## cr1932-macedonia-a4 ## Source details **Canonical URL:** [cr1932-macedonia-a4](https://www.imf.org/-/media/files/publications/cr/2019/cr1932-macedonia-a4.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/cr1932-macedonia-a4.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/cr1932-macedonia-a4.pdf.json) --- ### 1) Proposed Pension Reforms — availability note - The supplied excerpt does not contain the substantive text of the chapter titled "1. Proposed Pension Reforms." - No chapter-specific figures, numeric projections, policy measures, or reform proposals for pensions can be extracted from the provided content. - Extraction or summarization of proposed pension reforms requires the actual chapter text not included here. ### 2) Labor market weaknesses and recommended multi-pronged approach - Summary finding: - A multi-pronged approach is required across education, labor market, and wage policies. - Preliminary fiscal costs of a set of most impactful measures estimated to be around 0.6 percent of GDP. - Improved statistics (including a new population census; last census was in 2002) and better surveying of informal workers are critical. - Education policies — priorities: - Boost basic skills by increasing completion rates for secondary education. - Improve quality: PISA scores are considerably lower than regional peers. - Increase efficiency of public spending on education despite spending close to EU-28 average and a high teacher-to-student ratio. - Boost teachers’ training and quality of instruction. - Upgrade and modernize vocational education to address skill shortages in manufacturing and industrial fields. - Better align tertiary education with skills required by employers. - Accompany measures with strategic and long-term national planning to coordinate ministries, education institutions, and employers. - Cost Estimates of Recommended Structural Reform Measures (cumulative cost as percent of the 5-year GDP average over 2019-23): - Total: 0.57 - Expand affordable pre-school childcare centers 2/: 0.12 - 2/ Covers cost of buildings and staffing for 40 pre-schools over 2018-25. - Reform the basic educational system 3/: 0.03 - 3/ Includes cost of revising curricula, issuing revised text books, and upgrading school activities and conditions. - Improve coordination between employers and educational institutions: Neutral - Modernize vocational schools 4/: 0.27 - 4/ Based on costing for vocational education and training in the authorities' Comprehensive Education Reform Plan. - Provide additional on-the-job training 5/: 0.08 - 5/ Reflects cost of doubling current spending on internship and training programs for five years. - Enhance job matching and intermediation 6/: 0.06 - 6/ Reflects cost of upgrading registration of job seekers; broadening outreach to employers; and developing an online job portal. - Labor market policies: - Target ALMPs at youth and the long-term unemployed; emphasize internships and apprenticeships. - Enhance job-matching and intermediation to reduce unemployment durably. - Re-evaluate employment incentives (self-employment grants and wage subsidies) which absorb more than 50 percent of the ALMP budget. - Expand affordable preschool services and childcare to increase female labor force participation (female participation remains below 50 percent mostly due to family responsibilities). - Minimum wage policy: - Formalize minimum wage setting to prevent ad-hoc hikes. - Current minimum-to-average wage ratio: 49 percent. - Further increases should be mindful of productivity growth. ### 3) Rebuilding fiscal policy space — context, measures, and staff recommendations - Fiscal context and risks: - Public debt: 48 percent of GDP at end-2017; doubled in the last decade. - Drivers: road infrastructure and public construction projects; recurring primary deficits from declining tax revenues and rising current spending. - 2019 budget measures (high-level): - Pension reforms: higher contribution rates and CPI-only indexation of benefits, partial harmonization of accrual rates, measures to address legacy weaknesses. - Social assistance: consolidate overlapping child and social protection benefits into two means-tested programs—a guaranteed minimum income conditional on activation programs—and an elderly social pension. - Tax changes: introduce second PIT rate at 18 percent for top 1 percent of earners; increase threshold for tax-free allowance; increase flat tax rate on capital income from 10 to 15 percent. - Estimated net positive impact on fiscal balance in 2019: 0.2 percent of GDP (text table). - Baseline and staff projections: - Staff projects overall deficit to increase to 3 percent of GDP in 2019 before declining to 2.4 percent of GDP by 2023. - Medium-term decline in overall deficit largely due to restrained pension expenditure growth. - Staff’s medium-term baseline assumes higher growth in pension benefits relative to CPI-only indexation reflecting historical divergence. - Staff recommendation on fiscal consolidation: - Reach a zero-primary balance by 2023: implies additional consolidation of about one percent of GDP relative to baseline. - Almost two-thirds achievable by refraining from deviations from CPI-only pension benefit indexation and avoiding ad-hoc increases. - Complement with durable revenue and expenditure measures; use additional fiscal space for structural reforms and buffers. - Long-term pension sustainability: tighten early retirement conditions and gradually raise and equalize statutory retirement ages to EU average (Box 1). - Recommended fiscal reforms and estimated gains/savings: - Possible permanent gains from revenue and savings measures: 1.2-1.9 percent of GDP. - Steadfast implementation of CPI-only indexation of pension benefits: 0.5-0.6 percent of GDP. - Improving revenue administration and compliance and/or expanding the VAT base (M): 0.3-0.8 percent of GDP. - 2/ Curtailing estimate based on removing reduced rates for publications, pharmaceuticals, hotel accommodation and computers and software. - Rationalization of agricultural subsidies (S-M): 0.4-0.5 percent of GDP. - Reform of property taxation (M-L): 0.3-0.5 percent of GDP (local govt.) - 3/ Assumes gradual increase in permissible recurrent tax rates from current 0.1-0.2 percent to 0.3-0.6 percent by 2022. ### 4) Fiscal transparency and public financial management (PFM) - Assessment: - FYR Macedonia meets good or advanced practice in more than one third of assessed areas in fiscal transparency evaluation. - Strengths: - Publication of timely budget execution reports. - Budgetary documentation of medium-term macroeconomic and fiscal projections. - Timely submission of budget drafts to Parliament. - Areas for improvement: - Improve fiscal coverage by including entities outside general government (mostly SOEs). - Develop capacity to monitor fiscal costs of tax expenditures. - Ensure more realistic macroeconomic projections. - Improve tax collection efficiency. - Speed up development of accrual-based fiscal reporting to control expenditure commitments and prevent arrears. - Authorities’ PFM measures and views: - Confident measures in proposed budget will reduce deficit to 2½ percent of GDP in 2019. - New IT system to enhance tax audit candidate selection; progressive steps to cap cash payments; steps to limit VAT circumvention and transfer pricing loopholes; introduce pre-filled PIT. - Central government arrears reduced to around 0.2 percent of GDP. - 2018 supplementary budget provided for clearance of half of municipal arrears (about ½ percent of GDP). - New initiative to cap municipal-level budgeted spending to realized average revenues of the last three years plus a 10 percent margin. ### 5) Monetary policy stance, de-euroization, and financial inclusion - Monetary policy: - Monetary policy described as appropriately accommodative given negative output gap, benign inflation outlook, and stable FX market. - NBRM lowered policy rate twice in 2018. - Conditional guidance: if reserves accumulation falls below baseline or global conditions tighten, NBRM should be ready to tighten. - De-euroization: - Policies reducing deposit euroization effective but decline has tapered off. - Possible additional actions: further increase FX reserve requirements; raise premium for deposit insurance on FX deposits; introduce macroprudential measures such as higher risk weights on FX lending. - Financial inclusion and SME constraints: - Barriers: high collateral requirements, weak financial accounts and management. - Recommended reforms: improve insolvency and creditor rights; support business planning; upgrade IFRS for corporates. - Recommend establishing comprehensive legal and regulatory framework for financial consumer protection. ### 6) Financial sector resilience, FSAP recommendations, and vulnerabilities - Banking sector condition: - Banks are well-capitalized and liquid; meet Pillar I capital adequacy requirements and maintain sound aggregate liquidity buffers. - High provisioning contains credit risks; NPL ratio declined from 10 percent in 2015 to 5 percent in 2018. - Structural vulnerabilities identified by FSAP: - Indirect credit risks from large FX exposures to potentially unhedged borrowers. - High dependence on adjustable- and variable-rate loans; high corporate portfolio concentrations. - Significant presence of euro area bank subsidiaries creates negative spillover risk. - Key FSAP recommendations (selected actions and timing): - Grant NBRM legal macroprudential mandate and develop framework for systemic risk identification. ST/MT - Increase supervisory intensity for D-SIBs and reconstitute the Financial Stability Committee. MT - Finalize new resolution regime and strengthen the Deposit Insurance Scheme (DIS). ST - Extend FMI oversight and improve AML/CFT implementation. ST/MT - Enhance auditors’ quality, corporate accounting standards, and financial consumer protection. MT - ST = short term (1–3 years); MT = medium term (3–5 years). ### 7) Box 1 — Proposed Pension Reforms (key findings and measures from excerpt) - Current challenges: - Pension system deficit projected to increase from 4½ percent of GDP at end-2017 to a peak above 6 percent of GDP by early 2030s. - Generous pay-as-you-go first pillar and ad hoc benefit increases raised