## 1mkdea2020003

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---

### EXECUTIVE SUMMARY — Context
- North Macedonia’s economic outlook has deteriorated substantially due the COVID-19 pandemic.
- Real GDP is expected to decline by 4 percent due to a fall in both domestic and external demand.
- Elections planned for April 2020 have been postponed; the caretaker government will remain in place for the next months.
- The Executive Board concluded the 2019 Article IV consultation on a lapse-of-time basis on January 22.

### Impact of COVID-19 — Health, macroeconomic outlook, and fiscal/external pressures
- Health and containment status:
  - 555 confirmed cases of COVID-19.
  - State of emergency declared, borders closed, severe social-distancing restrictions imposed.
- Macroeconomic impact and outlook:
  - Staff project real GDP to contract by 4 percent in 2020, a reduction by 7½ percentage points relative to the Article IV report published in January 2020.
  - Private consumption expected to fall amid rising unemployment and reduced spending on travel, hospitality and entertainment.
  - Private investment expected to experience negative growth as plans are delayed.
  - Exports projected to decline as the European automotive industry stops production.
  - Baseline assumes growth resumes in the second half of 2020, but output level will recover only slowly and not converge to the pre-virus baseline even over the medium term.
- Fiscal and external pressures:
  - General government deficit projected to increase to 6½ percent of GDP in 2020 before receding to about 3 percent in 2021.
  - Reserve coverage would decrease to 87 percent of the ARA metric by end-2020 absent IMF and other external financing.
  - Authorities requested a purchase under the Rapid Financing Instrument (RFI) to address urgent fiscal and balance of payments needs.

### Economic policies and near-term policy recommendations
- Authorities’ policy stance:
  - Fiscal policy support is targeted and temporary, focusing on protecting employment and poor households.
  - The National Bank of the Republic of North Macedonia (NBRNM) cut its policy rate and stands ready to act to protect the de-facto exchange rate peg.
  - Financial sector policies encourage banks to restructure debt of affected borrowers, combined with intensified monitoring.
- Specific measures already taken:
  - March package of targeted and temporary fiscal measures amounting to 0.2 percent of GDP to provide cash-flow relief and protect jobs (LOI ¶2).
  - NBRNM lengthened the limit for classifying loans as NPLs from 90 to 150 days, temporary with return to 90 days by end-2020.
- Staff advice and cautions:
  - Fiscal support should be well-targeted and temporary; announced additional measures include a wage subsidy to protect employment in the private sector (about 1 percent of GDP) and transfers to poor households during Q2 2020 (LOI ¶2).
  - To offset costs, defer capital expenditure, implement temporary cuts to the public sector wage bill and purchase of goods and services; cuts to capital expenditure should be temporary given large infrastructure needs.
  - Bolster health care capacity remains a priority.
  - NBRNM should balance liquidity support with protecting the exchange rate peg; inflation at 0.7 percent year-on-year in February and expected to move into negative territory in the next months.
  - Preserve financial stability: banking system capital adequacy ratio at 16.3 percent at end-2019; staff encourage NBRNM to explore using regulatory flexibility (e.g., permitting banks to draw down the capital conservation buffer) with careful capital and liquidity planning and enhanced monitoring.
  - Freed-up bank resources should not be used to distribute dividends, pay out cash bonuses or initiate share buybacks.

### Modalities of Fund financial support and financing needs
- Authorities’ request:
  - Request for financing under the Rapid Financing Instrument (RFI) equivalent to 100 percent of quota (SDR 140.3 million, about €176.7 million).
- Funding role and disbursement:
  - Fund support would be disbursed to the central bank and on-lent to the government to cover COVID-19-related spending.
  - Given the health emergency, authorities are not in a position to design or implement a Fund-supported program at this time.
- Residual financing gap and external partners:
  - EU and the World Bank expected to contribute with at least €95 million in budget support and measures to alleviate the pandemic’s impact (discussions at an early stage).
  - Staff project a remaining fiscal and external gap of about €213 million after Fund financial assistance (Text Table 1 and Table 6).
- Key consolidated financing figures (Text Table 1. Fiscal and External Financing, 2020–21 (€ million)):
  - Total Financing Requirement (Gross): 2020 = 1,969; 2021 = 1,923
  - Central Government Deficit: 2020 = 727; 2021 = 371
  - Gross Amortizations: 2020 = 1,242; 2021 = 1,552
    - Domestic: 2020 = 803; 2021 = 821
    - External: 2020 = 439; 2021 = 732
      - Private: 2020 = 360; 2021 = 644
      - Official: 2020 = 79; 2021 = 88
  - Total Financing Sources (Gross): 2020 = 1,485; 2021 = 1,923
    - Government deposits at the NBRNM (budget account): 2020 = 100; 2021 = -20
    - Flow from Denar budget account: 2020 = 45; 2021 = -9
    - Flow from FX budget account: 2020 = 55; 2021 = -11
    - Domestic: 2020 = 1,178; 2021 = 1,239
    - External: 2020 = 207; 2021 = 704
      - Private: 2020 = 120; 2021 = 555
      - Official: 2020 = 87; 2021 = 149
  - Fiscal and External Gap: 2020 = 484; 2021 = 0
    - IMF – RFI: 2020 = 177; 2021 = 0
    - European Union/World Bank: 2020 = 95; 2021 = 0
    - Remaining unidentified financing: 2020 = 213; 2021 = 0
- Reserve coverage scenarios (Gross International Reserves in million euro and coverage in percent of ARA metric):
  - 2019: 3,263 / 114
  - Current (March 31, 2020): 3,017 / 103
  - 2020 projections:
    - w/o Exceptional External Financing: 2,525 / 87
    - with RFI purchase only: 2,701 / 93
    - with financing gap closed: 3,009 / 103

