Former Yugoslav Republic of Macedonia: Ex Post Assessment of Longer-Term Program Engagement

The staff report for the Second Review Under the Stand-By Arrangement on the Former Yugoslav Republic (FYR) of Macedonia highlights economic developments and policies. FYR of Macedonia’s economic performance since independence has been marked by notable achievements in macroeconomic management, as well as some disappointments in the area of structural reforms. Inflation was brought down from hyperinflation levels to the low single digits by the de facto exchange rate peg, which was sustained in spite of sometimes challenging circumstances.


The staff report for the Second Review Under the Stand-By Arrangement on the Former Yugoslav Republic (FYR) of Macedonia highlights economic developments and policies. FYR of Macedonia’s economic performance since independence has been marked by notable achievements in macroeconomic management, as well as some disappointments in the area of structural reforms. Inflation was brought down from hyperinflation levels to the low single digits by the de facto exchange rate peg, which was sustained in spite of sometimes challenging circumstances.

I. Introduction

1. The Former Yugoslav Republic (FYR) of Macedonia’s economic performance during the years since independence has featured both notable achievements and disappointments. A major success was the early attainment of a relatively high degree of macroeconomic stability which was maintained through a period punctuated by some major shocks. The country dismantled the apparatus of central planning and took many steps to strengthen the institutional framework for a market economy. However, some key structural weaknesses—many of which were identified at a much earlier stage—remain to be addressed effectively and hinder the country in achieving sustained higher growth.

2. The Fund remained engaged with FYR Macedonia during much of this period, with a series of financial arrangements. These included access under the Systemic Transformation Facility (STF) in 1994; a Stand-By Arrangement (SBA) in 1995; an ESAF/PRGF arrangement in 1997; an EFF/PRGF blend arrangement in 2000; and a SBA in 2003.

3. This report presents an ex post assessment of FYR Macedonia’s longer-term program engagement with the Fund.1 Section II provides an overview of economic developments. Section III discusses achievements and shortcomings in some key areas. Section IV assesses the role of the Fund in this process, including the reasons for and consequences of the longer-term program engagement. Section V discusses the implications for possible future Fund engagement.

II. Overview of Economic Developments

4. Since achieving independence from Yugoslavia in 1991, the FYR Macedonia has been buffeted by several shocks. These include the hyperinflationary breakdown of the monetary system of former Yugoslavia; the “transitional recession’ experienced by many countries in the early years after the fall of Communism; the impact of trade embargoes, conflict and UN sanctions in other parts of former Yugoslavia (including the 1999 Kosovo crisis); and the internal security crisis of 2001. Since 2001, however, FYR Macedonia has enjoyed a period of comparative stability.

5. Geography and history created important challenges for FYR Macedonia in launching its transition to a market economy. It is a landlocked, mountainous country, dependent on the stability and goodwill of its neighbors for access to international markets. Recent independence, and the Yugoslav legacy, were also important factors. Like many other transition economies, FYR Macedonia had to build up the institutions of a nation-state from those of a republic within a wider federation: while this provided the opportunity to design appropriate institutions, it strained the authorities’ administrative capacity to implement other reforms. The country inherited the Yugoslav model of socialism based on worker-controlled enterprises, the starting point for transition was a network of somewhat ambiguous entrenched claims of existing workers and managers. Moreover, as a result of central planning in former Yugoslavia, its economy was heavily concentrated in a small number of activities that are heavily protected in foreign markets—including agriculture (notably tobacco), steel, and textiles. Finally, conflict in other former Yugoslav republics presented the image of a “bad neighborhood” which made it more difficult to attract foreign investment than elsewhere in Central and Eastern Europe.

6. The country’s ethnic divisions are an important condition underlying the political economy of transition. Ethnic Macedonians comprise 64 percent of the population, ethnic Albanians 25 percent and other minorities 11 percent. The ethnic Macedonians had a greater role in the traditional industrial sector while ethnic Albanians had greater involvement in small business and higher rates of emigration. Reforms had a differential impact on the two largest ethnic groups, as the transition reduced the value of ethnic Macedonians’ access to jobs in state-owned enterprises or the civil service, while raising the value of ethnic Albanians’ experience with small businesses and their connections abroad (including the steady flow of remittances).2

7. From this starting point, the period since independence can be divided into three phases: the post-transition slump and the restoration of macroeconomic stability (roughly 1991-96); a period of hesitant structural reform (1996-2001); and a period of post-conflict stabilization and renewed reform (2001-04). A detailed chronology of events is provided in Table 1.

Table 1.

FYRM: Chronology of Economic and Political Developments (1990-2004)

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Sources: IMF staff.

Shaded lines refer to IMF involvements.

8. The 1991-94 period was characterized by a massive decline in economic activity—a cumulative decline in GDP of more than 25 percent—reflecting the breakdown of central planning and trading arrangements in former Yugoslavia along with acute financial instability and inflation. Inflation reached a maximum of 1600 percent per annum, and the denar depreciated by some 650 percent from its value at independence through 1994 (Figure 1). The macroeconomic instability reflected the existing regime of soft budget constraints: socially-owned enterprises had almost unlimited access to credit because the National Bank of the Republic of Macedonia (NBRM) was required to rediscount loans provided by commercial banks, which were not operated on commercial principles. In the context of this regime, the transitional slump led to widespread insolvency in the financial system.

Figure 1.
Figure 1.

Macedonia, FYR: Selected Economic Indicators, 1990-2003

Citation: IMF Staff Country Reports 2004, 276; 10.5089/9781451826029.002.A003

Sources: Fund WEO, and staff estimates.1/ Data not available.

9. The authorities were successful in stabilizing the economy by 1996. The decline in economic activity leveled out in 1994; by 1996, inflation was brought down into single digits and growth turned positive. This stabilization was the result of a strategy introduced in 1993, which included a sharp deceleration of monetary expansion associated with an abrupt tightening of fiscal policy and limitations on credit expansion to state enterprises. The exchange rate—which initially had been nominally pegged to the deutsche mark (DM) but with frequent adjustments—was de facto pegged to the DM in early 1994. The process of stabilization was, however, delayed by a trade embargo imposed by Greece in early 1994, in protest over the country’s name and flag, which continued until September 1995.

