Press Release No. 06/77

Press Release: IMF Executive Board Completes First Review Under Stand-By Arrangement with the Former Yugoslav Republic of Macedonia

April 20, 2006

The Executive Board of the International Monetary Fund (IMF) today completed the first review of the former Yugoslav Republic of Macedonia's economic performance under a Stand-By Arrangement.

In completing the review, the Board approved the authorities' requests for waivers of applicability of seven end-March 2006 quantitative performance criteria, as well as waivers for the non-observance of the end-December 2005 quantitative performance criterion on the arrears of the Health Insurance Fund and the end-December 2005 structural performance criteria on the designation of a new organizational chart by the Public Revenue Office and on the submission of a new Banking Law to Parliament. The Board also approved the authorities' request for an extension of the repurchase expectations to the obligations schedule in an amount equivalent to SDR 13.4 million, that arise from September 30, 2006 through December 31, 2007.

The three-year Stand-By Arrangement for an amount equivalent to SDR 51.7 million (about US$74.5 million) was approved on August 31, 2005 (see Press Release No. 05/196). The authorities are now treating the arrangement as precautionary.

Following the Executive Board discussion of Macedonia, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, made the following statement:

"The economic performance of FYR Macedonia under the Fund-supported program has been encouraging, with stable growth, low inflation, falling unemployment, and a significant improvement in the balance of payments position. Fiscal restraint, a prudent monetary policy, and structural reforms, together with the recently announced European Union (EU) candidacy, should help to increase confidence further and lead to lower interest rates, placing the country on a more rapid growth path.

"The central bank's policy of letting interest rates fall gradually while building up reserves as the current account position strengthens has been successful in maintaining exchange rate stability and low inflation. Should the present high level of foreign exchange inflows persist, monetary and fiscal policy should be ready to respond in order to keep inflation in check and support exchange rate stability. The authorities' plans to revise the Banking Law and improve banking supervision are also welcome in this context.

"A sound fiscal policy has underpinned the macroeconomic stabilization. The authorities are committed to adhere to the fiscal deficit target and to resist spending pressures, as evidenced by the authorities' latest decision regarding the pension eligibility requirements. Further public sector reforms should help sustain fiscal adjustment and create room for more public investment. Strengthening of tax administration and the planned harmonization of the bases for social security contributions will also help.

"Structural reforms have already contributed to an improved business environment, but further actions will enhance competitiveness and help prepare for eventual EU accession. The introduction of a one-stop shop system for company registration has reduced business start-up costs, and the authorities are committed to streamlining business licensing further. Judicial reform, including court organization and the training of judges, will also help support business development. Privatization of the electricity distribution company has been successful, and should now be accompanied by steps to sell the remaining telecom shares and to liberalize this sector, in line with existing EU commitments. These and related efforts should improve the business climate and boost foreign direct investment," Mr. Kato said.