IMF Executive Board Concludes 2009 Article IV Consultation with FYR MacedoniaPublic Information Notice (PIN) No. 09/140
December 28, 2009
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On December 11, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Former Yugoslav Republic of Macedonia (FYR).1
FYR Macedonia’s main vulnerability at the outset of the global crisis was its large current account deficit in the context of the exchange rate peg to the euro. At the same time, it benefited from a small fiscal deficit, modest public debt, significant international reserve buffers, and a small banking system with limited reliance on external financing. These factors provided room for maneuver and limited the country’s exposure to global financial conditions.
The crisis hit Macedonia at the end of 2008 through a collapse in export demand and decline in external financing. These factors led to a sharp slowdown in the economy, reduced tax revenues, and a significant loss of central bank foreign exchange reserves.
The National Bank of Macedonia (NBRM) responded to reserve outflows by tightening bank liquidity and reserve requirements and raising its policy rate from 7 to 9 percent. These actions helped to slow credit growth and contain the loss of reserves. The government curtailed planned spending increases to preserve its 2.8 percent fiscal deficit target in the face of declining tax revenues. It also issued an €175 million Eurobond (at 9⅞ percent) in July, which bolstered reserves and ensured sufficient budget financing.
By the second half of 2009 the situation had stabilized, confidence had improved, and reserve losses from earlier in the year had been recouped. In the banking sector, nonperforming loans rose, but capital adequacy ratios remained high and no significant liquidity pressures emerged. For the year as a whole, GDP is expected to decline 1.3 percent, less than most countries in the region, before returning to 2 percent growth in 2010.
Executive Board Assessment
Executive Directors praised the Macedonian authorities for the conduct of macroeconomic policies, which contributed to a modest downturn in Macedonia’s economy relative to other countries in the region. They welcomed the prospect of a return to growth in 2010. Nevertheless, the large—albeit reduced—current account deficit in the context of an exchange rate peg is a source of vulnerability and limits the room for policy maneuver. In the near term, supporting growth while reducing external imbalances will remain a key challenge.
Directors agreed that the exchange rate peg, supported by prudent fiscal and monetary policies, has served Macedonia well. They took note of the staff assessment that there is no significant exchange rate misalignment. They encouraged the authorities to press ahead with structural reforms to boost competitiveness and foster foreign direct investment, particularly administrative and judicial reforms.
Directors observed that the tightening of monetary policy in the first half of 2009 had helped to rebuild international reserves and provided critical support to the exchange rate peg. They supported the recent cut in the policy rate, given more conducive conditions. Going forward, Directors called for cautious monetary easing that should await clear signs of lasting favorable trends in the balance of payments and international reserves.
Directors supported the fiscal stance in 2009 and 2010, which aims to accommodate automatic stabilizers and protect spending from the cyclical shortfall in revenues. Noting that revenue assumptions for 2010 may prove somewhat optimistic, they welcomed the authorities’ readiness to take all the necessary measures to meet the deficit target for 2010. They were also reassured by the authorities’ commitment to fiscal consolidation over the medium term, and recommended that fiscal targets be guided by debt sustainability considerations.
Directors were encouraged by the broadly healthy condition of the banking system and its low reliance on external funding. They welcomed the authorities’ intentions to move forward on the recommendations in the Financial Sector Assessment Program (FSAP) Update, including strengthening crisis response mechanisms, and legal changes enabling the authorities to intervene in troubled banks without being subject to court challenge. They looked forward to early operation of the recently created supervisory body for the insurance sector.