Statement by Mr. Menno Snel, Executive Director for Former Yugoslav Republic of Macedonia and Mr. Jeroen Clicq, Advisor to Executive Director, August 28, 2015

The broad-based GDP growth supported by public investment, improved credit and labor market conditions, and robust exports is expected to moderate in the near term. Domestic political uncertainties and the crisis in Greece constitute significant downside risks. Fiscal policy space built up in pre-crisis years has largely been depleted. Rebuilding policy space and buffers to preserve macroeconomic and financial stability is a priority now.


The broad-based GDP growth supported by public investment, improved credit and labor market conditions, and robust exports is expected to moderate in the near term. Domestic political uncertainties and the crisis in Greece constitute significant downside risks. Fiscal policy space built up in pre-crisis years has largely been depleted. Rebuilding policy space and buffers to preserve macroeconomic and financial stability is a priority now.

On behalf of our Macedonian authorities, we thank staff for the candid and constructive exchange of views during the mission. This year’s Article IV mission took place at a time when the situation in Greece and the domestic political situation were quite uncertain. Not surprisingly, the staff report has listed those two issues as the main downside risks for the Macedonian economy.

We are happy to report that significant progress has been made on both fronts. With the timely and forward-looking measures to contain negative spillovers from Greece and the agreement reached in the Eurogroup on Greece on August 14, the scenario of a prolonged and deep crisis in Greece, set forward in box 4 of the report, has been avoided and possible negative spillovers from Greece will likely be contained. Also, the domestic political situation has significantly improved. On July 15, the four main political parties reached an agreement that put the political crisis to an end. All parties agreed to ensure full implementation of the agreement facilitated by EU Commissioner Hahn, Members of the European Parliament, and the EU and US Ambassadors to Skopje. Parliamentary elections will take place in Macedonia on April 24, 2016. The incumbent government will submit its formal resignation to Parliament in time to enable the caretaking Government, headed by a new Prime Minister, to be sworn in 100 days before the Parliamentary elections. All current ministers will hold their positions in the interim government. It was also agreed that by September 15, a new Special Prosecutor with full autonomy will be appointed to lead the investigations arising from the interception of communications.

Unemployment reduction is the top priority of the Macedonian authorities.

Unemployment at almost 27 percent, and reaching 50 percent among young people, is the central economic problem of Macedonia. Reducing unemployment is the top priority of the Government. In recent years, good progress has been achieved in this area by implementing structural reforms and active labor market policies. As a result, the unemployment rate is on a declining path from 37 percent in 2005 to 27 percent in 2015. We would have liked that the staff paper devotes more attention to this main challenge for economic policymaking. The authorities’ strategy to reduce unemployment, and by doing so reducing social tensions in this multiethnic society, is essential to understand the broader economic policy choices of the Macedonian authorities. In a small land-locked economy like Macedonia, unemployment reduction will only materializes if investments take place. To attract foreign investors, the Macedonian authorities offer a favorable tax environment, are undertaking the necessary infrastructure investments and are creating a favorable business environment. This development strategy is bearing fruit and Macedonia is experiencing the highest economic growth rate in the region. The country has successfully diversified its exports. The strategy of strengthening the export base resulted in a shrinking trade deficit, which is an important factor for monetary policy under the chosen monetary strategy of exchange rate targeting. It is expected that total job creation of FDIs will exceed more than 30,000 jobs in the next 2 to 3 years, with significant positive impacts on disposable income, tax and social contributions and VAT related revenues.

The Macedonian experience illustrates that in countries where infrastructure bottlenecks are constraining growth, the gains from increased and efficient public investments by alleviating these bottlenecks are large. We believe that the report should have elaborated more on the long-term growth potential of the economy instead of being overly concerned about the short-term fiscal consequences of the country’s development strategy given that the authorities are firmly committed to ensure fiscal sustainability, sound public finances and are in the process of adopting a fiscal rule.