10. The 1996-2000 period was one of hesitant but significant reform in the context of a reasonable degree of macroeconomic stability. Progress was made in a number of areas for reform—albeit considerably slower than envisaged, and in some cases not optimally designed. A majority of state-owned enterprises were privatized, in most cases into the hands of insiders. Important reforms were made in the financial sector, although major gaps in supervision and regulation remained. A major trade reform undertaken in 1996 reduced tariff rates and abolished numerous non-tariff restrictions (such as licensing requirements for imports and exports). The government also abolished various restrictions in the labor market, although as discussed below this reform was piecemeal. During this period, growth picked up to levels averaging 3 percent during 1996-2000. Inflation was kept in a range averaging around 2 percent, with the pegged exchange rate playing a vital role as a nominal anchor. The external current account deficit was a source of concern, however, widening to close to 8 percent of GDP, amid sluggish exports and high interest rates. Market pressures prompted a 15.5 percent devaluation of the denar in mid-1997. While pass-through from the devaluation to inflation was limited, the effect of the resulting increase in competitiveness is unclear: the current account did strengthen to near-balance, but this effect occurred only after about a year and a half, was short-lived, and was also associated with the Kosovo crisis in 1999. The Kosovo crisis changed the complexion of events in other ways: this crisis led to an influx of refugees and of international aid and interrupted the gradual progress of reform.

11. Civil conflict broke out in early 2001, threatening macroeconomic stability and halting progress with structural reforms. The conflict—ignited by the war in Kosovo against a background of ethnic tensions—was relatively contained and quickly resolved: a Peace Framework Agreement (PFA), brokered by the EU and US, was concluded in Ohrid in August. But the economy was affected: GDP slumped by about 4 percent while the related surge in defense-related spending pushed the general government fiscal balance to a deficit of some 7 percent of GDP and the external current account deficit to over 8 percent of GDP. Moreover, implementing the PFA would place further demands on the government: the ethnic-Albanian minority was promised higher representation in the civil service, the use of Albanian as a second official language, and greater autonomy through fiscal decentralization to the local government level.

12. During the period following the 2001 PFA through the present, the main tasks have been to restore stability, reactivate economic growth, and push forward with reforms—including those associated with the PFA and in preparation for eventual accession to the European Union. Fiscal policy was adjusted to ensure that the transient expenditures associated with the conflict—and the inefficient temporary revenue measures used to finance them—did not become entrenched. In particular, the financial transactions tax introduced to cover temporary crisis-related spending was abolished on January 1, 2003, followed by offsetting expenditure cuts. The exchange rate anchor was maintained throughout this period, underpinning price stability. Growth recovered to near pre-crisis rates, although the growth rate did not move to a distinctly higher path. The external current account deficit remained wide, although it appears to have been financed in part by errors and omissions, presumably reflecting unrecorded remittances and proceeds from trade in the informal sector. Some structural reforms were undertaken during this period, albeit not path-breaking ones.

III. Achievements and Shortcomings

13. FYR Macedonia’s experience reveals a mix of achievements and shortcomings. This section provides an overview of progress in key areas. The IMF’s role will be examined in the following section.

14. A noteworthy success was in stabilization. Inflation was subdued from near-hyperinflationary levels and a comparative degree of price stability maintained, often under difficult circumstances. The de facto pegged exchange rate was maintained from 1994 onward (albeit with one large devaluation), throughout a very turbulent period. The external current account deficit, although worryingly large at times (including during the period from 2001 to the present), resulted in strong adverse market pressures only in 1997. The step devaluation undertaken in response to those pressures in the context of weak demand, a wage freeze, and tight fiscal policy, translated into improved competitiveness with little pass-through to inflation. The current account was financed in most years mainly through a combination of official financing and errors and omissions. The real growth rate fluctuated considerably over this period, but it is not clear that these fluctuations were avoidable, given the various shocks buffeting the economy.

15. Unlike many other transition economies, FYR Macedonia managed to avoid an unsustainable run-up of debt. Both the external and public debt dynamics were reasonably stable, due to relatively small ongoing imbalances, although debt did ratchet up with transitory surges in deficits. At end-2003, external debt stood at about 33 percent of GDP, of which public external debt consisted of about 29 percent of GDP. At the same time, given that debt is primarily foreign currency-denominated, the debt ratios are vulnerable to a possible change in the exchange rate.3

16. FYR Macedonia also made substantial—albeit often delayed and still in many ways incomplete—progress in building the institutional foundations of sound macroeconomic policies: an independent central bank and a modern fiscal system. A modern legal framework for the central bank was established in 1992, although the independence of the central bank has not been without challenges—for instance, in the handling of problem banks and government pressures over the stance of monetary policy. A number of important improvements were made in central bank accounting and monetary policy operations, as well as in the payments system infrastructure.

17. Public resource management has been, and remains, a major issue. Despite repeated efforts, little progress has been made in rationalizing the public service, although there has been significant progress with some elements of civil service reform.4 While measures to rationalize government functions, reduce staffing, and review salary structure were proposed as far back as 1997, average expenditures have remained virtually unchanged as a percent of GDP since 1995, without substantial improvements in the quality of public services. Related reforms were made with long delays and important weaknesses in the budget planning system and internal audit remain. The establishment in 2000 of a Treasury, although long delayed (it was originally planned in 1995), was a notable accomplishment in this area.

18. The tax system was gradually reformed to reduce the distortionary effect of taxation on the economy. One key step in this direction, the implementation of a VAT, was taken in 2000, several years after it had first been put on the agenda. Some measures have been taken to reduce the tax burden on labor (e.g. the lowering of income tax rates in 2001) but the burden remains high—recently a 47-50 percent tax wedge.5 The effectiveness of collection has remained a major issue—particularly for labor taxes, where the high tax rates and weak enforcement has led to widespread evasion (i.e. unreported employment).

19. The development of the economy’s long-run growth potential has been disappointing, however. Macedonia’s growth performance was weaker than that in a number of more successful transition economies (Figure 2)—including other Balkan countries that experienced even greater conflict-related turbulence. Foreign investment has been particularly slow to materialize. While in part this performance reflects the political risk associated with the Balkan region, and with FYR Macedonia in particular, it also in large part reflected other aspects of the investment climate, notably weak institutions and governance more generally—in turn resulting from comparatively slow progress with structural reforms (as summarized by the EBRD’s transition score).6 Another important factor is the low savings rate—with national and domestic savings rates among the lowest in Eastern Europe.

Figure 2.
Figure 2.

Selected Transition Countries: Comparison of Economic Indicators, 2003

Citation: IMF Staff Country Reports 2004, 276; 10.5089/9781451826029.002.A003

Sources: Fund WEO, and staff estimates.1/ Averages exclude Macedonia, FYR.2/ EBRD transition score, averaged across enterprise, markets, infrastructure and financial institutions.3/ 1998 - 2003 only, as data for 1996-97 are not available.4/ Medium- and long-term debt outstanding at year-end.

