OVERVIEW OF FISCAL DECENTRALIZATION
Moldova is a unitary state with local governments operating at two tiers. There are thirty five territorial units corresponding to the second level of local government authority: thirty two districts (rayons), two municipalities (municipii) -Chisinau and Balti, one autonomous territorial unit (UTA Gagauazia), and one un-recognized territorial unit (Transnistria). The thirty five units are divided into 896 first-level territorial units–towns (oraşe) and villages (sate).
Legal acts governing fiscal decentralisation
The legal framework on fiscal decentralization of Moldova is governed by the Law on Local Public Finance (2003, last amended in 2013); and the Law on Administrative Decentralization (2006, last amended in 2012).
Qualifying fiscal decentralization
The process of fiscal decentralization reform commenced with the passage of the legislation on public finance and decentralization in the early 2000s. Local government bodies however continue to suffer from an insufficient fiscal base. Local government revenues as a share of GDP are low; in 2013, they represented 1% of GDP. Own revenues (local taxes, local charges and fees) constitute 9% of municipal revenues. Shared revenues—from national taxes collected locally, such as personal income tax; corporate income tax; or VAT—in 2013 constituted 3.5% of GDP.
With the implementation of the school financing reform, half of expenditures at the local level are now at the top-tier level (rayons). Rayon governments accounted for two-thirds of subnational expenditures on education in 2013 (compared with less than 10% in 2012). The rayon governments also continue to dominate subnational expenditures on social benefits. This distribution of expenditures between top- and bottom-tier jurisdictions is consistent with mandated expenditure assignments.
Between 2008 and 2013, 78% of local capital expenditures were financed through budget fund transfers from central government; 5 % from transfers from special funds (Social Fund, Ecological Fund, Energy Efficiency Fund).
In Moldova, fiscal equalization mechanisms are in place to ensure the provision of mandatory services and based on a special formula stipulated in the Law on Local Public Finance. The mechanism takes into account factors like population size, number of pupils in schools, share of the elderly in municipal population, taxation capacity, etc. Equalization grants constitute roughly two-thirds of the total local revenues. State equalization grants intended for the first- and second-level local budgets go to the rayons (districts). In turn, the rayons set the amount of grants to the first level (towns and villages) in accordance with the legal equalization formula.
There is a structural problem in the financing of local governments. Originally, the equalization system at the central level was supposed to contain transfers from both the state budget and from regions with high revenues compared to expenditures. Since tax revenues do not keep pace with the costs of the mandatory services, the transfer component from rich regions has disappeared. Even the Chisinau capital city municipality, which earlier contributed to the system, now also receives equalization grants from the state budget.
Deficit, debt at the sub-national level and borrowing capacity
Local governments in Moldova have the possibility of accessing debt markets. The Law on Local Public Finance (2003, last amended in 2013) allows municipal borrowing for capital purposes both domestically and abroad. It also provides for the possibility of issuing guarantees on borrowing to municipal enterprises and fully- or majority municipal-owned enterprises, as long as debt service, including repayment of principal and interest, is below 20 percent of annual municipal revenues. In order to access debt markets, as stipulated in the law on public finances, municipalities are required to obtain approval from the local council. Nevertheless, while the national government is not required to approve requests for accessing debt markets, the Ministry of Finance exercises supervision over the process of borrowing.
In 2013, the total outstanding municipal debt was quite low, at 0.7% of GDP; a large share of this figure is debt incurred by the municipality of the capital city of Chisinau. In the case of Chisinau, the key issue is outstanding debt to energy companies, which the government plans to tackle by restructuring the heating sector and ensuring that the municipality divests itself of the stake in district heating companies. Over the last few years, there has been a slight decrease in local government debt. Ministry of Finance data indicate that as of the end of 2013, local governments had unpaid bills totaling 37.9 million MDL (or about 0.3 percent of subnational revenues), down from 147.8 million MDL at the end of 2011.
Recent borrowing included loans from international lending institutions. Specifically, in 2013, the municipality of Chisinau took loans from EBRD and EIB totaling 48 million Euros. Generally, municipalities stay within the borrowing limits stipulated by law.
Recent amendments to the legislation change in a number of ways the legal framework for subnational debt. First, with the abolishment of the hierarchical structure of subnational governments, intergovernmental loans are not confined any longer to borrowing from the government level immediately above. This means that the new law allows bottom-tier jurisdictions to borrow from the central government or other bottom-tier governments. Furthermore, issuance of municipal bonds is now allowed for the bottom-tier jurisdictions, and guarantee issuance is also permitted for the bottom-tier municipalities (to municipal enterprises and commercial enterprises whose capital is wholly or majority-owned by the municipality). The rules on subnational debt do not place restrictions on foreign borrowing.
