Back Matter

APPENDIX I: The External Trade and Payments System

Exchange Arrangement

The currency of the FYRM is the Denar, the external value of which is determined freely in the exchange market. Buying and selling rates for transactions between authorized banks and enterprises have to be reported to the National Bank, which calculates an average daily rate. Based on this rate and cross rates on the international market, the National Bank publishes rates for 22 currencies. On December 31, 1994, the midpoint exchange rate for the U.S. dollar published by the National Bank was denar 40.5962 per US$1. The National Bank deals at the published midpoint rates plus or minus a margin of 0.3 percent. At the end of each week, the average of the daily published rates is established for customs valuation purposes for the following week. There is no tax on the purchase or sale of foreign exchange, and banks are free to set commissions for their services. Forward foreign exchange contracts for trade transactions are permitted.

The exchange market operates at two levels—wholesale and retail. The wholesale level includes enterprises, commercial banks, and the National Bank, all of which may buy and sell foreign exchange in this market. The Government also participates in this market through the National Bank. The National Bank is not obliged to trade and deals, at present, only in the spot market. The retail level of the foreign exchange market consists of foreign exchange bureaus, which are owned and operated by banks, enterprises, or natural persons. Natural persons may purchase foreign currency from these bureaus without limit.

Administration of Control

According to the Foreign Exchange Act and the National Bank Act, the National Bank is authorized to control foreign exchange operations of banks and other financial institutions. The Ministry of Finance is authorized to control foreign exchange and trade operations and the foreign credit relations of enterprises as well as other forms of foreign business activities. The Ministry of Foreign Relations administers the Foreign Trade Act and the Foreign Investments Act.

Medium-term and long-term loans must be registered with the National Bank as stipulated by the Foreign Credit Relations Act. This obligation does not apply to short-term loans, which are permitted without restrictions, except those related to imports with a maturity exceeding six months. Short-term loans related to commercial banks’ credit lines, with a maturity exceeding 90 days, should also be registered.

Prescription of Currency

Residents of the FYRM may receive payments and transfers in any convertible currency.

Resident and Nonresident Accounts

Non-residents may open foreign exchange accounts with authorized banks in the FYRM. These accounts may be credited freely with foreign exchange and debited for payments abroad or for conversion into denars. Resident natural persons may open foreign exchange accounts in the FYRM. Foreign exchange balances predating September 1, 1990 have been frozen, except that these deposits may be used to purchase socially owned apartments, socially owned business premises, or shares in enterprises as part of the privatization process. In special cases (weddings, funerals, payments of health care costs), depositors are allowed to make withdrawals from their frozen deposits up to the equivalent of DM 1,000. Resident natural persons may not maintain foreign exchange accounts or hold other financial assets abroad. In specific cases (e.g., enterprises with foreign operations), enterprises may hold foreign exchange accounts abroad with the approval of the National Bank.

Imports and Import Payments

Payments for authorized imports are not restricted. Imports from the Federal Republic of Yugoslavia (Serbia and Montenegro) are prohibited in accordance with UN Security Council Resolution Nos. 757, 787, and 820. In addition, transit trade through the Federal Republic of Yugoslavia is banned under UN Security Council Resolution Nos. 787 and 820.

The import regime in operation during 1993 was largely similar to that inherited from the former SFRY, with a few changes made since independence (the liberalization of imports of wheat, flour, sugar, meat, and some other products). Since January 1, 1994, a new trade regime has been in effect. Under the new regime, goods in almost 98 percent of import categories can be imported without quota restrictions. Goods in approximately 2 percent of import categories are subject to quota restrictions that are designed to protect domestic production; these products include certain chemical and steel products, buses, and, for three months of the year, certain seasonal food products. Customs duties are levied on imported goods; the rate of customs duties range from zero to 17 percent, with imports of crude oil and essential items subject to duty at a low rate (i.e., 1 percent on crude oil), 5 percent on raw materials and equipment, 10 percent on oil derivatives, and about 12-15 percent on consumer products. Imports of certain goods, such as weapons and medicine, are subject to licensing requirements for security or public health reasons. In 1994, the effective average rate of duty was about 9.5 percent. Since September 30, 1994, importers have been allowed to purchase foreign exchange to cover letters of credit on imports 180 days in advance of the maturity date. The previous payment arrangement allowed only a two-day advance purchase of foreign currency and only applied to crude oil imports.

Payments for Invisibles

Resident juridical and natural persons may purchase foreign exchange freely to make payments for invisibles on presentation of documentation showing the nature of the services bought abroad or transfers made. Enterprises, including banks, that have overdue obligations abroad may freely repay them at their own discretion.

