IMF Executive Board Concludes 2019 Article IV Consultation with the Republic of North Macedonia
January 27, 2020
On January 22, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of North Macedonia and considered and endorsed the staff appraisal without a meeting. [1] , [2]
Economic activity is strong. Real GDP growth is estimated to have strengthened to 3.2 percent in 2019, supported by buoyant private consumption and a rebound in investment. Export growth remained high despite the slowdown in key trading partners, while imports were boosted by the solid domestic demand. Helped by sizeable inflows from remittances, the current account deficit was modest. Inflation, which is mainly driven by euro area inflation and food and energy prices, was low.
The overall fiscal deficit is expected to have remained below 2 percent of GDP in 2019, keeping public debt broadly stable. Capital spending increased markedly from 2018 but continues to be below budgeted amounts, despite the country’s investment needs.
Credit growth is solid, and non-performing loans remain relatively low. Against the background of low inflation, solid deposit growth, and favorable foreign exchange market developments, the National Bank of the Republic of North Macedonia has continued to accumulate international reserves and further cut its policy rate in January 2020, keeping monetary policy accommodative.
Executive Board Assessment
In concluding the Article IV consultation with the Republic of North Macedonia, Executive Directors endorsed the staff’s appraisal as follows:
After a protracted political crisis, the economy has entered a period of solid growth and stability. Over the recent years, the authorities have reviewed the reform momentum, with crucial institutional and governance reforms and efforts to make public finances more sustainable and equitable. Through these actions, they have gained substantial policy credibility and the economy has rebounded.
Growth is expected to accelerate in 2020. Lower taxes and higher pensions and wages―including public sector and minimum wages―are expected to provide a further, albeit one-off, stimulus to consumption. Export and investment growth would remain robust but slow somewhat, reflecting weak growth in trading partners. This moderation could become more pronounced if global trade tensions worsen or investment plans are delayed due to uncertainty during the election period.
Staying on the path of reform is essential to further bolster the economy’s resilience to shocks and durably raise income levels. This period of solid growth should be used to rebuild fiscal space, in order to strengthen the economy’s ability to cope with future shocks. Going forward, speeding up income convergence and improving living standards will necessitate a more growth-enhancing fiscal policy mix and an unwavering commitment to the ambitious structural reform agenda.
An ambitious consolidation is needed to rebuild fiscal policy space and re-orient public spending toward investment. A cumulative consolidation of 1½ percent of GDP over 2020–22, compared to staff’s baseline projections, would achieve primary budget balance and ensure that there is policy space to act in an economic downturn. The consolidation would require steadfast implementation of already approved reforms to pensions and personal income tax, as well as enhanced revenue administration and rationalization of agricultural subsidies. These measures would also make space in the budget to increase essential capital expenditure to narrow the investment gap. This should be underpinned by measures to strengthen the public investment management framework, including better prioritization and addressing bottlenecks in execution of planned projects. To safeguard against fiscal risks, the authorities should wait to approve new PPPs until a strengthened framework is in place.
Reforms to address key labor market and institutional weaknesses will help lift medium-term growth and speed up income convergence. Although growth has been solid in the past two decades, it has not been enough to substantially narrow North Macedonia’s large income gap with the EU. To accelerate convergence, it is essential to continue reforms to improve the public administration, rule of law, and control of corruption. This should be complemented by efforts to build physical capital given infrastructure gaps and to boost human capital to address skills shortages and mismatches, including through vocational education and training and more use of skill-enhancing active labor market policies. Reforms to tackle informality would help improve the business climate and protect workers, with potential large revenue gains. Strengthening revenue administration efficiency and compliance should be the priority, combined with measures that raise public trust in institutions and tax morale.
The minimum wage should be aligned closely with productivity. The net minimum wage has been raised by 44 percent cumulatively since 2017 while productivity growth has been low. The minimum wage is estimated to reach 53 percent of the average wage in 2020, which is high by regional standards. These increases may not be effective in reducing overall poverty and may have adverse effects on formal employment and competitiveness.
The monetary policy stance is appropriate. The NBRNM has appropriately used the favorable conditions to accumulate reserves within the de facto exchange rate peg. While reserve coverage is broadly adequate, the central bank should continue building buffers against possible domestic or external shocks. Going forward, should the external environment worsen, the NBRNM should stand ready to tighten monetary policy.
The banking system is healthy, but efforts are needed to further mitigate credit risk. The banking system is well capitalized and liquid. Steps to further increase deposit denarization, coupled with carefully calibrated measures to curb foreign currency lending to households, as needed, would help strengthen financial system resilience. Amid continued high credit growth to households, closer monitoring, including by collecting granular household data, is warranted.
