1 MOLDOVA PUBLIC EXPENDITURES FOR AGRICULTURAL DEVELOPMENT June 2006

2 OBJECTIVE & SCOPE  OBJECTIVE  Assist in enhancing the impact of agricultural development in Moldova  SCOPE ( )  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

3 GENERAL BUDGET FRAMEWORK  Public finances expected to remain very tight in the medium term  Over the period (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%

4 TOTAL AGRICULTURAL SPENDING At less than 1% of GDP prior to 2006, agriculture spending in Moldova is low relative to comparator countries

5 POLICY ISSUES  Role of government  Affordability and efficiency  Balance between productive and distributional policies  Coordination, rural development and decentralization

6 EXPENDITURE MANAGEMENT Strengthening required in:  Planning and budgeting  Budget execution  Transparency and accountability  Impact/ efficiency indicators

7 OVERALL SPENDING TREND Total budget spending in agriculture has increased significantly since 2001

8 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

9 FARM CASH SUBSIDIES (1)  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) Expenditures on subsidies have been growing in recent years

10 FARM CASH SUBSIDIES (2)  Frequent modifications and amendments during the year – low predictability  Since 2004, trend towards concentration on subsidies benefiting medium to large operators – additionality debatable Efficiency and targeting of farm subsidies is a main issue

11 FARM CASH SUBSIDIES (3)  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

12 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

13 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

14 PUBLIC SERVICES & INVESTMENT (3) Delivery of services need to be strengthened and rationalized:  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

15 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.

16 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