Focus on Gagauzia: slow economic progress despite fiscal privileges
Gagauzia is an autonomous region in southern Moldova, accounting for 2.3% of Moldova’s GDP. The backbone of the economy is the agro-food sector, which also contributes to high volatility in GDP. In contrast to the rest of Moldova, trade is more focused on CIS countries and Turkey, although exports to Russia have significantly declined. Key exports include wine, knitted garments, and agricultural products.
Recently, Gagauzia has been the focus of discussions regarding its special tax status, particularly its full retention of VAT. Due to this autonomous status, Gagauzia can retain 100% of taxes in the region, resulting in the highest per capita revenue and public spending in Moldova. However, these financial advantages have not translated into broader economic development, leaving Gagauzia with a low GDP per capita.
Background information
The Autonomous Territorial Unit (ATU) of Gagauzia was established in 1994 under organic law and operates with its own executive and legislative bodies. The region’s Executive Committee, led by the Governor (Bashkan), who is elected for a four-year term, oversees the implementation of laws and manages socio-economic affairs. Legislative power is held by the 35-member People’s Assembly (Halk Toplushu), responsible for passing laws and regulating the region’s activities.
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Economic overview
Turning to Gagauzia’s economy, official GDP estimates have not been available since 2021. However, the German Economic Team (GET) estimates the regional GDP to be around USD 336 m in 2022, with a GDP per capita of USD 2,686 — the lowest in the country, though comparable to other rural regions outside Chisinau. The region accounts for 2.3% of Moldova’s GDP and 5% of its population.
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Agriculture makes up 27% of Gagauzia’s GDP, a proportion similar to other Moldovan regions outside Chisinau. The manufacturing sector, which mainly focuses on beverages and food processing, contributes 16%, reflecting the strong agro-food sector.
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Trade wise, Gagauzia differs from the rest of Moldova, with a stronger focus on CIS countries and Turkey, while the EU plays a more significant role in the rest of the country. However, exports to Russia have dropped from 17% in 2019 to just 2% of total in 2023. Major exports include wine (to CIS countries), knitted garments (to Turkey), and agricultural products (to the EU). Turkey is Gagauzia’s largest source of imports, followed by the EU and CIS countries.
Wages in Gagauzia have increased in recent years, but remain lower compared to other regions, and the gap with faster-growing regions continues to widen.
Fiscal autonomy
Gagauzia’s budget is made up of taxes and transfers from the national government, similar to other Moldovan regions. However, Gagauzia enjoys much greater fiscal autonomy, retaining 100% of tax revenues collected in the region, including personal income tax (PIT), corporate income tax (CIT), VAT, and excise duties. In comparison, other regions like Balti and Chisinau only retain part of PIT and none of the CIT, VAT, or excise duties.
Gagauzia’s fiscal autonomy is further strengthened by Gagauzia’s unusual VAT arrangement. Normally, the entity collecting VAT is responsible for refunds, but in Gagauzia’s case, the national government covers this. As a result, Gagauzia doesn’t need to use its own budget to cover VAT refunds for businesses operating in the region, freeing up more resources for local services. An amendment to the Tax Code in 2023 aimed to standardize VAT handling, requiring Gagauzia to return VAT to the national government. However, a constitutional court ruling in March 2024 overturned this change, allowing Gagauzia to continue retaining VAT collections without covering refunds.
Gagauzia’s budget revenues and expenditure
Gagauzia’s ability to retain those taxes results in both the highest revenue per capita and the highest public expenditure per capita in Moldova. While the region, like others, receives national transfers, these are relatively modest. The true source of its financial strength lies in the described tax advantage.
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In terms of expenditures, major spending areas include education, social protection, and culture. Gagauzia also spends more on personal expenses than other regions, likely due to its broader administrative responsibilities as an autonomous unit. However, the region provides also higher social benefits compared to the national average, reflecting its greater financial resources. The region also has several local funds, such as the Entrepreneur Fund, Agricultural Subsidies, and a State-Owned Enterprise Horse Farm Subsidy, in addition to national government subsidies.
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Conclusion
Gagauzia’s financial autonomy, which allows it to retain 100% of taxes and benefits from a highly favorable VAT arrangement, results in the highest per capita revenues and public spending in Moldova. This enables greater resources for social benefits, as well as local subsidies. However, these fiscal privileges have not translated into the broader economic development one might expect. The region continues to lag behind, with wages remaining lower than in other regions. Furthermore, disputes with the national government have not created a stable investment environment necessary for future growth.
This Newsletter is based on our Economic Monitor Gagauzia.
