weak transport and logistics infrastructure. 39. While Moldova's financial sector has deepened rapidly, it seems in a relatively better position to weather the international financial storm compared to regional peers. The banking sector has experiencedrapid credit growth (52% just in 2007), major changes in the ownership structure, and decreasing spreads. Foreign participation in the banking sector has grown with a number of foreign banks recently establishing themselves in Moldova. The recent wine ban and rising gas prices demonstrated that the Moldovan financial system can withstand major exogenous shocks to the enterprise sector. Moreover, the Financial Sector Assessment Program (FSAP) Update conducted in 2007 issued a largely positive opinion on the National Bank of Moldova's regulatory and supervisory capacity, on the basis of substantial compliance with the majority of Base1Core Principles. 40. However, given the recent global and regional financial turbulence, some caution is warranted in the otherwise positiveoutlook of the financial sector. Although the banking sector is relatively stable in the short run due to existing high prudential 14 requirements and weak integration into the global markets, it is quite vulnerable in the medium term as a severe recession in Moldova's main trading partners could affect negatively the flow of remittances, leading to reduction inbanks'deposit base. At the same time, reduceddemandfor Moldovan exports and a possible currency weakening could lead to a rise of non-performing bank loans. 41. A major challenge for the authorities is to raise the level of financial intermediation while keeping potential systemic risks under control. Moldova's financial system remains small relative to those of most other transition economies. Total assets of the banking sector amounted to 60 percent of the GDP at the end of 2007, whereas lending represented only 39 percent (in 2004 these figures amounted to 42 percent and 23 percent, respectively). The cost of credit remains relatively high, and access to long-term credit by the corporate sector is very limited. Development of the non-bank financial sector could increase the relatively low level of savings inthe economy and fuel the growth of the domestic capital market. To mitigate risks, Moldova needs to finalize the legal and regulatory framework for non-bank financial institutions supervised by the newly established National Commission on Financial Markets (NCFM), build NCFM's licensing and supervision capacity, and improve consumer protection and financial literacy. 42. Timely, transparent and reliable corporate financial reporting is critical for strengthening confidence in the banking sector, improving access to credit, and channeling remittances to good effect. The Bank conducted a Report on the Observance o f Standards and Codes (ROSC) assessment in Moldova in 2004. Since then, the Government has undertaken significant steps by adopting in2007 the Accounting Law and Auditing Law based on provisions of relevant EU Directives and Regulations and international best practices. Currently, the Ministry o f Finance, with assistance of the Bank and the newly established Vienna Center for Corporate Financial Reporting, is in the process of implementing the Country Strategy and Action plan to enhance financial reporting and auditing inthe Republicof Moldova. 43. The country's economy is highly dependent on road transport, and developing this physical infrastructure is critical for enhancing competitiveness. Moldova's road network, totaling about 16,800 km, has been severely neglected during the past 15 years, with few resources spent for maintenance and rehabilitation, For example, in 2006, an amount equal to 0.6 percent of GDP was actually spent on road maintenance and rehabilitation whereas roughly 3.6 percent was required. A similar dynamic exists for Moldova's state railway company (CFM-Calea FeratSi din Moldova). Revenues from freight traffic have been used to finance the operation and maintenance of the entire rail network and to subsidize passenger transport operations. Continued efforts to restructure CFM are needed, but the lack of funding has been an impediment given that separating infrastructure management and transport services will require some investment upfront to establish separate and self-sufficient companies. 44. Moldova's economy remains vulnerable to external energy price shock. This vulnerability is due to the country's dependence on imported natural gas which covers about two thirds of the country's energy needs. Despite a relatively low level of energy consumption per capita, Moldova has high energy intensity, using twice as much energy per unit of GDP (at PPP rate) than Romania and three times more than the EU average. 15 While significant institutional reforms in the late 1990s helped restructure the sector, improve the regulatory environment and attract private investors (three out of five power distribution companies were privatized in 2000), the sector reforms are far from being consolidated. The recent rise of energy prices contributed to the accumulation of new debts, mainly inthe district heating in Chisinau where current heating tariffs cover only about 70 percent of the cost. The price of imported natural gas continues to rise and i s expected to reach the EUparity level by 2011 .'Despite this price increase, natural gas will remain the most competitive fuel for heating and electricity generation given the existing energy infrastructure. 45. The task of reducing energy vulnerability must include improving efficiency, reducing energy waste, and developing alternative energy sources. The policy response of the Government should focus now on: (i)consolidating the energy sector reform, includingthrough adoption of new Energy Law and fwrther harmonization of the legal and regulatory framework with the EU energy directives and best practices; (ii)maintaining financial discipline while adjusting energy tariffs to the full cost recovery level; (iii) approving and ensuring adequate implementation o f the Energy Efficiency Action Plan, including measures to facilitate investments in energy efficiency and alternative (renewable) energy resources; and (iv) strengthening institutional capacity in the government for policy making and contingency planning in the energy sector, particularly from the point ofview of protecting the most vulnerable population groups. 46. An integrated and strategic approach for the telecommunications sector could promote a reduction in the cost of services, improve Moldova's international competitiveness and enhance governance. Although the telecommunications sector i s quickly developing, Moldova fares much worse than most of its neighbors in terms of prices and availability of services. Better regulation and increased competition will be required to change this trend, with cooperation betweenthe National Regulatory Agency (ANRCETI, the regulator) and the National Agency for the Protection of Competition. Developments in the regulatory framework include a new law on electronic communications in 2008 and introduction of third-generation mobile telephony. A new Director for ANRCETI has recently been appointed, and the government is pondering whether andwhen to privatize Moldtelecom. This shouldbe addressedcarefully as part of a comprehensive ICT development strategy to maximize the development impact for the , industry and the economy and to avoid the creation of a private monopoly. The Government is developing its national ICT strategy, which should be anchored around three pillars: (i) promoting competition and strengtheningthe regulatory environment inthe telecommunications sector; (ii) developing the local Information Technology (IT) industry as a driver of innovation, entrepreneurship, employment for youth and economic diversification; and (iii) mainstreaming I T applications into government to improve public sector governance, client-responsivenessand efficiency. 47. A strategy to raise Moldova's competitiveness needs to include attention to the competitiveness of agriculture and the associated processing sector. The sector i s characterized by underdeveloped and imperfect markets and policy uncertainty, meaning The currentprice of importedgas (US$253 per mcm) is about two thirds o fthe EUparity level. 16 that agriculture has continued to underperform the industrial and services sectors in both absolute and relative terms. Moreover, over-employment in the sector leads to low labor productivity and correspondingly low incomes. Within this context, the high levels of poverty and the limited opportunities for non-agricultural business fuel migration-the ongoing exodus o f Moldova's valuable human resources. Although it i s observed across countries that agricultural production declines as a share of GDP as economies grow, the sector should continue to grow inabsolute terms. 48. Government interventions to protect urban consumers create problems by depressing profits and requiring subsidies. Land reform started in mid-1990s has remained incomplete, as large corporate farms still account for 60 percent o f arable land. Subsidies not only disproportionately support corporate farms, but they are also directed mainly at inputs or outputs rather than investment or growth enhancing services. Moreover, a highly regulated environment and limited public investment in agricultural research and education have contributed to low private investment in the sector. The artificial pressure created by these interventions deter investment in higher value agricultural products (e.g., horticulture with multi-year gestation periods) which would raise incomes and help to establish a viable and competitive agricultural economy. In addition, this system creates a significant risk o f leakage and corruption. 49. Current reform activities such as harmonizing Moldova's food safety system with those of the EU, developing a market information system, and taking steps to reform the agricultural subsidy system are all advancing but at a slow pace. Global food price inflation, rising land values, and increasing incentives to consolidate small holdings and use land in corporate farms more efficiently are all promoting more understanding and willingness to invest inknowledge and improvedtechnologies. Human Development and Improved Public Services 50. The immediate challenge in the social assistance sector is to successfully complete the ongoing reform program-improving the targeting of and access to social services and increasing the overall impact on poverty. The social benefits system in Moldova i s regressive but improving. In2001, the lowest quintile received only 5.7 percent o f all benefits, and the second quintile received only 7.8 percent while the fourth and fifth quintiles received 44.6 percent and 28.8 percent respective1 By 2004, the first and second quintiles were receiving 8.1 percent and 15.1 percent.'( In June, 2008, Parliament approved a social support law to establish an improved, targeted, social assistance benefit scheme, aiming at ensuring a minimumguaranteed monthly income to vulnerable families. In October, 2008 the law became effectve for families with at least one member with a disability. The new system, to be fully operational by July 2009, will be directed to the poorest 10 percent o f Moldovans. A consolidated database o f beneficiaries o f social assistance i s in the design phase and should increase the government's capacity to assess the impact and effectiveness o f social assistance over time. 51. Pension benefits in Moldova are not yet based reliably on actual contributions 10Republic of Moldova: Improving Public Expenditure EBciency for Growth and Poverty Reduction. A Public Expenditure Reviewfor the Republic of Moldova. World Bank ReportNo. 37933-MD. 17 paid. The general pension law (1999) to reformthe pay-as-you-go pension systemhas met the short-term objectives of making pension payments on time, in-cash (as opposed to in- kind), and without the need for budget transfers. However, the government has not yet successfully eliminated pension privileges. Key issues that need to be addressed immediately therefore include weak linkages between actual contributions and pensions, the declining number of contributors supporting a growing number of pensioners as the population continues to age, and the weak administrative capacity within the system. Recent migration trends serve to accentuate these challenges. 52. Reforms are also underway in the education sector but further and more significant improvementsin expenditure efficiency will be required. Public spending for education amounted to 6.0 percent of the GDP in 2001 and increased to 8.2 percent in 2006, representingthe largest set of expenditures inthe national public budget (20 percent in2006). Increasedspendinghas yielded positive measures to increasequality and access, particularly the provision of textbooks and food to children of poor families and the development of new curricula. However, despite growing resources both inabsolute and in per capita terms (as the population of school age children is shrinking), key reform challenges remain to be addressed. One area of reform that holds great promise for the future of Moldova in an increasingly knowledge-based global economy, is the integration of ICT in education, both as a subject matter and as a tool for the delivery of education in all areas and at all levels. This i s of particular relevance inhigher education, where a strong link with the private sector, especially the IT industry, will lead to better employment opportunities for young talent and has the potential to reversethe brain drain. 53. The education sector continues to suffer from persistent problems related to the quality of services, equal access, and institutional arrangements that do not facilitate the most efficient use of public resources. HBS data from 2006 show that household expenditures for education vary significantly by residence area and by welfare level: on average, urban families spend 2.7 times more than rural families, and wealthier families s end 7 times more than poor households or 30 times more than extremely poor families.''HBS data also show that a household headed by a person with a university education faces a poverty risk that i s 5 times lower than that of a household headed by a person with a primary or incomplete secondary education-thus signaling the importance of decreasing dropouts and removing barriers to high quality education services. The Ministry of Education and Youth with World Bank support has completed a School Network Optimization Strategy and has developed options for formula funding, both of which will be piloted after elections as part of ongoing efforts to increase quality, access, and efficiency. 54. Health indicators have improved but remain well below EU averages. Moldovan average life expectancy at birth is 68.8 years in 2007, 12 years shorter than the average for EU countries, and 6 years shorter than for new EU-10 nationals, respectively. The life expectancy of Moldovan women at birth is the lowest in the European region at 72.6 years in 2007. There has been notable progress: for example, child and maternal "PovertyandPolicy Impact Report 2006. Republicof Moldova, Ministry o f Economy and Trade. November, 2007. Moldova: Poverty Update. World Bank ReportNo. 35618, June 2006. , 18 mortality has declined (see Progress Towards the Millennium Development Goals). Nevertheless, chronic diseases such as cardiovascular diseases cause double the share o f avoidable mortality in the working age population as in the EU-IO. The reemergence o f tuberculosis and the emergence o f HIV/AIDS in the 1990s pose serious risks to the population. However, a recent ECA benchmarking exercise to rate country performance in response to HIV shows that Moldova i s leading the region inmany areas. 55. Moldova's health sector reforms, while substantial, are not yet complete. These have included the introduction o f mandatory health insurance (now covering 76 percent o f the population) to address the problem o f out-of-pocket payments, but the base o f contributors has remained largely limited to public-sector workers. Nearly half o f the population aged 25 to 44 are not covered by insurance. Public sector spending on healthcare has grown from 4.2 percent o f GDP in 2004 to 4.8 percent in 2006, which i s high relative to other countries at a similar level of development. Moreover, resources allocated from the budget and contracts o f the health insurance funds with health facilities are tied to inputs rather than performance. As a result, incentives for efficiency improvements have remained limited. Formal co-payments for health services have decreased as a share o f private expenditure; however, informal co-payments remain substantial. 56. Moldova's water supply and wastewater services are generally deficient. Only slightly more than half o f rural communities have piped water systems and only approximately 40 percent o f rural communities have sewerage infrastructure, which, in many cases, has ceased to function. Approximately 80 percent of all urban residents are connected for water supply and 63 percent for sewerage. Few existing wastewater treatment facilities meet standards, and many are abandoned due to operating costs and lack o f maintenance. About 10 percent o f samples from urban water supplies and 16 percent from rural ones are contaminated with coliforms. The bacteriological quality of water in rural communities i s likely still worse. Given that Moldova remains a predominantly rural country, it i s imperative to implement a large-scale rural water and sanitation program where the emphasis should be on replicability,and sustainability. 57. Environmental degradation and climate change pose significant challenges for the future. Moldova has in the past two decades experienced an increased number o f droughts, the most severe occurring in 2007. The impact o f recent extreme flooding (July, 2008) on agricultural production and social welfare is not yet clear. Other environmental concerns are soil degradation, surface water pollution from run-off and agro-chemicals, lack o f sustainable waste management (both solid and water), as well as increased ground water pollution due to poor manure management in rural communities. Based on the climatic change predictions for the South-Eastern Europe, Moldova also might face serious problems related to water resources availability, especially for irrigation. Continued focus by Moldova and development partners on emission reductions and carbon sequestration through supporting carbon-financed projects and bio-carbon investments will be important-in particular for benefiting from the global carbon market and for soil conservation and expansion o f the country's forested area. 58. Moldova is a "signatory" to the St. Petersburg Declaration on Forest Law Enforcement and Governance (FLEG) and has committed itself to combating illegal 19 logging and corruption and improving governance in the forest sector. However, a study prepared in2005 on the governance and illegal logging inthe forest sector, identified the forest sector as one of those where corruption is rife inMoldova and concluded that as muchas 42 percent of wood extractedcould be from illegal/unstated/uncertain sources. As a follow-up to the St. Petersburg declaration, the Bank is now assisting Moldova to improve its FLEGthrough the development and implementation of a National Action Plan. The 3-year program of assistance is being implemented in partnership with the WWF and IUCN, fundedby a grant from the EC. 59. Migration and the associated remittances flows have made a strong contribution to poverty reduction, but are causing social strains in rural families and among the youth.12 The National Bureau of Statistics (NBS) estimates that over 300,000 Moldovans or 21 percent of the Moldovan workforce resided abroad in the second quarter of 2006. The average Moldovan migrant is 35 years old. Most are men from rural areas where there are few employment opportunities; however, patterns are shifting toward more opportunity-based migration that draws men and women with higher educational qualifications who live in urban areas. One important recent trend is the growing share of migrants obtaining permanent residencies in destination countries. As a result, the more permanentmigrationof families has increased, as has the risk of brain drain. 60. Moldova's youth are leaving in massive numbers due to the lack of adequate jobs and business development opportunities, particularly in rural areas. Young people (15-34 years of age) account for about one third of Moldova's population, but they face major obstacles infinding work. According to the Employment Agency, youth are 3.5 times more likely than adults to be unemployed. Similarly, the youth joblessness rate (number of young people out of work, not looking for work, and out of school) is one of the highest in ECA at 30 percent. While Moldova has been struggling to address youth issues in a comprehensive and cross-sectoral manner, there are a number of important constraints to youth programming in the country, including weak institutional capacity at national and local levels, limited financial resources, lack of equipment, limitedtargeting of the most vulnerable youth, weak monitoring and evaluation systems, and lack of human resources, particularly specialists. The launch of both Moldova's Year of Youth in 2008 and the NDS provide important opportunities for facilitating youth training and employment in the country and encouraging returning migrants to stay in the country and contribute to private sector-led growth in combination with a targeted approach for the most disadvantaged young people especially inrural areas. Moldova could create newjobs for the thousands of young graduates who work in the grey economy as programmers, by promoting the development of the local IT industry, encouraging the creation of IT incubators and techno-parks, facilitating the creation of businesses in this field and promoting access to credit, including venture capital and lending products designed for export-oriented IT firms. 61. Women are paid less than men on average in part because of occupation segregation. Although education indicators are better for girls than for boys both at the secondary and tertiary levels, human capital acquisition does not always translate into 12Recession, recovery andpoverv in Moldova ReportNo. 28024-MD, November2004. 20 better outcomes in labor markets. Women in Moldova comprise 47 percent o f the labor force, but estimates o f the International Labour Organization indicate that women's salaries constitute only 60 percent of men's salaries. Women also have lower labor force participation rates (43 percent versus 50 percent among men, in 2006). Moreover, women are more likely than men to suffer from human trafficking and exploitation abroad. However, these trends are improving and the World Economic Forum's Global Gender Gap Report 2008 ranks Moldova in the top 20 countries. The report indicates that women's labor force participation i s almost 85 percent that of men's, perceived wage equality for similar work i s among the highest inthe world, and women hold nearly double the number o f professional and technical worker positions than men do. Public Sector Management and Governance 62. Moldova's ongoing governance agenda needs new impetus. Reforming the systems of public administration with the aim o f improving government capacity to develop and implement policies, strengthening civil service professionalism, improving incentives inthe civil service to attract and retain professional staff, eliminating redundant government layers and structures, improving the effectiveness of public financial management, and promoting the deployment o f e-government applications for better service delivery and increased governance are all critical elements o f this agenda. 63. Moldova's public sector wage bill as a percent of total government expenditures is among the highest in the region, including several advanced OECD economies. However, public sector wages remain low compared with those o f the private sector, and the system for compensation i s complex and lacking transparency. The Governmenthas set out an ambitious reform agenda aimed at modernizing its civil service to European standards. While only 30 percent o f new civil servants were appointed through a competitive merit basis in 2007, the recent adoption o f the civil service law should accelerate this trend. The development o f a new transparent and equitable civil service wage system, though delayed, i s underway. In addition, the establishment of policy analysis and coordination units have helped strengthen the linkages between the Government's policy priorities and the budgetaryprocess. Continuing this reform program i s critical for Moldova given that public sector wages are projected to rise and outpace economic growth in the short-term, creating significant fiscal and macroeconomic pressures and crowding out essential public spending. 64. Moldova has been strengtheningits resource allocation processes by expanding the coverage of sectors included in the Medium Term Expenditure Framework (MTEF).While there has beenimprovement inthe management of public resources, there i s still a need to better integrate externally financed projects, centralized investments, and other sources o f public investment into a single common public investment program. Efforts are starting, on a pilot basis, to develop a common procedure for the identification, prioritization, preparation and appraisal o f public investment projects. These efforts can contribute to better public expenditure planning, thereby facilitating the more effective allocation o f resources to meet stated policy objectives. 65. Moldova has also demonstrated solid progress in improving other elements of national public financial management (PFM) systems and processes. A Public 21 Expenditure and Financial Accountability Assessment Update conducted in 2008 confirms that solid progress inthe quality of PFM systems and processes has beenachievedbetween 2006 and 2008. The most significant development influencing the scores was the creation of the Single Treasury Account, which improved the overall scores in cash management and accounting recording and reporting. Other areas where scoring improved were payroll, procurement and internal controls. Substantial work has been done on revising the budget classification for the public sector and preparing for the implementation of the integrated financial management information system (to be operational in 2011). A solid reform program is also inplace to improve internal controls and develop an internal audit system, and to strengthen financial accountability through developing the Court of Accounts into a modern supreme audit institution. 111. BANK GROUP ASSISTANCE STRATEGY A. Implementationof the last CAS 66. The country context and IDA's allocation system have changed since IDA's last Country Assistance Strategy (CAS) for Moldova (2005-2008) was de~eloped.'~ This strategy was presented to the Executive Board against the backdrop of a difficult policy environment, with the IMF's PRGF and the World Bank Structural Adjustment Credit I11 programs both having been recently suspended with less than one third of the committed funds disbursed. Given concerns about Moldova's commitment to economic reform, the CAS directed IDA support to mainly local interventions in areas with the highest concentration of poverty. IDA'Scountry portfolio followed a Base Case lending scenario that provided only investment operations and specified a series of reform benchmarksthat would trigger eligibility for High Case policy-based lending. 