## _cr1462

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### Recent Economic Developments
- Growth and demand
  - Following 3.2 percent yoy growth in the first three quarters of the year, a stronger than expected recovery of about 2½ percent for 2013 is achievable.
  - Private consumption growth turned positive in 2013.
  - Investment needs a sustained improvement amid signs of a pickup in private credit to balance risks and maintain growth momentum.
  - External trade contribution turned increasingly positive in 2013, with sizeable import compression and a pickup in exports in Q2 and Q3.

- Inflation
  - Headline inflation peaked at 4.2 percent (yoy) in June 2013 and decelerated to 1.3 percent in October.
  - Core inflation accelerated to 3.2 percent in October.
  - Inflation expected to return to around 2¼ percent at the end of 2013 with the output gap not expected to fully close until 2017.

- External sector and reserves
  - Trade deficit expected to improve to 22 percent of GDP by end-2013 from 23.6 percent in 2012, mainly due to weaker-than-anticipated imports; exports increasing since July with notable contribution from free-trade zones.
  - Private transfers declined to about 19 percent of GDP; current account deficit projected to widen by about 0.4 percentage points, to 3.4 percent of GDP.
  - Net foreign direct investment picked up and is expected to reach 3.3 percent of GDP.
  - Official foreign exchange reserves declined by about €185 million as of early December since end-2012 driven by sizeable negative valuation effects.

- Banking sector and credit
  - As of Q3 2013, average CAR is 17.3 percent (Tier 1 of 14.7 percent).
  - Liquidity ratio is above 32 percent of total assets.
  - NPLs fell to 11.8 percent of total loans from 12.3 percent in June 2013.
  - Recent stress tests indicate resilience to significant deposit withdrawals or sharp deterioration in loan quality.
  - Profitability declining, with ROE down to about 1.8 percent on average.

- Monetary stance and credit growth
  - Credit growth decelerated to about 3.1 percent in the first half of 2013.
  - In July 2013, central bank bill rate reduced by 25 basis points to 3.25 percent and the 7-day deposit facility rate by 25 basis points to 1.50 percent.
  - Reserve requirements on domestic liabilities lowered; reserve requirements on short-term FX deposits tightened.
  - Credit growth remained subdued, especially to corporates.

- Fiscal execution (2013)
  - Supplementary budget approved in November 2013 accommodates a MKD 1 billion increase in pensions and MKD 0.4 billion to clear arrears with foreign suppliers.
  - Revenue underperformance of about 1.3 percent of GDP on a full-year basis noted.
  - Expenditure compression suggests overall fiscal deficit target of 3.9 percent of GDP for 2013 is attainable.

### Outlook and Risks
- Growth projections
  - Growth expected to strengthen to 4 percent in the medium term, with domestic demand the main driver.
  - Consumption expected to recover to about 3–3 ½ percent growth.
  - Net exports’ contribution would strengthen only gradually as imports increase with recovering consumption and FDI.

- Risks to outlook
  - Weak credit growth could impede rebound in private consumption and investment.
  - Uncertainty about start of EU accession talks poses risks to institutions and investment.
  - Growth hampered primarily by slower accumulation of capital; policy focus on building capital via public infrastructure and foreign investment.

- Credit outlook
  - Credit expansion likely to accelerate in 2014; supply-side analysis suggests scope for credit growth of around 4.5 percent in 2014.
  - Risks from potential restructuring in Slovenian and Greek parent banks whose local subsidiaries hold an almost 40 percent share of assets.

- Current account and external financing
  - Current account expected to deteriorate in 2014 mainly due to further decline in private transfers.
  - With private transfers normalizing to about 18.5 percent of GDP, current account deficit would widen to just under 4 ½ percent of GDP.
  - FDI projected to strengthen to 3.8 percent of GDP, covering about 80–85 percent of the projected current account deficit over the next two years.

- Reserves and financing in 2014–near term
  - Reserve accumulation expected to resume in 2014 largely due to public sector external borrowing financing foreign-financed tradable-sector projects (mainly automotive).
  - Sizable public sector medium-term external borrowing expected to dominate net inflows on the financial account, allowing reserve accumulation absent disruptive valuation effects.

- Public sector debt outlook
  - Public sector debt projected to increase from 41½ to 49 percent of GDP over 2013–18.
  - PESR signed a EUR 550 million credit line with the Chinese Ex-Im bank to be disbursed over 2014–18.
  - MBDP contracted an additional credit line of about EUR 100 million from the EIB for SME financing.
  - PESR debt projected to increase from 1.5 to 6 percent of GDP in 2014–18; debt of other SOEs projected to decrease from 3.8 to 3.3 percent of GDP over 2014–18 based on amortization and no new investment activity.

### Policy Discussions — Fiscal Policy
- General stance
  - Authorities broadly agreed with staff advice to start shifting away from stimulus by ending monetary easing and gradually withdrawing fiscal stimulus as recovery proceeds.
  - Fiscal risks from broader public sector operations and external position risks emphasized.

- 2014 budget and revenue risks
  - 2014 deficit target appears attainable though revenue projections likely overstated relative to expected end-2013 outturns.
  - About 1 percent of GDP of the difference relative to staff projections comes from non-tax revenues and grants tied to project-based grants and donations.

- Expenditure mix concerns
  - New current expense commitments could reinforce a less growth-friendly expenditure mix.
  - Capital expenditure is low relative to peers; transfers rank among the highest compared with peers.
  - Draft 2014 budget includes a 5 percent ad hoc increase in pension benefits estimated to cost 0.3 percent of GDP.
  - Lack of timely granular information on implementation of priority infrastructure projects complicates assessment of their protection from cuts and delays.

### Medium-term fiscal strategy and attainability
- Medium-term fiscal strategy
  - Envisages central government fiscal deficit decreasing from 3.9 percent to 2.6 percent of GDP in the period 2013–16.
  - Central government debt projected to increase to 37.5 percent of GDP in 2016–17, before declining to just under 36 percent of GDP by 2018.
  - Negative fiscal impulse in 2014–16 considered unlikely to jeopardize the recovery given strong exports from new capacity and improved euro area outlook.

- Attainability and financing
  - Envisaged adjustment attainable; primary gap about 2 percentage points of GDP.
  - Gross central government financing requirements projected to decrease from almost 15 percent of GDP to 10 percent in 2015–16, mainly driven by progressive lengthening of debt maturity.
  - Identified pipeline of external financing commitments from multilaterals (some 16 percent of GDP over 2014–18).

- Recommendations
  - If private sector-led growth returns earlier than anticipated, front-load adjustment in 2014–15 to strengthen credibility and build buffers.

### Broader public sector fiscal risks and recommendations
- Risks noted
  - Road infrastructure spending shifting off-budget.
  - Greater role of MBDP in securing financing for SMEs.
  - Investment in the energy sector including through state-owned ELEM.

