Former Yugoslav Republic of Macedonia: Staff Report for the 2010 Article IV Consultation and Request for an Arrangement Under the Precautionary Credit Line

In this study, economic recovery and growth of Macedonia are discussed. In the financial sector, nonperforming loans (NPLs) rose, and bank profitability declined as a result of the crisis. Executive Directors agreed with the thrust of the staff appraisal. Directors were encouraged by the overall healthy condition of the financial system. The need to accelerate structural reforms and strengthen public infrastructure to raise productivity and help reduce high unemployment is encouraged. Macedonia met the Precautionary Credit Line (PCL) qualification requirements.


In this study, economic recovery and growth of Macedonia are discussed. In the financial sector, nonperforming loans (NPLs) rose, and bank profitability declined as a result of the crisis. Executive Directors agreed with the thrust of the staff appraisal. Directors were encouraged by the overall healthy condition of the financial system. The need to accelerate structural reforms and strengthen public infrastructure to raise productivity and help reduce high unemployment is encouraged. Macedonia met the Precautionary Credit Line (PCL) qualification requirements.

Annex I—Fund Relations (As of November 30, 2010)

Missions. Article IV mission, Skopje, November 4-17, 2010. Concluding statement is available at:

Staff team. Wes McGrew (head), Nicolas Arregui (EUR), Gabriela Dobrescu (FAD), Ran Bi (SPR), and Alexander Tieman (Resident Representative).

Discussions. The staff team met Deputy Prime Minister and Minister of Finance Stavreski, National Bank of the Republic of Macedonia Governor Gošev, Deputy Prime Minister Peshevski, other senior officials, and representatives of the banking, business, political and international communities.

Publication. The Macedonian authorities have indicated that they agree with publication of this staff report.

I. Membership Status: Joined 12/14/92; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Latest Financial Arrangements:

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formerly PRGF

VI. Projected Payments to the Fund (Expectations Basis) (SDR million; based on existing use of resources and present holdings of SDRs):

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VIII. Exchange Arrangement:

The currency of the FYR Macedonia is the denar. The FYR Macedonia maintains a managed floating exchange rate system with a de facto stabilized arrangement against the Euro. The exchange rate system is free of restrictions on the making of payments and transfers for current international transactions. Households can transact through commercial banks or through foreign exchange bureaus that act as agents of banks; enterprises can transact through the banking system. The reserve requirement on foreign currency deposits is set at 13 percent, while that on FX-indexed denar deposits are set at 20 percent.

At end-November 2010, the official exchange rate was 46.8 denars per U.S. dollar and 61.5 denars per euro. The FYR Macedonia has accepted the obligations of Article VIII, Sections 2, 3, and 4 with effect from June 19, 1998.

IX. Article IV Consultations:

The first consultation with the FYR Macedonia was concluded in August 1993. The last consultation was concluded on December 11, 2009 (SM/09/278). The FYR Macedonia is on the standard 12-month consultation cycle.

X. Technical Assistance (since 2005):

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XI. FSAP Participation and ROSCs (since 2003)

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XII. Resident Representative

The Fund has had a resident representative in Skopje since 1995. Mr. Alexander Tieman has held this position since August 2009.

Annex II—Statistical Issues As of December 1, 2010

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FYR Macedonia: Table of Common Indicators Required for Surveillance

(as of December 1, 2010)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Weighted interest rates on loans and deposits in domestic banks. Separately, data is submitted on the rates on central bank bills (policy rate) and treasury bills, notes, and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Currency and maturity composition is reported only on request.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

Reflects the assessment provided in the data ROSC or the Substantive Update (published on September 29, 2004, and based on the findings of the mission that took place during February 18 - March 3, 2004) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 8, except referring to international standards concerning source data, assessment and validation of source data,, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