pension expenditures above what demographics justify. - Technical registration errors from the 2006 fully-funded second-pillar establishment resulted in unpaid obligations to the second pillar. - Lower accrual rates in the dual-pillar system create inter-generational imbalances. - Numerical details on accrual rates and disparities: - Net accrual rates in the dual-pillar system: 0.75 and 0.86 percent for men and women respectively; lower than first-pillar-only rates (1.6-2.6 pillar depending on time of service period and gender). - Proposed reforms reduce the first pillar accrual rate for the current service period to 1.47 percent and increase dual-pillar accrual rates to 1 and 1.14 percent for men and women respectively. - Reforms included in the 2019 budget: - Allow dual-pillar participants near retirement to switch back to the first pillar with transfer of accrued second-pillar contributions. - Partially harmonize first-pillar-only and dual-pillar accrual rates. - Increase pension contribution rates by 0.4 percentage points both in 2019 and 2020. - Re-index benefits to CPI only (from current “Swiss formula” linked to prices and real wages). - Medium- and longer-term considerations: - To contain medium-term deficit rise: implement contribution rate increases and CPI-only re-indexation. - Further measures to consider: tighten early retirement conditions; gradually harmonize and raise gender-specific statutory retirement ages. - Footnote specifics: - 1/ Net accrual rates in the dual-pillar system (0.75 and 0.86 percent for men and women respectively) are lower than in the first pillar only (1.6-2.6 pillar depending on time of service period and gender) and well below their share of pay-as-you-go contributions (two-thirds of contributions paid). The proposed reforms reduce the first pillar accrual rate for the current service period to 1.47 percent and increases dual-pillar accrual rates to 1 and 1.14 percent form men and women respectively. - 2/ Retirement ages are 64 and 62 for men and women respectively with 15 years of contributions. Participants working in hazardous occupations can qualify for early retirement at the age of 49. ### 8) Box 2 — Improving VAT Collections (summary) - Context and performance: - VAT accounts for nearly half of tax revenues. - C-efficiency is about 52 percent relative to WB average of over 60 percent. - Informal sector estimated at around 30 percent of GDP. - Compliance gap crudely approximated in range 15-25 percent of potential VAT revenues, corresponding to about 1–2 percent of GDP. - Main drivers of weak VAT performance: - Policy gaps (reduced rates and exemptions), weak compliance due to a large informal sector, inefficiencies and capacity constraints in tax administration, and data limitations. - Revenue administration weaknesses: - PRO needs better identification and treatment of compliance risks; VAT audit strike rates are low, notably for the LTO. - PRO underfunded and understaffed; outdated and fragmented IT systems. - Need improved processes for timely collection and dedicated dispute resolution function. - Governance and reform implementation: - PRO’s Modernization Program 2017–21 has stalled; requires stronger governance mechanisms and a single coordination unit. - Legal and technical measures: - Proposed legal amendments to register cash payments; recommended steps can limit corruption and foster voluntary compliance. ### 9) Annex I — Judicial reform and anti-corruption efforts - Strategic importance: - Judicial reforms and anti-corruption are priorities to advance EU accession and improve potential growth, social inclusion, investment climate, and income convergence. - Recent legislative progress (2017–2018): - Amendments to Law on the Judicial Council (Dec 2017, May 2018) and Law on Courts (May 2018); amendments to whistle-blower protection law. - Remaining gaps and assessments: - EC’s 2018 report: “some level of preparation” but persistent risks to judicial autonomy and legal certainty. - GRECO’s 2018 report: recommends further actions to secure autonomy and strengthen judges’ code of conduct. - As of November 2018: additional amendments prepared and expected to be discussed in Parliament in February 2019. - Track record on high-level corruption cases: - Out of 26 investigations by the Special Prosecutor’s Office into high-level corruption, 17 indictments confirmed; only a single defendant in one case convicted. ### 10) Debt sustainability, public debt management, and stress-test highlights - Key DSA background figures: - Public debt nearly doubled since 2008, reaching 48 percent of GDP in 2017. - General government debt about 39½ percent of GDP at end-2017. - Publicly guaranteed SoE debt rose to 8½ percent of GDP at end-2017. - External debt reached 73.9 percent of GDP in 2017. - Baseline projections and key macro-fiscal assumptions: - Real GDP growth: around 2 percent in 2018; medium-term around 3½ percent. - Headline inflation: projected to reach 2 percent by end-2019. - Baseline public debt expected to rise to around 55 percent in the medium term; general government debt to about 44 percent at end-2023. - Public gross financing requirements peak around the 15-percent benchmark in the next three years. - Stress test outcomes: - Combined macro-fiscal shock and a real GDP growth shock produce largest impact; public debt could rise to 60–63 percent of GDP in the medium term with gross financing needs at and above 15 percent of GDP through 2021. - Under a 30 percent exchange rate depreciation shock, foreign debt would increase to 112 percent of GDP in 2019. - Fan chart: under symmetric distribution public debt at end-2023 remains below 60 percent of GDP in 80 percent of simulated outcomes; restricted distribution shows debt above 60 percent in more than 30 percent of simulations. - Borderline Scenario selected indicators (percent of GDP; selected points): - Nominal gross public debt: 2016: 29.3; 2017: 39.8; 2018: 39.4; 2019: 41.4; 2020: 42.5; 2021: 43.2; 2022: 43.8; 2023: 44.1. - Public gross financing needs: 2016: 14.7; 2017: 14.9; 2018: 12.4; 2019: 13.7; 2020: 11.7; 2021: 12.2; 2022: 12.8; 2023: 9.2. - Real GDP growth: 2016: 3.0; 2017: 2.8; 2018: 0.2; 2019: 2.0; 2020: 2.8; 2021: 3.0; 2022: 3.1; 2023: 3.3. - Effective interest rate: 2016: 3.1; 2017: 3.2; 2018: 3.6; 2019: 3.2; 2020–2023: 3.5 each year. - Policy implications: - Stronger fiscal consolidation needed to ensure sustainability and create fiscal space. - Continue improvements in public debt management: lengthen average maturity of domestic debt and deepen secondary market. - Medium-term fiscal strategy should be accompanied by a debt management strategy balancing external and domestic financing. ### 11) Fund work, technical assistance, and data adequacy - Fund work and TA: - Article IV Report: September 2017; November 2017. - TA on Revenue Administration Reforms (Tax Compliance and Risk Management, Arrears Management, Large Taxpayers Office): short-term expert visits FY18; TA report after mission. - TA on Government Finance Statistics: short-term expert visits FY2018; TA report after mission. - FSAP: FY2018-19; FY2019. - Statistical assessment (as of November 26, 2018): - Data provision broadly adequate for surveillance with shortcomings in national accounts and GFS. - Authorities plan to publish annual balance sheet data in 2020; to expand reporting to general government debt in 2019. - FYR Macedonia subscribed to SDDS since November 2011 and is in process to adhere to SDDS plus. - Key macro developments (statements as of January 23, 2019): - Constitutional name-change amendments approved January 11, 2019 to “Republic of North Macedonia”; further approval by Greek Parliament required. - 2018 preliminary fiscal outcome: overall fiscal deficit estimated at -1.8 percent of GDP (preliminary). - Q3 2018: real GDP growth 3 percent yoy; staff projection for 2018 real GDP growth: 2 percent. - Unemployment rate in 2018: 20.8 percent. - Credit growth first eleven months 2018: households 10.1 percent yoy; corporate 5.8 percent yoy. - Total deposits growth: 11.1 percent yoy in first eleven months of 2018. - Pension contribution rates to gradually increase from 18 to 18.8 percent in 2020 under authorities’ adjustments. - Personal income tax reform: marginal PIT rate of 18 percent applied for top 1 percent earners to income exceeding MKD 90,000 (about EUR 1,450 equivalent). *Source: cr1932-macedonia-a4 — International Monetary Fund (IMF) staff report content.* ### 1. Proposed Pension Reforms ____________________________________________________________________ 28 ### 1. Proposed Pension Reforms ### Available content in the supplied excerpt - The supplied excerpt does not contain the substantive text of the chapter titled "1. Proposed Pension Reforms." - The excerpt includes the table of contents listing that chapter and extensive material from the report's front matter, context, recent developments, outlook and risks, and policy discussion up through "Institutional Weaknesses and Impact." - No findings, projections, analysis, or policy recommendations specific to "Proposed Pension Reforms" are present in the provided content. ### Consequence for overlay - No chapter-specific figures, numeric projections, policy measures, or reform proposals for pensions can be extracted or summarized from the supplied text. - Any extraction or summarization of proposed pension reforms would require the actual chapter text not included here. *Source: cr1932-macedonia-a4 - 1. Proposed Pension Reforms — https://www.imf.org/-/media/files/publications/cr/2019/cr1932-macedonia-a4.pdf* ### 15. A multi-pronged approach is needed to address labor market weaknesses. This will ### 15. A multi-pronged approach is needed to address labor market weaknesses. This will ### Summary finding - A multi-pronged approach is required across education, labor market, and wage policies. - The preliminary fiscal costs of a set of most impactful measures are estimated to be around 0.6 percent of GDP. - Improved statistics (including a new population census; last census was in 2002) and better surveying of informal workers are critical to assess labor market trends accurately. ### Education policies - Priorities: - Boost basic skills by increasing completion rates for secondary education—the