- Recommendations
  - Analyze evolution of, and risks to, the broader public sector fiscal position when setting budgetary targets and prioritizing spending.
  - Broaden coverage of public debt with attention to entities presenting significant fiscal risks (off-budget public entities or public–private partnerships).
  - Prompt collection and dissemination of information on implementation of strategic investment projects.

- Authorities’ views and risk management
  - Authorities stress commitment to priority infrastructure projects and that current expenditure was reduced to minimum sustainable levels during the crisis.
  - Authorities argue Maastricht criteria define general government debt as the relevant concept and view public enterprises’ borrowing as contingent liabilities absent stress events.
  - Ministry of Finance conducts long-term debt sustainability analysis (through 2025) including contingent liabilities from operations with government guarantees; government-approved 5-year investment program for Public Enterprise for State Roads.

- Data transparency
  - Data on government guaranteed debt compiled monthly by Ministry of Finance and complemented by data from relevant public enterprises.
  - All external loans approved by Parliament published in the official gazette.

### Monetary policy, external sustainability, and FDI
- Monetary policy
  - Amid high bank liquidity, a less tentative recovery, and small declines in reserves, a pause in monetary easing deemed appropriate.
  - Continued relaxation of monetary policy unsuccessful in spurring private-sector credit growth.
  - No evidence of pressures on the peg; NBRM net buyer on the foreign exchange market through November.

- Trade and current account
  - Trade deficit forecast to gradually decline to about 21 percent of GDP assuming import dependence of exports improves.
  - Private transfers conservatively forecast to return to about 16½ percent of GDP from record 21 percent in 2012.

- FDI and structural change
  - FDI key driver of stronger export performance in 2013 but limited role in structural change so far.
  - Technological industrial development zones (TIDZ) attracted about one third of total FDI; exports from zones represent about 25 percent of total exports in 2013.
  - Import dependence of these exports remains high; domestic spillovers still nascent.

### Capacity to repay and external financing outlook
- Reserves and buffers
  - Reserves at almost 30 percent of GDP in 2012 provide a significant buffer.
  - Projected FDI flows at 3¾ percent of GDP per year in the medium term, about one percentage point of GDP below historical average.
  - Public sector external borrowing mainly linked to investment projects with substantial identified lending commitments from official sources.
  - Rollover rates of trade credit and intercompany loans above 95 percent over the last four years.
  - Medium- and long-term private external debt about 23 percent of GDP in 2012.

### Box 1 — Highlights on FDI, growth, and structural change
- Results
  - FDI has positive labor market outcomes (employment growth regionally) and diversification of export basket.
  - FDI accounts for a large part of the acceleration in exports and notable diversification in products and markets.

- Challenges to domestic spillovers
  - Human capital: spillovers limited as foreign firms use low-skilled local labor; anecdotal evidence of gradual build-up of managerial skills.
  - Technology transfer: small domestic component of production in zones—estimated at less than 10 percent on average—due to strict quality/security standards; main spillovers to local transporters and construction companies.

- Authorities’ measures to improve business climate
  - Business-friendly tax regime; SMEs benefit from profit tax exemptions.
  - Flow of credit to SMEs via EIB credit lines secured by MBDP and intermediated by commercial banks.
  - Streamlined procedures to buy land and open businesses; more flexible labor laws.
  - Draft law on financial discipline (now approved by Parliament) imposes substantial financial sanctions to limit payment delays.

### Debt Sustainability Analysis — core findings and stress tests
- Baseline dynamics
  - Baseline central government debt projected to peak around 37.5 percent of GDP in 2016-17 and decline thereafter.
  - Primary balance projected to improve from -3.1 to -1.1 percent of GDP over 2013–18, below the debt-stabilizing primary balance of 1.6 percent.
  - Slowly closing primary gap adds about 11 percentage points of GDP to debt over the same period.
  - Real GDP growth expected to increase from 2.2 to 4 percent over the medium term.

- Debt profile vulnerabilities
  - FX debt represents 79 percent of public sector debt; 63 percent of public sector debt owned by non residents.
  - Currency composition of debt is a key vulnerability; issuing foreign debt helps maintain a stable reserve path but carries FX-liability risks.

- Stress test quantitative impacts (percentage points in excess of baseline at end of projection period)
  - Primary Balance Shock: 2.9
  - Real GDP Growth Shock: 2.2
  - Interest Rate Shock: 1.7
  - Real Exchange Rate Shock: 2.1
  - Combined Macro-Fiscal Shock: 9.5
  - Debt guarantee shock: 5.2
  - Pension Shock: 2.4

- Additional sensitivity results
  - A slowdown in consolidation by 50 percent plus interest rate increases of 25 bps per 1 percent of GDP worsening in primary balance increases debt/GDP by 2.9 percentage points above baseline.
  - A slowdown in real GDP growth by 70 bps relative to baseline increases debt/GDP by 2.9 percentage points above baseline.
  - Annual increases in pension entitlements as witnessed in 2013–14 increase debt/GDP by 2.4 percentage points above baseline.
  - Central government guarantees called on SOE borrowing would increase debt/GDP by 5.2 percentage points above baseline.

### Key projections and selected indicators (preserved exactly where cited)
- Primary fiscal balance 1/: -3.0 -3.1 -2.6 -1.8 -1.1 -1.1 -1.1
- Cyclically-adjusted primary balance (HP) 2/: -2.6 -2.8 -2.4 -1.8 -1.2 -1.1 -1.1
- Fiscal impulse (primary balance, HP) 2/: 0.5 0.2 -0.4 -0.7 -0.6 0.0 -0.1
- Output gap (HP) 2/: -1.2 -0.9 -0.5 -0.1 0.1 0.0 -0.2

- Nominal gross public debt (percent of GDP): 25.1 27.9 34.1 36.1 36.2 37.5 37.4 36.3 35.8
- Public gross financing needs (in percent of GDP): 0.4 7.6 8.7 15.0 11.1 10.7 9.4 7.2 8.3
- Real GDP growth (in percent): 3.6 2.9 -0.4 2.5 3.0 3.6 3.9 4.0 4.0
- Inflation (GDP deflator, in percent): 4.4 3.0 0.1 4.0 3.0 1.8 3.0 2.9 2.2
- Effective interest rate (in percent): 3.0 3.3 3.3 3.3 3.2 3.1 3.4 3.5 3.3

- Public sector gross debt (percent of GDP, projections / memo): Gross Central Government Debt 24.2 27.9 34.1 35.9 35.9 37.4 37.7 36.8 36.6; Public Sector Gross Debt 27.8 32.1 39.0 41.6 43.2 46.4 47.0 47.5 47.0.

