Press Release No. 08/214

Press Release: Statement by the IMF Mission to FYR Macedonia

September 22, 2008

An International Monetary Fund (IMF) mission headed by Mark Griffiths visited Skopje September 10-22 to conduct the 2008 Article IV Consultation with the Former Yugoslav Republic (FYR) of Macedonia. At the conclusion of the mission in Skopje, Mr. Griffiths made the following statement on the preliminary findings of the mission:

"The economy is growing strongly. Growth increased to 5 percent in 2007 and 6 percent in 2008, with industrial production growing at double digits. Strong investment and plentiful labor supply means there is considerable scope for this rapid growth to continue.

"However, vulnerabilities are increasing, which could threaten the sustainability of this improved growth performance. Though inflation has risen sharply, the exchange rate anchor should bring it back down to under 6 percent by the end of this year and around 3 percent next year, provided that monetary and fiscal policy are supportive. However, the rapid widening of the current account deficit poses a more serious concern, both in terms of keeping sufficient international reserves, and in maintaining external debt sustainability. Recent international financial turmoil heightens these concerns, to the extent that capital inflows weaken, or that slower world growth reduces exports or remittances. The possibility that the wider current account deficit will eventually force significant monetary and fiscal tightening is the main risk to continued strong economic growth.

"In the view of the mission, plans to relax fiscal policy should therefore be reconsidered. This year's supplementary budget includes a substantial increase in government spending, which will add to inflation and the current account deficit. With growth already strong, this year's revenue over performance would best be saved. While there is a need for public infrastructure investment, plans for a substantial increase in the central government budget deficit in 2009 may need to be reconsidered, given the current account deficit.

"There is also scope for tightening monetary policy further. Rapid credit growth has contributed to the increased current account deficit, and may increase risks in the banking system. Though the fixed exchange rate limits the central bank's room for maneuver, it may need to take further measures.

"The surest path to sustained and rapid economic growth is through structural reform, rather than fiscal expansion. The government has made considerable progress in improving the business climate, encouraging foreign direct investment, and cutting labor taxes to stimulate employment. These measures will all help increase the potential growth rate. Public investment needs are substantial, both in education and in infrastructure, but should be well-planned and subject to cost-benefit analysis. Given current macroeconomic conditions and the time it will take to select the best projects, this investment is best financed by slowing the recent growth in public consumption. Over time, there could be scope for financing these projects through a slightly higher budget deficit, once the current account deficit returns to sustainable levels.

"The mission would like to thank the Macedonian authorities for their cooperation throughout the mission and for their warm hospitality."