WORLD TRADE RESTRICTED WT/ACC/MOL/37 11 January 2001 ORGANIZATION (01-0151) Working Party on the Accession of Moldova REPORT OF THE WORKING PARTY ON THE ACCESSION OF THE REPUBLIC OF MOLDOVA I. INTRODUCTION 1. The Government of the Republic of Moldova (hereinafter Moldova) applied for accession to the General Agreement on Tariffs and Trade (GATT 1947) in November 1993. At its meeting on 17 December 1993, the GATT 1947 Council of Representatives established a Working Party to examine the application of the Government of Moldova to accede to the General Agreement under Article XXXIII and to submit to the Council recommendations which may include a draft Protocol of Accession. Membership of the Working Party was open to all contracting parties wishing to serve on it. Following the conclusion of the Uruguay Round, Moldova requested accession to the World Trade Organization (WTO) under Article XII of the Marrakesh Agreement Establishing the World Trade Organization. Having regard to the decision adopted by the General Council of the World Trade Organization on 31 January 1995, the existing GATT 1947 Working Party on the Accession of Moldova was transformed into a WTO Accession Working Party. The terms of reference and the membership of the Working Party were reproduced in document WT/ACC/MOL/7/Rev.6. 2. The Working Party met on 17 June 1997, 18 March 1998, 16 April, 19 July 1999 and 20 December 2000 under the chairmanship of Mr. M. Kumar (India). DOCUMENTATION 3. The Working Party had before it, to serve as a basis for its discussions, a Memorandum on the Foreign Trade Regime of Moldova (WT/ACC/MOL/2 and Addenda 1 and 2) and the questions submitted by Members of the foreign trade regime of Moldova, together with the replies thereto WT/ACC/MOL/3 and Corr.1, Add.1, Add.1/Corr.1 and Add.2; WT/ACC/MOL/4 and Add.1 and Corr.1; WT/ACC/MOL/8 and Add.1; WT/ACC/MOL/9 and Add.1 and Corr.1, WT/ACC/MOL/11, WT/ACC/MOL/25, WT/ACC/MOL28 and WT/ACC/MOL/30 and other information provided by the Moldovan authorities (WT/ACC/MOL/5, WT/ACC/MOL/6, WT/ACC/MOL/10, WT/ACC/MOL12-24, WT/ACC/MOL26-27, WT/ACC/MOL/29, WT/ACC/MOL/31-35 and WT/ACC/MOL/36, Add.1 and Add.2). The Government of Moldova made available to the Working Party the documents listed in Annex I. Introductory statements 4. In an introductory statement, the representative of Moldova said that since the declaration of independence Moldova had been vigorously pursuing free market reforms within a democratic framework, notwithstanding political and economic difficulties. Considerable progress in transforming a centrally planned economy to a market-based economy has been achieved. Fuller integration into the world economy and the continuing diversification of Moldova’s economic relations with other countries were central objectives of the Government’s reform efforts. The Government of Moldova believed that these objectives could only be attained through trade policies that emphasized specialization on the basis WT/ACC/MOL/37 Page 2 of international comparative advantage. It was for this reason that Moldova attached priority to its accession to WTO and wished to complete negotiations for membership at the earliest opportunity. 5. The Constitution of Moldova adopted by the Parliament in July 1994 stated: "The economy of the country is market and society oriented, based on private and public property and free competition". Article I states that Moldova is a democratic State regulated by Law. Article 9 ensures private property rights and Article 126 defines the general characteristics of the economy as socially oriented and based on private and public property rights and free market principles. The representative of Moldova noted that Moldova continued to be a country in transition whose economy was undergoing a process of structural adjustment in order to correct an excessive dependence on primary production. Initially inflation had been brought down to an average monthly rate of 1.1 per cent in April 1996 from 32 per cent in February 1993. The budget deficit in 1995 had amounted to 4.9 per cent of GDP. The exchange rate of the Moldovan Leu (MDL), introduced in 1993, was approximately MDL 4.5 to the US dollar in May 1995. Following a period of stabilization in the first quarter of the 1999, the currency had again come under pressure in May/June depreciating steadily to around MDL 12 per US dollar, before recovering somewhat to around MDL 11 per US dollar in early July 1999. This situation was linked with the financial crisis in the region and current developments in financial markets. By mid-1999 the value of the Moldovan Leu had dropped by more that 65 per cent against the US dollar, giving rise to an acceleration of inflation. Since end-1999 the exchange rate had been stable at around MDL 12 per US dollar. Nevertheless, the financial shock from the economic crisis in Russia and in the region had continued to weigh heavily on the Moldovan economy, as evidenced by the collapse of exports by 35 per cent in the first half of 1999. Despite these difficulties the authorities were convinced of the appropriateness of a free, market-determined floating exchange rate regime, and remained committed to maintaining current international transactions free of any restrictions that could run counter to its obligations under Article VIII, section 2, 3, and 4 of the IMF Articles of Agreement. 