- External sector indicators (selected):
  - Current account balance (percent of GDP): -2.0 -2.5 -3.0 -3.4 -4.4 -5.7 -5.1 -4.4 -4.1
  - External debt (percent of GDP): 58.2 64.8 69.3 64.6 63.2 63.4 62.4 60.4 59.4
  - Gross official reserves (millions of euros, projection series): 1,715 2,069 2,193 2,004 2,183 2,367 2,588 2,793 3,088
  - Gross external financing need (in percent of GDP, from external DSA): 32.2 27.0 23.4 24.8 27.8 29.0 28.6 30.5 26.2

### Selected historical and recent macro indicators (preserved exactly)
- Real GDP growth: -0.9 (2009); 2.9 (2010); 2.9 (2011); -0.4 (2012); 2.5 (2013).
- Real domestic demand: -3.3 (2009); 0.3 (2010); 5.3 (2011); 1.9 (2012); 0.1 (2013).
- Consumption: -3.9 (2009); 0.9 (2010); 3.4 (2011); -1.7 (2012); 3.1 (2013).
- Gross Investment: -0.7 (2009); -2.0 (2010); 13.5 (2011); 16.1 (2012); -10.1 (2013).
- Net Exports (contribution to growth): 3.2 (2009); 2.5 (2010); -3.3 (2011); -2.6 (2012); 2.4 (2013).
- CPI inflation (annual average): -0.8 (2009); 1.5 (2010); 3.9 (2011); 3.3 (2012); 2.8 (2013).
- Unemployment rate (annual average): 32.2 (2009); 32.0 (2010); 31.4 (2011); 31.0 (2012); 28.7 (2013).
- Current account balance: -6.8 (2009); -2.0 (2010); -2.5 (2011); -3.0 (2012); -3.4 (2013, proj.).
- Trade balance: -23.3 (2009); -20.5 (2010); -22.1 (2011); -23.6 (2012); -22.0 (2013).
- Exports of goods: 28.8 (2009); 35.9 (2010); 43.0 (2011); 41.7 (2012); 41.1 (2013).
- Imports of goods: 52.1 (2009); 56.4 (2010); 65.0 (2011); 65.2 (2012); 63.1 (2013).
- Private Transfers: 16.4 (2009); 18.9 (2010); 19.0 (2011); 21.1 (2012); 19.1 (2013).
- External debt: 56.4 (2009); 58.2 (2010); 64.8 (2011); 69.3 (2012); 64.6 (2013).
- Gross investment: 26.2 (2009); 25.5 (2010); 26.2 (2011); 29.4 (2012); 28.4 (2013).
- Domestic saving: 19.4 (2009); 23.5 (2010); 23.7 (2011); 26.4 (2012); 25.0 (2013).
- Public saving: 0.6 (2009); 1.1 (2010); 1.4 (2011); 0.2 (2012); -0.5 (2013).
- Private saving: 18.8 (2009); 22.4 (2010); 22.3 (2011); 26.2 (2012); 25.5 (2013).
- Foreign saving: 6.8 (2009); 2.0 (2010); 2.5 (2011); 3.0 (2012); 3.4 (2013).
- Central government gross debt: 23.8 (2009); 24.2 (2010); 27.9 (2011); 34.1 (2012); 34.3 (2013).
- Central government balance: -2.7 (2009); -2.4 (2010); -2.5 (2011); -3.9 (2012); -3.9 (2013).
- Nominal GDP (billions of denars): 411 (2009); 434 (2010); 460 (2011); 459 (2012); 489 (2013).
- Nominal GDP (billions of euros): 6.7 (2009); 7.1 (2010); 7.5 (2011); 7.5 (2012); 7.9 (2013).
- GDP per capita (euros): 3265 (2009); 3430 (2010); 3629 (2011); 3615 (2012).

### Staff appraisal and policy recommendations
- Macroeconomic outlook
  - Prospects improving despite weak external environment; activity pickup to 3.2 percent yoy growth in first three quarters of 2013 suggests less fragile recovery.
  - Export growth accelerated due to expanding FDI-related capacity.

- Policy shifts recommended
  - Start shifting away from providing stimulus.
  - Fiscal policy: planned fiscal path consistent with reducing central government debt over the medium term and broadly appropriate cyclically; consider front-loading adjustment in 2014–15 if private-sector led growth returns earlier to strengthen credibility and build buffers.
  - Monetary policy: pause in monetary easing appropriate given high banking system liquidity, stronger recovery, and small declines in reserves.

*Source: IMF staff report excerpts, “1. Foreign Direct Investment, Growth, and Structural Change” and related chapters in _cr1462.*

### 1. Foreign Direct Investment, Growth, and Structural Change  ___________________________________  13

### 1. Foreign Direct Investment, Growth, and Structural Change

### Recent Economic Developments
- Growth and demand
  - Following 3.2 percent yoy growth in the first three quarters of the year, a stronger than expected recovery of about 2½ percent for 2013 is achievable.
  - Private consumption growth turned positive in 2013, supporting an acceleration of domestic demand.
  - A sustained improvement in investment, amid signs of a pickup in private credit, is needed to balance risks and maintain growth momentum.
  - External trade contribution turned increasingly positive in 2013, with sizeable import compression and a pickup in exports in Q2 and Q3.

- Inflation
  - Headline inflation peaked at 4.2 percent (yoy) in June 2013 and decelerated to 1.3 percent in October.
  - Core inflation accelerated to 3.2 percent in October.
  - With the output gap not expected to fully close until 2017, price developments likely to be moderate; inflation is expected to return to around 2¼ percent at the end of 2013.

- External sector and reserves
  - Trade deficit expected to improve to 22 percent of GDP by end-2013 from 23.6 percent in 2012, mainly due to weaker-than-anticipated imports, particularly fuel imports; exports have been increasing since July, with notable contribution from free-trade zones.
  - Private transfers declined to about 19 percent of GDP; the current account deficit is projected to widen by about 0.4 percentage points, to 3.4 percent of GDP.
  - Net foreign direct investment picked up and is expected to reach 3.3 percent of GDP; these flows are about 1.2 percentage points below the forecast at the time of the 2013 Article IV discussions.
  - Official foreign exchange reserves declined by about €185 million as of early December since end-2012, driven by sizable negative valuation effects affecting gold and foreign securities despite robust public sector net borrowing.

- Banking sector and credit
  - As of Q3 2013, average CAR is 17.3 percent (Tier 1 of 14.7 percent).
  - Liquidity ratio is above 32 percent of total assets.
  - NPLs fell to 11.8 percent of total loans from 12.3 percent in June 2013.
  - Recent stress tests indicate resilience to significant deposit withdrawals or sharp deterioration in loan quality.
  - Profitability has been declining, with ROE down to about 1.8 percent on average, reflecting full provisioning of non-performing loans and uncertainty around euro area parent banks.

