Press Release No. 08/33

Press Release: IMF Executive Board Completes Third Review Under the Stand-By Arrangement with the Former Yugoslav Republic of Macedonia

February 27, 2008

The Executive Board of the International Monetary Fund (IMF) today completed the third review of the former Yugoslav Republic of Macedonia's economic performance under a Stand-By Arrangement. The three-year Arrangement for an amount equivalent to SDR 51.7 million (about US$82.2 million) was approved on August 31, 2005 (see Press Release No. 05/196). The authorities are treating the arrangement as precautionary.

Following the Executive Board discussion of Macedonia, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"Economic performance of the former Yugoslav Republic of Macedonia under the Fund-supported program continues to improve. Economic growth has been robust, the fiscal position has strengthened, and foreign direct investment and international reserves have increased. The Government has also continued to make progress in reducing its external debt. Despite these successes, economic challenges remain, including containing the recent rise in inflation, achieving a sustained higher economic growth rate, and reducing unemployment.

"The authorities' record of fiscal discipline has underpinned Macedonia's strong macroeconomic performance. Substantial improvements in revenue administration and tax collections have made possible ambitious cuts in personal and corporate income tax rates, and increases in investment. At the same time, the Government expects to contain its fiscal deficit to 1.5 percent of GDP in 2008. However, substantial pension and public sector wage increases, the latter pre-announced for three years, will limit the flexibility of the budget.

"A key near term policy challenge will be to contain inflation. The central bank's interest rate increase is expected to help ensure that recent food and energy price pressures only have a temporary impact on inflation. The government should stand ready to tighten fiscal policy in case inflation pressures persist or the current account deficit widens beyond projection. By strengthening central bank governance and independence, the new central bank law should also help safeguard price stability.

"The recent increase in foreign direct investment is positive, but continued structural reform is needed to further improve the business environment and boost growth. The authorities' commitment to link health contributions to hours actually worked is commendable: this should increase part-time employment and reduce the unemployment rate. The next step should be to reduce quickly minimum social insurance contributions, as these remain a substantial impediment to job creation in the formal sector, particularly for low wage earners," Mr. Kato said.