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Press Release No. 00/63
November 29, 2000
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Three-Year, US$31 Million EFF Loan and Approves in Principle Three-Year, US$13 Million PRGF Loan for the Former Yugoslav Republic of Macedonia

The Executive Board of the International Monetary Fund (IMF) today approved a three-year loan under the Extended Fund Facility1 for the former Yugoslav Republic of Macedonia (FYRM) in an amount equivalent to SDR 24.1 million (about US$31 million) to support the government's economic program. The decision will enable the FYRM to draw an amount in the equivalent of SDR 1.1 million (about US$1.5 million) immediately.

The Executive Board also approved today in principle a three-year loan under the Poverty Reduction and Growth Facility (PRGF)2 in an amount equivalent to SDR 10.3 million (about US$13 million). A final decision by the IMF Executive Board is pending discussion of the FYRM's interim Poverty Reduction Strategy Paper (PRSP) by the World Bank Executive Board, expected to take place on December 14, 2000. The first disbursement under the PRGF will become available in an amount equivalent to SDR 1.7 million (about US$2 million) after a final decision has been taken by the IMF Executive Board.

Following the Executive Board discussion, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, said:

"The Former Yugoslav Republic of Macedonia has successfully established and maintained financial stability despite a difficult regional situation. The government has taken several important steps to move ahead with structural reforms, and these efforts need to be accelerated.

"The authorities' three-year program of structural reforms aims to generate high growth while maintaining a stable financial environment. It includes the following main elements: (i) reducing the excessive direct tax burden, reforming public administration, and rationalizing expenditures; (ii) addressing the problems of key lossmaking enterprises through sale or closure and improving the business enabling environment for private sector firms; and (iii) strengthening the regulatory framework of the banking system and improving the quality of bank intermediation.

"The program envisages that monetary policy will continue to support the exchange rate anchor and complement fiscal policy in maintaining financial stability and promoting structural change. In 2001, the planned reduction in labor taxes which is needed to provide incentive to employers for job creation and spending on reforms will reverse the large fiscal surplus of 2000. However, the authorities plan to proceed cautiously and implement the revenue-reduction and expenditure-enhancing measures in phases. Expenditure restraint through public administration reforms is expected to free resources for tax cuts. Fiscal control and transparency are also expected to increase with the integration of off-budget accounts into the budget and the introduction of a central treasury system.

"On the structural front, the progress made in strengthening bank supervision will be followed up with strict enforcement of guidelines. Implementation of laws on bankruptcy and creditors' rights should improve corporate governance and resource allocation. The sale or closure of some 40 large lossmaking enterprises has been targeted and some closures are likely. In this regard, it is welcome that adequate social safety net arrangements are in place to cushion the impact on displaced workers.

"The interim Poverty Reduction Strategy Paper (I-PRSP) provides a basis for the development of a full, participatory PRSP and for Fund concessional support under the PRGF. The full PRSP should provide details on plans that would protect the interests of the most vulnerable groups, improve targeting of social programs, and prioritize expenditures for poverty reduction projects," Mr. Sugisaki said.

ANNEX

Background

Macroeconomic developments in the former Yugoslav Republic of Macedonia (FYRM) have been favorable since the end of the Kosovo crisis in mid-1999. Economic activity has picked up and foreign exchange reserves have increased substantially. Growth prospects for 2000 and beyond look favorable with real GDP projected to expand by 6 percent in 2000 and by about the same in 2001. Inflation has been subdued except for an on-off level increase in consumer prices in April 2000 as a result of the introduction of the value-added tax (VAT). Consumer prices are projected to increase by 6.1 percent on average in 2000, but inflation is expected to slow to 2.2 percent in 2001. Recovering from the Kosovo crisis-related compression in 1999, imports outpaced exports thus far in 2000 as they have been boosted by higher consumption demand, replenishment of stocks, and the rising international price of oil. However, a wider trade deficit has been more than offset by large inflows of private transfers, privatization receipts, trade credits and sizeable unrecorded inward transactions. Thus, gross official reserves have increased by US$117 million from end-December 1999 to US$595 million as of end-September 2000.

With an estimated one-fifth of the population living below the poverty line, a key medium-term objective of the government's three-year economic program is to reduce poverty. The government considers rapid and sustained growth as the principal basis for poverty reduction. Therefore, the government will continue to focus on macroeconomic policies that provide a stable financial environment and accelerate structural reforms.

Fiscal Strategy

Fiscal performance has been unexpectedly good in 2000, despite continuing problems with expenditure management and control. The fiscal accounts have recorded a large surplus mainly on account of extremely buoyant VAT collections. The program's fiscal strategy will focus on implementing a wide array of reform measures to address the structural weaknesses of the budget. In 2001, tax cuts will reduce the large gap between gross and net wages and spending on necessary reforms will increase. Thus, a small fiscal deficit (1.25 percent of GDP) is envisaged for 2001. The implied fiscal stimulus is expected to be offset by a rebound in private saving that already appears under way. To guard against the risk that the recovery in private saving will not fully materialize, the fiscal policy package for 2001 will not be fully introduced until the first program review in mid-2000. On the expenditure side, a downsizing of the civil service is planned as are measures to improve fiscal transparency and governance and to complete the centralization of the treasury system.

Monetary Policy

Monetary policy will continue to be oriented toward the exchange rate anchor. The denar is de facto pegged to the deutsche mark (euro). Monetary control will be based solely on the use of indirect instruments. In recent months, the central bank has made significant strides to strengthen the legal framework for bank supervision and to enhance its monitoring capacity. In the period ahead, enforcement of supervisory guidelines and prudential regulations will be emphasized.