highest qualification for the majority of workers. - Improve quality: PISA scores are considerably lower than regional peers. - Increase efficiency of public spending on education despite spending being close to EU-28 average and a high teacher-to-student ratio. - Boost teachers’ training and quality of instruction. - Upgrade and modernize vocational education to address skill shortages in manufacturing and industrial fields. - Better align tertiary education with skills required by employers to deliver more graduates in technical fields. - Accompany measures with strategic and long-term national planning to coordinate ministries, education institutions, and employers. - Cost Estimates of Recommended Structural Reform Measures (reflects cumulative cost expressed in percent of the 5-year GDP average over 2019-23): - Total: 0.57 - Expand affordable pre-school childcare centers 2/: 0.12 - 2/ Covers cost of buildings and staffing for 40 pre-schools over 2018-25. - Reform the basic educational system 3/: 0.03 - 3/ Includes cost of revising curricula, issuing revised text books, and upgrading school activities and conditions. - Improve coordination between employers and educational institutions: Neutral - Modernize vocational schools 4/: 0.27 - 4/ Based on costing for vocational education and training in the authorities' Comprehensive Education Reform Plan. - Provide additional on-the-job training 5/: 0.08 - 5/ Reflects cost of doubling current spending on internship and training programs for five years. - Enhance job matching and intermediation 6/: 0.06 - 6/ Reflects cost of upgrading registration of job seekers; broadening outreach to employers; and developing an online job portal. - Source: Comprehensive Education Action Plan (2018), World Bank, Country authorities, and IMF staff calculations. ### Labor market policies - Active labor market policies (ALMPs): - Continue to target youth and the long-term unemployed. - Greater focus on internships and apprenticeships—programs that have delivered high employment retention. - Enhanced job-matching and intermediation expected to reduce unemployment durably by providing skills and easing education-to-work transition. - Other employment incentives (self-employment grants and wage subsidies), which currently absorb more than 50 percent of the ALMP budget, require more rigorous monitoring and re-evaluation of cost-effectiveness and impact durability. - Expand affordable preschool services and childcare centers to increase female labor force participation (female participation remains below 50 percent mostly due to family responsibilities). ### Minimum wage policies - Formalizing the minimum wage setting process is expected to hedge against pressures for ad-hoc hikes. - Current minimum-to-average wage ratio: 49 percent. - Further increases beyond this threshold should be mindful of productivity growth to avoid jeopardizing competitiveness (Annex II). ### Statistics and measurement - Strengthen labor market statistics to better assess unemployment rates and labor force participation. - Priorities include a new population census (last census in 2002) and better surveying of informal workers. ### Reducing informality - A comprehensive approach is needed: - Improve tax administration and labor inspection as key deterrents to informal activity. - Combat corruption to raise public trust and support tax morale. - Reduce regulatory burden on microenterprises and ensure even and predictable implementation of business regulations. - Raise labor skills and improve formal job opportunities through ALMPs and coherent wage policy to encourage exit from the informal economy. ### Judiciary, rule of law, and institutions - Macroeconomic benefits from an autonomous judiciary and more effective rule of law. - Incomplete judicial reforms and weak institutions may explain part of productivity gaps versus EU-15 peers. - European Commission and Council of Europe recommendations, including legislative amendments to the Law on the Judicial Council, are welcomed; sustained implementation is needed. - Empowering the State Commission for Prevention of Corruption (SCPC) to pursue corruption cases is critical. ### Growth implications - A more skilled labor force and better institutions will support a higher growth path. - Enterprise surveys identify low skills and poor institutional quality as key obstacles to investment, alongside weak trade logistics and political uncertainties. - Improvements should increase transparency of business regulations, improve customs processes, and speed up court proceedings for contract enforcement and debt collection. ### Authorities’ views and measures - Authorities agree on need to address labor market challenges and focus on strengthening vocational training (planned technical assistance from Germany). - Intend to diversify away from labor-intensive industries and attract FDI in higher value-added industries to slow emigration of skilled labor. - To increase female labor force participation: - A dozen new childcare centers opened across municipalities; number expected to double by year-end. - Proposed law on social assistance ties activation and employment plans to receipt of means-tested minimum guaranteed income to reduce incentives to stay out of the workforce. - Authorities commit to refrain from further ad-hoc increases in the minimum wage until full effects of previous hikes are assessed. - Combatting informality: - New June 2018 regulations progressively limit cash transaction sizes to target large cash-based entities and reduce “envelope payments”. - Strengthening customs border control to combat “suitcase trade”. - Agree stronger labor inspection is needed. - Judicial independence and anti-corruption: - Plan additional legislative amendments to the Law on the Judicial Council and the Law on Courts to be ratified by Parliament in early 2019. - New draft legislation on corruption prevention aims to grant SCPC access to financial and banking information of public officials and government databases. - Proposed amendments to the Law on the Public Prosecutor’s Office to enshrine the Special Prosecutor’s Office indefinitely and expand jurisdiction to other high-level corruption cases and election irregularities. --- ### B. Rebuilding Fiscal Policy Space ### Fiscal context and risks - Public debt: 48 percent of GDP at end-2017; doubled in the last decade. - Drivers: investment in road infrastructure and public construction projects, and mostly recurring primary deficits from declining tax revenues and rising current spending. - Result: higher gross financing needs, composition risks of public debt, and limited policy space to address shocks and long-term needs. ### Recent policy traction - Fiscal policy: authorities implementing long-standing recommendations; 2019 budget proposes measures to reduce pension deficit and improve targeting of social assistance. - Structural policies: ALMPs scaled up but focused more on subsidies than training; plans to expand childcare facilities ongoing; steps to improve governance and public administration. - Monetary and financial policies: generally in line with IMF recommendations; 2018 FSAP noted substantial implementation of 2008 FSAP recommendations. ### 2019 budget measures (high-level) - Pension reforms: higher contribution rates and CPI-only indexation of benefits, partial harmonization of accrual rates, and measures to address legacy weaknesses. - Social assistance: consolidate overlapping child and social protection benefits into two means-tested programs—a guaranteed minimum income conditional on activation programs—and an elderly social pension. - Tax changes: introduce second PIT rate at 18 percent for top 1 percent of earners; increase threshold for tax-free allowance; increase flat tax rate on capital income from 10 to 15 percent. - Estimated net positive impact on fiscal balance in 2019: 0.2 percent of GDP (text table). ### Baseline and staff projections - Staff projects overall deficit to increase to 3 percent of GDP in 2019 before declining to 2.4 percent of GDP by 2023. - Divergence with authorities’ 2019 deficit projections reflects differences in GDP and wage growth projections and assessment of expansionary elements in the 2019 budget. - Medium-term decline in the overall deficit largely due to restrained pension expenditure growth. - Staff’s medium-term baseline assumes higher growth in pension benefits relative to CPI-only indexation reflecting historical divergence. - Projections subject to macroeconomic risks and specific risks from higher wage pressures (downside) and under-execution of capital spending or higher tax revenues upon expiry of prior tax incentives in the TIDZ (upside). ### Staff recommendation on fiscal consolidation - Recommend reaching a zero-primary balance by 2023: implies additional consolidation of about one percent of GDP relative to baseline. - Almost two-thirds of this can be achieved by refraining from deviations from CPI-only pension benefit indexation rule and avoiding ad-hoc increases. - Complement with durable revenue and expenditure measures; use additional fiscal space for structural reforms and buffers. - Long-term pension sustainability: tighten early retirement conditions and gradually raise and equalize statutory retirement ages to EU average (Box 1). ### Recommended fiscal reforms and estimated gains/savings - Possible permanent gains from revenue and savings measures: 1.2-1.9 percent of GDP. - Steadfast implementation of the CPI-only indexation of pension benefits: 0.5-0.6 percent of GDP. - Improving revenue administration and compliance risk management and/or expanding the VAT base by curtailing untargeted preferential treatment of certain goods and services (M): 0.3-0.8 percent of GDP. - 2/ Curtailing estimate based on removing reduced rates for publications, pharmaceuticals, hotel accommodation and computers and software. - Rationalization of agricultural subsidies (S-M): 0.4-0.5 percent of GDP. - Reform of property taxation (M-L): 0.3-0.5 percent of GDP (local govt.) - 3/ Assumes gradual increase in permissible recurrent tax rates from current 0.1-0.2 percent to 0.3-0.6 percent by 2022; gain does not directly contribute to central government balances but limits contingent risks and creates room for savings from transfers to local governments. - Sources: Estimates by World Bank (VAT, subsidies) and IMF staff (revenue administration). *Source: cr1932-macedonia-a4 (IMF staff report content).