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Public Information Notice (PIN) No. 02/25
March 8, 2002
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2001 Article IV Consultation with the former Yugoslav Republic of Macedonia

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The Staff Report for the 2001 Article IV Consultation with the former Yugoslav Republic of Macedonia is also available (use the free Adobe Acrobat Reader to view this PDF file).

On March 4, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the former Yugoslav Republic of Macedonia (FYRM).1

Background

After three consecutive years of generally favorable performance, the FYRM economy suffered a setback in 2001 because of a six-month security crisis. Output declined markedly. New outlays on security operations and weak revenues contributed to a large expansionary fiscal swing. Owing to a deterioration of the external current account position, the foreign exchange loss was heavy. However, the impact on reserves was cushioned by sizeable privatization inflows in early 2001. In the aftermath of the crisis, FYRM requested cancellation of the Poverty Reduction and Growth Facility/Extended Fund Facility arrangements. Subsequently, the authorities requested, and management agreed, that the IMF staff monitor their economic program for six months starting January 1, 2002.

There was a broad-based decline in real GDP of 4½ percent in 2001. Inflation, driven mainly by higher food prices, slowed only slightly to 5.3 percent. The unemployment rate fell by 1.7 percentage points to 30.5 percent, reflecting a buoyant informal economy and recruitment of a large number of reservists in the security forces.

The fiscal outturn in 2001 was substantially worse than anticipated in the original budget. Because of the crisis, additional spending on military equipment and on security personnel amounted to 6¾ percent of GDP. Tax receipts were lower than forecast in the budget in nominal terms, reflecting a weaker economy. In the second half of the year, the authorities embarked on a public investment program funded from privatization receipts. Partly to offset the pressures on the budget, the 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. Thus, the 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 can be attributed to revenue-reducing measures introduced in early 2001 and the impact of cyclical factors.

The external current account deficit (excluding grants) is estimated to have widened by about 5 percentage points of GDP to 10¾ percent of GDP in 2001. The trade balance improved, as imports were severely compressed on account of lower domestic demand and more than offset a marked decline in export earnings, but there was a sharp drop in net inflows of private transfers. Thus, since the beginning of the crisis in late February through end-December, gross official reserves declined by about US$160 million (about 22 percent of total reserves at the beginning of the year). However, owing to receipts of US$323 million from the privatization of the telecommunications company in January, gross foreign exchange reserves remained at a relatively comfortable level of US$779 million, equivalent to 4.7 months of next year's imports, at end-December 2001.

The National Bank of Macedonia (NBM) was challenged in the conduct of monetary policy by the expansionary fiscal stance and an erosion of market confidence in the denar. Pressure on the foreign exchange market, which initially appeared in early 2001 following a fiscal-policy induced expansion of liquidity, intensified with the onset of the security crisis, and peaked in mid-June. Experiencing substantial foreign exchange loss, the NBM tightened monetary policy during May-June: the remunerated reserve requirement was increased and the interest rate on 28-day central bank bills was more than doubled to 20 percent. In addition, in August, the period for surrendering export proceeds was shortened from 180 days to 30 days. These initiatives and the signing of the peace framework agreement helped restore normalcy in the foreign exchange market by mid-August. Subsequently, the NBM lowered the interest rate on bills by 5 percentage points to 15 percent.

There was notable progress on the structural front. As part of civil service reform, in the first half of 2001, gross employment in the public administration was reduced by 6½ percent, through voluntary separation and early retirement. In the banking sector, the regulatory framework of bank supervision was strengthened further and "problem" banks took steps to improve their operations. The reform of the Payments Operations Bureau (ZPP) was completed by end-2001. However, the progress toward divesting non-core government activities and resolution of loss-making enterprises was slow, in part because of the complications created by the security crisis.

Executive Board Assessment

Executive Directors noted the enormous economic costs of the six-month security crisis in 2001: output declined markedly; the fiscal position deteriorated, owing to new outlays on security operations and weak revenues; and foreign exchange reserve loss was heavy. Moreover, despite the authorities' fiscal and monetary measures in mid-year to contain the negative impact, the crisis had made it difficult to comply with the PRGF/EFF-supported program, leading the authorities to cancel the arrangements.

