North Macedonia: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, February 26, 2025
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- Published: February 26, 2025
Growth outlook and dynamics
- Growth is gaining momentum: expected at 3.3 percent in 2025, driven by stronger domestic demand as public investment projects (including the Corridor 8/10d road project) intensify and consumption is supported by government transfers and real wage growth.
- External headwinds: the impact of weak external demand seen in 2024 is expected to persist in 2025, driven by structural shifts in the European automotive sector.
- Long-term potential growth: Staff now estimate potential growth at 3.0 percent, noting high emigration—especially among the young—will lower potential growth over time.
Inflation and labor-cost dynamics
- Inflation trajectory: In January, inflation reached 4.9 percent year-on-year, up from a low of 2.2 percent in August 2024.
- Drivers: Core inflation is the main driver and remains persistent, fueled by strong wage growth. Food inflation remains high despite administrative price controls and other interventions.
- Policy implication: High real wage growth without productivity gains and increased fiscal transfers could further fuel inflation and erode competitiveness.
Domestic and external risks
- Elevated domestic risks: weak public investment, stalled productivity reforms, emigration, and slowing activity of key trade partners threaten medium-term growth.
- External vulnerabilities: trade policy shifts and shocks to FDI may suppress exports and tighten financial conditions.
- Interaction risks: fiscal loosening (via transfers and wages) could amplify inflationary pressures and competitiveness losses.
Fiscal stance, targets, and recommendations
- 2025 budget target and risks:
- The 4 percent of GDP deficit envisaged in the 2025 budget will be exceeded if the authorities’ expected revenue gains (of 1½ percent of GDP) from reducing the shadow economy and increasing tax compliance fall short.
- IMF staff agree with the authorities' goal of reducing the deficit this year, but are concerned revenue will underperform, rendering this goal out of reach.
- Short-term recommendations for any supplementary budget:
- Avoid increasing spending.
- Focus on reducing tax expenditures and transfers (e.g., subsidies to agriculture).
- Ensure the full and timely transfer of contributions to the second-pillar pension system.
- Fiscal rules and debt dynamics:
- The budget deficit has exceeded the 3 percent of GDP ceiling in the fiscal rules.
- Public debt is on an upward trend and has surpassed 60 percent of GDP in 2024—14 percentage points above pre-pandemic levels.
- A credible fiscal strategy is needed to bring debt on a downward path, preserve market access, create space for investment, and strengthen resilience.
Elements of a credible fiscal consolidation strategy
- Controlling current spending:
- Omit further pension increases in September 2025 and return to a rule-based pension system in 2026—indexing only to inflation—to support consolidation while protecting pensioners’ purchasing power.
- Limit public wage growth to inflation in the near term.
- Strengthen Ministry of Finance oversight to ensure public wage increases are consistent with achieving the fiscal rules.
- Over time, unify the fragmented wage negotiating system to prevent unexpected budget pressures.
- Mobilizing revenues:
- Tax revenue potential is estimated at 22-24 percent of GDP.
- Tax reforms should focus on reducing tax expenditures, limiting reduced rates and exemptions, improving tax compliance, and gradually increasing property tax.
- Accelerated digitalization efforts will enhance revenue mobilization.
- Structural fiscal reforms and fiscal governance:
- Continue implementing the Public Investment Management decree and manual, adopt the PPP law, and conduct spending reviews to optimize budget allocation.
- Manage fiscal risks from SOEs and major projects like the Corridor 8/10d road.
- The inclusion of a fiscal risk assessment in the Medium Term Fiscal Strategy is noted as an achievement.
- ESM (state-owned electricity generator) requires investments in technology and efficiency improvements to lower production costs and expand production, while gradually reducing its role in the subsidized, regulated market.
- Operationalization of the Fiscal Council is positive; staff encourage strengthening its independent assessments.
Monetary policy and financial stability
- Monetary policy stance:
- Policy rates should remain on hold and liquidity tools warrant further tightening until inflation steadily declines.
- Given renewed acceleration in headline and core inflation, the National Bank (NBRNM) should remain on hold until there is clear evidence of sustained disinflation.
- Staff support the changes in reserve requirements implemented by the NBRNM and advise further tightening to absorb excess liquidity.
- The NBRNM should remain vigilant to inflationary risks from domestic factors (wage and pension increases) and heightened external risks; be prepared to tighten further if risks materialize.
- Central bank credibility:
- Robust reserves accumulation in 2024 has fostered stability in the foreign exchange market.
- The NBRNM’s operational and financial autonomy underpin its independence and credibility—essential for maintaining price and exchange rate stability and must be safeguarded.
- Financial sector resilience and macroprudential policy:
- Banking sector: well-capitalized, highly liquid, and profitable, with low system-wide non-performing loans.
- Recent lending acceleration: strong balance sheets and increased deposits fueled lending growth towards end-2024.
- Macroprudential measures: implemented loan-to-value and debt service-to-income ratios help safeguard stability.
- Staff support gradual tightening of the countercyclical capital buffer and additional capital requirements in line with EU regulations.
- If lending and real estate prices continue growing briskly, further tightening of macroprudential instruments may be warranted.
Structural reforms to boost productivity and offset emigration costs
- Strategic objectives supported by IMF staff: boost productivity, raise living standards, and reduce informality to counteract the drag from high emigration and stalled convergence with the EU.
- Priority reform areas and recommendations:
- Improving the business environment:
- Reduce informality through streamlined business registrations and expanded digital public services.
- Improve predictability of the legal and regulatory environment by limiting expedited parliamentary procedures, increasing stakeholder consultation, and applying regulatory requirements consistently.
- Simplify and digitalize work permits to address skill and labor shortages.
- Avoid ad-hoc adjustments to the minimum wage to help contain inflation and preserve competitiveness.
- Strengthening the labor market:
- Raise educational quality and job matching via vocational training.
- Expand affordable childcare in municipalities.
- Gradually raise the retirement age of women to match men to help offset workforce losses from emigration.
- Increasing public infrastructure investment and project management:
- Complete major infrastructure projects (Corridor 8/10d and the Kicevo-Ohrid highways) which are over budget and behind schedule.
- Safeguard capital expenditures in the budget and strengthen public investment management to prioritize high-impact projects.
- Strengthening rule of law and anti-corruption efforts:
- Improve judicial independence and impartiality to strengthen contract enforcement and reduce informality.
- Enhance prosecution of high-profile corruption cases, align the Criminal Code with international standards, and increase resources for key anti-corruption institutions.
- Use the upcoming new national anti-corruption strategy to accelerate reforms through stronger accountability and coordination.
- Enhancing governance:
- Expand digital public services, reassess state aid schemes, strengthen procurement systems, and improve SOE management to increase public resource efficiency, accountability, and transparency.
Closing note
- The IMF team thanks the authorities of North Macedonia and other counterparts for their productive collaboration and constructive policy dialogue.
North Macedonia: Staff Concluding Statement of the 2025 Article IV Mission
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- Северна Македонија: Завршна изјава на персоналот за мисијата според Член IV за 2025 година