(Bloomberg) -- Moldova plans to simplify its tax system in an effort to haul one of the poorest countries in Europe out of an economic crisis brought on by the war in Ukraine, the nation’s economy minister said.
The changes, including a rewrite of corporate law to increase transparency and a bid to raise revenue by eliminating most existing tax exemptions, will be pushed through by July, Economy Minister Dumitru Alaiba said. A central part of the effort will be to integrate Moldova’s sprawling informal economy, a swathe of unregulated activity that Alaiba says makes up more than two-fifths of output.
“The war in neighboring Ukraine has eaten up our economic growth and we need to recover very fast,” Alaiba said during an interview from his office in Chisinau last week. Regulating the “gray economy” is key, he said, because “half of our economy doesn’t react to any measures we take.”
A former Soviet republic of 2.6 million wedged between Romania and war-battered Ukraine, Moldova has endured a devastating banking crisis, the presence of Russia’s military in a breakaway region, crippling energy blackouts and an alleged plot by the Kremlin to topple the government.
But under pro-European President Maia Sandu, Moldova has secured candidacy status from the European Union and aims to become a member by 2030. Sandu told Bloomberg last month that she’s confident accession will happen with its breakaway Transnistria region despite Russia’s occupation.
For the economy, it will mean drawing investors with the “simplest fiscal system,” Alaiba said, shaking off a legacy of bank fraud and money-laundering scandals. The minister said the government also plans to reduce bureaucracy and follow Estonia’s example of digitalizing most public services, such as paying taxes and obtaining paperwork.
The path will be a long one for Moldova, whose gross domestic product shrank almost 6% in 2022 to about $15 billion, erasing half of the 14% growth recorded the previous year. Inflation topped 30% last year, significantly eroding purchasing power. Alaiba predicts growth will rebound this year — but it won’t be “spectacular” as hardship persists.
The planned measures will aim to unleash double-digit economic growth over the next decade, a necessity for Moldova to increase living standards and converge with EU neighbors to the west.
“We can’t afford growth of 2%-3% to get out of poverty,” Alaiba said.
Sandu wants to kick off EU negotiations as early as this year, but doing so will mean meeting EU requirements on reforming the judiciary and strengthening institutions. Moldova has been struggling to recover from a $1 billion case of banking fraud in 2015 that left the tiny nation on the verge of bankruptcy.
Since then, the central bank has teamed up with organizations such as the International Monetary Fund to help clean up the banking sector and strengthen supervision to prevent similar incidents.
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