Directors welcomed the authorities' formulation of a six-month stabilization program—being monitored by the Fund staff from January 1, 2002—and the prospects of substantial donor assistance. However, they observed that the FYRM faced significant challenges over the medium term. They stressed the importance of firm implementation of the Staff-Monitored Program, and hoped that the authorities would put together a policy package that could be supported by a successor arrangement with the Fund. Directors noted the importance of regional cooperation to strengthen the foundations for progress over the medium term.

While welcoming the authorities' commitment in the 2002 budget to reverse the large fiscal swing of the previous year, Directors underscored the need for further consolidation over the medium term to safeguard external sustainability and government debt dynamics. Spending pressures are likely in the coming years for modernization of the armed forces, realigning of the wage structure of civil servants, reform of the pension system, and for agreed measures under the peace framework agreement. Moreover, Directors stressed the need for durable measures to follow the current temporary adjustment measures in the 2002 budget. In this regard, Directors urged the 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.

Directors also stressed the importance of further strengthening expenditure management and control. They encouraged the authorities to set up a framework for monitoring the budget's expenditure commitments and payment arrears. Directors saw efficient use of privatization receipts, especially on public investment programs, as vital to establish a strong basis for growth.

Noting that monetary policy initiatives at the height of the crisis had helped to restore confidence in the exchange rate anchor, Directors recommended that the central bank should continue to lower interest rates on its bills, as fiscal consolidation efforts take hold.

Directors agreed that FYRM's external competitiveness is broadly appropriate, but recommended that the exchange rate level and regime be kept under close review, especially if exports do not respond quickly as the peace framework agreement is implemented. In particular, Directors observed that maintaining the exchange rate anchor could be a challenge, once capital and financial transactions are liberalized later in the year. In these circumstances, greater flexibility in fiscal policy and the labor market will be needed to address any shocks to the economy. Directors encouraged the authorities to increase the operational independence of the central bank to cope with such exigencies over the medium term.

Directors noted that the health of the banking system remains fragile, notwithstanding improvements in the regulatory framework and supervision. They considered it important that the next stage of banking reforms focus on consolidating and improving transparency and governance. Directors welcomed the measures taken so far to combat money laundering and tackle the financing of terrorism, and encouraged the authorities to continue their efforts. They also welcomed the central bank's interest in a Financial Sector Assessment Program.

Directors stressed that continuing structural reforms would be key to improving the prospects for strong economic growth over the medium term. They welcomed the authorities' plans to find an early solution for loss making enterprises through sale or closure, and emphasized the need to do so in a transparent manner that ensures sustainable enterprise restructuring. Directors cautioned that the envisaged devolution of fiscal responsibilities to municipalities must be done in an orderly fashion, so as not to undermine fiscal soundness and the ongoing reforms or compromise delivery of services.

Directors recommended the authorities to improve further the quality, scope, and timeliness of statistics, and encouraged the authorities to expedite the preparation of relevant meta data for participating in the General Data Disseminating System.


FYRM: Selected Economic Indicators, 1999-2002


         

1999

 

2000

 

2001


 

2002

 
         

 

 

Program 1/

Jan-Sep
Prel.

 

Year
Est.

     

Real economy

(Percent change)

                               
 

Real GDP

 

4.3

 

4.6

6.0

-6.0

a

-4.6

 

4.0

 
 

Consumer prices

                       
   

period average

 

-0.7

 

5.8

2.2

5.6

5.3

 

2.5

 
   

end of period

 

2.6

 

6.1

 

1.2

2.9

b

3.7

 

2.7

 
 

Real wages, period average

 

3.6

 

-0.3

2.3

-1.8

a

-1.5

1.0

 
 

Employment, monthly data

 

1.0

 

-0.5

 

1.0

-3.9

a

-4.1

1.0

 
 

Unemployment rate (average)

 

32.4

 

32.2

 

31.8

...