Macro-economic situation

In 2014, growth reached 3.8 percent, the highest in the region. The economy is growing at a solid pace without inflationary pressures. July data show a mildly negative (-0.3 percent) headline inflation, while core annual inflation was, on average, 0.2 percent in the first seven months of the year.

In July 2015, the authorities have revised GDP growth for 2015 from 4 percent to 3.5 percent reflecting the likely impact of a prolonged political crisis and the Greek crisis casting uncertainty on the economy during June and July. The authorities’ growth forecast is somewhat higher than the 3.2 percent set forward in the staff report because a faster improvement in confidence, especially in the construction and trade sector, is expected. Downside risks have recently abated, bringing the projected growth well within reach. The quality of the macroeconomic forecasts of the authorities has markedly improved. Over the last two years there have been no significant forecasting errors.

Fiscal policy

As stated in our introductory remarks, the authorities are firmly committed to sound fiscal policies. Sound public finance management is a top priority. With the support of the EU, the authorities are enhancing medium-term budget planning and fiscal reporting. The authorities acknowledge that maintaining stability and sustainability of the budget and public debt levels is important for a small country like Macedonia. At the same time, they consider that at this stage prioritization of capital expenditures for roads, railway, energy and health infrastructure is still needed to help the economy grow and further reduce unemployment. Against this background and because of countercyclical fiscal policy measures, public debt has indeed increased but debt dynamics illustrate that the debt will remain well below the theoretical 60 percent limit. Staff’s comparison between public debt levels in 2008 and 2014 is somewhat misleading since the low debt level in 2008 was due to early repayment of debt under unfavorable terms. Assessing debt developments in the period 2006 -2014 illustrates that debt levels increased by 12.8 p.p., mainly due to capital investments which are generating economic growth. Both public debt at 43.7 percent and general government debt at 36.1 percent are among the lowest in Europe.

The authorities expect for 2015 a budget deficit of 3.6 percent compared to the 4 percent set forward in the staff paper. The authorities also project significant lower financing needs for 2015 (8.86 percent) than those calculated by the staff (15 percent). The authorities consider staff’s fiscal projections too pessimistic especially on the revenue side. For the first half of 2015, the budget deficit was 1.7 percent of GDP. Compared with the same period in 2014, budget revenues are already 14 percent higher, tax revenues are 15.6 percent higher and social contributions are 8.2 percent higher. The good results are mainly due to higher revenues from both profit tax and excises. The supplementary budget adopted by the authorities on July 16 does not entail major changes to the basic macroeconomic parameters but rather reallocates some expenditures to support government policies and projects such as intensifying the construction of the gas pipeline network from Klecovce to Stip. Increasing salaries for the police is another additional spending item.

The Selected Issues paper on fiscal rules is a valuable input for the ongoing domestic discussions. The authorities are in the process of adopting a fiscal rule and are currently looking at developing proper institutional settings, including the development of a proper legal basis, automatic correction mechanisms and brakes, top-down processes and escape clause at times of significant natural and economic distress. The authorities are highly committed to a deficit below 3 percent of GDP by 2017. The authorities are also thankful for the technical assistance received by the Fund which has contributed to increased revenue collection.

Monetary and financial sector policy

The economic and financial conditions prove that the current monetary policy setup is adequate. Exiting from accommodative monetary policy will mainly depend on changes in the external position of the economy and its effects on foreign reserves. As of June 30, 2015 the gross foreign reserves stood at EUR 2,254.8 million and foreign reserves registered a somewhat higher decrease than expected in the second quarter. Yet, foreign reserves adequacy indicators remain within the safe zone. The continuing process of de-euroization reflected by an upward trend of the share of Denar deposits in total deposits indicates the credibility of the monetary authority, the strengthened confidence in local currency and the preferences to favor domestic savings.

