This study aims at exploring one of the main viable instruments that could be used by the Local Public Authorities (LPA) for developing the localities and to fortify the local autonomy – the local bonds. In the international practice, these are also called municipal bonds that represent securities issued by cities or other forms of local authorities. Based on these instruments, the LPAs can borrow financial means in order to obtain financing, usually for capital investments.
In the Republic of Moldova, although the legislation foresees the possibility for local authorities to issue bonds by local authorities of all levels, however, up to this moment, no such entity has engaged in such activities. The causes are multiple, both legal, investment and even financial infrastructure ones. On the one hand, interacting with the capital market requires that the LPA have special financial and economic forecast competencies. On the other hand, the legal framework does not seem to be favourable both in terms of municipal bonds issuance as much as investing in them. As well, the national capital market remains shadowed by the banking system, the possibilities allowed by the latter being limited and also, little known.
The first chapter offers an overview of the current legislative and normative framework provisions in order to reflect the mechanism on issuing municipal bonds. This refers to the conditions in which the municipal bonds can be issued, the purpose of issuing, the Ministry of Finance endorsement, the stages of the issuing process and reimbursing the loans attracted as a result of issuing the bonds. The emphasis is made on the aspects that limit somehow the possibility to implement this instrument, particularly: (i) the inequitable fiscal regime of investments in municipal bonds, (ii) the indebtedness cap set at 20% from revenues excluding the special destination transfers and (iii) the impossibility to issue bonds in foreign currency.
The second chapter analyses the international practice, because in the majority of states from the region, issuing municipal bonds is the simplest way to attract a pool of investors from outside of the banking sector. Particularly, the chapter analysed in detail the evolution of the local bonds market from 3 states in the region, an experience which is relevant for the Republic of Moldova. The analysed states are Romania, Bulgaria and Serbia.
The third chapter analyses the LPAs revenues, particularly if they allow real financial autonomy and how financially sustainable they are to issue bonds. The analysis of local budgets is crucial in the context of discussions regarding the local bonds, in light of respecting prudential norms and avoiding the transformation of this instrument in financial and electoral adventures. The chapter analyses the local tax base, the indebtedness level of the LPA and the local financial autonomy degree of the LPA, especially from the perspective of issuing local bonds.
The fourth chapter presents the opportunities related to issuing municipal bonds. Aside from the advantages and opportunities presented by the municipal bonds, certain criteria that must be respected for ensuring success in using this instrument are specified.
Overall, this study emphasises the legal, fiscal, financial and institutional barriers that prevent the LPAs to issue bonds, as well as presents a set of policy recommendations based on the experience of other states comparable, in terms of valuing this instrument, by respecting prudential and good governance norms.
This document was elaborated by the Independent Analytical Centre “Expert-Grup” within the project “Local government bonds – a measure to enhance local autonomy”, financed by the Kingdom of the Netherlands Embassy in the Republic of Moldova.
Any statements made in this document belong solely to the authors of the document and do not necessarily express the same opinion as the donor or the commentators on this document. Expert-Grup does not adopt collective positions.