Public Information Notice: IMF Concludes Article IV Consultation with FYR of Macedonia

June 23, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 10, 2000, the Executive Board concluded the Article IV consultation with FYR of Macedonia.1


After a generally favorable performance in 1998, the FYRM economy suffered a setback in the first half of 1999, mainly owing to the Kosovo crisis. The impact of the crisis, however, was less severe than initially feared. With the ending of the conflict in early June, economic activity picked up markedly and the balance of payments improved beyond expectations. The stance of financial policies was generally prudent in 1999, and inflation remained low. Structural reform initiatives resumed in the second half of 1999, but the follow-through was weak because of the uncertain political climate.

A broad-based pickup in economic activity in the wake of the Kosovo crisis was key to an estimated GDP growth of 2.7 percent in 1999. Unlike the experience of the previous years, an improvement in net foreign demand was a major driving force behind the growth performance. Domestic demand was sluggish, mainly owing to erosion of investor confidence. Consumer prices declined in the course of the first seven months of the year, largely because of lower food prices. Thereafter, inflation turned positive with the firming of food prices and higher oil prices. Unemployment fell slightly, but the rate remained high at 32½ percent.

The balance of payments position improved in 1999, and indicators of external vulnerability remained satisfactory. The current account deficit (excluding grants) narrowed sharply to 6 percent of GDP (from 9½ percent in 1998), as both exports and imports declined for the year as a whole. After a severe trade disruption during the Kosovo crisis, exports and imports picked up strongly with the ending of the conflict. Service receipts also surged in the second half of the year, with FYRM serving as a key transit route for travel and delivery of goods to Kosovo. The capital account surplus contracted as the foreign direct investment inflows experienced in 1998 were not sustained. With a sizable amount of unrecorded inward transactions, many of them Kosovo-related, gross official reserves increased by about US$125 million, to the equivalent of 2.7 months of next year's imports at end-1999.

The National Bank of Macedonia (NBM) faced contrasting challenges in the conduct of monetary policy during and immediately after the Kosovo crisis. With the onset of the crisis, the NBM provided liquidity support to banks experiencing difficulties on account of deposit withdrawals and delays in debt-service payments by enterprises. The liquidity position of banks improved dramatically in the post-crisis period, as residents began reconstituting their earlier deposit withdrawals and the NBM intervened in the foreign exchange market to neutralize appreciation pressures. A large part of this liquidity influx was sterilized. Official and money market interest rates peaked in May and fell sharply, to below pre-crisis levels, as liquidity in the banking system improved. However, notwithstanding the large swings in liquidity, the lending and deposit rates of banks remained virtually unchanged during the year.

The fiscal situation improved in 1999 despite the Kosovo crisis, but there were lapses in expenditure management and control. The central government accounts swung to a surplus of about 1 percent of GDP, compared with a deficit of 0.2 percent of GDP envisaged in the pre-crisis budget, and the general government accounts were in approximate balance. Tax revenues were extremely buoyant, mainly on account of efforts to improve tax administration. There were slippages in outlays on wages, goods and services, and some social programs, but these were largely offset by saving in other areas. The breach of wage discipline was more serious than indicated by budgetary data, as several line ministries made additional wage payments (totaling nearly 1½ percent of GDP) from their off-budget self-generated special revenues.

The pace of structural reforms picked up from end-1999. A value-added tax (VAT) was introduced on April 1, 2000, after the slow progress in administrative preparations forced the authorities to postpone its introduction in January. In the enterprise sector, 8 out of the 12 loss-making enterprises targeted for closure or sale under the recently expired Fund-supported program had been dealt with by end-March 2000. In the banking sector, a majority share in Stopanska Banka, the largest commercial bank, was sold to a consortium of foreign investors in early April 2000.