- Monetary stance and credit growth
  - Credit growth decelerated to about 3.1 percent in the first half of 2013.
  - In July 2013, the authorities reduced the central bank bill rate by 25 basis points to 3.25 percent and the 7-day deposit facility rate by 25 basis points to 1.50 percent.
  - Reserve requirements on liabilities in domestic currency were lowered, while reserve requirements on short-term FX deposits were tightened, aiming to stimulate local-currency deposits and encourage long-term foreign funding.
  - Credit growth remained subdued, especially to corporates, due to risk aversion and portfolio cleaning.

- Fiscal execution (2013)
  - Supplementary budget approved in November 2013 accommodates a MKD 1 billion increase in pensions and MKD 0.4 billion to clear arrears with foreign suppliers.
  - Revenue underperformance of about 1.3 percent of GDP on a full-year basis is noted.
  - Expenditure compression in goods and services and capital expenditures suggests the overall fiscal deficit target of 3.9 percent of GDP for 2013 is attainable.

### Outlook and Risks
- Growth projections
  - Growth is expected to strengthen to 4 percent in the medium term, with domestic demand as the main driver.
  - Consumption is expected to recover to about 3–3 ½ percent growth.
  - Contribution of net exports would strengthen only gradually as imports increase with recovering consumption and FDI.

- Risks to outlook
  - Weak credit growth could impede rebound in private consumption and investment.
  - Broader risks to institutions and investment arise from continued uncertainty about the start of EU accession talks.
  - Growth hampered primarily by slower accumulation of capital; policy focus appropriately on building capital via public infrastructure and foreign investment.

- Credit outlook
  - Credit expansion likely to accelerate in 2014 as banks reach under-served segments using refined monitoring and credit scoring, enabling more lending against cash flows rather than only collateral.
  - Supply-side analysis suggests scope for credit growth of around 4.5 percent in 2014, accounting for government financing needs.
  - Risks include potential restructuring in Slovenian and Greek parent banks, whose local subsidiaries hold an almost 40 percent share of assets; lengthy divestment processes could shift strategy away from credit intermediation toward portfolio beautification, negatively affecting domestic demand.

- Current account and external financing
  - Current account expected to deteriorate in 2014 mainly due to further decline in private transfers.
  - Import volume growth projected to accelerate with new production capacities and intensified free-trade zone activity; export volume growth would outpace import growth, broadly stabilizing the trade deficit.
  - With private transfers normalizing to about 18.5 percent of GDP, the current account deficit would widen to just under 4 ½ percent of GDP.
  - Over the medium term, strong imports, catching-up exports, declining transfers, and modest steady FDI are expected to widen the current account deficit through 2015 but gradually improve it thereafter.

- Reserves and financing in 2014–near term
  - Reserve accumulation expected to resume in 2014, largely due to public sector external borrowing financing foreign-financed tradable-sector projects (mainly automotive).
  - FDI projected to strengthen to 3.8 percent of GDP, covering about 80–85 percent of the projected current account deficit over the next two years.
  - Sizable public sector medium-term external borrowing for construction projects expected to dominate net inflows on the financial account, allowing reserve accumulation absent disruptive valuation effects.

- Public sector debt outlook
  - Public sector debt projected to increase from 41½ to 49 percent of GDP over 2013–18.
  - PESR signed a EUR 550 million credit line with the Chinese Ex-Im bank to be disbursed over 2014–18.
  - MBDP contracted an additional credit line of about EUR 100 million from the EIB for SME financing.
  - PESR debt projected to increase from 1.5 to 6 percent of GDP in 2014–18; debt of other SOEs projected to decrease from 3.8 to 3.3 percent of GDP over 2014–18 based on amortization and no new investment activity.

### Policy Discussions — Fiscal Policy
- General stance
  - Authorities broadly agreed with staff advice to start shifting away from stimulus by ending monetary easing and gradually withdrawing fiscal stimulus as recovery proceeds.
  - Discussions emphasized fiscal risks from broader public sector operations and external position risks given weaker private capital flows.

- 2014 budget and revenue risks
  - Despite likely overstated budgetary space, the 2014 deficit target appears attainable.
  - Revenues have consistently underperformed budget forecasts; revenue projections in the 2014 budget are likely overstated relative to expected end-2013 outturns.
  - About 1 percent of GDP of the difference relative to staff projections comes from non-tax revenues and grants tied to project-based grants and donations; underperformance on these revenue targets automatically curtails linked expenditures.

- Expenditure mix concerns
  - New current expense commitments could reinforce a less growth-friendly expenditure mix.
  - Capital expenditure is low relative to peers, and ex post shares of capital expenditure in total spending differ from ex ante policy statements.
  - Transfers rank among the highest compared with peers; draft 2014 budget includes a number of new current commitments, including a 5 percent ad hoc increase in pension benefits estimated to cost 0.3 percent of GDP.
  - While the budget targets acceleration of large capital expenditures (railways, gasification, hospitals), space for these outlays could be constrained by entitlement spending increases.
  - Lack of timely granular information on implementation of priority infrastructure projects complicates assessment of their protection from cuts and delays.

*Source: IMF staff report excerpt, “1. Foreign Direct Investment, Growth, and Structural Change”*

### 14. The return to publishing a medium-term fiscal strategy, in line with

### _cr1462 - 14. The return to publishing a medium-term fiscal strategy, in line with

### Medium-term fiscal strategy and fiscal stance
- The published medium-term fiscal strategy envisages a central government fiscal deficit decreasing from 3.9 percent to 2.6 percent of GDP in the period 2013–16.
- The planned fiscal path is consistent with reducing central government debt over the medium term and is broadly appropriate from a cyclical point of view.
- Central government debt is projected to increase to 37.5 percent of GDP in 2016–17, before declining to just under 36 percent of GDP by 2018 (Appendix I).
- The negative fiscal impulse in 2014–16 is unlikely to jeopardize the recovery, given:
  - strong performance of exports from new capacity, and
  - an improved outlook for the euro area.
- If private sector-led growth returns earlier than anticipated, some front-loading of the adjustment in 2014–15 would:
  - strengthen the credibility of the consolidation plan, and
  - build up fiscal buffers to allow a countercyclical response to any future downturn.

Key fiscal statistics (percent, 2012–2018)
- Primary fiscal balance 1/: -3.0 -3.1 -2.6 -1.8 -1.1 -1.1 -1.1
- Cyclically-adjusted primary balance (HP) 2/: -2.6 -2.8 -2.4 -1.8 -1.2 -1.1 -1.1
- Fiscal impulse (primary balance, HP) 2/: 0.5 0.2 -0.4 -0.7 -0.6 0.0 -0.1
- Output gap (HP) 2/: -1.2 -0.9 -0.5 -0.1 0.1 0.0 -0.2

Notes:
- 1/ Percent of GDP.
- 2/ Percent of potential GDP.
- HP stands for Hodrick-Prescott Filter. The fiscal impulse is the difference in the cyclically-adjusted balance between the previous and the current year (a negative fiscal impulse means a cyclically-adjusted contraction).
- Source: IMF staff estimates.

