One of the main conditions of the market oriented economy development is a stable banking system, directed to meet the economic entities' demands. In order to maintain a stable financial situation and the banks' solvency, the National Bank of Moldova (NBM) is supervising the activity of all financial institutions which act as independent entities.

The new laws concerning the NBM and financial institutions were approved by Parliament in 1995, having been worked out with the assistance of the IMF experts. These laws correspond to international standards and are setting up the legislative framework for a stable and sound financial system.

The Law on the NBM provides for greater independence for the National Bank in drawing up and implementing monetary and foreign policies, as well as in regulation and complete supervision of commercial banks' activities. According to the new Law, the NBM is an autonomous public legal and is responsible to the Parliament.

When working out the new legal acts and regulations on the activity of commercial banks, great importance is given to decrease the risk, to increase the safety, and to ensure stable activity of commercial banks. These measures play a decisive role in gaining the public's confidence in banks as depository institutions, and in such a way the available funds would be mobilised and the role of banks as intermediaries in this process will grow.

Moldova has a two-tiered banking system

The National Bank is situated on the first coordinating level and acts independently from executive authorities. The main targets of the NBM are to ensure the stability of the national currency; to work out and implement the monetary, credit and foreign exchange policies pursuing the laws of the state; to ensure the supervision of commercial banks and to control their liquidity and loans; to supervise the system of payments; to compile balance of payments; to hold and manage foreign international reserves and to act as banker and fiscal agent of the Republic.

The second level is comprised of 22 commercial banks and a subsidiary of a foreign bank. There are no restrictions regarding the establishment of foreign banks or branches of foreign banks on the territory of Moldova. Eighteen commercial banks have obtained the NBM's Type B and Type C licenses for performing international foreign exchange operations.

In their current activity the banks provide advanced methods of banking services, allowing them to win the confidence of foreign banks and thus to receive loans in foreign exchange. Commercial banks of Moldova have correspondent accounts opened with well-known banks worldwide. On 1 January 1998 the banking system of Moldova was moved to the system of electronic settlements, where it was connected to the SWIFT system. In 1997 the whole banking system will shift to the international accounting standards, implemented in 1995 by the NBM. The introduction of the new chart of accounts in commercial banks will allow for estimating the financial standing of banks, applying international standards. In turn this will lead to more possibilities for using international prudential regulations while regulating the banks' activity.

Beginning on 1 January 1998, the NBM provision for the minimal total capital has grown to eight million lei (in 1996 it was four million lei).

According to the Law on Banks' Taxation, all financial institutions should provide a risk fund, which is set up before taxation. In turn this should create the necessary source for covering all possible losses from unpaid debt under provided loans, also excluding the possibility of banks' failure. Banks with poor financial standing, which fail to comply with the NBM÷s provisions, should be reorganised or liquidated.

Credit rating

In recognition of Moldova's commitment to reform, its cooperation with multilateral organisations, eg, IMF, World Bank, and its low level external debt, the international credit rating agency Moody's assigned a Ba2 rating to Moldova's external debt, with a Ba3 to long-term foreign currency deposits. This rating is the same as those assigned to Russia and Lithuania and above that of Romania.

These measures, directed towards reinforcing prudential norms, strengthening the financial system, and developing banking supervision, should lead to a further reduction of risks, undertaken by economic entities that do business with banks.

Seeking foreign investment opportunities

Since the proclamation of its independence, the Republic of Moldova has made significant progress in implementing economic reforms in the process of transition to a market oriented economy. The National Bank of Moldova has been and continued to be one of the main promoters of these reforms. A number of important measures have been made to stabilise the monetary, credit and fiscal environment. Since the economic situation of the country and the living standards of the population greatly depend on how the country's monetary and credit system function, special attention has been focused to this very aspect. There is no other alternative of economic reforms. The course of reforms is outlined in the new Constitution of Moldova, which ensures that the country has a market-oriented economy, socially oriented, based upon private and public property and free competition.

The macroeconomic policy, promoted by the Government and the National Bank of Moldova, has established a target to attract foreign investments and expend Moldova's economic relations with other countries of the world. One of the cornerstones of this policy was the introduction on November 29 1993 of the national currency, Leu, and the further promotion of a tight monetary and credit policy. Since the introduction of the national currency, the National Bank of Moldova has undertaken a number of measures directed to limit the expansion of broad money and reduce inflation rate.

The exchange rate of the national currency is floating, being fixed on a daily basis at the Moldovan Inter Bank Foreign Currency Exchange. The exchange rate of the Moldovan Leu at the moment of introduction was 3.85MLD for US$1, while the rate as of 21 January 1998 was 4.68 MLD for US$1. As compared with the other member states of the CIS, Moldova has the best results in this sector.

Due to a tight monetary policy, the inflation decreased considerably, reaching the monthly level of 1.5 per cent in December 1998, compared to 10 per cent in March 1994, or 23.2 per cent in August 1993. In July 1997 the inflation rate was negative and equal to one per cent. The annual rate of inflation in 1996 was 15.1 per cent (the projected level was 15 per cent), while in 1995 it was 23.8 per cent and in 1994, 104.5 per cent. The projected annual inflation rate for 1997 was 10-13 per cent, while for 1998 it is 10 per cent.

The decrease of the inflation rate had a positive effect on the refinancing rate of the NBM, which, beginning in January 1994, became positive in real terms. The NBM abolished preferential credits. Since the beginning of 1994 the refinancing rate is not determined administratively, and is set up on a regular basis at the credit auctions held by the NBM. The refinancing rate of NBM, set at the credit auctions held on 17 November, was 16 per cent.

Along with other positive factors, the stability of the national currency and the reduction of the inflation rate are important steps attracting foreign investments into Moldova's economy.

Following the significant progress achieved by Moldova in the fields of financial stabilisation in July 1995, our country accepted the provisions of Article VIII, Sections 2, 3 and 4 of the Articles of Agreement of the International Monetary Fund. This in fact means the convertibility of the national currency, Leu, allowing economic entities to buy and sell freely foreign exchange for all payments related to current account operations, as well as other capital account operations.

Currently, the foreign exchange regime of Moldova is quite liberalised. This is very important for potential investors, especially due to the following aspects:

• there no limits on current exchange operations;
• exporters are allowed to receive and hold export earnings on foreign exchange accounts and there is no surrender requirement for foreign exchange;
• foreign investors have the right to repatriate their profits on investments.

The convertibility of current international operations, along with the measures to liberalise foreign trade, are considered to be very important factors that should play an ultimate role in directing Moldova enterprises towards a process of efficient production and investment decisions, representing a sign of economic freedom and openness for foreign investors.

There is a daily operating foreign exchange market in Moldova. At the sessions of the Moldova Inter Bank Foreign Currency Exchange the transactions in foreign currency between authorised commercial banks with the participation of the NBM are held. Banks are trading very actively beyond stock exchange sessions.

The setting up of securities market, Clearing Centre, as well as the opening of a large number of foreign currency exchange offices offering exchange services along with commercial banks, largely contributed to the stabilisation of the Moldovan foreign exchange market.

Since March 1995 the Moldovan state budget deficit is covered by the issuance of T-bills and not by direct crediting of the budget by the NBM. This fact permits the attraction of available financial resources from the financial market. The amount of State Certificates issued is annually set up by Parliament through the Law on the Budget.

The Government and National Bank established a treasury bill market in March 1995, whereby State Certificates are sold at a discount through commercial banks, available for both legal entities and individuals. There are no taxes and no restrictions for non-residents while participating in T-bill market.