Press Release: IMF Executive Board Concludes the Fourth Post-Program Monitoring Discussion with Former Yugoslav Republic of Macedonia

January 27, 2015

Press Release No. 15/16
January 27, 2015

On January 15, 2015, the Executive Board of the International Monetary Fund concluded the fourth Post-Program Monitoring (PPM)1 with the Former Yugoslav Republic of Macedonia and considered and endorsed the staff appraisal without a meeting.2

Macedonia’s economic growth is accelerating, driven by strong exports, public infrastructure projects and private consumption. At 3½ percent, growth is about 2 percentage points above the average for south-eastern Europe, and has allowed the unemployment rate to further recede to 27.9 percent. Monetary policy has been supportive, and private credit growth is returning to pre-crisis averages. The fiscal deficit target was adjusted from 3.5 to 3.8 percent of GDP as revenues came in lower than budgeted, which has resulted in a stronger-than-expected boost to the economy.

The short-term outlook appears broadly stable. The external position has been improved thanks to a €500 million Eurobond issuance in July that halted the decline in reserves and pre-financed the repayment of external debt maturing in 2015. The current account deficit, projected below 3 percent of GDP, would remain largely covered by foreign direct investment (FDI) inflows.

Public sector debt is expected to continue to rise to about 52 percent of GDP by 2019, driven by an increase in the debt of both the general government and non-financial state-owned enterprises (SOEs), projected respectively at 38.1 and 6 percent of GDP at end-2014.

Near-term risks primarily include a stalling recovery in the Euro area, which would weigh on external demand and potentially weaken—or postpone—FDI inflows. Energy supply disruptions resulting from the geopolitical conflicts would rapidly increase capacity constraints. Continued deflation—which has recently eased but averaged 0.3 percent year-on-year through December—could complicate fiscal adjustment. Regulatory spillovers from EU parent banks, particularly through differential treatment of home and host central bank and government securities for risk-weighted asset computation, may complicate the conduct of monetary policy.

Executive Board Assessment3

In concluding the fourth Post-Program Monitoring with the Former Yugoslav Republic of Macedonia, Executive Directors endorsed the staff’s appraisal as follows:

The improving economic outlook and employment situation are encouraging. The jobs and growth agenda should remain a top policy priority. Efforts should focus on alleviating key constraints for domestic firms, which generally operate under strong liquidity constraints, so as to ensure a handover to private sector-led growth. Key measures would include enforcing payment discipline in both public and private sector contracts, as well as upgrading the professional status of inspection bodies, clarifying their mandate, and streamlining their work.

The current public-sector led growth strategy will require careful expenditure prioritization if consolidation is to proceed as planned. In the absence of further tax policy changes to boost revenues, a comprehensive spending review that seeks to minimize the growth impact of current expenditure compression should be undertaken. Investment spending should target gaps in transport and energy infrastructure to maximize the payoff for medium-term growth. At the same time, with public debt rising steadily over the next years, the authorities should aim at frontloading fiscal consolidation. This will help secure compliance with the envisaged rules of a 3 percent of GDP deficit ceiling and a 60 percent of GDP debt threshold by 2017.

Renewed presence in international capital markets highlights the role of public debt management in supporting external sustainability. To further reduce risks, the debt management strategy should encompass the debt of SOEs as well as contingent liabilities, particularly in managing currency risk. Importantly, increased reliance on foreign currency borrowing has implications for external sustainability and the conduct of monetary policy through its impact on central bank reserve developments and domestic liquidity.

The monetary easing cycle has reached its end. The combination of relaxed financial conditions and tight prudential regulation has helped revive credit growth while preserving the health of the financial sector. The focus of monetary policy henceforth should be exclusively on maintaining the attractiveness of holding denar-denominated assets in support of the exchange rate peg. High banking sector liquidity and falling currency spreads argue against further easing.

IMF credit outstanding to Macedonia has fallen below the relevant threshold of 200 percent of quota at end-2014 and current risks to external sustainability or capacity to repay do not warrant an extension of the PPM, which will be discontinued. 


FYR Macedonia: Selected Economic Indicators, 2009–14
 

 

2009 2010 2011 2012 2013 2014
 

 

Annual percentage change, unless otherwise specified  

 

     

 

 

 

Real GDP

-0.4 3.4 2.3 -0.5 2.7 3.5

Real domestic demand

-2.2 1.0 0.4 3.5 2.6 3.7

Consumption

-3.3 3.8 -5.4 1.2 2.1 3.5

Gross investment

-0.6 -3.8 17.9 10.2 16.6 5.4

Net exports 1/

2.0 1.9 1.7 -3.5 0.8 -0.5

 

 

 

 

 

 

 

CPI inflation (annual average)

-0.6 1.7 3.9 3.3 2.8 -0.2

Unemployment rate (annual average)

32.2 32.1 31.4 31.0 29.0 27

 

 

 

 