Executive Board Assessment

Executive Directors noted the overall favorable macroeconomic developments in 1999, despite the Kosovo crisis: real output had increased, inflation was subdued, the fiscal position had improved, and foreign exchange reserves had strengthened substantially. Moreover, the post-conflict demand stimulus and the prospects for further financial assistance under the Stability Pact for Southeastern Europe provided for a relatively bright near-term outlook. However, Directors stressed that the economy's prospects for sustained growth would hinge critically on a vigorous implementation of structural reforms as well as on a continuation of prudent financial policies. While acknowledging the difficulties that the former Yugoslav Republic of Macedonia (FYRM) has faced and the significant steps that have been taken in the recent past, Directors urged the authorities to spell out, without further delay, a complete medium-term structural reform agenda and economic strategy.

Directors welcomed the authorities' commitment, embodied in the central government budget for 2000, to maintain financial discipline. They stressed the importance of further strengthening fiscal performance by firmly resisting pressures from interest groups for specific relief or support and by adhering to a strict execution of the budgetary plans. Directors also welcomed the recent introduction of the value-added tax.

On the expenditure side, Directors stressed the importance of containing personnel expenditure, and welcomed the authorities' decision to begin downsizing the civil service in 2000. They urged the authorities to press ahead with the divestiture of noncore activities and the consolidation of ministries. Directors considered that prompt integration of the off-budget special revenue accounts into the budget was crucial for ensuring proper fiscal management. They underscored the need to develop a comprehensive medium-term fiscal framework that would clearly order expenditure priorities while taking full account of expenditure liabilities, including those arising from enterprise and bank restructuring.

Directors noted that the prevailing exchange rate regime had served the FYRM well, and agreed with the authorities' assessment that the current level of the exchange rate was appropriate. They did not see a benefit of changing the exchange rate regime at this stage. Nevertheless, Directors recommended that the appropriateness of the exchange rate level and the regime be kept under close review.

Regarding the financial system, Directors remarked that high real interest rates reflected largely the sizable share of nonperforming loans in banks' portfolios, which were the result of poor lending practices and delays in banking system reform. They viewed the recent sale of Stopanska Banka to a foreign investor as well as the ongoing efforts to strengthen bank supervision, as crucial steps toward establishing a sound and competitive banking sector and reducing intermediation costs. However, Directors emphasized that a lasting and effective response to the financial system's problems would not be possible without addressing the underlying weaknesses of the enterprise sector. They also welcomed the recently completed Basel Core Principles Assessment, and encouraged the authorities to implement its recommendations in those areas where additional improvements are still needed.

Directors welcomed the recent progress in addressing the situation of several loss-making enterprises. They noted, however, that remedial action for the largest loss-makers still remained to be taken and that the list of loss-makers for inclusion in the reform agenda needed to be expanded. Directors urged the authorities to accelerate the momentum of enterprise reform through the liquidation of unviable enterprises. They emphasized the need to contain the fiscal costs of enterprise reform in order to maintain macroeconomic stability. Directors stressed the need to improve corporate governance and enterprise performance through strict implementation of newly amended laws on bankruptcy procedures and creditors' rights. Noting the high level of unemployment, Directors also stressed the importance of increasing labor market flexibility to generate employment opportunities, and encouraged the authorities to reduce payroll taxes and limit unemployment benefits in order to enhance the incentive for job search.

Directors looked forward to the authorities' early announcement of their medium-term economic strategy and their plans for structural reform. They stressed that concrete and timely actions, in particular public enterprise and banking sector reforms as well as the preparation of a draft Poverty Reduction Strategy Paper (PRSP) would facilitate the mobilization of resources needed in support of the authorities' reform effort, and attract foreign direct investment. Directors welcomed the upcoming discussion on a program that could be supported by the use of Fund resources.

Directors noted that further improvements in the reliability, coverage, and timeliness of economic data were warranted in order to ensure proper economic policy formulation and surveillance. They recommended that the authorities participate in the Fund's General Data Dissemination System.

