Press Release: IMF Approves Second Annual ESAF Loan for the Former Yugoslav Republic of Macedonia

June 19, 1998

The International Monetary Fund (IMF) has approved the second annual loan under the Enhanced Structural Adjustment Facility (ESAF)1 for the former Yugoslav Republic of Macedonia (FYRM), in an amount equivalent to SDR 18.19 million (about US$24 million), to support the government’s economic program for 1998/99. The loan is available in two equal semiannual installments, the first of which is available this month.


The FYRM began to reassert financial stability in 1994 following the destabilizing impact of the break up of the former Socialist Federal Republic of Yugoslavia. By orienting monetary policy to a fixed level of the denar against the deutsche mark, price stability was essentially restored by early 1996. Structural reforms focused on privatization, strengthening market-based institutions, and reducing barriers to restructuring, while the exchange rate anchor imposed hard budget constraints, and fiscal consolidation supported external adjustment. However, a continuing difficult regional political situation limited trade opportunities and discouraged foreign direct investment, thus affecting the balance of payments adversely. Enterprise profitability and bank portfolios remained weak.

By mid-1997, it was clear that the envisaged improvements in competitiveness had been insufficient to ensure a sustainable balance of payments, and the denar was devalued by 14 percent. The economy has responded favorably to the devaluation, and inflation has remained low, although uncertainties in the balance of payments remain.

The 1998 Program

The overall strategy for 1998-2000 aims to improve living standards by consolidating private ownership and strengthening market-based institutions; macroeconomic policies will focus on providing a stable financial environment to engender enterprise adjustment, reduce interest rates, and promote investment and jobs. The 1998 program supported by the ESAF targets real GDP growth of 5 percent, end-year inflation of 3 percent, and a current account deficit of

7.3 percent of GDP. Consistent with these goals, the overall fiscal deficit in 1998 is projected to increase only slightly to 0.7 percent of GDP. Despite the projected faster increase in nominal GDP, revenue is projected to grow by just under 3 percent, in part because one-time repayments of tax and social security arrears cease. As a result, the revenue/GDP ratio falls by 1¾ percentagepoints. Projected expenditure growth of 3½ percent would be slightly positive in real terms. Monetary policy will continue to be based on the deutsche mark anchor. A contraction in net credit to government embodied in the 1998 budget creates scope for a 15 percent expansion of private sector denar credit during the year.

Structural Reforms

Key objectives of the structural policy agenda are to strengthen corporate governance and bank lending practices. To this end, the authorities are taking measures to promote share trading and encourage ownership of enterprises by outsiders. The National Bank will enforce prudential requirements in the Banking Act to ensure a reduction in bank lending to delinquent debtorsCa major factor behind high interest rates. The authorities also intend to rationalize public expenditure and introduce a value-added tax to place the fiscal accounts on a more sustainable footing and provide room for a reduction in the direct tax burden. Efforts will continue toward liberalizing labor markets, developing financial markets, and removing barriers to trade and foreign investment to promote the transfer of needed capital and technology and reduce high unemployment.

Addressing Social Needs

The government will continue to improve the adequacy and targeting of the means-tested social assistance program for persons capable of work and to improve its poverty monitoring capacity. These, along with supplemental programs for the elderly and disabled, are the main vehicles for protecting the poor. In an effort to restore financial balance to the health system and improve the quality of care, a Health Insurance Law will be adopted in 1998 to define a basic benefits package and to introduce better incentives for health providers. The education system will also require modernization if it is to cater to the needs of a market-based system.

The Challenge Ahead

The challenge ahead will be to maintain the momentum of reforms, which are now beginning to bear fruit. In particular, implementation of the measures to strengthen the enterprise sector, improve bank lending behavior, and restructure public expenditure is essential if the economy is to attain its potential and reduce high unemployment. Continued caution will need to be exercised as regards macroeconomic policies in view of the vulnerability of the balance of payments.

The FYRM succeeded the former Socialist Federal Republic of Yugoslavia to membership in the IMF on December 14, 1992. Its quota2 is SDR 49.6 million (about US$67 million), and its outstanding use of IMF credit totals SDR 65 million (about US$87 million).

Former Yugoslav Republic of Macedonia: Selected Economic Indicators







(Percent change)

Real GDP







Consumer prices (12-month change end-of- period)







(Percent of GDP)

Overall fiscal balance (accrual)







Current account balance1







(Months of imports)

Gross official international reserves







Sources: The Macedonian authorities; and IMF staff estimates.
1There are indications that the current account deficit is substantially overestimated due to unreported remittances.

1The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5½-year grace period.

2A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.


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