## cr18299 ## Source details **Canonical URL:** [cr18299](https://www.imf.org/-/media/files/publications/cr/2018/cr18299.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18299.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18299.pdf.json) --- ### Preface and Executive Summary - IMF technical assistance mission in Skopje: April 30 to May 14, 2018; preliminary visit March 30, 2018. - Mission composition: Amanda Sayegh (head), Alberto Soler (FAD), Phillip Stokoe (Statistics Department), Suzanne Flynn (FAD regional advisor; participated April 30–May 4, 2018), Ali Uppal (FAD expert). - Principal interlocutors included Minister of Finance Mr. Dragan Tevdovski and senior officials across MoF, Budget Council of the Assembly, Parliamentary Institute, Public Procurement Bureau, State Statistics Office, State Audit Office, NBRM, Central Registry, multiple ministries, Health Insurance Fund, City of Skopje Administration, Public Enterprise for State Roads, Public Transport Corporation of Skopje, EU Delegation to Macedonia, and the World Bank. - Assessment against the IMF Fiscal Transparency Code: - Meets good or advanced practice on 13 of the 36 principles. - Meets basic standard on 12 principles. - Practices do not meet basic practice on 5 principles; some gaps could be addressed by publishing internally collected data. - Areas of strength: - Extensive and timely in-year budget execution reports for central and local budgetary units and three social security funds. - Medium-term macroeconomic and fiscal projections in budget documentation; clear legal framework for budget formulation; timely submission of draft budget. - Disclosure of risks to public finances, alternative macro scenarios, public debt and explicit guarantees, and sound management frameworks. - Key areas for improvement (summary): - Fiscal and statistical reports exclude public units with net expenditures around 3 percent of GDP classified as extrabudgetary units under international standards. - Fiscal reports lack information on other liabilities, financial assets, and revenues forgone from tax expenditures. - State Audit Office audit scope limited; does not opine whether annual budget report fairly represents public finances. - No reconciliation explaining how changes in government debt relate to the budget deficit. - Budget excludes tax revenues allocated to the Public Enterprise for State Roads (0.7 percent of GDP) and taxes on banks for deposit insurance claims (0.2 percent of GDP). - Budget is largely input-based; limited reporting on performance and absence of reconciliation between successive fiscal plans. - Project reporting omits total project costs and published cost-benefit analyses for domestically financed or bilateral loan projects. - Fiscal risk reporting fragmented; no single comprehensive fiscal risks report. - Limited central oversight of PPPs, concessions, and public corporation performance. ### Quantified implications and public sector balance sheet (from 2016 data) - Consolidating extrabudgetary units under government control would: - Add 1.8 percent of GDP to consolidated general government revenue (2016). - Add 3.1 percent of GDP to consolidated general government expenditure (2016). - Increase the reported deficit by 1.3 percent of GDP (2016). - Public sector balance sheet (2016): - Public sector assets: 106.8 percent of GDP. - Nonfinancial assets: 65.2 percent of GDP. - Financial assets: 41.6 percent of GDP. - Public sector liabilities: 79.8 percent of GDP. - Debt securities and loans: 50.2 percent of GDP. - Overall public sector net worth: 27 percent of GDP. *IMF mission report (Skopje, April 30–May 14, 2018) as presented in the PREFACE and EXECUTIVE SUMMARY sections.* ### Major recommendations (executive summary) - Coverage and reporting - Expand institutional coverage to include all institutional units classified as general government under international statistical standards. - Include tax revenues allocated to PESR (0.7 percent of GDP) and Deposit Insurance Fund taxes (0.2 percent of GDP) and associated transfers in consolidated budget reporting. - Present complete own revenues and expenditures of all extrabudgetary funds in consolidated fiscal aggregates. - Quality and reconciliation - Publish data on government assets and financial liabilities. - Reconcile changes in the stock of debt with budget deficits and explain differences between fiscal and statistical aggregates. - Publish regular estimates of revenues forgone from tax expenditures. - Audit and oversight - Expand audit coverage of the annual budget to include the entire budget (own source revenue, loans, and grants). - Increase number of financial audits undertaken by the State Audit Office. - Budget composition, credibility, and performance - Present multi-annual expenditure plans by administrative unit. - Reconcile changes in fiscal aggregates between successive fiscal forecasts. - Encourage independent evaluation of fiscal forecasts. - Regularly report on compliance with medium-term fiscal objectives and enhance reporting against performance indicators. - Investment appraisal - Publish total costs of investment projects. - Develop and publish methodological guidelines for appraisal of large projects and publish their assessments. - Fiscal risk management and disclosure - Publish a summary fiscal risks report with material risks, magnitudes, and management strategies. - Publish long-term public debt projections. - Strengthen monitoring and oversight of fiscal risks from PPPs and public corporations. --- ### Fiscal reporting: coverage, timeliness, quality, integrity H3: Main fiscal reports and in-year reporting - Published reports include: - Monthly budget execution reports: cash-based outturns for central government and three Social Security Funds (SSFs) by detailed economic classification; monthly reports also present cash-based execution for each budget user by economic classification. - Monthly and quarterly economic reports: central government outturns and, since July 2017, discussion on largest budget users; quarterly reports include general government debt trends. - Quarterly budget execution reports: cash-based outturns for general government at higher aggregation. - Quarterly debt statistics: stock of general government and guaranteed debt with historical data by instrument. - Semi-annual budget execution reports: first-half cash outturns for central government and SSFs with commentary. - Annual report on the budget: final cash outturns for central government by economic, functional, administrative and program classification; individual local governments by detailed economic classification. - Annual report on public debt management: stock of general government and guaranteed debt with historical instrument breakdown. - Timeliness: - Monthly execution reports published within 25 days of period end. - Since July 2017 monthly execution reports by administrative unit published with a lag of two months. - Quarterly general government execution reports published within two months of quarter end. - Quarterly and annual public debt reports published within one month of quarter end. - Semi-annual and annual reports published: cash-based annual budget execution reports published before or around end of June following the year; interim unaudited annual outturn reports within two months of year end. - Plan to publish all treasury payments daily. H3: Coverage of institutions, flows, and stocks - Public sector structure and counts: - Total public sector units: 1,328. - Central government: 398 budgetary central government units and 131 extrabudgetary units (including 113 public health institutions, 6 regulatory agencies, and 12 public enterprises that should be classified inside the general government boundary). - Local government: 668 units including 81 municipalities and 587 other government bodies controlled by municipalities. - Public nonfinancial corporations: 126 corporations (21 controlled by central government units; 105 controlled by local government units). - Public financial corporations: NBRM, MBDP, and three financial regulatory agencies. - Notable unit-level fiscal magnitudes (2016): - PESR expenditures: 2.5 percent of GDP. - MZT expenditures: 0.2 percent of GDP. - MPT expenditures: 0.2 percent of GDP. - DIF: revenues of 0.2 percent of GDP and financial assets of 2.4 percent of GDP at end-2016. - Aggregate expenditure shares (2016): - Public sector expenditures: 38.6 percent of GDP. - General government expenditure: 34.5 percent of GDP (about 86 percent central government; 14 percent local governments). - Public corporation expenditures: 4.8 percent of GDP. H3: Coverage gaps and impacts - Missing extrabudgetary units have net expenditures around 3.2 percent of GDP. - Reported general government deficit: 2.7 percent of GDP in 2015. - Including extrabudgetary units would: - Add around 1.8 percent of GDP to consolidated revenue and 3.1 percent of GDP to consolidated expenditure, increasing consolidated general government deficit by 1.3 percent of GDP to 4.0 percent of GDP. - Expanding coverage to public corporations would add 4.8 percent of GDP to revenue and 4.1 percent of GDP to expenditure, with an overall public sector deficit of 3.3 percent of GDP. H3: Coverage of stocks (assessment: Not Met) - Government debt reports present debt securities and loans amounting to 48.4 percent of GDP at end-2016. - Omissions: - Unguaranteed debt of public enterprises: ~0.2 percent of GDP. - NBRM bills: 3.8 percent of GDP. - DIF debt holdings not consolidated. - Accounting for omissions would take public debt to 50.2 percent of GDP at end-2016. - Central bank and related liabilities (end-2016): - NBRM currency in circulation: 5.7 percent of GDP. - NBRM SDR liabilities: 2.7 percent of GDP. - Banking system reserves: 8.4 percent of GDP. - Outstanding stock of NBRM securities: 3.8 percent of GDP. - Assets disclosure gaps: - No fiscal or statistical reports provide government assets information. - General government nonfinancial assets estimated at least 42.2 percent of GDP; equity in public corporations around 23.4 percent of GDP. - Examples: 34.8 percent ownership stake in Macedonia Telecom (worth almost 1 percent of GDP in 2016); 50 percent ownership stake in GA-MA (estimated around 0.2 percent of GDP). H3: Coverage of flows and arrears - All fiscal reports compiled on cash basis; no accrual adjustments. - Cash basis omits accrued expenditures, payment arrears, and some non-cash flows. - MoF May 2017 survey found unconsolidated arrears across entire public sector around 3.6 percent of GDP. - Preliminary estimates: accounts payable for general government around 9 percent of GDP at end-2016 (high uncertainty). - Survey breakdown of accounts payable (approximate, 2016): - Central government budgetary units: 1 percent of GDP. - Public health institutions: 0.5 percent of GDP. - Local government units: 0.8 percent of GDP. - Central and local government enterprises: around 1.4 percent of GDP. - Health Insurance Fund estimates: public health institutions arrears 0.8 percent of GDP; the Fund itself has estimated accounts payable of 0.2 percent of GDP due to lengthy payment terms. H3: Classification, consistency, and revisions - Classification: fiscal reports present administrative, economic, and functional classifications; annual GFS compiled on GFSM 2014 basis; budget and national reports use national presentation broadly following GFSM 86. - Internal consistency: only one of three internal consistency checks required under the Code is published (reconciliation of deficit and financing in gross terms). Missing reconciliation between increase in debt and debt issued. - Stock-flow adjustment averaged (in absolute terms) 0.8 percent of GDP annually over past decade. - Historical revisions: fiscal statistics are not revised; annual GFS submissions to IMF commenced in 2017. Recommendation to implement reclassifications back to 2013 and disclose impacts. H3: Integrity and audit - Statistical integrity: MoF compiles fiscal statistics; SSO developing ESA 2010 reporting to Eurostat. - External audit: SAO publishes opinion on central government’s core budget execution report; audit is compliance-focused and limited in coverage. - In 2016, 118 entities audited out of more than 1,000 public sector institutions; only 19 percent of these audits expressed unqualified opinions. - Comparability: differences exist across fiscal and statistical reports not publicly reconciled. - In 2016, general government revenue and expenditures in GFS were approximately 1.6 percent of GDP lower than presented in the annual report. - Key drivers: 2nd pillar pension contributions (~0.8 percent of GDP), on-lending treatment differences, repayments of historic loans (less than 0.1 percent of GDP). H3: Summary assessment (Table 1.4 highlights) - Principle 1.1.1 Coverage of Institutions: Assessment Basic; Importance High; Recommendation 1.1. - Principle 1.1.2 Coverage of Stocks: Assessment Not Met; Importance Medium; Recommendation 1.2. - Principle 1.1.3 Coverage of Flows: Assessment Basic; Importance Medium; Recommendation 1.1. - Principle 1.1.4 Coverage of Tax Expenditures: Assessment Not Met; Importance Medium; Recommendation 1.3. - Principle 1.2.1 Frequency of In-Year Reporting: Assessment Advanced; Importance Medium. - Principle 1.2.2 Timeliness of Annual Financial Statements: Assessment Advanced; Importance Medium. - Principle 1.3.1 Classification: Assessment Advanced; Importance Low. - Principle 1.3.2 Internal Consistency: Assessment Basic; Importance Medium; Recommendation 1.2. - Principle 1.3.3 Historical Revisions: Assessment Not Met; Importance Low. - Principle 1.4.1 Statistical Integrity: Assessment Basic; Importance Low. - Principle 1.4.2 External Audit: Assessment Basic; Importance High; Recommendation 1.4. - Principle 1.4.3 Comparability of Fiscal Data: Assessment Basic; Importance Medium; Recommendation 1.2. --- ### Structural bonds, pension contributions, and tax expenditures H3: Structural bonds - Nature: instruments compensating households for deposits lost during the breakup of Yugoslavia, compensation for property seized without compensation, and rehabilitation/privatization of banks in transition. - Accounting treatment: - Treated as liabilities in debt stock figures published by MoF. - Not correctly