### Attainability of adjustment and financing
- The envisaged adjustment is attainable. The primary gap is about 2 percentage points of GDP.
- Recent fiscal shortfalls may have weakened credibility of the target—the primary balance forecasting error is higher than the average for other market access countries—but:
  - the projected maximum cumulative adjustment in the cyclically-adjusted primary balance (CAPB) over any three-year period during the projection horizon is below the top quartile for reference market access countries (Appendix I).
- Financing requirements are declining and can be met under reasonable conditions:
  - Gross central government financing requirements are projected to decrease from almost 15 percent of GDP to 10 percent in 2015–16, mainly driven by a progressive lengthening of debt maturity.
  - These financing requirements are likely to be met by a strong identified pipeline of external financing commitments from multilaterals (some 16 percent of GDP over 2014–18).

### Broader public sector fiscal risks
- With a widening scope of public sector operations, a more comprehensive picture of public sector fiscal risks is needed:
  - road infrastructure spending shifting off-budget;
  - a greater role of the Macedonian Bank for Development Promotion (MBDP) in securing financing for SMEs;
  - investment in the energy sector including through state-owned ELEM.
- Recommendations:
  - Analyze the evolution of, and risks to, the broader public sector fiscal position in setting budgetary targets and prioritizing spending.
  - Coverage of public debt should be as broad as possible, with particular attention to entities that present significant fiscal risks (off-budget public entities or partnerships with the private sector).
- A comprehensive picture of public sector fiscal risks would facilitate monitoring by external lenders, particularly given the strong pipeline of committed project financing from the EBRD, EIB, and the World Bank over the next few years.

### Authorities’ views and risk management
- Authorities’ emphasis:
  - Commitment to priority infrastructure projects; current expenditure reduced to minimum sustainable levels during the crisis.
  - In the energy sector, recent delays linked to environmental monitoring and the need to reopen some tenders.
- On the relevant debt concept:
  - Authorities argue that Maastricht criteria define general government debt as the relevant concept.
  - A broader public debt concept including state-owned enterprises lacks specific benchmarks, thresholds, and comparability across countries.
  - Absent stress events, public enterprises’ borrowing should not be considered government debt but only contingent liabilities.
- Risk management strategy focuses on:
  - Strict control over indebtedness of public enterprises: Public Enterprise for State Roads submits a 5-year investment program subject to government approval and scrutiny.
  - Long-dated and comprehensive analysis of capacity to pay: Ministry of Finance conducts a long-term debt sustainability analysis (through 2025) including contingent liabilities from operations with government guarantees; used to establish maximum borrowing limits but not made public.

- Data transparency:
  - Data on government guaranteed debt are compiled on a monthly basis by the Ministry of Finance and complemented by data from relevant public enterprises.
  - All external loans approved by Parliament are published in the official gazette.

### Monetary policy and external sustainability
- Monetary policy stance:
  - Amidst high bank liquidity, a less tentative economic recovery, and small declines in the reserve stock, a pause in monetary easing would be appropriate.
  - Continued relaxation of monetary policy has been unsuccessful in spurring private sector credit growth, particularly as high risk aversion in big banks binds.
  - Negative valuation effects have weakened the reserve position in the context of high banking system liquidity, a stronger economic recovery, and elevated core inflation.
  - No evidence of pressures on the peg; the NBRM has been a net buyer on the foreign exchange market through November.
- Trade and current account:
  - Structurally large trade deficits remain an important vulnerability.
  - Trade deficit is forecast to gradually decline to about 21 percent of GDP, assuming import dependence of exports improves.
  - Private transfers (mostly remittances, plus unregistered services exports) are conservatively forecast to return to pre-crisis levels of about 16½ percent of GDP from the record level of 21 percent reached in 2012.
- FDI and structural change:
  - FDI has been a key driver of stronger export performance in 2013 but has had limited role in affecting structural change so far.
  - Technological industrial development zones (TIDZ) have attracted about one third of total FDI; exports from zones represent about 25 percent of total exports in 2013.
  - Import dependence of these exports remains high; domestic spillovers still nascent.
- External debt dynamics:
  - Under the baseline, external debt is expected to stabilize at just under 64 percent of GDP before trending downward in 2016, aided by an improving trade balance, higher growth, fiscal consolidation, and modest FDI flows.
  - Scenario analysis indicates combined shocks of lower growth, a deteriorating current account and interest rate hikes would not jeopardize this trend.
  - Baseline dynamics are significantly weaker than under a scenario with key parameters at historical averages, largely driven by lower non-debt creating flows.
  - With weaker private non-debt creating flows, reserve accumulation would increasingly depend on external public debt trajectory—requiring careful calibration of public debt management to ensure adequate foreign exchange reserves and reduce public debt vulnerabilities.

Box 1 highlights on FDI, growth, and structural change
- Results:
  - FDI has positive labor market outcomes (employment growth regionally) and diversification of export basket.
  - FDI accounts for a large part of the acceleration in exports and notable diversification in products and markets.
- Challenges to domestic spillovers:
  - Human capital: spillovers limited as foreign firms use low-skilled local labor; anecdotal evidence of gradual build-up of managerial skills.
  - Technology transfer: small domestic component of production in zones—estimated at less than 10 percent on average—due to strict quality/security standards; main spillovers to local transporters and construction companies.
- Authorities’ measures to improve business climate:
  - Business-friendly tax regime; SMEs benefit from profit tax exemptions.
  - Flow of credit to SMEs via EIB credit lines secured by MBDP and intermediated by commercial banks.
  - Streamlined procedures to buy land and open businesses; labor laws more flexible.
  - Draft law on financial discipline (now approved by Parliament) imposes substantial financial sanctions to limit payment delays.

### Capacity to repay and external financing outlook
- Reserve position and buffers:
  - Reserves at almost 30 percent of GDP in 2012 provide a significant buffer against shocks.
  - Projections for private foreign capital inflows revised downwards; medium- and long-term public sector borrowing should help meet the heavy amortization schedule, particularly in 2015, while preserving reserve adequacy ratios.
- Risk factors and balances:
  - Baseline forecast is conservative: projected FDI flows at 3¾ percent of GDP per year in the medium term, about one percentage point of GDP below historical average.
  - Public sector external borrowing mainly linked to investment projects with substantial identified lending commitments from official sources.
  - Rollover rates of trade credit and intercompany loans have remained above 95 percent over the last four years.
  - Medium- and long-term private external debt represented about 23 percent of GDP in 2012; rollover risks appear contained as they mainly reflect debt financing of direct investment projects with naturally hedged borrowers.

