Former Yugoslav Republic of Macedonia: 2013 Article IV and First Post-Program Monitoring Discussions- Concluding Statement of the IMF Mission
April 16, 2013
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
An IMF team headed by Ms. Ivanna Vladkova Hollar conducted surveillance and post-program monitoring of the Macedonian economy during April 3 – 16, 2013. Article IV macroeconomic surveillance is performed regularly for all 188 IMF member countries. The post program monitoring (PPM) process is intended for member countries that have substantial IMF credit outstanding following the expiration of their programs. After the mission, the team will draft a report which will be submitted to the IMF Board.
The IMF team is grateful to the authorities for their hospitality and open and constructive discussions during the mission, and also to the many private sector representatives who made time to meet with us.
A track record of conservative fiscal, monetary and financial policies gave the Macedonian authorities policy space to confront spillovers from the global crisis—balance of payments pressures early on in the crisis were managed successfully, reserves were reinforced, and looser fiscal policy has supported weak domestic and external demand. As a result, FYR Macedonia avoided large declines in output and disruptive capital outflows, and is well-positioned to return to growth when the recovery in Europe sets in.
Moderate economic growth of 2 percent in 2013 is still achievable, but subject to substantial downside risks. As the external environment remains difficult and as signs of recovery in the Macedonian economy remain fragile, policies should remain supportive in the near term, particularly since there are no exchange rate imbalances. In that respect, the 3.5 percent of GDP cash deficit target for the central government in 2013 as well as current monetary policy settings are appropriate.
Clearance of public sector payment arrears – for goods and services and VAT refunds – which started in September 2012 has provided much needed liquidity to a strained corporate sector. The magnitude of these delayed obligations is economically very significant and has likely exacerbated the effects of weak credit growth. A reoccurrence of such payment delays would jeopardize the recovery, as it impedes proper cash management by firms. Continued transparency on the evolution of the stock of arrears would boost confidence in the durability of the solution.
Further to preserving a stable macroeconomic environment, medium term policies should be geared towards supporting an acceleration of growth—by ensuring space in the budget for priority structural reforms with a fiscal cost, preserving competitiveness, and removing structural distortions that may impede the ability of the banking system to efficiently intermediate savings and finance growth.
While the timing of fiscal consolidation should take into account the largely downside risks to growth, a key immediate challenge is to anchor fiscal policy. The authorities should re-establish a medium-term fiscal and debt management strategy in the lead-up to the 2014 budget process. We understand such a strategy is under preparation. It should increase budget transparency and present a framework for the prioritization of expenditure. It would also ensure sustainability, by safeguarding proper budgetary space for structural priorities, and reconciling the objective of maintaining a business-friendly low tax environment with growing expenditure pressures. The introduction of a multi-annual budgeting framework could further strengthen this process.
The authorities have made good progress in lengthening domestic debt maturities. Articulating a medium term debt management strategy—including a strategy to build a presence in private external debt markets and offer 7-10 year domestic securities—would solidify this progress and support the conduct of monetary policy.
As growth returns, Macedonia should aim to rebuild some fiscal space for future countercyclical responses, by gradually lowering debt levels. The scope for demand management falls squarely on fiscal policy as monetary policy remains appropriately focused on maintaining exchange rate stability against the euro. The debt trajectory should take into account the fact that safe debt levels depend on country specific characteristics such as low and volatile revenue ratios and low growth. With some capital expenditure being moved off budget to the Public Enterprise for Roads, it will be important to target the broader public sector aggregate that includes the spending and debt contracting activity of this public enterprise.
External and Financial Sector Resilience
A number of important factors limit the direct channels of transmission of renewed financial market stress in Europe. Banks are funded mainly by resident deposits and not dependent on wholesale external financing. Public sector external financing requirements for 2013 have been met. Reserve levels are adequate. Nonetheless, the external environment remains volatile, and the authorities should remain vigilant and ready to react to low probability but high impact confidence shocks. In that regard, the mission welcomes the recently adopted changes to the Banking Law, which close most remaining gaps identified in the 2011 PCL request letter.
Structural Policies for Competitiveness and Growth
The effort to attract FDI is bearing fruit, and should have a positive impact on the speed of structural transformation and, critically, on activity rates and employment. The authorities have developed a strategy that goes beyond a low tax environment—focusing on building needed infrastructure and allowing feedback from the needs of new industries to the education and training offer. This, together with a greater focus on primary education, should help absorb the large pool of unemployed labor. However, with labor costs being an important input into location decisions of labor-intensive industries, the authorities should carefully monitor the impact on labor costs of the decision to link the minimum wage to the average wage. Durably boosting growth would also depend on FDI projects developing linkages with the domestic economy—this will be a gradual process, but continued improvements in the business environment would help.
The banking sector is well-capitalized and liquid, but credit growth remains weak. While cyclical considerations and conservative policies at the parent group level currently play a role, there are a number of structural issues that likely limit credit extension. To address these, it would be important to continue with the ongoing important reform to the bankruptcy framework, and abolish the interest rate cap, which distorts risk pricing and impedes the transmission of monetary policy. In addition, the authorities should consider recording and publishing real estate sales prices to address collateral valuation issues, and strengthening training programs on corporate accounting for entrepreneurs and domestic auditors, which would make financial statements and business plans more transparent.
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