 

30.5

 

30.5

 
                               

Government finances

(In percent of nominal GDP)

                               
 

General government revenues and grants

 

35.4

 

36.7

 

32.6

24.2

c

34.4

 

33.4

 
 

General government expenditures

 

35.4

 

34.2

 

33.7

29.3

c

40.4

 

36.8

 
 

General government balance

 

0.0

 

2.5

 

-1.1

-5.1

c

-6.0

 

-3.4

 
 

Central government balance

 

0.8

 

2.7

 

-0.2

-4.7

c

-5.7

 

-2.7

 
 

Government debt 2/

     

               
   

Gross

 

49.1

 

48.3

 

...

46.9

c

46.9

 

48.8

 
   

Net

 

45.6

 

41.1

 

...

35.7

c

36.9

 

39.2

 
                               

Money and credit

(Percent change, end of period)

                               
 

Broad money (M3) 3/

 

29.7

 

25.6

 

12.7

-7.8

b

54.4

 

-20.8

 
 

Total credit to private sector

 

9.4

 

17.2

 

13.1

6.7

b

7.8

7.1

 
 

Short-term lending rate (percent)

 

20.0

 

19.0

 

...

21.2

19.2

 

...

 
 

Interbank money market rate (percent)

 

11.6

 

7.2

 

...

19.3

11.9

 

...

 
                               

Balance of payments

(In millions of U.S. dollars)

                               
 

Exports

 

1,191

 

1,319

 

1,558

872

1,183

 

1,225

 
 

Imports

 

1,584

 

1,875

 

2,163

1,125

1,580

 

1,643

 
 

Trade balance

 

-392

 

-556

 

-605

-253

-397

 

-417

 
 

Current account balance

             

       
   

excluding grants

 

-187

 

-202

 

-328

-236

-363

 

-354

 
     

(in percent of GDP)

 

-5.1

 

-5.6

-8.3

-7.0

c

-10.8

 

-9.7

 
   

including grants

 

-125

 

-110

 

-295

-221

-345

 

-339

 
     

(in percent of GDP)

 

-3.4

 

-3.1

-7.4

-6.6

c

-10.2

 

-9.3

 
 

Overall balance

 

117

 

204

 

-30

56

79

 

-115

 
 

Official gross reserves 4/

 

478

 

714

 

752

762

779

818

d

   

(in months of current year's imports

                       
     

of goods and non-factor services)

 

3.0

 

3.8

 

3.6

4.7

 

4.9

 

4.9

 
   

(in months of next year's imports

                       
     

of goods and non-factor services)

 

2.6

 

4.5

 

3.4

4.6

 

4.7

 

4.6

 
 

External debt service ratio 5/

 

13.9

 

13.1

 

10.7

...

 

19.0

 

11.9

 
 

External debt to GDP ratio (percent)

 

40.5

 

41.5

 

44.0

41.5

 

40.7

 

42.4

 
                               

Exchange rates 6/

(Percent change, period average)

                               
 

Nominal effective exchange rate

 

2.9

 

0.1

 

...

2.5

a

...

 

...

 
 

Real effective exchange rate (CPI-based)

 

-2.3

 

-0.6

 

...

1.6

a

...

 

...

 
 

Real effective exchange rate (ULC-based)

 

-1.0

 

3.7

 

...

3.6

a

...

 

...

 

Sources: Data provided by the FYRM authorities; and IMF staff projections.

     
                               

a

 

Percent change relative to the same period of the previous year.

       

b

 

Percent change relative to December of previous year.

         

c

 

Percent of the annual GDP.

                   

d

 

Assumes that financing gap is filled by donor support.

           
                               

1/

Data as reported under the PRGF/EFF-supported program (EBS/00/231), except ratios to GDP that are based on a nominal GDP that is calculated by applying the growth expected under the program to the actual 2000 outturn.

2/

Total debt of the general government; includes liabilities assumed by the government upon the sale or closure of loss-making enterprises and associated with the cleaning up of Stopanska Banka's balance sheet prior to its sale.

3/

Includes foreign currency deposits.

                 

4/

Includes receipts from privatization of telecommunications company of US$323 million in January 2001.

5/

Debt service due, including IMF, as a percentage of exports of goods and services.

6/

An increase means appreciation of the denar. Partner countries exclude Federal Republic of Yugoslavia.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.



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