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Press Release No. 99/37
August 5, 1999
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves CCFF Credit for the Former Yugoslav Republic of Macedonia

The International Monetary Fund (IMF) has approved a credit for the former Yugoslav Republic of Macedonia (FYRM) totaling SDR 13.78 million (about US$19 million) under the Compensatory and Contingency Financing Facility (CCFF)1 to help offset a temporary shortfall in exports of goods and services resulting from effects of the Kosovo crisis.

At the conclusion of today's Executive Board meeting, Shigemitsu Sugisaki, Deputy Managing Director of the IMF, said: "The Executive Board of the IMF approved the request of the former Yugoslav Republic of Macedonia (FYRM) for compensatory financing for an export shortfall under the Compensatory and Contingency Financing Facility (CCFF). As a result, SDR 13.78 million (US$19 million or 20 percent of quota) is now available to FYRM.

"Directors observed that, because of the Kosovo crisis and the resulting closure of the main transit route through the Federal Republic of Yugoslavia (FRY), FYRM's exports to FRY and other trading partners had been seriously disrupted. A full recovery of exports would have to await a restoration of the transit routes through FRY. Moreover, Directors noted that, largely reflecting the slump in exports, economic activity had declined and unemployment had risen from its already high level. These developments and the refugee-related expenditures have put significant strains on FYRM's budget and balance of payments.

"Directors praised FYRM's response to the formidable challenges posed by the crisis. Noting the heavy economic and social costs suffered by FYRM as a result of the crisis, Directors called on the international community to provide early additional financial assistance to FYRM in order to help meet the sizeable financing requirements in 1999 and over the following three years.

"Directors regretted the slow progress on structural reforms, especially in the enterprise sector, and the lapses in expenditure management and control that had occurred in recent months. However, they welcomed the authorities' renewed commitment to reforms, following the end of the conflict as evidenced in the recent passage of the value-added tax law, as well as the steps taken to restore control over central government wages in the second half of the year, and to enhance bank supervision. In this context, Directors welcomed the authorities' intention to begin negotiations on a program that could be supported by a new ESAF arrangement, in order to preserve the hard-won stabilization gains made under earlier Fund arrangements."

ANNEX

Program Summary

Prior to the Kosovo crisis, the economic performance of the former Yugoslav Republic of Macedonia was generally strong. In 1998 real GDP growth accelerated, inflation declined, and foreign exchange reserves increased. However, policy implementation was hindered before the November parliamentary elections and fiscal policy eased, wages in the enterprise sector rose markedly, and structural reforms stalled. Together with weakened demand in external markets, these developments led to a slowing in industrial production and exports in the latter part of 1998 and early 1999.

The Kosovo crisis inflicted enormous economic costs on the FYRM. At the height of the crisis there were 260,000 refugees living in FYRM. As a result of trade disruption and the erosion of investor confidence, GDP is expected to decline by 4% in 1999, and the unemployment rate to increase by two percentage points to 36 %. At the height of the crisis, a widening of the general government budget deficit by 5 percentage points to 7 % of GDP was projected, but with the refugees now returning to Kosovo, the deficit could be closer to 6 %. The crisis also led to a deterioration in the quality of the loan portfolios of banks.

The loss of foreign reserves since the Kosovo crisis began has been small, but a large financing gap is projected for 1999 as a whole. Private capital flows fell sharply, but this was offset by domestic payments of humanitarian agencies. Looking ahead, exports are likely to remain depressed until transit routes through the Federal Republic of Yugoslavia (Serbia/Montenegro) are rebuilt, while imports are projected to rise, given the limits of inventory drawdowns. A financing gap of about US$345 million is projected for 1999, of which close to US$125 million remains unfilled.

The authorities have stated their intention to request support from the IMF under a new Enhanced Structural Adjustment Facility (ESAF), and to this end they have committed themselves to a number of important policy initiatives, including strengthening expenditure management, enhancing banking supervision, reforming enterprises, and phasing out trade restrictions.

The former Yugoslav Republic of Macedonia joined the IMF on December 14, 1992 and its quota is SDR 68.9 million (about US$94 million). Its outstanding use of IMF financing currently totals SDR 67 million (about US$92 million).


Former Yugoslav Republic of Macedonia (FYRM): Selected Economic Indicators, 1996-99

                     
       

1996

 

1997

 

1998

 

1999

               

Program

 

Prel.

