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The Former Yugoslav Republic of Macedonia: Concluding Statement of the Fourth Post-Program Monitoring Mission

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

November 10, 2014

Against the background of strengthening growth, the authorities should continue to reduce vulnerabilities and rebuild fiscal space within credible policy frameworks. Continued cooperation between the fiscal and monetary authorities will help ensure external sustainability. To enhance the benefits of the FDI growth strategy, improving further the operating environment for domestic private firms will raise the productive potential of the economy, help further reduce the unemployment gap and make growth more inclusive.

1. The economic outlook is improving. The authorities’ strategy to strengthen and diversify the export base through FDI mitigates a weak external environment. Growth continues to strengthen above regional averages, supported by strong exports—notably from the special economic zones—as well as rising domestic demand. Domestic investment growth is mainly driven by public infrastructure projects, while higher private consumption reflects an acceleration in credit growth, steady employment growth, and an increase in real wages and pensions. Deflation is expected to be temporary and driven by low food prices and spillovers from the euro area, rather than weak domestic demand; prices are expected to increase slightly in the coming months. Overall, the economy is projected to grow by about 3½ percent in 2014 and to slightly strengthen next year.

2. Having broadly achieved its objectives, the monetary easing cycle has reached its end. Since early 2012, the central bank has appropriately supported the resumption of credit growth to the corporate sector through targeted measures, without undermining the health of the financial sector. There are no signs of pressures on foreign exchange and currency spreads—which have fallen to seven year lows—have not triggered denar holders to shift into foreign currency; nonetheless, high banking sector liquidity suggests that further reductions in the policy rate are unlikely to be effective in fostering further credit growth. The authorities should remain committed to using the one-month central bank bill as the main policy instrument to strongly guide preferences towards the denar.

3. Stronger fiscal consolidation is needed. The adjustment path previously set under the 2014-2016 fiscal strategy appropriately aimed at bringing the central government deficit to 2.6 percent of GDP by 2016, a level that would broadly stabilize the debt to GDP ratio. The upward revision of the budget deficit target for 2014 and the relaxation of fiscal targets in the new 2015-2017 medium-term fiscal strategy mean that stabilization of the public debt will now not occur until later, and at a higher level. In that respect:

  • With 2015 tax revenues underpinned by credible macroeconomic assumptions, any over-performance on revenues should be used to improve the fiscal balance and aim for a tighter-than-planned fiscal deficit, rather than to boost spending.

  • Early contingency planning would not only safeguard the planned adjustment path but also protect against unsustainable cuts in spending, including in investment and transfers.

  • The announced introduction of a fiscal rule provides a sound anchor to medium-term public finances. Frontloading the consolidation will help ensure compliance with the planned deficit ceiling of 3 percent of GDP by 2017. It would also keep public debt more comfortably below the planned 60 percent of GDP threshold. This threshold should not be used as an operational target, but rather as a ceiling, meaning that policy should aim at keeping debt well below that level in normal times.

4. Meeting the key objectives of fiscal policy calls for a careful evaluation of spending priorities. The available revenue envelope reflects a strategic decision to maintain a low corporate tax environment. Moreover, looking forward, tax revenues may not keep pace with output growth, reflecting in large part the expansion of special economic zones subject to preferential tax schemes. Under these circumstances, the needed fiscal consolidation implies trade-offs and requires careful prioritization of spending, in line with long-term developmental goals.

  • A key pro-growth priority, capital expenditure will rightly remain high in the medium term in order to meet large infrastructure needs. Embedding the public investment decision-making process in a rigorous economic cost-benefit analysis would ensure the maximum payoff in medium-term growth.

  • In order to allow for planned increases in pension and other social transfers as outlined in the fiscal strategy for 2016 and 2017, current spending will have to remain frozen in nominal terms.

  • • Potential pressures on expenditure, stemming from any new projects or additional transfers to the Health Fund for the gradual reduction in arrears, should be accounted for in the medium-term budget framework.

5. Renewed presence in international capital markets highlights the role of public debt management in supporting external sustainability. Government borrowing has implications for monetary policy through its impact on domestic liquidity and the level of foreign exchange reserves (government borrowing in foreign exchange accounts for most of the country’s gross reserve accumulation). Supporting the currency peg therefore requires continued close cooperation between the fiscal and the monetary authorities. The lengthening of domestic public debt maturities and the recent successful issuance of a Eurobond demonstrate an active debt policy, which is documented in the fiscal strategy for 2015-2017. The recent publication of consolidated public debt data is also a welcome step. From a fiscal risk perspective, however, the government debt management strategy should encompass public sector debt, including the risk profile of all borrowing by state-owned enterprises, particularly in the transport and energy sectors where investment activity is set to rapidly expand.

6. A stronger and more competitive domestic private sector is needed for sustainable growth. Maintaining a stable macroeconomic and financial environment is one pre-condition for sustainable growth. However, real income convergence with the EU and long-term external sustainability will mainly come from the establishment of export-oriented domestic production capacities, more private investment and improved productivity. Key in this regard is the effort to strengthen human capital, including through more intensive knowledge transfers from FDI, and preserving the country’s cost competitiveness. Additional measures to reinforce the speed of judicial decisions would enhance the business environment. Enforcing payment discipline in both public and private sector entities would ease liquidity constraints in a still strained corporate sector. The welcome initiative to upgrade inspection bodies could be complemented with the review of the structure and enforcement of fee regimes.

The IMF team is grateful to the authorities for their open and constructive discussions during the mission, and also to representatives of the private sector and other institutions who made time to meet with us.


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