### Staff appraisal and policy recommendations
- Macroeconomic outlook:
  - Macroeconomic prospects improving despite weak external environment.
  - Activity pickup to 3.2 percent yoy growth in the first three quarters of 2013 suggests less fragile recovery.
  - Export growth accelerated due to expanding FDI-related capacity; better euro area outlook in 2014 should sustain the trend.
  - Private consumption growth has turned positive.
- Policy shift recommendation:
  - To preserve solid fundamentals, the focus of policies should start shifting away from providing stimulus.
  - Fiscal policy: The authorities’ planned fiscal path is consistent with reducing central government debt over the medium term and is broadly appropriate cyclically. If private-sector led growth returns earlier than anticipated, front-loading adjustment in 2014–15 is advised to strengthen credibility and build buffers.
  - Monetary policy: Amidst high banking system liquidity, a stronger recovery, and small declines in reserves, a pause in monetary easing would be appropriate.

*Source: IMF staff estimates.*

### 29. Large infrastructure needs require a carefully calibrated fiscal space. Fiscal

### _cr1462 - 29. Large infrastructure needs require a carefully calibrated fiscal space. Fiscal

### Fiscal stance and infrastructure priorities
- Fiscal adjustment needs to protect the execution of priority capital spending.
- Return to multiyear budget frameworks should help ensure a growth-friendly expenditure mix that helps address infrastructure gaps, particularly in roads, railways, and energy.
- Given the widening perimeter of public sector operations—namely SOEs—which are executing such investment, the authorities should continue to analyze the evolution of, and risks to, the broader public sector debt in setting budgetary targets and prioritizing spending.
- Prompt collection and dissemination of information on the implementation of strategic investment projects will help in protecting priority capital spending.

### Public debt management and external reserves
- Further good progress on public debt management would strengthen both the fiscal and external positions.
- Authorities have increased the size of domestic issuance, lengthened domestic maturities, and set operational targets for variability as well as currency composition of central government debt.
- A broader perspective of public debt is appropriate to further strengthen debt management.
- With weaker private non-debt creating flows, the path of reserve accumulation would increasingly depend on the external public debt trajectory—requiring a careful calibration of the public debt management strategy so as to ensure adequate foreign exchange reserves as well as to reduce public debt vulnerabilities.

### Trade balance, FDI, and structural adjustment
- A structural improvement in the trade deficit is needed to ensure sustained and balanced growth and a sound external position.
- FDI flows have a key role to play; existing operations are already starting to provide an impulse to exports and to job creation.
- To ensure more balanced growth, it is important to continue to facilitate spillovers to the domestic productive sector so that:
  - Emergence of a competitive and qualified domestic supply chain would help reduce imports and raise domestic value-added.
  - Innovation spillovers to domestic firms should strengthen the tradable sector.
- Closing infrastructure gaps to connect Macedonia efficiently to larger markets and continuing to ensure a stable operating environment for all firms—domestic and foreign, small and large—will help.

### Appendix I. Debt Sustainability Analysis — summary findings and risks
- Government debt dynamics—contingent on meeting the outlined medium-term fiscal targets—are stable under the baseline, but sensitive to growth and primary balance shocks.
- Fan charts: the 10 to 90 inter-percentile range of debt-to-GDP ratio in 2018 is between 26 and 46 percent of GDP; an asymmetric distribution with no upside shocks yields an inter-percentile range of 34 and 51 percent of GDP.
- The currency composition of debt remains the key debt profile vulnerability.

Key projections and mechanics:
- Baseline central government debt levels are projected to peak at around 37.5 percent of GDP in 2016-17 and decline thereafter.
- The primary balance is projected to decrease from 3.1 to 1.1 percent over the 2013–18 forecast horizon, below the debt-stabilizing primary balance of 1.6 percent.
- In cumulative terms, a slowly closing primary gap is the main debt creating flow, adding about 11 percentage points of GDP to debt over the same period.
- Effective interest rates are projected to remain on average constant over the forecast horizon as the impact of increasing debt levels in the first part of the period is offset by increasing favorable terms on external debt.
- Real GDP growth is expected to moderately increase from 2.2 to 4 percent over the medium term—offsetting about ¾ of the effect of higher deficits.
- Availability of large government deposits at NBRM (some 4.3 percent of GDP at end-2012) to meet financing needs alleviates some of the pressure on gross debt.

Debt maturity and consolidation feasibility:
- Maturity of domestic debt has increased, notably reducing rollover risk. The government succeeded in increasing the maturity of domestic debt from 5 to 25 months in the last two years.
- Average maturity of outstanding debt is likely to increase further as authorities plan to start issuing 10-year maturity notes and retire shorter maturity notes.
- The consolidation path planned by the authorities appears achievable:
  - The maximum cumulative change in cyclically adjusted primary balance (CAPB) planned by the authorities in any given 3 years over the forecast horizon is below the top quartile of reference countries.
  - The maximum 3-year rolling average CAPB that the government will maintain over the forecast horizon is also lower than the top quartile of reference countries.
  - The planned cumulative change in primary balance of 2 percentage points in GDP over the forecast horizon is judged realistic and achievable.

Sensitivity and stress tests:
- Historical staff estimates of primary balances have been optimistic, suggesting the need for further sensitivity analysis.
- Stress test results:
  - A slowdown in the consolidation path by 50 percent relative to baseline and consequent increase in interest rates by 25 bps for every 1 percent of GDP worsening in the primary balance would increase the debt to GDP ratio by 2.9 percentage points above the baseline towards the end of the projection period.
  - A slowdown in real GDP growth by 70 bps relative to baseline and consequent deterioration of primary balance would have a similar impact (increase debt to GDP ratio by 2.9 percentage points above the baseline).
  - Annual increases during the whole forecast period in pension entitlements as witnessed in 2013 and 2014 increase the debt to GDP ratio by 2.4 percentage points above the baseline towards the end of the projection period.
  - In the context of capital expenditure shifting from the budget to SOEs, central government guarantees that, if fully called upon, would increase the debt to GDP ratio by 5.2 percentage points above the baseline towards the end of the projection period.

Currency composition vulnerability:
- FX debt still represents 79 percent of public sector debt, which is also largely owned by non residents (63 percent).
- From a debt management strategy point of view, issuing foreign debt allows the country to maintain a stable reserve path against shocks from volatile remittances and FDI flows.
- However, the current large share of external debt could trigger a reassessment by markets of the stability of the peg, especially if FX revenues from FDI, remittances and the export sector significantly underperform.
- An explicit debt management strategy designed to balance the risk posed by excessive FX liabilities and the advantages of cheaper financing would largely mitigate the risks associated with the current currency composition of debt.

