Statement by Menno Snel, Executive Director for the Former Yugoslav Republic of Macedonia and Metodij Hadzi-Vaskov, Advisor to Executive Director, January 29, 2014

The Macedonian authorities would like to thank both IMF mission teams for the constructive discussions and the helpful analysis and recommendations included in the staff reports. They broadly agree with staff’s assessment and main policy recommendations. Following a well-established practice, the authorities have continued to implement policies in line with Fund advice, particularly in re-establishing the medium-term fiscal strategy, further developing the domestic debt market, and lengthening domestic debt maturities. As highlighted in staff’s assessment, Macedonia’s capacity to service external debt obligations, including to the Fund, remains adequate. The Macedonian authorities remain fully committed to preserving Macedonia’s sound economic fundamentals and track record of prudent economic policies, maintaining macroeconomic and financial stability, and further enhancing competitiveness through the continued implementation of structural reforms and key infrastructure investments.

Abstract

The Macedonian authorities would like to thank both IMF mission teams for the constructive discussions and the helpful analysis and recommendations included in the staff reports. They broadly agree with staff’s assessment and main policy recommendations. Following a well-established practice, the authorities have continued to implement policies in line with Fund advice, particularly in re-establishing the medium-term fiscal strategy, further developing the domestic debt market, and lengthening domestic debt maturities. As highlighted in staff’s assessment, Macedonia’s capacity to service external debt obligations, including to the Fund, remains adequate. The Macedonian authorities remain fully committed to preserving Macedonia’s sound economic fundamentals and track record of prudent economic policies, maintaining macroeconomic and financial stability, and further enhancing competitiveness through the continued implementation of structural reforms and key infrastructure investments.

The Macedonian authorities would like to thank both IMF mission teams for the constructive discussions and the helpful analysis and recommendations included in the staff reports. They broadly agree with staff’s assessment and main policy recommendations. Following a well-established practice, the authorities have continued to implement policies in line with Fund advice, particularly in re-establishing the medium-term fiscal strategy, further developing the domestic debt market, and lengthening domestic debt maturities. As highlighted in staff’s assessment, Macedonia’s capacity to service external debt obligations, including to the Fund, remains adequate. The Macedonian authorities remain fully committed to preserving Macedonia’s sound economic fundamentals and track record of prudent economic policies, maintaining macroeconomic and financial stability, and further enhancing competitiveness through the continued implementation of structural reforms and key infrastructure investments.

Economic developments

Economic growth in 2013 has been stronger and more robust than expected. The latest figures suggest that real GDP continued to grow by 3.3 percent in the third quarter, following a growth rate of 3.1 percent in the first half of 2013, which places Macedonia among the fastest growing economies in Europe. At the same time, industrial production has been steadily increasing since the beginning of 2013, reaching a growth rate of 2.6 percent over the period January-November. Supported by strong activity of existing and newly-opened FDIs, overall exports grew by 2.3 percent over the same period. Coupled with subdued imports, this contributed to a noticeable improvement in the trade balance and an increase in the import coverage from 61.8 percent to 64.6 percent. After reaching the trough of 3.3 percent at end-April credit growth has accelerated somewhat to 6.4 percent at end-December, and is expected to provide much needed support to economic activity going forward. Credit growth was somewhat above expectations, and it ranks highest in regional comparison. Citing improving growth prospects, moderate budget deficit and debt, a stable currency peg, and a stable banking system, Fitch has recently affirmed Macedonia’s credit ratings at BB+ with stable outlook.

The latest World Bank Doing Business report ranked Macedonia among the top 10 reformers in the world, a recognition for the continued and comprehensive improvement of the business environment that the country received for a fourth time in the last seven years. Macedonia has continued to be successful in attracting FDIs, which accounted for EUR 209.3 million (or about 2.7 percent of GDP) over the period January-October 2013, with an extensive pipeline of ongoing and forthcoming FDI projects. In the authorities’ view, a key indicator about the concrete and tangible improvement of the business environment is the decision by several large foreign investors to expand their production by opening new factories and production facilities in Macedonia only a few years after their initial investments in the country. The opening of new FDIs has significantly contributed to the decline in the unemployment rate by about 2 percentage points over the last year, which makes Macedonia a rare example in Europe where the unemployment rate has significantly decreased since the beginning of the crisis in 2008. The authorities continue to emphasize that the reduction in the unemployment rate on a sustainable basis remains their key priority.

