IMF Approves US$28 Million Stand-By Credit for the Former Yugoslav Republic of Macedonia

This paper evaluates the 2003 Article IV Consultation and a Request for a Stand-By Arrangement (SBA) for the Former Yugoslav Republic of Macedonia (FYRM). The Article IV policy discussions focused on regaining a sustainable fiscal and external position, restarting economic growth and job creation, and addressing vulnerabilities resulting from public sector indebtedness, banking sector fragility, and euroization of bank and government balance sheets. FYRM has also requested IMF support of the program under an SBA in the amount SDR 20 million.


This paper evaluates the 2003 Article IV Consultation and a Request for a Stand-By Arrangement (SBA) for the Former Yugoslav Republic of Macedonia (FYRM). The Article IV policy discussions focused on regaining a sustainable fiscal and external position, restarting economic growth and job creation, and addressing vulnerabilities resulting from public sector indebtedness, banking sector fragility, and euroization of bank and government balance sheets. FYRM has also requested IMF support of the program under an SBA in the amount SDR 20 million.

The Executive Board of the International Monetary Fund (IMF) today approved a Stand-By Arrangement for SDR 20 million (about US$28 million) for the former Yugoslav Republic of Macedonia in support of the country’s economic program for the period April 30, 2003-June 15, 2004. The decision will enable FRY Macedonia to draw SDR 4 million (about US$5.5 million) from the IMF immediately.

The Stand-By Arrangement follows a staff-monitored program with the IMF during the first half of 2002, which the authorities had requested after the cancellation of the arrangements under the Poverty Reduction and Growth Facility (PRGF) and the Extended Fund Facility (EFF) in November 2001.

Following the Executive Board discussion, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chair, said:

“The former Yugoslav Republic of Macedonia authorities have adopted an economic program to promote fiscal and external sustainability. The program restores the fiscal deficit to a sustainable level after the spending surges following the 2001 security crisis, and builds on the successful record of monetary policy. The elimination of the distortionary financial transaction tax and the implementation of measures aimed at increasing labor market flexibility, promoting exports and improving the business climate will pave the way for a resumption of economic growth, a reduction in unemployment, and improvements in living standards. The successful implementation of the program will require resolve on the part of the authorities and consolidation of inter-ethnic peace.

“The authorities’ economic strategy is realistic and prudent. The fiscal adjustment aims at reducing the budget deficit in 2003 to a level consistent with stabilizing the net public debt at 40 percent of GDP. This is to be achieved by elimination of some non-recurrent expenditures, bringing recurrent spending back to the pre-crisis level, and rationalizing the VAT rate structure. The authorities intend to keep the fiscal deficit at a sustainable level in 2004 and beyond, while accommodating public investment needed for improvements in infrastructure.

“The authorities’ program is consistent with the Peace Framework Agreement and makes provisions for expenditure related to the devolution of certain responsibilities to local government institutions. The authorities are prepared to move with caution in this area in order to ensure that the fiscal decentralization does not undermine the efficiency and accountability of fiscal operations.

“The de facto peg of the denar to the euro has served the former Yugoslav Republic of Macedonia well in the past, sustaining its impressive record of low inflation during turbulent times. The level of the exchange rate remains consistent with the objective of maintaining competitiveness, economic growth, and low inflation. The authorities have supported the peg by enhancing the transparency of the interbank foreign exchange market,” Mr. Sugisaki said.


Recent Economic Developments

When the security crisis erupted in the spring of 2001, growth came to a halt and macroeconomic balance was disrupted. While the loss of life and destruction of property were limited, the crisis slowed structural reform and sapped business confidence. Real GDP declined by 4.5 percent in 2001 and a further 1.5 percent year-on-year in the first six months of 2002. Government spending ballooned during the crisis and in the run-up to elections in 2002. Security spending, though partly covered by an emergency financial transactions tax, nonetheless propelled the general government deficit to 7.2 percent of GDP in 2001 (including foreign-financed projects), compared with a surplus of 1.8 percent of GDP in 2000. Fiscal consolidation planned for 2002 did not materialize owing to the postponement of security personnel demobilization and pre-election spending surge.

The impact of the deficits, however, was cushioned by a large inflow of proceeds from telecoms privatization in 2001 and donor finance in early 2002. These privatization and donor receipts—together with monetary tightening—made it possible to maintain the exchange rate peg and keep inflation low against the backdrop of large fluctuations in monetary aggregates.

