Former Yugoslav Republic of Macedonia: Staff Report for the 2000 Article IV Consultation
Author: International Monetary Fund
Publication Date:
23 Jun 2000
eISBN:
9781451826036
ISBN:
9781451826036
Language:
English
Keywords:
ISCR; CR; authority; staff; Macedonian authorities; staff report; government coalition; exchange rate; FYRM authorities; foreign currency; balance of payments; broad money; Europe
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The macroeconomic developments in the Former Yugoslav Republic of Macedonia were positive, despite the Kosovo crisis. Executive Directors welcomed this development, stressed the need to implement prudent financial policies, and accelerate structural reforms. They emphasized the need to improve corporate governance and enterprise performance through implementation of laws on bankruptcy procedures and creditors' rights. Directors noted the need for improvements in the reliability, coverage, and timeliness of economic data, and recommended the authorities to participate in the General Data Dissemination System.

Abstract

The macroeconomic developments in the Former Yugoslav Republic of Macedonia were positive, despite the Kosovo crisis. Executive Directors welcomed this development, stressed the need to implement prudent financial policies, and accelerate structural reforms. They emphasized the need to improve corporate governance and enterprise performance through implementation of laws on bankruptcy procedures and creditors' rights. Directors noted the need for improvements in the reliability, coverage, and timeliness of economic data, and recommended the authorities to participate in the General Data Dissemination System.

I. Introduction

1. Discussions for the Article IV consultation with the authorities of the former Yugoslav Republic of Macedonia (FYRM) were held in Skopje during November 11–29, 1999 and January 26-February 3, 2000.1 The staff met with Prime Minister Georgievski; Governor of the National Bank of Macedonia (NBM); all economic ministers; and key senior officials of government ministries, the NBM, major commercial banks, the Chamber of Commerce, and labor unions. Finance Minister Gruevski continued the discussions with management and staff at headquarters during March 13–15, 2000.

2. The last Article IV consultation was concluded on June 19, 1998, when the second annual ESAF arrangement (now the Poverty Reduction and Growth Facility (PRGF)) was also approved (EBS/98/91). On that occasion, Executive Directors commended the FYRM authorities for their successful efforts in maintaining financial stability. However, they noted that major structural weaknesses remained, and urged the authorities to implement the structural reform agenda vigorously (EBM/98/66).

3. Since then, macroeconomic performance has been generally satisfactory, but structural reforms have continued to lag. The midterm review under the second annual PRGF arrangement was not completed because of lack of progress in enterprise reform. Delays were caused initially by the parliamentary elections in November 1998, and subsequently the new multi-ethnic coalition government was confronted with the social and political ramifications of the Kosovo crisis. On August 5, 1999, the Executive Board approved a purchase in an amount equivalent to SDR 13.78 million (20 percent of quota) under the Compensatory and Contingency Financing Facility (CCFF) to compensate for a projected export shortfall arising from the Kosovo crisis (EBS/99/134). With the crisis over, negotiations were initiated in November 1999 on a program that could be supported by a new three-year arrangement. (The PRGF arrangement expired on April 10, 2000). The main focus of the discussions was on a macroeconomic framework and budget for 2000. Because of the unexpected political turmoil surrounding the presidential elections in November 1999 and the strained relations between the main ruling coalition partners, which necessitated a major cabinet reshuffle in late December, the authorities needed more time to fully specify their structural reform agenda and economic strategy for a three-year period. It was agreed that discussions with the staff would resume once the authorities had carried out this groundwork.

4. FYRM has accepted the obligations of Article VIII, Sections 2, 3, and 4 with effect from June 19, 1998. The freeze on certain foreign currency deposits of nonresidents, which constitutes a restrictive measure subject to Article VIII, Section 2(a), has been approved by the Board until April 30, 2000. FYRM’s relations with the Fund and World Bank Group are summarized in Appendices I and II, respectively.

5. FYRM’s statistical data suffer from weaknesses that hamper analysis and proper program monitoring. Real sector data are deficient in the coverage of the emerging private sector and informal activities. In the fiscal area, official data do not fully capture off-budget operations and domestic payments arrears. Trade data have been subject to sizeable revisions, and errors and omissions in the balance of payments have been consistently high and positive (Appendix III).

