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IMF Reviews the Former Yugoslav Republic of Macedonia’s Performance Under Past Fund-Supported Programs

Author(s):
International Monetary Fund
Published Date:
August 2004
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This PIN summarizes the views of the IMF’s Executive Board as expressed during the August 2, 2004 discussion based of the Ex Post Assessment of fYR Macedonia’s Longer-Term Program Engagement. Ex Post Assessments are prepared for countries with a longer-term program engagement in order to evaluate the success of past programs and implications for possible future Fund involvement.1

Background

The former Yugoslav Republic (fYR) of Macedonia’s economic performance since independence has been marked by notable achievements in macroeconomic management, as well as some disappointments in the area of structural reforms. Overall, macroeconomic management has been good. Inflation was brought down from hyperinflationary levels to the low single digits by the de facto exchange rate peg, which was sustained in spite of sometimes challenging circumstances. At the same time, sound fiscal policy helped to gradually lower the level of government debt to about 40 percent of GDP and recently even lower. But the implementation of structural reforms was mixed. Important progress was made in financial sector reforms and trade liberalization; further progress is needed in reforming labor market institutions and the judiciary and in strengthening governance. Privatization has been largely completed but the method of privatization gave insiders a dominant role, resulting in a smaller boost in efficiency than had been expected. Partly as a result of the unfinished structural agenda, economic growth has been lackluster. The average annual growth rate since the mid-1990s was around 1½ percent, well below other transition economies. Unemployment figures have remained high. In the external sector, the current account deficit has widened in recent years while foreign direct investment has been generally low.

Executive Board Assessment

Executive Director welcomed the opportunity to review fYR Macedonia’s longer term engagement with the Fund, which has involved a series of successive Fun-supported programs starting at an early stage of the country’s transition to a market economy beginning in the early 1990s. Directors agree that over this period Fund involvement has been quite effective in promoting macroeconomic stability in fYR Macedonia, especially when viewed against the back ground of the series of internal and external shocks that have buffeted the economy. The experience with Fund support for structural reforms has been more mixed, although many Directors agreed with the authorities’ own assessment that Fund support has served to underpin an acceleration of structural reforms.

Directors acknowledged that fYR Macedonia’s longer term engagement reflected in part the scope and complexity of the set of reforms required to ensure a successful transition, while ensuring that macroeconomic policies remained geared to maintaining stability and external viability. At the same time, the Fund’s long term involvement reflected the slow pace of reforms. The Fund’s involvement also served the donor community by performing a signaling function with respect to the quality of measures being taken by the authorities to promote stability and growth.

Directors considered several aspects of the Fund’s experience that could have influenced, and possibly speeded up, the pace of fYR Macedonia’s successful exit from a program relationship with the Fund. Most Directors agreed with the view that the disappointing progress in the area of structural reforms and the repeated program interruptions suggested that the Fund should have been more cautious in entering into new program relationships, once macroeconomic stabilization was achieved in the context of Fund-supported programs. They also felt that the sequencing of structural reforms and the Fund’s collaboration with other international institutions—especially the World Bank—could have been improved, with greater emphasis placed on strengthening governance, financial sector development, and labor market reforms.

This review of experience provides valuable lessons for possible future Fund engagement. Strong national ownership will remain essential. Most Directors felt that any financial engagement should be strongly directed at supporting essential remaining reforms that address fundamental problems—particularly in the structural area—and to lay the basis for successful exit for fYR Macedonia from the program relationship with the Fund. It was also suggested that the alternative of an arrangement not involving the further use of Fund resources should not be ruled out.

Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The Staff Report for the 2004 Article IV Consultation with the Former Yugoslav Republic of Macedonia is also available.

FYR Macedonia: Selected Economic Indicators, 1999-2004
199920002001200220032004
Prog.Prel.Prog.Proj.
1st Rev.1st Rev.
Real economy(Percent change)
Real GDP4.34.5-4.50.92.83.13.0-4.04.0
Consumer prices
period average-0.75.85.32.41.81.22.52.8
end of period2.66.13.71.02.22.62.53.3
Real wages, period average3.6-0.3-1.74.54.9
Unemployment rate (average)32.432.230.531.936.7
Government finances(In percent of nominal GDP)
General government balance
w/o foreign financed projects0.01.8-7.2-5.6-2.5-1.6-2.5-2.2
Revenues35.436.234.034.934.033.133.133.0
Total expenditure35.434.441.140.536.534.735.635.3
Central government balance0.82.7-5.8-5.3-1.4-0.9-0.9-0.9
Government debt 1/
Gross57.453.251.647.744.846.641.844.8
Net53.846.041.641.340.141.337.940.5
Money and credit 2/(Percent change, end of period)
Broad money (M3) 3/29.725.656.7-8.614.717.29.417.9
Total credit to private sector 4/9.417.27.39.99.519.37.217.3
Short-term lending rate (percent)20.019.019.217.714.5
Interbank money market rate (percent)11.67.211.914.45.8
Balance of payments(In millions of U.S. dollars)
Exports1,1901,3211,1551,1131,3541,3591,4431,499
Imports1,6862,0111,6771,8782,1232,2112,2022,360
Trade balance-496-690-521-765-769-851-759-860
Current account balance-32-75-234-322-292-278-347-382
(in percent of GDP)-0.9-2.1-6.8-8.5-6.3-6.0-7.0-7.7
Official gross reserves 5/450700756735816903839946
(in months of following year’s imports of goods and services)2.44.34.23.53.94.03.94.0
External debt to GDP ratio (percent)39.240.138.038.432.934.433.135.3
Exchange rates 6/(Percent change, period average)
Nominal effective exchange rate12.412.43.30.72.7a
Real effective exchange rate (CPI-based)2.94.0-6.1-2.40.4a
Real effective exchange rate (ULC-based)7.67.6-6.2-2.4-0.8b
Sources: Data provided by the FYRM authorities; and IMF staff projections.

As of end-December 2003

As of end-September 2003

Total debt of the general government; includes liabilities assumed by the government upon the sale or closure of loss-making enterprises and associated with the cleaning up of Stopanska Banka’s balance sheet prior to its sale.

The projection for 2003 and 2004 are prepared based on current exchange rate data, while historic data is based on the stock-flow methodology.

Includes foreign currency deposits; strong growth of foreign currency component explains the high growth in Broad Money in 2003.

Adjusted for provisioning until 2002.

Includes receipts from privatization of telecommunications company of US$323 million in January 2001.

An increase means appreciation of the denar. Partner countries include among others Serbia and Montenegro, and Bulgaria.

Sources: Data provided by the FYRM authorities; and IMF staff projections.

As of end-December 2003

As of end-September 2003

Total debt of the general government; includes liabilities assumed by the government upon the sale or closure of loss-making enterprises and associated with the cleaning up of Stopanska Banka’s balance sheet prior to its sale.

The projection for 2003 and 2004 are prepared based on current exchange rate data, while historic data is based on the stock-flow methodology.

Includes foreign currency deposits; strong growth of foreign currency component explains the high growth in Broad Money in 2003.

Adjusted for provisioning until 2002.

Includes receipts from privatization of telecommunications company of US$323 million in January 2001.

An increase means appreciation of the denar. Partner countries include among others Serbia and Montenegro, and Bulgaria.

This PIN summarizes the views of the Executive Board as expressed during the discussion based on the staff report.

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