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The following item is a Letter of Intent of the government of Macedonia, which describes the policies that Macedonia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Macedonia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
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November 15, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

The attached "Memorandum of Economic and Financial Policies for 2000–03" (MEFP) describes the Government of the Republic of Macedonia’s medium-term economic program aimed at reducing poverty and promoting rapid sustained growth through the maintenance of macroeconomic stability and acceleration of structural reforms. We have also prepared an interim Poverty Reduction Strategy Paper, which is being submitted separately to the Fund and the World Bank. In support of the program, on behalf of the Government of the Republic of Macedonia, we request a three-year financial arrangement from the IMF under the Poverty Reduction and Growth Facility (in an amount of SDR 10.34 million, equivalent to 15 percent of quota) and the Extended Fund Facility (in an amount of SDR 24.12 million, equivalent to 35 percent of quota). We expect that the prior action for the approval of the PRGF/EFF arrangements on the sale of Feni, the largest lossmaking enterprise, as described in paragraph 7 of the MEFP will be competed by the time of the Executive Board meeting on the arrangements, scheduled for November 29, 2000.

Our previous arrangement with the IMF under the former Enhanced Structural Adjustment Facility (ESAF) went off track in the second half of 1998 mainly because of lack of progress in structural reforms. Reforms were delayed in the run-up to the parliamentary elections in November 1998. Thereafter, the new multi-ethnic coalition government was confronted by the social and political ramifications of the Kosovo crisis in 1999. However, the Government has renewed its reform efforts since the beginning of 2000 and has made notable progress. Significant achievements this year include the introduction of the value added tax, the sale of the largest commercial bank to foreign investors, and the sale or closure of several lossmaking enterprises. All these measures were originally on the agenda of the last ESAF-supported program. The Government remains committed to further structural reforms and is also seeking support from the World Bank.

We believe that the policies and measures described in the attached memorandum are adequate to achieve the objectives of the program. However, the Government stands ready to take additional measures and seek new understandings with the IMF, if necessary, to keep the program on track. The implementation of policies and measures in the first year of the program will be reviewed with the IMF before June 14, 2001 and again before December 14, 2001. We will remain in close consultation with the IMF in accordance with the IMF’s policies on such consultation.


Nikola Gruevski
Minister of Finance
Ljube Trpeski
National Bank of the Republic of Macedonia


Memorandum of Economic and
Financial Policies for 2000–03

I.  Introduction

1.   This memorandum outlines the Government’s medium-term economic program for the period October 2000–September 2003 for which support is being requested from the International Monetary Fund (IMF) under a new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) and the Extended Fund Facility (EFF).

2.   Over the past five years, considerable success has been achieved in macroeconomic stabilization and in transforming toward a market-based economy, notwithstanding an adverse regional environment and periodic exogenous shocks. Inflation is fully under control, and the external reserves position has improved markedly. Key elements behind this performance have been prudent fiscal management and a monetary policy targeted at maintaining the exchange rate anchor.

3.   Nevertheless, the supply response of the economy and expansion of employment opportunities have been sluggish. Thus, the unemployment rate has remained high at over 30 percent and one-fifth of the population is estimated to be living below the poverty line. In part, this can be explained by the disruption of trade and erosion of investor confidence resulting from periodic closing of the northern and southern borders driven by regional political developments. However, it also reflects deep-rooted structural weaknesses of the economy and insufficient progress in implementing reforms. In particular, during the first half of 1999, the Kosovo crisis forced the government to focus on crisis management and made it difficult to move forward with the reform agenda.

4.   Post-conflict developments in Kosovo have provided a sharp stimulus to the economy, and the Pact for Stability of Southeastern Europe and the Stabilization and Association Agreement with the European Union (EU) that are in prospect should improve the regional environment and strengthen the growth outlook. The normalization of the situation in Serbia-Montenegro should eventually have a positive knock on effect, though the impact in the near term is difficult to assess at this stage. The government intends to make the most of this opportunity by implementing a comprehensive structural reform agenda and at the same time paying attention to the social problems in the country. Accordingly, reform efforts have been renewed since the beginning of 2000 and notable progress has been made. Several multilateral agencies, including the IMF and the World Bank, and bilateral sources are providing assistance with the formulation and implementation of these reforms. Also, the government has prepared—in consultation with civil society, donor groups, and international financial institutions—an Interim Poverty Reduction Strategy Paper (IPRSP) as the first step toward the preparation of a full-fledged Poverty Reduction Strategy Paper (PRSP). The IPRSP has been forwarded to the World Bank and IMF separately.

II.  Recent Developments

5.   Economic performance thus far in 2000 has been generally favorable. Economic activity has been strong, especially in the trade and service sectors, as Kosovo-related demand has remained solid and consumer demand surged ahead of the introduction of the value added tax (VAT) in April. Real GDP is estimated to have increased by 10½ percent in the first half, compared with the same period last year. After a sharp pick-up in consumer prices in April of about 4 percent, reflecting the one-time effects from the introduction of VAT and increases of electricity tariffs, inflation has tapered off to an underlying annual rate of about 2 percent. The trade deficit has widened as imports have recovered from the Kosovo crisis-related compressed level in 1999 and have been boosted by higher consumption demand, replenishment of stocks, and rising international oil prices. However, this has been accompanied by large inflows of private transfers, privatization receipts, trade credits and a hefty positive "errors and omissions" (most likely reflecting a surge in unrecorded exports). Thus, surpassing expectations, gross official reserves increased by US$117 million from end-December 1999 to US$595 million as of end-September 2000.

6.   Fiscal performance has been exceptionally strong, and has provided room for a rapid expansion in private sector credit. A general government surplus, including grants, equivalent to about 2.9 percent of annual GDP during January–September was mainly on account of buoyant sales tax/VAT collections. Unbudgeted inflows of foreign grants (0.9 percent of GDP) and lower-than-planned expenditures on structural reforms were also contributory factors. However, there has been continued slippage on the wage bill as some line ministries recruited staff without budgetary authorization and shifted to the budget personnel expenditures previously financed from off-budget accounts. Several line ministries also accumulated arrears to suppliers. Commercial banks stepped up credit expansion following the elimination of direct credit control in end-March. In sharp contrast to the experience in 1999, credit expansion in 2000 has been channeled to creditworthy borrowers. However, the average lending rate has remained high at around 19 percent, symptomatic of the large share of nonperforming loans in the banks’ portfolios and the difficulties that banks face in collecting claims from delinquent borrowers.

7.   On the structural front, several important measures have been implemented since the beginning of 2000 for reforming the tax system, addressing the problems of the enterprise and banking sectors, and strengthening the social insurance system. The VAT was introduced successfully in April and efforts to strengthen tax administration have been stepped up. Two commercial banks (including Stopanska Banka, the largest bank) have been sold to foreign investors, and a small insolvent bank has been closed. The government has taken remedial action, through closure or sale, on a subset of the twelve loss-making enterprises that were originally on the agenda of the last IMF-supported program under the Enhanced Structural Adjustment Facility. This includes the sale of Feni, a nickel smelting firm and the largest lossmaker. This sale, which is a prior action for the approval of the PRGF/EFF arrangements, is scheduled to be completed before the IMF Executive Board meeting on the arrangements. Preparatory steps were initiated for public administration reforms. However, the planned downsizing of the civil service through early retirement became stalled on account of a challenge in the Constitutional Court. To facilitate further systemic reform, key laws have been enacted on denationalization of property, banking activities and the financial system, frozen foreign currency deposits, enforcement of creditors’ rights, labor relations, and pensions.