Exports and Export Proceeds

Exports to the Federal Republic of Yugoslavia are prohibited under UN Security Council Resolution Nos. 713, 757, 787, and 820. Under the trade regime in force since January 1, 1994, the exportation of certain products (sugar, flour, wheat, and soya) remain temporarily restricted to protect domestic supply. The exportation of a small number of items is banned for security, public health, or cultural reasons (for example, arms, drugs, and historic artifacts).

Export receipts are to be converted into domestic currency within 94 days of repatriation unless they are used for other purposes. Thus, export receipts are held by commercial banks for a four day period during which the exporter can decide to use the foreign currency to pay for imports, sell the foreign currency to a commercial bank or enterprise, or keep the foreign currency in an account for 90 days, after which time the exporter can dispose of it in any of the alternative ways listed above.

Proceeds from Invisibles

Proceeds from invisibles are subject to the same regulations as those applicable to merchandise exports.

Capital

Resident natural persons are not allowed to engage in borrowing or lending operations with non-residents. Contracting of commercial credits by juridical persons is free of restrictions. Outward direct investment requires approval from, and registration with, the Ministry of Foreign Affairs. Banks may take foreign exchange positions subject to individual limits. Banks are also required to maintain a minimum net foreign exchange position abroad, which is determined quarterly by the National Bank. The aggregate minimum at the beginning of 1994 was set at US$43 million and was increased to US$54 million by end-1994.

Foreign direct investment in the FYRM is allowed except in a few sectors (e.g., arms production). Non-residents are allowed to invest in existing firms, establish their own firms, or establish joint ventures. Imports of raw materials, spare parts and equipment not produced domestically by joint-venture firms are exempt from customs duties if the foreign share in the investment is at least 20 percent. Foreign investors are exempt from the company income tax during the first three years of operation. All foreign investment registered with the Ministry of Foreign Relations is protected from nationalization. There are no restrictions on the transfer abroad of profits and dividends, provided that all financial obligations within the country have been met. There are no regulations governing inward portfolio investment. Outward portfolio investment by resident natural and juridical persons is not permitted.

Gold

The importation and exportation of gold require approval of the National Bank.

APPENDIX II: Privatization

By mid-1994 there were 61,000 registered enterprises in the FYRM, of which about 58,000 were privately owned. However, of these private enterprises, only 17,000-18,000 were active in the sense that they submitted financial reports to the Payments Operation Service (POS), as required by law for operational enterprises. Most reported revenue in the industrial sector is still generated by socially-owned enterprises.

In 1989, in an attempt to correct some of the shortcomings of social ownership of capital, a Law on Social Capital was passed in the former SFRY. The actual implementation of the law was left to the discretion of individual republics and about 400 enterprises were privatized under this Law in the FYRM. This was carried out through internal buyouts by employees. There were accusations of widespread abuses due to a lack of sufficient oversight and the Government of the FYRM has stopped all privatizations under this program. Since June, 1993, privatizations have been proceeding under the aegis of the Privatization Agency (PA) and have been governed by the Law for Transformation of Socially-Owned Enterprises.

Under the 1993 Law, small- and medium-sized enterprises were given until December 1994, to prepare a voluntary privatization plan, which had to include the method of privatization, a valuation by a licensed valuator, financial statements, records of ownership and a report from the POS (if the enterprise has previously been privatized under the Law on Social Capital). Large enterprises have until December 1995 to prepare such voluntary privatization plans. In all cases, the current managers and employees have the right of first refusal for the purchase of enterprise shares through a management/employee buyout. While majority ownership must be attained, the law allows the new owners to take immediate control while paying for the shares over several years.

When deadlines for internal privatizations expire, the PA has the right to nationalize any enterprise for which a restructuring plan has not been submitted, with ownership transferred to the Agency. The current Law also grants the PA considerable flexibility in the subsequent method used for privatization, for example through the private placement of shares or the public auction of shares, a swap of shares for new investment and debt to equity swaps. Another innovative feature of the current Law is that it allows the use of frozen foreign currency deposits to purchase shares of enterprises.

Very few privatizations had been completed under the new Privatization Law by the end of 1994. However, it is expected that the number of privatizations will accelerate significantly in 1995, following the lapse of the deadline for voluntary submission of privatization plans by small- and medium-sized enterprises.

