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Ministry of Foreign Affairs, Department for European Neighbourhood File no.: 403.Moldova.1-1-3. Internal Grant Committee Meeting 11 December 2013 Agenda Item no.: 5 1. Title: Inclusive Economic Development for Young Entrepreneurs in Moldova 2. Partners: International Fund for Agricultural Development (IFAD) 3. Amount: 30,350,000 DKK 4. Duration: January 2014 to January 2018 (48 months) 5. Previous Grants: Youth Entrepreneurship Rural Financial Services and Agribusiness Development Project, 2010-13, 27 million DKK. 6. Strategies and policy priorities: Strategy for the Danish Neighbourhood Programme 2013-17, Growth and Employment 2011-2015, Strategy for Denmark’s Development Co-operation, “Right to a Better Life.” 7. Danish National Budget § 06.32.11.10.41, Naboskabsprogrammet, account code: Programindsatser 8. Desk officer: Ole Dahl Rasmussen 9. Head of Department: Michael Suhr, Department for European Neighbourhood 10. Summary: Poverty in Moldova is largely a rural phenomenon, with rural poverty rates at 30%. The rural youth is particularly disadvantaged and migrates to a large extent. The present project aims to enable the poor rural youth to raise their incomes by increasing access to financial services. This in turn will contribute to job creation. It does so by providing loans together with matched grants to young entrepreneurs, in combination with a variety of training and technical assistance. This will generate income and create employment and will support a necessary transformation in Moldovan agricultural and rural development. During the last decade, growth in Moldova has been driven by remittances, which have financed an increase in consumption and imports. For future growth, employment and poverty reduction, increased productivity is needed, in particular in agriculture, which accounts for 11% of the country’s GDP. The programme is implemented in a delegated partnership with IFAD who has operated a similar programme since 2011. During the last two years, this programme has led to the establishment of more than 270 new businesses with over 760 employees. 2 Objective and problem formulation The objective of the Danish support is to increase living standards for Moldova’s rural poor by increasing access to financial services for rural youth entrepreneurs, age 18 to 35. Combined with training in business management and technical assistance in agriculture this will expand opportunities for young people in rural areas. Through business growth and job creation, the intervention will indirectly benefit the rural poor more generally. The relevant background is the situation regarding poverty in Moldova in general and rural poverty in particular. As in most post-Soviet countries, poverty increased immediately after independence. This trend was reversed in 1998, and during the last decade Moldova has experienced economic growth and a decline in poverty, with 30% of the population living below the absolute poverty line in 2006 and 17% in 2012.1 Growth has been driven by an increase in remittances, which accounted for 23% of GDP in 2012 and made Moldova particularly vulnerable to the financial crisis. Poverty rates are highest in rural areas, where 30% fell under the poverty line in 2010, compared to 10% in urban areas. There is a need for Moldova to reorient its rural growth away from a remittance-based model with widespread subsistence agriculture, and toward an investment-based economy with higher productivity. Increase in agricultural productivity is a key priority by the Government of Moldova as a means to reducing poverty. A more inclusive financial sector is a part of this priority.2 In this context, the present programme aims to increase rural productivity through a combination of financial support and technical assistance. In particular, the intervention will increase access to finance by making matched grants available, which will be provided together with loans through commercial financial institutions. At the same time, the programme will build participants’ competences within both business management and agriculture through a combination of courses and supervised mentoring. The Danish support targets youth, since this group is particularly challenged due to lack of collateral and no credit history, while at the same time being generally receptive to new ideas and technologies. A specific loan component for women has been added to remedy the fact that few women applied in the previous round. Apart from the strategic alignment with the government’s priorities, Denmark’s support is integrated into a larger programme implemented by the Moldovan Ministry of Agriculture and Food Industry and International Fund for Agricultural Development (IFAD). The development objective of the larger programme is to create inclusive rural economic development and employment. This larger programme is organised in three components: climate change resilience, rural finance and infrastructure. The outputs supported by Denmark, and described in the following, falls under the second component of the larger programme, and are integrated into the overall programme in terms of implementation, management and reporting.3 1 National Bureau of Statistics of the Republic of Moldova (Millennium Development Goals by Indicators and Years) and World Bank World Development Indicators. The poverty line is set at minimum required consumption, equivalent to 2282 kcal/person/day. 2 Agriculture and Rural Development Strategy 2014-2020, Government of Moldova 3 The three components supported by Denmark falls under outputs 2.1, 2.4 and 2.5 in the project LFA, page xi in the project design report. These outputs cover young entrepreneurs as well as entrepreneurs more generally. The appraisal 3 Resource efficiency The programme is a continuation of a previous programme and thus the implementation structures are already in place. A consolidated programme implementation unit in the Ministry of Agriculture and Food Industry administers all components of the programme, including the Danish support, thereby avoiding a separate implementation unit for different areas. This increases efficiency. Administration cost constitutes less than 5% of the total programme budget. To ensure harmonisation with other donors, a series of consultations was carried out prior to programme formulation, including the EU, the World Bank and USAID. The EU provides budget support to Moldova within the area of rural development. This programme will most likely continue in the next programming period 2014-20 under the European Neighbourhood Programme for Agriculture & Rural Development. Also, IFAD continues to play and active role in the joint donor coordination in Moldova and works continuously to insure close alignment to national development policies. Challenges and underlying reflections Rural entrepreneurs face a number of different challenges. Limited access to financial services in rural areas has been identified as the single most important constraint to business development in Moldova by the World Bank.4 This is caused by risk aversion on behalf of the banks, lack of collateral, challenges in valuation of existing collateral and, lastly, a so-called maturity mismatch: Loans in demand are long term, in particular for agriculture, whereas deposits are short-term, partly because the pension system is under-developed. Some related challenges include sensitivity to droughts, which affected the country in 2004, 2007, 2009 and 2012, low quality infrastructure and weak market linkages. Climate change resilience and infrastructure are addressed by the complimentary components of the larger IFAD programme. Project description The sector and its importance for combating poverty The sector is characterised by small family farms, with 390,000 small family farms with an average size of 1.5 hectare. Commercialisation and diversification require larger farm sizes, which will push some of the least productive farmers to seek employment elsewhere. The present intervention will seek to optimise the poverty impact of this process by promoting both investment and job creation among young entrepreneurs. At the same time, ten per cent of the Moldovan population work abroad. Two thirds of these come from rural areas and they belong mainly to the younger population. Because of this, only 17% of the rural workforce is between 15 and 34 years old, whereas this group constitute 25% of the workforce in urban areas. Losing skilled and entrepreneurial young people impedes rural productivity as well as future rural economic growth and thus poverty reduction. determined that the Danish component was sufficiently identified in the project document and that reporting should be done at an aggregate level. 4 IFC Enterprise Survey 4 Due to the high rural poverty rate, an increase in income for the rural population translates directly into a decrease in poverty. Agriculture is also important for the economy as a whole. It accounted for 11% of the country’s GDP in 2012 and employed 26% of the active labour force. Priority of the sector Developing a high value agricultural sector is one out of ten key challenges that the Ministry of Agriculture and Food Industries has identified in its list of priorities for the period 2012 to 2015. Another is the development of a modern market infrastructure. Finance for agriculture is important in this regard, since investment in production is a necessary first step toward diversification and commercialisation. Principal stakeholders The main stakeholders in the implementation of the