III.  Objectives and Policies for 2000–03

A.  Overall Strategy and Macroeconomic Framework

8.   A major objective of the government is to reduce the incidence of poverty by 3 percentage points to 17 percent by 2003. The poverty reduction strategy will have a three-pronged approach: (i) achieve sustained rapid economic growth; (ii) generate new employment opportunities and increase investment in human capital; and (iii) enhance and modernize the existing social protection system. To facilitate growth, macroeconomic policies will continue to focus on providing a stable financial environment. In addition, the structural policy agenda (summarized in a policy matrix annexed to the IPRSP) will focus on improving governance and fostering restructuring in the enterprise sector, enforcing better lending discipline on banks and other initiatives that would reduce intermediation costs, and improving budget design and execution. The strategy for human capital development (see Section III.G of this document) and plans to improve targeting of social assistance (Section III.H)  are still being developed. The detailed program in these areas will be set out in the full-fledged PRSP that the Government expects to complete by September 2001.

9.   Based on developments in the first half of the year, real GDP growth of 6 percent in 2000 appears feasible, and the government’s aim is to sustain this pace of growth over the medium term. The main driving forces behind growth would be strong export demand and investment associated with structural transformation of the economy and development of infrastructure. Rising domestic saving would finance much of the increase in investment, but the share of foreign-financed investment is expected to remain high, reflecting project lending by bilateral and multilateral parties under the Pact for Stability and improved conditions for foreign direct investment. Notwithstanding the anticipated increase in investment, real private consumption per capita should rise steadily.

10.   Key stabilization objectives are to maintain inflation at about 2 percent per year, and to increase foreign exchange reserves in 2001 to the equivalent of about 3½ months of next year’s imports of goods and services and maintain it at this level thereafter. Higher reserve coverage is deemed essential for sustaining confidence in the exchange rate anchor. The political uncertainties in the region and the associated risks for the balance of payments have not totally subsided. Moreover, annual swings in unidentified financing have been large in recent years and some of the Kosovo-related foreign exchange inflows may prove to be volatile. Thus, although the external current account deficit (excluding grants) is projected to narrow slightly over the medium-term and the capital account is expected to strengthen significantly, a modest amount of additional resources from the international community will be needed to ensure that the balance of payments is fully financed.

B.  Fiscal Policy and Budget Reforms

11.   Fiscal policy will be formulated within a medium-term framework and its stance will be consistent with the goal of achieving a sustainable external position. Within the appropriate fiscal targets, expenditures will take full account of the claims on budgetary resources that will arise from poverty reduction and structural reforms. New policy initiatives will be introduced only after a thorough evaluation of the full year’s cost of the policy change for later years. Measures will be taken to address the following weaknesses in the current structure of the budget: (i) the taxation of labor income is very high, creating disincentives for job creation; (ii) expenditure on wages, transfers and social sector outlays account for nearly four-fifths of total government expenditure, which limits the scope for the budget to contribute to the restructuring of the economy and makes fiscal management difficult in the event of contingencies; and (iii) line ministries have recourse to self-generated special revenues that are not subject to the centralized budget allocation process, resulting in possible misallocation of resources as well as in weakened governance, transparency, and spending control.

12.   The Government has taken a conservative stand regarding the use of the large fiscal surplus that is projected for 2000. The central government account is expected to be in a surplus of about 3.6 percent of GDP for the year as a whole, compared to approximate balance that was envisaged in the budget. The general government surplus should be lower, at 2.2 percent of GDP, reflecting foreign-financed expenditure on a road construction program. The Government has avoided early implementation of the planned tax cuts (see paragraph 17) because it wanted to first assess the durability of the strong VAT performance. Also, it has resisted pressures to spend the surplus on current expenditures, because of the risk that these could easily become permanent. Instead, the surplus accumulated in 2000 will be utilized for settling domestic arrears to suppliers, pre-paying government bonds held by the banking sector, and retiring early 50 percent of the amount falling due in 2002 of bonds issued to holders of frozen foreign currency deposits (see paragraph 23). There will be no selectivity involved in the pre-payment of these bonds, and all bondholders will be treated equally.

13.   Consistent with the medium-term macroeconomic framework and poverty reduction strategy, a ceiling on the general government deficit of 1.2 percent of GDP for 2001 has been set, but this deficit ceiling would be gradually reduced over time, reaching 0.5 percent of GDP in 2003. Taking into account externally financed expenditures by the Road Fund, this implies that the central government budget would have a deficit of no more than 0.2 percent of GDP in 2001 and surpluses of 0.2 percent of GDP and 0.4 percent of GDP in 2002–03, respectively. The Government will prepare a 2001 budget within this framework in consultation with the IMF staff in December 2000. Consistent with the programmed fiscal stance, quarterly ceilings have been set on net credit to the general government from the banking system for the period through end-December 2001, which will constitute performance criteria under the IMF-supported program.

14.   The measures underlying the fiscal stimulus in 2001 would be consistent with the government’s reform objectives and tax policy priorities, particularly those to reduce poverty through stimulating formal sector employment. Debt considerations do not pose any binding constraint on the proposed fiscal swing, as the debt-to-GDP ratio is projected to decline over the medium term and the interest bill will remain below 2 percent of GDP. The stimulus would be associated with only a slight increase of the external current account deficit in 2001 owing to an improving private sector saving-investment balance, and the current account deficit is not expected to result in an unsustainable financing need.

15.   The Ministry of Finance currently estimates that there is room for discretionary policy measures of about 2½ percent of GDP within the programmed fiscal ceiling for 2001. To guard against the risk that the assumed rebound in private saving is not forthcoming, the Government will introduce measures equivalent to only 1½ percent of GDP in the initial 2001 budget. A second round of revenue-reducing and expenditure-enhancing measures, equivalent to 1 percent of GDP, will be introduced in mid-2001 if at the time of the first program review data through end-March 2001 confirm that the benchmarks/performance criteria for fiscal and external sector developments have been met. If the performance targets are not met or there are signs of the external current account being weaker than projected, the Government will tighten the fiscal stance by foregoing the second round of policy measures and taking any other needed measures. The resources for the second round of policy measures will be set aside as a separate line item in the 2001 budget. The specific second round policy measures, other than a likely small reduction of excise taxes on oil derivatives, will not be explicitly identified when the budget is submitted to Parliament, and will be determined in consultation with the IMF staff at the time of the first program review. The extent of the second-stage revenue reduction measures will be limited to an amount that on an annualized basis can be sustained over the medium-term. Thus, any room left after the mid-year implementation of tax measures will be used for one-time poverty-oriented expenditures.

16.  The Government also intends to review the fiscal targets, in consultation with the IMF staff, in the event of unprogrammed privatization receipts. Pending consultation with the IMF staff on the use of these receipts, the ceilings on net bank credit to the general government will be adjusted downward for unprogrammed privatization receipts to the extent that they are not used to repay government external debt.