reflected in deficit numbers; transactions should have been recorded as capital transfers above the line when issued. - Magnitude: - Issuance averaged around 0.1 percent of GDP annually in 2011–2015. - Macedonia issued EUR 546.5 million of structural bonds in 2000, worth around MKD 33 billion at today’s exchange rate, or around 13 percent of GDP for that year. H3: 2nd pillar pension contributions - Authorities’ fiscal reports include contributions as revenue and expenditure. - Correct treatment: amounts collected by Public Revenue Office and transferred to private pension firms should be treated as financing transactions below the line. - Reporting status: - Flows recorded correctly in GFS reported to IMF GFS Yearbook. - In 2016 these flows were approximately 0.8 percent of GDP. - Current treatment in authorities’ fiscal reports overstates both revenues and expenditures but does not affect the budget deficit. H3: Tax expenditures (assessment: Not Met) - Government does not publish estimates of revenue loss from tax expenditures; no legislative requirement to report revenues foregone. - Existing practices: budget users must provide fiscal implication estimates when proposing legislative amendments; tax expenditure estimates may be prepared but generally not published. - Main tax expenditures and available estimates: - 15 Technological-Industrial Development zones: corporate income tax and personal income tax exemptions for first ten years; VAT and customs duty exemptions. - NBRM estimate: personal and corporate income tax exemptions cost MKD 1.1 billion (0.2 percent of GDP) in 2016. - Other tax preferences without formal estimates: voluntary pension savings preferences, excise exemption for wine, reduced rate property tax on principal dwelling, reduced-rate VAT for certain products, zero/reduced-rate customs under free trade agreements. - Recommendation: Publish an annual estimate of revenue foregone from tax expenditures with rationale and beneficiary groups. --- ### Fiscal forecasting, budgeting, and public investment H3: Budget documentation and MTBF - Key documents and publication timing include Annual Budget (Dec), Fiscal Strategy Report (Required by May), Economic Reform Program (Jan), Annual Report of the Budget (May), Annual Report on Public Debt Management (June). - Budget Unity (assessment: Not Met): - Budget covers 194 first-line budget users and 95.1 percent of budgetary central government revenue (excluding SSFs). - Taxes allocated to PESR (0.7 percent of GDP) and DIF (0.2 percent of GDP) are not included as central government revenue — omissions underreport tax revenues and expenditures by 0.9 percent of GDP. - Own revenues/expenditures of some extrabudgetary entities not presented in the budget: - Six nonfinancial regulatory bodies: estimated 0.2 percent of GDP. - Public health institutions: 0.4 percent of GDP. - PESR, DIF, MZT, MPT and others: combined revenues and expenditures would account for 1.3 and 2.6 percent of GDP respectively. - Combined omissions understated central government total revenues by 1.9 percent of GDP and expenditures by 3.2 percent of GDP, with overall impact of 1.3 percent of GDP on reported budget deficit in 2016. - On-lending activities not included in total financing; omission does not appear large but reduces consistency with change in debt stock. H3: Macroeconomic forecasts and forecast accuracy - Macroeconomic forecasts: three-year forecasts included; ERP and FSR disclose comprehensive three-year projections. - Medium-term real GDP forecast errors since 2008: absolute value of budget year forecasting errors for real GDP growth averaged 1.9 percent (European countries' average 1.3 percent). - Forecast biases: - Real GDP forecasts had optimistic bias 2009–12; since 2013 bias muted though negative errors significant in past two years due to political uncertainty. - Inflation forecasts tended to be higher than actuals. - Nominal GDP growth forecasts not significantly biased recently. - Forecast accuracy and biases for fiscal aggregates: - Budget year deficit underestimated by less than 0.1 percent of GDP on average over past decade (compared with 0.9 percent of GDP for EU countries). - Revenue and expenditure forecasts overestimated in budget year by average of 2.2 and 2.1 percent of GDP respectively. - Capital expenditure under-executed by average of 38 percent. H3: MTBF and reform program - Government intends to strengthen MTBF under 2018–21 PFM Reform Program: - Improve fiscal forecasting tools. - Develop comprehensive MTBF linking sectors, programs, projects to spending allocations and policy objectives. - Finnish Twinning Project developed a manual for MTBF preparation. - Implementation contingent on adoption of comprehensive program structure to present expenditure plans for budget year and following two years by administrative unit and program. - Successful implementation could meet advanced practice under the Code. H3: Investment projects, procurement, and execution - Investment project information: - Annual budget provides capital allocations for three-year projection period and project summaries but does not disclose total life-cycle cost, amounts already spent, or deviations from previous budgets. - FSR and ERP provide public investment priorities but not comprehensive total project costs. - National Investment Council list (2015) provides partial details but not cost allocation over project life. - Cost-benefit analysis: - CBA not always required prior to approval and not published for domestically financed or bilateral loan projects. - For EU and IFI-financed projects, CBA generally undertaken per donor methodologies. - Manual for Medium-Term Budgeting underscores need for CBA for largest projects but lacks legal authority and methodology. - Public procurement (2016 outcomes): - Public Procurement Law requires competitive tendering of contracts above 500 euros (monthly basis); exceptions exist (Articles 7–9). - 2016 outcomes: 76 percent of contract value awarded through open procedure; 7 percent via restricted/negotiated procedures without prior publication; 9 percent via simplified procedures. - Number of bidders in open procedure around 3.5 on average. - Public investment levels and execution: - General government investment (including PESR and MZT) around 5.2 percent of GDP in 2016. - Total public investment: 5.8 percent of GDP in 2016. - Capital expenditure under-executed on average by 38 percent over past 10 years. H3: Budget processes, timing, and parliamentary role - Budget Law: government must adopt three-year fiscal strategy by end-May and submit draft budget to National Assembly before November 15. - Draft budget submissions (dates): 20-Sep-13; 13-Sep-14; 23-Sep-15; 19-Sep-16; 9-Nov-17. - Budget approvals by Parliament (dates): 20-Dec-13; 16-Oct-14; 20-Nov-15; 17-Oct-16; 28-Dec-17. - FSR required by end-May but published in October or later in past three years; late FSR publication dilutes scrutiny. - Parliamentary amendments: National Assembly can reject draft budget and request revised draft with explanatory notes. H3: Fiscal rules, debt limit, and compliance - Law of Public Debt requires a public debt limit; since 2017 FSR sets public debt limit at 60 percent of GDP. - Debt ceiling complemented by rolling medium-term and short-term objectives on debt composition. - Debt ceiling precise but not time-bound. - Government committed to adopting fiscal rules legislation by 2019 under 2018–21 PFM Reform Program. - Recommendation: FSR should articulate rationale for fiscal rules and analyze compliance and circumstances for deviations. H3: Performance information, program budgeting, and public participation - Program information present but most programs lack clear links to policy objectives and performance indicators. - Manual on Program Budgeting proposes 14 policy areas and 49 programs with linking of sub-programs to performance indicators in an annex or separate MoF publication. - Gender budgeting: gender perspective introduced; gender budget statements published for certain ministries in 2018; pilots conducted in 2017. - Public participation: - Citizens’ guide published for 2018 Budget. - Public consultation started in 2017; 2018 stakeholders from civil society, business, labor unions, academia invited to discuss draft budget. H3: Credibility and independent evaluation - No independent fiscal agencies producing forecasts or assessing government forecasts; government committed to establishing a fiscal council in 2018–21 PFM Reform Program. - Budget documentation compares medium-term real GDP and inflation forecasts with IMF, WB, EBRD, EC, Vienna Institute, and NBRM but does not compare fiscal forecasts with external forecasters. --- ### Fiscal risk management and disclosure H3: Overview and institutional instruments - Section assesses budgetary contingencies, assets/liabilities management, guarantees, PPPs, financial sector exposures, natural resources, and environmental risks. - Fiscal Strategy, FSR, Debt Management Report, ERP, Annual Report on the Budget, and MoF internal data are referenced. H3: Budgetary contingencies (Good) - Two contingency reserves under Article 11: permanent reserve and current reserve; both for unforeseen circumstances. - Permanent reserve: restricted to natural disasters, epidemics, and environmental catastrophes; damages determined by Commission. - Article 11 cap: combined reserve size up to 3 percent of current expenditures of the Budget. - Historical usage: average use of reserves around 0.1 percent of expenditure; 2015 and 2016 flood events increased reserve use to around 0.4 percent of total expenditure. - Recommendation: publish MoF’s detailed internal reporting on reserve use. H3: Management of assets and liabilities (Basic) - Legal framework: government borrowing authorized by law; FSR sets borrowing limits and public debt limit at 60 percent of GDP. - Public debt reporting: stock published quarterly within one month of quarter end. - ERP sensitivity analysis covers interest rate and euro exchange rate risk. - Reported stock of general government debt at end-2016: 39.1 percent of GDP. - External debt share of public debt: around 60 percent. - Foreign currency denomination: about 90 percent of foreign currency debt denominated in euros. - Debt portfolio maturities: - Domestic debt: average time to maturity and average time to re-fixing around three years. - External debt: average time to maturity around 5.5 years and average time to re-fixing around 4.5 years. - MoF risk limits: - Minimum average time to maturity: three years. - Minimum average time to re-fixing: two years. - Minimum threshold for euro-denominated debt: 80 percent. - Minimum threshold for fixed interest debt: 50 percent. - Arrears: May 2017 survey estimated arrears around 3.6 percent of GDP. - General government financial assets at end-2016 estimated around 51 percent of GDP, composition: - Equity in wholly owned PCs: 37 percent of GDP. - Minority shares in joint stock companies: 1 percent of GDP. - Currency and deposits: 6 percent of GDP. - Central government loans on-lent to municipalities and public enterprises: 1.5 percent of GDP. - DIF asset portfolio: 2.3 percent of GDP. - Limited public disclosure on asset risks other than DIF. H3: Guarantees (Good) - Stock of government guarantees published quarterly. - Law on Public Debt allows sovereign guarantees; beneficiary must seek MoF opinion. - Fiscal Strategy 2018–20 limits (non-binding): - Stock of guaranteed debt must not exceed 13 percent of GDP. - Maximum issuance of guarantees in 2018 capped at 200 million euros. - End-2016 stock of government guarantees: 8.8 percent of GDP. - Government expects guarantees to rise to 11 percent of GDP by end-2019. - Past guarantee calls: average less than 0.03 percent of GDP a year from 2013 to 2017. H3: Public-Private Partnerships (assessment: Not Met) - PPP legal framework: Law on Concessions and Public-Private Partnerships; MoE maintains public register of 27 concluded PPPs with partial data. - Register omissions: excludes one large concession for Skopje and Ohrid airports (total investment around 2.5 percent of GDP) and lacks information on direct fiscal obligations or exposures. - Central oversight limited: feasibility studies required but opinions often based on limited information; robust risk and budget affordability assessments typically not conducted. - Reform efforts: align PPP law with 2014 EU Directive to expand MoE oversight powers. - PPP investment and fiscal exposure: - Total investment associated with PPPs: 6.8 percent of GDP. - Many concessions without direct fiscal obligations; fiscal exposure lower than investment. - Major projects distribution: - Airports concessions: close to 40 percent of total PPP investment. - TE-TO Skopje (electricity generation): 30 percent of total PPP investment. - Technological Development Zone in Tetovo: 24 percent of total PPP investment. - Remaining projects: smaller municipal water and utility projects. H3: Financial sector (Advanced) - Explicit financial sector obligations disclosed; NBRM conducts regular financial stability assessments. - DIF insures deposits up to 30,000 euros; discloses total deposits, share insured, and amount of insured deposits. - NBRM publications: annual Financial Stability Report in July with stress tests; quarterly banking system risk report with sensitivity analysis. - Financial sector metrics (end-2016 / 2016/2017 where indicated): - Financial sector liabilities: around 74 percent of GDP at end-2016. - Total bank liabilities: 74.3 (Percent of GDP). - Of which deposits: 38.0 (Percent of GDP). - Of which insured: 28.6 (Percent of GDP). - Total DIF assets: 2.3 (Percent of GDP). - Net exposure: 26.4 (Percent of GDP). - Capital adequacy ratio: more than twice regulatory minimum. - Banks have healthy liquidity buffers and relatively low share of non-performing loans fully provisioned. - Maturity mismatch: close to half of banks’ liabilities that fall due within a month are not covered by assets with similar maturity. - DIF requirement: maintain resources of at least 4 percent of total deposits; current DIF investments around 6 percent of total deposits (8 percent of insured deposits). - Past DIF payouts since 1997: around 0.2 percent of GDP. - 2016 political stress episode: - NBRM supplied banks with