IMF Executive Board Concludes 2011 Article IV Consultation with Former Yugoslav Republic of Macedonia

Public Information Notice (PIN) No. 12/58
June 8, 2012

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with Former Yugoslav Republic of Macedonia is also available.

On June 1, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Macedonia.1


The economic recovery is losing steam due to adverse external developments. Growth was 3 percent in 2011, but was slowing in the second half of the year, which was visible in softening exports, sales, production, and credit. Growth is expected to slow to 2 percent in 2012. The absence of significant imbalances in the Macedonian economy and limited external financial linkages will help to contain the impact on Macedonia of weak growth and financial stress in the euro area. Meanwhile, inflation peaked at 3.9 percent on average in 2011 on the back of sharp rises in food and fuel prices, but core inflation was lower at 1.1 percent. Inflation is expected to decline to 2 percent in 2012. The current account deficit was contained in 2011, at 2.8 percent of GDP, as a pick-up in domestic demand and higher fuel prices were largely offset by private transfers. The current account deficit is expected to widen and then level off at around 5 percent of GDP in the medium term, largely matching the inflow of foreign direct investment. Meanwhile, international reserves increased significantly to over €2 billion at end-2011, which is a broadly adequate level, and have been stable in 2012.

In the financial sector, non-performing loans (NPLs) remained at elevated levels at just below 10 percent. Still, provisions exceed NPLs, and the system remained free of pressures on liquidity or solvency. Moreover, the banking system remained profitable after provisioning, capital adequacy ratios remained close to 17 percent, well-above their regulatory minimum, and bank liquidity was ample. Reliance on domestic deposits as the primary funding source, combined with minimal reliance on external funding and the lack of exposure to risky external assets, have helped shield the banking system from euro area developments. Both deposits and loans have continued to increase modestly.

On fiscal policy, the authorities achieved their 2011 deficit target on a cash basis, by reducing spending in line with revenue shortfalls, although the deficit would have been somewhat larger if arrears on government payments and VAT refunds were included. The 2012 budget called for a deficit of 2½ percent of GDP, but was based on highly optimistic growth and revenue assumptions. The supplementary budget submitted to parliament in April 2012 reduced projected revenues and also reduced expenditures, preserving the original deficit target. The revised revenue assumptions are still somewhat optimistic—by about 1 percent of GDP according to staff projections—but the government has committed to adjust expenditures further if necessary to achieve its deficit target. In this context, Macedonia has a track record of meeting its cash deficit targets, cutting expenditure when needed to achieve its target.

The authorities announced that they have secured a foreign bank loan that will meet remaining 2012 fiscal financing needs and provide resources to repay a Eurobond maturing in January 2013. The loan is expected to be disbursed in the first half of 2012.

The National Bank left interest rates unchanged from December 2010 until April 2012, while modestly relaxing prudential requirements that had been tightened as a crisis response in 2008–09. In April, it introduced a set of measures aimed at easing credit conditions and furthering money market development, including a gradual reduction in the amount of outstanding 28-day central bank bills, the introduction of a 7 day and overnight deposit facility and a weekly repo auction. In early May 2012, it lowered the maximum rate on central bank bills by 25 bps to 3.75 percent. These gradual easing measures were taken against a background of favorable balance of payments conditions, slowing growth, subdued inflation, and modest credit growth.

Executive Board Assessment

Executive Directors noted that, while economic growth has slowed, Macedonia’s medium-term outlook remains generally favorable. To address challenges posed by possible adverse spillovers from the euro area, Directors encouraged the authorities to persevere in their pursuit of macroeconomic and financial stability, building on advances made thus far.

Directors considered the current fiscal stance appropriate. They noted that continued fiscal consolidation will be important to stabilize the debt-to-GDP ratio at prudent levels. In this context, Directors were reassured by the authorities’ intention to meet the 2012 deficit target but noted that further expenditure restraint might be needed. They underscored that a sound medium-term fiscal framework would help prioritize needed social spending.

Directors agreed that measures to improve public debt management and deepen the domestic debt markets should remain policy priorities. Progress on these fronts would reduce dependence on external financing, which could be volatile. Directors also emphasized the need for stronger public financial management that would improve budget planning and prevent arrears.

Directors agreed that the current exchange rate arrangement has served Macedonia well. They encouraged the central bank to stand ready to increase policy rates in the event that external risks materialize and exchange rate pressures emerge.

Directors concurred that the banking sector remains stable and well capitalized. They noted its limited reliance on external financing and ample liquidity. Nonetheless, Directors recommended continued vigilance and encouraged the authorities to make further progress on addressing regulatory gaps and strengthening their crisis response capacity.

Directors agreed that well-designed infrastructure investments and further labor market reforms are essential to raise potential growth and durably reduce unemployment. Steps in these directions would also cement Macedonia’s success in attracting foreign direct investment.

Former Yugoslav Republic of Macedonia: Selected Economic Indicators


2007 2008 2009 2010 2011


Annual percentage change, unless otherwise specified



Real GDP

6.1 5.0 -0.9 1.8 3.0

Real domestic demand

9.2 6.7 -3.3 -0.1 5.7


7.7 6.9 -4.9 0.5 3.8

Gross investment

23.2 4.7 -0.6 -2.1 21.2

Net exports 1/

-4.6 -3.1 3.2 1.9 -3.7







CPI inflation (annual average)

2.3 8.4 -0.8 1.5 3.9

Unemployment rate (annual average)

34.9 33.8 32.2 32.1 31.4








In percent of GDP







Current account balance

-7.1 -12.8 -6.8 -2.2 -2.8

Trade balance

-19.8 -26.2 -23.3 -21.3 -23.0

Exports of goods

41.4 40.1 28.8 36.1 43.5

Imports of goods

-61.2 -66.3 -52.1 -57.4 -66.5

External debt

47.6 49.2 56.4 59.9 66.7







Gross investment

24.6 26.8 25.9 23.7 25.4

Domestic saving

17.6 14.0 19.1 21.5 22.7


4.4 3.9 0.6 1.1 1.4


13.2 10.0 18.5 20.4 21.3

Foreign saving

7.1 12.8 6.8 2.2 2.8







Central Government Gross Debt

24.0 20.6 23.8 24.8 28.6

Central Government Balance

0.6 -0.9 -2.7 -2.5 -2.6







Memorandum items:






Nominal GDP (billions of denars)

365 412 411 425 450

Nominal GDP (billions of euros)

6.0 6.7 6.7 6.9 7.3

GDP per capita (EUR)

2917 3280 3265 3356








Sources: NBRM; SSO; MOF; IMF staff estimates.

1/ Contribution to growth

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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