Statement at the Conclusion of an IMF Mission to Former Yugoslav Republic of MacedoniaPress Release No. 08/77
April 8, 2008
An International Monetary Fund (IMF) mission headed by Mark Griffiths visited Skopje April 1-8, 2008 to discuss macroeconomic developments and prepare for further discussions at the IMF and World Bank Spring Meetings. A mission for the fourth review under the country's Fund-supported Stand-By Arrangement is tentatively planned for June.
At the conclusion of the visit on April 8, the mission issued the following statement:
"Economic momentum continues. Real GDP growth exceeded 5 percent in 2007, and growth in industrial production exceeded 10 percent in early 2008. However, macroeconomic pressures have increased. Inflation rose to 10 percent year-on-year in March, largely because of higher world food and energy prices. Higher imports of cars, energy and food, and some weakening in private transfers from abroad, have increased the current account deficit.
"Though the increase in prices is mainly due to international factors, monetary and fiscal policies now need to take steps to limit any second round increases in domestic wages and prices, so that the rate of inflation can quickly fall back down again.
"First, the mission supports the National Bank of the Republic of Macedonia's (NBRM) decision to raise interest rates to 6 percent. However, further measures may need to be taken by the NBRM to reduce the rapid rate of credit growth, and to meet the program's target for net international reserves.
"Second, the government has helped this disinflation effort by running a budget surplus in the first quarter of this year. This support should continue. Tax revenues this year are increasing rapidly: instead of passing supplementary budgets to increase spending, these revenues now need to be saved.
"If the government and NBRM implement the sound fiscal and monetary policies outlined above, this should limit the increase in the current account deficit and, by the end of the year, reduce inflation to the low single digits.
"While macroeconomic challenges have grown, continued structural reforms are also needed to boost growth and reduce unemployment. The mission again urges the government to reduce labor costs by basing part-time worker health contributions on the hours they actually work and can afford, and not on the assumption that they work full time. Minimum social contributions also need to be reduced and, eventually, abolished. This will bring firms and workers back into the formal economy and reduce the unemployment rate. The mission also urges the authorities to stick to the timetable in the program for integrating social fund collections, and for harmonizing their bases using actual rather than contracted wages.
"Electricity sector finances are opaque and remain a risk to the budget. Electricity prices in Macedonia are some of the lowest in the region. Yet high cost electricity imports are likely to be much higher this year than planned. The result is increased financial losses for electricity transmission company MEPSO, causing it to run arrears, which worsens the finances of electricity company ELEM. These losses should be included directly in the budget, and household tariffs raised gradually in line with international prices (together with increased social protection) to reduce these losses.
"To summarize, while economic growth remains strong, macroeconomic pressures have increased. The mission wishes the authorities every success in meeting these challenges, and thanks them and the many Macedonian people we have met over the last week for their help and hospitality."