### Debt sustainability, capacity to repay, and safeguards
- DSA conclusions:
  - Debt under the current baseline is sustainable; public sector debt is projected to stabilize at about 55 percent of GDP in the medium term and remain below the high-risk threshold in stress tests.
  - Gross financing needs will temporarily exceed the 15 percent of GDP high-risk threshold in 2020 and 2021.
  - Financing needs in 2020–21 exceed the high-risk thresholds and represent a substantial source of downside risk.
- Staff assessment of repayment capacity:
  - Proposed RFI purchase represents 1.6 percent of 2020 GDP and 5.8 percent of projected 2020 international reserves (Table 7).
  - Repurchases and charges projected to peak in 2024 at 2.4 percent of projected reserves and 1 percent of projected exports of goods and services.
  - On March 6, S&P maintained its BB- rating for North Macedonia with a stable outlook.
  - Authorities have an excellent track record in servicing obligations and proven ability to access international markets in normal times.
- Safeguards:
  - Authorities committed to undergoing a safeguards assessment (LOI ¶6).
  - NBRNM will provide most recently completed external audit reports and authorize external auditors to hold discussions with IMF staff.
  - IMF funds will be disbursed into the government’s account at the NBRNM; a memorandum of understanding regarding repayment has been prepared.

### Risks
- Downside risks (exceptionally large):
  - Prolongation or more severe spread of COVID-19 leading to a deeper, more long-lasting recession.
  - Larger-than-projected falls in remittances and private transfers, increasing external financing need.
  - Larger-than-projected drop in government revenue raising financing needs.
  - Potential jeopardy to debt sustainability if shocks are larger than those assumed in the DSA.
  - Protracted global financial volatility and risk aversion delaying access to financial markets, putting pressure on international reserves and the exchange rate peg.
  - Political uncertainty associated with upcoming elections.
- Upside:
  - Recently agreed opening of EU accession negotiations could boost confidence, provide additional EU financing, and renew reform impetus.

### Staff appraisal and recommendations
- Support for RFI:
  - Staff support the authorities’ request for a purchase under the RFI in view of the urgent external financing need.
  - Proposed purchase in the amount of SDR 140.3 million, equivalent to 100 percent of quota, will support efforts to fill external financing requirements in 2020.
- Policy priorities going forward:
  - Limit the macro-financial and social impact of the crisis while maintaining a sound policy framework to support recovery.
  - Ensure fiscal measures are well-targeted and temporary, prioritize health spending, protect vulnerable households and employment, and plan for medium-term fiscal consolidation to place debt on a downward path.
  - NBRNM to remain ready to act to protect the peg, monitor liquidity intensively, and facilitate prudent bank restructuring while preserving financial stability.
  - Continue close monitoring of loan classification and provisioning standards; avoid further relaxation that could hamper credit risk assessment.
- Staff stand ready to assist authorities in addressing immediate and medium-term policy challenges.

### Forecast error analysis, baseline assumptions, and stress tests
- Summary and baseline assumptions:
  - Real GDP expected to contract by 4 percent in 2020, then recover toward the pre-COVID-19 baseline over the medium term.
  - Headline inflation projected to be negative in 2020 and only gradually increase to 2 percent over the medium term.
  - Fiscal deficit projected to increase sharply in 2020 due to automatic stabilizers and measures taken to support the economy.
  - Downside risks described as exceptionally large, mainly reflecting uncertainty about the duration and spread of the pandemic.
- Stress tests and risk scenarios:
  - Primary balance shock: assumes that only half of the projected yearly reduction in the primary deficit materializes after the sharp increase in 2020.
  - Contingent liabilities scenario: includes contingent liabilities related to the banking system.
- Coverage and contingent liability findings:
  - Publicly guaranteed debt of state-owned enterprises rose from 2½ percent of GDP in 2008 to about 8 percent of GDP in 2019.