17.  A central element of the Government’s medium-term fiscal strategy is to modernize the tax system and provide stronger incentives for economic activity. The introduction of the VAT in April 2000 is an important part of this strategy. VAT collections so far have surpassed expectations and are expected to remain strong, as the administration of the VAT system should be fully developed by end-March 2001. Adequate staffing of the VAT unit and Public Revenue Office (PRO), strengthening collection efforts and audit operations, and the programs for education of taxpayers will continue to be priorities. On the other hand, the Government’s recent initiative on free trade agreements (see paragraph 34) with countries in the region has caused the tax base for import duties to shrink in 2000 and result in a sizeable loss of potential revenues. The share of duty-exempt imports is likely to increase in 2001 and deepen the potential revenue loss. Discussions are ongoing with the EU regarding the elimination of the 1 percent fee for processing customs documentation, which would also lead to a loss in revenues (of about 0.6 percent of GDP). Pressure from interest groups for specific tax relief will be firmly resisted. The base for direct taxes will be widened by subjecting the earnings of the self-employed to the personal income tax instead of the profit tax. However, the government intends to reduce personal income taxes in 2001, in order to induce employers to register workers and to facilitate job creation; employers would be the beneficiaries of this measure, with workers continuing to get the same net wage. Consideration is being given primarily to shifting agricultural primary inputs and medical supplies from the standard VAT rate to the reduced rate. Another goal, though less vital, is to reduce excise taxes on oil derivatives in order to cushion the impact of higher taxes following the introduction of the 19 percent VAT. The Government will continue to maintain its policy of changing the domestic retail price of oil derivatives in line with developments in international oil prices. The scale of tax reduction in the 2001 budget will be determined in consultation with IMF staff and after taking into consideration the medium-term outlook for revenues, new expenditure claims, and the impact of expenditure-restraining measures.

18.  On the expenditure side, the Government faces a number of new claims on budgetary resources. From August 2000, the government has begun to settle the outstanding court-mandated retroactive payments to pensioners, which will cost the budget 0.6 percent of GDP annually over a five-year period. The Government has also assumed liabilities equivalent to about 3½ percent of GDP to help finance the restructuring of Stopanska Banka prior to its sale. Further one-off and recurrent costs to the budget are expected to arise on account of enterprise restructuring and public administration reform. An initial central government budget allocation of 1 percent of GDP is under consideration for 2001 to cover such costs. Furthermore, the level of public investment needs to be increased to ensure that basic infrastructure facilities supportive of economic growth are provided. The key investment priorities are to build up rural and social infrastructure, and to improve the country’s road network. The Government has decided that budget support expected from donors in the fourth quarter of 2000 as co-financing with the World Bank’s Financial and Enterprise Sector Adjustment Loan (FESAL) operation as well as any future unbudgeted inflows of foreign grants or concessional financing will be used on expenditures to promote poverty reduction as identified in the IPRSP/PRSP.

19.  Priority will be given to restraining the Government’s personnel expenses. Because of the Constitutional court’s ruling against the early retirement scheme, the wage bill of the central government is likely to exceed the budgeted level in 2000. Measures have been introduced in September 2000 to ensure that there is no further drift in personnel costs financed by both the budget and the off-budget special revenue accounts in the remainder of the year. Further, the government is committed to bringing down the wage bill in 2001 by following through with the reduction of public sector employment that had been planned for 2000. Consistent with this objective, ceilings have been established on the wage bill for the second half of 2000 and for 2001, which are performance benchmarks under the IMF-supported program. General wage increases will be granted in 2001 if it proves feasible to create room within the overall wage ceiling through deeper rationalization of the civil service. An acceleration of civil service reform and a review of the salary structure of civil servants have become imperative, as the wage differential between the public and private sectors has steadily eroded and the government is experiencing difficulties in retaining and attracting high-quality staff.

20.  Special interim measures to control personnel expenditures, until a treasury system has been fully developed, include the following: (i) the Prime Minister’s office will be in charge of approving all new employment in public administration; (ii) the Employment Fund will not be able to register any new employee in public administration without a written approval from the Prime Minister’s office; and (iii) the Payments Operations Bureau (ZPP) will pay salaries of public administration officials only on the basis of a payroll list signed by the Ministry of Finance.

21.  The Government will implement a broad-based public administration reform program that incorporates a downsizing of the civil service in a manner that does not impair the efficiency of delivery of services. Assistance with public administration reform is being provided by the World Bank and PHARE. The Government will seek to revive the early retirement scheme for civil servants in 2001 by undertaking appropriate amendments to the enabling law that would be consistent with the Constitution of the country. Public administration will also be downsized through divestiture of noncore activities to the private sector and consolidation of ministries. A time-bound action plan for divesting noncore activities that are a source of special off-budget revenues for line ministries, including passage of relevant umbrella legislation, will be developed by December 2000 and execution of this plan will be completed by September 2001. The number of ministries has already been reduced from 22 to 14, and the surplus positions that have emerged will be eliminated. However, some increase in employment is indispensable in the Ministry of Finance and the Ministry of Justice in order to enhance their capacity to implement reforms.

22.  The Government is undertaking measures to strengthen expenditure management and control overall. Technical assistance is being received from the IMF to install a full treasury function in the Ministry of Finance, and the system is expected to become totally operational by end-2001. Beginning with the 2001 budget, budget design and preparation will be improved. The off-budget special revenue accounts associated with core government activities will be integrated into the central government budget; this will constitute a structural benchmark under the IMF-supported program. Until the noncore activities are divested, the use of their special revenues will be monitored closely. In order to increase accountability, the budgets of the four extrabudgetary funds will be submitted to Parliament simultaneously with the central government budget. To thwart pressures from the funds on the central government budget, limits will be placed on transfers and net lending, which will also constitute performance criteria under the IMF-supported program. Furthermore, all new legislation with fiscal implications will have to be cleared by the Ministry of Finance before they are submitted for parliamentary approval. In this context, the Government intends to rescind a number of modifications to social programs that were introduced in the first half of 2000 without taking into account the budgetary implications and which do not serve to better target social programs to the poorest segment of the population. Specifically, the amendment to the Health Insurance Law that has led to an increase in the health insurance contribution rate for the unemployed will be repealed by end-2000. The Government also intends to review the recently enacted Law on Employment of Disabled with the aim of assessing the potential budgetary costs of implementing the program, and will take corrective steps if there is a risk of the costs turning out to be open-ended. The Government also intends to strengthen its debt management ability, and has set up a debt-monitoring unit at the Ministry of Finance toward this end.

23.  In early 2000, the Government issued negotiable bonds in exchange for frozen foreign currency deposits (these obligations were already a part of the domestic debt of the government), with the aim of rebuilding confidence in the domestic financial system and developing the domestic capital market. Beginning in 2002, amortization payments equivalent to 1.3 percent of GDP will fall due annually over a ten-year period. To help reduce the need for cash repayments, the government will investigate ways to exchange the bonds for government assets such as land, real estate, and privatization shares.

C.  Monetary and Exchange Rate Policy

24.    The National Bank of Macedonia (NBM) will continue to orient monetary policy toward sustaining the exchange rate anchor. External competitiveness appears adequate at present. The appropriateness of the exchange rate level and regime will be kept under close review especially because of the on-going structural transformation of the economy. In the event of unanticipated foreign exchange inflows, sterilized intervention will be undertaken in the short run. If inflows prove persistent, the NBM will assess, in consultation with IMF staff, whether an easier liquidity situation or tighter fiscal situation would be appropriate or whether the impact of an appreciation could be absorbed. At a later stage, once enterprise and banking reforms have been implemented and the money market is well developed, the NBM intends to explore the option of moving to a more flexible exchange rate regime, in order to increase the maneuverability of monetary policy and reduce the volatility of money market interest rates.