* ### 26. Staff welcomed the authorities’ efforts to improve fiscal transparency but highlighted ### cr1932-macedonia-a4 - 26. Staff welcomed the authorities’ efforts to improve fiscal transparency but highlighted ### Fiscal transparency and public financial management - FYR Macedonia meets the standard of good or advanced level of practice in more than one third of the areas assessed in the recent evaluation of fiscal transparency. - Key strengths: - Publication of timely budget execution reports. - Budgetary documentation of medium-term macroeconomic and fiscal projections. - Timely submission of the budget drafts to the Parliament. - Areas for improvement: - Improve fiscal coverage by including entities currently outside the general government (mostly SOEs). - Develop capacity to monitor fiscal costs of tax expenditures. - Ensure more realistic macroeconomic projections. - Improve tax collection efficiency (see Box 2 referenced in source). - Speed up development of accrual-based fiscal reporting to better control expenditure commitments, prevent further accumulation of arrears, and strengthen capacity to address chronic under-execution of capital spending. ### Authorities’ views on fiscal policy and PFM reform - Authorities’ fiscal intent and expectations: - Confident that measures in the proposed budget will reduce the fiscal deficit to 2½ percent of GDP in 2019. - Continue to target a near primary balance over the medium-term. - Share staff’s view on stabilizing the pension system deficit. - Revenue and compliance initiatives highlighted by authorities: - New IT system to enhance tax audit candidate selection. - Progressive steps to cap cash payments. - Steps aiming to limit VAT circumvention, close loopholes related to transfer pricing, and introduce pre-filled PIT tax reforms. - Debt market developments: - Continued development of the domestic debt market with higher subscription rates, longer maturities of local currency debt issuance, and lower costs of borrowing. - Public financial management specifics: - Intend to improve fiscal reporting in line with GFS 2014; appreciate Fund technical assistance and see legal changes and IT system development as a package. - Prefer a gradual approach to broadening general government coverage. - Central government arrears reduced to around 0.2 percent of GDP. - 2018 supplementary budget provided for clearance of half of municipal arrears (about ½ percent of GDP). - Remaining outstanding arrears expected to be cleared from each public entity’s own funds. - All public entities legally required to report overdue obligations monthly; reports to be published quarterly. - New initiative to cap municipal-level budgeted spending to realized average revenues of the last three years plus a 10 percent margin. ### Monetary policy stance and macro-financial context - Monetary policy assessment: - Monetary policy described as appropriately accommodative. - FYR Macedonia has a de-facto stabilized exchange rate arrangement; limited global financial integration gives NBRM short-term autonomy. - Real interest rate is considerably below its long-term average. - Policy rate spread with the ECB is in the low range of staff’s model-based policy reaction function. - Current accommodative stance considered appropriate given the negative output gap, benign inflation outlook, and stable foreign exchange market. - If reserves accumulation falls below baseline projections or global financial conditions tighten, the NBRM should stand ready to tighten. - De-euroization: - Policies reducing deposit euroization have been effective but the decline has tapered off. - Possible additional actions: further increase FX reserve requirements, raise the premium for deposit insurance on FX deposits, introduce macroprudential measures such as higher risk weights on FX lending. - Measures should be carefully calibrated given potential impacts on liquidity, intermediation, and sterilization costs. - Financial inclusion: - Barriers for micro, small and medium enterprises: high collateral requirements and weak financial accounts and management. - Recommended reforms: improve insolvency and creditor rights, support business planning, upgrade International Financial Reporting Standards for corporates. - Households’ distrust in financial institutions is a key impediment; recommend establishing a comprehensive legal and regulatory framework for financial consumer protection. ### Financial sector resilience, vulnerabilities, and FSAP recommendations - Financial sector condition: - Banking sector is well-capitalized and liquid; banks meet Pillar I capital adequacy requirements and maintain sound aggregate liquidity buffers. - Credit risks contained due to high provisioning. - FSAP identifies high structural vulnerabilities: indirect credit risks from large FX exposures to potentially unhedged borrowers; high dependence on adjustable- and variable-rate loans; high corporate portfolio concentrations. - FSAP stress tests: bank recapitalization costs under extreme solvency shocks would be limited, but could expand with second-round effects from sizable bank losses. - Significant presence of euro area bank subsidiaries creates risk of negative spillovers. - Key FSAP policy recommendations (summary): - Macroprudential policy framework: - Grant NBRM a legal macroprudential mandate with clear objectives; develop framework for early identification of systemic risks. - Supervision and regulation: - Safeguard operational independence of the NBRM; intensify full-scope inspections for domestic systemically important banks; formalize corrective action and early intervention framework. - Address weaknesses in non-bank supervision; consider medium-term institutional reforms. - Crisis management and resolution: - Introduce a modern bank resolution framework with specified triggers, resolution powers, and funding mechanisms. - Develop contingency plans for euro liquidity. - Financial Market Infrastructure (FMI) oversight: - Extend oversight perimeter to cover all systemically important FMIs; improve coordination between NBRM and Securities Exchange Commission. - AML/CFT: - Timely implementation of new AML/CFT Law and National Strategy to address previously identified deficiencies. - Text Table: FSAP Key Recommendations (selected actions and timing) - Create a centralized macrofinancial database; collect granular household data. MT - Improve liquidity reporting and prepare for implementation of the liquidity coverage ratio (LCR). ST - Monitor and gradually strengthen banks’ FX liquidity buffers. MT - Grant the NBRM a legal macroprudential mandate via primary legislation. ST - Reconstitute the Financial Stability Committee (FSC) as principal domestic coordination body. MT - Increase supervisory intensity for D-SIBs, supported by adequate rise in staffing. MT - Amend legal framework to enhance FMI identification, regulation, and oversight; extend NBRM oversight to all FMIs. ST - Ensure effective implementation of new AML/CFT Law and National Strategy; strengthen FIO staffing. MT - Finalize draft legislation for a new resolution regime; strengthen the DIS. ST - Establish NBRM’s new resolution unit; develop resolution toolkit; initiate resolvability assessments and resolution planning for at least all D-SIBs. MT - Enhance out-of-court restructuring framework; introduce standstill agreements and guidelines. ST - Strengthen auditors’ quality and corporate accounting standards and practices. MT - Develop a legal and institutional framework for financial consumer protection. MT - ST = short term (1–3 years); MT = medium term (3–5 years). ### Staff appraisal: growth, fiscal outlook, and structural reforms - Growth and outlook: - Real GDP growth projected to increase to 2.8 percent in 2019 and further accelerate to 3.4 percent in the medium-term, supported by a rebound in investment and higher net exports. - External position assessed to be in line with medium-term fundamentals and desirable policies. - Key downside risks: rising global protectionism and tightening of international financial conditions. - Upside potential: decisive structural reforms and opening of EU and NATO accession negotiations could boost capital inflows and confidence. - Continued efforts to boost reserves important to underpin exchange rate peg stability as a mitigant for euroization risks. - Labor market and structural policies: - Need for multi-pronged policy to address labor market weaknesses. - Priorities: enhance quality of secondary and vocational education; realign tertiary education; focus active labor market policies on skill building and education-to-work transitions; calibrate minimum wage increases to labor productivity; expand affordable preschool and childcare; update census to assess labor market conditions. - Governance and investment climate: - Reforms to strengthen governance, reduce corruption, and ensure effective rule of law are instrumental to improving investment climate and reducing informality. - Recent and planned judiciary reforms are encouraging; sustained efforts needed to ensure tangible implementation. - Better public administration needed: tackle tax evasion, strengthen labor inspection, ensure predictable business regulation implementation. - 2019 budget and pension/social assistance reforms: - Proposed pension reforms include higher contribution rates and benefit re-indexation to CPI-only; expected to reduce the pension deficit and improve the overall fiscal balance in the medium term. - Social assistance reform intends to consolidate overlapping schemes into a means-tested guaranteed minimum income and social pensions for the elderly; expected to improve targeting while increasing coverage. - Staff estimates envisaged measures will temporarily increase the fiscal deficit to 3 percent of GDP in 2019 before narrowing to 2.4 percent over the medium-term, with public debt peaking around 54.9 percent of GDP in 2021. - Fiscal consolidation recommendation: - Staff recommends achieving a zero-primary balance over the medium term to put public debt on a firm downward trajectory. - Key measures to achieve this: - Steadfast implementation of CPI-only re-indexation of pensions. - Further measures to improve tax compliance, particularly VAT. - Rationalize agricultural subsidies. - Consider tightening conditions for early retirement and raising statutory retirement age for long-term pension sustainability. - Continue reforms to strengthen public financial management, increase fiscal transparency, develop accrual-based fiscal reporting, broaden coverage, and further disclose budget information. *Source: cr1932-macedonia-a4 - 26.