67. At the time of the CAS Progress Report (2006)' Moldova had accomplishedor substantially accomplished most of the reform benchmarks established as High Case triggers. However, Moldova's CAS was one of the last to contain explicit lending scenarios, and this was superseded by the IDA14 resource allocation process-specifying that country allocations are determined annually through IDA's performance-based allocation (PBA) system. This new system awarded funding based on country performance ratings, determined by the Country Policy and Institutional Assessment (CPIA), portfolio performance ratings, and the governance factor. Moldova did receive increased financial support according to the PBA formula, but this was below the level of assistance envisaged by the High Case scenario. 68. Despite these changes, the last CAS was implemented relatively smoothly and without major changes in the original objectives. The CAS focused on three pillars: (i) promoting a competitive market environment, stability, and pro-poor growth; (ii) minimizing social and environmental risks, building human capital, and promoting social inclusion; and (iii)combating corruption and improving public sector governance. The CAS Progress Report called for some realignment to the overall program to confirm that the investment lending was complementary to the new Poverty Reduction Support Credit ~ ~~ l3Country Assistance Strategyfor the Republic of Moldova, Report No. 28556-MD, November 12,2004. 22 (PRSC) program, that much-needed financing was provided for infrastructure (roads), and that planned operationswould fit within the PBA-determined IDA allocations. Portfolio Management and Performance 69. The overall portfolio including trust funds has been dominated by projects in the infrastructure and agriculture/environment sectors as well as in public sector reform. As of December 2008, IDA lending operations include a PRSC program and 10 investment operations (with an additional 3 GEF projects), with a total commitment of US$159.3 million, of which US$100.4 million (63%) remains to be disbursed. The on- going IDA portfolio is broad ranging covering almost every sector, but with a higher concentration of operations in the infrastructure sectors and in human and rural development. The World Bank also administers a substantial $76.5 million trust fund portfolio of 23 activities-the largest inthe ECA region-which provides co-financing to 6 IDA operations (39%), finances 6 stand-alone GEFKarbonoperations (33%), and provides other forms of direct support (28%) such as an EFA-FTI grant of $8.8 million for pre- primary education and a $6.15 million multi-donor trust fund for public administration reform. Trust fund resources support sustainable development (46%), human development (26%), public-sector reform (22%) and competitiveness(6%). 70. Analytic and advisory activitieshave complemented lendingoperations. Recent non-lending activities include a Financial Sector Assessment Update with the IMF, an on- going Country Economic Memorandum, a Public Expenditure Review, a Public Expenditure and Financial Accountability Assessment Update, a Private Sector Development Note, pension reform technical assistance, telecommunications analytic work, a Debt ManagementAssessment, and a Country Governance Assessment. 71. All IDA and GEF operationscurrently under implementation are proceeding satisfactorily as are the trust-funded activities. Project performance is satisfactory in terms of implementation progress, with the disbursement ratio of both the IDA and trust fund portfolios consistently exceeding 20 percent annually, aided by the new country financing parameters approved on February 1, 2005. Given its significance to the overall program, a special review of the trust fund portfolio was conducted in September 2008, providing the following insight into factors for good implementation and thus for increasing the likelihood of achieving results: (i)strong ownership and governance, also generally linked to good management capacity, are key for smooth implementation; (ii) capacity to adapt to challenges and adjust project design during implementation substantially lowers risks to failure; (iii)proactive support provided by the Bank, specifically by local staff on the ground, result in more effective implementation; (iv) combined resources of Bank administrative budget and trust fund resources can enable more frequent and thus more thorough Bank implementation support when an activity is anchored in a broader "program"; (v) unclear commitment from the Bank or the client can be very damaging; but (vi) clear benefits to beneficiaries combined with solid implementation capacity can make up for weak Government ownership. 72. Duringthe last CAS period, IFC continuedto develop private enterprises and assisted with attracting foreign strategic investors. IFC has been selective in its investments in Moldova, particularly in the banking sector where transparency and 23 corporate governance continue to pose challenges. IFC provided over $15 million o f its own funds in three projects over the 2005-2008 period. This included support to the banking sector in long-term financing and trade financing credit lines to the local bank, Mobiasbank where IFC provided critically needed term funding which would otherwise not be available from market sources. This i s helpingthe bank expand its lending to small and medium enterprises and also stimulate imports and exports by increasing access to trade finance for entrepreneurs. 73. IFC has recently increased efforts to support the private sector. In the agribusiness sector, the Government has requested IFC's assistance in reviving the country's wine sector which provides employment for nearly 10% o f its population. IFC provided long-term financing and advisory services to Bostovan Wineries Limited and i s working with a private partner to helpthe company recover from the 20-month Russianban on Moldovan wines crisis and develop into a leading regional producer. IFC's advisory services include helping the company's 700 grape farmers' suppliers improve their sustainability. IFC's involvement inthis project can stimulate other lenders and investors to invest inthe industry and inMoldova. Additionally, IFC has supported two regional private equity funds which may investinsmall and mediumenterprises inMoldova. Results Achieved 74. Over the 2005-2008 period, Moldova attained or exceeded many of the country development outcomes set as targets under the last CAS. Economic growth surpassed projections on average, and public debt levels declined to well below thresholds that would signal debt distress. With the increased stability o f its macroeconomic framework, Moldova worked incrementally toward a competitive market environment, by simplifying and reducing the cost o f business licensing and registration, improving customs services, increasing the efficiency o f the banking sector, and improving the efficiency and quality of energy supply in pilot areas. In the social arena, more Moldovans were covered by essential health interventions and maternal and child mortality rates decreased beyond their targets. Moldovans infive communities gained access to piped systems for clean water and sewage treatment. Finally, with IDA assistance, Moldova launched an ambitious public sector reform program that included the development o f a medium term expenditure framework for aligning public spending with development priorities. 75. Although IDA'S performance under the past CAS was satisfactory, some efforts have not yet achievedtheir desired outcomes. Ongoing activities inthe portfolio are expected to continue the pension reform process, improve the targeting o f social assistance, complete the overhaul o f the business enabling environment and MSTQ system, increase the access to and quality o f education-particularly for rural Moldovans-and further build the capacity of the public sector. The CAS Completion Report explored how well individual country development outcomes were achieved during the last CAS period and identified factors that contributed to or limited expected progress. This report, in Annex 3, describes the results achieved in more detail and identifies lessons to inform the CPS (Box 2). 76. The trust fund portfolio has contributed to achieving results. This has occurred through enhancing IDA resources in key program areas such as public finance reform or 24 initiating programs in areas not covered by IDA such as environmental conservation and clean-up efforts inrural areas (Table 5). There is significant complementarity and synergy across and between the IDA and trust fund portfolios, with 48% o f total grants linked to an IDA or other trust fund activity. The trust fund review revealed the importance of these synergies to increasing the likelihood for achieving impact when activities are firmly anchored in a multi-activity program. This also contributes to greater returns to client and resources for implementation and to the Bank for implementation support. What Worked Well and What WorkedLess Well 77. The priorities set in the last CAS were aligned to Moldova's longer-term development objectives identified in the EGPRSP. A critical focus of the Bank's strategy was on supporting a stable macroeconomic framework-through helping Moldova to manage and reschedule debt and through a series of analytic and advisory activities (AAA) to better understand and promote the factors needed for economic stability and sustainable, pro-poor economic growth. The successful reduction o f public and publicly guaranteed debt has improved the prospects for the success o f donor assistance, thus making it more likely that donors will provide additional support for development. The Government's ability to maintain a prudent fiscal stance has buoyed fiscal revenues, creating some fiscal space to increase public expenditures without increasing the relative size o f government. In short, IDA assistance has effectively supported Moldova in stabilizing its economy, continuing to reverse a decade o f economic decline and rising poverty, and helping to shape an economic context in which development efforts could be initiated with improved prospects for success. Table 5. Selected PortfolioResults under the Three CAS Pillars RegulatoryImpactAssessments (RIA) Seven agro-industryplants with waste- New draft procurement law developed, published mandatoryfor all new legislation, water treatmentplants,450 household in April 2007 and enacted in October 2007; initial Decrease in regulatorycompliancecosts manureplatforms financed, 130farmers development ofsome secondary legislation; wide for enterprisesto 16%,Conversionfrom havebuilt household manure platforms disseminationprogram relatedto the change in mandatoryto voluntary standards from their own resources (GEFI FSP- paradigmfor public procurement; downward starting01/01/2007 (PHRD AGRICULTURAL POLLUTION CONTROL trends in the use of SoleiSingleSource and Direct COMPETITIVENESS ENHANCEMENT PROJECT) Contractingand increasein open tenderingin .PROJECT) 934 2 tons ofPCB containing capacitors public procurement; training materials Lending to agricultural and rural sectors destroyed , 1272tons ofPOPs containing disseminatedand widely used; some 5000 staff in the portfolios of financial and contaminatedobsolete pesticides trained; Agency website developedand usedfor intermediarieshas increased from 2,l destroyed, Draft legislation on POPs advertisingpublic procurementopportunities, billion Moldovan Lei in0613012006to managementhas been preparedand up distribution ofdocuments, notificationof results 2 7 billion Moldovan Lei in 03/31/2008. for aoorovalinthe Government(GEFFSP and general disseminationof information; Beneficiariesof Rural Advisory POPS'STOCKPILES MANAGEMENT AND automatic system of statisticscollection developed Services increasedto 350,000 per year; DESTRUCTION PROJECT. REMEDIATION OF and in use (IDF DEVELOPMENT OF PUBLIC 245 businesseshave been created and . POPS PESTICIDESPOLLUTED) PROCUREMENTINFRASTRUCTURE) registered since 2006 (SIDA GRANT TO 14,500 hectaresofdegradedagricultural Functionalreview in centralgovernment SUPPORT TO THE SECONDRURAL lands restored(BCF SOIL CONSERVATION . conductedand recommendationsfor restructuring INVESTMENT AND SERVICES PROJECT) ERPA) have been implemented,central policy TA activities assistedthe Government 33 kindergartens were renovated; 15 coordinationestablished; centrally coordinated define and develop its reform program community centers were created as strategic planning process initiated; draf?civil in the areas ofagriculture,energy and alternatives to kindergartens; One pilot- service law approved in the 1st reading; personnel pensions - criticalreform areas Center for children with disabilities in policy division established inthe Government supported by the second PRSC (pm StraseniWaS established@FA-FTI Office (MDTF TECHNICAL ASSISTANCE SUPPORT TO POVERTY REDUCTION SUPPORT CREDIT 2) CATALYTIC FUND ) PUBLIC ADMINlSTRATION REFORM) 25 78. Leveraging other donor resources or supporting existing donor efforts have served as effective strategies for enhancing the impact of relatively limited IDA assistance. IDA has increased its collaboration with other donors to address Moldova's needs, taking the lead sometimes in development efforts and sometimes providing support to others' initiatives. IDA'Sconstructive and evolving relationship with the Government and leadership role in convening donors were both exemplified by the Consultative Group meeting in Brussels (2006). At this meeting, co-hosted by the World Bank and the EC, donors confirmed their commitment to the country's reform program and identified additional external financing inresponse to the recent economic shocks. 79. Broad-based support and technical assistance for Government initiatives have yielded desired outcomes where there was a combination of strong ownership and sufficient capacity in counterpart ministries. Bank staff have developed strong working relationships with Government counterparts, and IDA assistance has provided effective support for developing and implementing Government-led initiatives. Activities in the health sector and, more recently, in transport, provide illustrative examples wherein Moldova has worked with IDA and other development partnersto develop sector strategies that include ten-year investment and expenditure plans. In other cases, such as reforms o f the policy framework in agriculture or in improved targeting o f social assistance, government strategies were insufficiently developed or indeed contradicted Bank advice in key dimensions. In such cases, a more targeted approach to demonstrate the viability and positive results o f recommended reform strategies was warranted, together with focused analytical and advisory services to strengthen counterpart capacity. 80. Efforts to reduce poverty and improve the targeting of social assistance have had modest results to date, particularly for the rural poor. Moldova's economic recovery was accompanied by a reduction in poverty, but this trend stalled in 2004 with a slightly growing number o f rural poor. Activities under this past CAS did not effectively address policy distortions and market imperfections that negatively impact the farm sector or effectively target social assistance to minimize the benefits accruing to the middle and upperincome groups. Box 2. CAS CompletionReportLessonsLearned Effective, efficient, and transparent public sector managementis increasinglyimportant for achievingdevelopment objectives.Targeted support plays a critical role in building country institutions,enhancingministry capacity, and enablingthe development and implementationof longerterm policiesand,strategies. Increasinggovernment ownershipof development efforts is a priority: the mix of budget support, investment lending, and advisoryservices can be strategic in helpingthe Government strengthen its leadershiprole. IDA is devotingonly a small share ofthe resourcesavailablefrom internationaldonors for Moldova's development, andthese can be directed strategicallyto leverage support from other donors for optimal development impact. Analytic and advisory services can develop a better understandingofthe linkagesbetween economic growth and povertyreduction,particularlyfor the ruralsector. Continual improvements to the results orientationof the country programprovide guidance for identifying, pursuing, and achievingproject-and program-leveloutcomes. 26 81. Given that public domestic investment has remained very low, more support for public infrastructure was warranted than that envisaged by the previous CAS. Inparticular, the continued deterioration ofroads has hadnegativeimplications for growth. The Transport Strategy within the EGPRSP focused on road rehabilitation as a key factor infacilitating international trade andtransport, andthe Bank recognizedthe needto addthe Road Sector Program Support Project after the CAS Progress Report. 82. Continued efforts are needed to deepen collaborationwithin the World Bank Group. The International Finance Corporation (IFC) has remained active in Moldova, with a portfolio o f about $30 million supporting power, telecommunications, agribusiness, small and medium enterprises, and local banks. Buildingon IDA'Sefforts inthe health and infrastructure sectors, IFC will collaborate and complement IDA'Swork with public private partnership initiatives. The Multilateral Investment Guarantee Agency (MIGA) has also been active inMoldova, covering part o f a large-scale power sector privatization effort that has also been supported by IFC. MIGA has recently supportedthe start-up investment o f an Austrian financial institution inits subsidiary inthe leasing sector. MIGA's outstanding gross expenditure in Moldova amounted to nearly US$69 million in June 2008. MIGA remains open to opportunities to support foreign direct investment in Moldova through the provision o f political risk guarantees and will coordinate its involvement with IDA. 83. The resultsfocus of the country programhas been strengthenedunderthe past CAS to better identify, pursue, and achieve outcomes at the project and program level. The evaluations o f the EGPRSP and the EU-Moldova Action Plan completed in 2006 and the transition to the PBA system for IDA assistance have informed and promoted an ongoing refinement o f results measures in collaboration with other donors. Within this context, the country team has developed a results scorecard (Annex 4) that i s expected to serve as a regular and updateable tool to better understand the links between the inputs, outputs and outcomes o f IDA-supported and trust-funded activities. This scorecard has provided a useful evaluation o f the progress towards individual country outcomes under this past CAS, measured the quality of the results orientation in each activity in the total portfolio including those financed by trust funds, assessed the Bank's contribution to management for results at the country level, and guided strategic decisions to increase impact. An updated version of the scorecard will be used to monitor progress under this CPS on a regular basis and will assess the results focus o f AAA products inthe future. Client Perspectives 84. Stakeholders believe that improving governance and increasing economic growthare the keys to reducingpovertyin Moldova. The FY08 Client Survey explored how various stakeholders in the country perceive the overall value o f the World Bank in Moldova (Box 3). A plurality of those surveyed believed that the Bank was prioritizing appropriate areas o f work, and 58 percent indicated that the Bank should be more involved. The main concerns among respondents were the Bank's ability to safeguard against corruption in its own programs and the success o f the Bank's efforts to help the country to reduce corruption and increase transparency ingovernment. 27 Box 3.2008 Client Survey Findings Governanceand economic growth are viewed as the critical issues facing the country. Bankemphasis and focus on growth is desiredby aplurality. Private sector growth and foreign direct investmentemerge throughoutthe survey as critical areas worthy of attention. The Bank has agood foundation ofrelationshipsin Moldova uponwhich to sustaina successfulprogram. 0 The biggest concern is the Bank's ability to safeguard against corruption in its own projects. B. ProposedWorld BankGroup Country PartnershipProgram 85. This results-based CPS aims to assist in layingthe foundations for sustainable and inclusive economic growth in Moldova. The Bank's strategy will balance the objectives o f selectivity and flexibility, engaging in areas where the Bank can best contribute to desired country outcomes while also adjusting for near-term political and economic changes. The expected outcomes o f this CPS fall within three pillars: (i) improving economic competitiveness to support sustainable economic growth; (ii) minimizing social and environmental risks, building human capital, and promoting social inclusion; and (iii)improving public sector governance. 86. This strategy is directly aligned with Moldova's National Development Strategy. The Bank will work closely with Government and other development partners in support o f two pillars o f the NDS: (i)enhancing economic competitiveness; and (ii) developing human resources, enhancing employment, and promoting social inclusion. The consultative process used in developing this CPS has identified those areas where the Bank can best help achieve the strategic objectives set forth inthe NDS (Figure 2). 87. The choice of pillars for this CPS has been guided by the Government's own developmentstrategy, client perspectives, the lessons learnedfrom the previous CAS, and the Bank's understandingof Moldova's development challenges. It builds on the strengths o f the previous CAS, which itself was closely aligned with the Government's development objectives as articulated in the EGPRSP. It promotes cross-sectoral collaboration to maximize the impact o f interventions, and leverages other donor partners' resources. As explained below, the first pillar bringstogether a diverse set o f analytical and operational activities to enhance Moldova's competitiveness, bolster and deepen the reform efforts supported by the previous CAS, and assist the Government's effort to accelerate economic growth. The second pillar, on the other hand, brings together a menu of interventions to help Moldova make full use o f its human resources. This includes the efforts to build capacity, promote skills development, and provide adequate social and environmental protection. The third pillar provides crosscutting support for all o f the strategic goals o f the CPS by promoting better governance and modern, efficient, public institutions. 28 Figure2. SummaryResultsChainfor Moldova Country Partnership strateav Country Development Outcomes Improved competitiveness of Broader inclusion and e Professional civil service Moldova's enterprise sector better social protection Increased capacity of Specific Improved management of Increased quality of and the public sector to Country the road network access to education develop and implement Outcomes to public policies which CPS Improved energy efficiency Improved access to and Contributes and increased diversification quality of health, water, e Increased transparency of energy sources and sanitation services and accountability in the and reduced management of public Agricultural competitiveness environmental monies degradation Operational Principles 88. This CPS reflects a strategic transition from the previous CAS through a two- step process. The first stage involves scaling up interventions and programs that are working well within the existing portfolio during FY09 and FY10. During the second stage, interventions will be defined in more specific terms for the remaining years of the CPS period. This approach allows the Bank some flexibility to adjust the portfolio as needed in response to issues emerging after the upcoming elections or as a result of a regional financial crisis. Second-stage interventions will be clearly described in the CPS Progress Report, and the timing of this report will be advancedif appropriate to ensure that refinementsto the country program are timely and effective. 89. The Bank Group's program of support for Moldova will capitalize on those areas where the Bank has a comparative advantage for optimal impact. Moldova's National Development Strategy embraces European integration as a central objective, and the country i s collaborating increasingly with European institutions and receiving aid from a wide range o f donors. Inthis context, the Bank should be strategic inits engagement, not only interms of where to direct IDA resources and associated Trust Fundsbut also interms of how to best leverage its own internal partnerships.For example, IFC can play a critical role in ensuring that the Bank's program appropriately addresses the needs of the private sector within the results framework set forth by the CPS. 90. The effectiveness of this engagement will rely on strong coordination and harmonizationwith other developmentefforts. In some cases, the Bank's expertise or 29 established presence in an area will warrant that it lead a multi-donor development effort. The presence of partners can substantially increase the returns on the Bank's investments. However, in other cases, IDA assistance or other Bank resources might not add sufficient value for initiatives already heavily supported by other donor efforts. Above all, close coordination among donors i s called for to minimize the administrative burden and transaction costs for Moldova. Given limited IDA and administrative budget, the Bank's choices for engagement will be guided by: (i) client ownership, (ii)consistency with Bank priorities, (iii)willingness o f donors to provide administrative budget when the Bank i s requested to take a lead role, and (iv) possibilities for adding to IDA financing to materially increase the effectiveness o f IDA funds. 91. Flexibility will be central to the Bank's approach to allow for adaptation to changing economic and political contexts. Since Moldova's per capita income recently exceeded the IDA threshold, the country i s entering a transition period-possibly moving to lending from the IBRD. The Bank's country program will therefore adjust the use o f instruments as appropriate, still using all available IDA assistance but likely investing less inprojects and more in analytic and advisory activities (AAA) over time as would befit a middle income country. Given the additional costs o f administering Trust Funds, the Bank will also be more strategic in their use to ensure that they directly complement IDA and AAA activities. The country is also facing some political uncertainty, with a new government expected in 2009, and collaboration with the new government could warrant some changes. The evolving situation with regard to Transnistria might also open up possibilities for engagement there through Moldovan government-led programs.l4Finally, new areas o f engagement such as climate change could gain importance during this CPS period and require that the country program be adapted to take advantage o f existing and new instruments, including Carbon Finance Funds and the newly created Climate Investment Funds. 