20. One key element of reform needed to mobilize growth, the privatization of socially- and state-owned enterprises, had been largely7 completed by late 2003, eliminating a major structural drain on the public finances. But the method of privatization, together with the absence of a market for corporate control, gave insiders the dominant role. Privatization was undertaken in several phases. A privatization law passed in 1993 gave enterprise managers and employees the right to choose the method of privatization—in particular, permitting management and employee buyouts. In 1995-96, privatization was accelerated and, among other things, a Special Restructuring Plan focusing on the largest loss-makers was launched. In 2000, as privatization was still not complete, another effort was launched to privatize or liquidate the largest loss-makers. Most of the enterprises were sold via preferential share sales to former managers and employees. While the reliance on insiders for privatization may have helped build public support for privatization—as they did not disenfranchise existing stakeholders—it also meant that effective enterprise restructuring was undertaken much more slowly than envisaged, as the insiders often had neither the incentive nor access to the resources needed to modernize these firms. The government was unwilling to push chronically loss-making enterprises into liquidation, and in some cases put direct limitations on the restructuring undertaken by privatized firms.8

21. Once privatization had taken place, the resulting boost in efficiency and foreign investment was smaller than hoped,9 reflecting the absence of mechanisms for strengthening corporate governance. While in principle employee-owned firms can be efficient, this requires that the employee-owners internalize the benefits of restructuring and respond to market signals and discipline. In FYR Macedonia, this did not happen: the privatization mechanisms chosen led to diffuse ownership structures, and managers and employees were frequently allowed to control the secondary sales of shares. These factors are a strong disincentive for shifting corporate control to those with the resources and know-how to modernize these firms. Another factor is the information needed to value firms: enterprises are legally required to prepare accounts in line with International Accounting Standards, but these rules have not been applied consistently. In fact, only a handful of firms with shareholding structure trade in the FYR Macedonia’a minute stock market owing to weak accounting practices. Passage of a new bankruptcy law was long delayed and enforcement remains weak, with judicial processes proceeding very slowly and frequently with a bias in favor of existing owners and employees. Finally, although the automatic extension of credit to state enterprises was eliminated, various other aspects of softness in budget constraints—arrears in taxes and social contributions and politically-directed lending—remained. These factors tended to dull the incentives for privatized enterprises to restructure and expand—as reflected in virtually zero growth in these enterprises over the past decade.10

22. With regard to the financial sector, major reforms were undertaken but the results were mixed. In the early years of transition, the authorities faced the urgent task of changing the way the banking system operated to end the automatic expansion of credit to state enterprises, recapitalizing the banks after loan losses associated with the early events of transition, and establishing the rudiments of a modern regulatory and supervisory system. While these tasks were accomplished—enabling the system to operate on a commercial footing and hardening the state enterprises’ budget constraints—another set of problems proved much more difficult to address. Recapitalization was incomplete and labor practices limited the opportunities for more efficient staffing, so banks continued to rely on stiflingly high interest rate spreads to rebuild their capital. In particular, Stopanska Bank, the dominant banking institution, had significant governance problems as well as being undercapitalized; this institution was privatized and recapitalized in 2000, but similar problems persisted elsewhere in the system. There was insufficient emphasis on liquidating non-viable institutions, perpetuating a situation in which the country is overbanked—with 21 banks, unusually many for a country this size.

23. The development of the financial regulatory framework was slow. Moreover, excessive political interference together with a lack of expertise prevented it from dealing effectively with the complexities of new types of financial institutions. A dramatic example of the combination of these factors was the rise and, in 1997, fall of the TAT pyramid scheme. Problems associated with politically-connected lending recurred, resulting in balance sheet problems in some major institutions as recently as the past year. Moreover, with the fixed exchange rate, the financial system has built up substantial foreign currency exposures which have not been adequately measured or regulated.11 In the late 1990s—to some extent in response to the TAT scandal—significant improvements were made in both the regulatory framework and supervisory capacity. Nonetheless, the 2003 FSAP still identified a number of remaining areas in which the banking and financial market supervision needed to be strengthened: advancing to a more risk-based surveillance and monitoring system; introducing accounting and disclosure standards for banks, identifying and managing exchange rate risks, and strengthening bank supervision in a number of respects. A number of the reforms recommended—notably those related to the identification and management of exchange rate risks and improved procedures for on-site assessments—have now been implemented in the context of the current standby arrangement.

24. The trade system was overhauled in 1996 but given the other rigidities in the economy this did not result in a major shift in production to new activities. Tariffs were reduced and import licenses abolished, substantially reducing the degree of trade restrictiveness—from the lowest (“restrictive”) to the highest (“open”) ranking on the classification system of trade restrictiveness (CSTR). But due to various supply-side rigidities and disruptions, the country was not able to take advantage of a more liberal trade regime by substantially increasing the share of trade in the economy and diversifying away from products that are heavily protected in external markets.

25. Improving the overall business climate—particularly by strengthening governance—was, and to a significant extent remains, a missing ingredient for robust growth. Corruption has been prevalent—constituting a high and uncertain tax on entrepreneurship. Weak governance has, at times, vitiated the effects of other reforms: for example, despite reforms in customs administration, that administration remained notoriously corrupt as late as 2002, constituting an informal trade tax.12 Efforts have been made at various times to tackle corruption. Notably, a major anti-corruption drive was launched in early 2003, based on sound principles—setting up appropriate administrative structures (such as establishing an internal audit function) and changing regulations to reduce opportunities for corruption. Although there is a perception in the private sector that the level of corruption has diminished, some areas of public administration—notably the health insurance fund and the courts—remain problematic. As a related point, a new procurement law has been enacted and work has started on establishing regulations and institutional arrangements to implement it; although it remains to be seen whether the new law will be adequately enforced, the World Bank is supporting these reforms and following up on implementation. The Bank is also supporting attempts to address corruption through a number of actions to strengthen internal audit, budget formulation and execution, and above all, reform pharmaceutical procurement.13

26. The labor market was, and remains, a key area of weakness. Official unemployment rates rose during the early years of transition, remaining above 30 percent from 1996 through the present. Measured unemployment reflects, in part, the system whereby individuals are required to register as unemployed to qualify for health and other social benefits—as a result of which many of those active in the informal sector, as well as many undocumented workers in registered enterprises are counted as unemployed. At the same time, there is clearly also a genuine unemployment problem, associated with the high tax wedge on labor, a more general lack of flexibility of the labor markets, and a lack of employment opportunities in the formal sector more generally—the latter being attributable primarily to broader macroeconomic and structural factors rather than the labor market itself. The cosmetic problem associated with underreporting of employment hampers efforts to quantify and address the real problem. Various piecemeal efforts at reforms, which have aimed to increase labor market flexibility, for example by reducing severance pay and unemployment benefits, have been mainly ineffective in tackling the problem.

