Front Matter

Front Matter Page

© 2005 International Monetary Fund

September 2005

IMF Country Report No. 05/339

Former Yugoslav Republic of Macedonia: Request for Stand-By Arrangement and Extension of Repurchase Expectations—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the former Yugoslav Republic of Macedonia

In the context of the request for Stand-By Arrangement and extension of repurchase expectations with the former Yugoslav Republic of Macedonia, the following documents have been released and are included in this package:

  • the staff report for the Request for Stand-By Arrangement and Extension of Repurchase Expectations, prepared by a staff team of the IMF, following discussions that ended on May 24, 2005, with the officials of the former Yugoslav Republic of Macedonia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on August 17, 2005. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a staff statement of August 31, 2005 updating information on recent economic developments.

  • a Press Release summarizing the views of the Executive Board as expressed during its August 31, 2005 discussion of the staff report.

  • a statement by the Executive Director for the former Yugoslav Republic of Macedonia.

The documents listed below have been or will be separately released.

  • Letter of Intent sent to the IMF by the authorities of the former Yugoslav Republic of Macedonia*

  • Memorandum of Economic and Financial Policies by the authorities by the former Yugoslav Republic of Macedonia*

  • Technical Memorandum of Understanding*

  • *May also be included in the staff report

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to

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Front Matter Page



Request for Stand-By Arrangement and Extension of Repurchase Expectations

Prepared by the European Department

Approved by Susan Schadler and Donal Donovan

August 17, 2005

Stand-By Arrangement. To support their three year economic program, the FYR Macedonian authorities are requesting a three-year SDR 51.7 million Stand-By Arrangement (75 percent of quota). An initial purchase of SDR 10.5 million becomes available upon approval of this request. The authorities do not plan to make subsequent purchases under the arrangement. Total access under the previous SBA was SDR 20 million, all of which was purchased.

Extension of Repurchase Expectations: To smooth the debt service profile, the authorities are requesting that the repurchase expectations for SDR 5.4 million falling due before end-September 2006 be extended to the obligations basis.

Discussions were held in Skopje during October 12-26, 2004, February 9-24, 2005, and May 10-24, 2005. The staff team held discussions with President Crvenkovski, Prime Minister Bučkovski, Finance Minister Popovski, Ministers of Labor Manasievski and Jakimovski; Minister of Economy Besimi, Minister of Justice Mladenovska, Minister of Health Panovski, National Bank of the Republic of Macedonia Governor Gošev.

Staff. The team comprised Franek Rozwadowski (head), Christine Dieterich, Heikki Hatanpaa, Elina Ribakova and Anita Tuladhar (all EUR), Karl Driessen (MFD), Boileau Loko and Eva Gutierrez (both PDR), Nadia Rendak (LEG), John Brondolo (FAD) and Kevin Ross (Resident Representative).


  • Executive Summary

  • I. Introduction

  • II. The Political and Economic Background

  • III. The Program

    • A. Macroeconomic Framework

    • B. Fiscal Policy

    • C. Monetary and Exchange Rate Policies

    • D. Structural Reforms

  • IV. Program Modalities

    • A. Type of Program and Proposed Access

    • B. Program Conditionality and Monitoring

    • C. Capacity to Repay the Fund and Program Risks

  • V. Staff Appraisal

  • Text Tables

  • 1. Summary of Economic Indicators, 2000-05

  • 2. Contract Enforcement Efficiency, 2004

  • 3. Procedures for Starting a Business, 2004

  • Text Charts

  • 1. Trend in Exports, 1998-2005

  • 2. Tax Revenues as a Percent of GDP

  • 3. Amortization, Budget Support and Net Issuance of T-Bills

  • 4. Ratio Broad Money to Imports

  • 5. Macroeconomic Framework, 1999-2008

  • 6. Central Government Balance

  • 7. Public Debt

  • 8. Composition of Tax Revenue, 2004

  • Text Boxes

  • 1. External Competitiveness Indicators

  • 2. Credit Growth

  • Figures

  • 1. Cross-Country Comparison of Selected Economic Indicators

  • 2. Selected Economic Indicators, 2000-05

  • 3. Monetary and Financial Indicators, 2000-05

  • 4. External Sector Development and Competitiveness, 2000-05

  • 5. Recent Developments and Medium-Term Projections, 2000-09

  • Tables

  • 1. Selected Economic Indicator, 2000-08

  • 2. Central Government Operations, 2000-08

  • 3. The Central Bank Accounts, 2002-06

  • 4. Monetary Survey, 2002-06

  • 5. Medium-Term Balance of Payments, 2000-09

  • 6. Macroeconomic Framework, 1999-2008

  • 7. Schedule of Purchases Under the Stand-By Arrangement

  • 8. External Financing Requirements and Sources, 2003-08

  • 9. Indicators of Capacity to Repay the Fund, 2003-10

  • 10. Projected Payments to the Fund as of April 30, 2005 Under Obligated Repurchase Schedule

