First Development Policy Operation

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This program document presents a First Development Policy Operation (DPO-1) for an amount of US$ 30 million. This operation, the first in a programmatic series of two, supports efforts of the Government of the Republic of Moldova to improve the business climate, promote financial sector stability and development, and improve the equity and efficiency of public expenditure. It is aligned with the National Development Strategy 'Moldova 2020'. The operation supports the World Bank Group's goals of ending extreme poverty and promoting shared prosperity. It is a key component of the Moldova Country Partnership Strategy (CPS) for FY2014-17, discussed by the Board of Executive Directors on September 5, 2013. This DPO series builds on and deepens the structural reform agenda advanced under the Competitiveness Development Policy Operation, which was approved by the Board of Executive Directors on November 1, 2012. The operation aims to address key constraints to inclusive growth by consolidating reform efforts in three areas. Upward economic mobility in recent years (2006-2011) has been strongly associated with employment in the manufacturing sector and the services sector. This underlines the key role of improving export competitiveness and the business climate for SMEs in sustaining poverty reduction and shared prosperity. In the agriculture sector (the main sector of employment for the poor), it is especially crucial to enhance productivity and market access for farmers (with access to better technologies and with investments to reduce output volatility and improve compliance with European Union, or EU food safety and quality standards). While during the 2008-09 crisis an increase in poverty was averted by large increases in public sector wages, pensions and social protection payments, continued progress towards reducing poverty and promoting shared prosperity should be supported in a fiscally sustainable way, by maintaining macroeconomic stability, fostering strong private-sector led growth and improving the efficiency of public programs. Accordingly, the operation is built around three pillars, which are also the program development objectives. The first pillar of the operation seeks to strengthen the regulatory framework to improve predictability of the business environment, facilitate competition, and reduce regulatory compliance costs. The second pillar aims at strengthening financial sector stability, promoting transparency of shareholding and easing conditions for access to finance. The third pillar seeks to improve the public investment management framework, make investment subsidies in agriculture more efficient and equitable, and improve the coverage of well-targeted social assistance programs. The reform program builds on strong complementarity with other World Bank Group (WBG) instruments in Moldova, including investment projects and analytical and advisory activities. In addition, although not a formal continuation of the previous program, the first two pillars of this series support the implementation of select laws supported by the Competitiveness DPO (approved in FY2013).