27. Poverty is another important focus of economic policies. As in other transition economies, absolute poverty has been less prevalent in FYRM than in other countries with similar living standards, as income inequality has been less extreme. But due to low per capita income, absolute poverty rates are among the highest in Europe (exceeded only by Turkey and Albania). Moreover, over time, as growth has raised average living standards, the percentage of the population in absolute poverty has changed little, as inequality has tended to increase. Poverty has greater incidence for members of minority groups.14 More generally, building human capital remains a priority for growth and poverty reduction.15

28. To put growth on a sound footing, it is essential that its benefits be shared by all members of society. The Ohrid agreement includes measures to provide employment opportunities in the public sector for the communities and enshrines non-discrimination, decentralization, access to education, and official status for languages spoken by more than 20 percent of the population. Full implementation of these measures—and accounting for their costs in the country’s fiscal plans—is essential. Beyond this, steps to increase the economy’s flexibility and reduce the rents earned by entrenched insiders would also tend to work in the direction of greater equity.

IV. Experience with Fund-Supported Programs

29. Economic policies were set in the context of Fund-supported programs through much of the period, but performance under the programs was mixed (Table 2). FYR Macedonia’s uneven progress during the overall period raises questions about program design, conditionality, and implementation, which will be addressed in this section.

Table 2.

Macedonia, FRY; History of IMF Lending Arrangements

(In millions of SDRs, unless otherwise indicated)

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Source: Fund MONA database and program documents.
  • The initial programs under the STF in 1993 and the 1995 SBA, focusing on macroeconomic stabilization, were successfully implemented, and all of the agreed financing was drawn. In particular, the STF succeeded in supporting a swift stabilization of the economy; and the 1995 SBA succeeded in its primary objective of “securing a further reduction of inflation.”

  • The 1997 ESAF had the objectives of “further restructuring of the economy on market lines and the maintenance of a stable financial environment as indispensable ingredients for achieving sustainable growth and reducing unemployment and poverty.” This arrangement went off track during its second year—the 1998 mid-term review of the second annual arrangement was never completed and the arrangement was allowed to expire in 2000, with structural reforms the main stumbling block; the stated objectives were, for the most part, not achieved.

  • The EFF/PRGF arrangement approved in late 2000 was designed to “reduce the incidence of poverty by a substantial margin [through] rapid and sustained growth.” It started to go off track at an early stage; given the internal conflict of May 2001, and the political climate thereafter, it could not be salvaged and the objectives were not met. A staff-monitored program adopted in 2002 was not successfully implemented.

  • The most recent arrangement—the Stand-By approved in April 2003—was intended to “reduce the large current account and fiscal imbalances stemming from the security crisis and its aftermath, addressing vulnerability to domestic and external shocks and generating growth and employment.” This arrangement has had more encouraging results, with successful completion of the first review.

30. FYR Macedonia has had a longer-term program engagement with the Fund for several reasons. The Fund’s financing was used in the STF and the initial SBA to satisfy balance-of-payments needs associated with the process of macroeconomic stabilization; then, from 1996-2000, in the context of longer-term structural reforms, and during 2003-04, to help smooth the macroeconomic adjustments in the wake of the 2001 conflict. The Fund’s financial arrangements were intended to provide a framework for macroeconomic policies and related structural reforms during the transition to a market economy—also in the context of financial support from the World Bank, multilateral development banks, and the donor community. As in other countries in the region, establishing a viable market economy was an enormous task—and as in most of those countries, the obstacles were initially underestimated. In FYR Macedonia, the transition process was prolonged by the shocks to which the country was subjected and by delays in implementing key reforms, in large part reflecting weak ownership and limited administrative capacity. As in many other countries,16the desire for a Fund-supported program for signaling purposes led to pressure from donors for a Fund-supported program, particularly following the 2001 Peace Framework Agreement; in 2002, however, the Fund resisted these pressures, based on the judgment that little policy reform was likely to take place in advance of elections; the Fund instead provided a Staff-Monitored Program (SMP) that in the event had little ownership by the authorities and was weakly implemented.

31. As in many Fund-supported programs, the underlying macroeconomic projections were somewhat unrealistic. On the whole, growth projections showed a significant degree of over-optimism (Figure 3): in all but two years since 1995, growth fell short of projected levels; the largest shortfalls were due to exogenous events (notably the 2001 internal conflict), but the projections proved over-optimistic even in calmer times. (One exception was 2003, when the growth projections were fulfilled.) The inflation projections, on the other hand, were met or bettered. The external current account projections were highly inaccurate—although here the difficulties of forecasting were compounded by exogenous shocks and measurement problems (as reflected by highly variable and often very large Errors and Omissions). These patterns of inaccuracy in program projections are similar to those found for other countries—although it should also be recognized that staff faced exceptional challenges in making macroeconomic projections in the turbulent environment of FYR Macedonia.17 As in other cases, the unreliability of macroeconomic projections heightened the challenges of designing appropriate macroeconomic policies. Fortunately, however, the failure of projected growth rates to materialize did not result in an unsustainable run-up of debt in FYR Macedonia, as had occurred in some other transition countries: a relatively prudent fiscal policy was followed.18

Figure 3.
Figure 3.

Macedonia, FYR, Projections and Outcomes; 1992 - 2003

Citation: IMF Staff Country Reports 2004, 276; 10.5089/9781451826029.002.A003

Source: WEO database and staff calculations.1/ Data for 1996-97 not in program document. Taken from Oct-95 Draft Letter of Intent, Table 1: Main Economic Indicators;2/ The WEO data shown reflect subsequent data revisions.3/ Data for 1996-97 not in program document. Taken from Oct-95 Draft Letter of Intent, Table 1: Main Economic Indicators;4/ Data for 2002 not in program document. Taken from 5/23/01 Memo: Briefing Paper for 1st Pogram Review under PRGF/EFF Arrangements; Tab 4: Performance under the Program (comparing program with actuals).5/ Data for 2005-07 for the inflation rate represent GDP deflator, in percent, and are from the document’s table 9: Public sector debt sustainability framework.6/ At year-end, debtor based data.