### Key projections and selected indicators (figures as presented)
- Real GDP growth (percent): 2016: 2.8; 2017: 1.1; 2018: 2.7; 2019: 3.6; 2020: -4.0; 2021: 7.0; 2022: 4.5; 2023: 4.0; 2024: 3.5; 2025: 3.5.
- Nominal gross public debt (percent of GDP, selected): 2018: 37.5; 2019: 47.6; 2020: 47.8; 2021: 55.5; 2022: 55.5; 2023: 56.0; 2024: 55.8; 2025: 55.8.
- Public gross financing needs (percent of GDP, selected): 15.9; 13.3; 10.5; 19.9; 18.0; 12.4; 13.3; 10.8; 13.3.
- Gross general government debt (percent of GDP, Table 1 memo): 2016: 39.8; 2017: 39.5; 2018: 40.6; 2019: 40.2; 2020: 46.4; 2021: 45.9; 2022: 46.0; 2023: 46.3; 2024: 46.8; 2025: 47.2.
- Public and publicly guaranteed debt (percent of GDP, Table 1 memo): 2018: 46.7; 2019: 46.2; 2020: 47.6; 2021: 47.8; 2022: 52.9; 2023: 55.5; 2024: 55.7; 2025: 56.0.
- Current account balance (percent of GDP, Table 1 memo): 2016: -2.9; 2017: -1.1; 2018: -0.1; 2019: -2.8; 2020: -2.2; 2021: -1.3; 2022: -1.8; 2023: -1.9; 2024: -1.9; 2025: -1.9.
- Gross official reserves (millions of euros, Table 1 memo): 2016: 2,613; 2017: 2,336; 2018: 2,867; 2019: 3,263; 2020: 3,009; 2021: 3,119; 2022: 3,351; 2023: 3,534; 2024: 3,768; 2025: 3,967.
- External debt (percent of GDP, Table 1 memo): 2016: 74.7; 2017: 73.6; 2018: 73.3; 2019: 72.2; 2020: 74.8; 2021: 71.1; 2022: 70.6; 2023: 70.0; 2024: 69.6; 2025: 68.9.
- Table 6: Gross financing needs (percent): 2020: 1,073; 2021: 1,259; 2022: 605; 2023: 1,113; 2024: 654; 2025: 1,134.
- Table 6: Financing sources (percent): 2020: 335; 2021: 1,369; 2022: 837; 2023: 1,296; 2024: 889; 2025: 1,333.
- Net change in reserves (negative indicates increase) (percent): 2020: 254; 2021: -110; 2022: -232; 2023: -183; 2024: -235; 2025: -198.
- Memo items (Table 6) — GIR (millions of euros): 3,009; 3,119; 3,351; 3,534; 3,768; 3,967.
- GIR as % of Fund ARA Metric: 103; 105; 105; 108; 107; 109.

### Financial sector indicators (selected)
- Banking system NPLs/gross loans (percent): 2013: 10.1; 2014: 10.9; 2015: 10.8; 2016: 10.3; 2017: 6.3; 2018: 6.1; 2019 Q3: 5.0.
- Regulatory capital/risk weighted assets (percent): 2013: 17.1; 2014: 16.8; 2015: 15.7; 2016: 15.5; 2017: 15.2; 2018: 15.7; 2019 Q3: 16.9.
- Foreign currency lending/total credit to private sector (percent): 2013: 25.5; 2014: 23.8; 2015: 22.4; 2016: 20.5; 2017: 18.0; 2018: 16.5; 2019 Q3: 14.4.
- Provisions to Non-Performing Loans (percent): 2013: 107.1; 2014: 103.1; 2015: 104.6; 2016: 108.4; 2017: 114.8; 2018: 110.6; 2019 Q3: 119.0; 108.7.

