North Macedonia: Staff Concluding Statement of the 2021 Article IV Consultation
IMF News, December 17, 2021
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- Published: December 17, 2021
Mission overview and headline assessment
- An IMF mission conducted the 2021 Article IV Consultation between November 23 and December 10, 2021.
- Forceful policy support cushioned the economic impact of the pandemic: fiscal lifelines prevented large job losses and protected the most vulnerable; monetary and financial measures kept credit flowing.
- With uncertainty remaining high, policies need to be kept flexible, balancing limiting economic scarring and advancing long-standing reforms (public financial management, revenue administration, and the financial safety net).
Economic recovery and inflation prospects
- Growth forecasts and drivers:
- Growth is forecast to pick up from 4 percent in 2021 to 4.2 percent in 2022, driven mainly by strong domestic demand.
- Employment is likely to recover more gradually.
- High wage growth, rising remittances, and the release of some pent-up savings would boost disposable income.
- Export growth is expected to be solid but dampened by supply chain disruptions (notably in the automobile sector); strong domestic demand implies high import growth.
- Downside risks: low vaccine coverage, global resurgence of the pandemic and new virus variants, and political instability that could dampen confidence and hamper policy implementation.
- Upside possibility: a start of the EU accession negotiations could provide an impetus for reform and lift growth.
- Inflation outlook:
- Rising global energy and food prices have fueled higher inflation in 2021 and may continue to add to inflation in early 2022.
- More than half of household consumption spending is on food and energy.
- Measures of inflation which strip out volatile prices, including food and energy prices, have also increased, suggesting that higher inflation is becoming more broad-based.
- IMF staff expect inflation to reach 3.9 percent on average in 2022, before stabilizing at around 2 percent in 2023 and thereafter.
- Considerable uncertainty surrounds the future path of inflation; higher wage growth poses upside risks.
Rebuilding fiscal space and strengthening economic governance
- 2022 budget stance and near-term fiscal outlook:
- The 2022 budget appropriately scales back pandemic-related spending while continuing to support economic activity.
- On a preliminary basis, staff expect the fiscal deficit to narrow to 4.3 percent of GDP in 2022, from 5.9 percent in 2021.
- The budget provides for higher health spending, including for vaccines, and an envelope to allow a flexible response to pandemic-related spending needs.
- If emergency lifelines wane as expected, the funding could be reallocated to training and reskilling workers, incentivizing hiring and investment, and strengthening the social safety net.
- An allocation for targeted assistance exists, but additional funds may be needed to mitigate higher energy prices on vulnerable groups, especially when the reduced VAT rate on electricity is normalized starting in July.
- Continuing subsidies to energy companies or maintaining the reduced VAT rate would be more costly to taxpayers than targeted assistance to households with lower incomes.
- Medium-term fiscal strategy:
- Staff recommend bringing the fiscal deficit close to 1 percent of GDP over the next five years to rebuild fiscal space and create room for more investment.
- Key measures: tax policy reform (streamlining preferential treatments, reversing tax cuts taken during the pandemic, and making the system more progressive), strengthening collection capacity, and combating tax evasion.
- Public financial management and fiscal risk management:
- Complete plans to set up a dedicated unit in the Ministry of Finance to improve public investment management, and fully integrate public-private partnerships in the public investment framework.
- Continue efforts to ensure transparency and accountability in public spending, including further improvements in public procurement practices.
- Safeguards are needed to manage fiscal risks related to state-owned enterprises and local government finances.
Monetary policy, financial stability, and the safety net
- Exchange rate and reserves:
- The de facto peg has served as an anchor of stability over the past decades, and the level of international reserves remains appropriate to support the peg.
- None of the global factors driving inflation would respond to changes in domestic monetary policy.
- The National Bank of the Republic of North Macedonia (NBRNM) needs to carefully communicate its assessment of inflation developments and stand ready to tighten policies if inflation in North Macedonia becomes persistently higher than inflation in the euro area or if significant and sustained pressures materialize on foreign currency reserves.
- Banking system resilience and supervisory priorities:
- The banking system overall remains well capitalized and profitable.
- Initiatives to improve the framework for stress tests of banks are welcome.
- Intensified supervisory efforts are needed to ensure banks recognize problem assets and provision adequately for potential loan losses on a forward-looking basis.
- Given the still high share of FX or FX-linked loans in household loans, with limited hedging of borrowers, the NBRNM should maintain its carefully calibrated measures to limit FX lending.
- Rising private sector debt (albeit from low levels), high growth in mortgage lending, and an acceleration in house prices warrant further scrutiny.
- Strengthening macroprudential frameworks and the financial safety net:
- Preparations have been ongoing since the IMF’s 2018 Financial Sector Assessment Program (FSAP); the legislative process should be completed without further delays.
- Priorities: improve macroprudential oversight and coordination across institutions; ensure macroprudential instruments are available.
- Modernized frameworks for bank resolution and deposit insurance are crucial to bolster the financial safety net.
- The operational autonomy of the NBRNM should be preserved.
Limiting economic scarring and labor market policies
- Labor market and reallocation policies:
- The drop in labor force participation accelerated during the crisis and needs to be counteracted.
- Recommended policies: support job-to-job transitions through reskilling and retraining; strengthen education outcomes to reduce skill shortages.
- To preserve jobs and competitiveness, staff recommend adhering to the minimum wage mechanism while aligning it more closely with productivity developments.
- Any ad hoc increases in the minimum wage should be accompanied by further measures to strictly enforce the minimum wage to prevent jobs shifting to the informal sector.
- Strengthening the bankruptcy and insolvency framework, including implementation of the new bankruptcy law, can help resource reallocation going forward.
North Macedonia: Staff Concluding Statement of the 2021 Article IV Consultation
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- Северна Македонија: Завршна изјава на Мисијата по консултациите спроведени во врска со член 4