32. A second set of issues concern the appropriateness of macroeconomic policies. With regard to monetary policy, the exchange rate peg against the euro was central to bringing down inflation rapidly and then maintaining stability during a period of turbulent economic and political events; but it is not clear whether this regime remains appropriate.19 The need for a nominal anchor was particularly felt by the monetary authorities for much of the 1990s, given their comparatively recent experience with hyperinflation with the breakdown of the Yugoslav monetary system immediately preceding independence. The continuing appropriateness of the peg was reassessed at various times during the course of FYR Macedonia’s program engagement, and discussed by staff with the authorities, most recently prior to discussions on the current SBA: the argument for greater flexibility included reduced vulnerability to market pressures and greater ability of the real exchange rate to adjust to maintain competitiveness in the face of changes in equilibrium real exchange rates that may arise from changes in the structure of the economy over time.20 By encouraging the euroization of financial assets and liabilities, the peg may also have contributed to vulnerabilities that will become increasingly important with the liberalization of capital flows. (As a related issue, the liberalization of capital flows undertaken in 2002 was ill-sequenced—at least, to the extent that it was not offset by administrative restrictions: it should have been preceded by steps to strengthen supervision to address the increased risks associated with currency exposures.21) On the other hand, the possibility of moving to a more formal peg—e.g. a currency board or full euroization—was also considered. These considerations, which are relevant to the question of future Fund engagement, are discussed further below (paragraphs 53-54).

33. Another general issue is the appropriateness of the stance of macroeconomic policies: did the programs’ success—or even overachievement—on inflation come at the expense of other objectives? Here, there are two general views, which were aired in staff discussions with the authorities: one is that a more inflationary policy configuration—with easier monetary and fiscal policies in conjunction with currency devaluation—would have been beneficial to the transition, acting as a lubricant for the redistribution and relative price changes that are needed for successful transition. An alternative view is that the discipline provided by tight macroeconomic policies was an important element in the transition, weeding out non-viable enterprises as a precondition for the emergence of new ones—a central part of the “discipline and encourage” strategy that has been key to successful transition.22 While there are some qualifications to this discipline argument—it is counterproductive if it leads to a general collapse, or if it generates irresistible demands for government bailouts—there are no indications that easier policies would have done much to stimulate growth, given the supply-side limitations.

34. A number of questions can also be asked about the structural content of the Fund-supported programs. A key issue that stands out is the weakness of implementation of structural reforms—with extensive delays in a number of areas. Here, the experience points to a lack of desire for reform on the part of the authorities. This may in part have reflected other aspects of FYR Macedonia’s situation and in particular the relative attractiveness of rent-seeking versus entrepreneurship. The power of vested economic interests appears to have been a stronger brake on reforms than the ethnic differences. In addition, the country’s lack of administrative capacity was an important constraint; it was partly but less than fully compensated by extensive technical assistance in many areas, as discussed below.

35. There are also a number of issues about structural program design and conditionality. One key question is whether the Fund could have helped bring about a better outcome for the privatization program. Here, the basic problem was that insiders’ stakes in the enterprises to be privatized were firmly planted; a process requiring sales to outsiders would probably have brought about a much slower privatization process, both due to political resistance and to the fact that, given political risks and the investment climate, few qualified outside buyers existed. Another alternative would have been to restructure the enterprises while keeping them under state control—but it is not clear how successful this would have been in boosting efficiency, given the lack of administrative capacity. Moreover, there is some evidence suggesting that, even with the weaknesses in governance, privatization did lead to some efficiency gains, compared with maintaining the enterprises in state ownership.23 But, while it is not clear that the IFIs could have brought about a different method of privatization—and whereas it would probably not have been better to eschew privatization altogether—they could have pressed harder for liquidation rather than bailouts of some of the loss-makers. They could also have attached greater priority to reforms to strengthen corporate governance, through greater transparency, investor protection, and reformed bankruptcy procedures—both the passage of laws and strengthening their implementation through reform of the judiciary. The latter reform agenda remains to be completed.

36. A second question is with regard to the sequencing of reforms affecting the financial system and markets. The financial sector was rightly an area of focus, given the depth of problems there and its centrality to the transition process—particularly in light of the need to boost FYR Macedonia’s savings rate.24 The highest priority in this area should have been given to establishing the soundness of the financial system and strengthening its supervision and regulation. This, in turn, would have required addressing the deep structural problems in the nexus between the enterprises and the financial sector—notably the fact that many large enterprises remained insolvent. Delays in addressing these fundamental problems reduced the effectiveness of some other reforms advanced by the Fund, such as the development of money markets and the use of market-based instruments of monetary policy: since insolvent banks are not very responsive to market forces, the indirect instruments did not become sufficiently effective to replace direct credit ceilings for a considerable period of time although subsequently they were used successfully.

37. A third question is whether more could have been done early on to address distortions in the labor market. Labor market reforms were included in a number of the programs, but they were piecemeal in nature and were not given high priority. The results were disappointing: the unemployment rate remains in the mid-30s. One interpretation is that this outcome was largely unavoidable: actually solving the unemployment problem it will require sufficiently robust growth in the formal sector to draw substantial amounts of labor back out of the informal sector—solving at once the cosmetic problem of underreporting of employment and the genuine lack of employment opportunity.25 At the same time, granted the stubbornness of the problem, there are nonetheless some reforms that could have made a difference. In particular, a priority would have been to find a way to reduce the tax wedge on employment that distorts the labor market. Moreover, better targeting of social benefits, including by de-linking health care from employment status and cracking down on evasion, may both have helped to measure unemployment more accurately and to reduce distortions in the labor market.26

38. A fourth question is whether more could have been done in the programs to strengthen governance. The programs did indeed include elements of liberalization and institution-building that went in the direction of narrowing the opportunities for rent-seeking. But effectively tackling the problem of corruption would have required a wide-ranging strengthening of institutions, including the judiciary, with strong support at the highest political level. Given the pervasiveness of corruption, there were large and powerful entrenched groups with a strong interest in opposing such reforms. It is unlikely that the threat of withdrawing the Fund’s support would have been effective in bringing about such a sweeping change in the absence of a strong and broad-based commitment from the authorities; and the design of the detailed reforms required is largely outside the Fund’s area of expertise.

39. Implementation of the structural incentives covered by conditionality was mixed. The major program interruptions make it difficult to assess the overall effectiveness of conditionality, since implementation of the conditions is, strictly speaking, not relevant in the periods of program interruption.27 Even while the programs remained on track, however, implementation was mixed: the structural performance criteria (PCs) and prior actions (PAs) were generally implemented, while the record in achieving structural benchmarks (SBs) was weaker.28 The implementation record was much better in the 2003 SBA—all conditions for the first review were met—although that program’s structural content was perhaps less ambitious than that of the earlier ones.

