Former Yugoslav Republic of Macedonia
Recent Economic Developments

This paper reviews economic developments in the Former Yugoslav Republic of Macedonia during 1990–95. The financial stabilization in 1994 was a result of three key policy changes. The National Bank abolished its system of passively rediscounting selective commercial bank credits and the emphasis of monetary policy was switched to inflation control. A broad range of fiscal measures ensured a decline in the public sector deficit from 11 percentage points of gross social product in 1993 to 3 percentage points in 1994. There was a 50 percent drop in measured industrial production between 1990 and 1994.

Abstract

This paper reviews economic developments in the Former Yugoslav Republic of Macedonia during 1990–95. The financial stabilization in 1994 was a result of three key policy changes. The National Bank abolished its system of passively rediscounting selective commercial bank credits and the emphasis of monetary policy was switched to inflation control. A broad range of fiscal measures ensured a decline in the public sector deficit from 11 percentage points of gross social product in 1993 to 3 percentage points in 1994. There was a 50 percent drop in measured industrial production between 1990 and 1994.

FYRM: Selected Economic and Social Indicators

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Sources: The FYRM authorities; and staff estimates.

Registered unemployed in percent of the total domestic labor force.

Includes transfers to extrabudgetary funds, as in Table 5.

End-December.

The gradual inclusion of exports to (and imports from) other republics of the former SFRY from 1991 results in a discontinuity in the series. From 1993 on, imports include those related to humanitarian aid.

End-year figures. Including a staff estimate of arrears on the unallocated debt based on the FYRM’s share of the unallocated debt of the former SFRY. Figures exclude penalty interest on arrears, and accepted non-guaranteed or insured debt by government or government agencies to official bilateral creditors.

End-year figures. Include a staff estimate of arrears on the unallocated debt based on a working assumption regarding the FYRM’s share of the unallocated debt of the former SFRY. Figures exclude penalty interest on arrears.

Expressed in new denar (=. 100 old denar).

I. Introduction

The former Yugoslav Republic of Macedonia (FYRM) declared its independence in September, 1991 and introduced its own currency in April 1992, when it was experiencing a rapid decline in output and monthly rates of inflation of 80 percent. Initial attempts at stabilization failed. However, following the adoption of an ambitious macroeconomic program in early 1994, the FYRM has seen an impressive financial stabilization of its economy (Chart 1). For well over a year, the monthly rate of inflation has been averaging about 2 percent, the denar has shown a tendency to appreciate in nominal terms, and foreign reserves of the National Bank have been continuously increasing. This financial stabilization is particularly impressive considering that an extraordinary sequence of adverse shocks originating in the regional crisis have reduced GSP to about 60 percent of its pre-independence levels. Since mid-1994, there have been increasing signs that the large reduction in output may have bottomed-out.

CHART 1
CHART 1

FORMER YUGOSLAV REPUBLIC OF MACEDONIA: INFLATION and EXCHANGE RATE DEVELOPMENTS

Citation: IMF Staff Country Reports 1995, 050; 10.5089/9781451825961.002.A001

Source: Data provided by the FYRM authorities.

The financial stabilization in 1994 was a result of three key policy changes: (i) the National Bank abolished its system of passively rediscounting selective commercial bank credits and the emphasis of monetary policy was switched to inflation control; (ii) the implementation of a Wage Control Law was successful in restoring wage discipline; and (iii) a broad range of fiscal measures ensured a decline in the public sector deficit from 11 percentage points of GSP in 1993 to 3 percentage points in 1994.

The initial financial stabilization has exposed a number of underlying weaknesses in the FYRM economy and there is clearly a need for an acceleration of structural reforms to overcome such weaknesses. Most importantly, the refocusing of monetary policy on inflation control and the attendant termination of the policy of passively rediscounting bank credits were not accompanied by measures to unburden banks of bad loans and to restructure loss making enterprises. As a result, there has been a deterioration in the financial situation of major banks and a sharp increase in the number of workers who do not receive timely wage payments. In order to enhance the sustainability of the stabilization gains achieved in 1994, the FYRM is embarking on a significant acceleration of structural reforms, centered around bank rehabilitation, reduction in excess employment in large loss-making enterprises and measures to expedite the privatization process. The 1995 Budget includes substantial resources to facilitate such reforms.

