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Country Commercial Guides FY 2000: Moldova Report prepared by U.S. Embassy Chisinau, released July 1999 Note*

Chapter VIII: Trade and Project Financing

A. Description of the Banking System

1. Banks

The domestic banking system was created in the early 1990s as a two-level system: The National Bank of Moldova (NBM) and the commercial banks. The NBM supervises the commercial banks and acts independently of the government. The 1995 laws on the NBM and other financial institutions govern Moldova's banking system. The laws, prepared with IMF assistance, correspond to international standards.

There are no restrictions regarding the foundation of foreign banks or their branches in Moldova. Eighteen commercial banks have an NBM license that allows them to perform international operations.

In line with IMF and World Bank recommendations, the Moldovan banking system adopted international accounting standards on January 1, 1998. At that time, the NBM also doubled the requirement for minimum total capital of commercial banks up to ML 8 million ($700 thousand). By the end of 1998, the total capital reached ML 16 million ($1.4 million).

The banking system has functioned well over the past few years, especially in light of the economic crisis of late 1998, when the effects of Russia's crisis were reflected in the devaluation of the national currency. The NBM was vigilant in checking for imbalances and violations of the country's banking laws. In response to the collapse in the value of the leu in late 1998, the government raised reserve requirements drastically, from 8 to 25 percent of total liabilities, before reducing them again to 15 percent, and required an additional 10 percent to be held in government-issued treasury bills. The banks were obliged to deposit 13 percent of their capital with the NBM and 2 percent in correspondent accounts.

There are currently 21 commercial banks in Moldova, of which the largest are Agroindbank, Petrol Bank, Banca De Economii, Moldindconbank, Banca Sociala, and Victoriabank. Victoriabank is the only Moldovan bank with full membership in visa and Europay. As a private commercial bank, Victoriabank has been the most proactive in supporting the small industry, retail, and food industry of Moldova.

2. Other Financial Institutions

Other elements of Moldova's financial sector are less developed, but include the National Commodity Exchange, established in 1991; the Moldova Interbank Currency Exchange; the Moldovan Stock Exchange, established in 1995; 15 investment funds; and eight trust companies. In addition, a state commission on securities markets with the powers of a ministry has been created to supervise the activity of market participants. In 1998, the state commission was renamed the National Commission On The Securities Market.

The first auction of 91-day treasury bills was held in 1995, while 730-day treasury bills were introduced in December 1997. In 1998, the government tightened regulations concerning investment funds, limiting the holding of a fund in a firm to 25 percent.

B. Sources of Project Financing

1. The World Bank

Since Moldova joined the World Bank in August 1992, its lending has provided consistent support for Moldova's economic reforms. The Bank's assistance strategy for Moldova is in line with the Moldovan government's program and has three pillars: macroeconomic sustainability, private sector development, and public sector reform.

In February 1996, the Bank approved $35 million for the first private sector development project to support enterprises restructuring and financial sector reforms. In May 1996, two more loans were approved: $10 million for a project to help improve agricultural research programs; and a $10 million loan for an energy project to promote better economic and financial management. In April 1997, the Bank approved a $16.8 million loan for the general education project. In September 1997, two additional projects were approved: a $9 million credit for a private sector development project to strengthen the competitiveness of private enterprises, and a $100 million structural adjustment loan and credit (SAL-II) to support growth and macroeconomic stabilization. In January 1998, a $5 million credit was approved for the rural finance project, to assist in developing credit mechanisms for private farmers. This was followed in April 1998 by a $15.9 million credit for the Cadastre Project, to support the institutional framework for a land market.

2. European Bank for Reconstruction and Development (EBRD)

At the end of 1998, European bank for reconstruction and development (EBRD) commitments in Moldova totaled ECU 149 million ($146 million) in support of the private banking sector, infrastructure projects, agribusiness, and light industry. Of these, 16 percent were in the financial sector, 30 percent in the private corporate sector and agro-processing, and 54 percent in infrastructure.

The EBRD's strategy is to further promote the transition process in Moldova by focusing on the following objectives: promoting private sector investment, with a particular emphasis on the agro-processing sector; supporting the strengthening of the local financial sector; financing critical infrastructure investment; and pursuing an active implementation of the existing portfolio. The level of technical cooperation has increased, reaching ECU 7.1 million for 26 projects by the end of 1998. This is mainly related to project preparation or implementation.

EBRD Activity in Moldova's Financial Sector: In the financial sector, the EBRD has focused on the establishment of effective financial inter-mediation mechanisms to reach small and medium-sized enterprises (SME's) and to respond to current investment requirements. SME credit lines for five Moldovan banks are fully operational and have significantly improved the bank's ability to support the growth of the private sector.