40. A final question relates to the effectiveness of the Fund’s technical assistance (TA) in remedying, or compensating for, weaknesses in administrative capacity. In the fiscal area, advice was geared mainly toward conceptualizing reforms that were then implemented by the authorities, often with the assistance of other providers. Such assistance was thus not mainly intended to remedy deficiencies in administrative capacity, although in some cases in which Fund staff have had a longer-term involvement there have been indications of skill transfer. For instance, with the establishment of the treasury function, further progress is now being driven mainly by treasury officials themselves. The picture is very similar regarding assistance given in the monetary and financial sector. Technical assistance missions offered conceptual advice on reforms, while a transfer of skills took mainly place through the work of long-term resident advisors. Regarding financial sector regulation and supervision, the actual putting into use of these skills, once absorbed, was slow, on the one hand because of the highly complex and technical nature of the work, and on the other hand because of other obstacles (political and other) mainly outside the control of supervisors.

41. The quality of Bank-Fund collaboration was mixed during the 1990s, but more recently appears to have been improving. There was a need for close coordination, in particular, given the priority Fund-supported programs (especially the 1997 and 2000 arrangements) attached to financial sector and enterprise restructuring—areas in which the World Bank normally shares or takes the lead. While there was considerable collaboration in these areas, some frictions emerged, apparently reflecting different priorities and inadequate communication. The Fund-supported programs sometimes included “home-made” conditionality in these areas, which, to the extent that it was not linked to a more comprehensive policy dialogue, was limited in its effectiveness and also led to tensions with the World Bank. In the area of public expenditure management and civil service reform, disagreements surfaced over the pace of reforms. There were also disagreements over macroeconomic policies, with some World Bank staff viewing the Fund-supported program as overly restrictive. To some extent these frictions were unavoidable, given the two institutions’ different roles and time frames; but to some extent they might have been alleviated through better upstream collaboration to establish a common view on priorities and lead agency (as prescribed in the 2002 Guidelines on Bank-Fund Collaboration). In the more recent period, there has been more upstream dialogue to clarify priorities and better consultation on the form of conditionality. Some elements of duplication of conditionality remain, but these appear largely to reflect reform measures that are critical to both Bank- and Fund-supported programs.

Summary of Lessons

42. There were several reasons for the longer-term nature of FYR Macedonia’s program engagement with the Fund. To begin with, it reflects the magnitude and complexity of the reforms required to make a successful transition to a market economy and the need to maintain macroeconomic stability and external viability while that process was going on. But it also partly reflects slow progress with those reforms. The Fund’s decision to remain engaged despite that slow progress may reflect, in part, the prevalent view in the 1990s that the Fund should be involved in the transition countries if there was a reasonable chance of having a beneficial effect—in contrast to the greater emphasis on selectivity and ownership in more recent years.29 Moreover, given that FYR Macedonia was also receiving financial support from the World Bank, multilateral development banks, and the donor community, there was implied pressure for Fund-supported programs to provide a signal for donors; it is worth noting, however, that in 2002 the Fund resisted donor pressures for an arrangement at a time when implementation prospects were weak, instead agreeing to a staff-monitored program.30

43. The Fund’s program engagement appears to have been instrumental in establishing and maintaining macroeconomic stability in the face of adverse shocks—no small achievement. This role is evident in the initial successful stabilization in the context of the 1995 SBA and more recently, with post-conflict adjustment in the context of the 2003 SBA. The success of stabilization may reflect in part the authorities’ strong commitment—stemming from their desire to avoid a recurrence of the macroeconomic and financial chaos around independence—to a well-defined strategy for achieving stability, and the Fund’s expertise in this area.

44. The lackluster progress in structural reform and program interruptions in the 1997 ESAF and 2000 PRGF/EFF arrangements, however, bring into question whether the Fund’s program engagement continued to play a constructive role once the economy had successfully been stabilized. In some instances, weak implementation reflected unforeseeable developments—notably the 2001 security crisis. But implementation was weak even in relatively calm times prevailing during 1997-98, suggesting that the authorities’ commitment to reforms was lacking. In hindsight, the Fund should have been more cautious in entering a program relationship once stabilization was completed, particularly in light of delays in implementing reforms (under the 1995 SBA and the 1997 ESAF). Conditionality might also have played a larger role in ensuring that the Fund’s financing was provided only if critical measures were taken, as discussed in the next paragraph. Had the Fund moved to a surveillance-only relationship at that time, it would have been important to find a way of providing a convincing signal to donors of whether macroeconomic policies were on track; the Fund’s policy on assessment letters now provides a vehicle for institutional endorsement.31

45. The Fund’s conditionality was not very effective in fomenting needed reforms, although it was reasonably effective in shutting off Fund financing when reforms stalled. Greater reliance on “harder” forms of conditionality—i.e., prior actions and structural PCs rather than structural benchmarks—could have strengthened implementation. However, this would not necessarily have increased ownership and would still have left critical gaps in structural reform in areas outside the Fund core mandate.

46. The sequencing of structural reforms could have been improved. In particular, steps to strengthen corporate governance should have been taken alongside enterprise privatization; while much has been done to strengthen financial system soundness, this should have been given greater priority than other aspects of financial sector development; greater priority should have been given to strengthening the processes for enforcement of regulations and improving governance more generally; and problems in the labor market should have been addressed more vigorously (including by reducing the tax wedge on labor and increasing the flexibility of the labor code). Deficiencies in sequencing did not primarily reflect conceptual problems, however: in each of the instances noted above, the steps that in principle should have been taken earlier were those that were more likely to encounter political resistance from vested interests, and in many cases were in areas in which the Fund is not the lead institution.

47. Given that reforms in areas in which the World Bank took the lead had important implications for the objectives of the ESAF and PRGF/EFF programs, effective Bank-Fund collaboration was vital. But there were significant frictions—which appear to have eased in recent years. This experience underscores the importance of effective upstream collaboration, with a clear designation of lead agency, as prescribed in the 2002 guidelines on Bank-Fund collaboration.

V. Considerations for Future Program Engagement

48. Should the Fund continue its program engagement with FYR Macedonia, and if so, what form should this engagement take? This section draws on the ex post assessment to provide some general considerations on these questions.