foreign currency liquidity close to 130 million euros (over 5 percent of average foreign reserves during 2016). - Banks’ liquid assets decreased by more than 10 percent in Q2 2016. - No new drawdowns from DIF were required. H3: Natural resources and environmental risks (Not Met) - Government does not publish value or volume estimates of major natural resources. - Geology Department compiles site-by-site estimates every five years when commissioned; studies not published. - Concessions for mineral extraction: total 355 (14 metal; 56 quarrying; 45 water; 240 other non-metal). - General government natural resource revenues in 2017: less than 0.2 percent of GDP. - Environmental risks: - Directorate for Protection and Rescue national assessment not updated since 2007. - Crisis Management Centre (CMC) conducts internal risk assessments and holds workshops; internal database on past disaster costs. - 1963 Skopje earthquake estimated economic damage 15 percent of GDP. - Significant floods in 2016 resulted in fiscal costs of 0.1 percent of GDP disbursed from contingency reserves. - Average annual cost of disasters assessed as moderate at 0.3 percent of GDP, but large events have occurred. - Disclosure gaps: - No single comprehensive report on aggregate fiscal risk exposure; information scattered across documents. - Specific fiscal risks estimated in order of 46 percent of GDP in selected figures. - Rapid ageing projected to increase pension deficit by 10 percent of GDP. - General government liabilities and financial assets cited as 51.5 and 36.5 percent of GDP respectively (table figures). - Debt guarantees 9 percent of GDP; guarantee calls less than 0.03 percent of GDP a year on average. - Net exposure for insured deposits 26.4 percent of GDP. H3: Subnational finances and public corporations - Municipal finances: - Local government expenditure less than 5 percent of GDP. - Own source revenues make up 34 percent of local government funding. - Local government debt around 0.5 percent of GDP. - Unverified arrears for municipalities could be around 0.8 percent of GDP. - MoF publishes quarterly budget execution reports for individual municipalities since Q1 2017 and monitors municipal debt and arrears. - Public corporations (PCs): - Transfers and guaranteed debts disclosed; PCs required to publish annual financial statements though many are not up-to-date or have qualified audits. - Law on Public Enterprises amended April 2018 to require timely publication of annual accounts on PCs’ websites within 15 days of submission to Central Registry; PCs must submit quarterly financial reports to Government. - No published ownership strategy or consolidated PC sector performance report. - Some PCs perform non-commercial activities compensated by transfers (transfers to Macedonian Railways Transport, Macedonian Railways Infrastructure, Public Transport Company Skopje average over 0.5 percent of annual expenditure 2010–2016). - PC fiscal exposures: - Around 139 enterprises treated as outside general government with combined non-equity liabilities about 15.4 percent of GDP at end-2016. - Of these, around 1.2 percent of GDP are loans owed to the government. - Nearly all PC borrowing is backed by sovereign guarantee; of total borrowings of 9 percent of GDP, only 0.2 percent of GDP is not guaranteed. - Classifying some enterprises inside general government would increase general government liabilities and reduce PC liabilities; excluding these entities, PC liabilities (other than equity) would be 8.6 percent of GDP on a non-consolidated basis. H3: Fiscal-risk recommendations (Evaluation priorities) - Recommendation 3.1: Improve fiscal risk analysis and disclosure. - a. Publish a comprehensive statement on fiscal risks including: - Discussion and quantification of macroeconomic and public debt risks (building on FSR and ERP). - All explicit contingent liabilities, including guarantees, PPP obligations, and deposit insurance scheme exposure, their magnitude and, where possible, likelihood of realization, and management strategies. - Analysis of specific fiscal risks from PCs, major legal cases, and natural disasters. - b. Strengthen long-run fiscal sustainability analysis by including projections for general government debt and sensitivity to alternative macroeconomic and demographic scenarios. - Recommendation 3.2: Strengthen oversight and monitoring of PPPs and PCs. - a. Improve PPP disclosure and oversight by: - Expanding the PPP Registry to record direct financial obligations and contingent exposures. - Amending PPP law and by-laws to require MoE and MoF to assess budget affordability and fiscal risks at all decision stages. - b. Strengthen PC monitoring by compiling a central database of key financial information from PC quarterly and annual reports and defining core risk metrics. --- ### Priorities and consolidated recommendations (summary) - Recommendation 1.1: Expand institutional coverage of fiscal and statistical reports; adopt sectoral classifications aligned with international standards; publish list of general government and public sector units; record revenues, expenditures, financing, and liabilities of extrabudgetary units in fiscal reports. - Recommendation 1.2: Enhance fiscal reporting quality by publishing data on assets and all liabilities; reconcile changes in stock of debt with net financing and include reconciliation tables in annual financial statements. - Recommendation 1.3: Regularly report on revenues foregone from tax expenditures; publish annual estimates with objectives and beneficiary groups. - Recommendation 1.4: Expand annual audit coverage by amending Budget Law (Article 52) to require audit of the entire budget including own source revenue, loans, and grants; expand and plan SAO audits to enhance coverage. - Recommendation 2.1: Improve budget comprehensiveness by including taxes redirected to PESR and DIF and presenting own revenue/expenditure of extrabudgetary funds in consolidated tables. - Recommendation 2.2: Strengthen MTBF credibility by publishing multi-annual expenditure projections by administrative unit; explain deviations across successive forecasts; compare fiscal forecasts with independent forecasters. - Recommendation 2.3: Improve policy orientation by including clear fiscal objectives and assessing consistency of medium-term plans with objectives; report program performance against indicators. - Recommendation 2.4: Enhance transparency of public investment by publishing total costs of major projects and developing methodological guidelines and published appraisals. - Recommendation 3.1 and 3.2: Improve fiscal risk disclosure, long-run sustainability analysis, and oversight/monitoring of PPPs and PCs (see detailed items above). *IMF staff assessment and recommendations as presented in cr18299 (IMF Fiscal Transparency Evaluation, Skopje, April 30–May 14, 2018).* ### PREFACE _________________________________________________________________________________________ 6 ### cr18299 - PREFACE ### Preface - An IMF technical assistance mission was in Skopje from April 30 to May 14, 2018 to conduct a Fiscal Transparency Evaluation based on the IMF’s Fiscal Transparency Code. - Mission composition: Amanda Sayegh (head), Alberto Soler (FAD), Phillip Stokoe (Statistics Department), Suzanne Flynn (FAD regional advisor), Ali Uppal (FAD expert). Suzanne Flynn participated April 30 to May 4, 2018. A preliminary visit by Suzanne Flynn took place on March 30, 2018. - Principal interlocutors included: Minister of Finance Mr. Dragan Tevdovski; senior officials of the Ministry of Finance (Budget and Funds Department, Treasury Department, Macro-Economic Department, Debt and International Relations Department, Taxation and Customs Policy Department); the Budget Council of the Assembly; President of the Finance and Budget Committee; Parliamentary Institute; Public Procurement Bureau; State Statistics Office; State Audit Office; National Bank of the Republic of Macedonia; Central Registry; Ministry of Economy; Ministry of Labor and Social Protection; Ministry of Health; Ministry of Transport; Health Insurance Fund; City of Skopje Administration; Public Enterprise for State Roads; Public Transport Corporation of Skopje; EU Delegation to Macedonia; and the World Bank. - Evaluation is based on information available at the time of the May 2018 visit. Findings and recommendations reflect the views and advice of the IMF mission team and do not necessarily reflect those of the authorities. Unless specified, data in text, figures, and tables are IMF mission team estimates, not official government estimates. - Acknowledgements: Ms. Biljana Minoska, Ms. Biljana Davceva-Mijoski, Mr. Gjorgji Nacevski, Rohini Ray, Mr. Gordan Tanaskov, and Ms. Barbara Dragovik. ### Executive Summary — overall assessment - Macedonia is undertaking a PFM Reform Program for 2018–21 focused on improving quality and transparency of public institutions. - Assessment against the IMF Fiscal Transparency Code: - Meets the standard of good or advanced practice on 13 of the 36 principles. - Meets the basic standard on a further 12 principles. - In 5 areas where practices do not meet basic practice, publication of data already collected internally could address gaps. - Areas of strength: - Publication of extensive and timely in-year reports on budget execution for central and local budgetary units, on an economic and administrative basis, and for the three social security funds. - Presentation of medium-term macroeconomic and fiscal projections in budget documentation; a clear legal framework for budget formulation; timely submission of draft budget to the National Assembly. - Publication of information on several risks to public finances, including detailed analysis of alternative macroeconomic scenarios; extensive disclosure of public debt and explicit guarantees; sound management frameworks. - Key areas for improvement (summary): - Fiscal and statistical reports exclude some public units with net expenditures of around 3 percent of GDP that should be classified as extrabudgetary units under international standards. - Fiscal reports lack information on other liabilities, financial assets, and reporting on revenues forgone from tax expenditures. - State Audit Office does not offer an opinion on whether the annual budget report fairly represents public finances; annual audit is largely compliance based and focused only on execution of the central government’s core budget. - Differences in key fiscal aggregates between fiscal and statistical reports are not explained; no reconciliation explaining how changes in government debt relate to the budget deficit. - The budget excludes the share of tax revenues levied by government and allocated to the Public Enterprise for State Roads (0.7 percent of GDP) and taxes on banks to meet potential deposit insurance claims (0.2 percent of GDP). - Budget remains largely input-based; credibility is hampered by limited reporting on performance against fiscal objectives and absence of reconciliation between successive fiscal plans. - Project reporting: three-year costs for public investment projects are presented, but total costs are not disclosed; no requirement to conduct or publish cost-benefit analyses for projects financed domestically or through bilateral loans. - Fiscal risk reporting is fragmented across documents; no single comprehensive report details the range, magnitudes, and management strategies for fiscal risks. - Limited central oversight of public-private partnerships and concessions and limited central monitoring of public corporation performance. ### Quantified implications and balance sheet overview (from 2016 data) - Including and consolidating extrabudgetary units under government control would: - Add 1.8 percent of GDP to consolidated general government revenue (2016). - Add 3.1 percent of GDP to consolidated general government expenditure (2016). - Increase the reported deficit by 1.3 percent of GDP (2016). - Public sector balance sheet (2016): - Public sector assets: 106.8 percent of GDP. - Nonfinancial assets: 65.2 percent of GDP. - Financial assets: 41.6 percent of GDP. - Public sector liabilities: 79.8 percent of GDP. - Debt securities and loans: 50.2 percent of GDP. - Overall public sector net worth: 27 percent of GDP. ### Key recommendations (executive summary) - Coverage and reporting - Expand institutional coverage of fiscal and statistical reports to include all institutional units classified as general government under international statistical standards. - Include those tax revenues allocated to the Public Enterprise for State Roads (0.7 percent of GDP) and Deposit Insurance Fund taxes (0.2 percent of GDP) and their associated transfers in consolidated budget reporting. - Present complete own revenues and expenditures of all extrabudgetary funds in summary tables of consolidated fiscal aggregates. - Quality and reconciliation - Publish data on government assets and financial liabilities. - Reconcile changes in the stock of debt with budget deficits and explain differences between fiscal and statistical aggregates. - Publish regular estimates of revenues forgone from tax expenditures. - Audit and oversight - Expand the audit coverage of the annual budget report to include the entire budget (including own source revenue, loans, and grants). - Increase the number of financial audits of entities undertaken by the State Audit Office. - Budget composition, credibility, and performance - Present multi-annual expenditure plans by administrative unit. - Reconcile changes in fiscal aggregates between successive fiscal forecasts. - Encourage independent evaluation of fiscal forecasts. - Regularly report on compliance with medium-term fiscal objectives and enhance reporting against performance indicators for key policy areas. - Investment project appraisal - Publish total costs of investment projects. - Develop and publish methodological guidelines for appraisal of large projects and publish their assessments. - Fiscal risk management and disclosure - Publish a summary fiscal risks report detailing all material risks to public finances, their magnitudes, and management strategies. - Publish long-term public debt projections. - Strengthen monitoring and oversight of fiscal risks from public-private partnerships and public corporations. ### Structure of the report (contents) - Chapter I: Coverage, timeliness, quality, and integrity of fiscal reporting. - Chapter II: Comprehensiveness, orderliness, policy orientation, and credibility of fiscal forecasting and budgeting. - Chapter III: Disclosure and management of fiscal risks. *IMF mission report (Skopje, April 30–May 14, 2018) as presented in the PREFACE and EXECUTIVE SUMMARY sections.