### Appendix I. Letter of Intent — key commitments and measures
- Date and sender: Skopje, April 6, 2020; addressed to Kristalina Georgieva, Managing Director, International Monetary Fund.
- Confirmed COVID-19 case counts in the letter:
  - "555 confirmed COVID-19 cases" (as of the letter).
  - "As of April 8, the country has 617 confirmed COVID-19 cases" (statement dated April 10, 2020).
- Fiscal measures, social protection, and support to firms:
  - Exemption from advanced monthly payments of corporate income tax through June for companies and individuals with business activity in affected sectors.
  - Subsidy for social security contributions for affected firms, conditional on maintaining employment at the pre-virus level.
  - Development Bank funding: additional funding allocated to establish a credit line to affected micro, small and medium-sized enterprises at favorable conditions and a zero interest rate.
  - Budget users allowed to make reallocations in their budget up to 70 percent at the expenditure item level (compared to 20 percent in normal times).
  - Measures announced on April 1:
    - Wage subsidy equal to the minimum wage planned for affected companies; expected to protect "200,000 to 250,000 jobs".
    - Financial support for vulnerable households from the informal economy; expected beneficiaries: "around 20,000 households".
    - Offsetting measures: targeted and temporary cuts in capital expenditure, the public sector wage bill, and the purchase of goods and services; reduced expenditure by state-owned enterprises.
    - An additional "€50 million" to be made available from the Development Bank to commercial banks at favorable terms.
- Monetary, financial-sector, and regulatory response:
  - NBRNM cut its policy rate (central bank bills rate lowered).
  - Reduced the base for the reserve requirement in domestic currency by the amount of newly extended or restructured loans to firms in affected sectors.
  - Revised credit risk regulation to allow greater regulatory flexibility while preserving prudence.
  - Permits banks to restructure debts of high-quality borrowers affected by the pandemic.
  - National Bank committed to stabilizing the exchange rate, keeping inflation stable, and supporting targeted relief measures.
- External financing request under the RFI:
  - Request: "SDR 140.3 million (about €176.7 million)" corresponding to "100 percent of North Macedonia’s quota".
  - Intended use: finance health and macroeconomic stabilization measures and meet urgent balance of payments needs.
  - Domestic-currency equivalent of the IMF purchase intended for budgetary financing.
  - Memorandum of understanding between government and NBRNM establishes repayment modalities.
  - Authorities expect IMF support to have a catalytic effect to secure additional official and market financing.
  - Additional financing requests submitted to the World Bank and the European Union.
  - Authorities stand ready to collaborate on a safeguards assessment and authorize publication of the LOI and staff report.
- Macroeconomic context and commitments:
  - Pre-crisis GDP growth: "1.1 percent" in 2017; "2.7 percent" in 2018; "3.6 percent" in 2019.
  - Unemployment: "16.6 percent" at the end of 2019.
  - Fiscal impacts: deficit expected to widen to "6.5 percent" in 2020; public debt expected to "increase substantially in 2020" while remaining sustainable over the medium-term.
  - Authorities commit to allocate additional funds to health spending, preserve monetary, external and financial stability, rebuild fiscal buffers once crisis is over, and avoid measures that would compound balance of payments difficulties.

*Source: 1mkdea2020003 - EXECUTIVE SUMMARY; Appendix I. Letter of Intent*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- North Macedonia’s economic outlook has deteriorated substantially due the COVID-19 pandemic.
- Real GDP is expected to decline by 4 percent due to a fall in both domestic and external demand.
- Elections planned for April 2020 have been postponed; the caretaker government will remain in place for the next months.
- The Executive Board concluded the 2019 Article IV consultation on a lapse-of-time basis on January 22.

### Impact of COVID-19
- Health and containment status:
  - North Macedonia has 555 confirmed cases of COVID-19.
  - A state of emergency has been declared, borders closed, and severe social-distancing restrictions imposed.
- Macroeconomic impact and outlook:
  - Staff project real GDP to contract by 4 percent in 2020, a reduction by 7½ percentage points relative to the Article IV report published in January 2020.
  - Private consumption is expected to fall amid rising unemployment and reduced spending on travel, hospitality and entertainment.
  - Private investment is expected to experience negative growth as plans are delayed.
  - Exports are projected to decline as the European automotive industry stops production.
  - Baseline assumes growth resumes in the second half of 2020, but output level will recover only slowly and not converge to the pre-virus baseline even over the medium term.
- Fiscal and external pressures:
  - General government deficit projected to increase to 6½ percent of GDP in 2020 before receding to about 3 percent in 2021.
  - Reserve coverage would decrease to 87 percent of the ARA metric by end-2020 absent IMF and other external financing.
  - The authorities have requested a purchase under the Rapid Financing Instrument (RFI) to address urgent fiscal and balance of payments needs.