92. All activities and resources delivered as part of the Bank's program will adhere to the results framework, with clear milestones to monitor implementation and country outcomes through which to gauge impact. This results-based CPS calls for IDA assistance and any other Bank resources, including Trust Funds, to be used only for activities that are realistic in scope and that are expected to directly influence CPS outcomes. Given the tension between flexibility and results, the Bank will have a rolling results framework which can be adjusted over time. Implementation Measures 93. The CPS foresees a lending program of two to three operations per year-at least one of which would be budget support. Commitments will total approximately US$45-$50 million per annum, with the specific country allocation being determined annually through IDA'Sperformance-based allocation system. In addition, the Bank will consider additional financing to existing operations withinthe current portfolio and support for projects with regional or global goods components. Overall, investmentoperations and l4A Japan Social Development Fund(JSDF) grant to provide additional financingto the Social Investment Fund2 for Transnistria has recently beenapproved. This is the only activity involvingTransnistria that is currentlyenvisionedunder this CPS. 30 associated trust funds will build on the Bank's track record and comparative advantage vis- a-vis other partners and focus inthose areas where other funding can be highly leveraged. The components o f the lending program will be strategically selected and refined to achieve targeted results for the three CPS priorities: competitiveness, human resource development, and good governance. 94. I t is expected that Moldova will fully utilize the IDA-15 lending envelope. However, there may be circumstances under which the entire IDA envelope may not be able to be utilized due to: i)a political and/or economic governance environment which i s non-conducive for lending; and/or ii)an extended political transition period resulting in insufficient government capacity to make effective use o f IDA resources. 95. Partnershipswithin the World Bank Group will be leveraged strategically to better achieve the desired country development outcomes. Both IFC and MIGA will continue their involvement in Moldova and will remain open to opportunities for supporting the competitiveness and private sector development priorities. Possibly areas o f collaboration for the World Bank Group are in the health sector and in the infrastructure sector ifmore privatization happens as a result o f IDA'Sefforts. 96. Moldova is a strategic priority for IFC and during this CPS period IFC will increaseits investmentactivities and advisory services in the country. IFC's main goal i s to support private sector development, focusing in particular on financial sector, agribusiness, healthcare and infrastructuremodernization. IFC will collaborate closely with IDA in these areas. Discussions with the Government are already in progress on the benefits o f public private partnership (PPP) for infrastructure modernization, and-in the health sector-IFC will collaborate with IDA on a joint project to assess how the role of the private sector can be increased. This assessment will be followed by at least one PPP to be structured by the Minister o f Health with IFC's support. In the real sector, IFC will remain opportunistic and support companies from the region looking to expand and invest in Moldova. For example, in the telecom and ICT sector, if the government decides to privatize Moldtelecom, IFC i s prepared to consider advisory services and investment to support this process, as well as the nascent local IT industry, should an appropriate opportunity arise. Finally, IFC will continue to support regional private equity funds which can provide not only scarce equity financing but also managerial and strategic support to improve the competitiveness o f Moldovan companies. 97. IFC priority in Moldova is to provide investmentsgeared at strengtheningthe financial sector, expanding lending capacity and improving governance. The Moldovan financial system i s dramatically underdeveloped and suffers from a lack o f transparency and poor corporate governance practices. IFC will provide credit lines and advisory services to major banks for lending to SMEs which are significantly underserved by the financial sector. This support is crucial for the sustainable development o f the private sector across Moldova and will contribute to the increased competition in the financial sector as well as create a demonstration effect for other investors. Inaddition, IFC will promote energy efficiency credit lines and the development of non-bank financial institutions. 98. When feasible, IFC will look to invest directly in companies operating in 31 agribusiness. IFC will also work with financial institutions which lend in the sector to provide long-term financing and capacity building advisory services. For example, in continuing its support for Bostavan Wineries Limited, IFC i s already launching an advisory services project financed by the Italian trust fund to find out how 700 grape suppliers can improve their incomes either by more efficient production or by diversifying. 99. MIGA will continueto promote foreign direct investmentin Moldova through the provisionof politicalrisk guarantees.MIGA will support the investmentsof regional financial institutions geared at strengthening the financial sector. In particular, MIGA will continue to support investments that promote the development o f non-bank financial institutions. MIGA will also consider opportunities inthe infrastructure sector. MIGA will coordinate its involvement inthis area with IDA. Inaddition, MIGA i s prepared to support projects in the agribusiness, manufacturing and services sectors. MIGA i s open to supporting investments that promote the development of SMEs in Moldova through its Small Investment Program. 100. Duringthe implementationperiod of the CPS, discussionswill take place with the authorities and within the Bank on a medium-term road map to IBRD status. An initial credit assessment will be undertaken by the IBRD Credit Department in FY09. In parallel, the Bank will work with the authorities to strengthen debt management. Eligibility for IBRD loans will depend on Moldova's sustained and credible track record o f economic performance, and the credit assessment will be based on an analysis of eight components of creditworthiness: political risk, external debt and liquidity, fiscal policy and public debt burden, balance of payments risks, economic structure and growth prospects, monetary and exchange rate policy, financial sector risks, and corporate sector debt and vulnerabilities. 101. Analytic and advisorywork will continueto be a core element of the program, with the Bank shifting toward greater financing of AAA versus lending operations. The Bank will continue as a leading external source of economic and social analysis and will use this analysis to discuss policy choices with the authorities. Analytical work will focus on needed structural reforms and on those issues most critical to reducing the risks to the population posed by transition and external shocks. For example, a C E M (FY09) will enhance the existing body o f knowledge on Moldova's competitiveness, constraints to possible sources o f future economic growth, and policy options to ensure that future growth i s sustainable, broad-based, and able to make full use o f Moldova's human and financial resources. As part o f the broader transition to a blended or IBRD lending program, the Bank will make a shift toward greater financing o f AAA versus lending operations with an emphasis in those areas where there are real knowledge gaps, e.g. climate change, food security, local governance, rural poverty. 102. The PRSC (and subsequent DPL) programwill remain the main policy-based lending instrument of the Bank for providing support to the implementation of the NDS. The cross-sectoral PRSC agenda will be explicitly aligned with EUbudget support with the second 3-year series commencing in FY10. The complementarity o f efforts betweenprogrammatic support under the PRSC/DPL and investment lendingwill be key to making efficient use o f Bank resources, Synergies will be found between policy-based lending, investment projects and trust funds to support institutional reforms and capacity building required for increased competitiveness and improved governance-helping the 32 government realize its vision o f a private-sector led economy. These investment projects support reforms in the areas o f business environment and the agricultural, environmental and rural sectors. The Bank also supports a number of projects aimed at improving the efficiency o f public sector resource use including more effective and transparent management o f public finances as well as broader public administration reform efforts. Bank operations have also focused on improving resource use in specific sectors, including energy, water and sanitation, and road infrastructure. Inthe social sectors, Bank support is provided in the context o f human development programs in health, education, and social protection as well as in support o f the government in scaling up efforts to improve the targeting efficiency o f social assistanceprograms. 103. The Bank will also make further progress toward programmatic approaches and budget support modalities in selected sectors, reducing the number of active operations by the end of FY12. This move must go hand-in-hand with demonstrated and measured progress by the Government in improving the country systems and more transparent and accountable sectoral investment planning (e. g., infrastructure, health, and education) as well as strengthened public information disclosure mechanisms, and increased efficiency o f government services (e.g., e-solutions, including e-government and e-procurement). The Bank will assess how best to support these efforts during the CPS period. To support the move to country systems, a Country Systems Assessment - a programmatic approach to assessing government systems will incorporate CPAR, CFAA, - PEFA, and other diagnostic tools as appropriate. 104. Non-IDA World Bank-administered projectsfinanced by trust funds and other grants will be strategically integrated into the Bank Group's country partnership program. With nearly half (48%) o f trust funds directly complementing existing Bank operations, grant support will remain critical for achieving results across all three pillars of this CPS. The Bank will be more strategic in its use of non-IDA resources to ensure that they: (i)contribute to the objectives and outcomes o fthe CPS; and (ii) not put additional do stress on the administrative budget. A review o f the Tkst Fund portfolio was conducted in FY09 with a view to putting a framework in place that strengthens the linkage between trust funds, strategic priorities and CPS outcomes, and provides a basis for exercising selectivity. 105. The Bank's work on governance and anti-corruption will be consistent with the Bank's recently approved corporate strategy.I5 As with other key reform areas, country ownership and leadership are critical in this area together with the coordinated roles of other donors. This i s the only way that the Bank's program can make a decisive difference in the period of the proposed engagement strategy and improve Moldova's standing on various comparative governance measures. The proposed engagement will include an advocacy role for reforms on governance and measures to address corruption, seek to develop areas in which the government and the Bank have common goals, and ensure that appropriate fiduciary oversight i s applied to proposed resource transfers from the Bank, duringpreparation, implementation, as well as through regular portfolio reviews.. '* See Strengthening WorldBank Group Engagement on GovernanceandAnti-Corruption, March2007 33 106. In addition, the Bank will emphasize the need for good governance for harnessinga competitivebusiness environment. This focus will include: (i) continuing the implementation assistance for competition and regulatory reform and curbing bureaucratic discretion; (ii)strengthening the financial intermediatiodinfrastructure in the banking sector and increasing the transparency in corporate financial reporting, with the assistance o f the Vienna Center for Corporate Financial Reporting; (iii)addressing competitiveness gaps by further development o f the export potential for the agricultural sector; and (iv) engaging the private sector on strengthening the demand side for good governance. Annex 2 elaborates the proposed program o f support for CGAC activities. The proposed activities are fully integrated with the objectives of this CPS and would help to achieve greater depth and sustainability o f the CPS objectives by strengthening the demand side for good governance (DFGG). Proposed Program of Support 107. The proposed program of lending and AAA work links systematically to the Bank's ongoing portfolio to support the country development agenda set forth in the NDS. Table 6 presents the activities plannedfor FY09 and FY10. As part ofthe two-step approach set forth in this strategy, the lending in italics are well-performing operations where additional resources can be absorbed to assist in achieving the CPS objectives. The AAA program supported by the CPS contains core diagnostic studies and ESW to strengthen the capacity for improved governance mainly on the supply side, and also on the demand side, e.g. promoting greater transparency and accountability o f public and private institutions. The two year program adheres to the selectivity principles set out inparagraph 90 as it reflects explicit requests from the government o f Moldova (client ownership) and builds on existing, successful IDA operations (comparative advantage). Programming decisions beyond FYlO will be guided by CPS operational principles and priorities that may emerge in the course of the next two years (e.g. roads, agricultural competitiveness, food safety, trade, deinstitutionalization, energy efficiency, public sector reform). 108. This proposed program is designed to achieve progress under the three CPS pillars by focusing on ten strategic goals. The results matrix (Annex 5) presents each o f these goals to outline how the ongoing portfolio and the new program o f support below will contribute to the overall objectives and outcomes o f the CPS related to improving economic competitiveness, developing human resources, and improving public sector management. 34 Table 6: PlannedBankGroup Lendingand Non-lendingActivities ~ FY09 FYlO Improving AAA/TA AAA/TA Economic Country Economic Energy PolicyNote Competitiveness Memorandum:MoldovaGrowth Study Foodsecurity to Support LocalGov and Communal Services FinancialSector Monitoring Sustainable MoldovaTelecom Assistance FinancialSector ReformGrant (Dutch Economic PovertyUpdate TF) growth Public Expenditure Review INF Sector InvestmentPlanning RuralHazardRisk Mitigation Strategy (JSDF) Climate Change PSDFSD Dialogue Corporate FinancialReportingTA FinancialSector ReformGrant (DutchTF) Corporate FinancialReportingTA Lendindlnvestments Regional Disaster RiskMitigation and Lendindlnvestments Adaptation Energy2 Additional Financing (AF) Competitiveness PRSC3 (plus Dutchand DFID Trust Funds) EnhancementAF RISP2 AF - IFC PRSC4 (plus Dutch& DFID TFs) Loan and equity investment and advisory service in financial sector. Advisory services and investmentto promote PPP. Energy efficiency credit lines to local banks. Direct financingto companies in agribusiness, credit lines to local banks which lendto agribusinesssector andto rural areas Human AAA/TA AAA/TA Development Public Expenditure Review Foodsecurity and Improved Local Gov andCommunal Services Public Services Poverty Update Lendindlnvestments PensionPolicy Note Health and Social AssistanceAF Governance and HealthReform PRSC4 (plus Dutchand DFID TFs) Lendindlnvestments MSIF2 AF plus JSDF.for Transnistria Health -JSDFfor Hepatitis PRSC3 (plus Dutch& DFIDTrust Funds) E C Advisory services and investment to promote public-privatepartnershipsin health. Public Sector AAA/TA AAA/TA Management Public Expenditure Review INF Sector Investment Planning and Country Systems Assessment* Governance LendindInvestments PRSC4 (plus Dutchand DFID TFs) Lendindlnvestments PRSC3 (plus Dutchand DFID TFs) Note:The Counp Systems Assessment reflects a programmatic approachto assessing government systems. This will incorporateCPAR, CFAA, PEFA, and others as appropriate. 35 109. Under the first pillar, ongoing efforts to increase the competitiveness of Moldova's enterprise sector will be augmented with an enhanced focus by IDA and IFC on the agro-processingsector. Additional financing will be added for the successful Competitiveness Enhancement Project (CEP) and the Rural Investment Support Project 2 to expand the scope and range o f available market-based instruments. This additional project financing i s expected to facilitate the growth o f the export-oriented real sector with higher value added in Moldova through a combination o f (i) matching grant scheme the (based on the successful CEP pilot) to assist enterprises with upgrading their labor skills and management practices and expanding production; (ii)the line o f credit through qualified commercial banks to support long-term investment and working capital needs o f exporters, and (iii)the provision o f internationally recognized laboratory testing services to local producers, particularly in the area o f food safety. The envisaged lending will be strategic to increase Moldova's export o f goods and attract foreign investments and will be informed by complementary analytic work. 110. Developingthe key physical infrastructure of Moldova is integralto improved competitiveness and will be continued under this CPS. To decrease road user costs, additional financing could be provided for the Roads Sector Support Program, and the Bank's collaboration with Moldova and other donors will continue on the implementation o f the Transport Sector Strategy. Assistance for decreasing electric power losses and reducing Moldova's energy intensity will include scaled up financing for the successful Energy 2 project, together with SIDA. In addition, a complementary set o f lending, analytic, and advisory activities will be implemented to promote energy efficiency and renewable energy production, including a potential energy efficiency line of credit through IFC. The Bank will continue to support energy efficiency measures across the entire portfolio, e.g. the Social Investment Fund, the Health and Social Assistance project, etc. 111. Assistance under the second pillar comprises a coordinatedand cross-sectoral program to build human capital, promote social inclusion, and minimize social and environmental risks. Additional financing will build on the successes o f the ongoing Moldova Social Investment Fund 2 and Health and Social Assistance projects, including PPPs with IFC involvement in the health sector, Lessons learned under the past CAS and continual refinements to the portfolio's results orientation will guide the implementation o f new activities and the selection of potential interventions to contribute to desired country outcomes-particularly poverty reduction, increased access to quality education programs, and improvedhealth indicators. Giventhe importance of providing opportunities for youth to stay in Moldova and contribute to economic growth, the country team will continue to identify ways to mainstream this agenda into the on-going and future work program. In particular, the Bank will continue to work closely with the Youth Voice Group which has already been extremely active in promoting the climate change and good governance agendas throughout Moldova. The climate change agenda will be mainstreamed into the CPS starting in FY09 with a stocktaking assessment and an identification of future entry points in the country program, e.g. through further carbon financing, climate investment funds, etc. On-going support for improved water and sanitation and achievement of the MDG inthis area will continue to be a priority under this CPS. Close donor coordination inthis areawill be critical. 112. The third pillar of the proposedprogramwill provide crosscuttingsupport for 36 Moldova to strengthen its public sector governance. A combination of interventions- supported by multiple donors-will help Moldova in improving the quality o f regulatory services, developing and implementing sound public policies, and strengthening processes for allocating resources. In addition, the CPS program will launch an intense effort at awareness generation and greater participation o f citizens in the demand for good governance. 113. In support of the CPS results, the AAA program will underpin the lending program. The AAA will aim to provide timely knowledge and input to Government policies and inform the on-going development debate in the country, e.g. pensions, telecoms and ICT, energy, demand-side governance, trade, environmental issues (climate change, forestry). Inaddition, this CPS reflects a programmatic approach to AAA planning which will include an overall assessment o f government systems to identify opportunities for the increased use o f country systems in selected sectors and projects. This component will be critical for supporting Moldova's continued efforts at statistical capacity building. The AAA program will be closely coordinated with the government and other development partners. C. Partnerships 114. 1DA'~spartnershipwith the IMF in Moldova's development strategy has been strong over the past few years. Bank and IMF staffs have executed joint work and have continued to carry out joint missions at least twice a year for macroeconomic policy dialogue with the Government. The IMF policy dialogue with the Government takes place inthe context of the ongoing PRGF, covering the 2006-2008 period. The PRSC has been prepared in conjunction with the PRGF to ensure the consistency o f the macroeconomic and structural policy reforms supported by both programs. The IMF i s taking the lead on macroeconomic issues while IDA takes the lead on structural and social issues. Ina number of areas where the mandates o f the two institutions overlap, such as public finance, the work i s being closely coordinated to ensure that consistent advice i s provided to the authorities. The existence of an IMF program, set to expire next year, has been an important input for the determination o f the adequacy o f the macroeconomic policy framework. 115. The Bank has been active in helping to improve donor coordination.Moldova has worked with donors to harmonize development efforts and has achieved substantial progress since 2006 (Box 4). Alignment between the Economic Growth and Poverty Reduction Strategy Paper and the European Union-Republic of Moldova Action Plan and the willingness o f external partners-including the US, the EU, the UN, Sweden, DFID, the Swiss, and the -Dutch-to align their assistance with the EGPRSP (now NDS), has facilitated coordination on the ground. The Bank has worked closely with other donors both inanalytical work and inindividual lending operations. 116. The harmonization process was carried forward through a Development Partnership Framework designed to implement the Paris Declaration on Aid Effectiveness. The framework, "Co-ordination and Harmonization of Government and Donor Practices for Aid Effectiveness in the Republic o f Moldova," was signed by the Government, IDA, Netherlands, United Kingdom, Sweden, UN, IMF and EU in Chisinau 37 on May 29, 2006. This Partnership Framework commits the parties to joint reviews, harmonization o f indicators, and prior actions and synchronization with government budget cycles with a view to reducing transaction costs o f assistance to the country. It also contains performance indicators for both government and external partners to assess progress towards measures for increased aid effectiveness. Box 4. Milestones for Donor Coordination and Harmonization 0 Moldova signatory to Paris Declaration on Aid Harmonizationin 2005. 0 Development Partnership Framework between Government and major donors signed in May 2006. 0 Brussels Consultative Group meeting hostedby the EC and World Bank in December 2006-US$1.2 billion pledged. 0 National Development Strategy fully aligned with ENP Action Plan. Donors and Government developing new coordination mechanisms, including a donor task force to map out ajoint NDSresponse. 117. Moldova receives development assistance from a growing range of multilateral and bilateral donors. The emphasis o f these donor efforts varies somewhat depending on their expertise and selectivity as follows: The UnitedNations Development Programme's new strategy for 2007-1 1 focuses on: (i)governance andparticipation; (ii)accessto social services; and(iii)regionaland local development. The EU country assistance strategy for 2007-11 emphasizes: (i)democratic development and good governance; (ii)regulatory reform and administrative capacity building; and (iii)poverty reduction and economic growth. A three-year EU/Moldova Action Plan was approved in February 2005. The last progress report on the Action Plan was issued inFebruary2008. The EBRD country assistance strategy (approved by its Board in September 2007) focuses on private sector development, including support to financial institutions and publicinfrastructure. Key priorities for USAID include improving the environment for private sector development, promoting strong communities and accountable democratic institutions, and helpingcontrol most dangerous public health threats. Good governance i s a major area o f focus for SIDA, DFID, andthe Netherlands among others. SIDA also supports energy efficiency and rural investment while DFID emphasizes public financial management, public administration reform, and social assistance. The Netherlands has recently approved a grant to enhance the regulatory and supervisory framework for non-bank financial institutions. In December 2006, Moldova received a US$24.7 million grant from the Millennium Challenge Corporation (MCC) o f the USA to implementa two-year anticorruption plan with five components, including: 38 o strengthen the capacity ofthejudiciary inpreventing and combating corruption; o strengthen the monitoring capacity of civil society and mass-media; o preventand curb corruption inthe healthprotection system; o curb corruption inthe tax and customs administration and the police bodies; and o reform and improve the capacity ofthe Center for Combating Economic Crimes and Corruption. The Government has submitted to MCC in early 2008 their compact proposal which includes irrigation and roads. Central European countries, including Romania, Poland, the Czech Republic, Latvia and Lithuania also provide assistance, mostly inthe areas o f capacity building and good governance. 