25.    The NBM has formulated a monetary program, in consultation with the IMF staff for the second half of 2000 and for 2001, consistent with the macroeconomic objectives set out in Section III.A of this document. Money demand is expected to grow by about 20 percent in the second half of 2000. The increase in velocity of money in the first half of the year was temporary, reflecting an adjustment in enterprise behavior to the introduction of the VAT, and should be reversed in the second half in line with the long-term declining trend in velocity. In addition, the planned early retirement of bonds issued to holders of frozen foreign currency deposits (see paragraph 12) will also boost household deposits in banks. On the basis of a further build-up of deposits of the general government with the banking system, credit to the private sector is projected to grow by about 7 percent during July–December 2000. There is scope for further monetary deepening in 2001, as bank rehabilitation should increase public confidence in domestic monetary institutions and encourage residents to hold an increasing share of their saving in the banking system. Accordingly, broad money and credit to the private sector are each projected to grow by about 13 percent in 2001. Quarterly performance criteria have been established for the net foreign assets of the NBM (floor) and net domestic assets of the banking system (ceiling) for the period December 2000 through June 2001, and indicative targets have been set for the second half of 2001.

26.  From April 2000, the NBM has moved away from direct credit ceilings to a system of monetary control based solely on the use of indirect instruments. The NBM will conduct open market operations with NBM bills, as necessary, and interest rates on these bills would be flexible and market determined. The lending rates of banks should decline as a result of banking sector reform and enforcement of the recently amended laws aimed at strengthening creditors’ rights. The government intends to develop a market for Treasury securities by 2002. At that time, the NBM will progressively replace NBM bills with these securities in its open market operations.

D.  Financial Sector Reform

27.  Banking system reform is key to a better allocation of resources. As of end-June 2000, about two-fifths of the loan portfolio of the banking system was nonperforming and eight banks, which accounted for 16 percent of the total assets of the 22 banks currently in operation, were deemed as "problem" banks with a CAMEL rating of 4 or 5. While all banks met or exceeded the capital adequacy ratio guideline, only a few banks were in full compliance with the prudential regulations. The NBM’s agenda for banking sector reform, which will be supported by a FESAL operation from the World Bank, has three key elements: (i) strengthening the legal framework; (ii) enhancing bank supervision; and (iii) increasing competition. Substantial progress has been made since the beginning of 2000 in all these respects. A new banking law was enacted in July 2000, and prudential regulations are being revised to make them consistent with the new law. Notably, the limits for credit exposure to a single borrower and to banks’ shareholders have been lowered, to conform with EU standards. Separate units have been established in the Banking supervision department of the NBM for off-site monitoring and handling problem banks, and are now fully operational. Work has started on developing an early warning system. A stronger Stopanska Banka under foreign ownership has prompted other banks to seek foreign investors.

28.  With these institutional changes in hand, the focus in the period ahead will be on strict enforcement of the supervisory guidelines and prudential regulations. In March 2000, the NBM agreed with the eight problem banks on a corrective action program to upgrade their CAMEL rating to 3 or better. To date, four of the banks have demonstrated high responsiveness in implementing the corrective steps. For those banks which fail to upgrade their CAMEL rating to the minimum required level, as determined when the annual accounts for 2000 become available in March 2001, sanctions—such as removing the manager, imposing a freeze on new denar credits, and prohibiting all banking activities—will be imposed by the NBM; such a step will constitute a structural benchmark for the first review of the IMF-supported program. All banks are expected to be in full compliance with prudential regulations by June 2002. The Government will not devote public resources to bail out nonviable banks, especially if their closure does not pose any systemic risk. In line with the EU directive on deposit insurance, the government will establish by March 2001 a government-backed Deposit Insurance Fund to replace the current bank-owned and operated system.

29.  The Government has begun to implement a financial system infrastructure development program. The main objectives of the program are to: (i) reform the Payments Operations Bureau (ZPP); (ii) develop effective movable and immovable collateral registration systems; (iii) create a Central Securities Depository/Central Share Registry and a Delivery-versus-Payment-based securities clearing and settlement system; (iv) combat money laundering; and (v) revamp regulations on foreign exchange operations. The existing ZPP payments system services will be replaced by a large value payments system (to be operated by the NBM and the banking system) and a clearinghouse for small value payments (owned and operated by commercial banks). All corporate customer denar-denominated giro accounts will be transferred from the ZPP to the banking system. A register on pledged movable property is already operational, and all the other systems are scheduled to become fully operational in stages by end-2001. The regulations on foreign exchange operations will be revised with a view to: (i) discontinue the legal obligation for authorized banks to organize a foreign exchange market on their premises; (ii) allow non-bank financial intermediaries to operate in the market; and (iii) eliminate the export surrender requirement.

E.  Enterprise Sector Reform

30.  Lack of financial discipline and adequate corporate governance arrangements have resulted in continuing enterprise losses, and a build-up of inter-enterprise arrears and nonperforming loans in the banking system. In 1999 alone, a group of 40 enterprises, in which the Government had a stake or had large overdue claims, incurred losses amounting to 3 percent of GDP, or about two-fifths of the combined losses of all enterprises. The Government is committed to the sale/financial restructuring or closure of these 40 lossmaking enterprises. This effort will also be supported by the World Bank’s FESAL operation. To date, the Government has completed the necessary action in this respect for 9 enterprises, including Okta (a large oil refinery). Feni (a nickel smelter and the largest lossmaker) is in the process of being sold, and the Government expects the transaction (which is a prior action for the approval of a IMF-supported program) to be completed by the time of the IMF Executive Board meeting on the program. Specific benchmarks have been established for the remaining lossmaking enterprises. The larger lossmakers will be tackled first. Specifically, it is the objective of the Government to sell or close Jugochrom (the second largest lossmaker) and four enterprises from the next eight largest lossmakers by the time of the first review of the IMF-supported program. It is expected that the sale or closure of all the selected 40 enterprises will be completed by end-June 2002. An external advisor has been appointed to help the government: (i) prepare remedial action plans on the basis of a thorough financial and economic cost-benefit analysis of the options; and (ii) design a cap, which will decline over a three-year period, on the provision of explicit budget subsidies to the enterprise sector or indirect support in the form forgiveness of taxes, social contribution, and energy arrears, etc.

31.  To break the habit of lax corporate financial discipline and to allow the banking system to improve its asset quality, the Government has strengthened the legislative framework for creditors’ and shareholders’ rights. In July 2000, the Bankruptcy Law and the Law on Pledges on movable property were amended with a view to (i) simplify and accelerate bankruptcy and collateral foreclosure proceedings; and (ii) close loopholes currently open to debtors to delay creditor actions. The Government intends to submit for parliamentary approval, by early 2001, a new legislation that will enable secured creditors, on the default by a debtor, to preserve or enhance collateral for sale and to sell collateral in any commercially reasonable manner without intervention by a court. As for shareholders’ rights, the securities law was also amended in July to authorize the transfer of share books from companies to the central share registry, and to put in place the legal provisions needed for the development of the securities clearing and settlement system. Property rights have also been strengthened by the enactment of a new law on restitution and denationalization of property nationalized after 1944.