Directors welcomed the authorities' intention to release the staff report for the
Article IV consultation, and saw this as an indication of their commitment to improved transparency.

FYRM: Selected Economic Indicators, 1996-2000

  1996 1997 1998 1999

Real economy
(Percent change)
Real GDP 1.2 1.4 2.9 5.0 -4.0 2.7 6.0
Consumer prices, period average 2.3 2.6 -0.1 1.0 2.0 -0.7 4.0
Real wages, period average 0.5 0.2 3.8 2.0 -0.5 3.6 -0.3
Monthly series on monitored sector -4.7 -6.0 -2.9 1.0 -6.0 1.0 1.4
Labor force survey ... -4.7 5.4 ... ... 1.0 ...
Unemployment rate
(average) 1/
31.9 36.0 34.5 34.3 36.5 32.4 32.4
Government finances 2/
(In percent of GDP)
General government revenues and grants 36.5 34.9 34.0 33.5 33.7 37.7 35.3
General government expenditures and net lending 37.0 35.3 35.8 35.6 41.5 37.7 36.6
General government balance (accrual) -0.5 -0.4 -1.8 -2.1 -7.7 0.0 -1.3
Central government balance (accrual) -0.7 -1.2 -0.9 -0.2 -5.6 0.9 -0.1
Government debt 3/ 41.5 48.1 45.7 ... ... 53.2 53.3
Money and credit
(Percent change, end of period)
Broad money M3 4/ 0.3 15.8 14.9 8.4 -3.7 29.7 11.3
Private denar M2 2.3 13.2 11.1 11.4 0.0 33.5 11.2
Total credit to private sector 19.0 18.9 10.4 11.8 7.6 9.4 15.9
Short-term lending rate 23.2 21.6 20.5 ... ... 20.0 ...
Credit auction rate 5/ 11.0 15.2 18.5 ... ... 14.7 ...
Balance of payments
(In millions of U.S. dollars)
Exports 1,147 1,237 1,292 1,396 961 1,192 1,345
Imports -1,464 -1,623 -1,711 -1,791 -1484 -1,601 -1,831
Trade balance -317 -386 -418 -395 -524 -409 -486
Current account balance -288 -277 -308 -251 -489 -136 -321
(in percent of GDP) -6.5 -7.4 -8.8 -6.7 -14.5 -4.0 -9.0
Overall balance -96 16 44 -3 -309 99 -147
Official gross reserves 267 280 334 373 373 458 528
(in months of current year's c.i.f. imports) 2.0 1.9 2.1 2.3 2.7 3.1 3.1
(in months of next year's c.i.f. imports) 1.8 1.8 2.2 ... ... 2.7 3.0
External debt service ratio 6/ 11.1 8.7 10.1 12.9 17.1 13.0 13.8
External debt to GDP ratio (in percent) 7/ 25.4 31.5 41.1 40.9 44.2 43.3 43.3
Exchange rates 8/
(Percent change, period average)
Nominal effective exchange rate 12.4 24.2 -3.6 ... ... 5.7 ...
Real effective exchange rate (CPI-based) -2.6 -13.1 -11.0 ... ... -1.2 ...

Sources: Data provided by the FYRM authorities; and IMF staff projections.

1/ Persons seeking employment as percent of total labor force, based on official Labor Force Survey.
2/ Excludes revenue and expenditure of the special revenue and expenditure accounts of line ministries.
3/ Total debt of central government and external debt of general government; includes liabilities assumed by the government upon
the sale or closure of loss-making enterprises and associated with the cleaning up of Stopanska Banka's balance sheet prior to its sale.
4/ Includes foreign currency deposits.
5/ Data for 1999 is for October.
6/ Debt service due, including IMF, as a percentage of exports of goods and services.
7/ Including IMF.
8/ Partner countries exclude FR Yugoslavia. The effective exchange rate calculations are based on the chain index method, where the partner country weights are not fixed.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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