Journal Issue

Former Yugoslav Republic of Macedonia: Recent Economic Developments

International Monetary Fund
Published Date:
July 2000
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Table 1.FYRM: Basic Economic Indicators, 1996–99
Real economy(Percent change)
Real GDP1.
Consumer prices, period average2.32.6-0.1-0.7
Real wages, period average0.
Unemployment rate (average) 1/31.936.034.532.4
Government finances 2/(In percent of GDP)
General government balance (accrual)-0.5-0.4-1.80.0
Central government balance (accrual)-0.7-1.2-0.90.9
Government debt 3/41.548.145.753.2
Money and credit(Percent change, end of period)
Broad money M3 4/0.315.814.929.7
Total credit to private sector19.018.910.49.4
Short-term lending rate23.221.620.520.0
Credit auction rate 5/
Balance of payments
Trade balance (percent of GDP)-7.2-10.4-12.0-11.9
Current account balance (percent of GDP)-6.5-7.4-8.8-4.0
Official gross reserves (US$ million; end of period)267280334458
Reserve cover (in months of c.i.f. imports)
External debt-service ratio 6/11.18.710.113.0
External debt-to-GDP ratio (in percent) 7/25.431.541.143.3
Exchange rates 8/(Percent change, period average)
Nominal effective exchange rate12.424.2-3.65.7
Real effective exchange rate (CPI-based)-2.6-13.1-11.0-1.2
Geographic, demographic, and social indicators
Land area (in km2)25,43025,43025,43025,430
Population (in thousands)1,9831,9972,0092,022
Per capita GDP (in S; at market rates)2,2251,8521,7401,698
Population density (people per sq km)78.078.579.079.5
Population growth (in percent)
Life expectancy at birth (years)
Crude birth rate15.9
Infant mortality rate (per 1,000 live births)17.2
Crude death rate (per 1,000 people)7.9
Health care
Physicians (per thousand persons)2.3
Hospital beds (per thousand persons)5.2
Net enrollment ratios
Sources: Data provided by the FYRM authorities; World Bank and IMF staff estimates.

I. Introduction

1. After a generally favorable performance in 1998, the FYRM economy suffered a setback in the first half of 1999, mainly owing to the Kosovo crisis. The impact of the crisis, however, was less severe than initially feared. With the ending of the conflict in early June, economic activity picked up markedly and the balance of payments improved beyond expectations. The stance of financial policies was generally prudent in 1999, and inflation remained low. Structural reform initiatives resumed in the second half of 1999, but the follow-through was weak because of the uncertain political climate.

2. A broad-based pickup in economic activity in the wake of the Kosovo crisis was key to an estimated GDP growth of 2.7 percent in 1999. Unlike the experience of the previous years, an improvement in net foreign demand was a major driving force behind the growth performance. Domestic demand was sluggish, mainly owing to erosion of investor confidence. Consumer prices declined in the course of the first seven months of the year, largely because of lower food prices. Thereafter, inflation turned positive with the firming of food prices and higher oil prices. Unemployment fell slightly, but the rate remained high at 32½ percent.

3. The balance of payments position improved in 1999, and indicators of external vulnerability remained satisfactory. The current account deficit (excluding grants) narrowed sharply to 6 percent of GDP (from 9½ percent in 1998), as both exports and imports declined for the year as a whole. After a severe trade disruption during the Kosovo crisis, exports and imports picked up strongly with the ending of the conflict. Service receipts also surged in the second half of the year, with FYRM serving as a key transit route for travel and delivery of goods to Kosovo. The capital account surplus contracted as the foreign direct investment inflows experienced in 1998 were not sustained. With a sizable amount of unrecorded inward transactions, many of them Kosovo-related, gross official reserves increased by about US$125 million, to the equivalent of 2.7 months of next year’s imports at end-1999.

4. The National Bank of Macedonia (NBM) faced contrasting challenges in the conduct of monetary policy during and immediately after the Kosovo crisis. With the onset of the crisis, the NBM provided liquidity support to banks experiencing difficulties on account of deposit withdrawals and delays in debt-service payments by enterprises. The liquidity position of banks improved dramatically in the post-crisis period, as residents began reconstituting their earlier deposit withdrawals and the NBM intervened in the foreign exchange market to neutralize appreciation pressures. A large part of this liquidity influx was sterilized. Official and money market interest rates peaked in May and fell sharply, to below pre-crisis levels, as liquidity in the banking system improved. However, notwithstanding the large swings in liquidity, the lending and deposit rates of banks remained virtually unchanged during the year.

5. The fiscal situation improved in 1999 despite the Kosovo crisis, but there were lapses in expenditure management and control. The central government accounts swung to a surplus of about 1 percent of GDP, compared with a deficit of 0.2 percent of GDP envisaged in the pre-crisis budget, and the general government accounts were in approximate balance. Tax revenues were extremely buoyant, mainly on account of efforts to improve tax administration. There were slippages in outlays on wages, goods and services, and some social programs, but these were largely offset by saving in other areas. The breach of wage discipline was more serious than indicated by budgetary data, as several line ministries made additional wage payments (totaling nearly 1½ percent of GDP) from their off-budget self generated special revenues.

6. The pace of structural reforms picked up from end-1999. A value-added tax (VAT) was introduced on April 1, 2000, after the slow progress in administrative preparations forced the authorities to postpone its introduction in January. In the enterprise sector, 8 out of the 12 loss-making enterprises targeted for closure or sale under the recently expired Fund supported program had been dealt with by end-March 2000. In the banking sector, a majority share in Stopanska Banka, the largest commercial bank, was sold to a consortium of foreign investors in early April 2000.

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