In the second half of 2002, growth and exports recovered. Industrial output picked up, particularly in the textile and steel industries, and business confidence appeared to be returning. Real GDP is estimated to have increased by 2 percent year-on-year in the second half of the year. Textile exports are back to pre-crisis levels and metals exports have increased. In late 2002 and January 2003, international reserves declined, reflecting the weakening of fiscal discipline, but the exchange market pressure eased in February 2003 and interest rates have come down.

Program Summary

Political normalization and the implementation of the Peace Framework Agreement (PFA) have set the stage for a resumption of economic growth. The authorities’ program is aimed at creating the economic basis for sustained growth and increased employment. The main elements of the program are fiscal adjustment to reduce the crisis-related imbalances and restore fiscal sustainability; maintaining the fixed exchange rate anchor, with comfortable reserve cover; and implementing pro-market structural reforms in the labor market. In this climate, real GDP is projected to grow by 3 percent in 2003 and 4 percent in 2004. Average inflation is projected to remain at about 3 percent per annum.

FYR Macedonia’s balance of payments position is projected to improve in 2003. Exports are expected to sustain the recovery that began in the second half of 2002, reflecting new contracts in the textile industry and the reopening under new private ownership of a large formerly loss-making enterprise. Imports are expected to increase moderately as imports of used cars, which peaked in 2002 owing to a relaxation of import restrictions, return to normal levels. The external debt burden is moderate. At end-2002, the stock of medium- and long-term external debt is estimated to amount to the equivalent of 39 percent of GDP while debt service payments are estimated at about 16.5 percent of exports of goods and services.

Given the large fiscal deficits over the last two years, fiscal adjustment is a key objective of the program. Adjustment is needed both in order to stabilize FYR Macedonia’s public debt ratio at about 40 percent of GDP, and in order to lower interest rates and create more room for private sector credit. Through a mix of cuts in goods and services spending and an increase in VAT collection by reforming the VAT-rate structure, the government intends to reduce the general government deficit (including foreign-financed projects) to 2.7 percent of GDP in 2003 and to about 2.5 percent in 2004-the debt stabilizing level. Excluding foreign-financed projects, these general government deficits correspond to 2 percent of GDP in 2003 and 1.3 percent in 2004. The authorities further intend to implement structural fiscal reforms to support the execution of the budget.

On exchange rate and monetary policy, the National Bank of the Republic of Macedonia (NBRM) has developed a monetary program consistent with maintaining the de facto fixed exchange rate and increasing gross foreign exchange reserves to the equivalent of four months of imports. Real exchange rate indicators suggest that external competitiveness is adequate. In 2003, the improved fiscal position and donor support is expected to ease the pressure on monetary policy and should create scope for lower interest rates on NBRM bills in 2003 compared with 2002. The NBRM will continue to monitor foreign exchange flows and, in the event of pressure on the foreign exchange market, will take appropriate measures, including exchange market interventions, operations with NBRM bills, and adjustments of interest rates.

On structural reforms, the government intends to implement measures to address rigidities and improve incentives structures in the labor market. The key elements include measures to increase the flexibility of the labor market by scaling back overly generous unemployment benefits and severance packages and implementing a range of active labor market policies; the completion of the privatization process; the resolution of the remaining loss-making enterprises; a program to support small and medium-sized enterprises (SMEs); and the deepening of banking sector reforms. Further, the government plans to improve public sector governance and transparency, which will be essential to reactivate the business sector and attract foreign direct investments over the medium-term.

Although preparations are underway to bring the privatization process to an end, there will continue to be an urgent need to strengthen governance in already privatized enterprises. The ability of banks to channel domestic savings into productive activities in the private sector will be essential for achieving high and sustainable economic growth. Thus, the improvement of strict enforcement of bank supervisory and prudential regulations will continue. Further measures to strengthen the banking sector and bank supervision will be defined in light of the findings of the forthcoming Financial Sector Assessment Program (FSAP) mission and will be incorporated into the program conditionality at the first review under the program.

On trade policy, the authorities will allocate tariff free import quotas on a quarterly instead of a semi-annual first-come first-serve basis in an effort to limit the scope for market dominance by a few trading companies.

FRY Macedonia joined the IMF as a member on December 14, 1992. Its quota1 is SDR 68.9 million (about US$95 million), and its outstanding use of IMF credits totals SDR 45.9 million (about US$63 million).

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

Percentage change relative to the same period of the previous year.


Percentage change relative to December of previous year.

January-November 2002.

January-September 2002.

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.

Includes foreign currency deposits.

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

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

An increase means appreciation of the denar. Partner countries include Federal Republic of Yugoslavia and Bulgaria.


A member’s quota in the IMF detemiines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.