* ### 1. Fiscal reports should provide a comprehensive, timely, reliable, comparable, and ### 1. Fiscal reports should provide a comprehensive, timely, reliable, comparable, and accessible summary of the government’s financial performance, financial position, and cash flows. ### Overview and assessment focus - This chapter assesses Macedonia’s fiscal reporting practices against the IMF’s Fiscal Transparency Code for: - Coverage of public sector institutions, stocks, and flows; - Frequency and timeliness of reporting; - Quality, accessibility, and comparability of fiscal reports; - Reliability and integrity of reported fiscal data. ### Main fiscal reports published (summary) - Macedonia publishes a range of fiscal information through multiple documents, including: - Monthly budget execution reports: cash-based outturns for revenue, expenditure, and financing for the central government and the three Social Security Funds (SSFs) by detailed economic classification; monthly reports also present cash-based budget execution for each budget user by economic classification. - Monthly and quarterly economic reports: discussion comparing outturns for the central government by economic classification with the corresponding period of the previous year; since July 2017 expanded to include discussion on outturns for the largest budget users; quarterly reports include discussion on general government debt trends. - Quarterly budget execution reports: cash-based outturns for revenue, expenditure, and financing for the general government at a higher aggregation than monthly execution reports. - Quarterly debt statistics: information on the stock of general government and guaranteed debt, including historical data by instrument. - Semi-annual reports on budget execution: cash-based outturns for revenue, expenditure, and financing for the central government by budget user and the SSFs, with commentary on first-half performance and debt trends. - Annual report on the budget: final outturns for revenue, expenditure, and financing for the central government by economic, functional, administrative and program classification, and for individual local governments by detailed economic classification. - Annual report on public debt management: information on the stock of general government and guaranteed debt, including historical data by instrument. ### Coverage of institutions (basic) - Public sector structure and counts: - Total public sector units: 1,328. - Central government: 398 budgetary central government units and 131 extrabudgetary units (including 113 public health institutions, 6 regulatory agencies, and 12 public enterprises that should be classified inside the general government boundary). - Local government: 668 units including 81 municipalities and 587 other government bodies controlled by municipalities. - Public nonfinancial corporations: 126 corporations (21 controlled by central government units; 105 controlled by local government units). - Public financial corporations: National Bank of the Republic of Macedonia (NBRM), Macedonia Bank for Development Promotion (MBDP), and three financial regulatory agencies. - Notable unit-level fiscal magnitudes (2016): - Public Enterprise for State Roads (PESR) expenditures: 2.5 percent of GDP. - Macedonia Railways Infrastructure (MZT) expenditures: 0.2 percent of GDP. - Macedonia Radio Television (MPT) expenditures: 0.2 percent of GDP. - Deposit Insurance Fund (DIF): revenues of 0.2 percent of GDP and financial assets of 2.4 percent of GDP at end-2016. - Aggregate public sector expenditure shares (2016): - Public sector expenditures: 38.6 percent of GDP. - General government expenditure: 34.5 percent of GDP (about 86 percent spent by central government and 14 percent through local governments). - Public corporation expenditures: 4.8 percent of GDP (almost all by nonfinancial corporations). - Coverage gaps and impact: - Monthly and annual reports for central government, and quarterly and annual reports for general government, do not capture activities of certain regulatory agencies, public corporations that should be extrabudgetary units, or public health institutions. - Missing extrabudgetary units have net expenditures of around 3.2 percent of GDP. - Reported general government deficit: 2.7 percent of GDP in 2015. Including and consolidating extrabudgetary units under government control would add around 1.8 percent of GDP to consolidated revenue and 3.1 percent of GDP to consolidated expenditure, increasing the consolidated general government deficit by 1.3 percent of GDP to 4.0 percent of GDP. - Expanding coverage to the public sector by including public corporations would add 4.8 percent of GDP to revenue and 4.1 percent of GDP to expenditure, resulting in an overall public sector deficit of 3.3 percent of GDP. ### Coverage of stocks (not met) - Public debt reporting: - Government debt reports present general government and government-guaranteed debt in the form of debt securities and loans amounting to 48.4 percent of GDP at end-2016. - Reported debt omits certain liabilities: unguaranteed debt of public enterprises (~0.2 percent of GDP) and NBRM bills (3.8 percent of GDP); it also does not consolidate the debt holdings of the Deposit Insurance Fund (DIF). - Accounting for these omissions would take public debt to 50.2 percent of GDP at end-2016. - Central bank and related liabilities (end-2016): - NBRM currency in circulation: 5.7 percent of GDP. - NBRM SDR liabilities: 2.7 percent of GDP. - Banking system reserves: 8.4 percent of GDP. - Outstanding stock of NBRM securities: 3.8 percent of GDP. - Assets disclosure gaps: - No fiscal or statistical reports currently provide information on government assets; inclusion of government “currency and deposit holdings” (readily available) in debt statistics and fiscal reports would improve coverage assessment from not met to basic. - Based on available information, general government nonfinancial assets are estimated to be at least 42.2 percent of GDP, and equity in public corporations around 23.4 percent of GDP. - Examples of equity assets: 34.8 percent ownership stake in Macedonia Telecom (worth almost 1 percent of GDP in 2016) and 50 percent ownership stake in GA-MA (estimated around 0.2 percent of GDP). - Balance sheet estimates and work in progress: - NBRM has begun work on general government balance sheets as part of financial accounts compilation; no precise publication timeframe set. - State Statistical Office (SSO) has done preliminary work to estimate stocks of some general government nonfinancial assets (limited to roads, rail, R&D so far). - Broader public sector balance sheet estimates (end-2016, IMF staff estimates): - Consolidated public sector asset holdings: 106.8 percent of GDP. - Consolidated public sector liabilities: 79.8 percent of GDP. - Public sector net worth: 27 percent of GDP. - Public sector net financial worth: -38.2 percent of GDP. - Main components: Nonfinancial assets 65.2 percent of GDP; Financial assets 41.6 percent of GDP; Liabilities 79.8 percent of GDP. - Specific asset coverage limits: - Values of budgetary central government and local government nonfinancial assets (government buildings, government-owned land) are not reported; SSO work limited and values likely significantly underestimated. ### Coverage of flows (basic) - Accounting basis and limitations: - All fiscal reports are compiled on a cash basis with no accrual adjustments or accrual transactions; reports cover cash revenues, expenditures, and financing. - Cash-based data do not capture accrued expenditures, payment arrears, and some non-cash flows. - Some cash flows have been incorrectly recorded (example: central government on-lending to municipalities and public enterprises recorded as expenditure with an offsetting adjustment to revenue). - Accounts payable and arrears: - MoF quarterly data collection and a May 2017 survey found unconsolidated arrears across the entire public sector of around 3.6 percent of GDP. - Preliminary analysis suggests overall accounts payable (unpaid invoices, irrespective of overdue status) for general government were in the order of 9 percent of GDP at end-2016 (high uncertainty). - Survey breakdown: accounts payable about 1 percent of GDP for central government budgetary units; 0.5 percent of GDP for public health institutions; 0.8 percent of GDP for local government units; around 1.4 percent of GDP for central and local government enterprises. - Health Insurance Fund estimates: public health institutions arrears of 0.8 percent of GDP; the Fund itself has estimated accounts payable of 0.2 percent of GDP arising from lengthy payment terms. ### Reliability, integrity, and recommendations implied by findings - Fiscal reports provide substantial cash-based information and frequent reporting, but material coverage gaps in institutional coverage, liabilities, and assets mean the reports do not present a full picture of the public sector’s fiscal position. - Improving coverage would require: - Consolidation of extrabudgetary units and relevant public corporations into summary fiscal reports to reflect their fiscal activity (impacts include increasing reported deficits and debt). - Publication of nonfinancial and financial assets and fuller disclosure of liabilities (including NBRM-related liabilities and unguaranteed public enterprise debt). - Development and publication of general government and public sector balance sheets and expanded statistical work on asset valuation (buildings, land, equity). - Enhancing compilation of accounts payable and arrears data to capture accrued liabilities omitted by cash accounting. *Source: IMF staff assessment as presented in the chapter.* ### 15. Expenditures associated with the issuance of compensatory “structural bonds,” ### 15. Expenditures associated with the issuance of compensatory “structural bonds,” ### Structural bonds: treatment and fiscal impact - Finding: Structural bonds are a collection of instruments used to compensate households for deposits lost during the breakup of Yugoslavia, for compensation for property seized without compensation, and for rehabilitation and privatization of some banks in transition. - Accounting treatment: - These bonds have been correctly treated as liabilities in the stock of debt figures published by the MoF. - They have not been correctly reflected in the deficit numbers; transactions should have been recorded as capital transfers above the line when issued. - Magnitude: - Issuance of structural bonds averaged around 0.1 percent of GDP annually in the period from 2011–2015. - Macedonia issued EUR 546.5 million of structural bonds in 2000, worth around MKD 33 bill ion at today’s exchange rate, or around 13 percent of GDP for that year. ### 2nd pillar pension contributions: recording and implications - Finding: Contributions to 2nd pillar pensions are included as revenue and expenditure in the authorities’ fiscal reports. - Correct treatment: These amounts are collected by the Public Revenue Office and ultimately transferred to private pension firms administering individual accounts; they should be treated as financing transactions below the line. - Current reporting: - These flows are recorded correctly in the GFS data reported to the IMF GFS Yearbook database. - In 2016 these flows were approximately 0.8 percent of GDP. - The current treatment in the authorities’ fiscal reports overstates both revenues and expenditures, but this treatment does not affect the budget deficit. ### Coverage of tax expenditures (Not Met) - Finding: The government does not publish estimates of revenue loss from tax expenditures; no legislative requirement exists to report revenues foregone. - Existing practices: - When proposing legislative amendments, budget users must provide estimates of fiscal implications to the Government; individual tax expenditure estimates may be prepared ex ante and ex post but are generally not published. - PFM Reform Program activities to strengthen forecasting and analytical capacity will aid development of more comprehensive tax expenditure reporting. - Main tax expenditures and available estimates: - 15 designated Technological-Industrial Development zones: exemptions for corporate income tax and personal income tax for salaries for first ten years, plus VAT and customs duty exemptions for goods, raw materials, equipment and machines. - NBRM estimate: fiscal costs of the personal and corporate income tax exemptions amounted to MKD 1.1 billion (or 0.2 percent of GDP) in 2016. - Other tax expenditures with no formal estimates: tax preferences for voluntary pension savings, excise tax exemption for wine, reduced rate property tax on principal dwelling, reduced rate VAT for certain products, zero or reduced-rate customs tax under free trade agreements. - Recommendation: Publish an annual estimate of revenue foregone from tax expenditures, with policy rationale and beneficiary groups. ### Frequency and timeliness of fiscal reporting - In-year reporting (Advanced): - Monthly cash-based budget execution reports cover central government revenues, spending and financing (including for the three SSFs) and are published within 25 days of the end of month. They provide breakdowns by economic classification and revenue source at aggregate central government level. - Since July 2017, monthly execution reports by administrative unit (with breakdown by economic category) are published with a lag of two months. - Quarterly general government execution reports have been published since July 2017 within two months of quarter end; less detailed than central government reports and do not show separate subsectors. - Government plans to publish all treasury payments on a daily basis. - Public debt reporting: - Quarterly and annual public debt reports cover central and local government debt and publicly guaranteed debt; published within one month of