2010 Investment Climate Statement – Moldova

Bureau of Economic, Energy and Business Affairs
Openness to Foreign Investment

Moldova continues to take steps toward developing a stronger economy, reforming a cumbersome regulatory framework, combating corruption, and adopting reforms aimed at improving the business climate. A new Government of Moldova (GOM) assumed office on September 25, 2009, and has publicly committed itself to a reform agenda and European orientation. After a prolonged recession in the 1990s, GDP grew for seven straight years and inflation decreased between 2002 and 2008.

In 2009, like most countries in the region, Moldova was severely affected by the global economic recession. GDP decreased by approximately nine percent for 2009. Moldova, which is consistently ranked the poorest country in Europe, relies heavily on investments, foreign trade, and remittances sent by Moldovans working abroad, for economic growth. Recent years saw an increase in foreign direct investment (FDI) as investors took advantage of the eastward expansion of the European Union (EU), which now borders Moldova following the January 1, 2007, accession of Romania. The global crisis took its toll on FDI, which fell more than 50 percent in 2009. Though remittances dropped sharply in 2009 following the global crisis, they still equaled approximately one third of GDP. Over the past five years the GOM has made efforts to tackle some obstacles to investment, such as corruption and red tape. Furthermore, Moldova has declared European integration a strategic objective. The country had an Action Plan with the EU that set out a roadmap for democratic and economic reforms and the harmonization of Moldovan laws and regulations with European standards. The Action Plan expired in February 2008 and Moldova is set to start negotiations with the EU on an Association Agreement in January 2010.

As a country with a small market, Moldova benefits from liberalized trade and investment and wants to promote the export of its goods and services. Moldova has been a member of the WTO since 2001 and has signed free trade agreements with countries of the former Soviet Union (CIS) and southeast Europe. In December 2006, Moldova joined the Central European Free Trade agreement. Moldova benefits from an extended generalized system of preferences (GSP-plus) with the EU, and starting in March 2008 the EU unilaterally granted Moldova autonomous trade preferences, which expanded the duty-free access of Moldovan goods to EU markets. Moldova also seeks to further deepen its preferential trade arrangements with European Union in the negotiation of a deep and comprehensive Free Trade Agreement.

The GOM has created an adequate legal base, including favorable tax treatment for investors. Under Moldovan law, foreign companies enjoy the same treatment as local companies (national treatment principle). The GOM views investments as vital for sustainable economic growth and poverty reduction. However, the amount of FDI is far below the country’s needs.

After years of low FDI caused by a weak business climate, FDI inflows steadily increased from 2004 to 2008. According to the National Bank of Moldova, FDI inflows in 2007 amounted to USD 611.85 million and in 2008 FDI totals were USD 868.31 million. In the first nine months of 2009 FDI dropped to USD 231.06 million. Recent years have seen large investments by Germany’s Metro Cash & Carry, Germany’s Draexlmaier, France’s Societe Generale, Austria’s Grawe insurance company, Austria’s Raiffeisen Investment, the Netherlands’ Easeur Holding B.V., Italy’s Veneto Banca, the U.S. investment fund NCH Capital and the U.S. equity fund Horizon Capital. American investments in Moldova are primarily in the wine and food industry, cosmetics, telecommunications, banking and real estate.

Despite the GOM’s efforts to lower tax rates, strengthen tax administration, increase transparency and simplify business regulations, decision-making remains sometimes opaque and the application of regulations inconsistent. On occasion, government officials have interfered in business decisions in favor of a protected individual, used governmental powers to pressure businesses for personal or political gain, and selectively applied regulations. Since the judicial system remains weak, recourse to the courts does not guarantee citizens and foreign investors an impartial ruling on alleged governmental misdeeds.

In May 2004, the GOM approved the Economic Growth and Poverty Reduction Strategy (EGPRS), which established a policy framework for Moldova’s sustainable development in the medium term from 2004 to 2006. In 2006, the GOM extended the EGPRS to 2007. Both the World Bank and the International Monetary Fund (IMF) supported the implementation of the EGPRS. Together with the EU-Moldova Action Plan signed in February 2005 and subsequent GOM programs, the EGPRS guided Moldova’s economic development in recent years. Starting in 2008, the GOM consolidated its development strategies into an umbrella document – the National Development Plan (NDP) – which prioritizes the GOM’s policies for 2008-2011. Seeking to improve living standards, the NDP is based on five basic pillars: consolidation of the rule of law, Transnistrian conflict resolution, competitiveness enhancement, human development, and regional development.

Attracting FDI is critical to enhancing the economy’s competitiveness. In 2006, after a five-year intermission, the GOM resumed relations with the IMF by signing a Memorandum of Economic and Financial Policies that included criteria for the improvement of macroeconomic indicators, infrastructure development and better state property management. The memorandum expired in June 2009 and the Communist-led GOM was unwilling to negotiate a new agreement with conditions calling for salary freezes and other unpopular measures shortly before parliamentary elections on July 29, 2009. The new GOM has negotiated a new agreement with the IMF and is awaiting IMF board approval in January 2010. In 2007, Moldova received USD 24.7 million funding from the Millennium Challenge Corporation (MCC) for a Threshold Country Program which focused on supporting Moldova’s anti-corruption efforts. In January 2010, the GOM will sign an MCC Compact for USD 262 million. The Compact will fund two projects, one for road rehabilitation and the other for the transition to high value agriculture by rehabilitating central irrigation systems, providing technical assistance and providing access to financing for farmers. The MCC compact targets poverty reduction through economic growth.

The GOM launched the first privatization process in 1994. It has adopted three different privatization programs since that time, including privatization via National Patrimonial Bonds (foreigners were not allowed to participate); via cash transactions for both locals and foreigners; and via a program which involved only cash privatization. The third program began in 1997-1998 and was extended to 1999-2000. The program was later extended with some modifications to the end of 2006. Foreign investors have successfully participated in these privatizations. In 2007, Parliament passed a new privatization law which introduced a new plan for privatizing and managing state-owned assets with a focus on economic efficiency. The law has a list of assets, connected to the security of the state, which are not subject to privatization. The GOM also adopted regulations on the privatization of state-owned non-agricultural land through commercial tenders. The GOM has approved a list of assets subject to privatization.

The Law on Investment in Entrepreneurship prohibits discrimination against investments based on citizenship, domicile, residence, place of registration, place of activity, state of origin or any other grounds. The law provides for equitable and level-field conditions for all investors. It rules out discriminatory measures hindering the management, operation, maintenance, utilization, acquisition, extension or disposal of investments. Local companies and foreigners are to be treated equally with regard to licensing, approval, and procurement. In recent years, the GOM made significant efforts to streamline business registration. In the business registration procedure, the GOM simplified document submissions by implementing a “one window” approach. This process reduced the number of documents and days necessary for business registration. Limited on-line business-registration services were introduced in 2006 and 2007. In the business licensing procedure, the government simplified the process in 2002 by establishing one authority in charge of business licensing — the Licensing Chamber — and by reducing the number of business activities that require licensing. The GOM plans to streamline the permit process for entrepreneurial activity and introduce elements of the “one-window” approach in the activities of public authorities, including their electronic interconnection to facilitate the exchange of electronic data.