The Macedonian banking system is largely funded by domestic deposits and is very well capitalized. The legal minimum capital adequacy is 8 percent. In addition the authorities use moral suasion to induce large banks to maintain capital adequacy of at least 12 percent. Total deposit growth in June was somewhat influenced by lower household deposits due to the domestic political developments and the crisis in Greece but total deposits still increased by 8.8 percent on an annual basis at the end of the second quarter. Nonperforming loan ratios have stabilized and are fully provisioned. Solid monthly growth of total loans to the private sector was recorded in June and the annual growth rate of total loans in June was 9.1 percent.

The authorities have put in place sound prudent bank supervision and are experiencing good cross-border cooperation in the banking supervision with the Single Supervisory Mechanism. More recently, the National Bank of Macedonia has taken a number of actions to improve the contingency framework. The authorities (i) have established a Financial Stability Committee with involvement of the Governor and the Minister of Finance, (ii) have improved the regulation on collateral, and (iii) have improved, in cooperation with the World Bank, the contingency planning for dealing with high risk banks and introduced contagion metrics for assessing systemic risk. For the three largest banks and one small Greek subsidiary, a written strategy has been prepared, based on the current law, outlining how the central bank would resolve each of them if they would become problematic.

In the context of the decision of the ECB to freeze the level of emergency liquidity to Greece and the risk of Greece’s non-payment to the Fund on June 30, the Macedonian authorities adopted, on June 28, protective measures to safeguard the balance of payments and financial stability given the imminent threat of negative spillovers. These measures are in line with the Fund’s institutional view on capital controls; i.e. they are transparent, temporary, precautionary and don’t disturb the normal conduct of business. Indeed, until now, the authorities did not receive any complaints about these measures from banks or businesses and the trade relations with Greek companies have continued normally from the Macedonian side. The authorities have, in the meantime, with the expertise of the Fund, slightly amended the decisions to bring the restrictions fully in line with the Fund’s Articles of Agreement.

Structural reforms

Macedonia lists at the top among regional peers in the last 9 years, including the latest World Bank Doing Business report.

In line with Fund advice and with the support of the World Bank and IFC, the authorities are intensifying their efforts to strengthen the links between the companies operating in the Technological Industrial Development Zones and the domestic private sector. The authorities agree with the staff’s recommendations on the importance to continue to ease the operating environment for the domestic private sector. This is why the authorities have intensified the dialogue with the business community and the chambers of commerce. Recently, the authorities took measures to reduce the fines for the domestic companies and are continuing their efforts to improve access to finance for SMEs, through the European Investment Bank and the Macedonian Bank for Development Promotion, and to boost education systems to reduce skill mismatches and develop entrepreneurial spirit and skills.

To strengthen the innovative capacity of the Macedonian economy, the Fund for Innovations and Technology Development has launched in the beginning of 2015 its first call for co-financing grants for start-up, spin-off companies and innovations and will co-finance in 2015 for €458.700 projects in the area of IT, electrical, engineering, education, food and machinery industries. It is expected that the Fund for Innovations and Technology Development will contribute to generate new businesses and jobs (especially for young and highly qualified persons) and to better connect research and entrepreneurship.

It is also worth noting that the authorities are preparing an Action Plan to address shortcomings in the areas of rule of law and judiciary, public administration, media, electoral reform, inter-ethnic relations and economic governance. All these reform measures will continue to enhance economic growth, competiveness and provide a boost to job creation.

Concluding remarks

Unemployment reduction is a top priority for Macedonia and the authorities are delivering on this objective. Sound fiscal policies and strengthening medium-term budget planning are high on the political agenda and the authorities look forward to a continued collaboration with the EU and the Fund on this. Macedonia is transitioning towards a knowledge-based economy and the authorities are well aware that the economic prospects of Macedonia depend on the developments in the European economies. Against the background of the EU accession objective, for which Macedonia fulfilled all the criteria necessary to start accession negotiations already in 2009, there is clear political consensus and orientation towards both EU and NATO membership.

On a final note, we observe that Macedonia has completed, on February 27, 2015, the early repayment of its entire outstanding obligations to the Fund, amounting to SDR 123.1 million. This reflects the country’s improved access to domestic and international capital markets.