Former Yugoslav Republic of Macedonia
Third Review Under the Stand: By Arrangement and Request for Rephasing of Access: Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement

Macedonia’s economic performance under the program has remained strong, reflecting the authorities’ commitment to build on the progress made and to advance the reform agenda. The average inflation rate was 2.3 percent, although it started to pick up recently owing to a relatively high increase in food prices, reflecting the global trend. On the expenditure side, the authorities will improve the quality of spending and redirect public spending to more productive uses, such as health, education, and infrastructure.

Abstract

Macedonia’s economic performance under the program has remained strong, reflecting the authorities’ commitment to build on the progress made and to advance the reform agenda. The average inflation rate was 2.3 percent, although it started to pick up recently owing to a relatively high increase in food prices, reflecting the global trend. On the expenditure side, the authorities will improve the quality of spending and redirect public spending to more productive uses, such as health, education, and infrastructure.

I. Recent Developments

1. Economic recovery is in its sixth year (Figure 1, Tables 1-2, ¶3):1

  • Output growth for 2006 has been revised upwards to almost 4 percent (the true growth rate might have been even higher). For 2007, 5 percent growth is estimated, closer to the regional average. Exports are increasing strongly, led by iron and steel, and food products. Rapid credit growth is boosting domestic demand, employment and real wages, leading to higher imports. But the official unemployment rate (arguably overstated) remains high, at 35 percent.

  • Inflation has increased to 6 percent (its highest in five years). So far, this is due to higher food prices (more than one-third of the basket), and so does not seem to represent a permanent upward shift in the inflation trend.

Figure 1.
Figure 1.

FYR Macedonia: Real Sector Indicators, 2002-07

Citation: IMF Staff Country Reports 2008, 107; 10.5089/9781451826142.002.A001

Sources: State Statistical Office; NBRM; and IMF staff estimates.
Table 1.

FYR Macedonia: Selected Economic Indicators, 2004–08

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

Movements in 2005 and 2006 reflect the issuance of a Euro 150 million Eurobond and repayment of the London club debt. Net debt is defined as gross debt minus NBRM deposits of the central government.

Debt service due including IMF as percent of exports of goods and services. Excludes rollover of trade credits.

Table 2.

FYR Macedonia: Macroeconomic Framework, 2005-12

(percentage change, unless otherwise indicated)

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Sources: NBRM, SSO, MOF, and IMF staff projections.

Current account deficit.

Gross central government debt minus central government deposits at the NBRM.

uA01fig01

Macedonia: Consumer Price Inflation

(year-on-year change)

Citation: IMF Staff Country Reports 2008, 107; 10.5089/9781451826142.002.A001

uA01fig02

Consumer Price Inflation: Food

(year-on-year change)

Citation: IMF Staff Country Reports 2008, 107; 10.5089/9781451826142.002.A001

Sources: Eurostat; and national authorities.

2. The external position has been comfortable (Figures 2-3, Table 3). Though the trade deficit has steadied at around 20 percent of GDP, this continues to be offset by foreign currency sales to exchange bureaus (recorded as private transfers), so that the current account deficit is only 2 percent of GDP. Increased portfolio and foreign direct investment have been used to repay external debt (€200 million to the Paris Club, World Bank, IMF and EIB) and to increase international reserves to €1.5 billion—higher than the program projection, but now slightly below 4 months of imports, given the rise in imports. With the real exchange rate depreciating slightly, competitiveness issues remain more structural than price-related (as described in the last Article IV (Country Report 06/344)).

Figure 2.
Figure 2.

FYR Macedonia: External Sector Indicators, 2002-07

Citation: IMF Staff Country Reports 2008, 107; 10.5089/9781451826142.002.A001

Sources: State Statistical Office; and NBRM.
Figure 3.
Figure 3.

FYR Macedonia: Exchange Rate Indicators, 2000-07

(2000q1 = 100) 1/

Citation: IMF Staff Country Reports 2008, 107; 10.5089/9781451826142.002.A001

Sources: Eurostat; IFS; and IMF staff calculations.1/ Trade weights based on 1999-2001 data for exports of goods. Partner countries comprise: Austria, Bulgaria, Croatia, France, Germany, Greece, Italy, Netherlands, Russia, Serbia, Slovenia, Switzerland, Turkey, United Kingdom, and United States.
Table 3.

FYR Macedonia: Medium-Term Balance of Payments, 2006-12

(In millions of Euros)

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

For 2008 and beyond, the figures include accrued interest on reserves.

2007 includes payment of settlement of Okta dispute.

Amortization payments include prepayment of London Club debt in 2006 and Paris Club debt in 2007.

Private sector arrears.

