IMF Executive Board Concludes 2018 Article IV Consultation with FYR Macedonia

January 29, 2019

On January 23, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the 2018 Article IV Consultation with FYR Macedonia. [1]

After nearly stalling in 2017, real GDP growth experienced a modest rebound in the first three quarters of 2018 and is estimated to have reached 2 percent for the year. Private consumption––buoyed by employment and household credit growth––and robust exports growth––boosted by solid foreign demand and revived metal sector–– supported economic activity. However, investment continued to contract due to the postponement of large infrastructure projects, falling construction and lingering uncertainties. The resulting subdued investment-related imports, together with strong exports, is estimated to have reduced the current account deficit to little over ½ percent of GDP in 2018. After a brief spike, mostly reflecting higher international oil prices, headline inflation has eased in recent months.

The overall fiscal deficit is expected to have marginally improved to 2.6 percent of GDP in 2018 mostly due to under‑execution of capital spending. Revenues on aggregate underperformed, although collections of corporate income tax and social security contributions exceeded expectations. Public debt is estimated to have reached 50.7 percent of GDP at end-2018.

The banking sector is well-capitalized, liquid, and profitable. Banks comfortably meet Pillar I capital adequacy requirements and maintain sound aggregate liquidity buffers. Credit risks are contained due to high provisioning. Against the background of favorable foreign exchange market developments, strong deposit growth, moderate inflation, and a negative output gap, the NBRM cut its policy rate twice to 275 bps. The monetary policy easing, along with higher demand from households, supported private sector credit growth.

Executive Board Assessment [2]

Executive Directors welcomed the revival of reforms following the restoration of political stability, which has resulted in renewed confidence and a pickup in economic activity. With the prospect of opening accession negotiations with the European Union, Directors underscored the importance of pursuing an ambitious structural reform agenda to lift productivity growth and accelerate income convergence, while also rebuilding fiscal policy space and external buffers.

Directors noted that fiscal developments in the past decade have reduced policy space. They agreed that a gradual and steady fiscal consolidation toward a zero primary balance in the medium term is needed to put public debt on a firm downward trajectory. They welcomed recent measures aimed at reducing the pension deficit and improving the targeting of social assistance benefits. They emphasized the need for steadfast implementation of the CPI‑only pension indexation and recommended additional measures to improve tax efficiency and compliance, rationalize agricultural subsidies, and reduce the scope for early retirement. Directors also encouraged further efforts to strengthen public financial management and increase fiscal transparency.

Directors agreed that monetary policy has been appropriately accommodative against a background of moderate economic activity, low inflation, and favorable foreign exchange markets. Directors welcomed the authorities’ readiness to tighten the monetary stance if reserves accumulation falls below baseline projections or global financial conditions tighten.

Directors noted that the banking system remains well‑capitalized, liquid, and profitable but that there are risks that should be closely monitored. They underscored that further efforts to gradually increase deposit denarization, coupled with carefully calibrated macroprudential measures to reduce foreign currency lending to households, would help strengthen financial system resilience.

Directors commended the authorities for the considerable improvement in financial sector regulation and supervision over the past decade. However, they agreed on the need to further strengthen the financial stability framework along the lines identified in the recent Financial Sector Assessment Program. Directors noted that the macroprudential policy framework would benefit from additional capacity building for systemic risk monitoring and enhanced inter‑agency coordination. They also stressed the importance of addressing residual gaps in supervision and promptly finalizing the modernization of the crisis management and bank resolution regime.

Directors called for a multi‑pronged strategy to address labor market weaknesses that hinder growth. To reduce skill shortages and mismatches, Directors recommended enhancing the quality of secondary and vocational education and realigning tertiary education toward delivering the skills demanded by the economy. They noted that active labor market policies should continue to target youth and the long‑term unemployed but with a greater emphasis on building skills and facilitating education‑to‑work transition. Directors also welcomed ongoing efforts to raise female labor force participation.

Directors urged the authorities to maintain an unwavering commitment to implementing key institutional reforms that strengthen governance, reduce corruption, and ensure an effective rule of law. These will prove instrumental to improving the investment climate and reducing widespread informality, as well as unlocking EU accession negotiations.


FYR Macedonia: Selected Economic Indicators

2013

2014

2015

2016

2017

2018 (p)

2019 (p)

Year-on-year change, unless otherwise specified

Real GDP

2.9

3.6

3.9

2.8

0.2

2.0

2.8

Real domestic demand

1.3

4.4

5.4

5.0

0.3

0.0

2.6

Consumption

1.6

2.4

4.3

2.1

0.1

2.5

2.0

Gross investment

0.5

10.7

8.3

12.5

0.8

-6.1

4.1

Net exports

7.0

-8.0

-14.1

-16.7

-2.1

9.0

-1.3

CPI inflation (annual average)

2.8

-0.3

-0.3

-0.2

1.4

1.5

1.8

Unemployment rate (annual average)

29.0

28.0

26.1

23.8

22.4

21.0

20.3

Private Sector Credit 1/

6.4

9.8

9.5

0.0

5.3

8.0

7.0

In percent of GDP

Current account balance

-1.6

-0.5

-2.0

-2.9

-1.0

-0.6

-1.4

Goods and services balance

-18.3

-17.2

-16.2

-15.2

-14.1

-13.1

-13.4

Exports of goods and services

43.3

47.7

48.8

50.9

55.1

60.0

62.2

Imports of goods and services

61.6

64.9

65.0

66.2

69.1

73.1

75.6

Private transfers

18.1

17.3

16.8

15.4

15.9

15.8

15.5

External debt

64.0

70.0

69.3

74.7

73.9

76.1

78.5

Gross investment

28.8

30.3

30.4

32.5

33.0

31.7

32.8

Domestic saving

27.2

29.8

28.5

29.7

32.0

31.1

31.4

Public

-0.5

-0.9

-0.1

0.2

0.5

-0.2

0.5

Private

27.7

30.6

28.6

29.5

31.5

31.2

30.9

Foreign saving

1.6

0.5

2.0

2.9

1.0

0.6

1.4

General government gross debt

34.0

38.0

38.1

39.8

39.4

41.4

42.5

Public sector gross debt 1/

37.9

43.3

44.0

46.7

48.0

50.7

53.0

Central government balance

-3.8

-4.2

-3.5

-2.7

-2.7

-2.6

-3.0

Memorandum items:

Nominal GDP (billions of denars)

501.9

527.6

559.0

594.8

616.6

639.3

670.4

Nominal GDP (billions of euros)

8.1

8.6

9.1

9.7

10.0

10.4

10.9

GDP per capita (euros)

3930

4126

4380

4657

4825

...

...

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

1/ Includes general government and SOE debt.


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 summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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