118. The Government and its development partners have recently expressed interest in a joint approach to help Moldova over the upcomingperiod, utilizingthe newly designed NationalDevelopment Strategy as the overarchingframework in this process. In support of this joint approach, the development partners have launched a division o f labor and mapping exercise (Annex 6). The rationale behind this exercise i s to: (i)provideauseful, high-level overview ofOfficial DevelopmentAssistance supportto Moldova's new NDS, and (ii)map and align projects/programs with the results o f the National Development Strategy to better ensure coordination, avoid duplication, and ultimately to make development assistance more efficient and effective. It i s anticipated that implementation reviews and monitoring o f progress toward NDS outcomes would occur on a regular basis, providing opportunities to seek additional support or refine implementation strategies as needed to achieve the intendedresults. IV. MANAGING AND MONITORING THE COUNTRY PROGRAM A. Results-Based Monitoringand Evaluation 119. The success of the Bank's strategy in Moldova will be measured by the achievement of CPS outcomes aligned to selected priorities set forth in Moldova's National Development Strategy 2008-2011. The results framework identifies the outcomes to which the CPS i s expected to contribute and provides measurable indicators to assess the achievement o f each outcome. Mid-termprogress indicators identify key policy reforms and actions needed to achieve CPS outcomes. The core CPS indicators identified inthe results framework are summarized inFigure 3. ' 120. The results framework will guide the Bank in monitoring progress and modifying the strategy as necessary to remain a relevant and effective development partner. This matrix (Annex 5) links the Bank Group's lending, investments, and non- lending activities to specific outcomes and specifies milestones and target values to assess whether implementation and outcomes are occurring as planned. This results framework reflects the evolving results-oriented focus o f the country portfolio described previously and has benefited inparticular from: (i) increasing rigor of results frameworks for more the recent projects, (ii)increased capacity o f country systems as supported by the Bank and the World Bank Institute (WBI) for monitoring and evaluation, and (iii) the development of a results scorecard to support management in monitoring the portfolio's performance vis-a- 39 vis country outcomes, the quality of the results orientation in each individual activity- including those financed by trust funds-and the Bank's contribution to management for results at the country level. This evolution has warranted substantial departure from the results matrix presented in the last CAS. The matrix of results targeted by the CPS builds strongly on the activities inthe existing portfolio and the additional financing programmed for FY09 and FY10. Adjustments will be made at mid-term to incorporate new activities planned in the outer years of the CPS, recognizing that in most instances implementation will not progress fast enough to contribute to long-term development outcomes during the planning horizon of this strategy. Figure3. Core MonitoringandEvaluationIndicators,FY09-FY12 Real per capita income of the poorest quintile nses at leastas fast as averageincome Poverty headcount declinesfrom 30 2% in2006 down to 25%in2010 and20%in 2015 Gross enrollment rate for general secondary education increases from 90 5% in 2006 up to 95% in 2010 and Under-5 mortality rate decreases from 20 7 in 2006 to 186in2010and 153in2015 eAccess to an improved water source increases from * Export of goods and Decreased % of people below * Improved services increased as % of poverty line performance of civil GDP Increased access to quality servants Increased FDI preschool programs *Improved quality of Increased length of roads * Improved quality and equitable regulatory services rehabilitated access to general education * Sound public policies Decreased share of electric Reduced maternal mortality rate power losses as share of Improved fiscal Reduced HlVlAlDS incidence total energy consumption discipline and Reduced TB-associated mortality resource allocation Improvedcompetitiveness of the ruralfarm sector Improved coverage and quality of water and sanitation services - 1 I I 121. Plans for monitoring and evaluation under this CPS will capitalize on opportunities for increasedharmonization. To this end, indicators from the NDS have been incorporated into the results framework where appropriate and the Bank will rely on country data systems and unified reporting systems where feasible. The Bank will also monitor the share of IDA commitments in pooled funding arrangements and the share of on-going IDA operations using regularjoint donor supervision missions. 122. The Bank will actively monitor implementationprogress of the CPS with the Government and key partners through annual NDSKPS implementation reviews. The results scorecard will be one tool used in this process, and the Bank will increasingly use NDS outcome indicators and country basedsystems for measuring results. 40 B. ManagingRisks 123. The risks for this CPS include (i)fiduciary risks; (ii) implementation capacity at the central and decentralizedlevel; (iii)external shocks; and (iv) political economy risks. 124. The fiduciary risk in Bank-financedprojects in Moldova is substantial, and above the ECA averages. Lessons learned under past country assistance strategies have underscored that due diligence and caution is required in using the country systems to implement new projects. However, the residual risk does not prohibit increased use of country systems for selected sectors and projects to the maximum extent possible. Mitigating fiduciary risks by improving fiduciary controls at sectoral and project levels and assisting Moldova with improving transparency and strengthening the capacity of the government public procurement and public financial management systems, as well as finding optimal project implementation arrangements that use country systems where reliable will be the main fiduciary portfolio managementpriorities over the next CPS cycle. The PRSC program, as well as the Bank's and donor's work in these areas, is already providingassistance to the Government inthis endeavor. 125. The Government has limited institutional capacity which could delay the implementationof its ambitious reform agenda. Most line ministries still have limited capacity for the systematic selection and appraisal of projects, implementation, and evaluation and this may lead to the sub-optimal allocation of budgetary resources. To mitigate these risks, all the reform areas benefit from Bank and donor-supported TA and capacity building programs or investment operations. In areas where donor engagement i s limited, implementation risk will likely remain high. 126. Greater integrationinto the global economy, both with respect to trade and labor flows (i.e. remittances), makes Moldova more vulnerable to external market developments. For example, the recent turbulence in global financial markets may have adverse effects on Moldova through, among other things, a growth slowdown among its main trading partners and among the major host countries of Moldova's migrant workers. These may have significant poverty implications at the household level, depending on households' relative dependence on remittances and their sectors of employment. In addition, foreign inflow o f capital may fall due to a global tightening of credit. This may, in turn, dampen economic activity and job creation. Furthermore, the price of natural gas imports to Moldovawill rise to Europeanlevels over the next three years. Higher electricity prices from Ukraine are also forthcoming. Higher energy prices may have significant poverty implications with the burdenof the price increase falling disproportionately on the poor and on households with limited alternative sources of fuel. Rising food prices, stemming from either domestic or international sources, if they outstrip income growth, could have a disproportional impact on poor households. 127. The Bank, the IMF and other donors, have shown flexibility in the amount of availablefinancing to respond, if needed, to external shocks. A grant of US$7 million approved in August, 2008 under the Global Fast-Track Facility for the Food Crisis will help to mitigate some of the impact of rising food prices in 2008/9. Under the PRSC program, the Bank is promoting reforms to improve the efficiency of the energy and agricultural sectors as well as the Government's social assistance system. As demonstrated 41 at the Consultative Group meeting, Moldova will be the recipient o f considerable donor financing inthe coming years. 128. A number of reforms - civil service, education and agricultural reform could- be politically challenging as next year's elections draw closer. Under the EGPRSP and the NDS, Moldova has articulated an ambitious reform program. Over the last few years, the Government has established a steady track record of reform, albeit with some efforts proceeding faster than others. The extensive consultations surrounding the development o f the NDS indicate that a high degree o f political consensus has been established behind this reform program. Along with the reaffirmation o f Moldova's EU aspiration, this gives comfort that the agenda laid out inthe NDS will be pursued. These looming elections may have an impact on the political consensus that has developed behind the Government's reform program; however, the close linkage between the Bank-supported reform agenda and substantial donor assistance (DFID, SIDA, the Netherlands and EU) planned for Moldova continues to be a mitigating factor. 42 ANNEX 1:MOLDOVA AND THE MDGP The baseline year for establishing the medium-and long-term targets will be the same as in the initial MDG report (2002), except for cases when the estimation methodology was recently modified for some indicators. [Important to show actual results against these] Goal 1. Eradicate extreme poverty and hunger Reduce the proportion of people whose consumption is under $4.3 a day/person (in PPP terms) from 34.5% in2006 down to 29% in2010 and 23% in2015. Reduce the proportion of people under the absolute poverty line from 30.2% in 2006 down to 25% in2010 and 20% in2015. Reducethe proportion of people under the extreme poverty line from 4.5% in2,006 down to 4% in2010 and 3.5% in2015. Goal 2. Achieve universalaccess to generalsecondary education Ensureopportunities for all childrento attendgeneral secondary education. Increase the gross enrolment rate for general secondary education from 94.1% in2002 up to 95% in 2010 and 98% in2015. Maintain the literacy rate for the 15-24 year-old population at the level of 99.5%. Increase the enrolment rate for pre-school programs for 3-6 year-old children from 41.3% in 2002 up to 75% in 2010 and 78% in 2015, and for 6-7 year-old children from 66.5% in 2002 up to 95% in 2010 and 98% in 2015, as well as reduce by less than 5% the discrepancies between rural and urban areas, between disadvantaged and middle-income groups. Goal 3. Promote gender equality and empower women Increase women's representation in decision-making positions. Increase women's representationat the decision-making level from 26.5% inlocal councils in2007 upto 40% in 2015, from 13.2% in rational councils in 2007 up to 25% in 2015, from 18% women- mayors in2007 up to 25% in2015, and from 22% women-Parliament members in2005 up to 30% in2015. Reduce gender inequality in employment. Reduce gender inequality on the labor market by reducing the discrepancy between salaries of women and men by at least 10% until2015 (women's averagesalaryrepresenting68.1% ofmen's salary in2006). Goal 4. Reduce child mortality Reduce infant mortality from 18.5 (per 1,000 live births) in 2006 down to 16.3 in 2010 and 13.2 in2015. Reduce the under-5 mortality rate from 20.7 (per 1,000 live births) in2006 down to 18.6 in2010 and 15.3 in2015. 16See: "MoldovaNational Development Strategy, January2008.. 43 Maintain the proportion of under-2 children vaccinated against measles at least at 96% by 2010 and2015. Goal 5. Improve maternal health Reducethe maternal mortality rate from 28.0 (per 100thousand live births) in2002 down to 15.5 in2010 and 13.3 in2015. Maintain the number of births assisted by qualified medical staff during 2010 and 2015 at 99%. Goal 6. Combat HIV/AIDS, tuberculosis and other diseases Stabilize the spread of HIV/AIDS infection by 2015. Reduce HIV/AIDS incidence per 100,000 population from 10cases in2006 downto 9.6 by 2010 and 8 by 2015. Reduce HIV/AIDS incidence per 100 thousand population from 13.3 cases in 2006 down to 11.2by 2010 and 11by 2015 inthe 15-24-year age group. Have halted by 2015 and begunto reduce tuberculosis. Reducethe rate of mortality associated with tuberculosis from 16.0 (per 100,000 population) in 2002 down to 15.0 in 2010 and 10.0 in2015. Goal 7. Ensure environmental sustainability Integrate the principles of sustainable development into country policies and programs and reduce degradation of natural resources. Increase afforestation from 10.3 YO in2002 upto 12.1%in2010 and 13.2%in2015. Increase the share of protected areas to preserve biological diversity from 1.96% in 2002 up to 4.65% in2010 and 4.65% in2015. Increase the share of people with permanent access to safe water sources from 38.5% in2002 up to 59% in2010 and 65% in2015. Halve the number of people without access to improved sewage and sanitation systems. Increase the share of people with permanent access to improved sewerage from 31.3% in 2002 up to 50.3% in 2010 and 65% in 2015. Increase the number of population with access to sanitation systems from 41.7% in 2002 up to 51.3% in 2010 and 71.8% in 2015. Goal 8. Develop a global partnership for development Further develop a transparent, predictable and non-discriminatory trade and financial system based on rules through promoting exports and attracting investments. Settle the issues of land lock of the Republic of Moldova through upgrading the transport and customs infrastructure. Monitor the external debt issue. Develop and implement youth strategies. Ensureaccess ofpopulationto major drugs. Buildan information society. 44 ANNEX 2: MOLDOVA COUNTRY GOVERNANCE AND ANTI-CORRUPTION STRATEGY Executive Summary Given the current development path and institutional environment in Moldova, governance remains a significant challenge to growth and poverty reduction. Weak governance, uncompetitive private sector, and fragmented civil society together create a dynamic cycle where a large part of the active population migrates abroad instead of being agents for wealth creation at home. The Government recognizes governance and anti-corruption as a defining challenge; however, the authorities' commitment has not been consistent and the track record uneven. Recently government anti-corruption efforts seem to have accelerated, but the results remain to be seen. Moldova CGAC Objectives. The longer-term objective of the Bank's CGAC strategy is to assist Moldova indeveloping sustainablerule-basedgovernance, which will support the pro-EU choice by closing some of the major gaps between the quality of Moldova's institutions and that of institutions inthe member states. Over the midterm, the CPS governanceprogram will be geared to assist the Government inachieving macroeconomic predictability, sustainability and a gradual transition: away from the remittance economy and towards sustained competitiveness, a healthy business environment, and investment in human development. The principles guiding the CPS are to find new entry points for supplying good governance, complement these with selectedand promising demand-side interventions, and effectively leverage our limited resources through selectivity andpartnerships. Approach, Trade-Ofls, and Selectivity. The lessons from the unfinished reform agenda and the 2004 CAS results, which primarily emphasized supply-side governance, prompted a renewed Bank approach. The elements ofthis approach are: Align Moldova CGAC with the objectives of National Development Strategy (NDS) and generally adopt an approach that emphasizes country leadershipby working on strengthening country systems, includingpublic procurement; Consequently, approach the governance challenge in Moldova as both one of the CPS pillars as well as a cross-cuttingplatform underpinning the remaining two CPS pillars -- Competitivenessand Human Development; Continue to engage with the government on the supply side of good governance through the PRSC series, the unfinishedpublic governance reform agenda (PFM, PAR and CSR), by stepping up implementation of e-services for businesses and citizens and through measures to create a competitive business environment, but recognize the progress along these dimensions may continue to be gradual; Put incrementalefforts and resources into measures to strengthen the demand side for good governance (DFGG) at the country, sector and project level; Support donors' lead in the anti-corruption effort where they have active programs and comparative advantage; and continue to provide public goods for cross-country governance monitoring and analysis. 45 Proposed Entry Points and Program. At the country level, the ongoing public sector reform agenda, implemented through PRSC policy lending, PSM reform grants and technical assistance, will remain a main entry point for pushing ahead with reforms of the central governance systems and reducing opportunities and incentives for corruption. Implementation of e-governance solutions for financial management, procurement, and service delivery will also improve governance and reduce opportunities for corruption. Building on the good progress made with public finance management reforms, the Bank will extend its efforts on the country systems agenda, with a focus on public procurement, internal and external audit as well as building capacity in central and line ministries for performance related budget management. This will provide the foundation for a gradual transition towards greater budget support, as requested by the authorities. Specific entry points for the GAC strategy at the country and sectoral level may include: Improving the sectoral investmentplanning ininfrastructure, health, and education; Reform the civil service pay system to increase performance incentives; Strengthen the public information disclosuremechanisms to improve feedback loops; Development o f the export potential for the agricultural sector and promoting food security without distorting production incentives to increase rural incomes and reduce incentives for outward migration; Increasing the transparency in corporate financial reporting thereby attracting greater outside investment flows; Strengtheningthe banking sector and financial intermediation for flows of remittances to make them available for investment; Increasing the efficiency o f government services by application o f e-governance solutions (e.g. e-government; e-procurement); Addressing the Demand for Good Governance (DFGG) by engaging vulnerable actors with upward (middle class) potential and longer term stakes ingood governance - e.g. civic and private sector associations through building capacity for advocacy and collective action. Risks and Mitigation. The investment portfolio will continue to face fiduciary risks; yet the Bank should continue to promote the use o f country systems for selected sectors and projects, where residual risks are not prohibitive after mitigation. The main mitigation measures for strengthening the fiduciary controls at the portfolio and project levels will include: (i) invest in a deeper understanding o f SOEs and state corporate entities' management, strategic investment planning, and capital budgeting to build the policy dialogue in these areas; (ii) further building capacity for improving the public procurement system, (iii) finding an optimal PMU transition model; and (iv) strengthening the project design with controls along the project cycle and broader public oversight. On this basis, the Bank will explore the possibility to bring to readiness during this CPS the first investment loan which would be implemented entirely using country systems. Results and Monitoring. The Moldova CGAC results monitoring will gauge success by tracking actionable indicators and harmonizing outcomes with the downstream cross-sectional CPS policy- and development results matrix. Implementation progress will be tracked through existing and customized CGAC country- and ECCU2 GAC portfolio reports and advised on corrective actions by the ECCU2 GAC Committee. 46 * * * The annex below presents the details o f the Moldova country governance and anti-comption strategy. The strategy defines the objectives and the CGAC approach derived from the Bank's experience to date and the main identified challenges and drivers for change over the mid-term; further, the strategy sums up the sectoral and thematic selectivitykrade-offs drawing on the consultations conducted with the Bank's country team, the Government and the donors; finally, taking into account the magnitude o f the fiduciary risks and mitigation the strategy outlines the CGAC priorities for 2009-2012, and makes recommendations on a `good fit' program and a framework to account for results. Governance, Growth and Poverty Reduction 1. Moldova's recent high growth has been driven by increased domestic consumption, migration and remittancesbut there are strongdoubts concerningthe sustainability of this model over the medium-term. Moldova's growth and poverty alleviation achievements have beenimpressive- an average economic growth o f 7.0 percent annually since 2001 and noticeable improvements in the transition indicators. Remittances inflows are likely to be reduced significantly in the wake of the global economic crisis at the same time as foreign direct investment and other capital inflows suffer, forcing a retrenchment o f domestic demand and likely slower growth inthe near future. 2. Governance remains a significant challenge to growth and poverty reduction in Moldova.The composite picture that emerges from the extensive analytical and diagnostic work conducted by the Bank and other donors17reveals governance obstacles and limitedprospects for quick wins. These limitations are complex, and are due to not only external structural factors but also to the prevailing value-sets and institutional legacies. Progress is slowed by insufficient checks and balances that would prevent high concentrations o f state power, conducive for capture by special interests. The private sector i s weak and civil society i s fragmented'*. In addition, Moldova's prospects to join the EU are rern~te'~, and as a result a strong anchor for institutional reform and improved governance i s lacking. Despite these constraints, Moldova has remained committed to market reforms and a competitive electoral process; most Moldovans prefer a democratic form o f government. 3. Pervasivecorruption contributesto a widespread culture of cynicism and a sense that the public is disenfranchised.Compared to a sample of former Soviet Union (FSU) countries, Moldova performs better or i s on par on several performance indicators. (Fig.1). However, Moldova remains an outlier on "unofficial" payments for civil courts, public education, and public health. One-third o f the population believes that corruption has increased under this government2'. The same survey found that 70 percent o f the population view corruption as widespread; 78 percent believed that corruption had recently worsened in Moldova, and 64 percent that corruption was "normal and inevitable." Citizens surveyed think the most corrupt 17 This governance assessment draws on CVS (2008); the PEFA (2008); PER (2006); CPAR (2006); FSAP (2007); CPIA (2006); BEEPS (2005); LiTS (2006); Doing Business (2007); and other donors surveys and assessments, e.g., CoE's GRECO Report (2006); and MOLICO Anticorruption Survey (2007); USAIDMCC base-line assessment (2007); EU TACIS institutional review (2007). 18 More than 30 political parties and about 7000 NGOs operate mostly Chisinau. l 9One of the preconditions put forward by EU to discuss Moldova's membershipis the resolution of all neighboring border and territorial claims surrounding the Transnistrian conflict. 20 2007 MOLICO Anti-Corruption Survey, Chisinau, Council of Europe. 47 institutions are the police, customs, judiciary, prosecutors, and ministries; the least corrupt are the NationalStatistics Office, mayoralties, military, andlocal councils.21 4. The Government recognizes governance and anti-corruption as serious challenge; however, while commitment has been good on paper, implementation has been inconsistent and the record -- uneven. In 2000, Moldova initiated anti-corruption reform; with assistance from major donors the government began to upgrade legal and institutional capacity to reduce corruption and money laundering, and implement new legislative and policy instruments. Institutionally, Moldova optea to establish a powerful specialized agency, Fig.1 Governanceand DevelopmentOutcomes the Center for Combating Economic Control of Corruption Crimes and Corruption (CCECC), responsible for analysis, prevention, , investigation and prosecution of Qualityof Policies \ ChiidMortalityRate under corruption.22 However, perception is widespread that some CCECC investigations are politically motivated and focus on petty rather than "grand" corruption. Moreover, CCCEC has used its powers mainly to fight corruption in the private sector rather than in public Average GDP Growih institutions, as originally intended. ECA OMoldova Legislative reforms have been guided by Nonetheless, progress measured by the More corruptiontoday than in 1989 2005 National Strategy for the I Prevention and Fight against Corruption Gettingahead in life using nepotismand cnminal or Prefere Democratic and associated Action Plan as well a the corruptpractices Governance EU Action Plan. However, progress as reflected in international ratings has been marginal. The 2008 Transparency Jnofficial paymentsin the civil Trust in People International (TI) corruption index has courts improved marginally from 2.8 in2007 to 2.9 moving Moldova's ranking from Unofficialpaymentin public/ \Unofficial paymentin the 111th to 109th place among 180 education public health countries. According to the World Bank ECA OMoldova CPIA measures, Moldova lags its ECA Source: Authors; Data: WGI, CPIA, LiTS, MDGs comparators in transparency and accountability and compares on par with Bosnia and Herzegovina, Montenegro, Serbia, Russia, and Ukraine.23 5. Recently the government has renewed its anti-corruption efforts; however, long awaited results still remain to be seen. The National Development Strategy (NDS) signals a renewed government commitment to combat corruption. The NDS identifies priorities such as judicial independence, further judicial system consolidation, curtailing the General Prosecutor's extensive powers, and emphasizing preventive anti-corruption efforts. Despite some 2'About 80 percent of Moldovans believe that almost all civil servants are corrupt; many citizens typically solve problems with the authorities by bribing civil servant with money (73 percent), gifts (65 percent), or favors (60 percent). Since 2005, corruption amongparliamentariansand ministers has grown; 22www.ccecc.md 23The CPIA indicator assesses the extent to which the executive can be held accountable for its use of funds and the results of its actions by the electorate and by the legislature andjudiciary, and the extent to which public employees within the executiveare required to account for the use of resources, administrative decisions, and results. 48 weaknesses, at least on paper the rules for accountability of the public officials provide a basis for a strong reform implementation. For example, the system of limited-duration immunities is better than that insome countries, although immunity coverage is excessively broad and exempts not only MPs andthe President, but also a long list of prosecutors,judges, and public officials. 6. Progress has also been made in public procurement reform in moving towards alignment with the EU aquis. In past years, the share of the sole source contracting was reducedfrom 16percent (of total value) in2004 to 7.2 percent in2006 according to the statistics of the Procurement Agency. A new procurement law came in effect in October 2007. A Public Procurement Agency, which reports to the Prime Minister, has been created out o f central purchasing body of the Ministry of Economy. 7. Moldova i s a party of the international regimes combating illegal cross-border activities, AML-CFT and anti-trafficking. In July 2007, the governme;lnt adopted a law on Prevention and Fight of Money Laundering and Financing of Terrorism with CCECC being . responsible for the coordination and implementation of the law. During 2007-09, the National Committee on Anti-Trafficking adopted a new action plans for fighting drug trafficking. Furthermore Moldova has ratified the 2008 European Convention for Combating Human Trafficking, and in 2007, adopted a New Guard Law. Finally, in 2008, the Parliament adopted a law on international legal assistance inpenal matters. 