quarter end. - Reports capture almost all public sector debt in form of debt securities and loans, other than debt securities issued by the NBRM, with detailed breakdown by instrument. - Accessibility concern: - Budget execution information is spread across multiple reports (monthly, quarterly, semi-annual, short-term economic trends, economic quarterly reports), which may reduce accessibility despite timeliness. - Semi-annual report contains more detailed analysis and commentary, including outturns and public debt summary; municipality-level revenues and expenditures published in excel format. - Timeliness of annual financial statements (Advanced): - Cash-based annual budget execution reports are published before or around the end of June following the year, together with the audit report. - Interim (unaudited) annual outturn reports published within two months of year end. - Modified cash-based annual financial statements are required for all budget users but are not consolidated or consistently published; law does not require full balance sheet, only presentation of financial assets and liabilities. - Plans to move to modified accrual accounting are in the 2018–21 PFM Reform Program; no plans to adopt IPSAS. Audit scope and duration would need adjustment if accrual reforms proceed. ### Quality of fiscal reports: classification and internal consistency - Classification (Advanced): - Fiscal reports present spending by administrative, economic, and functional classification and provide some program information. - Authorities compile and report annual GFS to IMF Statistics Department in GFSM 2014 framework; budget and national reports use a national presentation broadly following GFSM 86. - Annual Report provides a full functional breakdown aligned with United Nations’ Classification of Functions of Government and includes expenditures by program for each administrative unit. - Internal consistency (Basic): - Macedonia publishes only one of three internal consistency checks required under the Code: reconciliation between the above-the-line fiscal deficit and below-the-line financing (movements in cash, acquisitions of other financial assets, incurrence of financial liabilities) in gross terms. - Missing: reporting on holders of government debt that could be compared with debt issued. - No reconciliation between increase in debt and debt issued in any given year; the ERP includes an annex table reporting change in debt stock broken down by primary balance, interest, and stock-flow adjustment but does not explain factors behind the adjustment. - Stock-flow adjustment has averaged (in absolute terms) 0.8 percent of GDP annually over the past decade. - Combining financing information and stock of debt in fiscal reports would enhance transparency. - Historical revisions (Not Met): - Fiscal statistics are not revised. Annual GFS submissions to IMF commenced in 2017; historical fiscal data published by authorities is not revised. - Recommendation: Inclusion of PESR, MZT, MPT, DIF and other units classified inside general government should be implemented across the time series, at least back to 2013 (when PESR was created), with the impact of reclassifications disclosed and detailed supporting data provided. ### Integrity of fiscal reports - Statistical integrity (Basic): - Fiscal statistics are compiled by the MoF on a GFSM 2014 basis and reported to the IMF; compiled by Treasury staff with no standalone fiscal statistics unit within the MoF. - SSO is developing reporting of fiscal statistics to Eurostat on an ESA 2010 basis; project ongoing and no data yet published. SSO supplements MoF data, makes accrual and other adjustments, and is an independent institution under the Law of Statistics; once published, SSO fiscal statistics could meet advanced standard for statistical integrity. - External audit (Basic): - Independent SAO publishes an opinion on central government’s core budget execution report. Law on State Audit provides SAO independence; Law on Budget requires SAO annual report submission to Parliament within six months of year end. - Audit is compliance-focused; no opinion on whether final accounts present a true and fair view; audit limited to revenue and expenditures and does not cover assets and liabilities. - Audit coverage limited by capacity: in 2016, 118 entities audited out of more than 1,000 public sector institutions; only 19 percent of these audits expressed unqualified opinions. - Law on Companies requires audits of financial statements of all medium and large, listed and limited liability companies; approved financial statements must be registered within two months and audited financial statements within six months at Central Registry (available to public for a fee). - Comparability of fiscal data (Basic): - Execution reports are produced on same basis as the budget, but differences exist across fiscal and statistical reports that are not publicly reconciled. - In 2016, general government revenue and expenditures in GFS were approximately 1.6 percent of GDP lower than presented in the annual report. - Main drivers of differences: - Treatment of 2nd pillar pension contributions: Budget execution reports record as government revenue and expenditure flowing through Pension and Disability Fund; GFS excludes these from revenue/expenditure and records them below-the-line as financing flows. In 2016 these flows were approximately 0.8 percent of GDP. - Treatment of on-lending: Budget execution records on-lending to municipalities and PCs as capital expenditures above the line with an offsetting adjustment to non-tax revenues; in GFS on-lending is recorded as financial transaction below-the-line. - Treatment of repayments of historic loans: Budget execution records inflows as non-tax revenues; in GFS recorded as financing flows below-the-line; this change results in a small difference (less than 0.1 percent of GDP) in the deficit between GFS and budget execution reports. - Treasury produced a reconciliation of main differences for MoF management; publishing this with additional details (like those in Table 1.3) would enhance transparency. - Table 1.3 (2016 figures, as presented in source): - Annual Report Revenues 181,745; GFSM 2014 Revenues 171,873; Difference -9,872. - Fiscal Balance Annual Report -15,912; GFSM 2014 -16,354; Difference -442. - (Table lists placeholders for Minus 2nd Pillar Pension Contributions, Minus on lending adjustment, Minus repayments of historic loans.) ### Summary assessment and recommendations - Strengths: - Monthly central government reports are timely and detailed on revenues, expenditures, and financing. - Quarterly general government budget execution and debt reports provide substantial information on revenues, expenditures, and financing for budgetary general government and most liabilities in form of debt securities and loans. - Annual and semi-annual reports provide a good breakdown of revenues and expenditures by administrative, economic, and functional classifications. - Key shortcomings and recommended enhancements: - Improve coverage of general government: not all institutions are covered in fiscal and statistical reports. - Capture accrued expenditures and payment arrears in reports. - Correct recording of some budgetary central government transactions (e.g., structural bonds, on-lending, 2nd pillar contributions). - Disseminate information on government assets and close gaps in liability coverage. - Publish estimates of revenues forgone from tax expenditures. - Reconcile differences between revenues and expenditures across reports and explain differences between budget financing needs and changes in stock of debt. - Implement historical revisions and disclose impacts of reclassifications (at least back to 2013). *Source: cr18299 - 15. Expenditures associated with the issuance of compensatory “structural bonds,”* ### 37. Based on the above assessment, the evaluation highlights the following priorities ### 37. Based on the above assessment, the evaluation highlights the following priorities ### Priorities and Recommendations for Improving Fiscal Reporting - Recommendation 1.1: Expand the institutional coverage of fiscal and statistical reports. Adopt sectoral classifications for fiscal and statistical reports that align with international standards: - Adopt in the Budget Law, internationally accepted criteria for determining the classification of institutional units for fiscal reporting purposes and publish the list of general government and public sector units; and - Record the revenues, expenditures, and financing of extrabudgetary units not currently included in the GFS reports and report liabilities of these entities as general government debt in the quarterly and annual fiscal reports. - Recommendation 1.2: Enhance the quality of fiscal reporting. - a. Publish data on assets and all liabilities in fiscal reports; and - b. Publish reconciliations of changes in the stock of debt and net financing in fiscal reports and include a reconciliation table in the central government annual financial statements to reconcile differences between it and other fiscal reports. - Recommendation 1.3: Regularly report on revenues foregone from tax expenditures. - Publish an annual estimate on the revenue foregone from tax expenditures, including details of the nature of these tax expenditures, their objectives, and the groups or sectors benefiting from them. - Recommendation 1.4: Expand the coverage of the annual audit. - Amend the Law on Budget (Article 52) to require audit of the entire budget including own source revenue, loans, and grants and expand the number of financial audits of entities undertaken and plan audits over the medium term to enhance coverage. ### Summary Evaluation: Fiscal Reporting — Key Findings and Statistics (Table 1.4 highlights) - Principle 1.1.1 Coverage of Institutions - Assessment: Basic — Fiscal reports cover most general government units, but exclude some extrabudgetary units that should be classified within that sector under international standards. - Importance: High — Revenues and expenditures related to activities of extrabudgetary units are not included in general government fiscal reports, resulting in an understatement of expenditures and the budget deficit of 3 and 1.3 percent of GDP respectively in 2016. - Rec: 1.1 - Principle 1.1.2 Coverage of Stocks - Assessment: Not Met — The government publishes detailed information on public sector debt liabilities, but no information is provided on other accounts payable, financial or nonfinancial assets. - Importance: Medium — Unreported public sector liabilities of around 31 percent of GDP and assets of 107 percent of GDP. - Rec: 1.2 - Principle 1.1.3 Coverage of Flows - Assessment: Basic — Fiscal reports cover cash revenues, expenditures, and financing. - Importance: Medium — Cash recording potentially understates expenditures and prevents a fuller understanding of accounts receivable and payables. - Rec: 1.1 - Principle 1.1.4 Coverage of Tax Expenditures - Assessment: Not Met — Revenues foregone from tax expenditures are not reported. - Importance: Medium — Several tax exemptions exist, with uncertainty about their size. - Rec: 1.3 - Principle 1.2.1 Frequency of In-Year Reporting - Assessment: Advanced — Monthly central government execution reports are published within one month of the end of the period. - Importance: Medium — Expenditure outturns have deviated by around 2 percent of GDP on average from the original budget. - Principle 1.2.2 Timeliness of Annual Financial Statements - Assessment: Advanced — Cash based annual budget execution reports are published before or around the end of June the following year, together with the audit report. - Importance: Medium — Annual execution reports do not include information on stocks. Central government arrears were estimated at 1 percent of GDP in 2017. - Principle 1.3.1 Classification - Assessment: Advanced — Fiscal reports include administrative, functional and economic classifications broadly consistent with international standards, as well as some program information. - Importance: Low — Extensive information is provided on the use of public funds, but program information is not clearly linked to policy objectives. - Principle 1.3.2 Internal Consistency - Assessment: Basic — Fiscal reports include only one reconciliation of the budget balance and financing. - Importance: Medium — Annual differences between changes in the debt stock and budget financing has averaged around 0.8 percent of GDP in absolute terms. - Rec: 1.2 - Principle 1.3.3 Historical Revisions - Assessment: Not met — Fiscal statistics are not revised. - Importance: Low — The priority is to prepare robust fiscal statistics. - Principle 1.4.1 Statistical Integrity - Assessment: Basic — Fiscal statistics are disseminated broadly in accordance with international standards. - Importance: Low — Although there are no independent checks on fiscal statistics, they are still being improved. - Principle 1.4.2 External Audit - Assessment: Basic — An independent supreme audit institution publishes an opinion report on implementation of the budget, based on a limited audit sample of entities. - Importance: High — Only about 10 percent of public sector institutions were subject to audit in 2016. Of these audits, only 19 percent received an unqualified opinion. - Rec: 1.4 - Principle 1.4.3 Comparability of Fiscal Data - Assessment: Basic — Budget execution reports are prepared on the same basis as the annual budget. Differences between fiscal reports and GFS are not explained. - Importance: Medium — Revenues and expenditures in fiscal and statistical reports differ by 5 percent, but differences in the deficit are low. - Rec: 1.2 ### Fiscal Forecasting and Budgeting — Key Assessments and Findings - Objectives of assessment (four dimensions of the fiscal transparency code): - The comprehensiveness of the budget and associated documentation; - The orderliness and timeliness of the budget process; - The policy orientation of budget documentation; and - The credibility of the fiscal forecasts and budget proposals. - Recent reforms (past two years) to strengthen transparency: - Publication of a Citizen’s Guide to the 2018 Budget, summarizing main economic and fiscal forecasts and new policy initiatives, combined with