II. Background

6. After a generally favorable performance in 1998, the FYRM economy suffered a setback in the fast half of 1999, mainly owing to deteriorating external markets and the Kosovo crisis. However, the impact of this crisis was less severe than initially feared. With the ending of the conflict in early June 1999, 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.

7. A broad-based recovery in economic activity in the second half of the year was key to GDP increasing by an officially estimated 2.7 percent in 1999(Table 1). The services sector suffered little during the Kosovo crisis, while output losses in industry were recouped quickly. Unlike the experience of the previous years, an improvement in net foreign demand was a major driving force behind this 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 1999, largely because of lower food prices. Thereafter, inflation turned positive with the firming of food prices, higher oil prices, and increases in excise taxes on selected items (Figure 1).

Table 1.

FYRM: Selected Economic Indicators, 1996–2000

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

Persons seeking employment as percent of total labor force, based on official Labor Force Survey.

Excludes revenue and expenditure of the special revenue and expenditure accounts of line ministries.

Total debt of central government and external debt of 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.

Includes foreign currency deposits.

Data for 1999 is for October.

Debt service due, including IMF, as a percentage of exports of goods and services.

Including IMF.

Partner countries exclude FR Yugoslavia. The effective exchange rate calculations are based on the chain index method, where the partner country weights are not fixed.

Figure 1.
Figure 1.

FYRM: Economic Activity Indicators and Inflation

Citation: IMF Staff Country Reports 2000, 076; 10.5089/9781451826036.002.A001

Sources: FYRM authorities; and IMF staff estimates.

8. Labor market developments in 1999 had a positive overtone, but they did not represent a fundamental improvement. The annual labor force survey indicates a fall of 2 percentage points in the unemployment rate, though it was still extremely high at 32½ percent. Employment in public administration increased, albeit without budgetary authorization. There was very little labor shedding in the enterprise sector during the Kosovo crisis, as employers forced workers to take leave at lower wages. With the rebound in activity, wage pressure emerged and employers also began to reduce wage arrears. For the year as a whole, the share of labor cost in output was virtually unchanged in industry and is likely to have increased in the monitored sector (Figure 2).

Figure 2.
Figure 2.

FYRM: Employment and Wages 1/

Citation: IMF Staff Country Reports 2000, 076; 10.5089/9781451826036.002.A001

Source: FYRM authorities.1/ Employment data are based on administrative surveys; unemployment data are based on the labor force survey undertaken annually in April; and the nominal wage bill is based on data from the Payments Bureau (ZPP).

9. The balance of payments position improved in 1999. Initially, FYRM’s trade was severely hit by the Kosovo crisis, but the ending of the hostilities and the rehabilitation of Kosovo under United Nations administration brought unforeseen gains in foreign exchange receipts. With the return of refugees, exports to the Federal Republic of Yugoslavia (mainly Kosovo) increased sharply, to nearly double the pre-crisis level. Consequently, the decline in export receipts in 1999 was limited to 8 percent, well short of the 27 percent fall projected at the height of the crisis in early June.2 Imports declined by 6½ percent, mainly reflecting a drawdown of inventories by enterprises and the disruption of oil imports in the second quarter. Service receipts surged in the second half of the year, as FYRM served as a key transit route for travel and delivery of goods to Kosovo. Accordingly, the external current account deficit (excluding official grants) narrowed sharply to 6 percent of GDP (from 9½ percent of GDP in 1998). The capital account surplus also contracted, as the large foreign direct investment inflows experienced in 1998 were not sustained. However, with a sizeable amount of unrecorded inward transactions, many of them Kosovo-related,3 gross official reserves increased by about US$125 million, to the equivalent of 2.7 months of next year’s imports at end-December 1999 (Table 2; Figure 3).

Table 2.

FYRM: Balance of Payments, 1996–2000

(In millions of U.S. dollars)

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

Includes changes in currency and deposit of private sector and unidentified short-term capital, such as trade credits, imports paid by drawdown of accounts held abroad, and unrecorded remittances.

Figures for 1999 and 2000 refer to a non-concessional deferral (five years maturity, including one year grace) of debt service payments due to the Paris Club creditors during April 1999-March 2000. The FYRM authorities have requested an extension of the consolidation period of the deferral. The debt-service payments due during April-December 2000 amount to USS24 million.

Represents proceeds from the sale of Stopanska Banka and Okta to foreign investors. Of ibis, USS38 million will accrue to the government.