* ### 41. Monetary policy has been appropriately accommodative. Against a background of ### Monetary policy has been appropriately accommodative ### Monetary policy stance and risks - The NBRM lowered its policy rate twice in 2018. - Measures taken against a background of moderate economic activity, low inflation, and favorable foreign exchange markets. - Conditional guidance: - If reserves accumulation falls below the baseline projections or global financial conditions tighten, the NBRM should stand ready to tighten monetary policy. ### Banking system and financial stability - Findings: - Banks are well capitalized, liquid, and profitable. - The share of non-performing loans has decreased. - Credit risks are well provisioned. - The authorities have maintained financial stability through episodes of turbulence, but vigilance remains necessary in view of structural risks. - Policy recommendations: - Further efforts to gradually increase deposit denarization. - Carefully calibrated macro-prudential measures to reduce foreign currency lending to households to strengthen financial system resilience. ### Strengthening the financial stability framework - Findings and gaps: - Financial sector supervision and regulations have been enhanced considerably over the past decade. - Residual gaps in supervision, as identified by the FSAP, should be addressed to ensure continued effectiveness. - Recommended actions: - Build further capacity for systemic risk monitoring within the macroprudential policy framework. - Enhance inter-agency coordination for systemic oversight. - Promptly complete ongoing efforts to modernize the crisis management and bank resolution regime. ### Consultation cycle recommendation - It is recommended that the next Article IV consultation cycle take place on the standard 12-month consultation cycle. ### Box 1. Proposed Pension Reforms — key findings and measures - Current challenges: - FYR Macedonia’s pension system faces considerable sustainability and social equity risks. - The system’s deficit is projected to increase from 4½ percent of GDP at end-2017 to a peak above 6 percent of GDP by early 2030s. - Generous first pillar (pay-as-you-go) pensions, and a series of ad hoc benefit increases have increased pension expenditures far above what is expected for FYR Macedonia’s current comparatively young demographics. - Technical registration errors originating from the time the fully-funded second-pillar was established in 2006 resulted in unpaid obligations to the second pillar. - Lower accrual rates awarded to participants in the dual-pillar system have proven insufficient to ensure equitable pensions for those now entering or nearing retirement. - Wide disparity in accrual rates between participants in the first pillar only (older generations not mandated to move to the dual-pillar system) and those in the dual-pillar system gives rise to inter-generational imbalances in pension benefits expected to last well through the next decade. - Numerical details on accrual rates and disparities: - Net accrual rates in the dual-pillar system (0.75 and 0.86 percent for men and women respectively) are lower than in the first pillar only (1.6-2.6 pillar depending on time of service period and gender) and well below their share of pay-as-you-go contributions (two-thirds of contributions paid). - The proposed reforms reduce the first pillar accrual rate for the current service period to 1.47 percent and increases dual-pillar accrual rates to 1 and 1.14 percent form men and women respectively. - Reforms included in the 2019 budget: - Allow dual-pillar participants near the retirement age to switch back to the first pillar to obtain equitable benefits, with the transfer of their accrued second-pillar contributions more than offsetting the near-term cost of clearing unpaid obligations to the second pillar. - Partially harmonize the first-pillar-only and dual-pillar accrual rates to alleviate inter-pillar imbalances in pension benefits. - Increase pension contribution rates by 0.4 percentage points both in 2019 and 2020. - Re-index benefits to CPI only, isolating them from economic swings (current “Swiss formula” indexation is linked both to prices and real wages). - Medium- and longer-term considerations: - Rising spending pressures beyond the medium-term warrant consideration of further measures. - To contain the rise in the pension system deficit in the medium-term, steadfast implementation of agreed contribution rate increases and pension benefit re-indexation are key. - Rising demographic pressures are expected to start increasing the deficit already in early-2020s, partially compounded by the longer-term costs of near-retirement participants moving back to the more generous first pillar. - Further sustainability measures to consider soon include: - Tightening of conditions for early retirement. - Gradually harmonizing and raising the currently gender-specific statutory retirement ages, while also keeping further adjustment to contribution rates and harmonization of accrual rates under review. - Footnote details preserved: - 1/ Net accrual rates in the dual-pillar system (0.75 and 0.86 percent for men and women respectively) are lower than in the first pillar only (1.6-2.6 pillar depending on time of service period and gender) and well below their share of pay-as-you-go contributions (two-thirds of contributions paid). The proposed reforms reduce the first pillar accrual rate for the current service period to 1.47 percent and increases dual-pillar accrual rates to 1 and 1.14 percent form men and women respectively. - 2/ Retirement ages are 64 and 62 for men and women respectively with 15 years of contributions. Participants working in hazardous occupations can qualify for early retirement at the age of 49. *International Monetary Fund — content unit: cr1932-macedonia-a4* ### Box 2. Improving VAT Collections ### Box 2. Improving VAT Collections ### Context and performance - FYR Macedonia’s tax revenues rely heavily on the VAT (nearly half of the total). - C-efficiency, controlling for both differences in statutory rates as well as the level of consumption, is about 52 percent relative to the WB average of over 60 percent. - The informal sector is estimated at around 30 percent of GDP. - A crude approximation drawing on available policy gap estimates for new EU member states would place the compliance gap in the range of 15-25 percent of potential VAT revenues, corresponding to about 1–2 percent of GDP. - C-efficiency definition (from source): C-efficiency = (1 – policy gap) x (1- compliance gap). The approximated compliance gap for FYR Macedonia corresponds to the 25th-75th percentile range of estimated policy gaps in new EU members states (CASE, Study and Reports on the VAT Gap in the EU-28 Member States Final Report, September 2017). ### Main drivers of weak VAT performance - Policy gaps: reduced rates and exemptions on specific goods. - Weak compliance: significant informal sector (around 30 percent of GDP). - Inefficiencies and capacity constraints in tax administration, reflected in large cumulative tax arrears. - Data limitations prohibit a precise compliance gap estimate for FYR Macedonia. ### Revenue administration weaknesses - Identification and treatment of compliance risks at the Public Revenue Office (PRO) need enhancement to support better targeted tax audits and limit activities that go unreported. - VAT audit strike rates (share of identified irregularities in conducted audits) are low, notably for the large tax payer office (LTO), indicating inefficiencies in audit candidate selection and excessive focus on low risk, low yield activities. - A new IT-system for candidate selection to be introduced early 2019 is expected to lead to some improvement. - PRO suffers from persistent underfunding and capacity constraints: - Outdated and fragmented IT systems. - Understaffing, particularly in the LTO. - Resource bottlenecks exacerbated by PRO’s many non-tax responsibilities (notwithstanding recent termination of some). - Inefficiencies in workforce allocation. - Need to improve processes for timely collection of new tax debts to prevent accumulation of uncollectable arrears. - Dispute resolution currently relies on Administrative Court reviews in the absence of a dedicated PRO function. ### Governance and reform implementation - PRO has adopted a Modernization Program 2017–21, building on recommendations of prior IMF 2014 technical assistance mission and 2016 Tax Administration Diagnostic Assessment Tool (TADAT) assessment, but systematic implementation of the program has stalled. - Successful implementation of modernization initiatives calls for urgent strengthening of the PRO’s governance mechanisms, including: - More systematic integration of governance mechanisms in the PRO’s management and planning processes. - Establishing a single coordination unit for the reforms. ### Legal and technical measures to improve collections - Proposed legal amendments seeking to address deficiencies in registering cash payments can help improve VAT collection. - Beyond administrative efficiency gains, the recommended steps can limit the scope for corruption and foster voluntary compliance by building public trust in the quality and fairness of the tax system. *Source: Box 2. Improving VAT Collections, cr1932-macedonia-a4* ### Annex I. Judicial Reform and Anti-Corruption Efforts in FYR ### Annex I. Judicial Reform and Anti-Corruption Efforts in FYR Macedonia: Recent Progress and Next Steps ### Judicial reform and anti-corruption — strategic importance - Judicial reforms and the fight against corruption are key structural reform priorities for FYR Macedonia. - Material progress in these areas