Debt service due including IMF as percent of exports of goods and services. Excludes rollover of trade credits.

Including IMF.

uA01fig03

Exports by Sector

(Millions of euro)

Citation: IMF Staff Country Reports 2008, 107; 10.5089/9781451826142.002.A001

uA01fig04

Imports by Sector

(Millions of euro)

Citation: IMF Staff Country Reports 2008, 107; 10.5089/9781451826142.002.A001

Sources: SSO; NBRM and IMF staff estimates.

3. Monetary policy has facilitated the recovery (Figures 4-5, Tables 4-5). During 2007, the de facto exchange rate peg to the euro has not faced pressure. The central bank has lowered interest rates below 5 percent, low by historical standards, and only slightly above ECB rates. Interest rate spreads remain high (at around 5 percent), but have fallen due to increased competition. Broad money growth is 30 percent, with the denar deposit share increasing slightly. Credit growth is even higher (40 percent), but from a low base as private sector credit as a share of GDP is low for the region. Financial indicators remain sound, with the share of non-performing loans falling and bank profitability rising (Figure 6, Table 6). Stock market volatility has increased, but with little macroeconomic impact.

Figure 4.
Figure 4.

FYR Macedonia: Financial Market Developments, 2006-07

Citation: IMF Staff Country Reports 2008, 107; 10.5089/9781451826142.002.A001

Sources: NBRM; and IMF staff estimates.
Figure 5.
Figure 5.

FYR Macedonia: Money and Credit Developments, 2002-07

Citation: IMF Staff Country Reports 2008, 107; 10.5089/9781451826142.002.A001

Sources: NBRM; and IMF staff estimates.1/ Includes foreign currency indexed lending (approximately one third of total denar credit).
Table 4.

FYR Macedonia: Central Bank Accounts, 2005–08

(End-period; in billions of denars unless otherwise indicated)

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Sources: NBRM, and IMF staff projections.

Measured on a rolling basis as a sum of nominal GDP of four preceding quarters including the last quarter of each period

Table 5.

FYR Macedonia: Monetary Survey, 2005–08

(End-period; in billions of denars unless otherwise indicated)

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Sources: NBRM, and IMF staff projections.

Includes foreign currency indexed.

Includes municipal and public enterprise accounts.

Forex linked assets include banks’ NFA, forex loans (including forex indexed), and forex reserves at the NBRM. Forex linked liabilities include forex denominated and forex indexed deposits.

Measured on a rolling basis as a sum of nominal GDP of four preceding quarters including the last quarter of each period.

Figure 6.
Figure 6.

FYR Macedonia: Banking Sector Developments, 2003-07

Citation: IMF Staff Country Reports 2008, 107; 10.5089/9781451826142.002.A001

Sources: NBRM; and Fund staff estimates.1/ Total assets include off-balance sheet items.2/ Adjusted for unallocated provisions for potential losses.
Table 6.

FYR Macedonia: Financial Soundness Indicators, 2002-07

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Sources: NBRM’s Banking Regulations Department; and Fund staff estimates.

Until 2005, total loans include deposits with banks. From end-2006 onwards, total loans include interbank loans.

The ratio differs from that used in the monetary survey due to different definitions.

Includes only loans to nonfinancial sector.

Adjusted for unallocated provisions for potential loan losses.

Highly liquid assets are defined as cash and balances with the NBRM, NBRM bills, and accounts with foreign banks. Large drop in 2006 compared to 2005 is due to change in methodology.

Short-term liabilities are defined as deposits and other liabilities with a maturity of one year or less. Large drop in 2006 compared to 2005 is due to change in methodology.

The increase in 2006 is due to loans channeled through NBRM, not NBRM credit to banks.

4. The central government deficit target for 2007 was easily met (Table 7, ¶8). Preliminary data show that the central government ran a 0.6 percent of GDP surplus, well above the 1 percent deficit target for the year. Revenues ended the year 3 percent of GDP above program, driven by stronger VAT and CIT collections (due to improved tax administration, elimination of the double deduction for investment, and higher than expected profits in 2006). The impact on the deficit was partially offset by higher spending (especially in the fourth quarter), through the passage of two supplementary budgets.

Table 7.

FYR Macedonia: Central Government Operations, 2006-08

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Source: MOF and IMF Staff estimates.

Outturn of the first 9 months of 2007.

Outturn of the first 9 months of 2007 of the four largest public enterprises.

Supplementary budget approved in September 2007.

Table 7.

FYR Macedonia: Central Government Operations, 2006-08 (continued)

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Source: MOF and IMF Staff estimates.

Outturn of the first 9 months of 2007.

Outturn of the first 9 months of 2007 of the four largest public enterprises.

Supplementary budget approved in September 2007.