Japan, US$8 million; and USA, USS22 million.

An increase in debt-to-GDP ratio from 1996 to 1997 is attributable to the 1997 devaluation.

Figure 3.
Figure 3.

FYRM: External Sector Developments

Citation: IMF Staff Country Reports 2000, 076; 10.5089/9781451826036.002.A001

Sources: Data provided by the FYRM authorities; and IMF staff estimates.1/ Exports to all European countries (including Russia, Ukraine, and Belarus) other than Albania, Bulgaria, Greece, and Turkey.

10. Indicators of external vulnerability remained satisfactory. At end-1999, total external debt amounted to the equivalent of some 43 percent of GDP; the share of short-term debt was very small (3½ percent of GDP and 27 percent of official reserves).4 Gross official reserves were nearly two-thirds the level of broad money. The average real effective exchange rate (both CPI-based and ULC-based) remained broadly unchanged in 1999 and near their most depreciated levels in five years (Table 3).

Table 3.

FYRM: Indicators of External and Financial Vulnerability, 1996–2000

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

Figure for 1999 refers to end-September.

Figure for 1999 refers to October.

Increases in external debt-to-GDP ratios from 1996 to 1997 are attributable to the 1997 devaluation.

Includes short-term trade credits.

Calculated as the ratio of next year’s amortization to reserves.

Figure for 1999 refers to January-October compared to the same period of the previous year.

11. The NBM faced contrasting challenges in the conduct of monetary policy during the Kosovo crisis and the post-crisis period. With the onset of the crisis, banks experienced a liquidity shortage owing to large deposit withdrawals and delays in debt-service payments by enterprises. The NBM responded by injecting liquidity into the banking system through credit auctions and redemption of NBM bills. 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. This liquidity influx was largely sterilized, as banks wound down their credit lines with the NBM and invested in NBM bills. 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 (Tables 4 and 5; Figure 4).

Table 4.

FYRM: Accounts of the National Bank of Macedonia, 1997–2000 1/

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Sources: The National Bank of Macedonia; and IMF staff projections.

Foreign currency denominated items exclude effects of exchange rate gain/losses.

Net credit to the government for external debt service, adjusted for collection of loans from the original debtors.

Includes non-financial sector deposits.

Table 5.

FYRM: Monetary Survey, 1997–2000 1/

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Sources: The National Bank of Macedonia; and IMF staff projections.

Foreign currency denominated items exclude exchange rate effects.

Net credit to the government for external debt service, adjusted for collection of loans from the original debtors.

Adjusted for the removal of fully provisioned loans from banks’ books.

Adjusted for the November 30, 1999 reclassification of denar 6.271 million of Stopanska Banka’s loans from other items (net) and foreign currency credits into denar credits.

Adjusted for the recapitalization operation of Stopanska Banka through a swap of nonperforming loans for Government bonds in the amount of DM 235 million, as of December 31, 1999.

Figure 4.
Figure 4.

FYRM: Money, Credit and Interest Rates

Citation: IMF Staff Country Reports 2000, 076; 10.5089/9781451826036.002.A001

Source: FYRM authorities.

12. 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. The general government accounts, which include foreign-financed expenditure to build roads, were in approximate balance. Tax revenues were extremely buoyant—mainly on account of efforts to improve tax administration—and surpassed expectations. The FYRM budget incurred refugee-related expenditures of 1.3 percent of GDP, which were largely covered by donor support.5 Aggregate expenditure on other categories was marginally higher than budgeted. There were slippages in outlays on wages, goods and services, and some social programs, but saving in other areas largely offset them. The breach of wage discipline was even more serious than indicated by budgetary data. Several line ministries made additional wage payments, totaling nearly 1½ percent of GDP, from their off budget self-generated special revenues.6 The payments were for salaries of staff recruited without budgetary authorization as well as wage increases (Tables 6 and 7; Figure 5).

Table 6.

FYRM: Central Government Operations, 1998–2000

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Sources: Ministry of Finance; National Bank of Macedonia; and IMF staff estimates.

As reported in EBS/99/134

Includes privatization receipts in 1998.

Total debt of central government and external debt of 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.

Table 7.

FYRM: General Government Operations, 1998–2000

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Sources: Ministry of Finance; National Bank of Macedonia; and IMF staff estimates.

As reported in EBS/99/134.

Includes privatization receipts in 1998.

Figure 5.