8. Given the limited resources and capacity of Moldova's civil society, its impact on holding the government or private interests to account is quite weak. Although the civil society inMoldova i s active and diverse inmeeting identified social needs and represents a wide array of civic values (from good governance, social stability, consumer protection, gender and minorities, poverty and social protection, environmental standards, and other public interests) almost half of the NGOs operate in the social sector. The majority of Moldovan NGOs is financially struggling. Despite the recognized role of NGOs in improving government effectivenessand responsivenessinmany countries, only 28%25of the Moldovanpublic perceive NGOs favorably. Donor financed projects remain the main source for NGOs funding. NGOs' capacity for monitoring of specialized or complex reforms i s perceived as low also due to the skills and expertise gaps in conducting advocacy campaigns and engaging the Government effectively. WorldBank's Governanceand Institutional Reform Effort to Date 9. The 2004 CAS placed strong attention to governance and anti-corruption and addressed public sector governance as one of the three pillars aligned with the government program objectives of the EGPRSP. A considerable portfolio of lending and analytical services26aimed to implement the two governance and institutional reform objectives of the CAS: strengthen the capacity of the public sector to develop and implementpublic policies; increase the transparency and accountability of PFM and improve public perceptions of governance. The main lending interventions and technical assistance targeted PFM reform, civil service reform, reforming courts and the engaging civil society ingrowth and poverty-reduction decisions. 24LawNo.l90-IX, July 2007, effectiveas of September 2007 25IPP Survey, April 2008 http://www.im.md/barometrul.ahp?l=ro&id=31 The lending portfolio included:ReformingCourtsIDF Grant (FY06); Poverty ReductionSupport Credit (FY07; FY08); Multi-Donor Trust Fundfor PublicAdministration Reform(FY07); Public FinancialManagement(FY07); The non-lending portfolio executed ten technicalassistance and diagnostic products: Bottomup GovernanceNote(FY05); Civil Service GovernanceTA (FY06, FY07); Local Government and Communal Services Note (FY07); Public FinanceReview(FY07); Public ProcurementTA-IDF (FY07); TA for the Court of Accounts (FY07); Central PublicAdministration ReformFollow-up (status?);Country FinancialAccountability Review (2006); FSAF' (2007); CorruptionVulnerability Scan (FY08); 49 10. Implementation overall has been satisfactory. However most of the results concern outputs, and there has been little impact on perceived corruption levels in general. In addition, while progress with the reform o f PFM and public procurement has been steady, improvements inpublic administration reform and civil service reform did not materialize to the same extent during the 2005-2008 CAS. One o f the most important achievements has been the launch of the Medium-TermExpenditure Framework (MTEF) making possible a single Treasury account for all budget transaction^.^^ Financial Management Information Systems (FMIS) developed under the PFM Project TA have contributed to increasing the quality o f budget preparation and expenditure management. An internal financial control and audit system consistent with EU standards has been developed. A central policy unit has been established to improve policy decisions and target them towards poverty reduction. The Court of Accounts (COA) i s transforming into a capable SAI, compliant with international standards2*. 11.A significant part of the governance efforts in the 2005 CAS were supported by donor trust funds. While this allowed the Bank to leverage its limitedresources, it has contributed to some fragmentation of efforts and a less than optimal use o f synergies with other parts o f the portfolio. The present strategy present GAC activities as a cross-cutting pillar in recognition o f the scope to exploit such synergies further. Fiduciary Risks in the Bank's Portfolio and Mitigation 12. The fiduciary risk inBank-financed projects in Fig. 2. Moldova FM Risks Level Moldova is substantial, and above the ECA FM Risk Band -All ECA, Moldova m averages. At the Bank's 2008 fiscal year end, the 0 S.osIan1.al Moldovaportfolio included 14 operations (including 0 Maerala . - 0 . 0 A 3 3 6 GEF)with most ofthe ongoing projects beingrated satisfactory for development objective and implementationprogress. The team that reviewed implementationarrangements and assessingcorruption vulnerability in2008 concluded that the vulnerability to corruption inBank-financed projects inMoldova i s substantial. The Bank's financial management (FM) `RAPMAN-PRIMAas ofJune 16, 2008 monitoring system recognizes Moldova as a "high-risk" FM ISR Ratings -All E A , Moldova country with significant fiduciary risks (11 percent) in the active investment projects (Fig.2) compared with the ECA regionalaverage (6 percent). 13. Procurement is a particularly vulnerable aspect of the Bank's Moldova portfolio. Project fiduciary staff are pressured by implementing agencies to influence bid outcomes o f the evaluation and contract ECA MoMova awarding processes. Despite the increase o f Bank RAPMAN-PRIMA 8s ofJune 16 2008 scrutiny and intensity o f prior reviews the mitigation measures appear to have iimited effect due to the following four main reasons: underutilized project and portfolio management tools by the implementing agencies; inadequate internal ''Except '*The for medical and social funds, which are still separate accountswith the Central Bank ofMoldova. COA modernization is assisted by the Swedish national audit institution, financed by a multi-donor trust fund (MDTF) executed by the World Bank. 50 controls and external audit arrangements; high turnover among fiduciary consultants; and inadequateinformation disclosure. 14. Steps to improve country systems and increase their use in Bank-financed operations are to be encouraged. Given Moldova's track-record and high systemic risks, such an approach should proceed on a case by case basis, and only if residual risks after mitigation are deemed acceptable. The present strategy believes, however, that by moving in this direction, the governance agenda can benefit from additional country leadership and ultimately contribute to greater development effectiveness. Mitigating fiduciary risks by improving fiduciary controls and assisting Moldova with strengthening the capacity of the government procurement system, as well as finding an optimal PMU implementation model will be one of the main fiduciary priorities over the next CPS cycle. 15. Finding the right implementation model faces considerable trade-offs between risks to the project and capacity and knowledge transfer. Most investment projects are implemented by traditional project implementation units (PMU) and recent efforts have been made to better integrate project implementation with the agents responsible for the overall project execution. There are three distinct models (Box 1) that apply to investment lending implementation in Moldova. However, experience shows that none of these models can fully protect the project from manipulation of bid outcomes or contract awards. Therefore, as part of the transition arrangementsfor mainstreaming PMUs, a readinessassessment needs to be conductedto identify and address criteria, gaps and atimetable for transition towards greater use of country systems. 16. In the meantime, additional efforts to improve country-level fiduciary controls will be needed. Country level due diligence needs to include the management of state-owned enterprises, strategic investment pianning, and capital budgeting. Increasingly, the Bank has been using elements of country Box 1.PMU Models in Moldova Portfolio systems and existing institutions, thus reducing the transaction costs in Bank (i) Complete "ring-fencing," which means fiduciary investment projects. Further increase in consultants are not integrated with the implementing the use of these elements (including the institution; this model presents the highest resistance to use of the Treasury, the Court of Accounts undesirable pressures from the beneficiaries and for audit and national procurement rules) implementingagencies but engenders the lowest degree of ownershipby the Borrower; would results in the gradual substitutions (ii) "Legal agent'' is the extreme version of "ring- of the Bank requirements with the full use fencing" in which all powers and authorizations are of country systems and, while this would handed over to the PMUs,which are established as legal not be feasible within the lifetime of this entities solely to implement the projects.The downside is CPS, it is expected that steps towards total dependence on the integrity of the PMU staff, and a complete lack of knowledge and capacity transfer to the readiness would be achieved. government agency. (iii) "Out-sourced fiduciary function" is a hybrid model Bank's CGACStrategyfor Moldovafor in which beneficiaries are in charge of implementation 2009-2012 and assign staff as project coordinators, and the downside is similar to the legal agent model described above. 17. Improving governance in Moldova (iv) "Fully integrated country systems" is a model in i s central to development. However a which the implementation management responsibility is big gap exists between the current level with the ministries and the beneficiaries using the flow of of governance quality and the country's funds through the treasury system. The most obvious EU aspirations. The unfinished PSM downside is the existing procurement risk due to weak government capacity. reform agenda requires a ramped-up Bank approach. Although the Government is willing and committedto deliver on the enhanced governance and the anticorruption agenda, its efforts are limitedby the country's internal political dynamics. Furthermore, earlier Bank efforts 51 have focused primarily on the supply side o f governance institutions and focused on the government as the main stakeholder and client. The last CAS results indicate that there has been limited engagement with civil society and private stakeholders to generate demand for better accountability and transparency inthe delivery o f public services by the government. 18. The longer-term strategic objective of the Bank's governance strategy will be to assist Moldova in developing sustainable rule-based governance, which will support the pro-EU choice and close some of the distance between Moldova's institutional quality and that in the new member states. The Bank's CGAC Strategy will continue to emphasize supply side interventions, but complement these with greater attention to the demand for good governance. Moreover, efforts to improve Moldovan institutions will be broadened to cover sectoral investment planning, corporate financial reporting, financial sector deepening and others in recognition o f the role that good governance plays not only for the delivery o f public services but also for investmentand improved economic competitiveness. 19. The proposed Bank's strategic response will approach the governance challenge in Moldova as a pillar and cross-cutting platform to support the objectives o f the two CPS pillars aligned with the Government NDS -- Competitiveness and Human Development. The Bank's approach will rest on three main thrusts taking into account the limited Bank resources, Bank areas o f effectiveness and likelihood to achieve results: Continue to engage strategically the government on the supply side governance through the implementation o f the PRSC series and the unfinished public governance reform agenda (PFM, PAR and CSR) and competitive business environment at the country level; Support the donors lead inthe anti-corruption effort where the donors have active programs and have been more effective with comparative advantage; provide public goods for country level governance monitoring and analytics through the CODB, BEEPS and the WGI instruments or through co-financing diagnostics (e.g. SIGMA) which can open new opportunities for donors engagement on advancing the anti-corruption agenda; Increase the incremental effort and resources in areas where Bank efforts would render mid- term results, i.e. sectoral governance diagnostic, demand side governance, strengthening country systems and public procurement. (i)Country Level: SustainingReformofthe CentralSystems 20. The ongoing public sector reform activities targeted through PRSC policy lending and PSM technical assistance will remain the main lending interventions for urging reforms of the central governance systems. PRSC program ensuring cross-sectoral dialogue and triggers will provide the levers for promoting improvement inpublic investment management processes, while the ongoing Bank projects for reforming the central public administration, establishing meritocratic civil service, ensure effective public finance management and lessen the bureaucratic burdenwill build capacity to reduce opportunities and incentives for corruption. 21. The Bank will work towards establishingthe foundations for greater budget support by strengtheningthe capacity for strategic planning, budgeting and performance monitoring, as well as creating appropriate incentives from improved public sector management. Achieving this will require further upgrading the public fiduciary controls and advances in planningand execution o fpublic investments. This will be implemented by strengthening central government capacity for managing the implementation o f CSR and PAR, further PFM reform (which would ensure proper use o f procurement planning and monitoring), supporting the ongoing development o f public procurement including e-Procurement and upgrading the 52 capacity o f the COA and reform of the civil service pay system. By strengthening the capacity for public sector management and putting in place key elements o f an enhanced country system (e.g. completing the reform o f public financing and facility for midterm forecasting, aligning spending with priorities, and strengthening the capacity o f public procurement) will create conditions for makinga transition to budget support and sector-wide approaches over the mid- to longer term. ii)SectorLevel:RisksandOpportunitiesforBudgetSupport 22. The governance assessment diagnostics suggests the following development areas for increasing governance effectiveness at the sectoral level in response to the identified sectoral . governance challenges: Improving the sectoral investment planning in infrastructure, health, and education to ensure greater effectiveness and strategic alignment o f public spending; . Reform the civil service pay system to create incentives for improved public sector management; Strengthenthe public information disclosure mechanisms to increase accountability; . Strengthen the financial intermediatiodinfrastructure for remittances flows and increase the transparency incorporate financial reporting to promote investment; Develop the export potential o f the agricultural sector and promote food security without . distorting production incentives to create income opportunities in rural areas and prevent labor outflows; Increase the efficiency o f government services by application o f e-government; e- procurement solutions; 23. Table 1 below summarizes the program of governance-related AAA interventions planned in the CPS. The program reflects a detailed governance diagnostic and several consultations with stakeholders, donors and the authorities and i s targeted towards deepening understanding o f linkages between different sectoral governance challenges and overall development outcomes. It i s designed to enhance the effectiveness o f the Bank's core IDA funded assistance, including through a focus on measures to enhance the demand for good governance. The consolidated program i s presented inTable 1below. 53 Table 1. Proposed Bank CGAC Program 1 AAASectorandTheme I Tasks I Unit IComment1 MacroManagement; Growth; Shocks, Predictably CEM-Growthand Competitiveness ECSPE On-going ImprovingCompetitionTA follow up ECSPF Ongoing Private Sector Governance Corporate FinancialReporting ECSPFPS On-going Infrastructure INF Sector InvestmentPlanningCapacity ECSSD New Local Governance LocalGov, Communal Services Note ECSPF On-going Health, Education, and Social Protection Governance and Health ECSHD On-going Public Sector Management, CentralPAR(Follow-up) ECSPE On-going Accountabilityand AC Country Systems Assessments ECSPSPE New (iii)ProjectLevel: ProjectActionPlans 24. At project level, the strategy will target further integration of anti-corruption measures into sectoral projects and programs, and strengthening the project design. Building on the emerging Bank-wide body of good practices, the strategy seek to implement this objective in three ways: . Smart project design and smart fiduciary portfolio oversight over the project cycle; Portfolio approach and review process; Social supervision and accountability, enhancedpublic oversight; Staff learning and training for operational staff and the task teams. Donors, Partnerships, and Communication 25. Even with the recent growth of the economy and increased flows or remittances, the share of donor assistance in Moldova has remained substantial relative to government expenditures; the global financial crisis and recession may further increase this dependence. Donor assistance would be vital for the continuation of the country's institutional development and anti-corruption governance reforms (see Table 2). In May 2006, the Government and key donors signed A Development Partnership Framework to implement the 2005 Paris Declaration on Aid Effectiveness and Harmonization. Thus, the Government committed itself to develop capacity in leading the harmonization effort by improving country systems and layingthe foundations for the transition to budget support. 26. Major donors in Mfidova include the EU2',the European Bank for Reconstructionand Development (EBRD) , and several bilateral donors. Among these, USAID3'/MCC32, 29 The 2007-11EU country assistancestrategy emphasizes (i) democratic development and good governance; (ii) regulatory reform and administrative capacity building; and (iii) poverty reduction and economic growth. A three-year EUhloldova Action Plan was approved in February2005; the most recent progress report was Dec. 2006. 30 The 2007 EBRD country assistance strategy focuses on private sector development, including support to financial institutions and public infrastructure. 3 1Key USAID priorities include improving the environment for private sector development, promotingstrong communities and accountable democratic institutions, and helping control most dangerous public healththreats. 32 InDecember 2006, Moldova receivedaUS$24.7million grant from the Millennium ChallengeCorporation (MCC) to implement atwo-year anticorruption plan with five components: (i)strengthen the capacity of thejudiciary in preventing and combating corruption; (ii)strengthen the monitoring capacity o f civil society and mass-media; (iii)prevent and curb corruption inthe health system; (iv) curb corruption inthe tax, customs and the police bodies; and (v) reformthe CCECC. 54 Sweden (SIDA), UNDP33, the UK (DFID) and the Netherlands are the most important contributors. Eastern European countries, including Romania, Poland, the Czech Republic, Latvia and Lithuania also provide assistance, mostly for capacity building and good governhce. 27. The Bank will regard partnerships and donor coordination for governance results as another delivery instrument.The Bank needs to: (i) continue to be a lead donor convening key stakeholders and mobilizing donors' resources to address national priorities; (ii) lead in selected governance areas where it has already established programs and dialogue. In areas where other donors and partnershave proven advantage or implement sizable programs, the Bank will hand- over the lead donor role, offering its convening role as needed and remaining a provider of analytical support. Areas where the Bank can rely on the lead role of other donors are: judicial reforms (USAID/MCC; UNDP; EC); customs, security, police; law enforcement (EC; USAID/MCC); border control, customs, combating corruption and anti-trafficking (CoE, U SAID); regional development and empowering civic and local communities (DFID; UNDP; EC, USAID). 28. Over the implementation period of this CPS, the Bank will widen its outreach to a broader audience of public and private sector entities, sub-national government, judiciary, and civil society to assist with anti-corruption campaigns or to support civic group initiatives for increased public disclosure of information and transparency for reducing the opportunities for corrupt practices and fraud. Also, the Bank will need to take a more strategic approach to communication, integrating on demand political economy mapping and analysis of key stakeholders' positions for coalition building over the entire project cycle. The Bank will also increasethe transparency of its transactions by making more information on its project activities open to the public. GACResultsMonitoring and Reporting 29.Results and Monitoring. The Moldova CGAC results monitoring will gauge success by tracking actionable indicators fully integrated inthe outcomes of the CPS results matrix. The implementation progress will be accounted through existing and customized CGAC country GAC portfolio reports informing remedial actions reviewed and advised by the ECCU2 GAC Committee. 33The 2007-11 UNDP strategy focuses on (i) governanceand participation; (ii)access to social services; and (iii)regional and local development. 55 Table 2. Donor Assistance to Moldova for Governance and Institutional Reforms Source: Authors' compilation 56 ANNEX 3: MOLDOVA COUNTRY ASSISTANCE STRATEGY COMPLETION REPORT Country: Moldova Date o f CAS: December 14,2004 Date o f Progress Report: September 25,2006 Period Covered by the CAS Completion Report: FY05 to FY08 Completed by: Dawn Roberts Date o f the Report: December 15,2008 I.INTRODUCTION 1. This report examines the implementation and effectiveness of the Bank's Country Assistance Strategy (CAS) for Moldova as defined in the FY05 CAS document and adjusted in the FY07 CAS Progress Report. To identify lessons that are relevant for the design and implementation o f the new results-based Country Partnership Strategy (CPS), this assessment considered the following: 1 Alignment of the objectives of the CAS with Moldova's longer term strategic goals and expected development results (Section 11) 1 Moldova's progress towards its development goals (Section 11) 1 Achievement o f CAS outcomes and their contribution to Moldova's longer term strategic goals (Section 111) 1 The Bank's performance duringthe CAS period (Section IV) Inaddition to discussions with the country team and other stakeholders, this assessment is based on reference documents such as Project Appraisal Documents, Implementation Status and Results Reports (ISRs), supervision reports (Aide-Memoires and Bank-to-office reports), reports related to Economic and Sector Work (ESW), Implementation Completion Reports (ICRs), and evaluation reports and ratings from the Bank's Independent Evaluation Group (IEG) and Quality Assurance Group (QAG). 11. MOLDOVA'S TERMSTRATEGIC GOALS LONGER 2. The CAS under review for this report was developed to support the objectives o f Moldova's Economic Growth and Poverty Reduction Strategy Paper (EGPRSP), establishing the Bank's lending and non-lending support for Moldova from FY05 through FY08. The EGPRSP, adopted in May 2004, was the first full Poverty Reduction Strategy Paper prepared by the government o f Moldova (GoM) in consultation with broad-based stakeholders and civil society. This document contained a diagnostic assessment of poverty in Moldova and a vision for sustainable and comprehensive poverty reduction during the 2004-2006 period. In 2006, the EGPRSP was extended through 2007. Overview of the EGPRSP 3. The EGPRSP identified three pillars to address the country's main obstacles to 57 longer-term development: sustainable economic growth, human development, and social protection. Using this framework, the government's strategy outlined a long-term vision for the development o f Moldova, established priorities for addressing the current obstacles to sustainable growth and poverty reduction, and identifiedthe medium-term objectives that should be achieved withinthe 2004-2006 period. These objectives were the main focus of the EGPRSP .. and served as the drivers for the prescribed actions and indicators: Sustainable and inclusive economic growth . Poverty and inequality reduction, and increased participation of the poor in economic development Human resources development 4. Both the medium- and long-term priorities identified by the EGPRSP were explicitly linkedwith the MillenniumDevelopmentGoals (MDGs). The MDGswere adapted "to the Moldovan reality," with target indicators established to define successful progress by 2006, 2010, and 2015.34 The strategy therefore indicated broad priorities for development and identified specific targets insome key areas throughwhich to gauge success. CAS Context and Alignment to Moldova's LongerTerm Strategic Goals 5. The Bank's Country Assistance Strategy was presented to the Executive Board against the backdrop of a difficultpolicy environment,and the alignment of the FY05 CAS to the strategic goals set forth in the EGPRSP is best understood by considering the country context. Moldova's transition to a market economy has been challenging, with high vulnerability to external shocks, a volatile internal political environment, and mixed reform implementation. Both the IMF (PRGF) and the World Bank Structural Adjustment Credit I11 programs had recently been suspended with less than one-third of the committed funds under these programs being disbursed. In addition, the policies and actions proposed in the EGPRSP reflected a significant departure from Moldova's 2001 Economic Revival Program. These circumstances raised concern about the GoM's commitment to the reform program articulated in the EGPRSP. 6. The CAS prescribeda cautious approachand mainly supported interventionsat the local community level in areas with the highest concentrationof poverty-including rural areas and small cities. By design, these targeted interventions were intended to address the needs inone or more o f the three interrelated pillars for development defined by the CAS: rnPromoting competitive market environment, stability, and pro-poor growth rnMinimizing social and environmental risks, building human capital, and promoting social . inclusion Combating corruption and improving public sector governance 34 For more discussion ofthe linkages betweenMoldova's development strategy and the MDGs, see the EGPRSP (Section 5.3). 58 These pillars organized the priorities differently than the main themes for development identified in the EGPRSP, but this approach was designed precisely to ensure better that Moldova's medium-termdevelopment objectives could be achieved. 