FYR Macedonia –- 2010 Article IV Consultation, Concluding Statement, November 17, 2010

November 17, 2010

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.

November 17, 2010

This statement presents the findings and main recommendations of the IMF’s 2010 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 gracious hospitality and cooperation.


1. Economic prospects in Macedonia have improved over the past year. Although the recovery of growth has been slower than expected, the improvement in external conditions and sound balance sheets in the banking system provide a solid platform for a more robust upturn in 2011. External risks remain high, in light of the unusual levels of uncertainty regarding the economic and financial outlook in Europe. Against this background, the authorities’ macroeconomic policies should strike an appropriate balance between supporting economic recovery and guarding against risks.

Macroeconomic and financial outlook

2. The mission expects output to grow somewhat more than 1 percent in 2010, as activity is picking up in the second half of the year. We expect consumption to strengthen in the second half, adding to the rebound in exports that has been taking place. This outlook is consistent with the upturn that is visible in indicators such as retail sales and consumer credit. Inflation is expected to be around 1.5 percent. The momentum in the second half of the year should carry over into next year, leading to growth in the 3-3½ percent range in 2011. Factors supporting this outlook include the recovery in the economies of Macedonia’s trading partners, lower interest rates, growing bank deposits, and ample liquidity in the banking system. Inflation in 2011 is expected to rise to around 2.5 percent, due in part to higher food and fuel prices.

3. The mission expects the current account deficit to narrow to 3½-4 percent of GDP in 2010, due both to a smaller trade deficit and to strong private transfers. This is a rapid adjustment from the large deficit of two year ago and has supported a stabilization of foreign exchange reserves. For 2011 and over the medium term, the mission expects continued growth in exports, which should be supported by strong metals prices and higher capacity resulting from past foreign direct investment. Import growth is also expected pick up as the economy recovers. The mission expects the current account deficit to widen modestly next year to 4½-5 percent of GDP and to stabilize over the medium term at levels that can be financed largely by foreign direct investment.

4. The banking sector appears to be in sound shape. Capital ratios have remained above 16 percent, well over the regulatory minimum, with tier 1 capital at over 13 percent. Non-performing loans have risen during the past two years but have been largely provisioned. Loans are funded through domestic deposits, which are a relatively stable source of financing, and reliance on foreign financing is low. Finally, bank liquidity is strong, which together with ample capital and growing deposits, puts the banking system in a good position to increase lending to the economy.


5. The main risks come from continued uncertainties in the economies of Macedonia’s trading partners and in international financial markets. Financial conditions remain unsettled in several Eurozone countries, where negative events could spill over to Macedonia in the form of lower demand for Macedonian exports and reduced access to external financing. Such a downside scenario could undermine the expected resumption of healthy growth and result in new pressures on external and fiscal financing. On the upside, faster recovery in Eurozone and in other neighboring countries could give a stronger boost to exports and support a more vigorous rebound in growth. Progress towards EU accession would improve prospects for foreign investment and growth.

Fiscal policy

6. The mission views the government’s deficit targets of 2.5 percent of GDP in 2010 and 2011 as appropriate in light of current conditions. This fiscal stance will help to support output and employment and minimize the need for spending cuts, while maintaining debt ratios at moderate levels. Macedonia has benefited from a legacy of sound public finances in recent years, which has provided room for larger deficits during periods of economic weakness. It will be important to reduce deficits over the medium term to preserve debt sustainability and keep space to respond to future economic cycles. Moreover, as public debt transitions from official lending to more expensive private financing over the medium term, lower deficits will be needed to keep debt ratios stable at moderate levels.

7. The government faces two challenges in the fiscal area in 2011 and over the medium term. First, the 2011 budget relies on private external borrowing to cover the fiscal deficit. It would be prudent to access external markets early in the year, provided market conditions are favorable, to prevent the emergence of domestic financing pressures and to avoid the risk that external market conditions worsen later in the year. Over the medium term, as healthy growth resumes and risks abate, the government should work to develop local public debt markets, including at longer maturities, to reduce exposure to volatility of external financing conditions. Second, the planned reductions in social contributions in 2012 and 2013 are beneficial from the viewpoint of fostering formal sector employment and attracting investment, but they will place pressures on the budget. It will be important to continue to contain government consumption and transfers to prevent higher deficits, while protecting investment spending that is needed to raise growth potential.

Monetary Policy and Financial Stability

8. The National Bank of the Republic of Macedonia (NBRM) has reduced its policy rates substantially over the past year, to 4.5 percent at present. The mission views this as an appropriate response to the easing of external financing pressures in a context of weak growth and subdued inflation. As lower interest rates gradually filter through to lower bank lending rates, this should support the economic recovery. Looking forward, monetary policy should be guided foremost by the need for consistency with the exchange rate peg to the euro, and in particular by the need to maintain an adequate level of official international reserves. The scope for further easing is limited. In this regard, one factor is that the spread between the NBRM and European Central Bank policy rates has narrowed. If this spread were reduced too much, this could lead to a shift towards foreign assets by Macedonian residents and create pressures on international reserves of the NBRM.

9. The quality of banking regulation and supervision, conducted by the independent NBRM, has contributed to the stability of the banking sector. Careful attention to capital ratios, conservative practices in setting reserve and liquidity requirements, and close monitoring of bank balance sheets and lending practices have been important in this regard. The mission welcomes the submission to parliament of the new NBRM law, which would bring legislation fully in line with EU and Eurozone standards. The mission also supports the authorities’ actions to strengthen crisis response mechanisms by making the Financial Stability Committee operational. NBRM initiatives in other areas such as mechanisms for providing emergency lending assistance in the event of liquidity shortfalls, and measures to bolster the NBRM’s authority to take necessary actions in the event of financial stress, are also welcome.

IMF web sources

Webpage of the Resident Representative Office in Macedonia.

General IMF webpage (information on all member countries, as well as publications like the World Economic Outlook, the Global Financial Stability Report, and the European Regional Economic Outlook).

IMF external webpage for the media.


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