  • 11. Indicators of Financial and External Vulnerability, 2000-05

  • Appendices

  • I. Letter of Intent

    • Attachment 1. Memorandum on Economic and Financial Policies

      • Table 1. Quantitative Performance Criteria and Indicative Targets for 2005 and 2006

      • Table 2. Structural Conditionality, August 2005 to June 2006

      • Table 3. Summary and Timetable for Potential Structural Measures

    • Attachment 2. Technical Memorandum of Understanding

      • Table 1. Net International Reserves of the NBRM

      • Table 2. Balance of Payments Finance Assumptions, from end-December 2004 to end-December 2006

  • II. Debt Sustainability Analysis

    • Table 1. Fiscal Debt Sustainability Framework, 2000-10

    • Table 2. External Debt Sustainability Framework, 2000-10

  • III. Financial Position in the Fund

  • IV. Statistical Issues

    • Table of Common Indicators Required for Surveillance

  • V. IMF-World Bank Relations

  • VI. Selected Social and Demographic Indicators

  • VII. Millennium Development Goals



Debt Sustainability Analysis


European Agency for Reconstruction


Ex Post Assessment


European Bank for Reconstruction and Development


European Union


Framework Agreement


Fiscal Affairs Department


Foreign Direct Investment


Financial Sector Assessment Program


Gross Domestic Product


Health Insurance Fund


Law on Labor Relations


Memorandum on Economic and Financial Policies


Monetary and Financial Department


Ministry of Finance


Ministry of Health


North Atlantic Treaty Organization


National Bank of the Republic of Macedonia


Pension and Disability Fund


Public Revenue Office


Public Health Institution


Stand-By Arrangement


U.S. Agency for International Development


World Trade Organization


FYR Macedonia’s impressive record of macroeconomic stabilization has been marred by a lack of comparable progress in structural reforms. Fiscal discipline has kept the debt ratio low while the de facto exchange rate peg has brought inflation close to zero. However, poorly functioning institutions—restrictive labor market regulations, inefficient state institutions and dysfunctional courts—have undermined business activity directly and kept per capita FDI low, even by regional standards. The resulting weak competitiveness has led to disappointing growth, high unemployment, and a persistent current account deficit. The restrictive business climate has also created a large informal sector. A currency devaluation in 1997 did little to improve performance, underlining that the problem was incomplete structural reforms.

Against this background the authorities have asked the Fund to support an ambitious program which includes structural reforms that address the root causes of FYR Macedonia’s weak performance. The main structural reforms affecting the business climate are a new, more flexible Law on Labor Relations and an overhaul of the judicial system. In addition, banks will be made more resilient by strengthening the fit and proper rules and improving the supervision of foreign exchange exposures.

On the macroeconomic front, the near-term aims of the program are to strengthen the exchange rate peg by increasing foreign exchange reserves and to manage the transition from official budget financing (which is drying up) to market-based financing (which is still nascent). The program relies on proceeds from two large privatizations to build up reserve cover in the first two years and on sound macroeconomic policies to maintain reserve cover thereafter. The government’s capacity to raise budget finance on the market will be increased by making the government debt market deeper and more liquid, keeping debt under a tight rein in order to sustain market confidence, and making an initial, cautious, eurobond issue.

The program also aims to secure medium term fiscal sustainability in the face of pressures on both expenditure and revenue. A reform of the Health Insurance Fund will address one source of risk by improving governance in a sector with large outlays; tax administration reform will broaden the base for payroll taxes; and expenditure control will be improved. A ceiling on wages will help ensure that the costs of key reforms (including Framework Agreement-related reforms) are kept within affordable limits. If successful, the fiscal reforms will create room, later in the program, to cut payroll taxes, further improving conditions for investment and employment.

The program, which will become precautionary after the first purchase, is expected to create the basis for an orderly exit from IMF support.

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August 31, 2005

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Press Release No. 05/196


September 1, 2005

International Monetary Fund

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August 31, 2005