Public Information Notice: IMF Concludes 2001 Article IV Consultation with the former Yugoslav Republic of Macedonia
IMF News, March 8, 2002
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- Published: March 8, 2002
Background
- Executive Board concluded the Article IV consultation with the former Yugoslav Republic of Macedonia (FYRM) on March 4, 2002.
- FYRM requested cancellation of the Poverty Reduction and Growth Facility/Extended Fund Facility arrangements after the 2001 crisis; authorities requested IMF staff monitoring of their economic program for six months starting January 1, 2002.
- The Staff Report for the 2001 Article IV Consultation is available.
Economic performance in 2001
- Broad-based decline in real GDP of 4½ percent in 2001.
- Inflation (period average) slowed slightly to 5.3 percent; driven mainly by higher food prices.
- Unemployment rate fell by 1.7 percentage points to 30.5 percent.
- Real wages (period average) registered -1.5 percent in 2001 (table: -1.8 in Jan–Sep, -1.5 Year Est.).
- Employment, monthly data: -4.1 percent (2001).
Fiscal developments and public finances
- Additional spending on military equipment and security personnel amounted to 6¾ percent of GDP in 2001.
- General government deficit in 2001 is estimated at 6 percent of GDP, implying an expansionary fiscal swing of 8½ percent of GDP relative to 2000.
- Of the swing, about 3 percentage points attributed to revenue-reducing measures introduced in early 2001 and cyclical factors.
- Authorities postponed revenue-reducing measures originally envisaged for June, and introduced on July 1, for a six-month period, a new tax on financial transactions.
- General government revenues and grants: 32.6 percent of nominal GDP (2001).
- General government expenditures: 29.3 percent of nominal GDP (2001).
- General government balance: -5.1 percent of nominal GDP (2001).
- Central government balance: -4.7 percent of nominal GDP (2001).
- Government debt (gross): 46.9 percent of GDP (2001); net: 35.7 percent of GDP (2001).
External sector and reserves
- External current account deficit (excluding grants) estimated to have widened by about 5 percentage points of GDP to 10¾ percent of GDP in 2001.
- Trade balance and flows (millions of U.S. dollars):
- Exports: 1,558 (2001).
- Imports: 2,163 (2001).
- Trade balance: -605 (2001).
- Current account balance excluding grants: -328 (2001) or -7.0 percent of GDP.
- Gross official reserves declined by about US$160 million (about 22 percent of total reserves at the beginning of the year) from late February through end-December 2001.
- Receipts of US$323 million from privatization of the telecommunications company in January 2001 kept gross foreign exchange reserves at US$779 million at end-December 2001, equivalent to 4.7 months of next year's imports.
Monetary policy and central bank actions
- National Bank of Macedonia (NBM) faced pressure on the foreign exchange market and erosion of market confidence in the denar.
- NBM tightened monetary policy during May–June 2001:
- Remunerated reserve requirement was increased.
- Interest rate on 28-day central bank bills was more than doubled to 20 percent.
- In August 2001 the period for surrendering export proceeds was shortened from 180 days to 30 days.
- Following restoration of normalcy by mid-August, NBM lowered the interest rate on bills by 5 percentage points to 15 percent.
- Short-term lending rate: 21.2 percent (2001); interbank money market rate: 19.3 percent (2001).
Structural reforms and institutional developments
- Civil service reform reduced gross employment in public administration by 6½ percent in the first half of 2001 through voluntary separation and early retirement.
- Banking sector: regulatory framework of bank supervision strengthened; "problem" banks took steps to improve operations.
- Reform of the Payments Operations Bureau (ZPP) was completed by end-2001.
- Progress was slow on divesting non-core government activities and resolving loss-making enterprises, in part due to the security crisis.
Executive Board Assessment and policy recommendations
- Directors noted the enormous economic costs of the six-month security crisis: marked output decline, deteriorated fiscal position, and heavy foreign exchange reserve loss.
- Directors welcomed the six-month stabilization program being monitored from January 1, 2002, and prospects of substantial donor assistance.
- Key recommendations and observations:
- Firm implementation of the Staff‑Monitored Program and design of a policy package for a possible successor arrangement with the Fund.
