IMF Executive Board Concludes Article IV Consultation with Former Yugoslav Republic of Macedonia

November 22, 2017

On November 13, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV Consultation with the Former Yugoslav Republic of Macedonia. [1]

Following a solid economic recovery since the Global Financial Crisis, growth has slowed to 2.4 percent in 2016 and contracted by 0.9 percent in 2017H1. Economic activity has been supported by private consumption and exports, while negative effects from the prolonged political instability have restrained investment and slowed down corporate credit growth. Inflation has gradually picked up, after staying negative during the past few years, driven by rising increasing services prices and, to a smaller extent, food prices. The current account deficit has widened in recent years, albeit a narrowing trade deficit, reflecting higher profit repatriation by foreign firms, weaker remittances and higher foreign currency cash holdings by households.

On the fiscal front, the overall deficit narrowed to 2.6 percent in 2016. The improvement was largely due to under-execution of capital investment, spending constraints imposed during the pre‑election period, and accumulation of payment arrears. The under-execution of goods and services and capital spending continued in 2017H1, which is expected to keep overall fiscal deficit around 3 percent of GDP in 2017. Public debt is projected to rise to 47 percent of GDP in 2017. Currently, the government is in the process of preparing the draft economic program.

The financial sector is well-capitalized, liquid, and profitable. The authorities adopted Basel III standards on capital adequacy earlier this year. The banking system’s liquidity is high, in part due to a significant slowdown in credit growth to the non-financial corporate sector and banks’ limited preference for increasing sovereign assets holdings. Monetary conditions are accommodative, with the main policy rate reduced back to 3.25 percent in February 2017.

Executive Board Assessment [2]

Executive Directors noted the negative impact of the prolonged political crisis on economic growth and the limited progress on structural reforms. They noted that the formation of the new government is a turning point for the Macedonian economy, and underscored this as an opportunity to rebuild policy space and revive reforms.

Directors emphasized the need for fiscal consolidation, in light of the rapid rise in public debt and high gross financing needs. They welcomed the authorities’ intention to reduce the overall deficit gradually to 2 percent of GDP in the medium term, but stressed that this should rely on durable measures. They recommended strengthening tax administration, and increasing property and energy taxation to boost revenues. At the same time, they noted the importance of improving spending efficiency through subsidy rationalization and better targeting of social spending, and ensuring pension sustainability. Directors also supported the authorities’ plan to strengthen public finance management and increase fiscal transparency.

Directors agreed that an accommodative monetary policy remains appropriate given the still‑negative output gap, low inflation, and external stability. However, they emphasized that the monetary stance should be appropriately tightened as inflation developments warrant or in case of a loss of market confidence, and urged close monitoring.

Directors noted that the banking system remains well capitalized, liquid, and profitable. They commended the authorities for strong policy actions that restored stability after a period of financial turbulence, and the recent adoption of Basel III capital standards. They stressed that continued vigilance is important in light of a high degree of financial euroization and moderate deleveraging risks. Directors recommended that the authorities continue to complement monetary policy with macro-and micro-prudential measures to counter financial stability risks.

Directors urged the authorities to intensify the pace of structural reforms to increase employment and boost productivity. They welcomed the authorities’ plan to support employment and social inclusion, which need to be carefully targeted. To preserve competitiveness and fiscal sustainability, they stressed the need to keep wage growth in line with productivity developments. In light of an aging population, they noted the importance of increasing labor force participation, particularly that of women, through a mix of tax, social assistance, and family leave policies, as well as active labor market policies. Directors advised further improvements in governance and public administration, trade-enabling logistics, and skills to boost FDI inflows.

FYR Macedonia: Selected Economic Indicators

2012

2013

2014

2015

2016

2017

Year-on-year change, unless otherwise specified

Real GDP

-0.5

2.9

3.6

3.8

2.4

1.9

Real domestic demand

3.5

1.3

4.4

3.4

1.5

1.0

Consumption

1.4

1.6

2.4

3.4

3.7

2.6

Gross investment

10.2

0.5

10.7

3.6

-4.3

-3.6

Net exports

-26.3

7.0

-8.0

-1.0

3.9

1.8

CPI inflation (annual average)

3.3

2.8

-0.3

-0.3

-0.2

1.2

Unemployment rate (annual average)

31.0

29.0

28.0

26.1

23.6

23.0

Private Sector Credit 1/

5.2

6.3

9.8

9.5

1.0

5.8

In percent of GDP

Current account balance

-3.2

-1.6

-0.5

-2.0

-2.7

-1.9

Goods and services balance

-22.4

-18.3

-17.2

-16.3

-14.8

-14.7

Exports of goods and services

44.5

43.3

47.7

48.8

49.3

51.3

Imports of goods and services

66.9

61.6

64.9

65.1

64.2

66.0

Private transfers

20.6

18.1

17.3

16.9

15.1

15.4

External debt

68.2

64.0

70.0

69.4

73.5

71.8

Gross investment

28.9

28.8

30.3

31.1

33.6

33.2

Domestic saving

25.8

27.2

29.8

29.1

30.9

31.3

Public

0.2

-0.5

-0.9

-0.1

0.2

0.0

Private

25.5

27.7

30.6

29.3

30.7

31.3

Foreign saving

3.2

1.6

0.5

2.0

2.7

1.9

General government gross debt

33.7

34.0

38.0

38.2

39.0

38.8

Public sector gross debt 1/

36.2

37.9

43.3

44.1

45.7

47.1

Central government balance

-3.8

-3.8

-4.2

-3.5

-2.6

-3.0

Memorandum items:

Nominal GDP (billions of denars)

466.7

501.9

527.6

558.2

607.5

631.6

Nominal GDP (billions of euros)

7.6

8.1

8.6

9.1

9.9

10.3

GDP per capita (euros)

3680

3930

4126

4374

4755

...

Sources: NBRM; SSO; MOF; IMF staff estimates.

1/ Includes general government and public sector non-financial enterprises.


[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.

[2] 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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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