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MOLDOVA PUBLIC EXPENDITURES FOR AGRICULTURAL DEVELOPMENT June 2006 1 OBJECTIVE & SCOPE OBJECTIVE Assist in enhancing the impact of agricultural development in Moldova SCOPE (1998-2006) Agriculture spending Central and local government expenditures – MAFI and related public institutions (state budget) – Other agriculture support funds (outside MAFI) – Local government spending on agriculture 2 GENERAL BUDGET FRAMEWORK Public finances expected to remain very tight in the medium term Over the period 2007-2009 (MTEF), share of public expenditure would shrink from 38% of GDP in 2005 to 37% in 2009 Public spending on agriculture, forestry, fishery and water services, following some increase (ongoing), would also shrink as percentage of GDP from 2008 onwards: 2005 (completed) approx. 1.0% 2006 (approved) 1.4% 2007 (estimated) 1.5% 2008 (estimated) 1.3% 2009 (estimated) 1.2% 3 TOTAL AGRICULTURAL SPENDING At less than 1% of GDP prior to 2006, agriculture spending in Moldova is low relative to comparator countries Comparator country data (approximate figures) Agriculture as Share of GDP Agriculture Budget share Agric. spending As % GDP Moldova 20% 3% 0.9% Others Armenia Azerbaijan Kyrgyz Republic Nicaragua Poland Turkey 35% 18% 47% 30% 3% 12% 9% 6% 7% 8% 8% 6% 1.2% 3.1% 1.8% 3.5% 3.5% 1.1% Source: WB PERs / country studies. Figures are only indicative as different accounting practices are applied in different countries. Agriculture spending in Poland includes a large subsidy and pensions element, equivalent to around 2.5% GDP. 4 POLICY ISSUES Role of government Affordability and efficiency Balance between distributional policies productive and Coordination, rural decentralization development and 5 EXPENDITURE MANAGEMENT Strengthening required in: Planning and budgeting Budget execution Transparency and accountability Impact/ efficiency indicators 6 OVERALL SPENDING TREND Total budget spending in agriculture increased significantly since 2001 has % Total Consolidated Budget % Moldova GDP 1,4% 6,0% 1,2% 5,0% 1,0% 4,0% 0,8% 3,0% 0,6% 0,4% 2,0% 0,2% 1,0% 0,0% 0,0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 plan 1998 1999 2000 2001 2002 2003 2004 2005 2006 plan 7 COMPOSITION OF SPENDING Farm subsidies show large variations over the last 8-10 years, and account for most of the increase in spending since 2001 Delivery of services (and investment) have been more stable, with only limited increase in recent years 1,4% % GPD Moldova 1,2% 1,0% 0,8% 0,6% 0,4% 0,2% 0,0% Services Delivery 1998 1999 2000 2001 Farm Subsidies 2002 2003 2004 Total Spending 2005 2006, plan 8 FARM CASH SUBSIDIES (1) 0.80% % GDP Moldova Expenditures on subsidies have been growing in recent years 0.70% 0.60% 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 1998 1999 2000 2001 2002 MAFI budget 2003 2004 2005 2006 plan other funds Prior to 2006, most of this growth came from funds with earmarked revenues outside MAFI (vineyard support fund) In 2006, allocation for MAFI support fund is also increased (3.5 times compared to 2005 actual spending) 9 FARM CASH SUBSIDIES (2) Efficiency and targeting of farm subsidies is a main issue Distribution of vineyard plantation subsidies (2004) Funds outside MAFI MDL thousand current prices 120,000 40% 35% 100,000 30% 80,000 25% Planned 60,000 Actual 40,000 % applications 20% % area 15% 10% 5% 20,000 0% 0 5-10 ha 10-15 ha 15-20 ha 20-30 ha 30-50 ha 2001 2002 2003 2004 2005 2006 50-100 ha above 100 ha Frequent modifications and amendments during the year – low predictability Since 2004, trend towards concentration on subsidies benefiting medium to large operators – additionality debatable 10 FARM CASH SUBSIDIES (3) 350,000 MDL thousand (current prices) 300,000 VAT refunds & domestic sales 250,000 others (land, walnut, plowing) livestock 200,000 tobacco and sugarbeet risk insurance subsidy machinery (MTS) 150,000 credit incentives orchards 100,000 viticulture 50,000 0 2002 2003 2004 2005 2006 plan Many subsidies are intended to foster private investment, but they cannot substitute for improvement in the overall climate for private domestic and foreign investment Amounts are small compared to investment needs – need to ensure adequate targeting and efficiency of subsidies No rural development subsidies 11 PUBLIC SERVICES & INVESTMENT (1) Public expenditures from national budget for agricultural investments are negligible IFI-financed investment and recurrent expenditures are not included in the budget Public expenditures for the delivery of services represent a very low share of GDP, in comparison with other countries 12 PUBLIC SERVICES & INVESTMENT (2) Distribution of public funding for services delivery has remained stable across activities – some additional activities introduced, but no systematic review of existing ones 0,60% % GDP Moldova 0,50% Others 0,40% Irrigation Crops 0,30% Livestock Research 0,20% Education 0,10% 0,00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 plan 13 PUBLIC SERVICES & INVESTMENT (3) Delivery of services need strengthened and rationalized: to be reform veterinary services to focus on public good aspects fully integrate extension activities in MAFI budget critically review activities of dubious value make irrigation support sustainable restructure agricultural research and education 14 PRIORITIES FOR PUBLIC SPENDING International evidence (including cross-country comparisons), market failure and social objectives suggest future priorities for public spending directed towards: public goods such as research and development, advisory services and information systems facilitating private sector delivery of other services (e.g. rural finance) rural infrastructure, including rural roads and irrigation empowerment of farmers’ groups supporting the emergence and addressing the needs of family farms and commercial farmers/ entrepreneurs policy formulation, statistical systems, regulatory activities, Along with creating a good and stable policy environment, favorable investment climate. 15 SUMMARY OF KEY ISSUES Main policy challenge to raise agricultural productivity and improve on-farm and off-farm employment opportunities Clarify public / private roles avoid the pitfall of excessive (and difficult to reverse) subsidies Strengthen PEM to provide link between strategic objectives, functions, outputs and resources available framework that enables prioritization between competing activities Impact and efficiency of service delivery M&E systems to justify agricultural sector spending 16