Press Release No. 07/81

Press Release: IMF Executive Board Completes Second Review Under Stand-By Arrangement with the Former Yugoslav Republic of Macedonia

April 27, 2007

The Executive Board of the International Monetary Fund (IMF) today completed the second review of the former Yugoslav Republic of Macedonia's economic performance under a Stand-By Arrangement.

In completing the review, the Board approved the authorities' requests for waivers of nonobservance of the structural performance criteria with respect to the establishment of a Large Taxpayer Office at the Public Revenue Office and a Large Contributor Office at the Pension and Disability Fund, as well as with respect to the sale of the remainder of the government's residual shares in Makedonski Telkomunikacii AD (except for a minority shareholding of no more than 7 percent).

The three-year Stand-By Arrangement for an amount equivalent to SDR 51.7 million (about US$ 78.9 million) was approved on August 31, 2005 (see Press Release No. 05/196). The authorities now treat the arrangement as precautionary.

Following the Executive Board discussion of Macedonia, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"Economic performance of the former Yugoslav Republic of Macedonia and implementation of its Fund-supported program remain encouraging. Growth has been stable, inflation is low, and international reserves are steadily increasing. The new banking law should encourage competition and reduce interest rate spreads, while strengthening banking supervision. The main challenge ahead will be to maintain macroeconomic stability, and to raise significantly the country's growth potential through accelerated structural reforms.

"Fiscal discipline has underpinned the country's continued strong performance. Although the budget deficit is expected to increase slightly in 2007, this will finance reductions in taxes and import tariffs, and allow an increase in public investment. A reduction of the financial losses in the electricity sector and continued resistance to spending pressures will be key to meeting this year's deficit target.

"For the medium term, rationalizing government spending, and harmonizing and broadening the tax base are needed to help ensure that the government's tax-cutting plans are consistent with fiscal discipline. The effective implementation of reforms in the Public Revenue Office, together with the planned integration of social fund collections, should also boost revenues and help finance these tax cuts.

"The authorities are giving appropriate priority to the goal of attracting foreign direct investment. In order to secure a lasting improvement, this is best achieved through a continued focus on macroeconomic stability and the acceleration of structural reforms to enhance the business environment, instead of using generous tax incentives," Mr. Kato said.