   

Pre-crisis

 

Latest

 

Incremental

 
                   

Actual

   

Estimate

 

Projection

 

Impact of

 
                                 

Kosovo

   
                                 

Crisis

   
                                       
Real economy      

Real GDP

0.8

 

1.5

 

5.0

 

2.9

   

5.0

 

-4.0

 

-9.0

   

Consumer prices, period average

2.5

 

1.5

 

3.0

 

0.6

   

1.0

 

2.0

 

1.0

   

Real wages, period average

3.1

 

0.4

 

...

 

3.1

   

2.0

 

-0.5

 

-2.5

   

Employment

                               

Monthly series on monitored sector

-4.7

 

-5.0

 

...

 

-2.1

   

1.0

 

-6.0

 

-7.0

   

Labor force survey

...

 

-4.7

 

...

 

5.4

   

...

 

...

 

...

   

Unemployment rate (average)1

31.9

 

36.0

 

...

 

34.5

   

34.3

 

36.5

 

2.2

   
                                       

Government finances2

     

General government revenues and grants

36.5

 

34.9

 

37.2

 

33.6

   

33.5

 

33.7

 

-2.6

   

General government expenditures and net lending

37.0

 

35.3

 

37.9

 

35.4

   

35.6

 

41.5

 

2.9

   

General government balance (accrual)

-0.5

 

-0.4

 

-0.7

 

-1.8

   

-2.1

 

-7.7

 

-5.4

   

Central government balance (accrual)

-0.7

 

-1.2

 

-0.6

 

-0.9

   

-0.2

 

-5.6

 

-5.4

   
                                       
Money and credit      

Broad money M33

0.1

 

17.6

 

9.0

 

14.9

   

8.4

 

-3.7

 

-12.1

   

Private denar M2

2.3

 

13.1

 

9.6

 

11.1

   

11.4

 

0.0

 

-11.4

   

Total credit to private sector

19.0

 

18.9

 

12.6

 

10.4

   

11.8

 

7.6

 

-4.2

   

Short-term lending rate4

21.2

 

21.6

 

...

 

20.5

   

...

 

20.5

 

...

   

Credit auction rate4

11.0

 

15.2

 

...

 

18.3

   

...

 

25.0

 

...

   
                                       
Balance of payments      

Exports

1,147

 

1,237

 

1,325

 

1,322

   

1,396

 

961

 

-435

   

Imports

-1,464

 

-1,623

 

-1,674

 

-1,722

   

-1,791

 

-1,484

 

-307

   

Trade balance

-317

 

-386

 

-349

 

-400

   

-395

 

-524

 

-128

   

Current account balance5

-288

 

-276

 

-238

 

-290

   

-251

 

-489

 

-238

   

(in percent of GDP)6

-6.5

 

-7.4

 

-7.3

 

-8.2

   

-6.7

 

-14.5

 

-7.1

   

Overall balance

-51

 

34

 

-24

 

46

   

-3

 

-309

 

-306

   

Official gross reserves

267

 

280

 

347

 

333

   

373

 

373

 

0

   

(in months of c.i.f. imports)7

2.0

 

1.9

 

2.3

 

2.1

   

2.3

 

2.7

 

0

   

Debt service ratio (percent)

11.1

 

8.7

 

8.9

 

9.9

   

12.9

 

18.8

 

5.9

   

Debt to GDP ratio (percent)

25.4

 

30.4

 

34.8

 

37.8

   

40.9

 

44.2

 

3.3

   
                                       
Exchange rates      

Nominal effective exchange rate8

-2.3

 

-10.2

 

...

 

-7.6

   

...

 

1.8

 

...

   

Real effective exchange rate (CPI-based)8

-2.8

 

-11.2

 

...

 

-8.8

   

...

 

-2.7

 

...

   
                                       
                                       

Sources: Data provided by the FYRM authorities; and IMF staff estimates.

1Persons seeking employment as percent of total labor force, based on official Labor Force Survey.

2Excludes revenue and expenditure of the special revenue and expenditure accounts of line ministries. Incremental impact of Kosovo crisis is calculated as denar difference as a percentage of revised GDP. Latest projections for 1999 are as of May.

3Including foreign currency deposits.

4Figures for 1999 refer to end-May.

5There are indications that the current account deficit is substantially overestimated due to unreported remittances.

6Incremental impact of Kosovo crisis is calculated as dollar difference as a percentage of revised GDP.

7Incremental impact of Kosovo crisis is calculated as dollar difference as a percentage of revised imports.

8Partner countries exclude Bulgaria, Federal Republic of Yugoslavia (Serbia/Montenegro), and Slovenia. Figures for 1999 refer to January-March over same period in 1998.


1 The CCFF assists IMF members experiencing temporary shortfalls in export earnings. The loans are repayable between 3 and 5 years, and carry a standard annual interest charge, which is currently 3.82%.

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