### Economic policies and near-term policy recommendations
- Authorities’ policy stance:
  - Fiscal policy support is targeted and temporary, focusing on protecting employment and poor households.
  - The National Bank of the Republic of North Macedonia (NBRNM) cut its policy rate and stands ready to act to protect the de-facto exchange rate peg.
  - Financial sector policies encourage banks to restructure debt of affected borrowers, combined with intensified monitoring.
- Specific measures already taken:
  - March package of targeted and temporary fiscal measures amounting to 0.2 percent of GDP to provide cash-flow relief and protect jobs (LOI ¶2).
  - NBRNM lengthened the limit for classifying loans as NPLs from 90 to 150 days, temporary with return to 90 days by end-2020.
- Staff advice and cautions:
  - Fiscal support should be well-targeted and temporary; announced additional measures include a wage subsidy to protect employment in the private sector (about 1 percent of GDP) and transfers to poor households during Q2 2020 (LOI ¶2).
  - To offset costs, defer capital expenditure, implement temporary cuts to the public sector wage bill and purchase of goods and services; cuts to capital expenditure should be temporary given large infrastructure needs.
  - Bolster health care capacity remains a priority.
  - NBRNM should balance liquidity support with protecting the exchange rate peg; inflation at 0.7 percent year-on-year in February and expected to move into negative territory in the next months.
  - Preserve financial stability: banking system capital adequacy ratio at 16.3 percent at end-2019; staff encourage NBRNM to explore using regulatory flexibility (e.g., permitting banks to draw down the capital conservation buffer) with careful capital and liquidity planning and enhanced monitoring.
  - Freed-up bank resources should not be used to distribute dividends, pay out cash bonuses or initiate share buybacks.

### Modalities of Fund financial support and financing needs
- Authorities’ request:
  - Request for financing under the Rapid Financing Instrument (RFI) equivalent to 100 percent of quota (SDR 140.3 million, about €176.7 million).
- Funding role and disbursement:
  - Fund support would be disbursed to the central bank and on-lent to the government to cover COVID-19-related spending.
  - Given the health emergency, authorities are not in a position to design or implement a Fund-supported program at this time.
- Residual financing gap and external partners:
  - EU and the World Bank expected to contribute with at least €95 million in budget support and measures to alleviate the pandemic’s impact (discussions at an early stage).
  - Staff project a remaining fiscal and external gap of about €213 million after Fund financial assistance (Text Table 1 and Table 6).
- Key consolidated financing figures (Text Table 1. Fiscal and External Financing, 2020–21 (€ million)):
  - Total Financing Requirement (Gross): 2020 = 1,969; 2021 = 1,923
  - Central Government Deficit: 2020 = 727; 2021 = 371
  - Gross Amortizations: 2020 = 1,242; 2021 = 1,552
    - Domestic: 2020 = 803; 2021 = 821
    - External: 2020 = 439; 2021 = 732
      - Private: 2020 = 360; 2021 = 644
      - Official: 2020 = 79; 2021 = 88
  - Total Financing Sources (Gross): 2020 = 1,485; 2021 = 1,923
    - Government deposits at the NBRNM (budget account): 2020 = 100; 2021 = -20
    - Flow from Denar budget account: 2020 = 45; 2021 = -9
    - Flow from FX budget account: 2020 = 55; 2021 = -11
    - Domestic: 2020 = 1,178; 2021 = 1,239
    - External: 2020 = 207; 2021 = 704
      - Private: 2020 = 120; 2021 = 555
      - Official: 2020 = 87; 2021 = 149
  - Fiscal and External Gap: 2020 = 484; 2021 = 0
    - IMF – RFI: 2020 = 177; 2021 = 0
    - European Union/World Bank: 2020 = 95; 2021 = 0
    - Remaining unidentified financing: 2020 = 213; 2021 = 0
- Reserve coverage scenarios (Text Table 2 and related figures):
  - Gross International Reserves (in million euro) and coverage (in percent of ARA metric):
    - 2019: 3,263 / 114
    - Current (March 31, 2020): 3,017 / 103
    - 2020 projections:
      - w/o Exceptional External Financing: 2,525 / 87
      - with RFI purchase only: 2,701 / 93
      - with financing gap closed: 3,009 / 103

### Debt sustainability, capacity to repay, and safeguards
- DSA conclusions:
  - Debt under the current baseline is sustainable; public sector debt is projected to stabilize at about 55 percent of GDP in the medium term and remain below the high-risk threshold in stress tests.
  - However, gross financing needs will temporarily exceed the 15 percent of GDP high-risk threshold in 2020 and 2021.
  - Financing needs in 2020–21 exceed the high-risk thresholds and represent a substantial source of downside risk.
- Staff assessment of repayment capacity:
  - The proposed RFI purchase represents 1.6 percent of 2020 GDP and 5.8 percent of projected 2020 international reserves (Table 7).
  - Repurchases and charges are projected to peak in 2024 at 2.4 percent of projected reserves and 1 percent of projected exports of goods and services.
  - On March 6, S&P maintained its BB- rating for North Macedonia with a stable outlook.
  - Authorities have an excellent track record in servicing obligations and proven ability to access international markets in normal times.
- Safeguards:
  - Authorities committed to undergoing a safeguards assessment (LOI ¶6).
  - NBRNM will provide most recently completed external audit reports and authorize external auditors to hold discussions with IMF staff.
  - IMF funds will be disbursed into the government’s account at the NBRNM; a memorandum of understanding regarding repayment has been prepared.

