Public Information Notice: IMF Concludes Article IV Consultation with FYR of Macedonia
IMF News, June 23, 2000
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- Published: June 23, 2000
Background
- Kosovo crisis caused an economic setback in the first half of 1999, but the impact was less severe than feared; economic activity and the balance of payments improved markedly after the end of the conflict in early June.
- Real GDP growth was driven mainly by an improvement in net foreign demand; domestic demand was sluggish due to erosion of investor confidence.
- Consumer prices declined in the first seven months of 1999 (largely because of lower food prices) and turned positive thereafter with firming food prices and higher oil prices.
- Unemployment fell slightly but remained high at 32½ percent.
- Balance of payments:
- Current account deficit (excluding grants) narrowed to 6 percent of GDP in 1999 (from 9½ percent in 1998).
- Gross official reserves increased by about US$125 million to the equivalent of 2.7 months of next year's imports at end-1999.
- National Bank of Macedonia (NBM) actions:
- Provided liquidity support to banks during the crisis; liquidity improved post-crisis as deposits were reconstituted and NBM intervened to neutralize appreciation pressures.
- Large part of liquidity influx was sterilized; official and money market interest rates peaked in May and fell sharply thereafter, while lending and deposit rates remained virtually unchanged during the year.
- Fiscal developments:
- Central government accounts swung to a surplus of about 1 percent of GDP in 1999 (compared with a deficit of 0.2 percent of GDP envisaged in the pre-crisis budget); general government accounts were in approximate balance.
- Tax revenues were extremely buoyant due to improved tax administration.
- Breach of wage discipline: several line ministries made additional wage payments totaling nearly 1½ percent of GDP from off-budget self-generated special revenues.
- Structural reforms:
- VAT introduced on April 1, 2000 (postponed from January).
- By end-March 2000, 8 out of 12 loss-making enterprises targeted under the recently expired Fund-supported program had been dealt with.
- Majority share in Stopanska Banka sold to a foreign consortium in early April 2000.
Executive Board Assessment and Policy Recommendations
- Directors' overall assessment:
- Noted favorable macroeconomic developments in 1999: increased real output, subdued inflation, improved fiscal position, and strengthened foreign exchange reserves.
- Cautioned that sustained growth depends on vigorous structural reform implementation and continuation of prudent financial policies.
- Urged the authorities to spell out, without further delay, a complete medium-term structural reform agenda and economic strategy.
- Fiscal policy recommendations:
- Maintain financial discipline as embodied in the central government budget for 2000.
- Resist pressures from interest groups for specific relief or support; adhere to strict execution of budgetary plans.
- Contain personnel expenditure; proceed with downsizing the civil service in 2000.
- Integrate off-budget special revenue accounts into the budget to ensure proper fiscal management.
- Develop a comprehensive medium-term fiscal framework that orders expenditure priorities and fully accounts for expenditure liabilities, including those from enterprise and bank restructuring.
- Exchange rate and monetary policy:
- Directors viewed the prevailing exchange rate regime as having served FYRM well and saw no benefit in changing it at this stage, but recommended keeping the appropriateness of the exchange rate level and regime under close review.
- Financial sector and enterprise reform:
- High real interest rates largely reflected sizable share of nonperforming loans due to poor lending practices and delayed banking reform.
- Sale of Stopanska Banka and strengthened bank supervision were seen as crucial steps, but addressing underlying enterprise-sector weaknesses is essential.
- Urged acceleration of enterprise reform, liquidation of unviable enterprises, containment of fiscal costs of enterprise reform, improvement in corporate governance, and strict implementation of amended laws on bankruptcy procedures and creditors' rights.
- Recommended increasing labor market flexibility, reducing payroll taxes, and limiting unemployment benefits to enhance incentives for job search.
- Data and transparency:
- Recommended participation in the Fund's General Data Dissemination System to improve reliability, coverage, and timeliness of economic data.
- Welcomed authorities' intention to release the staff report for the Article IV consultation as an indication of commitment to improved transparency.
- Support and strategy:
- Directors stressed that prompt public enterprise and banking sector reforms and preparation of a draft Poverty Reduction Strategy Paper (PRSP) would facilitate mobilization of resources and attract foreign direct investment.
- Looked forward to authorities' early announcement of a medium-term economic strategy and structural reform plans.
- Welcomed upcoming discussion on a program that could be supported by the use of Fund resources.