are paramount to starting accession negotiations with the EU. - Improving quality and transparency of public institutions is expected to: - help boost potential growth, - increase social inclusion, - provide a better environment for investment, - accelerate income convergence with advanced Europe. - Third-party governance indicators highlight significant institutional gaps in FYR Macedonia (Annex I Figure 1). ### Recent legislative and institutional progress (2017–2018) - A new reform strategy and action plan were adopted in 2017 to address weaknesses in the EC’s Urgent Reform Priorities and Venice Commission recommendations. - Key amendments: - Law on the Judicial Council: amendments in December 2017 and May 2018 addressing appointment, appraisal, promotion, disciplinary and dismissal procedures for judges. - Law on Courts: amendments in May 2018. - Amendments to the Law on the protection of whistle-blowers. - Expected effects of these legislative changes: - provide buffers against undue interference in the judicial system, - enhance judicial functioning, - improve whistle-blower protection as part of corruption repression. ### Remaining gaps, risks, and international assessments - The EC’s 2018 report acknowledges “some level of preparation” but highlights persistent risks to judicial autonomy and legal certainty. - GRECO’s 2018 report on corruption prevention recommends further action to: - secure autonomy and accountability of judges in settling disputes, - strengthen the code of conduct of judges. - As of November 2018, additional legislative amendments were prepared to address most outstanding recommendations and were expected to be discussed in Parliament in February 2019. - Implementation risk: tangible implementation of legislative reforms remains key. - Track record to date on high-level corruption cases: - Out of 26 investigations launched by the Special Prosecutor’s Office into high-level corruption, 17 indictments were confirmed; however, only a single defendant in one case was convicted. ### GRECO recommendations and assessments (Second Compliance Report) — summary of selected points - Abolish ex officio membership of the Minister of Justice in the Judicial Council: - GRECO assessment: Not Implemented. - Recent action: Constitutional amendments prepared but abandoned; Law on the Judicial Council amended in 2017 to deprive the Minister of Justice of voting rights in appointing judges. - Recommended action: Preclude participation of the Minister of Justice in the JC through legislative or constitutional amendments. - Strengthen independence and integrity of lay judges: - GRECO assessment: Partly Implemented. - Recent action: Training program (including ethics) delivered to lay-judges at the judicial academy. - Recommended action: Further strengthen conditions to become a lay judge to enhance integrity. - Increase transparency of Judicial Council decisions on promotion of judges: - GRECO assessment: Fully Implemented. - Recent action: 2017 amendment obliges JC members to publicly explain decisions on election of a judge and inform each candidate in writing. - Review appraisal system to introduce qualitative criteria and limit automatic grade lowering: - GRECO assessment: Fully Implemented. - Recent action: Amendments overhaul appraisal system using quantitative and qualitative criteria, with 60 percent weight for qualitative criteria. - Develop rules/guidance on acceptance of gifts, hospitality, and other advantages: - GRECO assessment: Partly Implemented. - Recent action: Guide on principles of ethical behavior for judges prepared March 2016; new advisory body for Judicial Ethics expected to ensure compliance. - Recommended action: Further enhance guidance with additional explanations and concrete examples on unacceptable gifts and other advantages. - Define disciplinary infringements and range of sanctions; reserve dismissal for most serious misconduct and abolish automatic sanctions: - GRECO assessment: Partly Implemented. - Recent action: New Law on Courts defines serious and less serious violations, extends range of disciplinary measures, abolishes automatic sanctions; dismissal considered for 9 serious offences only, following a disciplinary procedure. - Recommended action: Reduce excessive vagueness of some offenses (e.g., “unprofessional, untimely, or inattentive exercise of the judicial office”). - Review disciplinary proceedings to allow for one disciplinary procedure and separate initiating authority from sanctioning authority: - GRECO assessment: Fully Implemented. - Recent action: May 2018 amendments allow for a single disciplinary procedure; December 2017 amendments prevent JC members participating in an investigation from voting on disciplinary action. ### Economic and governance implications - Stronger, more efficient institutions are expected to improve economic outcomes: - Institutional reforms can raise income and productivity across Central, Eastern, and Southeastern Europe (IMF 2016). - Strengthening the effective rule of law should help fend off the pernicious effects of widespread corruption on growth and provide a level playing field to incentivize investment and innovation (Johnson and others 2002). - Broader governance improvements recommended: - Enhance fiscal and financial transparency, - Strengthen accountability, - Discourage rent-seeking behavior, - Boost public investment efficiency and quality of public services (education and healthcare). - Expected socio-economic benefits: - Slow down persistent emigration of skilled workers, - Reduce shortfalls in productivity and competitiveness (Cooray and Schneider 2014). - External and institutional anchors: - EU membership aspirations provide a significant external anchor for reforms. - Modernization of the AML/CFT framework can enhance anti-corruption efforts. - The IMF can play a catalytic role through technical assistance, particularly on public financial management and fiscal transparency. ### Key statistics and indicators cited - Out of 26 investigations by the Special Prosecutor’s Office into high-level corruption: 17 indictments confirmed; only a single defendant in one case convicted. - GRECO Second Compliance Report: August 2018 (assessments and recommendations summarized in Annex I. Table 1). *Source: Annex I. Judicial Reform and Anti-Corruption Efforts in FYR Macedonia, cr1932-macedonia-a4.* ### References ### References and Annex III. Debt Sustainability Analysis ### References - European Commission, 2018, “the Effect of the Minimum Wage on Employment: Evidence from a Panel of New Member States”. Directorate-General for Employment, Social Affairs and Inclusion. - IMF, 2016, “Cross-Country Report on Minimum Wages, Selected Issues Paper on the Republic of Latvia, the Republic of Lithuania, Poland and Romania”, IMF Country Report No. 16/15, June. - Neumark, David, 2015, “The Effects of Minimum Wages on Employment”. FRBSF Economic Letter 2015–37. - Neumark, D., J. Salas, W. Washcher, 2013, “Revisiting the Minimum Wage-Employment Debate: Throwing Out the Baby with the Bathwater?” Institute of Labor Economic (IZA) Discussion Paper No. 7166. - Rutkowski, J., 2003, “The Minimum Wage: Cure or Curse?”, Human Development Economics, Europe and Central Asia Region, The World Bank. ### Annex III. Debt Sustainability Analysis — Background (A) - Public debt (general government and SOE-guaranteed debt) nearly doubled since 2008, reaching 48 percent of GDP in 2017. - General government debt increased by 18¾ percentage points of GDP to about 39½ percent of GDP at end-2017. - Publicly guaranteed debt of SoEs rose from 2½ percent of GDP in 2008 to 8½ percent of GDP at end-2017 due to Public Enterprise for State Roads (PESR) infrastructure projects. - Medium-term gross financing requirements of general government and the public sector peak at about 13 and 15 percent of GDP, respectively, in the next three years. - Improvements in public debt structure: - Average maturity of outstanding government securities increased from less than 12 months in 2011 to around 4½ years by 2017. - Share of FX-denominated domestic government securities declined from 90 percent in 2009 to around 46½ percent in 2017. - Interest rates on all types of securities have decreased noticeably. - Most public debt is external; around three-quarters of public debt is FX-denominated. - External debt increased by 25 percent of GDP since 2008, reaching 73.9 percent of GDP in 2017. - Main drivers of external debt increases: public sector borrowing and FDI-related intercompany borrowing. - External gross financing needs declined to reach 19 percent of GDP in 2017. ### Annex III. Public DSA Results — Baseline (B) - Baseline assumption: temporary increase in the fiscal deficit in 2019, followed by gradual consolidation over the medium term. - Key macro-fiscal assumptions: - Real GDP growth: projected to be around 2 percent of GDP in 2018; medium-term growth projected to pick up to around 3½ percent of GDP. - Headline inflation: projected to gradually reach 2 percent by end-2019. - General government primary balance: projected to decline slightly to around 2.6 percent of GDP in 2018; slight increase to about 3 percent in 2019; expected to narrow gradually to 2.4 percent of GDP in the medium term. - Forecast error analysis: - No systemic bias in historical estimations of real GDP growth and primary balance; some negative bias on inflation. - Forecasts of the primary balance were optimistic between 2012 and 2014; bias disappeared and became more conservative in recent years. - Growth projections remained within the interquartile range in the past five years except in 2017. - Baseline debt projections: - Public debt expected to rise to around 55 percent in the medium term. - General government debt expected to continue upward trajectory to about 44 percent at end-2023. - Publicly guaranteed debt expected to grow by around 2½ percentage points of GDP between 2017 and 2021, then gradually decline. - Baseline public gross financing requirements projected to remain high and peak in 2021 around the 15-percent benchmark, driven by amortization of Eurobonds and syndicated loans. ### Annex III. Macro-Fiscal and Additional Stress Tests (C) - Macroeconomic and fiscal shocks can significantly increase public debt