### Risks
- Downside risks are exceptionally large and include:
  - Prolongation or more severe spread of COVID-19 leading to a deeper, more long-lasting recession.
  - Larger-than-projected falls in remittances and private transfers, increasing external financing need.
  - Larger-than-projected drop in government revenue raising financing needs.
  - Potential jeopardy to debt sustainability if shocks are larger than those assumed in the DSA.
  - Protracted global financial volatility and risk aversion delaying access to financial markets, putting pressure on international reserves and the exchange rate peg.
  - Political uncertainty associated with upcoming elections.
- Upside:
  - Recently agreed opening of EU accession negotiations could boost confidence, provide additional EU financing, and renew reform impetus.

### Staff appraisal and recommendations
- Support for RFI:
  - Staff support the authorities’ request for a purchase under the RFI in view of the urgent external financing need.
  - The proposed purchase in the amount of SDR 140.3 million, equivalent to 100 percent of quota, will support efforts to fill external financing requirements in 2020.
- Policy priorities going forward:
  - Limit the macro-financial and social impact of the crisis while maintaining a sound policy framework to support recovery.
  - Ensure fiscal measures are well-targeted and temporary, prioritize health spending, protect vulnerable households and employment, and plan for medium-term fiscal consolidation to place debt on a downward path.
  - NBRNM to remain ready to act to protect the peg, monitor liquidity intensively, and facilitate prudent bank restructuring while preserving financial stability.
  - Continue close monitoring of loan classification and provisioning standards; avoid further relaxation that could hamper credit risk assessment.
- Staff stand ready to assist authorities in addressing immediate and medium-term policy challenges.

*Source: 1mkdea2020003 - EXECUTIVE SUMMARY*

### 2023. Forecast error analysis suggests no systematic

### 2023. Forecast error analysis suggests no systematic bias in historical projections

### Summary and baseline assumptions
- Real GDP is expected to contract by 4 percent in 2020, driven by a sharp fall in both domestic and external demand, then recover toward the pre-COVID-19 baseline over the medium term.
- Headline inflation is projected to be negative in 2020 and only gradually increase to 2 percent over the medium term.
- The fiscal deficit is projected to increase sharply in 2020 due to automatic stabilizers and measures taken to support the economy.
- Private consumption is expected to contract as disposable income comes under pressure amid rising unemployment and as spending on travel, hospitality and entertainment is slashed due to regulatory restrictions.
- Private investment plans are expected to be delayed, due to uncertainty, and exports would contract due to weak global demand.
- Downside risks are described as exceptionally large, mainly reflecting uncertainty about the duration and spread of the pandemic, globally and in North Macedonia.

### Stress tests and risk scenarios
- The stress tests demonstrate the risks associated with the government’s high public financing needs, as well as the considerable share of FX-denominated debt.
- Primary balance shock: assumes that only half of the projected yearly reduction in the primary deficit materializes after the sharp increase in 2020 — characterized as a severe downside scenario relative to the baseline where the COVID-19 shock is temporary.
- Contingent liabilities scenario: includes a standard scenario where contingent liabilities related to the banking system materialize.

### Coverage and contingent liability findings
- Publicly guaranteed debt of state-owned enterprises rose from 2½ percent of GDP in 2008 to about 8 percent of GDP in 2019, mainly due to public transport infrastructure projects by the public roads company.
- North Macedonia’s public debt includes guaranteed debt of state-owned enterprises; stress test scenarios incorporate those contingent liabilities.