FYRM: Selected Economic Indicators, 1996-2000 (as reported)
- Real economy (Percent change)
- Real GDP: 1996: 1.2; 1997: 1.4; 1998: 2.9; 1999 Pre-crisis Estimate: 5.0; 1999 Kosovo Scenario: -4.0; 1999 Prel. Actual: 2.7; 2000 Projection: 6.0
- Consumer prices, period average: 1996: 2.3; 1997: 2.6; 1998: -0.1; 1999 Pre-crisis Estimate: 1.0; 1999 Kosovo Scenario: 2.0; 1999 Prel. Actual: -0.7; 2000 Projection: 4.0
- Real wages, period average: 1996: 0.5; 1997: 0.2; 1998: 3.8; 1999 Pre-crisis Estimate: -0.5; 1999 Kosovo Scenario: 3.6; 1999 Prel. Actual: -0.3
- Employment, monthly series on monitored sector: 1996: -4.7; 1997: -6.0; 1998: -2.9
- Employment, labor force survey: 1999 Prel. Actual: ...; 2000 Projection: 5.4
- Unemployment rate (average) 1/: 1996: 31.9; 1997: 36.0; 1998: 34.5; 1999 Pre-crisis Estimate: 34.3; 1999 Kosovo Scenario: 36.5; 1999 Prel. Actual: 32.4
- Government finances (In percent of GDP) 2/
- General government revenues and grants: 1996: 34.9; 1997: 34.0; 1998: 33.5; 1999 Pre-crisis Estimate: 33.7; 1999 Kosovo Scenario: 37.7; 1999 Prel. Actual: 35.3
- General government expenditures and net lending: 1996: 37.0; 1997: 35.8; 1998: 35.6; 1999 Pre-crisis Estimate: 41.5; 1999 Kosovo Scenario: 36.6
- General government balance (accrual): 1996: -0.4; 1997: -1.8; 1998: -2.1; 1999 Pre-crisis Estimate: -7.7; 1999 Kosovo Scenario: 0.0; 1999 Prel. Actual: -1.3
- Central government balance (accrual): 1996: -1.2; 1997: -0.9; 1998: -0.2; 1999 Pre-crisis Estimate: -5.6; 1999 Kosovo Scenario: 0.9
- Government debt 3/: 1996: 48.1; 1997: 45.7; 1998: 53.2; 1999 Pre-crisis Estimate: 53.3
- Money and credit (Percent change, end of period)
- Broad money M3 4/: 1996: 0.3; 1997: 15.8; 1998: 14.9; 1999 Pre-crisis Estimate: 8.4; 1999 Kosovo Scenario: -3.7; 1999 Prel. Actual: 29.7; 2000 Projection: 11.3
- Private denar M2: 1996: 13.2; 1997: 11.1; 1998: 11.4; 1999 Pre-crisis Estimate: 11.2
- Total credit to private sector: 1996: 19.0; 1997: 18.9; 1998: 10.4; 1999 Pre-crisis Estimate: 11.8; 1999 Kosovo Scenario: 7.6; 1999 Prel. Actual: 9.4; 2000 Projection: 15.9
- Short-term lending rate: 1996: 23.2; 1997: 21.6; 1998: 20.5; 1999 Pre-crisis Estimate: 20.0
- Credit auction rate 5/: 1996: 11.0; 1997: 15.2; 1998: 18.5; 1999 Pre-crisis Estimate: 14.7 (Data for 1999 is for October.)
- Balance of payments (In millions of U.S. dollars)
- Exports: 1996: 1,147; 1997: 1,237; 1998: 1,292; 1999 Pre-crisis Estimate: 1,396; 1999 Kosovo Scenario: 961; 1999 Prel. Actual: 1,192; 2000 Projection: 1,345
- Imports: 1996: -1,464; 1997: -1,623; 1998: -1,711; 1999 Pre-crisis Estimate: -1,791; 1999 Kosovo Scenario: -1484; 1999 Prel. Actual: -1,601; 2000 Projection: -1,831
- Trade balance: 1996: -317; 1997: -386; 1998: -418; 1999 Pre-crisis Estimate: -395; 1999 Kosovo Scenario: -524; 1999 Prel. Actual: -409; 2000 Projection: -486
- Current account balance: 1996: -288; 1997: -277; 1998: -308; 1999 Pre-crisis Estimate: -251; 1999 Kosovo Scenario: -489; 1999 Prel. Actual: -136; 2000 Projection: -321
- Overall balance: 1996: -96; 1997: 16; 1998: 44; 1999 Pre-crisis Estimate: -3; 1999 Kosovo Scenario: -309; 1999 Prel. Actual: 99; 2000 Projection: -147
- Official gross reserves (in months of current year's c.i.f. imports): 1996: 267; 1997: 280; 1998: 334; 1999 Pre-crisis Estimate: 373; 1999 Kosovo Scenario: 458; 1999 Prel. Actual: 528
- (in months of next year's c.i.f. imports): 1996: 1.9; 1997: 2.1; 1998: 3.1
- (in months of next year's c.i.f. imports): 1999 Pre-crisis Estimate: 1.8; 1999 Kosovo Scenario: 2.2; 1999 Prel. Actual: 3.0
- External debt service ratio 6/: 1996: 8.7; 1997: 10.1; 1998: 12.9; 1999 Pre-crisis Estimate: 17.1; 1999 Kosovo Scenario: 13.0; 1999 Prel. Actual: 13.8
- External debt to GDP ratio (in percent) 7/: 1996: 25.4; 1997: 31.5; 1998: 41.1; 1999 Pre-crisis Estimate: 40.9; 1999 Kosovo Scenario: 44.2; 1999 Prel. Actual: 43.3
- Exchange rates (Percent change, period average)
- Nominal effective exchange rate: 1996: 12.4; 1997: 24.2; 1998: -3.6; 1999 Pre-crisis Estimate: 5.7
- Real effective exchange rate (CPI-based): 1996: -2.6; 1997: -13.1; 1998: -11.0
Public Information Notice: IMF Concludes Article IV Consultation with FYR of Macedonia, June 23, 2000.