49. The goal should be a successful exit from a program relationship with the Fund. Exit should be seen as a sign of a sustainable external position that does not require the Fund’s financial support. It should also be viewed as a sign of maturation in domestic decision-making processes—indicating that the Fund is no longer needed to provide a policy framework. Ideally, exit should take place in a setting in which significant further progress has been made with structural reforms. But the completion of reforms should not be viewed as a necessary condition for exit: if the authorities have established a modus vivendi, based on their domestic political equilibrium, it may be that the Fund’s program engagement is no longer productive. This is a question that should be examined, on the basis of the authorities’ current policy plans and a candid assessment of their commitment to those plans, in considering any possible successor arrangement, including the next one as well as any in the future.

50. In determining whether there should be a financial arrangement, and if so what form such an arrangement should take, an important consideration should be the existence and duration of a balance-of-payments need. Such an assessment should not be based mainly on the ex post assessment but on the forward-looking balance-of-payments analysis by the mission team. It is, however, useful to delineate the broad circumstances under which such a need may arise.

51. Now that stabilization has been largely achieved, an important outstanding macroeconomic issue is the exchange rate regime. While Macedonia’s experience under the existing de facto peg has generally been favorable, this regime is likely to become increasingly difficult to maintain as capital mobility increases.32 It may thus be prudent to review the options at a time when there are not immediate market pressures on the exchange rate. The setting for a change would be made more favorable by successful implementation of the current SBA, against the background of a longer period of reasonable success in maintaining stability.

52. In deciding whether a change in the exchange rate regime should be in the direction of greater flexibility or more formal peg with appropriate supporting policies, the authorities would face some important tradeoffs. Greater flexibility would permit shifts in equilibrium real exchange rates to be accommodated without variations in inflation rates, and would provide greater resilience in the event of market pressures. It is likely, however, that a more flexible exchange rate would need to be a tightly managed float, particularly at the outset, given the configuration of direct and indirect foreign-currency exposures in the banking system. A key question is whether the authorities have sufficient administrative capacity to manage a flexible exchange rate and to implement monetary policy to meet a domestic objective such as an inflation target or a money supply target.33 On the other side, a more formal peg—which could take various specific forms—would require that the authorities be prepared to live within the associated constraints, including a particularly prudent fiscal policy and greater emphasis on structural reforms to promote flexibility. Moreover, a more formal peg, by providing an implicit guarantee of the exchange rate, encourages currency mismatches throughout the economy; if there did come a time at which there was no alternative to adjusting the exchange rate in response to market pressures—for instance, associated with political uncertainties—these mismatches would make such an adjustment much more costly.

53. In the event that the authorities chose to change the exchange rate regime, a Fund arrangement could provide useful support. In whichever direction the exchange rate regime were changed, the Fund’s financing could help boost reserves and strengthen confidence. Moreover, a program relationship could be a suitable framework for intensive advice and consultation, both on the operation of the new regime and on the other policies needed to support it. A SBA—which could perhaps be treated as precautionary—could be a suitable vehicle for this purpose.

54. Another form of program engagement that could be considered would be an extended arrangement to support a comprehensive program of reform. In general, support under the Extended Fund Facility (EFF) is intended for countries with “serious payments imbalances relating to structural maladjustments in production and trade and where price and cost distortions have been widespread”, or those characterized by “slow growth and an inherently weak balance of payments position which prevents pursuit of an active development policy”.34 Arguably, FYR Macedonia has a mix of these two characterizations: its structural problems are associated with slow growth and a weak balance-of-payments position. An extended arrangement would require a comprehensive program to correct the structural imbalances identified. Such a program would need to command strong support from the authorities and in the country more generally, to provide a credible prospect for its implementation. This would require, in particular, clear evidence of significantly greater commitment to reforms than has been evident in the past.

55. If an EFF is to be considered, it should move forward with the unfinished elements of the structural agenda identified above. These include: (a) following through reforms of public administration, notably in the health sector; (b) devising and implementing reforms to reduce distortions in the labor market—some element of which should include reducing the tax wedge on labor and eliminating the distortionary effect of the health insurance system; (c) strengthening governance in general, including through reform of the judiciary; (d) strengthening corporate governance in particular, including by increasing transparency and enforcing protections for the rights of minority shareholders; and (e) continuing to strengthen financial supervision and regulation, with a view to strengthening incentives for domestic savings and channeling them into productive uses. At the same time, the authorities will need to allow room in their fiscal plans for pressures that will emerge, including the fiscal decentralization and hiring of minorities mandated in the PFA as well as the public sector salary reform needed to strengthen the efficiency of the public service.

56. Since many of the reforms indicated are in areas covered by the World Bank rather than the Fund, effective Bank-Fund collaboration would be of the essence. The Bank is planning to support many of the reforms identified in its ongoing operations. Upstream coordination will be essential to reach agreement on structural priorities and ensure that these are adequately covered. Collaboration with the European Union will also become increasingly important as FYR Macedonia sets its sights on possible accession.

57. Successful implementation of another program would depend, in large part, on the authorities’ commitment to reform. The shortcomings of implementation have been discussed above. The experience with implementation of the current program has been more favorable than with previous ones, perhaps signaling greater ownership by the authorities—although it should also be kept in mind that the current program is not particularly ambitious on the structural side. Implementation of many of the structural reforms that are now needed is likely to be politically challenging, in the face of strong vested interests and inter-ethnic differences. There is the potential to strengthen ownership—by promoting the view that structural reforms are needed to deliver the economic growth that will help reconcile competing demands as well as to pave the way to EU accession. But building a durable consensus in favor of reform is a task that still lies ahead.

58. Should neither of the premises discussed for a successor arrangement turn out to be viable, the Fund’s involvement with Macedonia would shift to surveillance and technical assistance.


The report was prepared by a team consisting of Mr. T. Lane (PDR—head), Ms. Dieterich (EUR), Ms. Kahkonen (World Bank), Mr. Pivovarsky (FAD), and Mr. Quintyn (MFD). The report draws on a review of Fund documents and benefited from informal discussions with current and former mission chiefs.


See, for instance, Ahmeti’s Village—The Political Economy of Interethnic Relations in Macedonia, European Stability Initiative, Skopje and Berlin, October 2002.


This is illustrated by the standard stress tests presented in the Staff Report for the 2003 Article IV Consultation, which show debt ratios rising substantially in the event of a major currency depreciation.


The civil service covers only a small fraction of overall public sector employment, though. The reforms in question include the establishment of an independent Agency for Civil Servants responsible for preparing and enforcing civil service management policies and procedures; a competitive process for civil service recruitment; uniform definitions of positions; and unification and decompression (ongoing) of the salary structure.


This wedge combines social contributions (at a rate of 32 percent) and income taxes (at rates of 15 or 18 percent). The comparable wedge in Serbia was recently 32 percent, in Croatia 45 percent, and in Bosnia-Herzegovina 50 percent in one republic and 67 percent in the others. (In the latter country, Fund staff have advised the authorities to reduce the tax wedge.)