7. Each of the CAS pillarswas designatedstrategically to further the goals set forth in the EGPRSP. The first CAS pillar supported the GoM's effort to eliminate the bottlenecks to growth by attaching a high priority to improving the business environment and investment climate. The second pillar promoted human development and called for selected interventions to focus directly on helping Moldova achieve its MDGs, including efforts to improve the quality and access o f social services for education, health, social protection, and community infrastructure. The third CAS pillar honored the objective o f the EGPRSP to "establish a modern, efficient public administration system, which will strengthen democratic processes and the market economy." This imperative for good governance was perhaps best summed up inthe Country Economic Memorandum (CEM) which was completed the following year: "Good governance i s fundamental for economic growth. An effective state must ensure an attractive and stable investment climate and allocate scarce resources efficiently and equitably. Failure to deliver services in an efficient and transparent manner increases the risk of corruption and reduces the credibility o f public policy inthe eyes o f citizens and investors alike." Moldova's ProgressTowards Achieving DevelopmentGoals 8. The country context has changed dramatically during the CAS period, and the new Country Partnership Strategy (CPS) will be developed under much different circumstances than this CAS was. At the start in FY05, the Bank's country portfolio followed a Base Case lending scenario that provided only investment operations. However, the CAS also contained a series o f key reform benchmarks that would provide the basis for evaluating reform in critical areas. These benchmarks provided triggers for a High Case lending scenario to leave open the possibility for resuming policy based lending. At the time o f the CAS Progress Report, the GoM had accomplished or substantially accomplished most o f the reform benchmarks that were established as High Case triggers-allowin for a Poverty Reduction Support Credit (PRSC) program to be implemented startinginFY07.8 5 9. The Annual Evaluation Report (AER) prepared by the GoM (2006), the CAS Progress Report, the PRSC program documents, and project ICRs all provide evidence of notable progress towards Moldova's longer term developmentgoals. Moldovahas increased the stability o f its macroeconomic framework-with generally strong growth, reduced poverty, and significant reductions in debt. The GoM has also improved the management o f public finances, launched a significant reform program for public administration, and improved its partnerships with the international donor community to increase the flow o f aid. 10. However, progress has been mixed for a core set of indicators linked to the MDGs. While the AER identifiedmore than 150 indicators through which to monitor EGPRSP progress, the Joint Staff Advisory Note to the EGPRSP highlighted selected indicators tied to the MDGs 35Moldova's CAS was one ofthe last to contain explicit lending scenarios. The IDA14 resource allocation process specifies that country allocations are determinedannually through IDA'Sperformance-basedallocation system, which supersededthe CAS indicative lending scenarios. The implications of the transition away from CAS lending scenarios for Moldova is explored inthe section on Bank performance(Section IV). 59 that the strategy's medium-term objectives aimed to achieve. These indicators are shown in Table 1. Moldova did experience strong economic growth, exceeding the target for GDP growth until 2006 when external shocks slowed the economy (discussed more in the next section on CAS outcomes). Also, while poverty was reduced overall, a troubling trend emerged after 2003, with poverty in the rural areas increasing between 2004 and 2005. Progress within the health sector has included decreases in the under-5 and maternal mortality rates which have exceeded the targets. Although the incidence o f HIV-AIDS remains well above the target level for 2006, the increase in new cases diagnosed reflects improvements in detection, with increased testing identifyingpreviously undiagnosed infections. Educationreform has advanced more slowly than planned (discussed more inthe next section on CAS outcomes). 2006 I.Sustainableand Inclusive Economic GDP growth rate, % 4.8 Growth 11. Poverty and Inequality Reduction Share of population with per and Increased capita incomebelow the Reduceto 28% 30.2' Participation of the absolute poverty line (MDL per in 2006 26,5 29.1 Poor in Economic adult equivalent per month), % Development Net rate of enrollment in Increase to 88.5 86.8 86.1 - - - - - - - - - - . . . . . . . . . . . . . . . . . . . . . . . . . secondary education,% 88.9% in2006 Under-5 mortality rate (per 1000 Reduceto 15.0 15.3 15.7 _ _ _ _ _ _ _ - - - _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ live born) in 2006 ~~~ ~ ~ ~ ~ Maternal mortality rate (per Reduce to 23.0 111. Human Resources .100,000. .live. .born). . . . . . . . . . . . . . . . 23.5 18.6 . . . . . . . . . . . . . . . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . in2006 Development Incidenceof HIV/AIDS (per Reduceto 4.0 _100,000_persons). . . . . . . . . . . . . . . . . . 6.20 8.53 _ _ - - - - - -. . . . . . . in2006 Reduceto 12.0 Mortality rate associated with in2010(no TB (per 100,000 persons) 16.8 18.9 target for 2006) Source: Annual Evaluation Report on the Implementation ofthe E a Data for 2006 are not comparablewith those of previous years due to changes in methodology for the Household Budget Survey. Data for 2006 represent a baselinefor analysis of poverty in future years. The increase inthe incidenceof HIV/AIDS infections is due, at least inpart, to increasedtesting activities and improvementsindetection. 11. Overall, a review o f all EGPRSP indicators and other evidence o f progress identified some key issues that pose remaining challenges for the new CPS: . Vulnerability to external shocks: Moldovan exports remain concentrated ina few commodities and are susceptible to weather hazards (2007 drought) and embargos (2006 ban on wine by Russia). The country also imports nearly all of its energy and i s vulnerable to international .price fluctuations. These factors have all dampened economic growth. Poverty in the rural areas: Rural households are increasingly impoverished due to the lack o f access to public services, the recent drought, and market distortions that have reduced farm- gate prices and thus affectedthe incomes o f farmers. 60 . The needfor increased foreign and domestic investment: The GoM has a mixed track record for economic and structural reforms. An improved business environment and enhanced competitiveness are neededto sustain economic growth. .Massive emigration: A large portion o f Moldova's working population live abroad to avail themselves o f better economic opportunities. These migrants are generally young, educated, and skilled. A better investment climate i s neededto create opportunities that would bring this population home and reduce emigration. 111. CASOUTCOMES 12. Performance under the FY05 CAS has been satisfactory. .The country team has worked to strengthen the results focus o f the country program duringthe CAS period, and a key product o f this effort has been the Moldova Results Scorecard.36Although this tool i s still being refined, it provides a useful summary assessment o f the performance of IDA assistance under this CAS. The outcomes that the Bank expected to influence and the corresponding results scores are shown inTable 2. Table 2. Moldova CAS Results Scorecard FY08 Maintain stable macro framework Debt strategy On-track 4 ReducedNPV of public and publicly guaranteeddebt Lower Public Debt Service On-track 4 Inflationin the single digits Governmentcurrent on budgetaryobligations On-track 4 Financiallyand socially viable pension systemin place No pension privilegesiredistribution of pensionpriviIeges/IOO% Mixed 3 contributors with individual accounts Reducedcost of doing business Customsclearancetime reducedLicensingcost Mixed 3 reducedilnspectionsreduced Arrest deterioration of transport infrastructure System of road user charges in place Inprogress 2 ImprovedEnergy efficiency and reducevulnerability Increasedavailability and reducedspecific heat consumption in On-track 4 pilots Agriculture: Strengthenproperty rights and increase Improved access to credit & outreach to farmers/ voluntary Mixed 3 access to finance. knowledge and technology production coopsihazardnsk strategy implemented Better targeting of social assistance Percentage of social assistancetargeted to the poor increased In progress 2 Higher quality educationand improved access NER in rural areas increasediGapin performancebetween rural Inprogress 2 and urban reduced Better allocation of efficiency in health and improved Reductionin IMR&CMR, TBiHIV incidenceand On-track 4 indicators mortalityhcreased%of pop'n coveredby essential health interventions Improvedaccess to and quality of WSS and Reduce 16 hours water supply in pilot areas/improvedcollection On-track 4 environmental degradationand hazards rates/O&M costs coverediwaterquality improvedI0bsolete POPSreducediafforestationincreased Increasedcapacity of public sector to developand Merit-based competition for civil servantsicivil service training Inprogress 2 implement policies system in placeAmprovedLocal Government budgeting systems Lowered perceptionof corruption by increased Reduce single source procurementihnual budgetsbased on On-track 4 transparency and accountability in managementof public MTEF monies I I I AVERAGE SCORE= 3.2 1 * Ratingsystem: 1=deterioration;2=steady state; 3=some improvement; and 4=significant improvement 36 The scorecardhas been designed as a updateabletool to improve the focus on results at the project and program level. Resultsscores are basedon self-assessmentsby country managementand by projectteams. 61 13. The following paragraphs provide a narrative explanation of CAS achievements under each pillar, their contribution to longer-term development goals, and the steps that are planned to address shortcomings. Various examples illustrate how the mix of lending and advisory services have allowed Bank staff to work effectively with client counterparts and other donors to build country systems and achieve results. Other examples highlight areas where results have not yet been achieved, often for multiple reasons. The GoM does not always speak with one voice, so an initiative could be championed by one ministry or official and then impededby another. The capacity of country systems or line ministries is still limited for implementing projects in some cases. Implications stemming from the turnover of Bank team leaders and bureaucratic processes must be reviewed to avoid any disruptions to the dialogue between the Bank and the GoM. Finally, the establishment of a new strategy or a new law-the main focus of the PRSC program-is a potentially critical step for sustainable change, but such accomplishments have often not yet yielded results during the CAS period. Rather than exploring the results of every activity pursued under this CAS, this section focuses on each main country outcome and explores the degree to which IDA assistance yielded results linked to this outcome. A list of CAS results is presented in the appendix along with the planned lending activities and advisory services and the actual deliveries. Pillar I: Competitive Market Environment,Stability, and Pro-poorGrowth 14. During the preparation of this CAS, the consultations with the business community, the Trade Diagnostic Study, and the Investment Climate Assessment all indicated that the high cost of doing business constrained private sector development andjob creation. The first CAS pillar called for a broad, crosscutting approach to improve the infrastructure for investment and economic activity, simplify bureaucratic controls and licensing procedures, streamline enforcement, improve corporate governance, and support the development of the rural economy where most of the poor live. The resulting mix of interventions supportedby IDA to further the country outcomes linked to this pillar is shown inTable 3. Outcome I.: Stable Macroeconomic Framework 1 15. The macroeconomic framework currently in place is satisfactory. The GoM has maintained a prudent fiscal stance during the CAS period, with fiscal surpluses in2003-2006 and a limited budget deficit target of 0.5 percent in 2008. IDA support has played an important role by providing advisory services and assisting with the establishment of a credible strategy for dealing with arrears on external debt (the May 2006 agreement with Paris Club creditors). This ability to reschedule debt has alleviated short-term liquidity difficulties and provided access to resourcesfor addressingdevelopment needs. 16. Moldova experienced strong economic growth from 2001 through 2005, with real GDP growth averaging 7.1 percent. However, since 2006, natural gas prices have more than doubled, imports of Moldovan wine were bannedby Russia, and the Moldova agricultural sector was hit by a severe drought. The growth of real GDP slowed in2006 to 4.8 percent and with the impact of the drought, growth slowed further in2007 to 4.0 percent. Given the severity o f these shocks, the economy has proved to be quite resilient and growth is expectedto rebound sharply in2008- 2009. 17. Although the country's economic performance has been positive under this CAS, this report highlights factors that could slow growth and poverty reduction and impede or erode 62 international competitiveness. It must be noted therefore that any review of the current macroeconomic framework should include an assessment o f the other outcomes desired under Pillar I. Table 3. Bank Assistance under Pillar I 1PrivateSector 1Cadastre Supplement(FY05) 1 Macro monitoring(continuous) Development 1RenewableEnergy from 1PensionPolicy Dialoguein cooperation with EC and IMF I1 (closed) Agricultural Waste (Biomass) (continuous) 1Cadastre I GEF Grant (FY05) 1 Annual Doing Business Survey (continuous) (FY98) 1CompetitivenessEnhancement 1 Private and FinancialSector DevelopmentDialogue 1Social (FY06) (continuous) Protection 1EnergyConservation and Management 1 Investment ClimateAssessment (FY04) EmissionsReduction (FY99) (CommunityDevelopment 1 Accountingand Auditing Reportonthe Observanceof Standards and Codes (FY04) . 1Rural Carbon Fund-CDCF) (FY06) Investment 1 Trade Study (FY04) 1Public HeatingBiomass Services Systems in Moldova Rural Country Economic Memorandum: Opportunities for (FY02) Communities CDCF) (FY06) Accelerated Growth(FY05) 1Trade and Noteon Impactof Gas Prices (FY06) 1Rural Investment and Services-1 Transport 2 (FY06) Agricultural PolicyNotes on Land, Markets, and Public Facilitationin 1 Expenditures(FY06) Southeast 1HealthServices and Social Europe Assistance (FY07) 1 FinancialSector Assessment ProgramFollow-upTA (FY03) (FY06) 1Road Sector ProgramSupport (FY07) 1 PovertyProfile Update and PRSP Support TA (FY06) 1Energy-2 (FY04) 1Poverty ReductionSupport 1 PublicExpenditure Review(FY07) Credit (FY07) and PRSC-2 Local Government and Communal Services Note:An (FY08) I Opportunityfor Reform(FY07) I HazardManagementNote (FY07) 1DisasterManagementNote (FY07) 1 Bank Strategy for Transport Sector (FY08) 1 Poverty and Social ImpactAnalysis (FY08) 1Multi-Donor Trust Fundfor Public AdministrationReform (FY07) Outcome 1.2: ReducedN P V of Public and Publicly Guaranteed Debt 18. Moldova's debt outlook is favorable, with a low risk of debt distress. External public and publicly guaranteed (PPG) debt, excluding debt o f state-owned enterprises, has sharply decreased under this CAS, from a baseline o f 53 percent of GDP in 2003 to an estimated 20 percent at the end o f 2007. This level o f PPG debt places Moldova well below the debt distress threshold o f 40 percent (net present value o f GDP) for countries with Moldova's Country Performance Indicator Assessment (CPIA) overall score. 19. The rapid decline o f PPG debt has been supported by the prudent fiscal policy, strong economic growth, and favorable debt rescheduling operations noted above under outcome I. In 1. 63 addition, the GoM has maintained policies that did not allow the debt situation to deteriorate despite severe external shocks. Commitments by the Consultative Group and the Millennium Challenge Corporation have demonstrated improved prospects for donor assistance which have, in turn, bolstered debt sustainability. In short, progress reducing PPG debt has created the opportunity for additional borrowing for infrastructure and other high priority development projects. 20. While the PPG debt reduction achieved under this CAS is notable, this success should be considered within the context o f continuing risks. In particular, any interruption o f remittance , inflows could affect the sustainability o f debt given the ongoing reliance o f the economy on workers living abroad. This dynamic underscores the importance o f improving the investment climate to enhance domestic sources o f growth. Outcome 1.3: Inflation in Single Digits 21. High inflation remains a concern in Moldova, and a renewed effort is needed to reduce inflation below 10 percent. Although the target for inflation control was not achieved during this CAS period, IDA assistance effectively supported the GoM in remaining current on budgetary obligations. The significant increase in energy prices since mid-2005 and the impact o f the drought on domestic food prices have impeded the efforts of the National Bank o f Moldova to reduce inflation. The CPI increased 12 percent in 2007, above the 10 percent target established inthis CAS. In the current context, disinflation will require ongoing tight monetary policy and a more rapid increase indomestic productivity. Outcome 1.4: Financially and Socially Viable Pension System 22. Significant progress has been achieved towards reforming the pension system, but more work remains to be done. Through the support provided by the Social Protection Management Project and the Pension Policy Dialogue, the general pension law (1999) to reform the pay-as-you-go pension system has metthe short-term objectives ofmaking pension payments on time, in-cash (as opposed to in-kind), and without the need for budget transfers. The system has increased transparency-with international accounting standards introduced and implemented and regular financial audits conducted (1999, 2002, 2003, 2004, 2005, and 2006). The National Social Insurance House has also made progress establishing and populating a database with individual records to allow for the calculation o f pensions based on individual contributions. 23. Despite these advances, pension benefits in Moldova are not yet based reliably on actual contributions paid. In some cases, GoM laws or policies have impeded Moldova's success in reforming the pension system. For example, employers have the responsibility to pay contributions on behalf o f the employee, but the recent law on contribution amnesty created incentives for employers not to comply. The GoM has also not yet successfully eliminated pension privileges, but the Ministry o f Social Protection, Family and Child has drafted a unification strategy for all categories of contributors/pensioners. 24. Bank staff have identified threats to the sustainability o f the pension system and rated the risk to the development outcome as substantial for the Social Protection Management Project (closed March 31, 2007). Key considerations in this assessment were the contribution amnesty law, the long-term financial sustainability o f the pension system, and the limited capacity o f the ministry for policy analysis and monitoring and evaluation on social protection issues. A major 64 factor affecting ministry capacity has been staff turnover due to low remuneration (see outcome 111.1). 25. Establishing a financially and socially viable pension system i s critical for sustained economic growth and poverty reduction, as noted in the section on social insurance in the EGPRSP. The Bank's Moldova country team envisions that the PRSC-3 will provide critical support to build on achievements made to date. Inparticular, this budget support will focus on establishing individual accounts for 100percent o f all pension contributors; unifying the pension system for all categories o f pensioners (non-agricultural, agricultural, and privileged) and achieving further progress in linking benefits to contributions. Outcome 1.5: Conditions Created for Increased Domestic and Foreign Investment through Reduced Cost o f Doing Business and Improved Trade Facilitation 26. The investmentclimatehas improvedduringthis CAS period, but notablerisks and barriers must still be addressed. The reform benchmarks established as triggers for the original high case CAS had all been fully accomplished at the time of the CAS Progress Report (September 2006). Moldova has simplified business registration and licensing procedures and reduced the number o f licenses and documents required for business registration. Comprehensive review o f all normative acts (by-laws) was conducted (the so-called Guillotine I exercise), resulting in the removal o f a large number o f obsolete and/or redundant regulations. Continued collaboration between the country team and the GoM via the Competitiveness Enhancement Project aims at further streamlining the business environment. The Law on the Basic Principles o f State Regulation of Entrepreneurial Activity (Law 235) was passed in July 2006 and included a series o f transitional provisions to (i)conduct a comprehensive review o f existing legislation (Guillotine 11) and (ii)build capacity for applying Regulatory Impact Assessment (RIA) methodology to new legislation Guillotine I1 has resulted in proposed amendments to more than 100 laws, with the draft legislative package currently under discussion by Parliament. Starting in March 2008, RIA has become mandatory for all new legislation affecting business operations. 27. A sound basis for financial reporting and auditing inthe corporate sector accordingto EU law and international practices has also been established for Moldova. Following the Report on the Observance o f Standards and Codes (ROSC) for accounting and auditing in FY04 and follow-up activities provided or supported by the Bank, the GoM passed new accounting and auditing laws in2007 that went into effect in2008. How to implement this legislationinpractice remains a challenge for Moldova, and currently, the GoM i s working with Bank assistance to prepare the country's strategy and action plan for strengthening corporate sector financial reporting. 28. The Trade Diagnostic Study implemented at the start o f this CAS period highlighted a number o f problems with operation o f the Moldova Customs Service (MCS) related to inefficient and costly border procedures. Under the Trade and Transport Facilitation in South East Europe project, the MCS has improved its performance and implemented an automated system for customs data to expedite processing. This system has served an important role in promoting export competitiveness and allowing domestic firms to participate in global production networks (see Box 1). 29. Notable progress has been achieved in Moldova's financial sector during the CAS 65 period-including remarkable growth in credit (50 percent year over year in 2007 alone) and deposits. The decreasing spreads in borrowing and lending rates and the increasing competition ox 1. A Modernized CustomsTrade provided by the entry o f foreign banks suggest Facility System continued improvement to the efficiency o f the Project: Moldo e and Transport banking sector. Facilitation in S t Europe Four years ago, a wait of seven hours in 30. An IMF Mission to Moldova (December 2007) noted that remittances are increasingly flowing into investmentsrather than consumption. Foreign direct investment (FDI) i s increasing and was projected to reach 11.2 percent o f GDP in 2007 (compared with 7 percent in 2006). The stock of FDI per capita has increased from $199 in 2003 to $519 in 2007 which is above the CAS their work, I know all the registration target o f $430 in2008. procedures will be carried out in a 31. Increases in domestic productivity are critical for supporting economic growth and poverty reduction, and such increases are only possible through greater investment and with support from the World Bank. innovation by firms and farmers. Duringthe CAS period, domestic fixed capital formation increased from 18.6 percent o f GDP in 2003 to 28.4 percent in 2006-above the CAS target of 22 percent set for 2008. 32. Despite this progress achieved under the CAS, Moldova still has one of the highest regulatory compliance costs in the region, and the country's overall global standing on the ease o f doing business has declined substantially in 2007 from 8Sthto 103`d (Doing Business 2007). This signals remaining inefficiencies inMoldova's business environment. 33. Agriculture i s still one of the largest real sectors of the economy, but Moldovan farmers are generally receiving less for their outputs and paying more for their inputs relative to international parity prices than they should. This constrains farmers' incomes and decreases returns to factors such as land and labor. In short, policy distortions and market imperfections continue to result in economic transfers from the farm sector and obscure agriculture's potential. While it is common for agricultural production to decline as a share o f GDP as economies develop, it should continue to grow in absolute terms. This i s not happening in Moldova, and the Bank has not focused any activities on directly supporting increased competitiveness or natural hazard mitigation inthe agricultural sector over the latest CAS period. 34. Insummary, these select details demonstrate how conditions have improvedfor domestic and foreign investment but also highlight areas for continued improvement. The country team expects key investment lendingand budget support to play importantcomplementary roles going forward. The PRSC i s a cross-sectoral instrument that fosters high-level dialogue and brings weight to regulatory reform. However, the GoM can not yet meet PRSC triggers without support. The individual projects remain critical for building GoM capacity to enhance or achieve specific results on the ground. 66 Outcome 1.6: Arrested Deterioration o f TransportationInfrastructure 35. Preliminary steps have been taken to implement a strategy for the road sector, including the rehabilitation of roads. Under the CAS, the main Bank support for the transportation infrastructure focused on increasing awareness o f the constraints that impede competitiveness through extensive ESW. With public investment remaining very low (less than 2 percent o f GDP), the roads continued to deteriorate with negative implications for growth. The country team has recognized this omission in the CAS and the Road Sector Program Support Project has recently become effective. This project i s expected to reduce road user costs in the longer term by improving the condition and quality o f the road network and by increasing the capacity o f the State Road Administration to manage, maintain, and rehabilitate the road network inan efficient andtransparent manner. 36. Bank staff have been actively engaged with GoM counterparts and other development partners in designing a Land Transport Infrastructure Strategy including a 10-year Investment and Expenditure Plan covering road, rail, and urban transport infrastructure. Following the Government's request, the Bank also helped the GoM to prepare a large-scale Road Sector Program which i s to be financedjointly by the GoM and at least five different external partners. The Bank's share i s contributed through the Road Sector Program Support Project which became effective in 2007. The process which has taken place in the Transport Sector has been considered as a model that could also apply to other infrastructure operations. However, the continued coordination of International Finance Institutions i s critical andthe absorptive capacity o f the GoM and current operations should be monitored closely, inparticular, with the European Commission (EC) and the Millennium Challenge Corporation (MCC) expressing interest in providing large additional financing to the Road Sector Program. Outcome 1.7: Improved Energy Efficiency and Reduced Energy Vulnerability 37. Targeted improvements in energy efficiency have been achieved, but the need to reduce energy vulnerability became increasingly urgent during the CAS period. Project activities achieved significant savings by implementing energy efficient technologies to upgrade metering, support more reliable operation o f the transmission system, and reduce the rate of outages o f the high-voltage transmission lines and substations. The availability o f heating in selected buildings has increased from 30 to 120 days a year, and the number o f buildings connected to heating has exceeded the output indicators. These improvements in the energy infrastructure have yielded social welfare results on the ground which undoubtedly contribute to other CAS outcomes (see Box 2). 