Further strengthening the financial stability framework remains a priority. In line with the recommendations of the 2018 FSAP, the authorities have started to enhance the supervisory and regulatory framework, including by enhancing banks’ liquidity risk reporting and increasing the supervisory intensity for domestic systemically important banks. It is important to strengthen the macroprudential mandate of the NBRNM, together with improved systemic risk identification. Further progress is needed on the financial safety net, by introducing a comprehensive bank resolution framework and buttressing the deposit guarantee scheme.
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North Macedonia: Selected Economic Indicators |
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|
2014 |
2015 |
2016 |
2017 |
2018 |
2019 (e) |
2020 (p) |
|
|
Year-on-year change, unless otherwise specified |
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|
Real GDP |
3.6 |
3.9 |
2.8 |
1.1 |
2.7 |
3.2 |
3.4 |
|
Real domestic demand |
4.4 |
5.4 |
5.0 |
0.5 |
2.0 |
4.2 |
3.7 |
|
Consumption |
2.4 |
4.3 |
2.1 |
0.4 |
2.4 |
2.9 |
3.1 |
|
Gross investment |
10.7 |
8.3 |
12.5 |
0.8 |
0.9 |
7.4 |
5.2 |
|
Net exports |
-8.0 |
-14.1 |
-16.7 |
-0.1 |
-1.2 |
-5.8 |
-5.2 |
|
CPI inflation (annual average) |
-0.3 |
-0.3 |
-0.2 |
1.4 |
1.5 |
0.9 |
1.2 |
|
Unemployment rate (annual average) |
28.0 |
26.1 |
23.8 |
22.4 |
20.7 |
17.9 |
16.8 |
|
Private Sector Credit |
9.8 |
9.5 |
0.0 |
5.3 |
7.3 |
6.7 |
6.3 |
|
In percent of GDP |
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|
Current account balance |
-0.5 |
-2.0 |
-2.9 |
-1.0 |
-0.1 |
-1.0 |
-1.2 |
|
Goods and services balance |
-17.2 |
-16.2 |
-15.2 |
-14.1 |
-12.8 |
-12.7 |
-12.2 |
|
Exports of goods and services |
47.7 |
48.8 |
50.9 |
54.9 |
60.4 |
63.0 |
64.0 |
|
Imports of goods and services |
64.9 |
65.0 |
66.2 |
69.0 |
73.2 |
75.8 |
76.2 |
|
Private transfers |
17.3 |
16.8 |
15.4 |
15.9 |
15.9 |
15.3 |
14.8 |
|
External debt |
70.0 |
69.3 |
74.7 |
73.4 |
73.4 |
74.2 |
74.0 |
|
Gross investment |
30.3 |
30.4 |
32.5 |
32.3 |
31.9 |
32.9 |
33.3 |
|
Domestic saving |
29.8 |
28.5 |
29.7 |
31.2 |
31.8 |
32.0 |
32.1 |
|
Public |
-0.9 |
-0.1 |
0.2 |
0.5 |
0.1 |
0.3 |
0.0 |
|
Private |
30.6 |
28.6 |
29.5 |
30.7 |
31.7 |
31.7 |
32.0 |
|
Foreign saving |
0.5 |
2.0 |
2.9 |
1.0 |
0.1 |
1.0 |
1.2 |
|
General government gross debt 1/ |
38.0 |
38.1 |
39.8 |
39.4 |
40.6 |
39.8 |
40.4 |
|
Public sector gross debt 1/ 2/ |
43.3 |
44.0 |
46.7 |
46.1 |
47.6 |
47.6 |
49.1 |
|
Central government balance |
-4.2 |
-3.5 |
-2.7 |
-2.7 |
-1.8 |
-1.8 |
-2.5 |
|
Memorandum items: |
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|
Nominal GDP (billions of denars) |
527.6 |
559.0 |
594.8 |
618.1 |
658.1 |
692.7 |
730.9 |
|
Nominal GDP (billions of euros) |
8.6 |
9.1 |
9.7 |
10.0 |
10.7 |
11.2 |
11.9 |
|
GDP per capita (euros) |
4138 |
4380 |
4657 |
4837 |
5145 |
... |
... |
|
Sources: NBRNM; SSO; MOF; IMF staff estimates. |
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1/ The historical debt ratios differ slightly from the numbers reported by MoF due to using end-year debt in local currency divided by local currency GDP. |
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2/ Includes general government and public sector enterprises. |
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[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] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
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