32.  Enterprise sector reforms will also focus on facilitating the entry of new private firms, creating a more favorable environment for foreign direct investment, and upgrading the quality of the privatization process. The Government has already initiated steps toward its goal of streamlining registration for all business enterprises. The Government is committed to simplifying administrative and regulatory procedures and to implementing the recommendations of a recent study by the Foreign Investment Advisory Service concerning the factors that currently inhibit foreign investment in the country. The Privatization Agency intends to create share packages with management rights by bundling minority shares of government agencies in already privatized enterprises with shares on which the purchasers had defaulted. The privatization of state- or socially owned enterprises will take place through public tender or the stock exchange. The Government has introduced legislation that prohibits privatization via direct negotiation. Preparations are underway for the sale of a large equity position in Telecom, and the deal is expected to be finalized in the first half of 2001. The Government also intends to privatize the electricity company over the medium term.

33.   The potential receipts from privatization are hard to assess at this stage. The use of these resources will be decided by the government, in consultation with the IMF staff and will be incorporated in the budget law. In particular, the government will officially announce the purposes and rules governing the use of privatization receipts. Regarding the main purposes, the government intends to limit the use of these resources to: (i) financing external debt service payments and reducing external debt in terms and conditions deemed beneficial to the country (the gross receipts from the sale of Stopanska Banka have already been set aside for this purpose); (ii) repaying retroactive pension liabilities as mandated by the constitutional court; (iii) facilitating the introduction of a fully-funded second pillar pension system; (iv) increasing government savings abroad, thus securing a stable stream of dividend or interest income for the budget; and (v) investing in viable projects, as per evaluation of the government in consultation with the World Bank staff.

F.  Trade Policy

34.  The Government’s trade policy objectives are to maintain a fairly open trade regime and to integrate the country into European markets. Negotiations were initiated in April 2000 on a Stabilization and Association Agreement with the EU. In July 2000, the first working group meeting took place to prepare the negotiations for the eventual accession to the World Trade Organization (WTO). A new trade agreement with EFTA will take effect from January 2001. The Government has concluded bilateral free trade agreements with Switzerland, Norway, Iceland, Bulgaria, Croatia, Federal Republic of Yugoslavia, and Slovenia. Negotiations are underway on bilateral free trade agreements with Albania, Bosnia and Herzegovina, Romania, and the Ukraine.

35.  As a result of the EFTA agreement, the bilateral free trade agreements, and certain minor modification of tariffs that the government intends to undertake in 2001, the simple (most-favored-nation) average tariff rate will decrease from the current 15.2 percent to about 14.5 percent. The weighted average tariff rate will fall from 6.8 percent to 5.9 percent. The government undertakes to conduct trade policy in accordance with the requirements of the EU and of the WTO and will not take measures that would increase the effective protection of the domestic market.

G.  Labor Market Reform and Human Capital Development

36.  The persistent high unemployment rate is primarily a reflection of the distortions in the labor market. With the aim of increasing labor market flexibility, the Government amended, in April 2000, the labor law and the employment law so as to: (i) decentralize the system of collective bargaining to the enterprise level; (ii) improve the ability of firms to hire and fire workers; and (iii) restrict the eligibility for special lifetime unemployment benefits.

37.  The Government will pursue an active labor market policy encompassing three types of measures: disseminating information on job openings; arranging training programs; and creating conditions for entrepreneurial development in support of job creation. The Government is particularly keen to foster a dynamic small and medium-sized enterprise sector and to promote investment in economically underdeveloped regions. In order to secure jobs for the poor, investment in environmental projects and infrastructure will be stepped up.

38.   Since incidence of unemployment and poverty is higher among the less-educated and minority groups, increasing investment in human capital will be a key element of the growth and poverty alleviation strategy. The Government is in the process of developing an education sector strategy to improve the quality, efficiency, and equity of the education system. In particular, emphasis will be placed on increasing the low enrollment of the poor and those living in predominantly rural areas.

H.  Social Insurance Systems Reforms

39.  The social safety net for alleviating poverty is well developed and spending on social protection is high, even compared to other transition countries. However, the efficiency and effectiveness of the programs are low. The Government has, therefore, started to take measures to address the underlying structural problems and to put the finances of the social insurance systems on a sustainable footing.

40.  Pension benefits and eligibility criteria have been changed recently to improve the financial position of the pay-as-you-go pension system. These changes include increasing the retirement age; reducing the replacement rate; and changing the basis of indexation from wages to wages and prices. The Government has also established the legal framework for introducing a fully-funded second pillar to the pension system, which will be mandatory for all new labor market entrants and voluntary for the currently employed. The transition to a multilevel pension system will be coordinated with the pace of reform in the payments system and development of a securities market, and the Government will take due care to ensure that the overall fiscal position does not deteriorate.

41.  Social assistance is still not well targeted, despite recent improvements in means testing. Inclusion errors are high, partly due to weak administrative capacity for monitoring. The Government has sought technical assistance from the World Bank to better target social assistance benefits to the poorest households.

42.  In the health sector, the passage of a new law in March 2000 provides the framework for reforms aimed at enhancing the budget process, strengthening financial control and accountability, rationalizing co-payments, and improving provider payment arrangements. Implementation arrangements are expected to be in place by end-2001. Thereafter, reform efforts will focus on organizational and payment reform of primary health care, rationalization of the hospital network, and pharmaceutical pricing and competition in pharmaceutical markets.

IV.  External Financing Requirements

43.  The balance of payments position is expected to improve over the medium-term, though there will still be a modest need for exceptional financing. A strong growth in exports is projected, mainly on account of: (i) greater market access that should follow the association agreement with the EU and the bilateral free trade agreements; and (ii) investment in sectors with export potential. Following a surge in 2000 related to a recovery from the compressed level in the previous year and on account of a boom in consumption demand and rising oil prices, import growth should moderate in the subsequent period and would be associated mainly with rising share of import-intensive investment in aggregate demand and growing demand for intermediate goods for export production. The pick-up in private transfers in 2000 partly reflected drawdown of foreign currency saving held outside the banking system by residents, and is unlikely to be sustained. On this basis, the external current account deficit, excluding grants, is expected to remain in the range of 8 to 9 percent during 2000-03. Official transfers are also projected to fall from the high Kosovo-related levels of 1999-2000. On the basis of the targeted increase in the external reserves position and taking into account identified and anticipated disbursements of project and program loans from bilateral and multilateral sources, including the World Bank and IMF, and likely persistent large unrecorded transactions, the Government estimates that a residual financing gap of about US$30 million per year would emerge during 2000-01 and US$25 million in 2002 (Table 1). The Government intends to seek assistance from the international community for filling the financing gap. The EU and a few bilateral donors have signaled their willingness to provide the required balance of payments support, and discussions with these parties are at an advanced stage.

44.  The external debt burden is moderate. At end-1999, total external debt (of the government and the non-government sector) amounted to the equivalent of 43 percent of GDP and total debt service was about 13 percent of exports of goods and services. The Government will continue to limit the amount of new debt that it contracts or guarantees on non-concessional terms under the IMF-supported program. External debt is projected to increase to nearly 51 percent of GDP by 2003, while the debt service ratio is projected to fall to under 11 percent of exports of goods and services in 2001 and to remain between 10 and 11 percent in the succeeding years. Currently, there are no outstanding external payments arrears, and the Government will strictly avoid any new arrears in the future.