### Key projections and indicators (selected figures from tables and text)
- Real GDP growth (percent): 2016: 2.8; 2017: 1.1; 2018: 2.7; 2019: 3.6; 2020: -4.0; 2021: 7.0; 2022: 4.5; 2023: 4.0; 2024: 3.5; 2025: 3.5.
- Nominal gross public debt (percent of GDP, selected years in figure): 2018: 37.5; 2019: 47.6; 2020: 47.8; 2021: 55.5; 2022: 55.5; 2023: 56.0; 2024: 55.8; 2025: 55.8.
- Public gross financing needs (percent of GDP, selected entries): 15.9; 13.3; 10.5; 19.9; 18.0; 12.4; 13.3; 10.8; 13.3 (as presented in the Public Sector DSA figure).
- Primary deficit (percent of GDP, selected years): 2016: 2.7; 2017: 1.2; 2018: 1.7; 2019: 6.6; 2020: 3.0; 2021: 2.2; 2022: 1.4; cumulative (projection) 15.9 (as presented in contribution to changes in public debt).
- Primary (noninterest) revenue and grants (percent of GDP, selected years): 29.1; 28.6; 29.2; 27.6; 29.3; 29.4; 29.4.
- Primary (noninterest) expenditure (percent of GDP, selected years): 31.8; 29.8; 30.9; 34.2; 32.3; 31.6; 30.8.
- Gross general government debt (percent of GDP, Table 1 memo): 2016: 39.8; 2017: 39.5; 2018: 40.6; 2019: 40.2; 2020: 46.4; 2021: 45.9; 2022: 46.0; 2023: 46.3; 2024: 46.8; 2025: 47.2.
- Public and publicly guaranteed debt (percent of GDP, Table 1 memo): 2018: 46.7; 2019: 46.2; 2020: 47.6; 2021: 47.8; 2022: 52.9; 2023: 55.5; 2024: 55.7; 2025: 56.0; (values as presented).
- Current account balance (percent of GDP, Table 1 memo): 2016: -2.9; 2017: -1.1; 2018: -0.1; 2019: -2.8; 2020: -2.2; 2021: -1.3; 2022: -1.8; 2023: -1.9; 2024: -1.9; 2025: -1.9.
- Gross official reserves (millions of euros, Table 1 memo): 2016: 2,613; 2017: 2,336; 2018: 2,867; 2019: 3,263; 2020: 3,009; 2021: 3,119; 2022: 3,351; 2023: 3,534; 2024: 3,768; 2025: 3,967.
- External debt (percent of GDP, Table 1 memo): 2016: 74.7; 2017: 73.6; 2018: 73.3; 2019: 72.2; 2020: 74.8; 2021: 71.1; 2022: 70.6; 2023: 70.0; 2024: 69.6; 2025: 68.9.

### External financing and reserves (selected items)
- Table 6: Gross financing needs (percent): 2020: 1,073; 2021: 1,259; 2022: 605; 2023: 1,113; 2024: 654; 2025: 1,134 (as presented).
- Table 6: Financing sources (percent): 2020: 335; 2021: 1,369; 2022: 837; 2023: 1,296; 2024: 889; 2025: 1,333 (as presented).
- Net change in reserves (negative indicates increase) (percent): 2020: 254; 2021: -110; 2022: -232; 2023: -183; 2024: -235; 2025: -198.
- Memo items (Table 6): Gross International Reserves (GIR) (millions of euros): 3,009; 3,119; 3,351; 3,534; 3,768; 3,967.
- GIR as % of Fund ARA Metric: 103; 105; 105; 108; 107; 109.

### Financial sector indicators (selected)
- Banking system NPLs/gross loans (percent): 2013: 10.1; 2014: 10.9; 2015: 10.8; 2016: 10.3; 2017: 6.3; 2018: 6.1; 2019 Q3: 5.0; (series as presented).
- Regulatory capital/risk weighted assets (percent): 2013: 17.1; 2014: 16.8; 2015: 15.7; 2016: 15.5; 2017: 15.2; 2018: 15.7; 2019 Q3: 16.9.
- Foreign currency lending/total credit to private sector (percent): 2013: 25.5; 2014: 23.8; 2015: 22.4; 2016: 20.5; 2017: 18.0; 2018: 16.5; 2019 Q3: 14.4.
- Provisions to Non-Performing Loans (percent): 2013: 107.1; 2014: 103.1; 2015: 104.6; 2016: 108.4; 2017: 114.8; 2018: 110.6; 2019 Q3: 119.0; 108.7 (as presented across rows).

*Source: IMF staff.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### COVID-19 context and immediate public-health stance
- Date and sender: Skopje, April 6, 2020; addressed to Kristalina Georgieva, Managing Director, International Monetary Fund.
- Confirmed COVID-19 case counts reported in the letter:
  - "555 confirmed COVID-19 cases" (as of the letter).
  - "As of April 8, the country has 617 confirmed COVID-19 cases" (statement dated April 10, 2020).
- Government emergency and containment actions:
  - Declared a state of emergency on March 18.
  - Closed external borders and imposed social-distancing restrictions.
  - Restrictions include in- and outbound travel limits, social distancing, special red containment zones, public hygiene campaigns, curfew hours during working days and weekends, and closure of schools and universities.
- Political context:
  - Early parliamentary elections scheduled on April 12, 2020 were agreed by major parties to be postponed.
  - The current government has a caretaker role endorsed by all major parties; the RFI request was endorsed by all major parties and their governmental representatives.