 

 

 

 

In percent of GDP

 

 

 

 

 

 

 

 

Current account balance

-6.8 -2.0 -2.5 -3.0 -1.8 -2.9

Goods and services balance

-22.8 -19.8 -20.6 -22.5 -18.6 -19.1

Exports of goods and services

31.8 38.6 45.7 44.5 43.5 46.8

Imports of goods and services

54.6 58.5 66.3 67.0 62.0 65.9

Private transfers

16.2 18.8 18.8 20.7 18.5 17.7

External debt (percent of GDP)

55.9 57.8 64.2 68.2 64.3 64.4

 

 

 

 

 

 

 

Gross investment

25.7 24.5 26.9 28.9 28.5 29.1

Domestic saving

19.0 22.4 24.4 26.0 26.7 26.9

Public

0.6 1.1 1.3 0.2 -0.5 -0.3

Private

18.4 21.4 23.1 25.7 27.2 27.1

Foreign saving

6.8 2.0 2.5 3.0 1.8 2.9

 

 

 

 

 

 

 

Central government gross debt

23.7 24.3 27.7 33.7 34.1 38.1

Public sector gross debt 2/

26.7 27.8 31.8 38.5 40.6 46.6

Central government balance

-2.6 -2.4 -2.5 -3.8 -3.9 -3.8

 

 

 

 

 

 

 

Memorandum items:

 

 

 

 

 

 

Nominal GDP (billions of denars)

415 437 464 467 499.6 521.2

Nominal GDP (billions of euros)

6.8 7.1 7.5 7.6 8.1 8.5

GDP per capita (EUR)

3296 3455 3664 3679 3931 ...

 

 

 

 

 

 

 

 

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

1/ Contribution to growth.

2/ Total Public Sector (including MBDP, municipalities, public sector non-financial enterprises; w/o NBRM).

FYR Macedonia: Selected Economic Indicators, 2009–14
 

 

2009 2010 2011 2012 2013 2014
 

 

Annual percentage change, unless otherwise specified  

 

     

 

 

 

Real GDP

-0.4 3.4 2.3 -0.5 2.7 3.5

Real domestic demand

-2.2 1.0 0.4 3.5 2.6 3.7

Consumption

-3.3 3.8 -5.4 1.2 2.1 3.5

Gross investment

-0.6 -3.8 17.9 10.2 16.6 5.4

Net exports 1/

2.0 1.9 1.7 -3.5 0.8 -0.5

 

 

 

 

 

 

 

CPI inflation (annual average)

-0.6 1.7 3.9 3.3 2.8 -0.2

Unemployment rate (annual average)

32.2 32.1 31.4 31.0 29.0 27

 

 

 

 

 

 

 

 

In percent of GDP

 

 

 

 

 

 

 

 

Current account balance

-6.8 -2.0 -2.5 -3.0 -1.8 -2.9

Goods and services balance

-22.8 -19.8 -20.6 -22.5 -18.6 -19.1

Exports of goods and services

31.8 38.6 45.7 44.5 43.5 46.8

Imports of goods and services

54.6 58.5 66.3 67.0 62.0 65.9

Private transfers

16.2 18.8 18.8 20.7 18.5 17.7

External debt (percent of GDP)

55.9 57.8 64.2 68.2 64.3 64.4

 

 

 

 

 

 

 

Gross investment

25.7 24.5 26.9 28.9 28.5 29.1

Domestic saving

19.0 22.4 24.4 26.0 26.7 26.9

Public

0.6 1.1 1.3 0.2 -0.5 -0.3

Private

18.4 21.4 23.1 25.7 27.2 27.1

Foreign saving

6.8 2.0 2.5 3.0 1.8 2.9

 

 

 

 

 

 

 

Central government gross debt

23.7 24.3 27.7 33.7 34.1 38.1

Public sector gross debt 2/

26.7 27.8 31.8 38.5 40.6 46.6

Central government balance

-2.6 -2.4 -2.5 -3.8 -3.9 -3.8

 

 

 

 

 

 

 

Memorandum items:

 

 

 

 

 

 

Nominal GDP (billions of denars)

415 437 464 467 499.6 521.2

Nominal GDP (billions of euros)

6.8 7.1 7.5 7.6 8.1 8.5

GDP per capita (EUR)

3296 3455 3664 3679 3931 ...

 

 

 

 

 

 

 

 

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

1/ Contribution to growth.

2/ Total Public Sector (including MBDP, municipalities, public sector non-financial enterprises; w/o NBRM).


1 The central objective of PPM is to provide for closer monitoring of the policies of members that have substantial Fund credit outstanding following the expiration of their arrangements. Under PPM, members undertake more frequent formal consultation with the Fund than is the case under surveillance, with a particular focus on macroeconomic and structural policies that have a bearing on external viability.

2 The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

3 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: http://www.imf.org/external/np/sec/misc/qualifiers.htm.




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