II. The Real Sector and Prices

1. Overview

The economy of the FYRM has been buffeted by a series of adverse external shocks over the past five years. The collapse of the CMEA, the dissolution of the former Socialist Federal Republic of Yugoslavia (SFRY), UN sanctions against the Federal Republic of Yugoslavia (Serbia-Montenegro), and a diplomatic dispute over the name, flag and constitution of the FYRM have entailed a drastic loss of access to traditional markets and transshipment routes. As the FYRM is a very open economy, with imports and exports equaling about two-thirds of gross social product (GSP), these shocks contributed to a dramatic fall in output through 1994. Between 1990 and 1994, real GSP is estimated to have fallen by about 40 percent (Table 1). 1/

Table 1.

FYRM: Gross Social Product

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Sources: FYRM authorities; and staff estimates.

Staff estimates and Ministry of Development estimates.

The external shocks have exposed two fundamental structural problems in the economy that the FYRM inherited from the SFRY.

First, the enterprise sector operated according to the Yugoslav system of “market socialism” in which workers managed firms, but capital was socially owned. All major decisions, including the selection of managers, were made by councils of workers, and there was an in-built incentive for managers to protect wages and employment at the cost of investment. Attendant losses were financed by a banking system controlled by major loss-making enterprises and easily monetized as a result of the National Bank’s policy of passively rediscounting commercial bank credits.

Second, the productive sector was dominated by large firms in heavy industries, many of which were virtually integrated with enterprises located in other former SFRY. Enterprises relied on other republics for industrial inputs and, to a significant extent, for electricity and other sources of power. 2/ Also, many enterprises had been established with a view to supplying captive markets in the former SFRY that have now been lost.

While these problems continue to affect economic activity adversely, there are a number of reasons to believe that the decline in production may have bottomed out. Firms with the greatest reliance on transfers and directed credits experienced chronic illiquidity as the effects of the 1994 economic program took hold, and they are likely to have already significantly reduced production in line with the decline in their available resources. Moreover, heavy industry has already suffered an extensive decline in production and no longer dominates the economy to the extent that it previously had. Finally, a stabilization in the production of finished goods in 1994, despite a further decline in aggregate income, suggest that enterprises have begun to replace lost markets. It should also be noted that the official output data does not fully capture what is believed to be a significant increase in private sector activity (see Appendix IV).

2. Developments in output and expenditure

a. Sectoral developments

Manufacturing and mining are still the largest components of output, despite a decline from 43 percent of GSP in 1990 to 38 percent in 1994 (Tables 1 and 2 and Chart 2). Agricultural production has steadily increased in importance. Value-added in trade has maintained its contribution to GSP at 18-19 percent since 1990.

Table 2.

FYRM: Gross Social Product by Sector

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Sources: FYRM authorities; and staff estimates.
CHART 2
CHART 2

FORMER YUGOSLAV REPUBLIC OF MACEDONIA: Composition of GSP

(In billions of Denars at 1990 Prices)

Citation: IMF Staff Country Reports 1995, 050; 10.5089/9781451825961.002.A001

Sources: The FYRM authorities; and staff estimates

(1) Manufacturing and mining

There was a 50 percent drop in measured industrial production between 1990 and 1994 (Table 4), with the rate of decline having slowed during the last year. 1/ During the second half of 1994, the index of industrial production was just 5 percent below 1993 levels; at the beginning of the year, the same index was 13 percent below 1993 levels (Chart 3). The production of capital and intermediate goods continues to be particularly adversely affected by the disruption of access to markets and transhipment routes. Manufacturing of final goods has also suffered severely from these disruptions, but the decline in such production appears to have bottomed-out in 1994, suggesting greater flexibility in switching to alternative markets and transshipment routes.

Table 3.

FYRM: Gross Social Product and Aggregate Demand

(In millions of denars)

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Sources: Data provided by the FYRM authorities, and staff estimates.

These are Ministry of Development estimates.

Table 4.