Annex III—Coordination of IMF and World Bank Work Plans

1. IMF and World Bank country teams for FYR Macedonia agreed that FYR Macedonia has weathered the global crisis relatively well but continued to face challenges that include below-potential growth and high unemployment. Low growth has resulted in weak tax revenues that have given rise to budget financing pressures. Further, while the banking sector remained broadly in good shape, it was exposed to risks of prolonged slow growth in Macedonia through a deterioration in the quality of its loan portfolio. Balance of payments pressures have eased significantly as the current account deficit has fallen and official foreign exchange reserves have recouped their losses. Nonetheless, the exchange rate peg to the Euro, while beneficial for stability, will continue to constrain economic policies. Against this background Macedonia’s main macroeconomic challenges are to avoid procyclical fiscal policies and maintain fiscal sustainability while securing adequate budget financing; pursue monetary and fiscal policies that are supportive both of the exchange rate regime and of economic growth; and safeguard the stability of the financial system, including through continued sound supervision and regulation as well as contingency planning.

2. Based on this shared assessment, the teams identified six areas of structural reform as macrocritical in light of their importance for stimulating private sector activity, and ensuring fiscal and external sustainability and financial sector stability.

  • Public expenditure management and public finance. Improving budget planning and the structure of public spending are key areas for improvement. Accurate revenue and expenditure forecasts are needed to ensure realistic budgets and avoid supplementary budgets that result from revenue underperformance or underestimation of spending. Moreover, further expanding the medium-term elements of the fiscal framework would help to anchor fiscal policy around the goal of public debt sustainability. The domestic public debt market needs to be developed over the medium term to provide a domestic source of fiscal financing and reduce reliance on external funding.

  • Tax administration. Continued reforms in this area will help to improve compliance and reduce informality, contributing to a broader and more stable tax base that allows lower tax rates and adequate fiscal financing. Macedonia has already achieved major gains by unifying the collection of social contributions (pension, health and unemployment) and integrating them with personal income tax collection, resulting in significant improvement in compliance.

  • Social Sector spending. Pension reform. Considerable reforms have been implemented to put the system on a sustainable financial basis. Still, with the recent reduction in contribution rates and changes to the pension indexation formula, the budgetary transfers made to the Pension and Disability Insurance Fund (PDIF) increased. Social safety net. The social safety net is complex, with a large number of overlapping programs that are not well-targeted and fail to reach some of most vulnerable elements in society. Efforts are needed to ensure pressures to cut spending do not weaken the social safety net while increasing share of transfer reach the poor. Health Sector. Spending pressures recently re-emerged in the health sector as contribution rate were lowered while higher wages increased costs.

  • Improving the business environments. The business climate improved in Macedonia in recent years, though areas where further efforts can pay off include streamlining administrative procedures, improving contract enforcement, and facilitating foreign trade, particularly by reducing tariffs and simplifying procedures and costs. Advances are needed in safeguarding property rights and the rule of law, facilitating competition through improved market entry and exit, and improving access to financing. Though the burden of excessive regulations has been reduced it still impedes economic activity in certain areas and there is some evidence that policy uncertainty has increased.

  • Financial sector. Stronger financial sector supervision and contingency planning will help to ensure the authorities are able to monitor the health of the system carefully and respond appropriately to problems that emerge. This includes powers of the banking regulator to impose fit and proper requirements on bank owners and to intervene in banks that are not viable. Implementation in practice of the recently concluded MoU on crisis coordination and cooperation between the NBRM, the Finance Ministry (MoF), and other agencies, is also important to improve supervision as well as identify and provide a quick response to threats.

  • Electricity sector. It will be important over time to revise the tariff structure to better reflect the costs of service delivery and comply with the country’s obligations under the Energy Community Treaty. This will help eliminate hidden and cross-subsidies that are poorly targeted, encourage inefficient patterns of consumption, damage incentives for investment, and impose fiscal or quasi-fiscal costs. New investment in generation capacity is also needed in light of inadequate domestic supplies. In view of financial and environmental considerations, end-use energy efficiency improvement, use of PPPs and renewable energy sources should be promoted. Reforms to create a more transparent regulatory framework will be helpful in this regard.

