Moldova in 1995 - 1999: Macroeconomic and Monetary Consequences of Fiscal Imbalances

Abstract

After stabilization in 1993 Moldova maintained an unsustainable macroeconomic policy mix. The key problem was a lack of a fiscal adjustment, which resulted in large budget deficits. At the same time, the National Bank of Moldova (NBM) attempted to conduct a tight monetary policy. As a result, the exchange rate was appreciating, domestic absorption increasingly exceeded income and the country has been running large Current Account deficits. Moldova had an access to international financial markets and its indebtedness vs. the rest of the world was growing year by year at an alarming rate. Finally, in late 1998 Moldova suffered a balance of payments crisis, directly triggered by developments in Russia. Moldovan leu was devalued by about 70% and the current account improved.

The paper concentrates on the empirical dimension of the Moldovan financial crisis. It provides a case study of a) detecting and interpreting macroeconomic anomalies and b) identification of early warning signals of policy unsustainability and imminent change of financial market sentiment.