FYRM: Industrial Output

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Sources: Statistical Office; and Ministry of Development.
CHART 3
CHART 3

FORMER YUGOSLAV REPUBLIC OF MACEDONIA: INDUSTRIAL PRODUCTION

Citation: IMF Staff Country Reports 1995, 050; 10.5089/9781451825961.002.A001

Sources: The FYRM authorities; and staff estimates.

Industrial production is concentrated in four major product groups. Heavy industry (which is centered on iron, steel and non-ferrous metal works) was particularly badly affected by the collapse of the CMEA and the loss of markets in the former SFRY and production of capital goods was halved between 1990-92. In 1994 the loss of the remaining external rail link had an exceptionally adverse impact on the import of essential raw materials for these industries. The production of vehicles fell by 36 percent in 1994, and iron and steel production was halved again. The textile industry, which relies heavily on imported cotton, saw its output halved in 1990-92. Production was stabilized in 1993-94 at this lower level. In the leather industry, the production of footwear and accessories declined further in 1993-94, after falling 20 percent in the earlier two years, but the production of other leather goods stabilized. Tobacco production increased in 1994, due to the establishment of new export agreements and a good harvest, and there are indications of significant foreign interest in developing this industry. This industry has seen fairly stable production levels in contrast to the other major sectors.

(2) Trade and tourism

GSP data indicate that value added in the trade sector declined in line with overall GSP in 1990-94. However, official data fails to capture what is believed to be significant trading activity by the private sector. In this regard, data produced by the Statistics Office on retail trade turnover suggest that such activity increased sharply in 1993 (by 16 percent) and 1994 (by 38 percent). 1/ Moreover, balance of payments data indicate that there may have been a substantial increase in unrecorded trade in 1993-94. Tourism, while never very well developed, has been particularly adversely affected by the regional crisis.

(3) Transport and communication

GSP data show that value added in the transportation sector continued its steady decline, shrinking by about 44 percent over the period 1990-92 and an additional 36 percent since then. The decline in 1994 is the result of an abrupt reduction in rail traffic, with the effective closure of the train line to Salonika. On the other hand, there has been a substantial increase in road and air traffic. In particular, with major impediments to road travel via northern and southern routes, it has been necessary for goods to be transported via a circuitous east-west route through Bulgaria, Romania and Hungary before reaching Western markets. As a result, there has been a significant rebound in both volume and value added by this part of the transportation sector. Communications were restored to normal levels soon after independence with the establishment of new satellite connections.

(4) Agriculture

The share of agriculture in GSP has grown steadily, from 14 percent in 1990 to 26 percent in 1994, despite a drought in 1993 that lead to the worst harvest in five years (Table 5). This increase, however, largely reflects sharp deteriorations in the output of other sectors of the economy. Agricultural production is concentrated in the areas of fruits and vegetables, livestock and tobacco. There is also limited production of wheat, corn and milk, although not sufficient to meet domestic requirements. Prior to independence, grapes produced in the FYRM were processed into wine in Slovenia, and there is now an expanding indigenous wine industry. More generally, cash crops such as tobacco and grapes appear to have the potential for considerable growth as the FYRM has a comparative advantage in terms of terrain and climate that has not been fully exploited.

Table 5.

FYRM: Agricultural Output

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Sources: Data provided by the Statistical Office; and Ministry of Development.

Most agricultural land in the FYRM has remained in small private lots, with only about 20 percent of cultivated land being controlled by the socially owned kombinats. However, in the past, these kombinats have had an advantage over private farmers, as they were afforded preferential access to credit, markets and essential inputs. This situation has altered with the phasing out of selective credits and the initiation of the process of privatizing kombinats.

(5) Construction

The recorded decline in value added in construction continued during 1993-94, with the sector contracting by 28 percent. However, there may also be significant under-recording of activity in this sector. Such under-recording is suggested by the relative stability in cement production (Table 4) over the same period. Activity in construction has suffered from uncertainty surrounding property rights. The construction of a railway link to Bulgaria should assist in a recovery in this sector.

b. Income and expenditure 1/

(1) Consumption and investment

The identification of trends in individual components of expenditure is complicated by the aforementioned problems with official GSP data. In particular, there is a significant overestimation of changes in stocks, which have been recorded at about 25 percent of GSP in recent years (Tables 1 and 3 and Chart 4). 2/ This is mostly due to substantial holding-gains on account of high rates of inflation.

