FYR Macedonia -- 2009 Article IV Consultation, Concluding Statement

October 27, 2009

Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

Skopje, Macedonia
October 27, 2009

This statement presents the findings and main recommendations of the IMF’s 2009 Article IV surveillance mission. Article IV surveillance missions are conducted with all IMF member countries on a regular basis. The mission is grateful to the authorities for their warm hospitality and cooperation.


1. Economic and financial conditions have improved in recent months, the risks of instability have decreased, and Macedonia has weathered the global crisis better than most of the countries in the region. Macroeconomic policies have helped to achieve this relatively good outcome. At the same time, risks remain, stemming in particular from the still large current account deficit and from remaining uncertainties about the health and prospects of the global economy and world financial markets. Against this background, policies should remain geared towards reducing risks.

Macroeconomic and financial outlook

2. The mission expects output to contract by 1 to 1.5 percent this year. This is a more favorable outcome than previously expected and represents a significantly better performance than most countries in the region. The improved outlook is due in part to better global prospects, as fears of a prolonged financial crisis in advanced economies have abated and signs of a return to growth have multiplied. It also reflects improved confidence of consumers and investors within Macedonia. Evidence of the stabilization of economic activity is apparent in various economic indicators, such as industrial production, retail sales, and tax revenues. Inflation is expected to be near zero this year, helped by lower commodity prices and the economic slowdown.

3. For 2010 the mission expects economic growth to recover further and to reach 2 percent. This outlook is based on the modest recovery of growth expected in trading partners and improved conditions for external financing, as well as the relatively sound condition of the banking sector in Macedonia. However, projections for 2010 are subject to unusually high uncertainty due to questions about the strength of the global recovery.

4. The mission expects the current account deficit to narrow to 9½ percent of GDP in 2009, due largely to a smaller trade deficit and to the recent recovery in private transfers. Foreign exchange reserves, after reaching a low of €1.2 billion in May, have risen to around €1.5 billion now. However, a large part of this recovery is due to one-off factors, including the Eurobond issuance in July, the SDR allocation in August, and favorable seasonal patterns. For 2010 and over the medium term, the mission expects exports to recover, supported by resumed growth in trading partners and a rebound in metals prices from the lows of 2009. Meanwhile, import growth is likely to be contained due to relatively modest growth of output and of credit in Macedonia, and to restrained fiscal policies. The mission expects the current account deficit to narrow to 8 percent of GDP in 2010 and reserves to end the year close to current levels.

5. The banking sector started from a relatively strong base and has weathered the global crisis well. Both the crisis and recession in Macedonia have had a negative impact on banks, in the form of higher non-performing loans, reduced profits, and a sharp slowdown in new loans. However, capital adequacy remains at satisfactory levels, liquidity remains adequate, and significant strains have been avoided. This favorable outcome reflects the relatively small size of the banking sector and its reliance on domestic deposits rather than external loans for funding.


6. Macedonia’s large current account deficit, in the context of the exchange rate peg, makes it dependent on continued external financing. The failure of export demand to recover as expected, renewed weakness of metals prices, or stronger than expected domestic demand and imports could cause the current account deficit to widen once more, and financial inflows could be lower than anticipated if global financial conditions fail to normalize. Such developments would put renewed pressures on foreign exchange reserves and the exchange rate peg and would also weigh on the banking sector. On the upside, rapid progress towards EU accession would improve prospects for foreign investment, which would likely ease external financing pressures and bolster reserves and the peg.

Fiscal policy

7. The mission views the government’s deficit targets of 2.8 percent of GDP in 2009 and 2.5 percent of GDP in 2010 as appropriate in light of current conditions. These deficits are at levels that will help to support output and employment. Macedonia has benefited from the low deficits of recent years and a relatively low level of public debt, which provided room for a larger deficit this year to limit budget cuts and support growth without threatening debt sustainability. The mission welcomes the government’s commitment to achieve its 2009 target even if revenues fall short of the optimistic levels assumed in the revised budget.

8. The government faces two key challenges in the fiscal area in 2010. First, the planned reductions in social contributions, which are desirable from the viewpoint of fostering jobs and investment, will place a burden on the budget. This will require measures to control expenditures, in particular in the areas of wages and transfers, in order to achieve the deficit target while devoting sufficient resources to public investment to increase the long-term growth potential of the economy. Second, the government will need to secure financing for the envisioned deficit. Domestic financing sources are limited due to the small domestic debt market, and domestic borrowing would also reduce banks’ room to provide credit to the private sector (“crowding out”). Foreign official financing from development banks and bilateral donors will provide valuable support. In addition, it may be necessary to seek foreign funding from private markets, provided market conditions are sufficiently favorable.

9. For the medium term, the mission recommends bringing fiscal deficits to below 1.5 percent of GDP. This will ensure that debt ratios remain low and provide a buffer against future risks. Relatively low deficits will also provide more flexibility and minimize the need for spending cuts during future downturns.

Monetary Policy and Financial Stability

10. The National Bank of the Republic of Macedonia responded to the large and rapid losses of foreign exchange reserves over the past year by raising interest rates and imposing tighter reserve and liquidity requirements. This response was consistent with the bank’s objectives of protecting the exchange rate peg and helped to contain the loss of reserves. In light of the still elevated level of external risk and the desirability of further augmenting the reserve buffer, it is still too early to initiate an easing of monetary policy in the view of the mission.

11. The quality of banking supervision and regulation has contributed to the stability of the banking sector. Regular on-site examinations of bank credit portfolios and rigorous stress tests have played an important role in this regard. The mission welcomes progress in implementing arrangements for crisis coordination and encourages the authorities to take further steps to ensure that adequate tools are in place to respond to futures strains in the banking sector. This includes unambiguous authority to intervene troubled banks and mechanisms to allow the National Bank to provide ample liquidity support to banks in the event of future banking crises. The mission also welcomes the creation of an insurance supervisory body and encourages the authorities to move forward swiftly to make it fully operational.

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