V.  Program Monitoring

45.  During the first year of the IMF-supported program, progress of the program will be monitored based on quantitative performance criteria, performance benchmarks and indicative targets for end-December 2000, end-March 2001, and end-June 2001, and indicative targets for end-September 2001 and end-December 2001, and structural benchmarks for the first program review (Tables 2 and 3). The quarterly quantitative targets include: (i) a ceiling on net domestic assets of the banking system; (ii) a ceiling on net credit to the general government from the banking system; (iii) a floor on net foreign assets of the NBM; (iv) a ceiling on transfers and net lending from the central government to the extra-budgetary funds; (v) a ceiling for contracting or guaranteeing by the government or the NBM of new non-concessional medium- and long-term external debt; (vi) a ceiling on the level of short-term debt or guarantees by the government, except for normal import-related credits; (vii) non-accumulation of any new external arrears on a continuous basis; and (viii) a ceiling on central government domestic payments arrears. Details of the monitoring of the quantitative targets, including definition of adjusters, are provided in the Technical Memorandum of Understanding (Attachment II). During the program period, the Government will not impose or intensify exchange rate restrictions on current transactions, impose or intensify import restrictions for balance of payments reasons, introduce or modify multiple currency practices, or conclude bilateral trade agreements inconsistent with Article VIII of the IMF’s Articles of Agreement. The Government will take additional measures and seek new understandings with the IMF, if necessary, to keep the program on track.

46.  The implementation of the program will be reviewed with the IMF before June 14, 2001 and again before December 14, 2001. Particular attention will be given during the first review to the appropriateness of the programmed fiscal stance, the progress in controlling the government wage bill, the steps taken to improve fiscal transparency and governance, and the progress in tackling lossmaking enterprises and problem banks. Also on that occasion, the performance tests for end-September and end-December 2001—which in this memorandum have been set on an indicative basis—will be re-examined and adjusted as necessary. The second review, as well as examining the further progress of macroeconomic and structural policies in the second half of 2001, will consider the macroeconomic and structural policies to be implemented in 2002, in line with the medium-term objectives set out in this Memorandum, and will establish appropriate performance criteria and policy targets for 2002.

Nikola Gruevski
Minister of Finance
Republic of Macedonia
Ljube Trpeski
National Bank of the Republic of Macedonia


Technical Memorandum of Understanding

This memorandum defines the quantitative performance criteria, performance benchmarks, and indicative targets established in the Memorandum of Economic and Financial Policies for 2000–03 (MEFP).

A.  Net Foreign Assets of the National Bank of Macedonia

1.   Net foreign assets (NFA) of the National Bank of Macedonia (NBM) are defined as the NBM’s foreign assets minus foreign liabilities, and stood at US$397.7 million at end-December 1999 and US$494.4 million at end-June 2000 (Table 1).

2.   Foreign assets of the NBM consist of reserve assets and the frozen deposits of the NBM at a foreign bank, which is the only frozen foreign asset of the NBM. Reserve assets are those that are readily available and exclude any pledged, frozen, or encumbered assets. Reserve assets are defined to include gold, convertible currency deposits in foreign banks, foreign currency held at the NBM, SDR holdings, holdings of foreign securities, and all other foreign currency assets as specified in the data template for foreign reserves developed by the Statistics Department of the IMF. Foreign assets so defined stood at US$499.4 million at end-December 1999 and at US$598.2 million at end-June 2000. Reserve assets so defined stood at US$478.1 million at end-December 1999 and at US$577.0 million at end-June 2000.

3.   Foreign liabilities shall be defined as liabilities to nonresidents contracted by the NBM, irrespective of their maturity, including outstanding obligations to the IMF; liabilities to the Bank of International Settlements; all arrears on principal or interest payments to commercial banks, suppliers, or official export credit agencies, and all other categories of liabilities to nonresidents as specified in the data template developed by the Statistics Department of the IMF. Foreign liabilities so defined stood at US$101.7 million at end-December 1999 and at US$103.8 million at end-June 2000.

4.   Quarterly targets have been established for minimum cumulative changes in the NFA of the NBM from end-June 2000 (see Table 2 of the MEFP). The changes in the NFA will be measured in U.S. dollars excluding valuation effects. The valuation effects are estimated according to the methodology used by the Foreign Reserves Department of the NBM (see section I). The NFA targets are defined based on the assumption that the balance of payments financing (defined as net disbursement of foreign financing or non-budgetary grants to the government, or one of its agencies, or the NBM, except for project loans, commodity loans and grants, and budgetary support; support received to close the residual financing gap is included in the balance of payments financing) will amount on a cumulative basis, from end-June 30, 2000 to:

End-September 2000US$-10.8 million
End-December 2000US$30.5 million
End-March 2001US$13.0 million
End-June 2001US$48.0 million
End-September 2001US$50.0 million
End-December 2001US$85.3 million


5.   In case when balance of payments financing exceeds (falls short of) this projection, the target for the minimum cumulative change in the NFA of the NBM will be adjusted upward (downward) to that extent, with the proviso that the downward adjustment will not exceed the equivalent of US$30 million.

6.   The target for the minimum cumulative change in the NFA will be adjusted upward for any excess in privatization proceeds in foreign currency to the extent they are not used to repay external debt over the following programmed levels on a cumulative basis from end-June 2000:

End-September 2000 US$0.0 million
End-December 2000 US$3.3 million
End-March 2001 US$3.3 million
End-June 2001 US$9.3 million
End-September 2001 US$9.3 million
End-December 2001 US$9.3 million

There will be no adjustment to the NFA target in the case of a shortfall in programmed privatization receipts.

B.  Net Domestic Assets of the Banking System

7.   Net domestic assets (NDA) of the banking system, which includes the NBM and the deposit money banks, are defined as broad money (M3) minus the net foreign assets (NFA) of the banking system. NDA so defined stood at denar 8,000 million at end-December 1999 and at denar -131 million at end-June 2000 (Table 2).

8.   Broad money (M3) includes currency in circulation, demand deposits, quasi-deposits, and non-monetary deposits (time deposits over 12 months and restricted deposits) of the social and private sector, and government deposits held at domestic money banks. Quasi and non-monetary deposits include deposits denominated in denar and in foreign currency. Broad money (M3) so defined stood at denar 40,482 million at end-December 1999 and denar 41,455 million at end-June 2000.

9.   NFA of the banking system are defined as the banking system’s foreign assets minus foreign liabilities. NFA so defined stood at denar 32,482 million at end-December 1999 and denar 41,586 million at end-June 2000.

10.   Ceilings on changes to the NDA of the banking system have been established on a cumulative basis from end-June 2000 (see Table 2 of the MEFP).


11.   The cumulative ceilings on the NDA of the banking system will be adjusted on the following basis.

12.   In case when balance of payments financing exceeds (fall short of) the programmed levels shown above (in paragraph 4), the limit for cumulative changes in NDA of the banking system will be adjusted downward (upward) to that extent, with the proviso that the upward adjustment will not exceed the denar equivalent of US$30 million.

13.   The limit for cumulative changes in NDA of the banking system will be adjusted downward for any excess in privatization proceeds (in denar and foreign currency), to the extent they are not used to repay external debt, over the following programmed levels on a cumulative basis:

End-September 2000 denar 0 million
End-December 2000 denar 217 million
End-March 2001 denar 217 million
End-June 2001 denar 604 million
End-September 2001 denar 604 million
End-December 2001 denar 604 million

There will be no adjustment in the NDA target for shortfalls in programmed privatization receipts. Cash receipts representing installment payments from direct sales of shares to employees and managers in past privatization (before June 30, 2000) will be treated as non-tax revenue. All other receipts from sale of government assets will be treated as privatization revenues against which the adjustment of the ceiling on net credit to general government will be undertaken. Such privatization revenues will be held in special accounts (in denar and foreign currency as appropriate) at the NBM.

