Press Release No. 24/18

IMF Executive Board Concludes the 2023 Article IV Consultation and Completes the First Review Under the Precautionary and Liquidity Line Arrangement for the Republic of North Macedonia

January 19, 2024

• The completion of the review gives the authorities access to SDR161.35 million (equivalent to about €200 million at current exchange rates or 115 percent of quota.)
• The authorities intend to draw SDR 119.26 million (or 85 percent of quota) and consider the remaining amount as precautionary insurance against external shocks.
• The authorities are progressing towards PLL objectives, encompassing the safeguarding of public finances, reduction of energy subsidies, addressing high inflation, and ensuring financial stability.The economy is recovering post the surge in energy and food prices triggered by Russia's war in Ukraine. Economic activity in 2023 was driven by strong exports and reduced energy imports, and it is set to strengthen into 2024.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) today concluded the 2023 Article IV Consultation[1] and completed the First Review under the Precautionary and Liquidity Line (PLL) Arrangement for North Macedonia. The completion of the review gives the authorities access to SDR161.35 million (equivalent to about €200 million at current exchange rates or 115 percent of quota.) The authorities intend to draw SDR 119.26 million (or 85 percent of quota) and consider the remaining amount as precautionary insurance against external shocks.

The goal of the PLL, approved in November 2022 and giving the authorities access to SDR 406.87 million (or 290 percent of quota), was to ensure financing was available at a challenging time in accessing financial markets, while supporting the authorities’ objective of reducing energy subsidies (a fiscal vulnerability exposed by the energy shock) while providing better targeted support to vulnerable households that need it most and consolidating public finances.

The successful completion of the first review marks a significant step in enhancing North Macedonia's economic resilience. The authorities are progressing towards PLL objectives, encompassing the safeguarding of public finances, reduction of energy subsidies, addressing high inflation, and ensuring financial stability. Planned fiscal consolidation for 2024 aims to bring the budget deficit closer to the 3 percent of GDP ceiling under North Macedonia’s Organic Budget Law. Additionally, it seeks to build buffers for potential cost overruns for the Corridor 8/10d road project and other spending needs. Recently undertaken measures will reduce the budget’s vulnerability to a surge in energy-related subsidies.

The economy is recovering post the surge in energy and food prices triggered by Russia's war in Ukraine. Economic activity in 2023 was driven by strong exports and reduced energy imports, and it is set to strengthen into 2024. The planned increase in public investment, notably the commencement of the Corridor 8/10d road project, will further support economic recovery. Although inflation remains a challenge, it has moderated substantially due to lower global energy and food prices, coupled with monetary tightening. An improved external trade balance, partly attributed to the sharp decline in global energy prices, along with resilient foreign direct investment, sustains adequate international reserves. The banking sector remains liquid, well-capitalized, profitable, with non-performing loans stable at a historically low level.

Article IV discussions focused on medium-term challenges. North Macedonia has seen a slowdown in convergence to the EU over the last decade, mainly driven by under-investment, high emigration, and low productivity growth. North Macedonia is also exposed to climate change and will be impacted by the EU-Carbon Broder Adjustment Mechanism. The country has a large potential to reduce carbon emissions through investments in renewable energy sources and decommissioning of old coal-powered powerplants.

Following the Executive Board discussion, Mr. Bo Li, Deputy Managing Director and Chair, issued the following statement:

“North Macedonia is recovering from the dual shocks of the COVID-19 pandemic and the surge in energy prices following Russia’s invasion of Ukraine. The country continues to qualify under the PLL because it has sound economic fundamentals and institutional policy frameworks, and it is implementing―and has a track record of implementing―sound policies. The government met its deficit target in 2023, and it has recently adopted a strong set of measures that will materially reduce energy subsidies. The authorities are committed to containing wage increases to those agreed in the General Collective Agreement. The National Bank of the Republic of North Macedonia (NBRNM) has tightened monetary policy significantly, which has brought down inflation and helped to stabilize the foreign exchange market. In this context, reserves increased in 2023, and remain at sound levels. The financial sector is profitable, liquid, and well capitalized.

“Going forward, the authorities’ policy agenda focuses on continued fiscal consolidation to rebuild buffers. In this context, parliament has approved a credible 2024 budget that targets significant fiscal consolidation while preserving space for priority spending. The authorities remain committed to strengthening tax compliance and scaling up public investment, while managing associated fiscal risks including from the Corridor 8/10d road project. Also, they plan to fully phase out untargeted energy subsidies while strengthening targeted support for vulnerable households and improving energy efficiency. The NBRNM is committed to further policy tightening should inflation risks materialize, and it continues to work towards strengthening the monetary transmission mechanism, enhancing bank-risk monitoring and supervision, and refining and operationalizing the macroprudential and resolution frameworks.

“North Macedonia faces significant medium-term challenges. Arresting emigration and boosting productivity are crucial for re-accelerating income convergence with the EU. North Macedonia is also exposed to climate change and will be impacted by the EU-Carbon Broder Adjustment Mechanism. Addressing these challenges requires among others improving the business environment and rule of law, and accelerating the green transition.”

[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.