- Importance of regional cooperation for medium-term progress.
- While the 2002 budget commits to reversing the fiscal swing, further consolidation over the medium term is needed to safeguard external sustainability and government debt dynamics.
- Anticipated spending pressures: modernization of the armed forces; realigning wage structure of civil servants; reform of the pension system; agreed measures under the peace framework agreement.
- Need for durable measures to follow current temporary adjustments in the 2002 budget; urged authorities to eliminate the financial transaction tax by end-2002 and to consider introducing from 2003 base-broadening and tax rate adjustments of the VAT as well as strengthening its administration.
- Further strengthen expenditure management and control; set up a framework for monitoring the budget's expenditure commitments and payment arrears.
- Efficient use of privatization receipts, especially on public investment programs, is vital for growth.
- Monetary policy: continue to lower interest rates on central bank bills as fiscal consolidation takes hold.
- Exchange rate: external competitiveness broadly appropriate but exchange rate level and regime should be kept under close review; maintaining the exchange rate anchor could be a challenge once capital and financial transactions are liberalized later in the year.
- Enhance operational independence of the central bank to cope with exigencies.
- Banking sector: next stage of reforms should focus on consolidation and improving transparency and governance.
- Continue efforts to combat money laundering and financing of terrorism; central bank's interest in a Financial Sector Assessment Program welcomed.
- Structural reforms are key to medium-term growth; find early solutions for loss-making enterprises through sale or closure in a transparent manner.
- Devolution of fiscal responsibilities to municipalities should be done in an orderly fashion to avoid undermining fiscal soundness or service delivery.
- Improve quality, scope, and timeliness of statistics; expedite preparation of relevant metadata for participation in the General Data Disseminating System.
FYRM: Selected Economic Indicators, 1999–2002 (highlights)
- Real GDP percent change:
- 1999: 4.3
- 2000: 4.6
- 2001: 6.0 (Program Jan–Sep Prel.); Year Est. -4.6 and Program 4.0 for 2002
- Consumer prices (period average):
- 1999: -0.7
- 2000: 5.8
- 2001: 2.2 (Jan–Sep 5.6; Year Est. 5.3; Program 2.5 for 2002)
- Unemployment rate (average):
- 1999: 32.4
- 2000: 32.2
- 2001: 31.8 (… ; Year Est. 30.5)
- Broad money (M3) percent change (end of period):
- 1999: 29.7
- 2000: 25.6
- 2001: 12.7 (Program -7.8; Jan–Sep 54.4; Year Est. -20.8)
- Total credit to private sector percent change:
- 1999: 9.4
- 2000: 17.2
- 2001: 13.1 (Year Est. 6.7; Program 7.8; 2002 Program 7.1)
- Balance of payments (millions of U.S. dollars):
- Exports: 1999: 1,191; 2000: 1,319; 2001: 1,558; 2002 Program Jan–Sep Prel.: 872; Year Est.: 1,183; 2002 Program: 1,225
- Imports: 1999: 1,584; 2000: 1,875; 2001: 2,163; 2002 Program Jan–Sep Prel.: 1,125; Year Est.: 1,580; 2002 Program: 1,643
- Current account balance excluding grants (millions): 1999: -187; 2000: -202; 2001: -328; 2002 Program Jan–Sep Prel.: -236; Year Est.: -363; 2002 Program: -354
- Official gross reserves (millions of U.S. dollars):
- 1999: 478
- 2000: 714
- 2001: 752
- 2002 Program Jan–Sep Prel.: 762
- Year Est.: 779
- 2002 Program: 818
- Reserves in months of current year's imports of goods and non-factor services: 1999: 3.0; 2000: 3.8; 2001: 4.7; 2002 Program Jan–Sep Prel.: 4.9
- External debt to GDP ratio (percent):
- 1999: 40.5
- 2000: 41.5
- 2001: 44.0
- 2002 Program Jan–Sep Prel.: 40.7
- Year Est.: 42.4
Source: Public Information Notice: IMF Concludes 2001 Article IV Consultation with the former Yugoslav Republic of Macedonia (March 8, 2002).