6. Members of the Working Party welcomed Moldova's application for accession to the WTO, noting that Moldova had been pursuing economic reform and trade liberalization decisively. They expressed strong support for the early accession of Moldova on the basis of comprehensive market- access commitments and the early implementation of the WTO Agreements. The Working Party reviewed the economic policies and foreign trade regime of Moldova and the possible terms of a draft Protocol of Accession to the WTO. The views expressed by members of the Working Party on the various aspects of Moldova’s foreign trade regime and on the terms and conditions of Moldova’s accession to the WTO are summarized below in paragraphs 7 to 236. II. ECONOMIC POLICES - Monetary and fiscal policies 7. In response to requests for information, the representative of Moldova said that all the key sectors, namely agriculture, manufacturing industry and construction had registered a decline of output in 1999 compared to a similar period in 1998. Private agriculture was becoming increasingly important in Moldova, so was farming restructuring. The information for the first half of 1998 showed that the number of registered companies with foreign participation had been rising quite fast. Figures for 1998 showed that the employment level had dropped by 7.4 per cent compared to a year earlier. This was a further decline over the first half of 1998. Agriculture and manufacturing had shown a decline of 11 per cent over the same period, with wholesale and retail trade at 15.5 per cent and construction at 16.6 per cent lower than a year ago. The dependence on imported goods and services had been steadily decreasing, from 64 per cent of the GDP in 1997 to 51 per cent in 1999. In 1999, the trade deficit had reached the amount of US$123,08 million compared to US$388.09 millions in 1998. However, in 1999 the Republic of Moldova engaged in a buy-back of the bonds issued in favour of Gazprom in the amount of US$140 million and in 2000 restructured the loans provided by Russia and the supplier credits provided by AKA, KFW etc., on favourable terms. This significantly improved WT/ACC/MOL/37 Page 3 Moldova’s debt profile. Presently, the Republic of Moldova is up to date on its external obligations and has no arrears. 8. The representative of Moldova added that the Government was no longer granting commercial credits. However, the Government was providing loan guarantees, issued against a risk premium of at least 5 per cent of the principal amount of the loan, which was paid into the Risk Fund. State guarantees could only be issued up to a total value not exceeding the amount in the Risk Fund set up by the Law on State Debt and State Guarantees (No. 943-XIII of 18 July 1996). Contributions to the Risk Fund were drawn from the Budget and from beneficiaries of State guarantees. In 1997 LEI 75 million had been issued as internal guarantees and US$ 5 million as external ones. In 1998 the amount of LEI 100 million had been issued as internal guarantees and the amount of US$39 million as external guarantees for the EBRD loans. It was expected that with the ongoing privatisation of the energy sector, the contributions of the Budget to the Risk Fund would be phased out. Since 1999, the Law on State Budget prohibits the issuance of state guarantees and no external guarantee has been issued since that time. 9. The representative of Moldova noted that 1998 had been a very difficult year for Moldova. Both endogenous factors such as, weak fiscal policies and poor energy sector management, and exogenous factors, such as the financial crisis in Russia had a negative impact on the Moldovan economy. Capital flight, a depreciating exchange rate, a significant decrease of international reserves, rising expenditure arrears and budget deficit financing through central bank credit, characterized the crisis. There was an economic decline in 1998, of 8.5 per cent, largely because of the severe impact on exports of the crisis in Russia.