The EBRD Transition Score shown in Figure 2 consists of an average of EBRD index scores across various measures of transition, including liberalization, privatization, enterprise reform, infrastructure, financial institutions, and legal environment.


By 2003, the privatization of most enterprises had been completed, but the fate of a handful of loss-making enterprises remained to be solved. To date, privatization of public utilities, notably the electricity company, has not yet been undertaken.


Employment concerns has been the dominant source of delays in dealing with large loss-making firms. Those that have been sold to private investors over the past few years often involved commitments by investors to maintain certain levels of employment in exchange for preferential tax treatments and special utility fees, clearly a second best option.


For evidence on the performance of privatized enterprises, see for instance, J. Zalduendo, Enterprise Restructuring and Transition: Evidence from the Former Yugoslav Republic of Macedonia, IMF Working Paper WP/03/136, 2003. See also R. Glennerster, Is Privatization Effective in an Environment of Weak Corporate Governance? The Case of the Former Yugoslav Republic of Macedonia, IMF Working Paper (forthcoming).


Insider privatization also occurred in other former Yugoslav republics, and in many cases similar issues arose. For instance, weak corporate governance has been an important concern in Bosnia-Herzegovina.


Typically banks have maintained long positions in foreign currency through foreign currency-denominated and -indexed lending, but this has exposed them to exchange rate-related credit risk to the extent that their borrowers are unhedged.


See, for instance, Macedonia’s Public Secret—How Corruption Drags the Country Down, International Crisis Group Balkans Report No. 133, Skopje/Brussels, 14 August 2002.


These measures include widening the coverage of the Treasury Single Account, ex ante controls over major spending items, and procurement regulations requiring ex ante Ministry of Finance approval of contracts.


See Robert Ackland, Poverty and Social Transfers in Macedonia: Results from the 2000 Household Budget Survey (SSORM and MLSP, Skopje 2002).


Improvements in these areas have been a priority for the World Bank, which has and continues to support major projects in education and social protection. There has been some progress in these areas but significant challenges remain: the health insurance fund is highly wasteful, the educational system poor, and social safety nets poorly-targeted.


The Independent Evaluation Office report on Prolonged Use of Fund Resources stresses the importance of this signaling role as a factor contributing to prolonged use in other countries, sometimes leading to continued program engagement that is not warranted on the basis of a country’s policies and financing needs.


See, for instance, A. Musso and S. Phillips, Comparing Projections and Outcomes of IMF-Supported Programs, IMF Staff Papers, 49, no. 1 (2002), 22-48.


This experience is in contrast with the CIS7 countries where unsustainable fiscal policies and borrowing were pursued while the Fund’s support was provided on the basis of overoptimistic growth projections. See Assessing Sustainability, May 2002, Box 2.


The continuing appropriateness of the exchange rate regime was examined repeatedly in staff’s discussions with the authorities—including in the context of the 2003 Article IV consultation.


These changes may include the Balassa-Samuelson related real appreciation that is to be expected in the course of the transition; they may also include other changes, in either direction, resulting from changes in the terms of trade and other factors.


This step was taken by the authorities outside the program context, more quickly than Fund staff advised at the time (and more quickly than required under the association agreement with the EU). Related issues are discussed in R. B. Johnston, Sequencing Capital Account Liberalizations and Financial Sector Reforms, International Economic Policy Review Volume 1 (1999). The 2003 FSAP report suggests some specific steps to measure and control foreign currency exposures, including systematic credit risk associated with foreign currency-indexed lending; a number of these steps have been implemented in connection with the 2003-04 SBA.


See for instance Transition—The First Ten Years (World Bank, 2001).


See R. Glennerster, Is Privatization Effective in an Environment of Weak Corporate Governance? The Case of the Former Yugoslav Republic of Macedonia, IMF Working Paper (forthcoming). This paper also documents some of the factors that weakened corporate governance.


From the onset of the transition the banking system, and therefore financial intermediation had to overcome another handicap: the freezing of the foreign exchange deposits held in the National Bank of Yugoslavia abruptly and deeply undermined the confidence of the public at large in the banks. As a result, FYR Macedonia still has one of the shallowest banking systems among the transition economies.


Even then, recorded unemployment may remain high: data on long-term unemployment suggest that there may be a large group whose skills are obsolescent and have not been employed for more than a decade and thus may not be employable at any reasonable wage.


For example, weak enforcement results in a narrow base for taxes on employment, thus hindering efforts to lower tax rates; it also implies a distortionary differential tax on labor in sectors in which there is greater scope for evasion.


Moreover, in the case of program interruptions, data on implementation of specific conditions are incomplete, since their delayed observance or non-observance is not systematically recorded in staff reports or in the MONA database.


Specifically, only 6 out of 10 SBs established under the 1995 SBA were met (the remainder being either delayed/ongoing or not met); in the 1997 ESAF, only 6 out of 11 SBs were met. The pattern of better implementation of “harder” conditionality (PCs and PAs) than of SBs is typical, though: given the nature of prior actions—i.e. the fact that they must be implemented before program approval—implementation rates are generally close to 100 percent, while failure to achieve structural PCs is more likely to result in a program interruption.


The latter approach is associated, in particular, with the 2002 Conditionality Guidelines and the Fund’s response to the 2002 Independent Evaluation Office study of Prolonged Use of Fund Resources.


The Fund did not agree to a financial arrangement on the grounds that implementation was unlikely in a pre-election setting. Weak implementation of the SMP confirms this judgment.


Staff-monitored programs were previously available for signaling purposes, with the drawback that they do not carry the endorsement of the Board; the Fund’s policy on SMPs has been changed to eliminate their use for signaling.


See, for instance, A. Burbula and I. Otker-Robe, Are Pegged and Intermediate Exchange-Rate Regimes More Crisis-Prone?, IMF Working Paper WP/03/223, 2003.


The authorities’ goal of eventual EU accession and participation in monetary union could cut both ways: to the extent that it may require an intervening period of participation in ERM2, it would put a premium on exchange rate stability; but an exchange rate peg could potentially undermine the country’s ability to satisfy a convergence criterion for inflation, to the extent that there is a need for adjustment in real exchange rates.


See International Monetary Fund, Selected Decisions (27th Issue, December 31, 2002), page 253.

Former Yugoslav Republic of Macedonia: Second Review Under the Stand-By Arrangement and Ex Post Assessment of Performance Under Fund-Supported Programs
Author: International Monetary Fund