Micro-Enterprise Loans: In September 1996, the EBRD, in cooperation with the Swiss and American governments, established the Swiss-American micro-enterprise program to give Moldovan start-up enterprises easier access to bank finance, especially for very small loans. The program's objective is to extend $5 million to a number of Moldovan banks, which in turn will provide credits of up to $20 thousand in foreign and local currency to small Moldovan businesses, generally defined as those employing 20 people or less. Initially, micro-enterprise funds were made available to Victoria bank, Mobias bank, Moldagroindbank, and Universalbank commercial banks of Moldova. By the end of 1998, 520 Moldovan entrepreneurs benefited from loans under this facility.

Infrastructure Projects: In 1996, the EBRD signed a $19 million financing package for Terminal SA, a Moldovan joint venture between state oil company Tirex - Petrol and a Greek joint-venture company Technovax SA, for construction of an oil terminal on the Danube river in southern Moldova. The road upgrading project, signed in 1995, contributed to strengthening of the road sector financing. The EBRD is also assisting the Moldovan government in the privatization and modernization of the state-owned telecommunications company Moldtelecom through the provision of advisory services.

Three major projects in the public sector and infrastructure are part of the EBRD pipeline for Moldova. They include a project to modernize the Chisinau international airport and its air navigation system, an energy project to improve the city's heating system, and a water and waste water rehabilitation program.

3. The International Monetary Fund

Moldova joined the International Monetary Fund (IMF) on august 12, 1992. The IMF has a number of activities in Moldova, including credit arrangements with the national bank of Moldova and the Moldovan government; economic policy advice; technical assistance, provided via resident advisors or via technical assistance missions from IMF headquarters in Washington, dc; and training of civil servants at the IMF institute at IMF headquarters, or at the joint Vienna institute in Austria. At present, IMF support to Moldova is some $200 million. In 1999, the IMF will finance projects in transportation, water supply, energy, social investment fund, housing, adjustment of enterprises, health, and construction.

4. Western NIS Enterprise Fund

The Western NIS Enterprise Fund (WESTNIS), capitalized with $150 million by the u.s. government, invests in private companies in the NIS region. The Fund has been fully operational in Moldova since June 1995. The Fund generally provides equity capital and loans in amounts between $750 thousand and $7.5 million to small and medium-sized private enterprises. The Small Business Loan Fund, a separate fund managed by WESTNIS, makes commercial loans under $100 thousand to small businesses and entrepreneurs.

In early 1997, WESTNIS funded Roua Universe, a Moldovan company that started providing custom farm services to agricultural businesses, primarily in the central and southern part of Moldova. WESTNIS has 50 percent of the company's equity and purchased Massey Ferguson combines for harvesting peas, barley, wheat, soy, beans, sunflower, and corn, as well as bailers for straw. The company became an exclusive distributor of Massey Ferguson and a dealership and service center of Massey Ferguson equipment in Moldova. Total company capitalization is $2.8 million.

In 1998, WESTNIS purchased 25 percent of equity worth $4.8 million in the glass container company (GGC), a Moldovan manufacturer of green glass packaging serving the wine and champagne industries of Moldova and neighboring countries. The Fund also procured 52 percent of stock worth $3.75 million of Vitanta, a dominant producer of beer, flavored alcoholic beverages, and soft drinks in Moldova.

Along with equity financing, WESTNIS also provides technical assistance for its credits beneficiaries. Its funds provide computer equipment, software, and its consultants to assist recipients in finance and business management, marketing, and project implementation.

5. Other Sources of Financing

-- OPIC, TDA, EXIM and other agencies are described in the Investment Climate Statement submitted by post.

-- The Turkish Export-Import Bank became active in Moldova in 1998, when it approved a $15 million loan for the water supply project in the southern districts of Moldova. The credit was granted for 7 years with a three-year grace period.

-- Since becoming independent, Moldova has received a total of ECU 60 million ($58.7 million) in balance of payments loans from the European Union (EU). Technical assistance grants amounting to ECU 27 million have been provided between 1995 and 1998. In 1999, a further grant of ECU 22 million is planned for Moldova, which will be focused on three priority sectors: agriculture and food distribution, private sector development, and human resource development (including the social sector). In addition, small projects will continue to provide assistance in areas such as policy advice, management training, customs and statistics.

-- Since its independence, Moldova has signed a bilateral agreement for financial assistance with the following countries: Canada, Denmark, Germany, Italy, Japan, Kuwait, Norway, Sweden, China, Turkey, United Kingdom, and the United States.