3. The teams agreed on the following division of labor.

  • The Bank will begin the preparation of the new Country Economic Memorandum which should help identify challenges to improved competitiveness and poverty reduction, by integrating sustainability and green growth into the main objectives of stronger growth, job creation and attracting FDI and EU accession.

  • The Fund will retain the lead in tax administration reform. It has a full-time resident advisor in place (funded by the Dutch government) as well as a full program of technical assistance missions. Priorities for the coming year include reviewing the progress in modernizing revenue administration, addressing compliance problems that have emerged with the economic slowdown, increasing training for Public Revenue Office staff, and coordinating technical assistance with other donors.

  • The Bank will support the Government in undertaking an analysis of the recent changes to the pension system and their implications for its financial sustainability and will work with the authorities to make needed adjustments to preserve the system’s sustainability and prevent a drain on general tax revenues.

  • Social safety net. The Bank will continue to advise the government on measures to consolidate various programs and improve targeting through its Social Protection Implementation Loan (SPIL) and Conditional Cash Transfers (CCT) operations and the Programmatic Poverty Assessment analytical work. Future priorities include introduction of a registry of programs and beneficiaries, initiating a conditional cash transfer system to ensure compliance with requirements for mandatory secondary school enrollment, consolidation of benefits, etc. Once implemented, these activities should result in better administration and targeting of social programs.

  • Both the Fund and the Bank will encourage the authorities to implement realistic, predictable, and transparent budget procedures. The Fund will also encourage the authorities to anchor fiscal policies in a credible medium-term fiscal framework and is prepared to offer technical assistance for that purpose. The Bank will provide support in improving the public procurement process.

  • A considerable part of the World Bank’s portfolio is providing support to improve the business environment. Infrastructure improvements are supported under the Regional and Local Roads Project, the Railways Project, Municipal Services Improvement Project and the Second Trade and Transport Facilitation Project. At the same time, the Business Environment Reform Project, the Real Estate Cadastre and Registration Project, the Legal and Judicial Implementation Project and the Agriculture Strengthening and Accession Project support development and reform of institutions to support growth. The ongoing Education Modernization Project and a planned Technical Assistance for Higher Education aim to assist the authorities in building skills. An innovative regional Disaster Management operation planned for 2011 will provide financial protection from losses caused by climate change and geo-hazards. Going further, the authorities have requested technical assistance from the Doing Business Reform Advisory on selected elements of the business environment (construction permits, trading across borders etc.).

  • The Fund and Bank have both been involved in financial sector reform, including through the November 2008 joint FSAA update as well as the extensive dialogue during the preparation of the 2009 World Bank First Development Policy Loan (DPL1). The Fund has also provided technical assistance in the area of contingency planning and will provide further assistance in this area as well as in macro modeling and stress testing bank balance sheets. The Bank, through the DPL2 and the Balkan Financial Sector Technical Assistance Facility will: i) (with input from IMF staff) assist the authorities in reviewing the bank resolution framework and the operational capacity of the Deposit Insurance Fund and ii) provide advice on the operational rules for the Financial Stability Committee and the design of a solvency test in case of Lender of Last Resort request.

  • The Bank has the lead on electricity sector reform. It will continue to encourage the adoption over time of realistic prices of electricity and elimination of subsidized rates. As part of the dialogue, the Bank provided comments on sections of the Energy Sector Strategy and is advising the government on promoting use of alternative ways of financing energy sector investments (PPPs) as well as diversifying energy sources (use of gas, renewables, wind etc.). The Bank is also providing assistance to strengthen the Energy Regulatory Commission. The Bank’s Energy Community of South East Europe Adaptable Programmatic Loan 3 (ECSEE APL3), the follow-up financing of this project planned for 2011 and the hydro-power project planned for 2011, support improvements of interconnectivity and the transmission grid and reliability of production. Finally, the recently restructured Global Environment Facility project will promote energy efficiency in the public sector.

Appendix 1. Macedonia: Bank and Fund Planned Activities in Macrocritical Structural Reform Areas, June 2010-December 2011

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