38. As noted in the CAS Progress Report, the issue of energy vulnerability gained prominence with higher international oil prices and the sharp increase inthe price o f natural gas from $80 in 2005 to $253 per thousand cubic meters inJuly 2008, with additional price increases phased in until they reach market (Le. EU) levels by 2011, Energy sector reforms allowed for domestic gas tariffs to increase by 70 percent between February 2006 and February 2007 as a response to this price increase, thereby significantly reducing the demand for gas as the cost is passed on to consumers. However, tariffs in the district heating sector (dominated by the state- owned Termocom supplying heat in Chisinau) remain below cost recovery levels and are resulting ingrowing arrears to energy producers. These across-the-board subsidies for both rich andpoor are not equitable and are underminingthe financial viability ofthe sector. 67 has made it possible to suppl Clinical Hospital and the Institute for Oncology,with hot water and steam. 39. The PRSC program is addressing energy vulnerability issues-particularly focusing on reducing Moldova's energy intensity, maintaining or improving financial discipline inthe sector, pursuing further cost recovery of energy tariffs for all categories of consumers, and addressing poverty and social implications. The GoM has met a key benchmark for the PRSC-2 by adopting a new Energy Strategy (July 2007) to establish a reform path for legal, regulatory, and technical harmonization of the Moldova energy sector with the EU internal energy market, and specifically the Energy Community Treaty (ETC). Outcome 1.8: Strengthened Property Rights and Improved Access to Finance, Knowledge, and Technology inRural Areas 40. A unified national real estate cadastre system for urban and rural land has been established, and the credit and technical assistance provided to private farmers has exceeded CAS targets. The security of tenure and ownership rights in Moldova has increased, with 75% of rural property inprivate hands having been fully registered. The average income in the businesses in the areas covered by the first Rural Investment and Services Project (RISP-1) increased by 23 percent over the project period, and 194 new businesses were created in rural areas under RISP-2 during 2006-2007. 41. Although these project interventions have had promising results, the Bank has not yet developed a strategy for more comprehensively dealing with the various bottlenecks in the agricultural sector. Agriculture has underperformed overall economic growth, and this trend has contributed to increasing poverty in the rural areas since 2003 (see outcome 11.1 below). Public services and investment in the sector remain inadequate, including measures to reduce vulnerability to natural hazards. Only limited IDA resources have focused on the agricultural sector and on improving access to finance, knowledge, and technology in rural areas under this CAS, but the opportunity exists going forward to leverage this funding in partnershipwith other donors offering considerable funding (particularly SIDA and MCC) to achieve the desired outcomes. 68 Pillar II: Minimize Social and Environmental Risks, Build Human Capital, and Promote Social Inclusion 42. The CAS supported actions to strengthen human, social, and physical capital, recognizing that this was critical for sustainable growth and poverty reduction. IDA assistance focused on improving the targeting of social assistance, the access o f the poor to public services, and critical infrastructure such as public utilities. The mix o f lending and non-lending activities provided to promote outcomes within this pillar i s shown in Table 4. Given that the CAS pillars and the associated outcomes are often interrelated, these lists overlap at times with those o f the other pillars. Table 4. Bank Assistance under Pillar I1 OngoingLendingat Actual LendingKrants Start of CAS (IDA and IDF) 1Social Protection 1 Renewable Energy from Agricultural Waste 1 Poverty and Social Impact Management (Biomass) GEF Grant (FY05) Analysis (FY06) (FY99) 1 Energy ConservationandEmissionsReduction 1 EducationPolicyNote 1HealthInvestment CDCF (FY06) (FY06) Fund(FYOI) 1 Avian Flu-Moldova(FY06) 1 HealthPolicyNote (FY06) 1AIDS Control Quality Educationinthe Ruralareas of Moldova Poverty Assessment Update (FY03) 1 1 (FY06) (FY07) 1Pilot Water Supply 1 Reconciliationthrough Gen. Sec. Educationin 1 Public Expenditure Review and Sanitation Transnistria- JSDF Grant (FY06) (FY07) (FY03) 1 Sustainable POPSStockpilesManagementGEF 1 Local Government apd 1Social Investment (FY06) Communal ServiceNote Fund-2(FY04) (FY07) 1 PCF Soil Conservation(FY06) . 1GEF Agriculture 1 LegalEmpowermentTA PollutionControl 1 HealthServicesand Social Assistance (FY07) for PoorestCommunities (FY04) Poverty ReductionSupport Credit (FY07) and (FY08) PRSC-2(FY08) 1PCF Soil Conservation 1 Educationfor All FastTrack Initiative Grant (FY04) (FY07) 1 EnvironmentalInfrastructure(FY07) 1 NationalWater Facility (FY08) Outcome 11.1: Reduced Poverty Rates Among Rural Residentsand Vulnerable and Excluded Groups 43. Social assistance remains poorly targeted, and the poverty rate among rural households has increased since 2003. The Moldova Poverty Update (June 2006) reported little progress inreducing poverty since 2002 despite vigorous growth o f the GDP. This trend appears to be largely due to the evolution of relative prices: Moldovan farmers' real wages fell as the prices they received for the products remained flat and the prices o f inputs (e.g., wage labor and diesel fuel) increased (see outcome 1.5). In addition, multiple social assistance programs have sufferedleakage to middle and upper income groups. 44. Ongoing portfolio activities (Health Services and Social Assistance, the PRSC Program, Poverty and Social Impact Analysis, etc.) are being pursued to effectively reduce poverty rates. In 2007, the GoM approved a social support law to improve the targeting o f social assistance 69 benefits and this law was approved by Parliament in June 2008. The new system, which commenced in October 2008, establishes a single benefit directed to the poorest 10 percent o f Moldovans. A consolidated database o f beneficiaries o f social assistance i s in the design phase and is expected to be in place by the fall o f 2009. These measures should increase the government's capacity to assess the impact and effectiveness o f social assistance over time and better ensure that the poor andvulnerable have access to these programs. Outcome 11.2: Higher Oualitv o f Education and ImprovedAccess to Education Services in Line with MDGs 45. Significant challenges remain related to the quality of and access to education in Moldova, but progress is underway with education reform. The IDA package has provided a mix of relevant knowledge management and policy dialogue initiatives and financial assistance and lending activities during the CAS period. The evidence is inconclusive as to whether education quality or access has increased as a result to date. This status appears to be due to a combination o f inadequate indicators to assess Bank performance and limited capacity o f the Ministry of Education and Youth for project implementationand change management. Projects have provided new textbooks and curricula (General Education project) and rehabilitated facilities (Social Investment Fund 1 and 2) largely as planned, but indicators have focused on these outputs (implementation milestones) rather than on whether this has resulted in improved quality or access. The Quality Education in Rural Areas o f Moldova project i s expected to improve access to education services and will measure quality through Baccalaureate results achieved by urbanand rural students. 46. Moldova lags behind on reforms in education and the current system is inequitable and inefficient inthe allocation o f resources. The G o M has undertaken a school mapping exercise to provide information for resource planning and drafted a Strategy for the Optimization o f the School Network (both PRSC program triggers). These steps, coupled with new and ongoing activities (including the new Education for All Fast Track Initiative) and improvements to monitoring and evaluation indicators are expected to achieve this outcome. Outcome 11.3: Better Allocation Efficiency in the Health Sector and Improved Health Indicators inLinewithMDGs 47. IDA assistance has effectively contributed to health indicators in line with MDGs and improved allocation efficiency inthe health sector. A health insurance system was introduced in 2004 and its coverage increased to 75 percent since 2006. The GoM has emphasized more cost- efficient service delivery in primary care settings and has spent more on primary care through IDA assistance and other donor funding. The infant, under-5, and maternal mortality rates have beendecreasing. HIV/AIDS incidence continues to increase, but at a steadily decreasing rate. To some degree, the rate o f HIV/AIDS infection has been artificially inflated due to improved testing procedures which are detecting previously undiagnosed cases. Infact, the AIDS Control project i s a good example of concrete human development results achieved through IDA assistance (see Box 3). 70 13.3% in 2002 9Treatment with highly active anti-retroviral therapy (HAART) has been made available for patients from all over the country, including Transnistria, and to the prison population. The total number of PLWHA who started HAART treatment is 549 (including 19 children, and 530 adults) from both the civilian and prison sectors. These services are delivered in cooperation with the GFATM, mortatity has decreased 48. Health reform i s a long-term agenda. The original aims of equitable coverage of the country with good quality primary care must still be met-with some inefficiency remaining in the hospital sector andthe numberofvacant positions for family practitioners inruralhealth centers remaining continuously high. Inaddition, although the GoM contributes to health insurance for the non-working population, there i s still considerablerisk of poverty due to the cost of illness among the ruralpopulation and the self-employed. 49. Despitethese continuing needs, there has beennotable progress inthe health sector during this CAS period. The Ministry of Health has ledthe process to develop an approved reform strategy, demonstratingthe initiative and capacity to set policy and collaborating with donors to gain support for the overall health strategy through a consolidated donor program. The Health Services and Social Assistance project i s part of this consolidated support, and the Bank expects to continue working effectively with the MoHandwith donors to further increaseequity and efficiency inthe health sector. 71 Outcome 11.4: Improved Access to and Quality of Water and Sanitation Services and Reduced Environmental Degradation and Health Hazards 50. Banksupport has been instrumentalin improvingthe supply and quality ofwater in targeted areas and in removing persistentorganic pollutants. The Pilot Water Supply and Sanitation Project has delivered results to Moldovans in five towns-meeting or exceeding CAS targets (see Box 4). The improved water supply has been accompanied by increasing collection rates by the utilities (now averaging 92 percent in the pilot areas), boosting their financial performance andbetter ensuring the sustainability of project outcomes. Five Moldovan towns with a al populationof about 250,000 benefited from the improved safety and sustainability of the water supply and sanitation services. The centralized water supply and sanitation of deferred maintenance. s were contaminated with . 100%of water samples now test negativefor pathogens; 4 the service continuity increased to 24 hours in four towns and 19 hours in the town of Stefan Voda . comparedto 2 hours over 15 years; the energy savings due to the replacementof obsolete and energy intensive equipment constituted about 30% - 35%; infrastructure and better welfare. If at the project start in 2004 Orhei was supplied with water just several hours per day, towards the end of 2007 wafer is being s The Project Implementation Unit is fully integra which conductsthe monitoring and evaluationof 51. Other activities have also notably contributed to improved water supply and environmental conditions-particularly through the collection, treatment, and use of agricultural waste (both as fertilizer and as renewable energy). The Soil Conservation Project has succeeded in afforesting 21,000 hectares of degraded land (see Box 5). IDA assistance is focused on protecting the environment and human health by safely managing and disposing stockpiles o f persistent organic pollutants (POPS)and PCBs. While the performance of this project has been satisfactory thus far, significant delays on sub-components related to the establishment of a modern chemical management system couldjeopardize the project development objective. This warrants greater attention to project management and technical assistance issues to ensure that 72 this reduction ofenvironmental degradation is sustainable. Project activities supported the afforestation of about 21,000 hectares of degraded lands. The project provides carbon sequestration that allows the country to benefit from the carbon market. The total ct in the world under the Pillar 111.Combating Corruption and ImprovingPublic Sector Governance 52. Moldova inherited weak institutions. Excessive regulations, bureaucratic discretion, and associated corruption affect the competitiveness o f the economy, put downward pressure on wage rates, and drive people either to emigrate or to join the shadow economy. Activities under this CAS, shown in Table 5, aimed to facilitate the transparent and efficient management o f public funds, strengthen the civil service system, reform the judicial system, empower local governments, and increase the engagement o f civil society in decisions for creating sustainable growth and reducing poverty. Outcome 111.1: Increased Capacity o f Public Sector to Develop and Implement Public Policies 53. A foundationfor buildingcapacity in the public sector has been established through a strategy for reforming public administration. Under the PRSC program, the GoM has drafted a Civil Service Law to classify and grade civil service positions and link pay with professional development and performance. In April, 2008, a Civil Service Management Unit was established to implement this reform, and the law was adopted by the Parliament in November2008. . 73 Table 5. BankAssistance under Pillar I11 OngoingLending Actual LendinglGrants at Start of CAS (IDA and IDF) Actual ESW I TA None 1ReformingCourts-IDF 1Bottomup GovernanceNote(FY05) (FY06) 1Country FinancialAccountabilityAssessment Follow-up 1Poverty Reduction and Update (FY05) SupportCredit(FY07) 1Central Public AdministrationReformFollow-up(FY05) and PRSC-2(FY08) 1Civi1,ServiceGovernance TA (FY06, FY07) 1PublicFinancial Management(FY07) 1Local Government and Communal ServicesNote (FY07) 1Public Expenditure Review (FY07) 1Public ProcurementTA-IDF (FY07) 1TA for the Court of Accounts (FY07) 1Multi-Donor Trust Fundfor Public AdministrationReform (FY07) Outcome 111.2: Lower Public Perception o f Corruption in Government and Increased Transparency and Accountability inthe Management o f Public Monies. 54. IDA assistance has facilitated and supported continuous improvements to the annual Medium Term Expenditure Framework (MTEF) and increased competition in public procurement. The Bank has aided Moldova in strengthening its resource allocation processes through the MTEF and expandingthe sectors included to respond to the EGPRSP. An internal financial control and audit system based on European Union standards has been developed. The GoM has established a central policy unit to allow for political consensus on policies and to help ensure that the budget i s an effective anti-poverty and development policy instrument. These steps, combined with increased competition in public procurement, are improving both transparency and accountability inthe management of public funds. 55. Ongoing activities started under this CAS are expected to contribute further to this outcome. For example, the PRSC program i s promoting improvement in public investment management processes, so that externally financed projects, centralized investments, and other sources o f public investment are integrated into a single common public investment program with clear processes for prioritization and implementation (including economic feasibility studies). A strategic plan for the institutional development o f the Court o f Accounts has been approved and the implementation has started. Bank projects are also focused on technical assistance to build capacity inpublic administration and on court reform to reduce corruption. 56. International measures indicate that the public perception o f corruption in Moldova has generally declined duringthe CAS period. TI'SCorruption Perception Index has improved from 2.4 to 3.2 from 2003 to 2006. Many indicators inthe EBRD-World Bank Business Environment and Enterprise Performance Survey (BEEPS) also show improvement. However, there i s still progress needed. In particular, the BEEPS data-while largely showing a positive trend- indicatedthat the share of firms reporting that bribes were a problem had increased from 2002 to 2005 for obtaining government contracts, influencing the content o f new legislation, and dealing with courts. In fact, the percent of firms surveyed saying that the judiciary was a problem for doing business increased sharply from 2002 to 2005 and was well above the level for other countries in the region. These findings underscore the need for continued efforts to improve public sector governance. 74 IV. BANKPERFORMANCE Quality of Products and Services 57. IDA performance during the CAS period has been satisfactory. IEG and QAG '` evaluations and other internal measures o f quality indicate that the quality o f Bank products and services inMoldovahas been improving, and there have beenno projects at risk since FY05.The only project evaluated by the Qualit Assurance Group for Quality at Entry in 2004-2007 (Energy-2) had a satisfactory rating. Out o f six projects that closed during the CAS period, five have been reviewed by IEG and rated as satisfactory. Inaddition, the recent ISRs on active projects suggestthat all are on track to meet their development objectives. 58. The Bank's Moldova Country Team has demonstrated a results orientation for maintaining and improving the quality of products and services, continually working to strengthen the indicators for monitoring and evaluation. As noted earlier, the team has recently adopted the use o f the Moldova CAS Results Scorecard to assess better the contribution o f CAS activities to desired country outcomes. The 2006 Country Program Review noted that the quality o f the results frameworks for individual projects overall has been good, with clear, concise, realistic, and measurable indicators that are consistent with projects' development objectives. Additionally, Moldova received the highest score for results among ECA countries inthe 2007 ISRreviewconducted bythe ECA Quality Group. 59. The Bank has used analytic and advisory work (AAA) effectively during the CAS period to complement investment projects and the PRSC. The CEM, poverty update, advisory work on agriculture, and the business environment surveys have directly informed the development o f the PRSC Program. The Public ExpenditureReview (PER) in 2007 was closely linked to policy notes in health and education to allow for a broader review and to ensure adequate sector specific input. As noted in the section on CAS outcomes, analytical work has also been mainstreamed into other areas o f engagement, such as agriculture, social assistance, and improved access to health and education. The country team and other stakeholders continually provide input to identify analytic gaps and develop strategies for addressing them; for example, a current focus i s on the need to better understandthe drivers for economic growth and how these relate to povertyreduction-particularly for rural populations. 60. The PRSC was developed with strategic links to the investment program and in close coordination with other donors. Investment operations provide significant technical assistance to enable the implementation o f policy reforms supported by the PRSC program. A number of other donor programs are aligned behind the PRSC: for PRSC1, the limited IDA resources ($10 million) leveraged nearly $7 million from other donors. PRSC2 will also have substantial donor financing. 61. Plans for implementing products and services have been adjusted to strengthen results based on portfolio experiences, GoM initiatives, and opportunities for leveraging 37 Quality measured through QAG includes quality at entry, quality of supervision and quality of ESW assessments (the latter two types of assessments were not completed for Moldova projects during the CAS period). Other internal measures include IEG reviews of projects, ISRs, the internal review of results frameworks as part of the 2006 Country Portfolio Review, and a review of the ISRs conducted by ECA Quality Group in2007. 75 resources provided by other donors. A road sector project was added in FY07 to provide muchneeded financing for infrastructure. Concernsthat emerged fromthe AER promoted more focus on the limited effectiveness of public expenditure, the uneven poverty reduction, and public sector governance. Harmonization between the EGPRSP and the EU-Moldova Action Plan (EMAP) and the growing support of donors for working within this framework have created opportunities for coordination in such areas as AIDS treatment and prevention and social assistance pilots among others. 62. The IDA-IMF partnership in Moldova's development strategy has been excellent over the past few years. Bank and IMF staffs have executedjoint work and have continued to carry out joint missions at least twice a year for macroeconomic policy dialogue with the Government. The IMF policy dialogue with the GoM takes place in the context of the ongoing Poverty Reduction and Growth Facility, covering the 2006-2008 period. The PRSC was prepared in conjunction with the PRGF to ensure the consistency of the macroeconomic and structural policy reforms supported by both programs. The IMF is taking the lead on macroeconomic issues while IDA takes the lead on structural and social issues. Ina number of areas where the mandates of the two institutions overlap, such as public finance, the work is being closely coordinated to ensure that consistent advice is provided to the authorities. The existence of an IMF program is an important input for the determination of the adequacy of the macroeconomicpolicy framework for the PRSC. 63. Continued efforts are needed to deepen collaboration within the World Bank Group. The International Finance Corporation (IFC) has remained active in Moldova, supporting power, telecommunications, agribusiness, small and medium enterprises, and local banks. Building on IDA'Sefforts in the health and infrastructure sectors, IFC will collaborate and complement IDA'S work with public private partnership initiatives. In addition, the Multilateral Investment Guarantee Agency (MIGA) is active in Moldova, covering part of a large-scale power sector privatization effort that has been supported by IFC. MIGA is open to opportunities to support foreign direct investment in Moldova through the provision of political risk guarantees andwill coordinate its involvement with IDA. PortfolioAssessment 64. Portfolio quality has been steadily improving over the CAS period. As shown in Table 6, the percentage of commitments at risk has been reduced from 23.5 in 2004 to 0 since 2005. The disbursement ratio has been relatively high, averaging 22 percent despite the young portfolio age (currently, the average project age is 2.4 years). 76 Table 6: Selected Portfolio PerformanceIndicators,FiscalYears 2005-2008 Indicators Performance FY05 I FY06 I FY07 I FY08* I I 11 I 15I 15 I 14I INO.ofprojects Net Commitments($M) I 148.7 I 181.3I 179.9I 185.2I ~~ Disbursementratio, % 18.6 25.5 27.5 21.8 Projectsat Risk ("?) 9.0 0.0 0.0 0.0 Commitmentsat Risk (YO) 23.5 0.0 0.0 0.0 ProblemProjects (%) 0.0 0.0 0.0 0.0 IProactivity Index I 100.0 I NIA I N/A I NIA I RealismIndex 0.0 NIA NIA NIA 65. The portfolio is dominated by projects in the infrastructure and human development sectors. As o f December 2008, IDA lending operations include a PRSC program and 10 investment operations (with an additional 3 GEF projects), for a total commitment o f US$159.3 million, o f which US$100.4 million (63%) remains to be disbursed.All IDA and GEF operations currently under implementation are proceeding well, with none inproblem status or at risk. 66. Investment loans foreseen in the CAS for FY05 (under IDA13), FY06, FY07, and FYO8 were approved as planned. They included 6 investment operations in support o f public financial management, competitiveness, education in rural areas, rural investment services, health care and social assistance, road sector support, and supplemental financing for the Cadastre project. Additional operations were also approved, including a project to help Moldova combat the threat o f avian influenza in FY06 and a National Water Facility in FY08. Moldova used all of its IDA allocation duringthe CAS period. 67. However, the volume of loans delivered and the focus of lending and non-lending activities were different at times than what was originally envisaged in the CAS. The difference between planned lending and actual deliveries i s explained by Moldova's successful progress meeting High Case triggers and adjustments in the Bank's program in response to changing country circumstances. These modifications were made to ensure coherence with the PRSC program, provide flexible financing in response to the new government's priorities in infrastructure (roads) and to adhere to the new performance-based allocations (PBA) IDA envelope. The full list o f planned versus actual lending and non-lending activities i s in the appendix (Tables 2 and 3). 68. The transition away from CAS lending scenarios to the PBA approach presented difficulties both for reaching a shared understanding with the GoM and for planning lendingoperationsto stay on track. Moldova qualified for the High Case lendingscenario but no longer had access to this level o f support under the PBA system. Improvements in portfolio performance and in Country Policy and Institutional Assessment (CPIA) ratings in FY06 led to an increase in the allocation for FY07 and FY08, but this amount was still below the originally foreseen High Case level. This transition appears to be a major reason why the program has been 77 implemented with delays-about half of the activities have slipped at least one fiscal year behindtheir original timelines. 