*IMF staff summary from chapter text.*

### 7.      While the heat map identifies additional vulnerabilities, several mitigating factors

### _cr1462 - 7.      While the heat map identifies additional vulnerabilities, several mitigating factors

### Vulnerabilities identified and mitigating factors
- Gross central government financing needs are high and exceed the 10 percent vulnerability threshold in 2013.
- Short-term debt: a notable increase of 8.5 percent of GDP in 2012 coincides with a period of substantial deepening of domestic debt markets—total domestic debt issuance nearly double over the 2011–12 period.
- Mitigants:
  - Short-term debt share is projected to decrease in line with the authorities’ maturity targets.
  - Risk from high share of debt held by non-residents is mitigated because, with the exception of the one outstanding Eurobond issuance, a large portion of the debt is non-market long-term debt held by IFIs, limiting rollover risks.

### Debt stress test scenarios and quantitative impacts (percentage points in excess of baseline at end of projection period)
- Primary Balance Shock: 2.9
  - Minimum shock equivalent to 50% of planned adjustment (50% implemented), or baseline minus half of the 10-year historical standard deviation, whichever is larger. There is an increase in interest rates of 25bp for every 1% of GDP worsening in the primary balance.
- Real GDP Growth Shock: 2.2
  - Real GDP growth is reduced by 70 bps for 2014-18 relative to baseline; revenue-to-GDP ratio remains the same as in the baseline; level of non-interest expenditures is the same as in the baseline; deterioration in primary balance leads to higher interest rate; decline in growth leads to lower inflation (0.25 percentage points per 1 percentage point decrease in GDP growth).
- Interest Rate Shock: 1.7
  - Interest rate increases by difference between average real interest rate level over projection and maximum real historical level, or by 200bp, whichever is larger.
- Real Exchange Rate Shock: 2.1
  - Estimate of overvaluation or maximum historical movement of the exchange rate, whichever is higher; pass-through to inflation with default elasticity of 0.25 for EMs and 0.03 for AEs.
- Combined Macro-Fiscal Shock: 9.5
  - Shock size and duration based on the underlying shocks.
- Debt guarantee shock: 5.2
  - Central Government guarantees as of 2013 on SOEs borrowing fully called over 2014-18 forecast horizon. There is an increase in interest rates of 100bps for every 1% of GDP worsening in the primary balance.
- Pension Shock: 2.4
  - 5% ad hoc annual increase in pension entitlements during the period 2015-18.

### Debt and financing indicators and projections (selected figures, as of June 30, 2013, and projections)
- Nominal gross public debt (percent of GDP): 25.1 27.9 34.1 36.1 36.2 37.5 37.4 36.3 35.8
- Public gross financing needs (in percent of GDP): 0.4 7.6 8.7 15.0 11.1 10.7 9.4 7.2 8.3
- Real GDP growth (in percent): 3.6 2.9 -0.4 2.5 3.0 3.6 3.9 4.0 4.0
- Inflation (GDP deflator, in percent): 4.4 3.0 0.1 4.0 3.0 1.8 3.0 2.9 2.2
- Effective interest rate (in percent): 3.0 3.3 3.3 3.3 3.2 3.1 3.4 3.5 3.3
- Change in gross public sector debt (cumulative projection): -1.6 (debt-stabilizing primary balance indicator also shown in DSA charts)
- Identified debt-creating flows, automatic dynamics, and other flows are quantified in the projections and contribute to year-by-year changes in gross public debt.

### Baseline assumptions and alternative scenarios (selected underlying assumptions)
- Baseline and alternative projections show scenarios for Real GDP growth, Inflation, Primary Balance, and Effective interest rate across 2013–2018:
  - Baseline Real GDP growth (2013–2018): 2.5 3.0 3.6 3.9 4.0 4.0
  - Baseline Inflation (2013–2018): 4.0 3.0 1.8 3.0 2.9 2.2
  - Baseline Primary Balance (2013–2018): -3.1 -2.6 -1.8 -1.1 -1.1 -1.1
  - Historical scenario, constant primary balance scenario, and additional stress test scenarios (Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Debt guarantee shock, Pension Shock) are modeled with their respective assumed paths for these variables.

### Additional quantitative context from the DSA and external sector tables
- Public sector gross debt (percent of GDP, projections / memo): Gross Central Government Debt 24.2 27.9 34.1 35.9 35.9 37.4 37.7 36.8 36.6; Public Sector Gross Debt 27.8 32.1 39.0 41.6 43.2 46.4 47.0 47.5 47.0.
- External sector indicators (selected):
  - Current account balance (percent of GDP): -2.0 -2.5 -3.0 -3.4 -4.4 -5.7 -5.1 -4.4 -4.1
  - External debt (percent of GDP): 58.2 64.8 69.3 64.6 63.2 63.4 62.4 60.4 59.4
  - Gross official reserves (millions of euros, projection series): 1,715 2,069 2,193 2,004 2,183 2,367 2,588 2,793 3,088
  - Gross external financing need (in percent of GDP, from external DSA): 32.2 27.0 23.4 24.8 27.8 29.0 28.6 30.5 26.2

*Source: IMF staff analysis and Public DSA tables and figures contained in the chapter.*

### 23.6 percent in 2012, mainly due to weaker-than-anticipated imports, while exports have been

### _cr1462 - 23.6 percent in 2012, mainly due to weaker-than-anticipated imports, while exports have been

### External sector and current account
- Trade balance: -23.6 percent of GDP in 2012.
- Exports of goods: 41.7 percent of GDP in 2012.
- Imports of goods: 65.2 percent of GDP in 2012.
- Private transfers: 21.1 percent of GDP in 2012, weakening to 19.1 percent of GDP (period not explicitly dated in excerpt).
- Current account deficit projected to widen slightly to 3.4 percent of GDP (projection context in text).
- Net foreign direct investment: expected to reach 3.3 percent of GDP—strengthening relative to 2012.
- FDIs in technological industrial development zones: accounted for about one quarter of overall exports in 2013.
- Exports increased, with a notable contribution from free trade zones.

### Balance of payments, reserves, and price effects
- Sizable negative price effects affecting gold and foreign securities resulted in an erosion of the stock of official reserve assets by about €200 million since end-2012.
- Stock of foreign exchange reserves: over 25 percent of GDP, providing a significant buffer and capacity to repay remains adequate.
- Authorities note a more balanced view of external risks: shortfalls in private transfers expected to be matched by corresponding declines in imports; shortfalls in capital inflows expected to be accompanied by decreases in imports.

### Banking sector and monetary policy
- Banking sector described as healthy, with high capital and liquidity ratios, although profitability has been declining.
- Non-performing loans: fallen to 11.8 percent of total loans.
- Credit growth: deceleration to about 3 percent in the first half of 2013; later accelerated to 6.4 percent at end-December (year implied 2013).
- Central bank policy rates (July change): central bank bill rate reduced by 25 basis points to 3.25 percent; 7-day deposit facility rate reduced by 25 basis points to 1.50 percent.
- Credit growth remained subdued to the corporate sector due to bank risk aversion and portfolio cleaning.
- Directors: further monetary easing not needed; encouraged readiness to tighten monetary policy as needed to preserve the currency peg and maintain robust international reserves.

