Statement at the Conclusion of an IMF Mission to Macedonia

Press Release No. 07/203
September 25, 2007

An IMF mission visited Skopje September 11-23, 2007 to continue discussions for the third review under the Stand-By Arrangement for Macedonia and issued the following statement at the conclusion of the mission on September 23:

"Progress has been made, but a few issues remain for completing the Third Review. These include: finalizing a budget for 2008 that respects the up to 1½ percent of GDP deficit target in the government's economic program; and completing the structural reforms set out in the last Letter of Intent.

"Economic performance this year has been quite strong. Growth this year should exceed the 4½ percent projected in the program, but be somewhat below the 7 percent recorded in the first quarter. Inflation has picked up slightly to just over 2 percent in August, and may rise a little more due to higher food prices caused by the drought, before falling back again next year. Higher tax revenues have allowed the government to increase spending while keeping the budget deficit to 1 percent of GDP. At just below 5 percent, central bank interest rates are low by historical standards, and credit growth has picked up. Prospects for growth in 2008 are good, though the international economic environment has become a source of uncertainty.

"The government has announced policies with implications for the budget. These include: a 10 percent increase in public wages for each of the next three years; a change in the pension indexation formula to 50 percent wages and 50 percent consumer price inflation, which will increase pensions; selective cuts in VAT; increased agricultural spending; and spending on computers for education and sports halls. These come on top of existing plans to cut personal and corporate income tax rates to 10 percent.

"The government has also announced that it is committed to keeping its budget deficit for 2008 and the medium term up to 1½ percent of GDP. The mission strongly supports this commitment, which is essential for maintaining low inflation, keeping interest rates low, and containing the current account deficit. The challenge now is to carefully cost these proposals, and to reconcile them with the budget deficit target. The mission is ready to assist the authorities in this effort.

"A number of fiscal risks also need to be either resolved or included in next year's budget. These include reducing financial losses in the electricity transmission company (MEPSO) which this year have been significant; and making sure that there are sufficient funds to ensure the success of Phase II of the decentralization of government responsibilities to local governments.

"Central bank independence has delivered low inflation and currency stability. The new central bank law will therefore safeguard the independence of the NBRM and strengthen its financial soundness.

"The mission encourages the authorities to reduce health contributions for part-time workers to the number of hours they actually work, and to gradually lower social contribution payments for low wage workers, reducing them to the wages they actually earn. This cut in labour taxes will fight the informal economy, and reduce unemployment.

"Finally, the mission would like to thank the Macedonian authorities for their cooperation throughout the mission and for their generous hospitality. It looks forward to resolving these outstanding issues, so that the review can be completed later this year."



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