On behalf of the Macedonian authorities, we would like to thank staff, led by Ms. Rahman, for their candid and constructive exchange of views during the Article IV mission and express our appreciation for the constructive policy findings and recommendations reflected in their report. The authorities broadly agree with staff’s appraisal.

More than 13 years after achieving candidate status, Macedonia has removed a key hurdle to joining NATO and the European Union. In June 2018, an agreement on the formal name of Republic of North Macedonia started the process of settling down a decades long name dispute between Macedonia and Greece. The Macedonian Parliament approved on January 11, 2019 the constitutional amendments on the change of the name of Republic of Macedonia to Republic of North Macedonia. The ratification of the agreement in the Greek Parliament will remove the last hurdle for the accession to NATO, which should be formally completed by Summer 2020. Subject to Greek Parliament ratification of the bilateral agreement, and adequate progress with priority reforms, EU accession negotiations will be opened in 2019.

In 2018, the Macedonian economy has rebounded from stagnation, supported by a robust growth in export and private consumption. In the third quarter, the solid growth (3 percent yoy) was the result of favorable performance of exports and solid private consumption. Real GDP growth for 2018 is projected to reach between 2.3 percent (NBRM) and 2.8 percent (MoF), higher than the 2 percent set forward in the staff report, as high frequency indicators, in particular from industry, trade and tax collection, but construction as well, point to further economic growth during the last quarter of the year. Against the backdrop of a sustained economic recovery, the unemployment rate recorded the lowest level over the last twenty-five years although remaining relatively high at 20.8 percent.

Real GDP growth is projected to pick up further in 2019 to reach between 3.2 percent (MoF) and 3.5 percent (NBRM), versus a staff projection of 2.8 percent, mainly due to the expected rebound in infrastructure investment, robust exports and strong private consumption fueled by wage and credit growth.

On the basis of favorable economic prospects, Fitch has affirmed its BB rating with Positive Outlook in July and S&P Global Ratings affirmed its BB-/B ratings, with Stable Outlook in September 2018.

The authorities agree on the need to reform the economy and on the priorities highlighted by staff to increase productivity and inclusive growth. In 2018, the government started a wide range of reforms aimed at addressing labor market weaknesses, combating informality, strengthening institutions and anti-corruption efforts. To reduce the high youth and long-term unemployment, active labor market policies (ALMP) focusing on modernizing vocational training and developing internships and apprenticeships programs have been introduced. These programs have proven to deliver high employment retention. To attract FDI in high-value-added sectors, the authorities envisage secondary and tertiary education policies focused on reducing the technical and professional skills mismatch of young graduates. The authorities acknowledged the need for a better ALMP budget monitoring and agree with staff that employment incentives should be reevaluated in the context of cost effectiveness and impact durability.

The authorities made significant progress on judicial reform through the revision of the procedures on the appointment, appraisal, promotion and dismissal for judges, which provides buffers against undue interference in the judicial system. Additional legislative amendments needed to address the remaining gaps and reinforce the fight against corruption are expected to be discussed in the Parliament in February 2019.

In the latest World Bank 2019 Doing Business Report, Macedonia has moved up by one place, to10th best country in the world for doing business. This puts Macedonia in by far the highest position in the Southeastern European region, and ahead of 26 EU members. It reflects a continuing effort to facilitate businesses and support private investment and inflow of FDIs.

The authorities are strongly committed to sound fiscal policies and agree with staff’s medium-term fiscal recommendations. They highly appreciate the Fund’s ongoing technical assistance programs on tax administration and public financial management.

The authorities estimate a much better fiscal performance in 2018 than anticipated in the budget. The fiscal deficit is expected to be 1.8 percent of GDP instead of 2.7 percent of GDP because of good revenue performance and under-execution of capital expenditure on large infrastructure projects. In line with the medium term Fiscal Strategy, the 2019 budget targets a deficit of 2.5 percent of GDP, lower than staff’s projection of 3 percent of GDP. The gap resulting mainly from differences in underlying GDP and revenue projections.

The government is achieving gradual fiscal consolidation by reducing the pension system deficit and improving targeting of social assistance spending. To improve the long-term sustainability, pension contribution rates will gradually increase from 18 to 18.8 percent in 2020. Benefit indexation will be changed to CPI only (from currently ½ average CPI and ½ average wage growth). Further measures may be considered in the future to address increasing demographic pressures.

The introduction of a more progressive personal taxation that replaced the current 10 percent flat tax reflects the authorities’ focus on greater social justice and inequality reduction. A marginal PIT rate of 18 percent will be applied for top 1 percent earners, to the portion of income exceeding MKD 90,000 (about EUR 1,450 equivalent, or almost 4 times the average net wage).

The authorities have improved public financial management by better monitoring government arrears. These arrears have been reduced by about 0.6 percent of GDP. The new legal provisions introduced in 2018 require quarterly publication for all public entities of

their overdue obligations. To achieve local government budget discipline, spending has been capped.

In the 2018–2021 Public Financial Management Reform Program, the government attaches high priority on improving the quality and transparency of public institutions. The 2018 IMF Fiscal Transparency Evaluation Report shows that Macedonia has made significant progress, but also provides a useful list of the main areas of focus for the future. Spending reports have significantly improved in quality and timeliness.

Monetary policy has been appropriate, supporting the economic recovery while keeping inflation expectations stable. The accommodative monetary stance during the entire year of 2018 has been maintained on the backdrop of the favorable foreign exchange market, a rather small output gap, and low and stable inflation. The three consecutive cuts in the key policy rate reflected the continuous favorable movements in the exchange rate market which indicate a solid external position and stable economic agents’ expectations.

The accommodative policy stance supported credit recovery in both households and corporate sector (by 10.1 percent yoy and 5.8 percent yoy in the first eleven months of 2018). The strong growth of total deposits by 11.1 percent yoy during the same period was another sign of stable expectations and confidence. Considering the stable inflation outlook, the authorities suggest that there is room for further monetary policy easing, although they stand ready to tighten the monetary stance in case of large external shocks.