IMF Staff Concludes Visit to North Macedonia

IMF News, June 27, 2023

Source details

Real GDP growth projections:
- 2.1 percent in 2023.
- 3.4 percent in 2024.
Consumer price (inflation) projections:
- 9.2 percent on average in 2023.
- 3.5 percent in 2024.
- Return to 2 percent by 2026.
Recent trends:
- Inflation has started to decline, helped by lower energy and food prices and ongoing monetary policy tightening.

Current status: Public finances are on track to meet the deficit target set out in the 2023 budget approved by parliament.
Risks and recommendations:
- Delays in passing the tax policy reform and the solidarity tax compromise tax revenues and could put priority spending at risk.
- Recommendation: The tax reform, whose design has benefitted from IMF input, should be adopted without delay given the long period allowed for public consultation, and so should the solidarity tax.
- Recommendation: Efforts at improving tax collection need to be sustained and accelerated.
- In line with PLL commitments, fiscal consolidation should continue to underpin fiscal sustainability and ensure adequate fiscal buffers for the next crisis.

Observations:
- The rise in consumer prices has reduced households’ purchasing power, prompting public sector wage demands.
- There already is room in the central government budget to accommodate an increase in the wage bill of close to 10 percent, similar to the projected rate of inflation for 2023, including the minimum wage harmonization this year.
Risks:
- Anything above this magnitude would create a large and permanent burden on the budget and would also risk squeezing out other essential spending.
- Large wage increases would also risk turning temporarily high inflation into persistently high inflation.
Recommendation: Public sector wage restraint is needed to avoid a large burden on public finances and to avoid fueling already high inflation.

Past reform: The electricity block-tariff reform in 2022 was a significant step in the right direction.
Current situation:
- Electricity prices for most households remain heavily subsidized and are among the lowest in Europe.
- Public finances remain vulnerable to surges in the cost of energy.
Recommendations:
- Continue moving ahead with electricity tariff reforms that gradually phase-out subsidies and strengthen energy efficiency.
- Use the current context of lower international energy prices as an opportunity to continue such reforms.
- Target support for electricity bills toward poorer households instead of benefitting most households in an untargeted manner.

Monetary policy normalization:
- The National Bank of the Republic of North Macedonia (NBRNM) has continued a necessary normalization of monetary policy through higher policy rates and other measures to ensure high inflation does not become entrenched.
- These policy changes have helped stabilize inflation expectations and are contributing to the gradual decline in inflation.
- They also ensure that international reserves remain adequate.
Banking system assessment:
- The banking system is liquid, profitable, and adequately capitalized.
- Expected to be able to absorb the effects of tighter financial conditions and other shocks.
- Recommendation: Positive conditions today should be used to continue adding to capital buffers.
- Support for the recent introduction of borrower-based macro-prudential measures: they are an important toolkit for the central bank and will help contain risks in the real estate sector.

Recommendation: Structural and institutional reforms, essential for North Macedonia’s EU accession prospects, should be accelerated to strengthen the country’s growth prospects and income convergence to the EU in the medium-term.

Source: IMF Staff press statement, June 27, 2023.

Тимот на ММФ ја заврши посетата на Северна Македонија
- Тимот на ММФ ја заврши посетата на Северна Македонија (Markdown version)
- Тимот на ММФ ја заврши посетата на Северна Македонија (PDF)