Fiscal policy

In line with the Board recommendations following the last Article IV consultation with Macedonia and their stated commitment, the authorities have adopted a medium-term fiscal strategy. This strategy envisions a decrease in the fiscal deficit from 3.9 percent of GDP to 2.6 percent of GDP over the period 2013-2016, and aims at stabilizing central government debt without endangering the path of economic recovery.

The recently adopted budget for 2014 envisages a decrease in the budget deficit from 3.9 percent of GDP in 2013 to 3.5 percent of GDP in 2014. At the same time, capital expenditures are projected to grow by 11 percent compared to 2013. The realization of major capital infrastructure projects in 2014 and over the medium term is a key priority for the authorities, given that an improved infrastructure network is expected to provide a key impulse to reducing costs, enhancing competitiveness, and boosting economic activity on a sustainable basis. The authorities reiterate that the realization of capital projects will not be constrained by current expenditure, which will continue to be contained.

Remaining vigilant about fiscal risks, the authorities retain full control over the indebtedness process of all public enterprises, given the legal obligation of these enterprises to submit their financial plan and investment program to the Government for approval and pass the same scrutiny as all other budget users. Furthermore, the Ministry of Finance assesses the borrowing capacity of each public enterprise through a comprehensive and rigorous long-term sustainability analysis.

The authorities emphasize that their focus on general government debt helps in providing specific benchmarks against which debt levels can be assessed and in achieving comparability across countries. Moreover, the compilation and publication of data on the size of liabilities which carry government guarantees on a monthly basis by the Ministry of Finance provide an opportunity to all stakeholders to monitor their development.

Monetary policy and external sustainability

The NBRM authorities stand ready to adjust monetary policy if needed to ensure the sustainability of the exchange rate peg. While several key indicators, including interest rate spreads and foreign exchange market developments suggest that there is no need to start a tightening cycle at the current juncture, the NBRM authorities remain vigilant, particularly to possible pressures on the balance of payments.

Overall, the authorities consider the set of risks to the external position to be more balanced relative to staff’s assessment. They emphasize that a possible shortfall in private transfers will be matched by a corresponding decline in imports, as these transfers refer mainly to workers’ remittances used to finance private consumption with high import content. Similarly, possible shortfalls in capital inflows are expected to be accompanied by a commensurate decrease in imports, given the substantial share of imports in foreign investment projects.

FDIs located in the technological industrial development zones have provided a key boost to export growth and accounted for about one quarter of overall exports in 2013. The authorities concur with staff about the importance of further developing linkages between foreign investors and domestic suppliers and supporting spillovers into the domestic economy. The continued implementation of measures to promote entrepreneurship, improve skills and qualifications, and facilitate access to finance, aims at helping local companies enhance competitiveness and meet the quality standards required by foreign investors. The gradually-rising interconnectedness with the domestic economy and the steady progress on the value added ladder are expected to keep on strengthening the external position on a sustainable basis.

Ex-post evaluation of exceptional access

The Macedonian authorities broadly agree with the main findings and assessments of the ex post evaluation (EPE) report. Notwithstanding the implications of the global financial crisis, over the analyzed period Macedonia maintained macroeconomic stability, substantially improved the business environment and enhanced the attraction of FDIs, while preserving fiscal prudence with low and sustainable debt levels.

The authorities concur that the domestic political situation related to the early parliamentary elections, in conjunction with limitations on the domestic market for government securities, was the underlying reason for the purchase under the PCL/PLL, while they see no relation with any weaknesses in public debt management. In the meantime, the authorities undertook numerous measures and achieved substantial progress with the development of the domestic debt market in accordance with Fund advice. In the authorities’ view, the occurrence of arrears seems to be overemphasized, especially in light of their full clearance in accordance with the authorities’ plan, which was successfully completed in February 2013.

The Macedonian authorities agree with staff’s assessment that the PCL/PLL was the right instrument for Macedonia at the time, which effectively insured the country against external shocks and helped the Government adhere to its sound policies without the need for a large adjustment. They also take note of the finding in the EPE report that the instrument was consistent with Fund rules and policies, with conditionality under the program being appropriate for the type of arrangement.