The Former Yugoslav Republic of Macedonia: Staff Concluding Statement of the 2018 Article IV Mission
IMF News, November 19, 2018
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- Published: November 19, 2018
Macro outlook and growth projections
- Real GDP is projected to grow at 2 percent in 2018, supported by robust exports and private consumption.
- Real GDP growth is projected to pick up to 2.8 percent in 2019 as investment recovers.
- Growth is expected to gradually approach 3.5 percent over the medium term, driven by planned infrastructure investment and stronger exports.
- Risks are tilted to the downside: renewed political uncertainty, spillovers from rising protectionism, and a tightening of international financial conditions.
- Upside scenario: decisive structural reforms and opening of EU accession negotiations could boost growth via higher capital inflows and enhanced confidence.
Labor market, skills, and informality
- Official unemployment rate remains high at 21 percent, particularly affecting youth.
- 80 percent of unemployment is long term.
- Over one third of the working age population is inactive; two thirds of the inactive are women.
- A sizeable informal sector is significant and undermines competition, productivity, and public finances.
- Key findings on skills and education:
- Skills shortages driven by poor education quality, underdeveloped vocational education, and labor emigration are central to high unemployment.
- Robust job creation has occurred, reflecting government employment initiatives and expanding investment in export zones.
Policy recommendations to boost employment and productivity
- Increase secondary education completion rates, raise quality of instruction, and upgrade and modernize the vocational educational system.
- Implement strategic and long-term national planning to coordinate ministries, educational institutions, and employers.
- Continue active labor market policies targeting the long-term unemployed with greater focus on skills, internships, and apprenticeships.
- Strengthen monitoring and evaluation of employment incentives.
- Expand affordable preschool and childcare services to improve female labor force participation.
- Improve statistics (including through an updated census) to better assess labor market conditions.
- Reduce informality by tackling tax evasion, strengthening labor inspection, and ensuring fair and predictable implementation of business regulations.
- Avoid excessive minimum wage increases that are not mindful of labor productivity growth.
Governance, judiciary, and institutional reforms
- Recent and planned legislative amendments to enhance judiciary functioning and autonomy are welcome.
- Sustained efforts needed to translate legislative reforms into effective implementation and improve public perception of institutional quality.
- Priorities: impartial judiciary, merit-based public administration, strong anti-corruption framework to improve investment climate and retain skilled workers.
Fiscal developments and medium-term fiscal strategy
- Recurring primary deficits, declining tax revenues, and rising current spending have doubled public debt over the last decade.
- The overall fiscal deficit is projected to reach 2.6 percent of GDP in 2018.
- Public debt is projected at 50.5 percent of GDP in 2018.
- The mission’s preliminary assessment: the 2019 measures will temporarily increase the fiscal deficit to 3 percent of GDP in 2019 before narrowing to 2.4 percent over the medium-term.
- Under the baseline projection, public debt will peak at 54.7 percent of GDP in 2021.
- Recommendation: achieve a zero-primary balance over the medium term to place public debt on a clear downward trajectory.
- Pension policy notes:
- Proposed pension reforms include higher contribution rates, benefit re-indexation, and measures to improve equity across participants in the two pillars.
- Re-indexation of pension benefits to CPI only would deliver significant fiscal savings if fully implemented.
- Consider tightening conditions for early retirement and raising statutory retirement age for long-term sustainability.
- Revenue and expenditure measures:
- Improve tax compliance, particularly for VAT.
- Rationalize agriculture subsidies.
- Strengthen coverage and targeting of social assistance via consolidation into a means-tested guaranteed minimum income and social pension scheme; removal of parental allowance for the third child is proposed.
- Public financial management reforms:
- Strengthen monitoring of arrears in the public sector.
- Link municipality budgets to realized revenues.
- Develop accrual-based fiscal reporting, include SOEs in coverage, and disclose fiscal costs of tax expenditures.
- Budget documentation should present greater information on SOEs’ own-source activities, medium-spending plans of budget entities, and public investment projects.
Monetary policy and financial stability
- Monetary policy has been appropriately accommodative; the NBRM lowered its policy rate twice in 2018.
- The NBRM should stand ready to tighten monetary policy if the external environment worsens.
- Banking system soundness:
- Banks are well capitalized, liquid, and profitable.
- The share of non-performing loans has decreased, including due to NBRM-mandated write-offs, and credit risks are well provisioned.
- Financial sector recommendations:
- Gradually increase deposit denarization.
- Use carefully calibrated macro-prudential measures to reduce foreign currency lending to households.
- Further strengthen the financial stability framework, including operational independence of the NBRM, boosting staffing levels, and intensifying supervision for systemically important banks (findings from the in-depth FSAP being finalized by the IMF and the World Bank).
- Build macroprudential capacity for systemic risk monitoring and enhance inter-agency coordination.
- Promptly complete modernization of the crisis management and bank resolution regime.
- Improve access and inclusion: address high collateral requirements and weak financial accounts for micro, small and medium enterprises through insolvency and creditor rights reforms and business planning support.
- Establish a comprehensive legal and regulatory framework for financial consumer protection.
Closing
- The IMF team expresses its appreciation for the authorities’ cooperation, hospitality and candid discussions.
The Former Yugoslav Republic of Macedonia: Staff Concluding Statement of the 2018 Article IV Mission — November 19, 2018.