and gross financing needs relative to baseline. - Highest vulnerabilities: - Combined macro-fiscal shock and a real GDP growth shock of one standard deviation in 2019-20 produce largest impact. - Under these stress tests, public debt would rise to 60–63 percent of GDP in the medium term with gross financing needs at and above 15 percent of GDP through 2021. - Real exchange rate gap and exchange rate risks: - Closing the real exchange rate gap implies a small exchange rate appreciation, resulting in a very slight decline in external public debt and external gross financing needs. - Still substantial share of FX-denominated public debt poses vulnerability to exchange rate risks. - Fan chart results: - Under a symmetric distribution, public debt stock at end-2023 would remain below 60 percent of GDP in 80 percent of simulated outcomes. - Under a restricted distribution (precludes positive shocks to the primary balance), public debt rises above 60 percent in more than 30 percent of simulations. ### Annex III. External Debt Sustainability (D) - External debt expected to peak in 2019 before gradually declining thereafter: - Debt level expected to peak at 78.5 percent of GDP in 2019. - Trade deficits projected to decrease moderately from 17.8 percent of GDP in 2021 to 17.4 percent in 2023. - Projected private sector borrowing in medium and long-term loans expected to remain modest while public debt service is gradually reduced starting in 2020–2021. - Sensitivities: - Under a 30 percent exchange rate depreciation shock, foreign debt level would increase to 112 percent of GDP in 2019 and stay broadly stable around that level afterwards. - A shock to the current account of half a standard deviation (around 2 percent of GDP) would cause more gradual deterioration in external debt; debt would not stabilize over the forecast horizon and would reach 84 percent of GDP in 2023. - A fiscal path worse than baseline could lead to larger and more expensive external borrowing and higher trade deficits, significantly impacting external debt dynamics. ### Annex III. Conclusion (E) - Stronger fiscal consolidation is needed to ensure fiscal sustainability and create fiscal space. - Key observations and risks: - Level of public debt not alarmingly high, but speed of debt accumulation since the financial crisis warrants caution. - Baseline gross financing needs are already around the 15 percent benchmark. - Adverse shocks, particularly in GDP growth, could raise general government and public debt to around 48½ and 60 percent of GDP respectively by 2023. - Space for fiscal policy is limited; general government’s primary deficit expected to be around 1 percent of GDP by 2023, broadly around the debt-stabilizing primary balance. - Policy implications: - Need for stronger fiscal consolidation to put public debt firmly on a downward path. - Continued improvement in public debt management should be pursued. - Public debt sustainability depends on sound macroeconomic management and continuing progress on institutional and structural issues to unlock growth potential and reduce vulnerability to shocks. *Source: cr1932-macedonia-a4 - References.* ### 12. The improvement in public debt management is welcome and should be continued. ### 12. The improvement in public debt management is welcome and should be continued. ### Public debt management: main message - Efforts to further lengthen the average maturity of domestic debt and deepen the secondary market would help reduce the domestic debt roll-over and interest rate risks. - With a large share of public debt being external, the medium-term fiscal strategy should be accompanied by a debt management strategy that strikes a balance between achieving an efficient mix of external and domestic financing to maintain overall macroeconomic stability. ### Key debt indicators (selected figures from DSA, Borderline Scenario) - Nominal gross public debt (in percent of GDP): 2016: 29.3; 2017: 39.8; 2018: 39.4; 2019: 41.4; 2020: 42.5; 2021: 43.2; 2022: 43.8; 2023: 44.1; 2023 (final listed): 44.1. - Public gross financing needs (in percent of GDP): 2016: 14.7; 2017: 14.9; 2018: 12.4; 2019: 13.7; 2020: 11.7; 2021: 12.2; 2022: 12.8; 2023: 9.2; 2023 (alternate entry): 9.6. - Real GDP growth (in percent): 2016: 3.0; 2017: 2.8; 2018: 0.2; 2019: 2.0; 2020: 2.8; 2021: 3.0; 2022: 3.1; 2023: 3.3; 2023 (final listed): 3.4. - Inflation (GDP deflator, in percent): 2016: 2.8; 2017: 3.5; 2018: 3.4; 2019: 1.7; 2020: 2.0; 2021: 2.0; 2022: 2.2; 2023: 2.2; 2023 (final listed): 2.2. - Nominal GDP growth (in percent): 2016: 5.9; 2017: 6.4; 2018: 3.7; 2019: 3.7; 2020: 4.9; 2021: 5.1; 2022: 5.4; 2023: 5.6; 2023 (final listed): 5.7. - Effective interest rate (in percent) (defined as interest payments divided by debt stock at end of previous year): 2016: 3.1; 2017: 3.2; 2018: 3.6; 2019: 3.2; 2020: 3.5; 2021: 3.5; 2022: 3.5; 2023: 3.5; 2023 (final listed): 3.5. - Sovereign spreads: EMBIG (bp) 293 (as of the referenced date). ### Fiscal dynamics and debt-creating flows (Borderline Scenario, selected) - Change in gross public sector debt (percent of GDP): 2016: 0.8; 2017: 1.7; 2018: -0.4; 2019: 2.0; 2020: 1.1; 2021: 0.7; 2022: 0.6; 2023: 0.3; 2023 (final listed): -0.1; cumulative (projection horizon): 4.6. - Identified debt-creating flows (percent of GDP): 2016: 1.0; 2017: 1.2; 2018: -0.4; 2019: 2.0; 2020: 1.1; 2021: 0.7; 2022: 0.6; 2023: 0.3; 2023 (final listed): -0.1; cumulative: 4.7. - Primary deficit (percent of GDP): 2016: 1.7; 2017: 1.6; 2018: 1.4; 2019: 1.4; 2020: 1.6; 2021: 1.4; 2022: 1.3; 2023: 1.1; 2023 (final listed): 0.9; cumulative: 7.8. - Primary (noninterest) revenue and grants (percent of GDP): 2016: 29.9; 2017: 28.4; 2018: 29.1; 2019: 29.7; 2020–2023: 30.9/30.9/30.8/30.8/30.8; cumulative (2019–2023): 183.9. - Primary (noninterest) expenditure (percent of GDP): 2016: 31.6; 2017: 30.0; 2018: 30.5; 2019: 31.1; 2020: 32.5; 2021: 32.3; 2022: 32.1; 2023: 31.9; 2023 (final listed): 31.7; cumulative: 191.7. ### Debt composition and projections (selected from figures) - Composition by maturity (gross nominal public debt in percent of GDP, selected points): medium and long-term and short-term components shown historically and projected through 2023 (figures indicate rising medium/long-term share over time). - Composition by currency (gross nominal public debt in percent of GDP): local currency-denominated and foreign currency-denominated components presented historically and projected through 2023. - Alternative scenarios presented: Baseline, Historical, Constant Primary Balance. Under the Baseline the underlying assumptions include Real GDP growth (2018–2023): 2.0, 2.8, 3.0, 3.1, 3.3, 3.4; Inflation (2018–2023): 1.7, 2.0, 2.0, 2.2, 2.2, 2.2; Primary Balance (2018–2023): -1.4, -1.6, -1.4, -1.3, -1.1, -0.9; Effective interest rate (2018–2023): 3.2, 3.5, 3.5, 3.5, 3.5, 3.5. ### Stress tests and risk assessment (selected findings) - Stress tests include: Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Contingent Liability Shock. - Example baseline and shock parameter values (Macro-Fiscal Stress Tests, General Government): - Baseline Real GDP growth (2018–2023): 2.0, 2.8, 3.0, 3.1, 3.3, 3.4. - Primary Balance Shock scenario Primary balance (2018–2023): -1.4, -1.6, -1.7, -1.5, -1.4, -1.2. - Real Interest Rate Shock scenario Effective interest rate (2018–2023): 3.2, 3.5, 4.1, 4.4, 4.7, 4.8. - Non-Financial Public Sector stress test scenario impacts (Table 1): - Primary Balance Shock: impact on debt 3.2 (percentage points in excess of baseline at end of projection period). - Real GDP Growth Shock: impact on debt 4.7. - Interest Rate Shock: impact on debt 2.0. - Real Exchange Rate Shock: impact on debt -0.2. - Combined Macro-Fiscal Shock: impact on debt 8.4. ### Public sector (including SOEs) baseline indicators (selected) - Nominal gross public debt (Public Sector Baseline Scenario, percent of GDP): 2016: 32.5; 2017: 46.7; 2018: 48.0; 2019: 50.7; 2020: 53.0; 2021: 54.0; 2022: 54.9; 2023: 54.9; 2023 (final listed): 54.4. - Public gross financing needs (percent of GDP, public sector): 2016: 16.4; 2017: 16.6; 2018: 14.9; 2019: 15.4; 2020: 14.4; 2021: 14.2; 2022: 14.9; 2023: 10.7; 2023 (final listed): 11.1. - Change in gross public sector debt (percent of GDP, public sector): 2016: 1.2; 2017: 2.7; 2018: 1.3; 2019: 2.7; 2020: 2.3; 2021: 1.0; 2022: 0.9; 2023: -0.1; 2023 (final listed): -0.5; cumulative: 6.4. - Identified debt-creating flows (percent of GDP, public sector): 2016: 1.7; 2017: 2.2; 2018: 1.2; 2019: 2.7; 2020: 2.3; 2021: 1.0; 2022: 0.9; 2023: -0.1; 2023 (final listed): -0.5; cumulative: 6.4. ### Policy implications and recommendations (drawn from text and DSA emphasis) - Continue the improvement in public debt management, with a focus on: - Lengthening the average maturity of domestic debt. - Deepening the domestic secondary market to reduce roll-over and interest rate risks. - Ensure the medium-term fiscal strategy is accompanied by a debt management strategy that balances external and domestic financing to maintain overall macroeconomic stability. *Source: IMF staff.