stakeholder engagement; - Ongoing reform of the Budget Law aimed at improving the quality and transparency of the budget and medium-term budgeting procedures; - Proposed amendments to the Law of Public Procurement to enhance the effectiveness and transparency of competitive tender processes. - Budget documentation coverage and publication (Table 2.1 summary): - Annual Budget: MoF; Coverage: BCG and SSFs; Flows: R, E, Fin; Basis: Cash; Class: Nat; Publication Date: Dec. - Fiscal Strategy Report: MoF; Coverage: GG; Flows: R, E, Fin, Debt; Basis: Cash; Class: Nat; Publication Date: Required by May. - Economic Reform Program: Govt.; Coverage: GG; Flows: R, E, Fin, Debt; Basis: Cash; Class: Nat; Publication Date: Jan. - Annual Report of the Budget: MoF; Coverage: GG; Flows: R, E, Fin; Basis: Cash; Class: Nat; Publication Date: May. - Annual Report on Public Debt Management: MoF; Coverage: GG; Flows: Debt and guarantees; Basis: - ; Class: Nat; Publication Date: June. - 2.1. Comprehensiveness of Budget Documentation - 2.1.1 Budget Unity (Not Met) - The budget includes revenues and expenditures of 194 first-line budget users in central government and the three SSFs; combined the budget covers 95.1 percent of budgetary central government revenue (excluding the Social Security Funds). - Taxation levied by central government allocated by law to the PESR (excises on road fuel and taxes on motor vehicle registration which amount to 0.7 percent of GDP) are not included as central government revenue and are netted against transfers; taxes levied on banks and allocated to the DIF (0.2 percent of GDP) are not included in the budget. These omissions underreport tax revenues and expenditures in the budget by 0.9 percent of GDP. - Own revenues and related expenditures of certain extrabudgetary entities not presented in the budget: - Six nonfinancial regulatory bodies: estimated to be 0.2 percent of GDP. - Public health institutions: 0.4 percent of GDP (transfers to finance operating and capital expenses are already reflected in Health Insurance Fund and Ministry of Health expenditure). - PESR, DIF, MZT, MPT and some other smaller public companies: combined revenues and expenditures would account for 1.3 and 2.6 percent of GDP respectively. - Overall implications: Combined omissions understated central budget total revenues by 1.9 percent of GDP and expenditures by 3.2 percent of GDP, in consolidated terms, with an overall impact of 1.3 percent of GDP on the reported budget deficit in 2016. - The budget documentation presents financing requirements and sources but does not include on-lending activities (loans from international financial institutions on-lent to other public sector entities are not included in total financing); this omission does not appear large and would not impact deficit or debt aggregates but would enhance consistency between financing and change in debt stock. - 2.1.2 Macroeconomic Forecasts (Advanced) - Budget documentation includes three-year forecasts for main macroeconomic variables, their components and underlying assumptions. ERP and FSR disclose comprehensive three-year projections; ERP includes detailed discussion of developments and drivers. Adding assumptions table to FSR would enhance transparency. - Medium-term real GDP forecast errors since 2008: absolute value of budget year forecasting errors for real GDP growth averaged 1.9 percent, compared to the European countries' average of 1.3 percent. Real GDP forecasting errors remain relatively high after volatility adjustment. - Forecast bias: - Real GDP forecasts have had an optimistic bias, especially during 2009–12; since 2013 bias more muted though negative errors were significant in the past two years due to political uncertainty. - Inflation forecasts have tended to be higher than actuals without a clear cyclical pattern. - Nominal GDP growth forecasts for the budget year have not shown significant bias and have been lower in more recent years. - 2.1.3 Medium-Term Budget Framework (Good) - Budget documentation includes medium-term projections of revenues, expenditures, and financing by economic category. FSR and ERP include three-year projections with the same institutional coverage as the annual budget and provide consolidated general government three-year fiscal projections. - No medium-term expenditure plans by administrative unit or by program are presented (not required by Budget Law). Three-year projections for development budget programs (capital projects) are included; in 2018 these reflected around 11 percent of total expenditures. - Forecast accuracy and biases: - Budget deficit forecasts have been relatively accurate over the past decade: the budget year deficit has been underestimated by less than 0.1 percent of GDP on average over the past decade (compared with 0.9 percent of GDP for EU countries). - Revenue and expenditure forecasts have been consistently overestimated in the budget year by an average of 2.2 and 2.1 percent of GDP respectively. - Government adjustments reduce expenditure during the budget year in response to lower than anticipated revenues to maintain targeted budget balance. - Capital expenditure has been under-executed by an average of 38 percent. - A noticeable correlation exists between revenue and capital expenditure forecast errors, particularly during cyclical downturns. *Italic: IMF staff evaluation (cr18299 - 37. Based on the above assessment, the evaluation highlights the following priorities)* ### 49. Fiscal forecasts have been more accurate in recent years (Figure 2.4). Absolute ### Fiscal forecasts have been more accurate in recent years (Figure 2.4) ### Forecast accuracy and recent developments - Absolute revenue and expenditure forecast errors have been lower in the period 2013–17 compared to 2008–12, partly reflecting uncertainty caused by the global financial crisis in the earlier period. - The same holds for deficit forecasts beyond the budget year. - Uncertainty caused by the recent political environment impacted forecast accuracy, with higher forecast errors in 2016–17. - Figure reference: Evolution of Fiscal Forecast Errors (average absolute errors) — revenues and expenditures (average percentage errors) and Budget Deficit (Percent of GDP). - Data are for budgetary central government including SSFs. ### Medium-Term Budget Framework (MTBF) and PFM reform - The Government intends to strengthen the MTBF as part of its broader PFM reform strategy. - The 2018–21 PFM Reform Program aims at: - improving fiscal forecasting tools; - developing a comprehensive MTBF that links sectors, programs, and projects to ensure spending allocations are aligned with policy objectives and make planning more stable. - With support of the Finnish Twinning Project, a manual for MTBF preparation has been developed, describing formulation of budget requests by administrative units, programs and sub-programs. - Implementation will follow adoption of a comprehensive program structure for the budget that would present expenditure plans during the budget year and the two following years by administrative unit and, within each unit, by program and sub-program. - Successful implementation would see Macedonia meet the advanced level of practice as defined by the Code. ### Investment projects (Basic) - The government provides substantial information on public investment projects, but does not regularly disclose the total multi-annual financial obligations for them. - The annual budget provides budget allocation for capital expenses for the three-year projection period and a summary for each project or sub-program included under the development budget. - The budget does not include the total life-cycle cost, amounts already spent, or deviations in project costings from the previous budget. - The FSR and the ERP provide detailed information on public investment priorities but do not comprehensively report total project costs. - The National Investment Council published a list of national priority projects in 2015 with some information on total cost, financing source, estimated construction period, and stage of development, but the list does not allocate costs over the life of the project and provides limited sector information. - Cost-benefit analysis (CBA): - CBA for major investment projects are not always required prior to approval and are not published. - For projects financed by the EU, international financial institutions and international development banks, CBA is generally undertaken per donors’ methodologies. - There is no legal requirement to conduct and publish CBA for projects financed by external bilateral loans or the budget. - The new Manual for Medium-Term Budgeting underscores the need for CBA for new project proposals, particularly the largest ones, without limiting the obligation by financing source; however, the Manual lacks legal authority and no methodology has so far been developed to guide CBA application. ### Public procurement and project selection - Major investment projects are subject to open and competitive bidding, but with some exceptions under the Public Procurement Law. - The Public Procurement Law requires competitive tendering of contracts above 500 euros (on a monthly basis). - Exceptions (Articles 7-9) relate to defense, security, and public contracts financed by international organizations or third countries provided they have their own awarding systems. - Most exceptions conform with EU procurement directive, except for the exemption related to national security. - 2016 procurement outcomes: - 76 percent of the contract value of tenders was awarded through open procedure. - 7 percent pertained to restricted or negotiated procedures without prior publication of a contract notice. - 9 percent was conducted through simplified procedures. - The number of bidders in the open procedure has been low (around 3.5 on average), which can impact effectiveness. - Planned legislative action: government plans amendments to the procurement law to address shortcomings and bring it into compliance with the EU 2014 procurement directive. - Transparency and appeals: - The Public Procurement Bureau publishes information on tenders, outcomes, and administrative decisions on appeals. - The State Appeals Commission decides on legality of awarding decisions; its decisions are published in the Official Gazette and the Bureau’s website. - In 2016, out of 623 appeals received, around 250 were accepted by the Commission. ### Public investment levels and execution - General government investment: - General government investment (including PESR and Macedonia’s Railway Infrastructure) stood at around 5.2 percent of GDP in 2016 and is projected to increase further over the medium term. - Total public investment was 5.8 percent of GDP in 2016. - Execution challenge: - Planned large-scale ramp up in public investment has proved difficult; capital expenditures typically under-executed. - On average, over the past 10 years, capital expenditure has been 38 percent lower than budgeted. - The government intends to strengthen public investment management as part of the PFM reform program. ### Fiscal legislation, timing, and parliamentary processes - Budget Law provisions: - The Budget Law defines the timeframe for budget preparation, key contents of the executive proposal, and powers of the National Assembly to amend the budget. - Government must adopt a three-year fiscal strategy by end-May and submit the draft budget to the National Assembly before November 15 to be adopted by end of the year. - The Budget Law specifies content of the Executive Budget Proposal (article 29) and fiscal strategy (Article 17). - The Rules and Procedures of the National Assembly (Articles 179 to 181) detail discussion procedure; the National Assembly can reject the Draft Budget and propose amendments, obliging the government to present a revised Draft Budget with explanatory notes. - The Budget Law does not require the fiscal strategy to be submitted or debated by the National Assembly (it is provided for information purposes). - Timeliness of documents: - The draft budget has generally been submitted to the National Assembly at least two months before the end of the fiscal year; submissions during the past five years typically occurred in mid-September. - Exception: 2018 budget was submitted in early November. - National Assembly has consistently approved the budget in December, prior to the start of the next fiscal year. - The Budget Law requires the FSR be published by end-May, but in each of the past three years the FSRs were published in October or later, partly due to political uncertainties; publishing the FSR near the budget dilutes depth of scrutiny. - Dates of budget submission and approval: - Submission to Parliament: 20-Sep-13, 13-Sep-14, 23-Sep-15, 19-Sep-16, 9-Nov-17. - Approval by Parliament: 20-Dec-13, 16-Oct-14, 20-Nov-15, 17-Oct-16, 28-Dec-17. ### Fiscal policy objectives and rules - Debt limit and medium-term targets: - The Law of Public Debt requires fiscal authorities to set a limit for public debt as a share of GDP. - Since the 2017 FSR, the public debt limit has been established at 60 percent of GDP. - The debt ceiling is complemented by rolling medium-term (over a three-year time horizon) and short-term (within one year) objectives in terms of public debt composition. - Medium-term objectives: cap for level of guaranteed debt (in terms of GDP), floor for euro-denominated debt within FX-denominated debt, minimum threshold for fixed-interest rate debt out of total debt. - Short-term objectives: net public debt borrowing, net guaranteed borrowing, minimum threshold for average time to maturity, minimum threshold for average time to re-fixing. - The 60 percent of GDP debt ceiling is precise but not time-bound. - Fiscal Strategy Reports: - Every Fiscal Strategy sets a path of rolling revenue, expenditure, deficit, and debt projections for general government over a three-year horizon; these are indicative and non-binding and tend to be revised year to year. - The government provides necessary information to assess compliance with the debt limit, but does not analyze performance against the fiscal strategy. - The FSR sets out three-year projections for public debt; the Annual Report on Public Debt Management discusses outcomes for level and composition of