CHART 4
CHART 4

FORMER YUGOSLAV REPUBLIC OF MACEDONIA: COMPONENTS OF EXPENDITURE

(In percent of GSP)

Citation: IMF Staff Country Reports 1995, 050; 10.5089/9781451825961.002.A001

Sources: The FYRM authorities; and staff estimates

Private consumption fell by about 20 percent in real terms in 1993-94. However, the proportion of private consumption in GSP increased significantly in these two years, and has now recovered to its pre-crisis levels. This can be attributed to two factors: (i) a large rise in real wages in 1993; and (ii) while the imposition of restrictions on trade constrained the availability of consumer goods in 1992, the gradual development of alternative trading routes has, in particular, benefitted imports of easily transportable products. Variations in the level of consumption have been largely mirrored by changes in the external current account, which deteriorated substantially in 1993-94 from a position of near balance in 1992. 1/ The proportion of public consumption in GSP has remained relatively stable.

The decline in investment activity has been quite dramatic over the past decade. In the early 1980s, gross capital formation averaged about 40 percent of GSP, but this proportion was halved by 1990, reflecting the prolonged economic stagnation in the former SFRY and the gradual loss of transfers to the FYRM from the SFRY Development Fund. Since 1991, the measured level of gross investment has been falling further as a proportion of GSP, due to a growing crisis in the banking system, the difficulty of making investment decisions in an environment of high and variable rates of inflation, and the uncertainty arising from delays in implementation of privatization and bank rehabilitation programs and from the regional crisis.

(2) Household income, expenditure, and savings

Real personal disposable net income fell sharply during the first two years of independence, but increased substantially in 1993, in line with real wages (Table 10). In 1994, the implementation of reforms to the taxation system produced a large increase in taxes and contributions as a proportion of total income (Table 12), but the impact on disposable income was partly offset by a substantial increase in income from social security related transfers.

Table 6.

FYRM: Primary Energy Production and Consumption 1/

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Source: Data provided by the FYRM authorities.

Consumption encompasses all forms of use, including further transformation, additions to stocks, and non-energy uses.

Thousands of terajoules (1015 joules).

Table 7.

FYRM: Secondary Energy Production and Consumption

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Source: Data provided by the FYRM authorities.

1015 joules.

Primary plus secondary energy imports relative to secondary energy consumption.

Table 8.

FYRM: Labor Force, Employment, and Unemployment

(Annual average)

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Source: Data provided by the FYRM authorities.

Estimate for 1994.

These data are independently derived from census figures and are generally less than the sum of the employed, the self-employed, the active agricultural population and the registered unemployed, reportedly due to overlap between these subcategories. In particular, some registered unemployed are said to be also included in the active agricultural population or the private sector.

Economically active population minus workers temporarily employed abroad.

In percent of the sum of social and private sector employment.

Table 9.

FYRM: Output, Employment and Unit Labor Costs in Industry

(Annual percent change)

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Sources: Data provided by the FYRM authorities.

In constant prices.

Statistical Office estimate differs from Ministry of Development estimate which is -10.5 percent.

Table 10.

FYRM: Nominal and Real Net Personal Income Per Worker in the Social Sector 1/

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Sources: Data provided by the Statistical Office.

Actual take home pay of employees.

Change from corresponding period of preceding year.

On January 1, 1990 the new denar, equal to 10,000 old denars, was introduced.

On May 15, 1993, denar was denominated and 100 denars was equal to 1 new denar.

Preliminary estimates.

Table 11.

FYRM: Net Personal Income per Employees, By Sector 1/

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Sources: Data provided by Statistical Office; and Ministry of Development.

Actual take home pay of employees.

Table 12.

FYRM: Income and Outlays of Population

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Sources: Statistical Office; and Ministry of Development; and staff estimates.

Calculated in the Ministry of Development by using its methodology different than the Statistical Office’s.

The data “income from collective consumption” are included in “gross personal income from employment”, for 1992 onwards.

Consumption is calculated as a residual.

Savings from 1993 and 1994 include interests from previous savings, as they are treated as deferred savings.

Exclusive of revaluation of foreign exchange accounts.