Structural Policies

Structural reform efforts have picked up in 2000 and significant progress has been made to date in completing the unfinished agenda of the last ESAF-supported program. In the enterprise sector, a key priority is the sale or closure of 40 large loss makers in which the government has a stake or has large overdue claims. The larger loss makers will be tackled first. Financial discipline in the corporate sector will also be improved through the enforcement of amended laws on bankruptcy procedures and creditors' rights.

The FYRM has a well-developed social safety net to cushion the impact of enterprise restructuring on redundant workers. As spending on social protection is already high, the government's poverty reduction efforts will initially focus on better targeting social programs and enhancing education and health services. Detailed action plans in these areas and expenditure priorities for poverty reduction projects will be developed in the coming months and set out in the full-fledged PRSP.

The FYRM joined the IMF on December 14, 1992. Its quota3 is SDR 68.9 million (about US$88 million). The FYRM's outstanding use of IMF credits totals SDR 60 million (about US$77 million).

Table 1. FYRM: Selected Economic Indicators, 1997-2001

                     
                     
       

1997

1998

1999

2000

2001

             

Jan-Sep

Year

Proj.

             

Actual

Proj.

 
                     
                     

Real economy

(Percent change)

 
       

 

           
 

Real GDP

1.4

2.9

2.7

10.4

a

6.0

6.0

 

Consumer prices

             
   

period average

2.6

-0.1

-0.7

5.6

 

6.1

2.2

   

end of period

3.2

-2.4

2.6

8.1

 

4.9

1.2

 

Real wages, period average

0.2

3.8

3.6

-0.5

b

-1.8

2.3

 

Employment, monthly data

-6.0

-2.9

1.0

0.2

c

0.5

1.0

 

Unemployment rate (average) 1/

36.0

34.5

32.4

32.1

 

32.1

31.8

                     

Government finances 2/

(In percent of nominal GDP)

                     
 

General government revenues and grants

34.9

34.0

37.9

29.4

 

40.2

34.4

 

General government expenditures

35.3

35.8

37.9

26.6

 

38.0

35.6

 

General government balance (accrual)

-0.4

-1.7

0.0

2.9

 

2.2

-1.2

 

Central government balance (accrual)

-1.2

-0.8

0.8

3.2

 

3.6

-0.2

 

Government debt 3/

             
   

Gross

47.1

45.0

52.3

...

 

52.4

55.5

   

Net

48.1

45.7

48.6

...

 

43.8

46.1

                     

Money and credit

(Percent change, end of period)

                     
 

Broad money (M3) 4/

15.8

14.9

29.7

8.9

 

22.6

12.7

 

Total credit to private sector

18.9

10.4

9.4

14.3

 

18.1

13.1

 

Short-term lending rate (percent)

21.6

20.5

20.0

19.2

 

...

...

 

Interbank money market rate (percent)

19.7

18.1

11.6

8.5

 

...

...

                     

Balance of payments

(In millions of U.S. dollars)

                     
 

Exports

1,237

1,292

1,192

648

a

1,367

1,558

 

Imports

1,623

1,711

1,601

972

a

1,968

2,163

 

Trade balance

-386

-418

-409

-324

a

-601

-605

 

Current account balance

             
   

excluding grants

-283

-335

-201

-162

a

-282

-328

     

(in percent of GDP)

-7.6

-9.6

-5.9

-4.9

a

-8.5

-9.1

   

including grants

-276

-307

-136

-127

a

-214

-295

     

(in percent of GDP)

-7.4

-8.8

-4.0

-3.8

a

-6.5

-8.2

 

Overall balance

34

46

118

76

a

103

-30

 

Official gross reserves

280

334

478

595

 

677

752

   

(in months of current year's imports

             
     

of goods and non-factor services)

1.8

2.0

3.0

3.1

 

3.5

3.6

   

(in months of next year's imports

             
     

of goods and non-factor services)

1.7

2.1

2.5

2.8

 

3.2

3.4

 

External debt service ratio 5/

8.7

10.1

13.0

...

 

12.4

10.7

 

External debt to GDP ratio (percent)

31.5

41.1

43.3

...

 

45.7

48.6

                     

Exchange rates 6/

(Percent change, period average)

                     
 

Nominal effective exchange rate

24.4

-3.6

5.7

1.3

b

...

...

 

Real effective exchange rate (CPI-based)

-13.1

-11.0

-1.2

1.1

b

...

...

 

Real effective exchange rate (ULC-based)

-16.0

-10.1

-1.7

2.7

c

...

...

                     
                     

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

           
                     

a

 

January - June.

             

b

 

January - August.

             

c

 

January - July.

             

1/

 

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

     

2/

 

Excludes revenue and expenditure of the special revenue and expenditure accounts of line ministries. Figures for 2001 assume that the bulk of the room for new policies will be used by tax reductions.

3/

 

Total debt of central government and external debt of general government; includes liabilities assumed by the government upon the sale or closure of loss-making enterprises and associated with the cleaning up of Stopanska Banka's balance sheet prior to its sale.

4/

 

Includes foreign currency deposits.

             

5/

 

Debt service due, including IMF, as a percentage of exports of goods and services.

         

6/

 

Partner countries exclude Federal Republic of Yugoslavia.

             

1 The EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4 -year grace period, and the interest rate, adjusted weekly, is currently about 4.85 percent a year.

2 On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was renamed the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It was intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for the FYRM, pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP, and preparations for a participatory process are underway. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework for future reviews under this PRGF arrangement. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 year grace period on principal payments.

3 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.


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