### Fiscal policy, medium-term strategy, and public investment
- Return to publishing a medium-term fiscal strategy noted as anchoring expectations.
- 2014 budget: described as appropriately contractionary; deficit target appears attainable.
- Authorities target acceleration of large capital expenditures (railways, gasification, hospitals); space for these outlays could be constrained by increases in entitlement spending.
- Fiscal strategy aims to decrease fiscal deficit from 3.9 percent of GDP to 2.6 percent of GDP over 2013–2016 (authorities’ plan).
- 2014 budget envisages a decrease in the budget deficit from 3.9 percent of GDP in 2013 to 3.5 percent of GDP in 2014; capital expenditures projected to grow by 11 percent compared to 2013.
- Authorities assert capital projects will not be constrained by current expenditure, which will continue to be contained.

### Public sector debt and debt management
- Central government gross debt: 34.3 percent of GDP (end-2013 levels referenced).
- Central government debt remains moderate at 34.3 percent of GDP.
- Public sector debt diverging from central government debt due to public enterprise investment and borrowing and external lines of credit to the Macedonian Bank for Development Promotion.
- IMF staff projects public sector debt to increase from 41 to 49 percent of GDP in the period 2013–18.
- Authorities emphasize full control over public enterprises’ indebtedness process; legal obligation for these enterprises to submit financial plans and investment programs to the Government for approval.
- Ministry of Finance compiles and publishes data on liabilities carrying government guarantees on a monthly basis.

### Purchase under PLL and Ex Post Evaluation (EPE) findings
- Macedonia made a purchase under the PLL of SDR 197 million (286 percent of quota) in March 2011.
- EPE findings:
  - PLL effectively insured Macedonia against external shocks and helped the government adhere to planned policies without a large adjustment.
  - The purchase highlighted weaknesses in debt management practices; arrears were accumulated after the First Review under the PLL when the arrangement was no longer active.
  - Ex post, alternatives to the PLL purchase would have been costlier but could have contributed to a stronger track record of market financing and helped take advantage of lower yields in 2012 and after the program.
  - In hindsight, the program request could have flagged domestic risks (risk of early elections and erosion of fiscal institutions).
- Authorities’ view:
  - Broad agreement with EPE findings that the PLL was the right instrument at the time.
  - Authorities argue arrears occurrence is overemphasized given their full clearance completed in February 2013.
  - Authorities undertook measures to address debt management weaknesses and to develop the domestic debt market and lengthen domestic debt maturities.

### Executive Board assessment and recommendations
- Directors noted continued strengthening economic growth and decelerating inflation.
- Policy priorities noted:
  - Address external and fiscal vulnerabilities.
  - Gradually tighten fiscal and monetary policies while fostering balanced and sustainable growth.
  - Ensure fiscal space for priority capital expenditure given the importance of public infrastructure to unlock growth potential.
  - Further improvements in public financial and debt management; monitor a broad concept of public debt including off-budget spending by public enterprises.
  - Maintain robust international reserves; be ready to tighten monetary policy to preserve the currency peg.
  - Continue efforts to attract FDI and facilitate spillovers to the domestic productive sector; improve job skills and qualifications to support balanced and sustained growth.
- Directors’ view on PLL/EPE:
  - Most Directors agreed PLL was the right instrument at approval, providing effective insurance against external shocks without the need for a large adjustment.
  - Some Directors noted fiscal institutional weaknesses became apparent after approval and that the purchase was used in response to a domestic rather than external shock; a different policy and financing mix might have strengthened market access.

### Key economic indicators (selected figures preserved exactly)
- Real GDP growth: -0.9 (2009); 2.9 (2010); 2.9 (2011); -0.4 (2012); 2.5 (2013).
- Real domestic demand: -3.3 (2009); 0.3 (2010); 5.3 (2011); 1.9 (2012); 0.1 (2013).
- Consumption: -3.9 (2009); 0.9 (2010); 3.4 (2011); -1.7 (2012); 3.1 (2013).
- Gross Investment: -0.7 (2009); -2.0 (2010); 13.5 (2011); 16.1 (2012); -10.1 (2013).
- Net Exports (contribution to growth): 3.2 (2009); 2.5 (2010); -3.3 (2011); -2.6 (2012); 2.4 (2013).
- CPI inflation (annual average): -0.8 (2009); 1.5 (2010); 3.9 (2011); 3.3 (2012); 2.8 (2013).
- Unemployment rate (annual average): 32.2 (2009); 32.0 (2010); 31.4 (2011); 31.0 (2012); 28.7 (2013).
- Current account balance: -6.8 (2009); -2.0 (2010); -2.5 (2011); -3.0 (2012); -3.4 (2013, proj.).
- Trade balance: -23.3 (2009); -20.5 (2010); -22.1 (2011); -23.6 (2012); -22.0 (2013).
- Exports of goods: 28.8 (2009); 35.9 (2010); 43.0 (2011); 41.7 (2012); 41.1 (2013).
- Imports of goods: 52.1 (2009); 56.4 (2010); 65.0 (2011); 65.2 (2012); 63.1 (2013).
- Private Transfers: 16.4 (2009); 18.9 (2010); 19.0 (2011); 21.1 (2012); 19.1 (2013).
- External debt: 56.4 (2009); 58.2 (2010); 64.8 (2011); 69.3 (2012); 64.6 (2013).
- Gross investment: 26.2 (2009); 25.5 (2010); 26.2 (2011); 29.4 (2012); 28.4 (2013).
- Domestic saving: 19.4 (2009); 23.5 (2010); 23.7 (2011); 26.4 (2012); 25.0 (2013).
- Public saving: 0.6 (2009); 1.1 (2010); 1.4 (2011); 0.2 (2012); -0.5 (2013).
- Private saving: 18.8 (2009); 22.4 (2010); 22.3 (2011); 26.2 (2012); 25.5 (2013).
- Foreign saving: 6.8 (2009); 2.0 (2010); 2.5 (2011); 3.0 (2012); 3.4 (2013).
- Central government gross debt: 23.8 (2009); 24.2 (2010); 27.9 (2011); 34.1 (2012); 34.3 (2013).
- Central government balance: -2.7 (2009); -2.4 (2010); -2.5 (2011); -3.9 (2012); -3.9 (2013).
- Nominal GDP (billions of denars): 411 (2009); 434 (2010); 460 (2011); 459 (2012); 489 (2013).
- Nominal GDP (billions of euros): 6.7 (2009); 7.1 (2010); 7.5 (2011); 7.5 (2012); 7.9 (2013).
- GDP per capita (euros): 3265 (2009); 3430 (2010); 3629 (2011); 3615 (2012).

*International Monetary Fund—Selected excerpts from the report text provided.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr1462.pdf_