Press Release No. 20/347

IMF Staff Concludes Virtual Visit to North Macedonia

November 20, 2020

• Economic activity is expected to rebound in 2021, after a sharp fall in 2020, but the second wave of the pandemic poses risks to the strength of the rebound.
• Addressing the health crisis remains a top priority and will be critical for protecting people and safeguarding the economy.
• Fiscal policy should remain supportive in the near term to protect jobs, firms, and the vulnerable, and health care spending should be prioritized.
• Accommodative monetary policy should be maintained until the recovery is well underway. Adequate provisioning for banks’ potential losses remains essential.

Washington, DC: An International Monetary Fund (IMF) mission, led by Bergljot Barkbu, conducted a virtual staff visit with the authorities of North Macedonia during November 9-18, to discuss recent economic and financial sector developments, the 2021 budget and the outlook. At the conclusion of the visit, Ms. Barkbu issued the following statement:

“Macroeconomic and financial stability has been maintained thanks to skillful policy management, as well as globally accommodative financial conditions. The timely policy actions taken by the Government and the National Bank of the Republic of North Macedonia (NBRNM) have played an essential role in mitigating the economic and social impact of the pandemic.

“As in other parts of the world, the economy contracted sharply in 2020. Unemployment, however, has increased only modestly, due to fiscal support measures. Headline inflation has picked up, primarily reflecting higher food prices. While a rebound in economic activity is expected in 2021, the second wave of the virus poses a considerable downside risk, despite recent promising news on vaccine development.

“Addressing the health crisis remains a top priority and will be essential for safeguarding the economy and public finances. In the near term, fiscal policy should remain supportive to help revive growth, preserve jobs, and protect the vulnerable. The draft budget for 2021 foresees a sizeable increase in capital spending, which––if implemented––could help boost demand and lift the growth potential of the economy, provided that spending is focused on high-quality projects. The draft budget also contains a contingency envelope for possible new stimulus measures. This could be used to extend wage subsidies, unemployment insurance, and social safety nets in a targeted manner, with the understanding that additional funds may be needed as the situation evolves. The planned credit guarantee scheme will help support firms’ liquidity. Fiscal risks related to budget revenue shortfalls, state-owned enterprises, and Public-Private Partnerships require close monitoring.

“In the medium term, the key objective is to achieve higher growth to improve living standards and income convergence with other European countries, which will require more investment in human and physical capital. Measures that reduce the revenue base and tax collection more broadly or increase recurrent spending, such as on pensions and subsidies, would go in the wrong direction as they imply less space for growth-enhancing investment.

“The accommodative monetary policy stance is appropriate and the NBRNM stands ready to act as needed to protect the de-facto exchange rate peg. The overall banking system remains well capitalized and profitable but going forward banks’ lending capacity is expected to be lessened by a likely deterioration of asset quality. It is important to maintain strict loan classification and provisioning rules to ensure that banks set aside sufficient reserves to cover potential losses. Banks should be encouraged to refrain from discretionary dividend distribution and share buy-backs.

“Given the criticality of the NBRNM’s capacity to take prompt supervisory actions to ensure the stability of the financial system, it is essential to preserve the NBRNM’s independence. This will enable it to continue fulfilling its mandates of maintaining price stability and protecting financial stability, which are crucial preconditions for sustainable growth.

“We would like to thank our counterparts for the candid and productive discussions and wish the Government and people of North Macedonia success in overcoming the pandemic.”