* ### 1. Fund work ### 1. Fund work ### Fund work program and technical assistance - Article IV Report: September 2017; November 2017. - Technical assistance on Revenue Administration Reforms (Tax Compliance and Risk Management, Arrears Management, Large Taxpayers Office): - Short-term expert visits FY18; TA report after the mission. - Regular short-term visits of region-based long-term expert FY2018. - Technical assistance on Government Finance Statistics: - Short-term expert visits FY2018; TA report after the mission. - Financial Sector Assessment Program (FSAP): FY2018-19; FY2019. ### Bank work program (summary of ongoing projects and closings) - Southeastern Europe Regular Economic Update: Continuous and periodic missions; November 2019 and April 2019. - Skills Development and Innovation Support Project: Continuous; Project closing May 2019. - Social Services Improvement Project: Continuous; Project closing June 2024. - Municipal Services Improvement Project: Continuous; Project closing March 2019. - Municipal Services Improvement Project 2: Continuous; Project closing March 2021. - Local and Regional Competitiveness Project: Continuous; Project closing December 2019. - National and Regional Road Rehabilitation Project: Continuous; Project closing September 2019. - Road Upgrading and Development Project: Continuous; Project closing December 2020. ### Statistical issues — assessment of data adequacy for surveillance (As of November 26, 2018) - General: Data provision has some shortcomings but is broadly adequate for surveillance. Key areas for improvement: national accounts and government finance statistics. - National accounts: - Amendments in 2013 to National Classification of Activities—NKD Rev.2 aligned with NACE Rev.2; resulted in significant changes in decomposition of historical data. - Financial accounts and balance sheets statistics are now being compiled. - NBRM objective: publish annual balance sheet data in 2020. - Price statistics: - CPI improvements introduced to align COICOP with international standards and EU regulations. - Government finance statistics (GFS): - GFS data has been improving with ongoing TA. - Authorities disseminate monthly central government operations, quarterly general government operations, and quarterly debt data on their website and SDDS National Summary Data Page. - Current dissemination: national presentation, cash basis, does not fully cover general government as defined in GFSM 2001/14, but data is generally good quality. - Authorities report detailed revenues and expenditures for inclusion in the Annual GFS database and are taking steps to publish quarterly GG data in GFSM 2014 presentation for inclusion in International Finance Statistics, expected in early 2019. - Authorities report central government debt to IMF/World Bank Quarterly Public Sector Debt Database and are expected to expand reporting to general government debt in 2019. - Monetary and financial statistics: - Macedonia regularly reports monetary data for central bank, other depository corporations, and other financial corporations using standardized report forms. - Financial sector surveillance: reports all core FSIs for deposit takers quarterly with one quarter timeliness, and sixteen encouraged FSIs for deposit takers and other sectors. - External sector: - External sector statistics meet international standards: quarterly balance of payments, IIP data, reserve assets and foreign currency liquidity data, and external debt statistics. ### Data standards and quality - FYR Macedonia has subscribed to the Special Data Dissemination Standard (SDDS) since November 2011 and is in the process to adhere to SDDS plus. - Data ROSC published on September 29, 2004. ### Key macroeconomic developments, outlook, and fiscal outcomes (statements as of January 23, 2019) - Name change and geopolitical developments: - Macedonian Parliament approved constitutional amendments on January 11, 2019 to change the name to “Republic of North Macedonia”; Greek Parliament approval required for agreement to become valid. - Resolution expected to bring country closer to NATO membership and opening of EU accession negotiations. - 2018 preliminary fiscal outcome: - Overall fiscal deficit for 2018 estimated at -1.8 percent of GDP (preliminary), lower than supplementary budget (-2.8 percent) and staff projection (-2.6 percent). - Main drivers: large under-execution of capital expenditures (1 percent of GDP) and goods and services spending (0.5 percent of GDP); partially offset by weaker-than-budgeted non-tax revenues and grants. - Tax revenues came out as budgeted with strong personal income tax and social security contributions collection at year-end. - Staff notes no material change to baseline projections as catch-up in capital spending not expected in 2019; risks of higher under-execution due to project documentation weaknesses and tendering delays. - Economic growth and labor market: - Q3 2018: solid growth of 3 percent yoy driven by exports and private consumption. - Real GDP growth for 2018 projected between 2.3 percent (NBRM) and 2.8 percent (MoF); staff projection was 2 percent. - Unemployment rate in 2018: 20.8 percent (lowest in twenty-five years but still relatively high). - Real GDP growth projected for 2019 between 3.2 percent (MoF) and 3.5 percent (NBRM); staff projection 2.8 percent. Drivers: rebound in infrastructure investment, robust exports, strong private consumption fueled by wage and credit growth. - Credit, deposits, and monetary policy: - Credit recovery in first eleven months of 2018: households 10.1 percent yoy; corporate sector 5.8 percent yoy. - Total deposits growth: 11.1 percent yoy in first eleven months of 2018. - Monetary policy: accommodative stance in 2018 with three consecutive cuts in key policy rate; authorities indicate room for further easing but readiness to tighten if large external shocks occur. - Fiscal policy and reforms: - Authorities committed to sound fiscal policies and agree with staff’s medium-term fiscal recommendations. - Authorities estimate 2018 fiscal deficit at 1.8 percent of GDP instead of 2.7 percent of GDP; 2019 budget targets a deficit of 2.5 percent of GDP versus staff’s projection of 3 percent of GDP (gap mainly from differences in underlying GDP and revenue projections). - Pension system adjustments to improve long-term sustainability: - Pension contribution rates will gradually increase from 18 to 18.8 percent in 2020. - Benefit indexation will change to CPI only (from currently ½ average CPI and ½ average wage growth). - Personal income tax reform: - Introduction of a progressive element: marginal PIT rate of 18 percent applied for top 1 percent earners, to the portion of income exceeding MKD 90,000 (about EUR 1,450 equivalent, or almost 4 times the average net wage). - Public financial management: - Improved monitoring of government arrears; arrears reduced by about 0.6 percent of GDP. - New 2018 legal provisions require quarterly publication of overdue obligations for all public entities. - Local government spending capped to achieve budget discipline. - 2018-2021 Public Financial Management Reform Program prioritizes improving quality and transparency of public institutions. - 2018 IMF Fiscal Transparency Evaluation Report: significant progress and list of main areas of focus for the future. - Structural reforms and labor market policies: - Active labor market policies (ALMP) introduced to modernize vocational training and develop internships and apprenticeships; programs have high employment retention. - Authorities plan secondary and tertiary education policies to reduce technical and professional skills mismatch. - Authorities acknowledge need for better ALMP budget monitoring and to reevaluate employment incentives for cost effectiveness and impact durability. - Financial system stability and FSAP follow-up: - Authorities broadly agree with FSAP conclusions and commit to key recommendations: - Ensure independence of central bank in supervisory duties. - Increase staffing levels. - Intensify on-site and off-site supervision of systemically important banks through full-scope examinations. - Adopt a new law on banking resolution aligned with international standards and best practices. - Broaden recovery planning requirements to all banks (currently only for systemically important banks). - Perform more frequent crisis simulation exercises. - Improve macro-prudential and crisis management framework. - Progress since 2008 FSAP: 20 out of 23 recommendations fully or partially implemented; legislative basis strong and supervision largely compliant with Basel Core Principles. - Banking system indicators: - Total capital ratio: 16.5 percent by end-June 2018. - NPL ratio: declined from 10 percent in 2015 to 5 percent in 2018. - Memorandum of Understanding between NBRM and European Central Bank concluded in December 2018 to enhance exchange of supervisory information. - Data transparency progress: - Authorities continuing efforts to align with international data transparency and quality requirements. - Fulfillment of IMF SDDS Plus requirements noted; official adherence expected at end January 2019. ### Selected timetable and data frequencies (as of November 26, 2018) - SDDS subscription since November 2011; Data ROSC published September 29, 2004. - Table of Common Indicators Required for Surveillance (selected entries with latest observation and date received): - Exchange Rates: latest observation 11/23/18; date received 11/23/18; Frequency of Data D; Frequency of Reporting W; Frequency of Publication D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: latest observation Oct,18; date received 11/14/18; Frequency of Data D; Frequency of Reporting M; Frequency of Publication M. - Reserve/Base Money: Oct. 18; date received 11/22/18; Frequency D; Reporting W; Publication M. - Broad Money: Oct. 18; date received 11/21/18; Frequency M; Reporting M; Publication M. - Central Bank Balance Sheet: Oct. 18; date received 11/21/18; Frequency M; Reporting M; Publication M. - Consolidated Balance Sheet of the Banking System: Oct. 18; date received 11/21/18; Frequency M; Reporting M; Publication M. - Interest Rates: Sep. 18; date received 10/31/18; Frequency M; Reporting M; Publication M. - Consumer Price Index: Oct. 18; date received 11/07/18; Frequency M; Reporting M; Publication M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: latest observation Sep. 18; date received 11/15/18; Frequency Q; Reporting Q; Publication Q. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: latest observation Oct. 18; date received 11/26/18; Frequency M; Reporting M; Publication M. - Stocks of Central Government and Central Government-Guaranteed Debt: Sep. 18; date received 10/31/18; Frequency Q; Reporting Q; Publication Q. - External Current Account Balance: Sep. 18; date received 11/30/18; Frequency M; Reporting Q; Publication Q. - Exports and Imports of Goods and Services: Sep. 18; date received 11/30/18; Frequency M; Reporting Q; Publication Q. - GDP/GNP: Jun. 18; date received 09/06/18; Frequency Q; Reporting Q; Publication Q. - Gross External Debt: Jun. 18; date received Sep. 18; Frequency Q; Reporting Q; Publication Q. - International Investment Position: Jun, 18; date received Sep. 18; Frequency Q; Reporting Q; Publication Q. *Source: cr1932-macedonia-a4 — (As of November 26, 2018; statements dated January 23, 2019).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1932-macedonia-a4.pdf_