### Fiscal measures, social protection, and support to firms
- Legislated fiscal measures to protect jobs, poor households, and firms’ cash flow:
  - Exemption from advanced monthly payments of corporate income tax through June for companies and individuals with business activity in affected sectors.
  - Affected firms will receive a subsidy for social security contributions, conditional on maintaining employment at the pre-virus level.
  - Development Bank funding: additional funding allocated to establish a credit line to affected micro, small and medium-sized enterprises at favorable conditions and a zero interest rate.
  - Increased flexibility in budget reallocations: budget users allowed to make reallocations in their budget up to 70 percent at the expenditure item level (compared to 20 percent in normal times).
- Measures announced on April 1 to prevent layoffs and support recovery:
  - A wage subsidy equal to the minimum wage planned for affected companies; the measure is expected to protect "200,000 to 250,000 jobs".
  - Financial support for vulnerable households from the informal economy; expected beneficiaries: "around 20,000 households".
  - Offsetting measures: targeted and temporary cuts in capital expenditure, the public sector wage bill, and the purchase of goods and services at central and local levels; reduced expenditure by state-owned enterprises.
  - An additional "€50 million" to be made available from the Development Bank to commercial banks at favorable terms.

### Monetary, financial-sector, and regulatory response
- Actions by the National Bank of the Republic of North Macedonia (NBRNM / National Bank):
  - Cut its policy rate (central bank bills rate lowered).
  - Reduced the base for the reserve requirement in domestic currency by the amount of newly extended or restructured loans to firms in affected sectors.
  - Revised credit risk regulation to allow greater regulatory flexibility while preserving prudence.
  - Regulatory changes permit banks to restructure debts of high-quality borrowers affected by the pandemic, allowing more favorable credit terms and easing financial strains.
  - National Bank remains committed to stabilizing the exchange rate, keeping inflation stable, and supporting targeted relief measures.

### External financing request under the Rapid Financing Instrument (RFI)
- RFI request specifics:
  - The Government requests financing from the IMF under the Rapid Financing Instrument (RFI) in the amount equivalent of "SDR 140.3 million (about €176.7 million)".
  - The requested purchase corresponds to "100 percent of North Macedonia’s quota".
  - Intended use: finance health and macroeconomic stabilization measures and meet urgent balance of payments needs arising from the COVID-19 outbreak.
  - Given budget financing constraints, the authorities intend to use the domestic-currency equivalent of the IMF purchase for budgetary financing.
  - A memorandum of understanding (MOU) between the government and the NBRNM establishes a framework on the modalities for repayment to the Fund.
- Expectations and coordination:
  - The authorities expect IMF support to have a catalytic effect in securing additional official and market financing to close the fiscal gap and ease balance of payments pressure in 2020.
  - Additional financing requests have been submitted to the World Bank and the European Union.
  - In line with the IMF safeguards policy, the authorities stand ready to collaborate on a safeguards assessment, provide the NBRNM’s most recently completed external audit reports, and authorize external auditors to hold discussions with IMF staff.
  - The authorities authorize the IMF to publish this letter and the staff report for the RFI purchase request.

### Macroeconomic impact, outlook, and policy commitments
- Pre-crisis macro performance:
  - GDP growth: "1.1 percent" in 2017 (deceleration), "2.7 percent" in 2018, "3.6 percent" in 2019.
  - Unemployment: "16.6 percent" at the end of 2019.
  - Recent positive developments: positive decision by the European Council on opening accession talks for EU membership; joined NATO as its 30th member.
- Expected economic impact of COVID-19:
  - Economic activity is expected to "contract sharply in 2020, before rebounding in 2021."
  - Fiscal impacts and debt:
    - The fiscal deficit is expected to widen to "6.5 percent" in 2020.
    - Public debt is expected to "increase substantially in 2020", while remaining sustainable over the medium-term.
  - Shock transmission channels highlighted: high trade openness, limited domestic market, disruptions to global trade and supply chains, lower external demand, remittances, and net FDIs, and tightened global financial conditions.
- Policy stance and commitments:
  - Authorities commit to allocate additional funds to health spending as necessary.
  - Authorities and the National Bank remain committed to preserving monetary, external and financial stability and stand ready to take additional measures as needed, in consultation with the IMF.
  - Commitment to rebuild fiscal buffers once the crisis is overcome to ensure debt sustainability.
  - Commitment to avoid measures that would compound balance of payments difficulties, to comply with IMF Articles of Agreement (including Article VIII obligations), and to avoid additional trade restrictions for balance of payments purposes.
  - Authorities are committed to resuming fiscal consolidation once the health crisis is contained and remain ready to take further measures in consultation with the Fund.

### Authorities’ statement and acknowledgement
- Statement dated April 10, 2020 by Mr. Richard Doornbosch (Alternate Executive Director) and Ms. Shahane Harutyunyan (Advisor to the Executive Director) expressing:
  - Gratitude to IMF management and staff for the timely and proactive RFI response.
  - Broad agreement with staff appraisal and policy advice.
  - Confidence that the policies outlined will enable effective use of the requested RFI purchase and have a catalytic effect in securing additional financing.

*Source: Appendix I. Letter of Intent (1mkdea2020003)*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mkdea2020003.pdf_