APPENDIX III: Bank Rehabilitation

The development of the financial sector has been impeded by the large share of non-performing assets in the portfolios of the two largest banks: Stopanska Banka with 65 percent of bank assets and the Banka za Nadvoresna Trbovina (Bank for Foreign Trade) with 15 percent. These banks encountered increasing liquidity problems with the adoption of a tight monetary program at the beginning of 1994. 1/

The process of reform has begun with audits of all major banks and the establishment of a Bank Rehabilitation Agency (BRA). The bank rehabilitation program will seek to: (a) safeguard liquidity in troubled banks and prevent them from undermining the monetary program; (b) ensure that banks do not extend further bad loans before adequate private control can be established; (c) eventually liquidate or completely recapitalize and privatize troubled banks; and (d) promote competitiveness by eliminating Stopanska Banka’s dominance of the banking system.

The first phase of the bank rehabilitation program was completed by mid-April, 1995, and the second and final phase will be completed within a year thereafter. The Bank for Foreign Trade has already had its license revoked by the National Bank, is operating solely as a depository with a prohibition on the extension of new loans, and has had formal liquidation proceedings introduced. The bank will continue to be run as a depository until such time as any remaining assets can be distributed to creditors.

The process of restructuring Stopanska Banka has also begun: (i) non-performing loans have been transferred to the balance sheet of the Bank Rehabilitation Agency and a large part of the bank’s capital has been written-off; (ii) a government bond of sufficient magnitude has been placed in the asset portfolio of the bank so that the earnings from this bond will restore and maintain liquidity; and (iii) one of Stopanska Banka’s larger branches (which account for about 10 percent of the balance sheet) has been split off from the main bank, and has been privatized through a management buy-out. The remaining part of Stopanska Banka will be privatized during the second phase of the bank rehabilitation program.

APPENDIX IV: The Decline in Output

Since the onset of transition in the FYRM, official figures imply that GSP has halved in real terms. However, it is believed that the official data exaggerates the output drop due to failure to capture what is considered to be a significant increase in private sector activity. The following points should be considered in this regard.

(i) There are several problems regarding the measurement of private sector activity in the FYRM. There is currently no systematic survey technique used to periodically measure how large the private sector is. The Statistical Office largely depends on enterprises reporting their output and the number of their employees on a voluntary basis.

(ii) Industrial output appears to have contracted by far more than the consumption of electricity by industry would suggest. In particular, for 1992, industrial production data indicates a contraction of 16 percent, whereas the prediction using electricity consumption would be of a growth of about 4 percent. In 1993, electricity usage was stable when the industrial production index declined. In 1994, there was a reported decline in industrial production of about 10.5 percent, while electricity usage declined by a smaller magnitude. Unrecorded economic activity may be increasing among socially owned enterprises, in addition to private enterprises, in order to avoid labor regulations and taxes.

(iii) Retail trade data does not include a large part of the private sector, but it still shows real growth of 16 percent in 1993 and of 38 percent in 1994. To some extent this may reflect the monetization of transactions associated with the transition to a market economy.

(iv) Imports of goods have grown in real terms in each year since 1992. In 1993, imports measured in U.S. dollars grew by about 2 percent and in 1994, by about 21 percent. The very high growth rate during 1994 could reflect the exceptional trading patterns which have arisen in the wake of the regional crisis. To the extent that the higher import reflects increased usage by domestic residents, the trade data also lends support to the hypothesis that official data tends to exaggerate the decline in real incomes.

(v) The strong revenue performance by the public sector could also suggest that activity is being under-recorded.

However, the under-recording of private sector activity is likely to be partly offset by an overvaluation of inventories due to excessive revaluations under conditions of high inflation. Considerable efforts are being directed towards improving the coverage and quality of output statistics.

APPENDIX V: Competitiveness, Real Wages, and Productivity

Since 1990, the FYRM has experienced large changes in nominal and real variables as a result of hyperinflation and large external shocks originating in the regional crisis. Despite these changes, measures of the real effective exchange rate (REER), based on both relative unit labor costs (ULC) and relative consumer price indices (CPIs), indicate that there has been a relatively small change in aggregate competitiveness.

Between 1990 and 1994, the annual average REER, based on ULCs, appreciated by only 7 percent (Chart 14). However, the apparent stability of this measure masks some significant changes in the underlying components. First, a large increase in nominal wages was almost perfectly offset by the depreciation of the currency. Second, and more importantly, there was a large drop in recorded industrial production (Chart 3) which, with virtually constant employment, caused ULCs to increase significantly, despite a decline in real wages. However, this increase was matched by a substantial increase in trading partner ULCs, reflecting mainly increases in other republics of the former SFRY, and the net effect on the REER index was small.