public debt, but neither provides specific discussion on rationale behind fiscal objectives, consistency of projections with objectives, or extent of past compliance. - Reform commitments: - The government has committed to strengthening the fiscal rules framework and aims to adopt fiscal rules legislation by 2019 under the 2018–21 PFM Reform Program. - Recommendation: To ensure transparency, the government should articulate the rationale for selected fiscal rules in the FSR and include discussion on compliance of medium-term fiscal forecasts and outcomes once the rule is established. - Credibility could be enhanced by ex ante specification of situations under which the government could deviate from stated fiscal objectives. ### Performance information and program budgeting (Basic) - Current presentation: - The budget presents program information for each administrative unit and a breakdown of expenditures allocated to each program by economic classification. - The budget provides information on 11 government programs with qualitative objectives and managing ministries. - Output indicators for administrative units are defined, but most programs lack clear links to policy objectives and absence of performance indicators for each program. - Example: Ministry of Labor and Social Policy includes number of children receiving benefits as an output indicator, but this is not linked to a specific social benefit program. - Ongoing work: - A Manual on Program Budgeting proposes a new programmatic structure based on 14 policy areas and 49 programs assigned to administrative units. - Once implemented, the budget would detail objectives of each program and an annex (or separate MoF publication) would link each sub-program with performance indicators, including realized values for past years and objectives for the next three years. - Implementation will require review of organizational structure of administrative units. - Gender budgeting: - The government introduced a gender perspective in budgeting and published gender budget statements for certain ministries in 2018. - The 2012 Gender Equality Strategy (2013–20) required inclusion of gender perspective in policy planning and budgeting. - Pilots in various ministries: each ministry selected a pilot program in 2017 to analyze from a gender perspective and developed gender indicators; in 2018 pilot ministries presented a gender initiative within sector programs and prepared gender budget statements. ### Public participation (Good) - Citizen outreach: - The Government published a citizen’s guide to the budget for the first time in 2017, for the 2018 Budget. - The citizens budget summarizes macroeconomic projections, main fiscal aggregates, composition of budget revenues and expenditures, and main policy priorities. - The citizens budget could be enhanced by linking key spending initiatives to government policy objectives and detailing impacts on typical citizens or different groups. - Participation in budget deliberations: - Public participation in budget deliberations started in 2017; in 2018 stakeholders from civil society, business, labor unions, and academia were invited to a presentation and discussion of the draft budget. - Opportunities could be enhanced by opening the forum to a wider range of stakeholders earlier in budget preparation. - Suggested measures: introduce a formal call for budget submissions from the public or add a public participation component in parliamentary committee hearings. ### Credibility and independent evaluation - External comparisons and independent agencies: - Budget documentation does not include a comparison of fiscal projections with those of external forecasters; the FSR and the ERP compare medium-term real GDP and inflation forecasts with IMF, WB, EBRD, EC, Vienna Institute, and NBRM but not fiscal forecasts. - Given historical deviations in revenue and expenditure outturns from forecasts, including comparisons for main fiscal aggregates would assist users in judging realism of government forecasts. - There are currently no independent fiscal agencies in Macedonia that produce independent fiscal and economic forecasts or assess government forecasts and fiscal performance. - The government committed to establishing a fiscal council in its 2018–21 PFM Reform Program. *Source: cr18299 - 49. Fiscal forecasts have been more accurate in recent years (Figure 2.4).* ### 67. The Budget Law requires parliamentary approval for changes to total budget ### 67. The Budget Law requires parliamentary approval for changes to total budget ### Budget Law: approval and reallocation rules - Legislative approval required for any changes to the total budget allocation (Article 36). - Legislative approval required for changes to allocations across budget users (Article 33(7)). - Individual budget users may reallocate within their own budgets without legislative approval, subject to limits (Article 33(1-6)): - Reallocations must not reduce expenditures within an economic classification by more than 20 percent. - Reallocations must not increase salaries by more than 10 percent. - Reallocations within budget users of up to MKD 5 million require approval from the MoF. - Reallocations above MKD 5 million require approval of the Council of the government. - Article 11(3): In a national crisis, appropriations of the contingency reserve can be increased (up to its cap of 3 percent of total expenditure) by reallocating spending from elsewhere in the budget, provided these do not result in reductions of an individual budget user appropriations of more than 5 percent. ### Supplementary budgets and execution outcomes - Supplementary budgets approved on nine occasions in the past decade, with five of these resulting in reduced budget appropriations. - Excluding 2008, supplementary budgets have resulted in reduced expenditures of 1.5 percent, on average, compared to the original budget. - For the period 2009–17: - Spending outturn was, on average, 4.8 percent lower than the spending approved in supplementary budgets. - Spending outturn was 6.3 percent lower than originally budgeted. ### Forecast reconciliation and revisions to plans (Assessment) - The ERP compares medium-term forecasts for real GDP growth, the budget deficit and debt between the current and previous fiscal strategy but does not compare changes in forecasts for key budget components (revenues and expenditures). - The ERP quantifies the budgetary impact of the main structural reforms over the next three years but lacks a full discussion of new initiatives with a budgetary impact or how they interact with macroeconomic developments to explain departures from previous fiscal objectives. - Recommendation: Include a more detailed comparison of macroeconomic and fiscal variables across vintages of fiscal strategies in the FSR as well as ERP, with explanations of the main reasons for revisions to enhance MTBF credibility and assess compliance with fiscal strategy. - Revisions to expenditure plans: - Between successive fiscal plans, absolute revisions to three-year ahead expenditure plans averaged 7.4 percent over the past ten years. - Revisions to the second-year ahead averaged 6.2 percent. - Revisions were predominantly larger prior to 2011; since then the average size of revisions has decreased but remain material. ### Key recommendations to improve fiscal transparency and budgeting - Recommendation 2.1: Improve budget comprehensiveness. - Include in the budget the taxes allocated to the PESR and DIF, and associated transfers. - Present information on the own revenues and expenditures of all extrabudgetary funds and include these in summary tables of consolidated budget revenue, expenditure, and balance. - Recommendation 2.2: Strengthen the credibility and transparency of the MTBF. - Publish multi-annual expenditure projections by administrative unit. - Explain reasons for possible deviations in key fiscal aggregates between successive fiscal forecasts, including reporting whether these are due to government policy decisions or economic and other developments. - Include comparison of fiscal forecasts (revenues, expenditures, deficit and debt) to those of independent forecasters. - Recommendation 2.3: Improve the policy orientation of the budget. - Include in the FSR a clear statement on the government’s fiscal objectives and assessment of whether medium-term fiscal plans, as well as past outcomes, are consistent with them. - Regularly report on the performance of major programs against clearly defined indicators. - Recommendation 2.4: Enhance the transparency of public investment projects. - Publish the total costs of major investment projects in addition to their multi-annual allocation. - Develop and publish methodological guidelines for the appraisal of large projects, along with their assessments. ### Summary assessments and key figures (from Table 2.4 and related analysis) - Exclusion of taxes redirected to the PESR and DIF understates central government revenues and expenditures by 0.9 percent of GDP. - Real GDP forecasts for the budget year have been, on average, overestimated by 1.9 percent (in absolute terms). - Revenue and expenditures have been overestimated by an average of 2.2 and 2.1 percent of GDP in the budget year. - Public investment was 5.8 percent of GDP in 2016 and there has been large under-execution (38 percent annual average). - Supplementary budgets have reduced expenditure by 1.5 percent a year on average since 2009. - Absolute revisions to expenditure plans have averaged 7 percent a year from 2008. *Source: cr18299 - 67. The Budget Law requires parliamentary approval for changes to total budget* ### 81. While Macedonia currently has relatively favorable demographics, its population is ### cr18299 - 81. While Macedonia currently has relatively favorable demographics, its population is ### Demographics and ageing - Old-age dependency ratio in 2015: less than 20 (less than one person aged 65 or older for every five working age people). - Projected old-age dependency ratio by 2050: 42 (i.e., more than two old-aged people for every five working age people). - Past reforms: introduction of mandatory private pension schemes and elimination of general early retirement are expected to mitigate some fiscal impacts; further reforms are planned. - World Bank analysis projection: ageing population likely to increase the pension deficit by around 10 percent of GDP between now and 2030 under a conservative scenario. - Health care cost projection (authorities' estimates): rise by around 1 percent of GDP between now and 2050; still expected to remain significantly below current health care expenditure in the EU (World Bank data: EU average in 2015 was 7.8 percent of GDP). *Source for population projections: United Nations, World Population Prospects: The 2017 Revision.* ### 3.2 Fiscal Risk Management — overview - Section assesses budgetary contingencies, management of assets and liabilities, guarantees, public-private partnerships (PPPs), financial sector exposures, natural resources, and environmental risks. - Fiscal Strategy and reporting instruments referenced: Budget Law (Article 11), FSR (Financial Stability Report), Debt Management Report, ERP, Annual Report on the Budget, and MoF internal data. ### 3.2.1 Budgetary contingencies (Good) Findings - Two contingency reserves established by Article 11 of the Budget Law: the permanent reserve and the current reserve; both can only be used for unforeseen circumstances. - Permanent reserve usage restricted to natural disasters, epidemics, and environmental catastrophes; damages determined by the Commission for Estimating and Determining the Amount of Damage from Natural Disasters. - Article 11 cap: total size of combined reserve at 3 percent of current expenditures of the Budget. - Public reporting: government publishes overall execution of reserves in the Annual Report on the Budget without specifics; MoF prepares more detailed internal information. - Historical usage: average use of reserves around 0.1 percent of expenditure; exception 2015 and 2016 (significant flooding) when reserve use rose to around 0.4 percent of total expenditure. Recommendation (implied) - Publication of MoF’s more detailed internal reporting on reserve use would align Macedonia with advanced practice. ### 3.2.2 Management of assets and liabilities (Basic) Findings - Legal framework: government borrowing authorized by law; FSR sets limits on new borrowing and public debt limit at 60 percent of GDP. - Public debt reporting: stock of public debt published quarterly within a month of quarter end. - ERP sensitivity analysis: public debt sensitivity to interest rates and to the euro exchange rate (Denar is pegged to the euro). - Limitation: analysis does not extend to market exposures associated with guaranteed debt, some of which are foreign currency borrowing. - Reported stock of general government debt at end-2016: 39.1 percent of GDP. - External debt share of public debt: around 60 percent. - Foreign currency denomination: about 90 percent of foreign currency debt denominated in euros. - Debt portfolio maturity: - Domestic debt: average time to maturity and average time to re-fixing of around three years. - External debt: average time to maturity around 5.5 years and average time to re-fixing around 4.5 years. - MoF risk limits published in debt management strategy: - Minimum limits: average time to maturity of three years and average time to re-fixing of two years. - Minimum threshold for euro-denominated debt in foreign currency portfolio: 80 percent. - Minimum threshold for fixed interest debt: 50 percent. - Arrears: May 2017 MoF survey estimated arrears around 3.6 percent of GDP (unaudited claims, includes intra-public sector payments and possibly amounts not past due). A software system is being developed to better record arrears; sanctions introduced through the Fiscal Discipline Law. - General government financial assets at end-2016: estimated around 51 percent of GDP (sectoral classification per authorities). - Composition: - Equity in wholly owned PCs: 37 percent of GDP. - Minority shares in joint stock companies: 1 percent of GDP. - Currency and deposits: 6 percent of GDP. - Central government loans on-lent to municipalities and public enterprises: 1.5 percent of GDP. - DIF (Deposit