14.   There will be no adjustment to the limits for cumulative changes in the NDA of the banking system in case of an excess or a shortfall in programmed external budgetary support.

C.  Net Domestic Credit to the General Government

15.   Net credit to general government is defined to include net position of the external account at the NBM, plus other credit to general government from the NBM and deposit money banks minus total general government deposits with the NBM and deposit money banks. For the purpose of this program, accounts of the general government includes all accounts recorded as government accounts in the monetary statistics reported by the NBM. Total net credit to the general government from the banking system stood at denar 3,549 million at end-December 1999 and at denar -5,550 million at end-June 2000. Of this the net position at the deposit money banks was equal to denar 6,146 million at end-December 1999 and denar 5,701 million at end-June 2000 and net credit to general government from the NBM at end-December 1999 stood at denar -2,597 million and at denar -11,251 million at end-June 2000 (Table 3).

16.   The net position of the external account stood at denar 1,882 million at end-December 1999 and at denar 166 million at end-June 2000.

17.   Credit to the general government from domestic money banks includes credit in denar and foreign currency. This includes credit to budget and line ministries, Pension Insurance Fund, Health Insurance Fund, Agency for Stock Reserves, other central government institutions, bills issued by the BRA, and accrued interest. The amount of outstanding credit from domestic money banks in denar and foreign currency stood at denar 8,524 million at end-December 1999 and at denar 7,967 million at end-June 2000.

18.   General government deposits with the domestic money banks consists of demand, quasi, and nonmonetary deposits, including deposits of the Pension Insurance Fund. The amount of general government deposits held at domestic money banks at end-December 1999 was equal to denar 2,378 million and denar 2,266 million at end-June 2000.

19.   Credit to the general government from NBM consists of the following: use of that portion of IMF credit corresponding to the earlier STF arrangement with the IMF; ordinary credit; purchased government securities; and other. The amount of outstanding credit from the NBM to the general government in denar and foreign currency stood at denar 5,205 million at end-December 1999 and at denar 4,785 million at end-June 2000.

20.   Deposits of the general government in the NBM include deposit accounts of the budget and line ministries, funds, institutions of central government (for example: courts), restricted deposits, and foreign currency deposits. The deposit balance as recorded under the category funds consists of deposit accounts of the Pension Insurance Fund, Health Insurance Fund, Employment Fund, Agency for Stock Reserves and other Government Funds and Agencies including the accounts of the Road Fund. The amount of general government deposits as defined held at the NBM at end-December 1999 was equal to denar 9,684 million and denar 16,202 million at end-June 2000.

21.   The ceilings on the net domestic credit to the general government from the banking system have been established on a cumulative basis from end-June 2000 and are specified in Table 2 of the MEFP.

22.   To achieve the target for general government net credit from the banking system, the central government will steadily build up deposits at its stabilization account with the NBM. It is assumed that the cumulative change of such deposits, which stood at denar 6,113 million at end-June 2000, will be:

End-September 2000denar 3,582 million
End-December 2000denar 1,326 million
End-March 2001denar 3,100 million
End-June 2001denar 3,760 million
End-September 2001denar 3,672 million
End-December 2001denar 4,042 million


23.   The limits for cumulative changes of net domestic credit to the general government will be adjusted by the same amount as the adjustment made to the limits on the NDA of the banking system.

D.  Ceilings on Transfers to Extra-Budgetary Funds

24.   A quarterly aggregated ceiling on transfers and net lending from the central government budget to the pension, health, and employment insurance funds is established, on a cumulative basis, beginning in January 2001 (see Table 2 of the MEFP).

25.   Transfers to the pension fund have three components; mandatory, reform, and gap transfers. Mandatory transfers are set by law. Reform transfers arise from the implementation of the enterprise restructuring program and comprise payments by the central government of arrears to the pension fund of firms which are sold or liquidated, and of pension contributions, in effect through additional transfers to the employment fund, on account of employees registered at the employment fund as a result of the program. Gap transfers are required for balancing pension fund accounts. The ceiling applies to the aggregate of these three transfers but does not include transfers which are linked to the government’s early retirement program. The latter will be determined as this program is implemented using existing rules for the calculation of pensions and reported separately to the IMF.

26.   Transfers to the employment fund refer only to regular transfers to the employment fund. It excludes transfers arising from payment by the central government of pension and health contributions, in effect through additional transfers to the employment fund, on account of those employees that will have to be registered at the employment fund as a result of the government’s enterprise restructuring program. It also excludes transfers related to the unemployment benefits paid to these employees, determined using existing rules for the calculation of unemployment benefits and reported separately to the IMF.

27.   Transfers to the health fund are set equal to zero. These transfers exclude, however, transfers that arise from the implementation of the enterprise restructuring program which comprise payments by the central government of arrears to the health fund on account of firms which are sold or liquidated, and of health contributions, in effect through additional transfers to the employment fund, on account of employees registered at the employment fund as a result of the program. These transfers are reported separately to the IMF.

E.  Nonconcessional Borrowing

28.   The limit on debt of 1–15 years (see Table 2 of the MEFP) applies to the contracting or guaranteeing by the central government (including all budget users and official agencies), local governments, the NBM, Pension Insurance Fund, Health Insurance Fund, Employment Fund, or by the Road Fund, of new nonconcessional external debt with an original maturity of more than one year and up to and including 15 years, with sublimits on external debt with an original maturity of more than one year and up to and including five years. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 by the Executive Board of the IMF, but also to commitments contracted or guaranteed for which value has not been received. Excluded from this performance criterion are changes in indebtedness resulting from refinancing credits and rescheduling operations (including the deferral of interest on commercial debt), credits extended by the IMF and the BIS, and credits on concessional terms, defined as those with a grant element of 35 percent or more calculated using the OECD Commercial Interest Reference Rates (CIRRs). Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantee becomes effective.

29.   The limit on short-term debt (see Table 2 of the MEFP) applies to the stock of short-term debt contracted or guaranteed by the central government (including all budget users and official agencies, local governments), the NBM, Pension Insurance Fund, Health Insurance Fund, Employment Fund, or by the Road Fund, with an original maturity of up to and including one year. The term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 by the Executive Board of the IMF. Excluded from this performance criterion are changes in indebtedness resulting from rescheduling operations (including the deferral of interest on commercial debt), and normal import-related credits. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantee becomes effective. There was no official short-term debt or guarantees on outstanding short-term debt as of end-June 2000.

F.  External and Domestic Payments Arrears

30.   External payments arrears consist of the total amount of external debt service obligations (interest and principal) of the government, the NBM and state enterprises, that have not been paid at the time they are due, excluding arrears on external debt service obligations pending the conclusion of debt rescheduling arrangements. The country had external arrears of US$1 million as of June 30, 2000, which has been fully repaid. Under the program, the avoidance of external payments arrears is a continuous performance criterion.

