Moldova’s population may number only 4.3 million people but it is hard not to be caught up in the enthusiasm of its leadership. Despite tensions with Russia over the breakaway territory of Transnistria and a history of large-scale labour emigration, Moldova is focusing on the benefits of further integration with the EU. It is also becoming a convincing destination for Western investment.

Encouraged by a zero corporate tax rate which came into force on January 1, 2008, and average economic growth of 6% over the past seven years, foreign investors are looking more closely at the country’s emerging economy. Last year, inflows reached about $530m. By the beginning of 2008, some 6300 companies had invested $1.8bn in FDI in Moldova.

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Moldova’s government, led by Europe’s first democratically elected communist president, has outlined a campaign to boost foreign investment in the country’s small manufacturing sector as a way to reduce its heavy reliance on foreign imports. It seems to be winning. Not only is the level of investment rising, but so too is the percentage of profits reinvested by the average company – a good indicator of investors’ trust.

Following Estonia’s lead in January 2000, Moldova has introduced a 0% tax for companies that reinvest their profits. “Moldova’s zero tax rate applies to all companies, local and foreign; we do not discriminate,” says the minister of finance Mariana Durlesteanu. “So long as foreign companies reinvest their profit, they pay no corporate tax and it is the same for domestic companies.”

Decreasing dependency

Moldova’s aspirations to join the EU may eventually interfere with the new tax regime, but for now there is a window of opportunity for foreign companies to invest. Ms Durlesteanu says: “We know that we cannot keep this [zero corporate tax] policy forever, but for the moment these incentives will encourage investment, increase local production and decrease dependency on imports. We don’t [expect] any loss in revenues since income taxes have a very small share of the government’s revenue structure.”

Moldova’s biggest revenues come from indirect taxes such as VAT, excises and other taxes. Investment in Moldova’s six free economic zones has now exceeded $104m. By law, 75% of goods manufactured in Moldova’s zones must be exported and 25% can be sold in the domestic market. Ms Durlesteanu says: “Most of the goods are exported and the zones have been set up to offer a simplified customs regime where everything can be done within the zone, with easy access to railways and good infrastructure which has all been provided by the state.”

Privatisation progress

The government is also seeking further private investment in the country’s remaining public-owned companies. Despite uncertain financial markets, it has announced its intentions to reduce further the state’s involvement in the economy. Ms Durlesteanu says: “We are not yet ready to justify exposing the railways and airport to privatisation, but we are getting ready to privatise the telecom service and another bank. Our objective is to sell outside strategic sectors such as railways and airports, because there is no longer any need for the government to be involved.”

The finance minister, who was in London in June to meet foreign investors, would not be tied down to a timescale for the next two major privatisations, but a government spokesperson confirmed that the process of selecting an adviser for the savings bank privatisation has begun. The government recently launched the country’s third wave of privatisation (following voucher privatisation in the 1990s and sales of strategic interests in other industries) by listing more than 200 smaller companies from which the state wishes to divest its remaining ownership.

“In some of these companies, the state is only a minority owner, but our objective is to sell because we know that the best and most transparent management will come from outside the state sector,” says Ms Durlesteanu.

COUNTRY PROFILE

MOLDOVA

Population:

4.3 millionPop. growth rate: -0.092%Area: 33,843 sq kmReal GDP growth: 5%GDP per capita: $2900Current account: -$410mLargest sector Services (% of GDP): 47.2%Labour force: 1.33 millionUnemployment rate: 2.1%

Source: CIA World Factbook 2008