Press Release No. 23/238

IMF Staff Concludes Visit to North Macedonia

June 27, 2023

• Public finances are on track, yet delays in passing the tax policy reform and the solidarity tax could put priority spending at risk. Tax revenues should be strengthened by urgently adopting the tax reform and the solidarity tax. Further, public sector wage restraint is needed to avoid a large burden on public finances, and to avoid fueling already high inflation.
• While the electricity block-tariff reform in 2022 was a significant step in the right direction, electricity prices for most households remain heavily subsidized. As a result, public finances remain vulnerable to surges in the cost of energy.
• The normalization of monetary policy is contributing to the gradual decline in inflation and ensuring an adequate level of international reserves. The banking system is liquid, profitable, and adequately capitalized. Current positive conditions in the banking system should be used to continue adding to capital buffers.

Washington, DC: An International Monetary Fund (IMF) mission, led by Jacques Miniane, visited North Macedonia during June 5-9, to discuss recent economic developments and policies in the context of the IMF’s Precautionary and Liquidity Line (PLL) with North Macedonia. At the conclusion of the visit, Mr. Miniane issued the following statement:

“An economic recovery is underway, with real GDP growth projected at 2.1 percent this year, followed by 3.4 percent in 2024. In recent months, inflation has started to decline, helped by lower energy and food prices as well as the ongoing monetary policy tightening. Consumer prices are expected to rise by 9.2 percent on average this year and by 3.5 percent in 2024, and to return to 2 percent by 2026.

“Public finances are on track to meet the deficit target set out in the 2023 budget approved by parliament. Yet, delays in passing the tax policy reform and the solidarity tax compromise tax revenues and could put priority spending at risk. In this context, the tax reform, whose design has benefitted from IMF input, should be adopted without delay given the long period allowed for public consultation, and so should the solidarity tax. Separately, efforts at improving tax collection need to be sustained and accelerated.

“Given that the rise in consumer prices in recent years has reduced the purchasing power of households, it is understandable that public sector workers are demanding higher wages. There already is room in the central government budget to accommodate an increase in the wage bill of close to 10 percent, similar to the projected rate of inflation for 2023, including the minimum wage harmonization this year. Anything above this magnitude would create a large and permanent burden on the budget and would also risk squeezing out other essential spending. Large wage increases would also risk turning temporarily high inflation into persistently high inflation.

“Going forward, and in line with the commitments under the PLL, fiscal consolidation should continue to underpin fiscal sustainability and ensure adequate fiscal buffers for the next crisis.

“While the electricity block-tariff reform in 2022 was a significant step in the right direction, electricity prices for most households remain heavily subsidized and among the lowest in Europe. As a result, public finances remain vulnerable to surges in the cost of energy. While raising energy tariffs is never easy, it will be important to continue to move ahead with electricity tariff reforms that gradually phase-out subsidies and strengthen energy efficiency. The current context of lower international energy prices provides an opportunity to continue such reforms. Support for electricity bills should be targeted towards poorer households, instead of benefitting most households in an untargeted manner, as is currently the case.

“The National Bank of the Republic of North Macedonia (NBRNM) has continued a necessary normalization of monetary policy through higher policy rates and other measures, to ensure that high inflation does not become entrenched. These policy changes have helped stabilize inflation expectations and are contributing to the gradual decline in inflation. Importantly, they also ensure that international reserves remain adequate, which is key for North Macedonia.

“The banking system is liquid, profitable, and adequately capitalized, and we expect it to be able to absorb the effects of tighter financial conditions and other shocks. However, positive conditions today should be used to continue adding to capital buffers. Finally, we support the recent introduction of borrower-based macro-prudential measures. They are an important toolkit for the central bank, and they will help contain risks in the real estate sector.

“Structural and institutional reforms, essential for North Macedonia’s EU accession prospects, should be accelerated, to strengthen the country’s growth prospects and income convergence to the EU in the medium-term.

“As for the Corridor 8/10d road project, IMF staff are still assessing the implications for public finances.

“We thank our counterparts for excellent discussions and for their hospitality during the staff visit.”