Competitiveness Developmenet Policy Operation

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The development objective of the Competitiveness Development Policy Operation Program is to improve competitiveness and thereby increase the volume of Moldovan exports, especially in European Union (EU) markets; and improve access to finance thereby promoting investment-led growth. This program document presents a Competitiveness Development Policy Operation (DPO) for an amount of US$30 million. This is a single operation supporting the efforts of the Government of the Republic of Moldova to enhance growth through export competitiveness and increased access to finance. The Government's program for the period 2011-2014 represents a transition from the stabilization and recovery agenda to establishing a strong basis for growth driven by investment, innovation and competitiveness. The operation builds on and deepens the growth and trade-oriented structural reform agenda started under the economic recovery development policy operation, which was approved by the Board of Executive Directors on June 24, 2010. The Government of the Republic of Moldova has an opportunity to implement reforms that would put the economy on a more sustainable export-led growth path. Emerging from the global economic crisis, Moldova's economic growth resumed swiftly in 2010 and 2011; however, the current Euro area crisis is likely to result in a slowdown of growth in 2012 and in the medium term. Moreover, despite the recovery in 2010 and 2011, job creation remained weak. The main driver of growth in 2010-2011 was private consumption, suggesting that the economy could be returning to the pre-crisis pattern of growth. Before the crisis, a decade of growth with weak job creation created a vicious cycle of migration, remittances, exchange rate appreciation, declines in tradable sectors, joblessness, and thus more migration. Heavy reliance on remittance-funded consumption and housing construction leaves the economy vulnerable to changes in the external environment and undermines Moldova's long-term competitiveness. The operation addresses binding constraints to economic growth by improving the returns to private investment and reducing the costs of finance.