Insurance Fund) asset portfolio: 2.3 percent of GDP (investments in public debt securities, consolidated out in calculation of general government assets). - Limited public disclosure on risks surrounding assets other than DIF. Specific asset risk notes - Equity in public corporations (PCs): government reviews PC business plans and receives quarterly financial reports, but public reports do not discuss potential risks to government capital or public finances; several PCs are loss making or receive subsidies. - Government on-lending: annual debt management report discloses new loans but not the stock of outstanding loans or risks. - DIF investment policy: investments must be in Macedonian Treasury bills or securities issued by the NBRM; maturity less than twelve months; annual report includes assessment of market risks. ### 3.2.3 Guarantees (Good) Findings - Stock of government guarantees published quarterly; Law on Public Debt allows MoF to issue sovereign guarantees and requires beneficiary to seek MoF opinion for each loan under a guarantee. - Fiscal Strategy 2018–20 limits: - Stock of guaranteed debt must not exceed 13 percent of GDP. - Maximum issuance of guarantees in 2018 capped at 200 million euros. - These limits are not legally binding. - End-2016 stock of government guarantees: 8.8 percent of GDP (relatively large compared to southeast Europe and European average). - Government expectation: stock of government guarantees to rise to 11 percent of GDP by end-2019. - Past guarantee calls: very low, averaging less than 0.03 percent of GDP a year from 2013 to 2017. ### 3.2.4 Public-Private Partnerships (Not Met) Findings - PPP legal framework: Law on Concessions and Public-Private Partnerships; MoE maintains public register of 27 concluded PPPs with total value and concession fee for some. - Register omissions: does not include one large concession contract for Skopje and Ohrid airports (total investment around 2.5 percent of GDP) and lacks information on possible direct fiscal obligations or potential exposures arising from contracts. - Central oversight: limited. Law requires feasibility studies and MoE/MoF opinions, but opinions often based on limited project information. Robust risk and budget affordability assessments are typically not conducted; no central review of feasibility study robustness. - Reform efforts: aligning PPP law with the 2014 EU Directive on Award of Concession Contracts to expand MoE oversight powers. - PPP investment and fiscal exposure: - Total investment associated with PPPs: 6.8 percent of GDP. - Many projects are concession arrangements without direct fiscal obligations; fiscal exposure is lower than investment. - Major projects: - Airports concessions: close to 40 percent of total PPP investment. - TE-TO Skopje (electricity generation): 30 percent of total investment. - Technological Development Zone in Tetovo: 24 percent of total investment. - Remaining projects: smaller municipal projects relating to water and utilities. ### 3.2.5 Financial Sector (Advanced) Findings - Explicit financial sector obligations disclosed; NBRM conducts regular financial stability assessments. - DIF insures deposits up to a cap of 30,000 euros; Fund discloses total deposits, share of insured deposits, and amount of insured deposits in its annual report and provides performance information. - NBRM publications: annual Financial Stability Report in July with stress test results under two adverse macroeconomic scenarios; quarterly report on banking system risks with sensitivity analysis. - Financial sector size and metrics (end-2016 / 2016/2017 where indicated): - Financial sector liabilities: around 74 percent of GDP at end-2016. - Total bank liabilities: 74.3 (Percent of GDP). - Of which deposits: 38.0 (Percent of GDP). - Of which insured: 28.6 (Percent of GDP). - Total DIF assets: 2.3 (Percent of GDP). - Net exposure: 26.4 (Percent of GDP). - Capital adequacy ratio of banking sector: more than twice the regulatory minimum (table referenced). - Banks have healthy liquidity buffers and relatively low share of non-performing loans which are fully provisioned. - Banks have a relatively high maturity mismatch: close to half the banks’ liabilities that fall due within a month not covered by assets with similar maturity. - Total bank deposits amount to 38 percent of GDP; insured deposits close to 29 percent of GDP. - DIF requirement: maintain resources of at least 4 percent of total deposits; current DIF investments around 6 percent of total deposits, or 8 percent of insured deposits. - Past DIF payouts since 1997: around 0.2 percent of GDP. - Political stress episode 2016: - NBRM interventions in April and May 2016 supplied banks with foreign currency liquidity close to 130 million euros (over 5 percent of the average amount of foreign reserves during 2016). - Banks’ liquid assets decreased by more than 10 percent in Q2 2016. - Despite pressures, banks remained stable and no new drawdowns from the DIF were required. ### 3.2.6 Natural Resources (Not Met) Findings - Government does not publish estimates of the value or volume of major natural resources. - Geology Department (independent directorate within MoE) estimates volume and value site-by-site every five years when commissioned, but such studies are not published. - Concessions: 355 concessions for mineral extraction: - 14 for metal - 56 for quarrying - 45 for water - 240 for other non-metal (e.g., sand, gravel, etc.) - General government natural resource revenues in 2017: less than 0.2 percent of GDP. ### 3.2.7 Environmental risks (Not Met) - Environmental risks assessed as "Not Met" in fiscal transparency/evaluation framework (no further numeric detail provided in the supplied content). *Italicized source: IMF staff report (cr18299).* ### 98. The government does not disclose the main fiscal risks from natural disasters. While ### 98. The government does not disclose the main fiscal risks from natural disasters. ### Natural disaster risk disclosure and institutional arrangements - Directorate for Protection and Rescue carried out a national assessment of risks from natural disasters; it has not been updated since 2007. - The Crisis Management Centre (CMC) was set up in 2009 as the National Platform for Disaster Risk Reduction. - CMC currently reports on natural disasters ex post through a monthly bulletin. - CMC conducts internal risk assessments which are not yet published. - CMC maintains an internal database on the cost of past natural disasters. - In late March 2018, CMC held a workshop on “Disaster Risk Assessment and Mapping” to advance a project to estimate losses from disasters and conduct regional risk assessments. - The Ministry of Environment and Physical Planning has a flood management strategy, but has yet to complete risk-based assessments and risk mapping. - The government maintains contingency reserves explicitly for dealing with natural disasters (see 3.2.1). ### Fiscal impact and exposure from natural disasters - Macedonia is exposed to earthquakes, wild fires, floods, droughts, extreme temperatures, landslides. - Earthquakes pose the largest risk in terms of impact. - The 1963 earthquake in Skopje is estimated to have caused economic damage of 15 percent of GDP. - Wildfires are the most frequent risk; floods are increasing in frequency and intensity. - Significant floods in 2016 resulted in fiscal costs of 0.1 percent of GDP from amounts disbursed through the contingency reserves. - Natural disaster events do not consistently pose a large risk relative to comparator countries (Figure 3.8). - Table 3.5 (Environmental Risks): - Not Met: The government does not discuss or quantify fiscal risks from natural or man-made disasters, but has strategies in place to manage these. - Medium: The average annual cost is moderate at 0.3 percent of GDP, but there have been large and costly disaster events. ### Disclosure gaps and broader fiscal-risk context - No single report provides a comprehensive picture of the government’s aggregate fiscal risk exposure; information on fiscal risks is scattered across different documents. - Contingency reserves: - Good: The budget includes two contingency reserves for unexpected events with relatively clear criteria for use. - Low: Use of the reserves amounts to less than 0.1 percent of expenditure. - Macroeconomic and fiscal context (selected figures from Table 3.5 and text): - Volatility of growth in nominal GDP and revenue is 3.8 and 6.7 percentage points respectively. - Specific fiscal risks are estimated to be in the order of 46 percent of GDP. - A rapidly ageing population is estimated to increase the pension deficit by 10 percent of GDP. - General government liabilities and financial assets are 51.5 and 36.5 percent of GDP respectively. - Debt guarantees are 9 percent of GDP; guarantee calls have been low at less than 0.03 percent of GDP a year on average. - Natural resource revenues are less than 0.2 percent of GDP. - Net exposure for insured deposits is 26.4 percent of GDP. ### Subnational government finances (relevance to fiscal risk) - Financial performance of municipalities is published quarterly, but the stock of debt by individual municipality is not disclosed. - Since Q1 2017 the MoF publishes quarterly budget execution reports on revenues and expenditures of individual municipalities. - The MoF reports total stock of commercial borrowings for all municipalities but not disaggregated by municipality or local government liabilities to the central government. - The MoF receives and monitors stock of debt and arrears by individual municipalities on a regular basis. - Key municipal figures: - Local government expenditure is less than 5 percent of GDP. - Own source revenues make up only 34 percent of local government funding. - Local government debt remains relatively low at around 0.5 percent of GDP. - Unverified data on arrears suggests payment arrears for municipalities could be around 0.8 percent of GDP. - Controls on local borrowing: - The Law on Financing of the Units of Local Self-Government caps short-term and long-term borrowing: stock of debt from either type of borrowing may not exceed 30 percent of total revenues in the current operational budget of the municipality in the previous fiscal year. - Commercial banks are required to report all loans to municipalities to the MoF. ### Public corporations (PCs) and contingent exposures - Transfers between the government and PCs (subsidies and dividend income) are disclosed in the budget. - Debt management report discloses guaranteed debts of PCs by beneficiary. - PCs required to publish annual financial statements; many are not up-to-date or contain auditor qualifications. - Law on Public Enterprises amended in April 2018 to require PCs to publish annual accounts on their website within 15 days from the date they have been submitted to the Central Registry; PCs must submit quarterly financial reports to the Government. - No published ownership strategy or consolidated report on PC sector performance; unclear performance criteria for PCs. - Some PCs perform non-commercial activities compensated by transfers (example: central government transfers to Macedonian Railways Transport, Macedonian Railways Infrastructure, and Public Transport Company Skopje constitute on average over 0.5 percent of total annual expenditure from 2010 to 2016). - PC fiscal exposures: - Around 139 enterprises treated as outside general government with combined non-equity liabilities of about 15.4 percent of GDP at end-2016. - Of these, around 1.2 percent of GDP are loans owed to the government. - Total liabilities of PCs are relatively low compared to other European countries. - Nearly all PC borrowing is backed by a sovereign guarantee. - Of total borrowings of 9 percent of GDP, only 0.2 percent of GDP is not guaranteed. - The government includes these guarantees in its calculation of ‘public debt’. - PCs are required to obtain MoF approval for guaranteed borrowing; MoF reviews balance sheet, projected revenues and analysis of the economic, financial, and social benefit prior to approval. - Non-guaranteed borrowing requires approval from the shareholding ministry. - Note: Classifying some enterprises inside the general government sector would increase general government liabilities and reduce PC liabilities; excluding these entities, PC liabilities (other than equity) would be 8.6 percent of GDP on a non-consolidated basis. ### Key recommendations (Evaluation priorities) - Recommendation 3.1: Improve fiscal risk analysis and disclosure. - a. Publish a comprehensive statement on fiscal risks comprising: - Discussion and quantification of macroeconomic and public debt risks building on the existing analysis published in the FSR and ERP; - All explicit contingent liabilities, including guarantees, obligations under PPPs and the deposit insurance scheme, their magnitude, and where possible, likelihood of realization, and strategies for their management; and - Analysis of other specific fiscal risks related to public corporations, major legal cases, and natural disasters. - b. Strengthen long-run fiscal sustainability analysis and disclosure by including projections for general government debt and analysis of the sensitivity of the projections to alternative macroeconomic and demographic scenarios. - Recommendation 3.2: Strengthen oversight and monitoring of PPPs and PCs. - a. Improve disclosure and oversight of PPPs and concessions by: - Expanding the PPP Registry to record information on direct financial obligations and contingent exposures in contracts; and - Amending the Law on PPPs and Concessions and by-laws to require that the Ministry of Economy and Ministry of Finance be responsible for assessing the budget affordability and fiscal risks associated with individual projects at all stages of the decision-making cycle, to help safeguard fiscal sustainability. - b. Strengthen the monitoring and assessment of PC performance and risks by compiling a central database of key financial information from PC quarterly and annual reports and defining core risk metrics to monitor their performance. *Fiscal Affairs Department International Monetary Fund 700 19th Street NW Washington, DC 20431 USA http://www.imf.org/capacitydevelopment* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18299.pdf_