69. The portfolio has included a high number of projects relative to the size of the IDA allocation, and the associated cost of supervision has limited the resources available for ESW and TA. The results scorecard exercise includeda review of operational efficiency and effectiveness and identified that the cost of supervision for the Moldova portfolio was substantially higher than for other ECA countries on average. For example, supervision for activities in Moldova required 52 percent of the total country services in FY07, comparedto 35 percent for ECA countries on average. During the same time period, 10 percent of country services in Moldova supported ESW and only 6 percent supported TA, comparedto 20 percent and 12percent for ECA overall. Country Dialogue and Aid Coordination 70. The Bank has strengthened its relationshipwith the GoM during the CAS period. Government authorities have demonstrated their commitment to economic reform by implementing the changes called for under the High Case lending scenario, adopting EU- Moldova Action Plan (2005), and working to build country systems. Among others, such systems have includeda public debt managementfunction, basic information systems for budget execution, and a national Court of Accounts to act as the supreme financial control institution in the country. Although government authorities have not always shared a unifiedview regarding the means to a specific development objective, Bank staff have succeeded in fostering effective dialogue with client counterparts to achieve results. 71, The development of the upcoming CPS will rely on a consultative process. The country team regularly reaches out to stakeholders to inform them of lending and advisory activities and to receive their input. For example, the World Bank Moldova Country Office has recently hosted roundtable discussions with the media, think tanks, and other stakeholders on migration and remittances, doing business, youth and energy. The GoM has recently implementeda highly consultative process in establishing its National Development Strategy, andthe country team expects to follow a similar process indeveloping the CPS. 72. Although IDA lendingand advisory services representonly a minor share of official development assistance (ODA) each year, the Bank plays a pivotal role in coordinatingaid. The Bank's leadership inconvening donors was exemplified by the Consultative Group meeting in Brussels in December 2006. This meeting, hosted jointly by the World Bank and the European Commission (EC), brought together the GoM and international partners to confirm commitment to the country's reform program and development agenda and to identify additional external financing in response to recent external shocks. Currently, the Bank's Moldova portfolio includes US$61 million in.active grants from trust funds. There has beenparticularly close collaboration with the EC and several bilateral donors (UK, Sweden, and the Netherlands) in the preparation of the PRSC. The section on CAS outcomes cites examples of where Bank staff work with other donors on individual lending operations or analytical work. Efforts to advance harmonization and donor coordination have resulted in several donors signing the Development Partnership Framework (2006), and Bank staff often have the opportunity or responsibility to mobilize other donors' resources to address national priorities and to provide a predictable flow of aid. This role for the Bank in Moldova could become increasingly important as the aid from other donors increases. 78 V. LESSONS LEARNED 73. Targeted support plays an important role in building country systems, enhancing ministry capacity, and enabling the development and implementation of longer term policies and strategies. Numerous examples have highlighted the contribution o f Bank operations to country development outcomes-xpediting customs processing, increasing the efficiency o f energy use, increasing the quality and supply o f water, developing a health insurance system, and increasing the security o f ownership rights for rural property to name a few. Specific investment operations provide valuable support to the GoM for achieving the benchmarks mandated by the PRSC program. 74. Capable and committed government ministries are a critical factor in achieving development objectives. National agencies contribute effectively to the development agenda when they have the leadership and capacity to design and implement the needed strategies and policies. This review has highlighted cases-such as for health and transport-where agencies have demonstrated ownership o f and commitment to country development outcomes. In other examples, agencies must still develop the requisite country systems. As shown by the experiences in education and pension reform, weaker ministry capacity or a lack o f clear ownership can impede development efforts and warrants more targeted intervention. 75. Cross-sectoral approaches improve the effectiveness of interventions. Linkages across multiple themes can hinder development efforts that are too narrowly focused. Energy vulnerability and access to healthcare have direct implications for social assistance programs. Water quality and organic pollutants influence health outcomes. The weak ministry capacity impeding pension reform is due in part to staff turnover, an issue directly linked to the civil service reform agenda. As described above, targeted interventions can serve an important role in building needed country systems and facilitating longer-term government ownership, but these operations are best planned selectively as part o f a more comprehensive development strategy. 76. Resources from the Bank can be directed strategically to leverage those of other donors for optimal development impact. Harmonizing aid-underscored by the Paris Declaration (2005) and the Development Partnership Framework (2006)-has been a key theme during this CAS period, and consolidated donor support has been instrumental in furthering development outcomes. Resources from other organizations have greatly augmented available IDA assistance-in health, transport, public administration reform, and in the PRSC program to name a few examples. The Bank has developed effective relationships with GoM counterparts for facilitating a constructive development dialogue and targeting resources where they are needed, and serving this leadership role is critical for achieving country development objectives. 77. The linkages between economic growth and poverty reduction are not yet sufficiently understood for Moldova. IDA assistance has contributed to a stable macroeconomic framework and strong economic growth, and the economy has been resilient despite severe external shocks. However, reducing poverty has proven to be a more challenging objective, particularly for populations in rural areas. The lack o f a direct correlation between sustainable economic growth and poverty reduction suggests an analytic gap in the Bank's current portfolio. 78. Effective, efficient, and transparent public sector management is becoming 79 increasingly important for achieving development objectives. The Bank's portfolio in Moldova i s currently dominated by projects in the infrastructure and human development sectors, and there has been a strategic emphasis during this CAS period on improving the investment climate to spur domestic productivity and foreign investment for sustainable economic growth. All of these development initiatives rely on sound public sector management for resource allocation, strategy development, policy analysis, project management, and monitoring and evaluation. The third pillar of the CAS, Combating Corruption and Improving Public Sector Governance, continues to gain importance with the addition of the PRSC program, the mainstreaming of project implementation units, and the exploration of sector wide approaches. SO 0 0 a 0 0 a a 0 0 a 0 0 0 (u L 0 0 0 0 0 0 0 0 0 m 00 0 0 0 . 0 0 0 0 0 0 0 0 0 0 0 . . 0 0 0 0 0 0 0 0 e . e e e e e . e e e e e e e c .-e * e m e e m e e e * m e e m e e cr % C 4! D 0 3 a '0 .I 88 .-* i C E -.- 3 * 0 a .-C 0 . 0 0 I 0 0 0 0 0 I 0 0 0 0 PI0 . . . . . . 00 00 . . . . e D x e e e e e e e e e e . e e e .-C -0 6 b a A a e 2 (r 2 c 0 1 4 m $ * u P 2 e e e e e 2 I L B U 8 8 i- 2 O m v:Fr n 3 3 N 2 I aze u 0 4 E 0 ? C c 2 c C F CI W W P 0 0 0 0 0 0 E N C U N 0s kkt: 9 9 9 0 Y 9 9 s 9 00 0 E 0 4- B v) -0 B8c .-bl m .-Va, Y E8 -3 0 c) a, 2 I- o\ r4 U G L 3 U c Q) E U VY -.-s PE 3 cd -i? v, 0 2 1 t;: k: 4 . 0 05 W e4 24 EE c E f C E F C L1 C C z 0 F ; C c 4 1 c fi fe a C c5 : c -2I E -5 a s c a i- I I 3 I a .I u a c= zua .I cw a 0 Y ; El 1 .,, . - , 5 a, P x 1 z i - - 2E s 2 3 Y t m 1TT T I I I m W I -u CI, a L s a U m El m 3 3 F I m w Eu cp 0 2: 9 9 7 " 7 " U 7 *- L 2 5 9 9 7 " 7 " F 7 *- L hl- 6 0 ;;;;: 7 " 2 * 2 2 I Lncq 7 " 4 - J) 3 *- L x3 *3 L . 3 *- L b *3 I . *3 L b *3 L h 3 *- L 5: L .w xE 9 m F E x 5 Europe 8 Lower I Key DevelopmentIndicators Central middle Moldova Asia income Age distribution, 2007 (2007) Male Female Papulation, mid-year (millions) 3.8 445 3,437 Surface area (thousand sq. km) 34 23,972 35,510 Population growth (%) -1.1 0.0 1.o Urban papulation (% of total population) 41 64 42 GNI (Alias method, US$ billions) 4.1 2,694 6,485 GNi per capita (Atias method, US$) 1,090 6,051 1,887 GNI per capita (PPP. international $) 2,930 11,116 4,544 GDP growth (%) 3.0 8.8 9.7 15 10 5 0 5 10 15 GDP per capita growth (%) 4.1 6.7 8.6 percent (most recent estlmate, 200LL2007) I Poverty headcount ratio at $1.25 a day (PPP, %) 5 Poverty headcount ratio at $2.00 a day (PPP. %) 11 Jnder-5 mortality rate (per 1,000) Life expectancy at birth (years) 68 69 89 Infant mortality (per 1,000 live births) 19 23 41 60 Child malnutrition (% of children under 5) 4 25 50 Adult literacy, male (% of ages 15 and older) 40 100 99 93 Adult literacy, female (% of ages 15 and older) 99 96 85 30 Gross primary enrollment, male (% of age group) 93 98 112 20 Gross primary enrollment. female (% of age group) 92 96 109 10 Access to an improved water source (96 of population) 46 95 88 0 Access to improved sanitation facilities (% of population) 44 89 54 1990 1985 ZOW 2008 0Moldova 0Europe & Central Asia I Net Aid Flows 1980 1990 2000 2007 ' (US$ mi//ions) Net ODA and official aid 10 123 228 Growth of GDP and GDP per capita (%) Top 3 donors (in 2006): European Commission 0 5 26 United States 9 35 24 Sweden 0 2 12 Aid (% of GNI) 0.4 9.4 6 0 Aid per capita (US$) 3 34 60 Long-Term Economic Trends 85 05 Consumer prices (annual % change) 788.5 31.2 12 3 GDP implicit deflator (annual % change) 13.5 27.3 15 8 --O-GDP - GDP per capita Exchange rate (annual average, local per US$) 0.0 12.4 12 1 Terms of trade index (2000 = 100) 1980-90 1990-2000 2000-07 (average annual growth %) Population, mid-year (millions) 4.0 4.4 3.6 3 8 0.8 -1.8 0.6 GDP (US$ millions) 3,593 1.288 4 396 2.7 -9.6 6.5 (% of GDP) Agriculture 36.1 29.0 12 0 -11.2 -1.8 Industry 36.7 21.7 14 8 -13.6 0.8 Manufacturing 36.0 16.3 14 2 -7.1 4.8 Services 27.2 49.2 73 2 0.7 11.5 Householdfinal consumption expenditure 57.5 91.4 93 7 9.9 10.1 General gov't final consumption expenditure 15.1 10.3 18 9 -12.4 7.0 Gross capital formation 24.9 23.9 38 2 -15.5 11.9 Exports of goods and services 48.2 49.8 45 3 1.0 13.0 Imports of goods and services 50.6 75.4 96 1 5.9 15.4 Gross savings 58.1 18.3 23 8 Note: Figures in italics are for years other than those specified. 2007 data are preliminary. ..indicates data are not available. a. Aid data are for 2006. Development Economics, Development Data Group (DECDG). 115 Moldova Balance of Paymentsand Trade 2000 2007 IGovernance indicators, 2000 and 2007 (US$ millions) Total merchandiseexports (fob) 477 1,342 Total merchandiseimports(cif) 793 3,690 VOIW and aCCoUntabillty Net trade in goods and services -331 2,296 Political stability Currentaccountbalance -96 -694 as a % of GDP -7.6 -15.8 Regulatory quality Workers' remittances and Rule of law compensationof employees(receipts) 179 1.498 Control of corruption Reserves.includinggold 218 1,334 0 25 50 75 100 Central Government Finance 2007 Country s percantile rank (0-100) 02000 htgher values im#y betler raling6 (% of GDP) Current revenue(includinggrants) 31.9 41.1 Source Kaufmann-Kraay-Mastnrul Wodd Bank Tax revenue 25.0 33.6 Current expenditure 34.7 34.6 Technology and Infrastructure 2000 2007 Overall surplusldeficit -2.6 -0.2 Paved roads (% of total) 86.1 86.3 Highestmarginaltax rate (%) Fixedline and mobile phone Individual 18 subscribers(per 100 people) 17 78 Corporate 15 Hightechnologyexports (% of manufacturedexports) 3.2 4.7 External Debt and Resource Flows Environment (US$ mi//ions) Total debt outstandingand disbursed 1,693 3,203 Agricultural land (% of land area) 77 77 Total debt service 150 336 Forest area (% of land area) 9.9 10.7 Debt relief (HIPC,MDRI) - - Nationallyprotectedareas(% of land area) .. 2.0 Total debt (% of GDP) 131.4 72.9 Freshwaterresourcesper capita(cu. meters) .. 258 Total debt service(% of exports) 18.1 9.5 Freshwaterwithdrawal(% of internalresources) 231.0 Foreigndirect investment(net inflows) 127 0 C02 emissions per capita (mt) 1.6 2.0 Portfolioequity (net inflows) 117 0 GDP per unit of energy use (2005 PPP $per kg of oil equivalent) 2.1 2.4 ICompooition of total external debt, 2007 IDA, 292 Energyuse per capita (kg of oil equivalent) 692 917 rlBRD.j41 Private Sector Development 2000 2008 Time requiredto start a business(days) - 15 Cost to start a business(% of GNI per capita) 8.9 Time requiredto register property(days) -- 48 Ranked as a major constraintto business 2000 2007 (% of managers surveyedwho agreed) Access tolcost of financing .. 40.4 Tax rates .. 37.2 Stock marketcapitalization(% of GDP) 30.4 22.1 Bank capitalto asset ratio (%) 30.6 17.0 Note: Figuresin italics are for years otherthan those specified. 2007 data are preliminary. 10115106 .. indicatesdata are not available. -indicates Observationis not applicable. DevelopmentEconomics,DevelopmentData Group (DECDG) 116 Millennium Development Goals Moldova With selected targets to achieve between 1990 and 2015 (estimate closestto date shown, +/- 2 yean) Goal 1: halve the rates for extreme poverty and malnutrltion .__ Povenyneadcount ratlo at $1 25 a day (PPP %of population) Poverty neadcount ratio at nahonalpoverty ihne (% of popLlation) Share of ncome or consumptfonto tne poorest qdnltile(%) Prevaence of malnutrt on (% of cn idren under5) Goal 2: ensure that chlldrenare able to complete primary schoollng -~ Primaryschoolenrollment (net %) Primarycompletionrate (% of relevant age grobp) Secondary schoolenrollment(gross %) YoLtn lderacy rate (YOof peopleages 15-24) Goal 3: eliminate gender disparity Ineducatlon and empower women Ratio of girlsto boys in primaryand secondary education(%) Women employed in the nonagriculturalsector (% of nonagriculturalemployment) Proportionof seats held by women in nationalparliament(%) Goal 4: reduce under-5 mortality by two-thlrds Under-5mortalityrate (per 1,000) Infantmortalityrate (per 1,000live births) Measles immunization(proportionof one-year olds immunized,%) ~- Goal 5: reduce maternal mortality by three-fourths Maternalmortalityratio (modeledestimate, per 100,000live births) Birthsattendedby skilled health staff (% of total) Contraceptiveprevalence(% of women ages 15-49) __ __ _ ~ ~ _ _ _ _ _ _ _ _________ Goal 6: halt and begin to reverse the sEead._ and other maJor dlseases of HIV/AIDS Prevalenceof HIV (% of populationages 15-49) Incidenceof tuberculosis(per lM),OOO people) Tuberculosiscases detected underDOTS (%) Goal 7: halve the proportion of peoplewithout sustalnable access to bask needs Access to an improvedwater source(% of population) Access to improvedsanitationfacilities (% of population) Forest area (% of total landarea) Nationallyprotectedareas (% of total landarea) C02 emissions(metrictons per capita) GDP per unit of energyuse (constant2005 PPP $ per kg of oil equivalent) Goal 8: develop a global partnenhlp for development Teleohonemainlines(Der 100 DeoDle) Mobilephone subscribers(per'lodpeople) internetusers (per 100 people) Personalcomputers(per 100people) Education lndlcaton (%) illeasles immunization(% of 1-year olds) IC1indlcators (per 100 people) I n 2WO 2W2 ZOW 2006 196-2 1995 2WO 2006 2WO 2002 2034 2006 --O-Primary net enrollment ratio -Ratio of girls to boys in primary & 0Fixed + mobilesubscnbers 0Moldova 0Europe& Central Asia seconda education 0Internet users Note: Figuresin italicsare for years otherthan those specified. ..indicatesdata are not available 10/15/08 DevelopmentEconomics,DevelopmentData Group (DECDG). 117 CAS Annex 82 Moldova - Selected Indicators*of Bank Portfolio Performanceand Management As Of Date 11I2412008 Indicator 2006 2007 2008 2009 PortfolioAssessment Number of Projects Under Implementation a 15 15 14 13 Average Implementation Period (years) ' 2.7 2.1 2.3 2.8 Percent of Problem Projects by Number 0.0 0.0 0.0 0.0 Percent of Problem Projects by Amount 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Number a' 0.0 0.0 0.0 0.0 Percent of Projects at Risk by Amount a, 0.0 0.0 0.0 0.0 Disbursement Ratio (%) e 26.6 27.6 21.8 8.4 Portfolio Management CPPR during the year (yeslno) Yes no no no Supervision Resources (total US$) 928.8 1335.4 1200.1 536.74 Average Supervision (US$/project) 66.3 83.5 85.7 48.79 Memorandum Item Since FY 80 Last Five FYs Proj Eva1by OED by Number 20 8 Proj Eva1by OED by Amt (US$ millions) 429.0 87.5 % of OED Projects Rated U or HU by Number 21.1 0.0 % of OED Projects Rated U or HU by Amt 18.8 0.0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 118 CAS Annex 83 IBRDllDA Program Summary - Moldova As Of Date 11/24/2008 Proposed IBRDllDA Base-Case Lending Program a Fiscal year Pmj ID US$(M) Strategic Rewards b Implementation b ( H I M ) Risks (H/M/L) 2009 ENERGY, ADDITIONAL FINANCING 10.0 H H PRSCB 10.0 H H SIF 2 Add'l Financing 5.0 H M Result 25.0 Overall Result 25.0 '/This table presents the proposed program for the next two fiscal years b/For each project, indicate whether the strategic rewards and implementation risks are expected to be moderate (M),high (H), or low (L) 119 Annex B3 Moldova: IFC Investment Program As of November 30,2008 2003 2004 2005 2006 2007 2008 2009* Commitments (US$m)* Gross 2.88 10.50 0.00 5.00 0.05 10.00 0.00 Net Commitment** 2.88 10.50 0.00 5.00 0.05 10.00 0.00 Net Commitment by Industry (%) Agriculture 0Yo 0Yo 0Yo 0% 0% 100 0% Finance 100% 100% 0% 100% 100% 0% 0% Total 100% 100% 0% 100% 100% 0% 0% Net Commitment by Investment Instrument (%) Equity 48% 0% 0% 0% 0% 50% 0% Loan 52% 100% 0% 100% 100% 50% 0% Total Commitment 100% 100% 0% 100% 100% 100% 0% *As of November 30,2008 **For IFC's own account 120 Annex B3 MIGA Outstanding Exposure(Gross Exposure,$ million) As of end of fiscal year FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 through 9/30/08 Sectoral Distribution Finance 0.0 0.0 0.0 0.0 0.0 7.5 6.9 Infrastructure 61.1 61.1. 61.1 61.1 61.1 61.1 61.1 Agribusiness/Manufacturing/Services~ourism 0.0 0.9 0.9 0.0 0.0 0.0 0.0 TOTAL 61.1 62.0 62.0 61.1 61.1 68.6 68.0 MIGA's Risk Profile Transfer Restriction 40.6 41.5 41.5 40.6 40.6 48.1 41.6 Expropriation 61.1 62.0 62.0 61.1 61.1 68.6 68.0 War & Civil Disturbance 61.1 62.0 62.0 61.1 61.1 61.1 61.1 Breach of Contract 61.1 61.1 61.1 61.1 61.1 61.1 61.1 MIGA'sGross Exposure in Country 61.1 62.0 62.0 61.1 61.1 68.6 68.0 % Share of MIGA's Gross Exposure 1.2% 1.2% 1.2% 1.1% 1.2% 1.1% 1.1% MIGA Net Exposure in Country 30.5 31.4 31.4 30.5 30.5 38.0 37.5 YOShare of MIGA's Net Exposure 1.O% 1.0% 1.0% 0.9% 1.0% 1.1% 1.1% 121 CAS Annex B4 Summary of Nonlending Services Moldova - - As Of Date 11/24/2008 Product CompletionFY Cost (US$OOO) Audience a Objective Recent completions AGRIC NOTE 2006 402 G, B, PD KG, PD, PS FSAP FLWP TA 2006 58 G, B, D KG, PS EDUC NOTE 2006 66 G, B, PD KG, PD, PS POV PROF UPDATE & PRSP SUPPORT TA 2006 21 G, B, D, PD KG, PD, PS HEALTH NOTE 2006 48 G, B, PD KG, PD, PS CIVIL SERV GOVERNANCE TA 2006 280 G, B, D KG, PS SOC PROT DIALOG 2006 22 G, B KG, PS PSDlFSD TNDIALOG 2007 271 G, B KG, PS PER 2007 172 G, B, D, PD KG, PD, PS DISASTER MGMT NOTE 2007 280 G, B, PD KG, PS POV UPDATE 2007 129 G, B, D, PD KG, PD, PS ROSC ACCT & AUDIT FLWP TA - MD 2007 126 G, B KG, PS STRATEGY FOR TRANSPORT SECTOR 2008 382 G, B, D, PD KG, PD, PS LEGAL EMPOWERMENT TA FOR POOR 2008 19 G, B KG, PS PSDlTA DIALOG 2008 164 G, B KS, PS FSAP UPDATE MOLDOVA 2008 196 G, B, D KG, PS FIRST STRGTH M 2008 21 G, B KS, PS FIRST DEVT OF MONEY MARKET II 2008 34 G, B KS, PS Underway LOCAL GOV & COMMUNAL SERVICES 2009 154 G, B KG, PS PENSION POLICY NOTE 2009 27 G, B KG, PS PER 2 2009 108 G, B, D, PD KG, PD, PS MOLDOVA TELECOM ASSIST 2009 110 G, B KG, PS CEM: MOLDOVA GROWTH STUDY 2009 150 G, B, D, PD KG, PD, PS PSDlFSD DLG: POST FSAP 2009 50 G, B KG, PS CPAR 2010 100 G, B KG, PS POV UPDATE & TA 2010 82 G, B, D, PD KG, PD, PS RURAL HAZARD RISK MITIGATION STR 2010 G, B, KG, PS CORPORATE FIN REPORTING 2010 G, B KG, PS GOVERNANCE AND HEALTH REFORM 2010 G, B KG, PS FIN SECTOR REFORM 2010 G, B KG, PS Planned ENERGY POLICY NOTE 2010 FOOD SECURITY 2010 PRIVATE SECTOR AND DSGG 2010 FIN SECTOR MONITORING 2010 INFRAST SECTOR INVESTMENT PLANNING 2010 SCORE CARDS/ SOCIAL 2010 HH REMITTANCES EXPENDITURE REVIEW 2010 COUNTRY SYSTEMS ASSESSMENT 2010 CIVIL SERVICE GOVERNANCE TA 2010 a. Government, donor, Bank, public dissemination. b. Knowledge generation, public debate, problem-solving. 122 CAS Annex B5 - Moldova Social Indicators As Of Date 15l10l2008 Latest single year Same regionlincome group Europe & Lower- Central middle- 1980-85 1990-95 2001-07 Asia income POPULATION Total population, mid-year (millions) 4.2 3.6 3.8 445.1 3,437.1 Growth rate (% annualaverage for pen'od) 1.o -3.8 0.7 0.0 1.1 Urban population (% of population) 44.2 46.3 41.3 63.6 41.7 Total fertility rate (births per woman) 2.8 1.9 1.3 1.6 2.3 POVERTY (% ofpopulation) National headcount index 30.2 Urban headcount index 42.6 Rural headcount index 67.2 INCOME GNI per capita (US$) 480 1,090 6,052 1,887 Consumer price index (2000=100) 37 205 159 144 Food price index (2000=100) INCOMElCONSUMPTlON DISTRIBUTION Gini index 34.3 33.2 Lowest quintile (% of income or consumption) 6.9 7.8 Highest quintile (% of income or consumption) 41.4 41.4 SOCIAL INDICATORS Public expenditure Health (% of GDP) 4.2 4.1 2.0 Education (% of GNl) 4.6 4.7 Net primary school enrollment rate (% of age group) Total 89 86 91 90 Male 89 86 92 91 Female 89 86 90 90 Access to an improved water source (% of population) Total 92 46 95 88 Urban 97 97 99 96 Rural 88 88 88 83 Immunization rate (% of children ages 12-23 months) Measles 99 96 97 77 DPT 76 98 95 75 Child malnutrition (% under 5 years) 4 25 Life expectancy at birth (years) Total 66 66 68 69 69 Male 63 62 65 64 67 Female 69 70 72 74 71 Mortality Infant (per 1,000 live births) 34 25 19 23 41 Under 5 (per 1,000) 42 30 21 26 54 Adult (15-59) Male (per 1,000population) 289 269 276 299 202 Female (per 1.000population) 173 146 137 123 126 Maternal (per 100,000live births) 16 44 300 Births attended by skilled health staff (99) 100 95 69 CAS Annex 65. This table was produced from the CMU LDB system. 10/15/08 Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey. 123 C A S Annex B6 Moldova Key Economic Indicators - Gross domestic product' 100 100 100 100 100 100 100 100 100 Agriculture 20 20 17 12 11 11 11 11 1 1 Industry 17 16 16 15 15 15 15 15 15 Services 62 64 67 73 74 74 74 74 74 Total Consumption 105 1I O 114 113 115 113 112 111 111 Gross domestic fixed investment 21 25 28 33 31 29 27 25 24 Government investment 2 2 2 3 3 3 3 3 3 Private investment 19 23 26 31 28 26 24 22 21 ~xports(GNFS)~ 51 51 45 45 42 42 41 41 41 Imports(GNFS) 82 92 92 96 92 89 84 81 79 Gross domestic savings -5 -10 -14 -13 -15 -13 -12 -11 -11 Gross national savings' 22 21 21 24 13 13 13 12 11 Memorandum items Gross domestic product 2598 2988 3408 4396 6345 8139 9608 10958 12467 (US$million at current prices) GNI per capita (US$,Atlas method) 720 820 960 1090 1400 1840 2390 2870 3340 Realannual growth rates (%, calculatedfrom 96 prices) Gross domestic product at market prices 7.4 7.5 4.8 3.0 6.5 4.0 4.0 4.0 5.0 Gross Domestic Income 2.6 3.0 3.7 1.7 2.4 5.6 3.5 0.6 0.6 Real annual per capita growth rates (%, calculated from 96 prices) Gross domestic product at market prices 7.7 0.0 6.0 4.1 6.6 4.1 4.1 4.1 5.1 Total consumption 0.6 7.4 12.2 7.0 9.6 6.2 4.4 3.5 3.9 Private consumption 3.7 7.9 10.8 8.5 10.1 5.8 4.2 3.4 3.8 Balanceof Payments (US%millions) ~xports(GNFS)~ 1317 1528 1542 2007 2642 3417 3967 4517 5127 Merchandise FOB 995 1IO4 1053 1361 1907 2606 3081 3529 4013 Imports(GNFS)~ 2131 2739 3129 4303 5858 7221 8043 8891 9861 Merchandise FOB 1754 2295 2644 3677 5117 6362 7151 7908 8778 Resourcebalance -813 -1211 -1587 -2296 -3216 -3805 -4076 -4373 -4734 Net current transfers 364 567 800 1178 1463 1660 1813 1960 2065 Current accountbalance -113 -285 -387 -694 -11I 3 -1381 -1416 -1509 -1635 Net private foreigndirect investment 148 225 243 447 909 1072 1253 1379 1503 Long-termloans (net) 1 74 116 372 -305 -297 -305 -106 -73 Official -50 -10 -14 14 -25 -22 -28 -31 -36 Private 50 84 130 358 -280 -275 -277 -75 -37 Other capital (net, incl.errors & ommissions) 112 1 I 4 169 404 1074 1025 880 697 744 Change in reservesd -148 -129 -141 -529 -565 -419 -411 -461 -540 Memorandum items Resourcebalance(% of GDP) -3 1.3 -40.5 -46.6 -52.2 -50.7 -46.7 -42.4 -39.9 -38.0 Realannual growth rates ( YR96 prices) Merchandiseexports (FOB) -25.3 9.1 11.1 10.2 10.5 11.7 12.0 Primary -33.6 1.3 35.8 30.1 14.8 11.8 10.8 Manufactures 24.7 -15.6 34.2 45.9 10.3 10.2 6.3 6.0 6.1 Merchandise imports (CIF) 16.1 22.9 9.4 24.6 14.6 11.0 9.1 7.4 7.8 fcontinued) 124 Moldova Key EconomicIndicators - (Continued) Actual Esumate PrOJeCkd indicator 2004 2005 2006 2007 2008 2009 2010 2011 2012 indicator Public finance (as YOof GDP at market prices)e Current revenues 35.8 38.1 39.9 41.1 39.7 38.3 38.0 38.0 38.0 Current expenditures 34.8 30.7 32.4 34.6 33.8 34.8 34.7 34.6 34.5 Current account surplus(+)or deficit (-) 1.O 7.4 7.4 6.5 5.9 3.5 3.3 3.4 3.5 Capital expenditure -0.2 6.4 7.8 7.6 7.1 6.4 6.5 6.6 6.7 Foreign financing -2.4 -0.1 -0.5 0.2 1.6 3. I 3.0 3.0 3.0 Monetary indicators M2iGDP 36.6 42.0 43.7 51.3 53.5 55.6 56.8 56.8 56.8 Growth of M2 (%) 37.7 35.0 23.6 39.8 16.5 5.3 18.1 14.4 I 4 5 Private sector credit growth / 73.5 155.1 103.1 110.8 101.7 101.8 101.3 101.6 101.7 total credit growth (%) Price indices(YR96 =loo) Merchandiseexport price index .. 82.4 106.3 124.4 159.2 197.4 211.2 216.5 219.8 Merchandiseimport price index 263.3 277.6 298.3 328.1 397.0 444.6 458.0 471.7 485.9 Merchandiseterms of trade index .. 29.7 35.6 37.9 40.1 44.4 46.1 45.9 45.2 Real exchange rate (US$/LCU)f 115.8 114.3 114.3 101.7 81.8 90.0 90.0 90.0 90.0 Real interestrates Consumerprice index (%change) 125 119 127 123 128 7 8 7 8 7.8 7 8 GDP deflator (% change) 8 0 9 3 134 158 103 8 2 8 2 8.2 8.2 a. GDP at factor cost b. "GNFS" denotes "goodsand nonfactorservices." c. Includesnet unrequitedtransfersexcludingofficial capitalgrants. d. Includesuse of IMF resources. e. Consolidatedcentralgovernment. f. "LCU" denotes "local currency units."An increase inUS$IzCUdenotesappreciation 125 '0 00 0' z" z - 6 0 . " - N M - N - N m 2 2 ; ; ; o m * m N - N - Ii z?;z O Q 3 0 P m M N N m 0 0 0 - 3 P M N M 0 Ii :: P o m N M 00 *? z m O N 0 m m m M M M N % - r- 0 z O N m m P M Q N P e o m N 0 N 0 P m Nm 0 - 0 N p! Y 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 O O O O I I O O N 9 ? " m " 9 9 r q Lo O m O O w m O r 0 0 0 g g g g g g g g 0 0 0 0 0 0 0 0 Ln -0 .- $ a0 0 0 0 0 0 I I O O O 9 ? ? 9 ? 9 9 9 0 o m o o m m o o c) c c) E v) 0 0 0 0 0 0 0 0 0 Q) -> ggg?gggg 0 S .E g rn W O :$ 0 Lo + 3c? 0 , = F W O 0 O O O O O O O N 9 9 0 9 9 9 9 9 Ea Q ) v ) 0 0 0 0 0 0 0 0 - a3 .-n v) 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 'El Ln 0 0 0 0 0 0 0 0 S m W 0 g: 0 0 0 0 0 1 1 0 0 0 9 m m q " q 9 9 O r n O O W r n ~ O ;E 0 5 0 , b E h v 00 m c m > e m 0 - . P 0 0 N 0 N P - N - 3 0 0 0 0W 0 0 0 0 0 0 N N N N N m 0 rmcoz = s N % 3 o o o o m 0 N m o o o o o - N N N N N .-L sm m & r c c u r r c c r r r .P.P.P0 c c c r r c E .cn .P.P rrr .P.P.P c c r c c r r .P.P.P.P smc sm a, i; a, r r c u .P.P.cn 0 rrr c u r c c r r c e c E .P.P.P c c c 2 2 .P.P.P.P c c c c d ell