The calculation of the REER based on ULCs is subject to two major uncertainties. First, the gap between real wages and productivity increased by about 24 percent from 1990 to 1994, in spite of a real wage decline of about 30 percent. As explained in Appendix IV, there is reason to believe that the measured drop in production overstates the true decline in productivity due to failure to capture increased private sector activity. If the recorded drop in output were overstated, the appreciation of the REER would also be overstated. Second, the magnitude of the offsetting increase in partner country labor costs is very sensitive to estimated trade weights, which have not been very stable over time.

It should also be noted that the REER in terms of relative CPIs actually depreciated by about 12 percent between 1990 and 1994. Moreover, average wages expressed in terms of deutsche mark (U.S. dollars) declined from DM 130 (US$275) in 1990 to about DM 75 (US$175) at the end of 1994.

Comparing 1994 to 1993, developments in nominal variables have caused relative costs in the FYRM to increase, resulting in a loss of competitiveness. This was, however, due to a once-off effect when the currency and price level stabilized at the beginning of 1994. With nominal wage increases linked to inflation through a backward-looking formula, wages stabilized with a lag. This precipitated a sharp appreciation of the ULC based REER of 17 percent over the first quarter of 1994. Since March 1994, however, the REER index has remained virtually constant as real wages declined.

Bibliography

  • International Monetary Fund, International Financial Statistics, various issues.

  • International Monetary Fund, Yugoslavia—Recent Economic Developments, SM/91/44 (2/27/91).

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  • Statistical Office of the Former Yugoslav Republic of Macedonia, January 1995, Volume 9, Statistical Yearbook of the Former Yugoslav Republic of Macedonia, 1993, April, 1994.

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  • Statistical Office of the Former Yugoslav Republic of Macedonia, Macedonia—basic Economic Data, January 1995, Volume 9.

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  • National Bank of the FYRM: Bulletin, various issues.

1/

Recent estimates for GSP should be regarded as being preliminary and GDP statistics are currently unavailable. GSP differs from GDP in several respects, the most important of which are: (i) it excludes so-called “unproductive” services, such as health, government and education; and (ii) it includes holding-gains on inventories which can become a significant component of GSP during periods of high inflation. Pending the availability of a longer time series, a recent unofficial estimate based on SNA principles places GDP for 1990 at almost the same level as GSP. Problems associated with the measurement of GSP are discussed in more detail in Appendix III of the accompanying Staff Report (EBS/95/67, 4/17/95).

2/

Industrial supplies and capital goods made up about 75 percent of total imports in 1990-92 (Table 30).

1/

These figures might overstate the true decline, due to under-recording of private sector activity. See Appendix IV.

1/

These data are discussed in more detail in Appendix IV.

1/

National income data is still of an extremely rudimentary nature, precluding a standard analysis of changes in the main components of expenditures. Moreover, official data is believed to significantly underestimate private sector activity, see Appendix IV. Estimates of expenditure are still based on the socialist accounting concept of Material Product, and should be interpreted with caution. Problems with the data are discussed in detail in Appendix III of the accompanying Staff Report (EBS/95/67, 4/17/95).

2/

The Statistical Office produces an index of the physical volume of stocks that shows that industrial stocks have declined by 10 percent over the period 1986-92. Overestimation of the increase in stocks implies that the share of other components of GSP is underestimated. There is also a large statistical discrepancy between output and expenditure measures of GSP.

1/

However, as explained in Section V, the increase in the current account deficit in 1994 might mainly reflect failure to record re-export of (unrecorded) imports.

1/

These are preliminary estimates for 1994.

2/

See Table 8. These data are obtained by the Ministry of Development, using an estimate for private sector employment.

1/

Estimates by the Ministry of Development.

2/

The authorities do not, as yet, have the technical capacity to carry out sample surveys and obtain a reliable estimate of the size of the private sector.

1/

An enterprise is defined to be illiquid if it is unable to meet payments obligations towards taxes, wages, etc. The Payments Operation Service is able to monitor such payments on a daily basis. Enterprises that are illiquid for 60 or more days, during a period of 75 days, are declared insolvent and, in principle, subject to the introduction of bankruptcy proceedings.

2/

The privatization program is detailed in Appendix II.

1/

These estimates are indicative as the FYRM currently does not produce separate indexes for tradeable and non-tradeable goods. Measures of inflation in the two sectors have been constructed by the staff, based on a breakdown of the CPI and RPI into components that can be regarded as tradeable and non-tradeable.

1/

Selective credits were finally abolished at the end of March, 1994.