31.   Central government domestic arrears, excluding those to suppliers, are defined to include all payment delays to: (i) banks for bond payments; (ii) individuals for Social Assistance Program payments; (iii) central government employees for food and travel allowances; (iv) benefit recipients of the Employment Fund; and (v) benefit recipients of the Child Care Program. The definition excludes the customary lag in paying wages (in the following month after they accrue), unemployment benefits and social benefits (until now two months after they accrue, but this will be reduced to one month by end-December 2000). According to the definition here, and as reported to IMF staff, central government domestic arrears, excluding those to suppliers, was zero as of September 30, 2000. Central government domestic arrears to suppliers are defined as obligations by government entities and institutions, including but not restricted to the Agency for Under-Developed Regions, the Service for Common Government Functions, and the Ministries of Agriculture, Culture, Education, Finance, Defense, Health, and Interior to suppliers which are overdue by more than 60 days. As defined here, and as reported to Fund staff, the stock of arrears to suppliers stood at denar 372 million as of October 20, 2000. This amount will be fully settled by end-2000. Under the program, the avoidance of new domestic arrears, as defined above, is a continuous performance criterion.

G.  Ceilings on the Wage Bill

32.   Ceilings on the wage bill are set from the central government budget, on a cumulative basis, from end-June 2000 (see Table 2 of the MEFP). The wage bill ceiling includes all components of the budget chapter 14 of the Macedonian budget classification (this component includes wages and salaries; social contributions; travel, food and vacation allowances; and other related categories in existence in the budget law of the year 2000), and any other personnel related expenses including overtime payments and bonuses. No wage bill or personnel related expenditures should be assigned to other budget categories. The wage bill of the central government so defined in January-June 2000 was denar 7,930 million. A separate ceiling is also established on wages and other personnel expenses being paid out of special revenue and expenditures accounts, or so-called 7–88 accounts. Wages and personnel expenses from the SRA were in January-June 2000 denar 430 million. Once the special revenue accounts are integrated in the 2001 central government budget, the wage bill ceiling of the central government budget will be adjusted by the personnel expenditures financed from special revenue accounts.

H.  Indicative Central and General Government Budget Balances

33.   Quarterly indicative targets for the central and general government budget balances, on a cumulative basis (see Table 2 of the MEFP), will be determined and monitored from the financing side beginning in end-June 2000. Domestic financing for the central government budget includes net credit from the banking system, net placement of securities outside the domestic banking system and other net credit from the domestic non-banking sector, and net variation in domestic arrears. Foreign financing includes disbursements of external loans and non-budgetary support grants received by the central government (i.e., balance of payments support deposited at the external account) minus amortization due, and rescheduled debt service payments programmed to be paid out of the mentioned external account. The financing side also includes privatization proceeds that are either deposited in the external account or deposited in the special account for privatization. The central government balance as of end-June 2000 was denar 4,509 million.

34.   The general government budget includes, in addition to the financing position of the central government budget, the financing position of the pension, health, employment, and road funds. Monitoring will also be carried from the financing side and include, in particular, foreign financing resources linked to the road construction program. For the four funds combined the general government balance as of end-June 2000 was denar 4,167 million.

35.   Adjustments will take place in these indicative targets to the extent that privatization proceeds fall short from programmed levels. Unprogrammed privatization receipts will not lead to automatic adjustments in budget balances but will trigger consultations with the IMF staff on the basis of the government’s policy for use of privatization proceeds. The indicative targets for the general government budget will be revised in line with the revisions of the central government budget. In addition, if foreign financing to the Road Fund exceeds (falls short of) the programmed level, the indicative targets for the general government balance will be adjusted upward (downward) by the full amount. The current financing schedule of the Road Fund, on a quarterly cumulative basis from June 2000, is:

End-September 2000denar 994 million (or US$15.3 million)
End-December 2000denar 2,609 million (or US$40.1 million)
End-March 2001denar 3,385 million (or US$52.1 million)
End-June 2001denar 3,944 million (or US$60.7 million)
End-September 2001denar 4,502 million (or US$69.3 million)
End-December 2001denar 4,907 million (or US$75.5 million)

I.  Valuation

36.   The stocks of assets and liabilities denominated in foreign currencies in the monetary survey will continue to be valued according to the stock/flow methodology. The stocks of assets and liabilities denominated in foreign currencies outstanding at September 30, 1996, are valued at the current exchange rate on that day. On a monthly basis, any subsequent changes in the assets and liabilities in foreign currencies to residents and non-residents relative to end-September 1996 will be valued at the average exchange rate prevailing in the month of the transaction. In particular, changes in the NFA of the NBM (in denar), after end-September 1996, will be calculated by applying the average monthly denar per U.S. dollar exchange rate to the monthly dollar value of transactions (equal to the change in NFA excluding valuation effects as calculated by the Foreign Reserves Department of the NBM). Gold is valued at the price fixed in the London market and was valued at US$290.85 per ounce at end-June 2000. The programmed foreign exchange flow projections assumes an exchange rate of denar 65 per U.S. dollar and cross exchange rates at the level prevailing end-June 2000.

37.   The Foreign Reserves Department of the NBM estimates the valuation effects on the NFA of the NBM as follows. On a daily basis all foreign currency denominated balances are converted into U.S. dollars using end of day exchange rates. The change in the daily U.S. dollar denominated balances, so calculated, is compared to the recorded daily transaction flows in U.S. dollars, and any difference between the two values is attributed to valuation effects.

38.   The exchange rate effects on the foreign currency denominated assets and liabilities of the commercial banks will be estimated on the basis of their currency composition, as provided by the NBM.

J.  Monitoring and Reporting Requirements

39.   Performance under the program will be monitored from information provided to the IMF by the NBM and the Ministry of Finance. All data will be monthly, unless otherwise specified, and should be sent to the IMF within 30 days of the end of each month, unless otherwise specified.

40.   The following information will be communicated to the IMF by the Ministry of Finance: (i) fiscal table for the central government and extra-budgetary funds; (ii) monthly information on privatization receipts (including detailed description of cash payments in local and foreign currency and payments with government bonds); (iii) data on enterprises including action taken and workers registered as unemployed; (iv) information on special revenue accounts (functional and economic classification) and separately by line ministries, particularly on personnel expenditures financed from these accounts; (v) information on guarantees given on new debt, and on new debt contracted by the government, government agencies, and public enterprises; and (vi) information on domestic arrears, including to suppliers.

41.   The NBM will supply: (i) balance sheets of the NBM and the consolidated accounts of the commercial banks—both should include details of the credit and deposits position of funds and other government entities as listed in section C; (ii) the monetary survey; (iii) data on components of NFA of the NBM as defined in section A, valued in U.S. dollars adjusted for valuation changes; (iv) statement from the Road Fund indicating its balances (in denar and foreign currency) at the NBM and at the commercial banks separately; (v) the foreign exchange cashflow of the NBM, including the level of official reserves; (vi) daily and monthly closing and average exchange rates; (vii) detailed data on exports and imports; (viii) information on all overdue payments on short-term external debt and on medium- and long-term external debt; (ix) data on transactions of the external account (gross disbursements, amortization, and interest payments); (x) information on lending by domestic money banks according to credit ratings of borrowers; (xi) data on off-balance sheet activity of domestic money banks; and (xii) data on each domestic money banks’ compliance with prudential regulations will be provided in a quarterly basis till end-2000 and in a monthly basis thereafter within 30 days of the end of the quarter/month. Monthly data on balance of payments will be submitted within 2½ months of the end of each month. Data on stock of external debt will be provided on a quarterly basis, within 30 days of the end of the quarter.