Press Release No. 03/172

Press Release: IMF Completes First Review Under Stand-By Arrangement for the Former Yugoslav Republic of Macedonia and Approves US$5.7 Million Disbursement

October 17, 2003

The Executive Board of the International Monetary Fund (IMF) today completed the first review of the former Yugoslav Republic of Macedonia's economic performance under the 14-month Stand-By Arrangement. The decision will enable FYR Macedonia to draw SDR 4 million (about US$5.7 million) from the IMF immediately.

The Stand-By Arrangement amounting to SDR 20 million (about US$28.6 million) was approved on April 30, 2003 (see Press Release No. 03/63). FYR Macedonia's initial drawing under the arrangement amounted to SDR 4 million (about US$5.7 million).

Following the Executive Board discussion, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chair, said:

"Macedonia's macroeconomic stabilization program for 2003 continues to rest on a basis of sound fiscal and monetary policies, and has restored the fiscal balance to a sustainable level after two years of high deficits. Continued sound monetary policy, anchored by the de facto peg of the denar, has kept inflation low and enhanced the credibility of the central bank while leaving competitiveness indicators broadly unchanged. The effects of these policies are already visible: interest rates have dropped significantly while foreign exchange reserves are accumulating. The authorities have also advanced on their structural agenda in a number of areas, including reforms to increase the flexibility of the labor market, though they are encouraged to accelerate the momentum of reforms.

"Fiscal management in 2003 was complicated by a slow start-up of government spending. While there are no indications yet of a significant increase of spending in the second half of the year in line with the supplementary budget approved in September, any increase could complicate monetary policy and put pressure on financial markets. The central bank, however, is committed to taking corrective measures to ensure that program targets are achieved. Looking forward, volatility in expenditures should be reduced. To help stabilize budget financing, the establishment of a government securities market is essential. Fiscal decentralization should continue at a pace consistent with the development of local administrative capacity.

"Further structural measures are important to address impediments to growth and to reduce unemployment. Reforms are necessary to strengthen the investment climate by creating a predictable business environment, implementing judicial reforms and addressing governance problems. In the same vein, the authorities should remove the bottlenecks in reform of the health sector. To achieve the authorities' commitment to stop budgetary transfers to the health sector by 2004, it is essential to press ahead with World Bank-supported measures to strengthen governance.

"The Financial System Stability Assessment acknowledged the authorities' efforts to improve the soundness of the banking system in recent years as well as to address remaining vulnerabilities. Reforms are particularly important to tackle corruption and money laundering. There has been considerable progress in laying the groundwork for financial sector supervision, especially banking supervision, though there remains a need to move towards risk-based assessments of banks in the highly euroized environment," Mr. Sugisaki said.