1/

Currently, the base period is end-November, 1994.

1/

A monetary survey and accounts for the National Bank and commercial banks have been produced according to a new methodology beginning in December, 1993 (Tables 16-18). Longer term monetary developments can only be traced according to the old methodology (Tables 19-20).

1/

In Chart 9, the apparent reduction in the combined use of excess reserves and National Bank deposits between July and September should be viewed with caution. During this period, a number of once-off measures to improve bank liquidity (such as the elimination of reserve requirements on government deposits and the inclusion of a float maintained by banks with the POS in calculated compulsory reserves), and the extension of liquidity credits, amounted to about 2 percent of the reserve money target.

1/

Based on representative deposit and lending rates. Real interest rate calculations are based on an adaptive expectations type hypothesis, with expected inflation equal to a weighted average of actual inflation over the past three months.

1/

These include pensions to war veterans, minimum pensions to farmers, pensions to former members of the police force, and early retirement pensions.

1/

In 1992, the ratio ranged from 34 percent in Bulgaria, to 39 percent in the Ukraine, to 43 percent in Romania, to 55 percent in Albania.

2/

This provides a clear incentive for people to register as unemployed even when they do not qualify for unemployment benefits.

1/

Frozen foreign currency deposits refer to the deposits of individuals that were frozen by the government of the former SFRY and subsequently became the liability of the government of the FYRM. These deposits can be used under certain special circumstances connected to social needs or to purchase of socially owned enterprises in the context of the privatization program.

1/

Excise taxes are mostly generated on oil derivatives, tobacco products, alcohol and automobiles.

2/

Industrial users have been exempted from such increases.

1/

Under the previous system, the social protection level for pensioners was the same as for employed people, whereas the unemployed received a less favorable treatment.

1/

This includes, on the revenue side, transfers from the central government equivalent to 1.1 of GSP and a small transfer from the Employment Fund. On the expenditure side it includes transfers from the Pension Fund to the Health Care Fund equivalent to 1.5 percent of GSP. Net of these transfers, the deficit of the Pension and Disability Fund amounted to 3.4 percent of GSP in 1993.

2/

In 1990, the proportion of people over 60 years old in the total population was less than 10 percent in the FYRM, compared to 14 percent on average in Eastern Europe and the former Soviet Republics, and 19 percent in OECD countries (Source: The World Bank).

3/

The maximum replacement ratio applies to beneficiaries who have worked and paid contributions for a minimum of 40 years for men and 35 years for women. If a beneficiary has worked for n years less than the minimum period, the replacement ratio is decreased by n times 2 percent. On the other hand, anybody who has satisfied the minimum contribution period requirement can retire with full benefits, even before having reached the minimum retirement age.

1/

The formula implied that pensions were increased at the inflation rate in the current month minus 2.5 percent, plus half the difference between actual and targeted inflation in any month where actual inflation exceeded the target.

2/

The implicit tax liability of the Pension Fund towards the central government amounted to 1.9 percent of GSP in 1994.

1/

See Appendix V for a detailed description of the main factors explaining real exchange rate movements.

2/

See Appendix III in the accompanying Staff Report (EBS/95/67, 4/17/95).

1/

Economic sanctions were first imposed in May 1992 and intensified in April 1993, comprising mainly of an embargo on trade (with the exception of medical, humanitarian or food supplies), a prohibition to transfer funds to and from the SFRY, and a freeze on SFRY’s funds abroad. The transhipment of goods through the SFRY was prohibited in November 1992.

2/

East-west routes are less viable options as a result of several factors, mainly the poor conditions of roads and infrastructure, and high traffic congestion. Also, there is no railway between Skopje and Bulgaria.

1/

Before February 1994, most oil-related imports were delivered by train from the port of Salonika.

1/

The figures presented are very preliminary and subject to significant uncertainty resulting from difficulties in obtaining reliable information due to unrecorded trade flows.

2/

The data available on capital account transactions is still preliminary and subject to future revisions.

3/

The balance of payments (Table 26) records medium- and long-term flows on an accrual basis, with arrears shown as a separate financing item.

1/

This share is equal to the FYRM’s share of the former SFRY’s IMF quota.

2/

These estimates include a working assumption regarding the division of the debt of the former SFRY, see the accompanying Staff Report (EBS/95/67, 4/17/95).

1/

Two other large banks, Komercijalna Banka with 12 percent of total bank assets and Ljubljanska Makedonska Banka with 5 percent, continue to be liquid.

Former Yugoslav Republic of Macedonia: Recent Economic Developments
Author: International Monetary Fund