Republic of North Macedonia: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for North Macedonia
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International Monetary Fund. European Dept.
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Publication Date:
27 Jan 2020
eISBN:
9781513527925
Language:
English
Keywords:
ISCR; CR; staff appraisal; lower-than-projected inflation; baseline projection; deficit outcome; rate; staff's assessment; Minimum wages; Capital spending; Income; Wage adjustments; Global; replacement ratio; foreign exchange; debt service; IMF staff calculation; maturing government securities
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2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of North Macedonia

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of North Macedonia

Context

1. The authorities have revived the reform momentum in recent years. Crucial institutional and governance reforms have demonstrated their commitment to tackle long-standing challenges. Moreover, the frameworks for pension and social spending have been improved, and taxation was made more equitable, strengthening the sustainability of public finances. Notwithstanding these achievements, the European Council has postponed a decision on opening EU accession negotiations, representing a difficult setback for North Macedonia. In this context, parliamentary elections initially scheduled for late 2020 have been brought forward to April 2020. As per the terms of the Przino agreement, a caretaker government will be in place from January 2020.1

2. The key challenges for North Macedonia are to bolster the economy’s resilience to shocks and speed up income convergence. It is essential to stay on the path of reforms. Steps in the 2020 budget to modify elements of the recent fiscal reforms could undermine the gains. More broadly, the focus of the 2019 Article IV consultation is on policies to rebuild fiscal policy space, reorient public spending toward investment in physical and human capital; and improve institutions and government efficiency.

Recent Developments

3. Real GDP growth rebounded in 2018 and has strengthened further in 2019. Growth remained strong at 3.6 percent year-on-year in the third quarter (Figure 1). Consumption has been buoyed by strong disposable income growth in 2019. Public and private investment have recovered after stagnating in 2018, boosting import growth. Exports, including of automotive parts, remained strong in spite of the slowdown in key European trading partners. The unemployment rate has continued to fall, but remains elevated, at 17.1 percent in September 2019.2 Inflation, which is mainly driven by euro area inflation as well as food and energy prices, remained subdued at 0.9 percent on average in the first ten months of 2019 despite a closing output gap.

Figure 1.
Figure 1.

North Macedonia: Recent Developments

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: MakStat; Haver Analytics; NBRNM; and IMF staff calculations.1/ Includes regulatory write-downs. Net of regulatory write-downs, the corporate credit growth in 2019 Q3 is estimated to be 5.1 percent year-on-year.

4. Monetary and financial conditions remain accommodative. Against a background of low inflation, solid deposit growth, and favorable FX market developments, the National Bank of the Republic of North Macedonia (NBRNM) has continued steadily accumulating international reserves and further cut its policy rate to 2.25 percent in March 2019. Lending interest rates are declining, and growth in credit to households has remained strong (9.5 percent y/y in September). Corporate credit growth is recovering, although regulatory write-downs led to a slowdown in the third quarter.

5. The fiscal deficit is likely to be below its target in 2019, to a large extent due to projected under-execution of capital spending. The supplementary 2019 budget envisaged a deficit of 2.5 percent for 2019, but based on budget execution through October, staff project a deficit of 1.8 percent of GDP, mostly because capital spending continues to be substantially below the budgeted amount (Figure 4). Current spending has increased compared to last year due to higher transfers, mainly reflecting higher pension expenditures, the impact of social assistance reform, and to a small extent the VAT reimbursement scheme introduced in July.

Figure 2.
Figure 2.

North Macedonia: External Sector Developments

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: Haver Analytics; IMF DOTS; NBRNM; National authorities; The Conference Board Total Economy DatabaseTM (Adjusted version); and IMF staff calculations.
Figure 3.
Figure 3.

North Macedonia: GDP Growth

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: Makstat; and IMF staff calculations.
Figure 4.
Figure 4.

North Macedonia: Fiscal Developments

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: Ministry of Finance; and IMF staff calculations.

6. The external position is estimated to be broadly in line with fundamentals and desirable policies (Figure 2, Table 7). The gap between the cyclically-adjusted current account balance and its multilaterally-consistent norm is estimated to be about 1 percent of GDP in 2018, largely explained by a temporary drop in investment. Based on data through September, staff projects that the current account gap will narrow to -0.1 percent of GDP in 2019, reflecting the ongoing rebound in investment. The two EBA-lite approaches suggest that the real effective exchange rate is close to its equilibrium value. The NBRNM has continued to accumulate reserves in 2019, helped by the disbursement of the World Bank’s Development Policy Loan in November. Reserve coverage is expected to reach 107 percent of the Fund’s ARA metric and 94 percent of short-term debt at remaining maturity at end-2019.

Table 1.

North Macedonia: Macroeconomic Framework, 2015–24

(Year-on-year percentage change, unless otherwise indicated)

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Sources: NBRM; SSO; MOF; World Bank; and IMF staff estimates and projections. National Accounts are revised by SSO, using ESA 2010

The inconsistency between Real GDP growth and contributions to growth results from discrepancies in the official data on GDP and its

The historical debt ratios differ slightly from the numbers reported by MoF due to using end-year debt in local currency divided by local

Includes general government and public sector non-financial enterprises debt.

Table 2a.

North Macedonia: Central Government Operations, 2015–24

(Billions of Denars)

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Sources: MoF and IMF staff estimates.

Results from excluding: (i) revenues from lending; and (ii) lending guarantees from current expenditures.

The historical debt ratios differ slightly from the numbers reported by MoF due to using end-year debt in local currency divided by local currency GDP.

Includes general government and non-financial SOEs.

Table 2b.

North Macedonia: Central Government Operations, 2015–24

(Percent of GDP)

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Sources: MaF and IMF staff estimates.

Results from excluding: (i) revenues from lending; and (ii) lending guarantees from current expenditures.

The historical debt ratios differ slightly from the numbers reported by MoF due to using end-year debt in local currency divided by local currer

Includes general government and non-financial SOEs.

Table 3a.

North Macedonia: Balance of Payments, 2015–24

(Millions of Euros)

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Sources: NBRM; and IMF staff estimates.
Table 3b.

North Macedonia: Balance of Payments, 2015–24

(Percent of GDP)

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Sources: NBRM; and IMF staff estimates.
Table 4.

North Macedonia: Monetary Survey, 2015–24

(Billions of Denars, unless specified otherwise)

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

North Macedonia: Central Bank Survey, 2015–24

(Billions of Denars, unless specified otherwise)

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Sources: NBRM; and IMF staff estimates.
Table 6.

North Macedonia: Financial Soundness Indicators of the Banking System, 2012–19

(Percent)

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Source: NBRNM Financial Stability Unit.

Includes loans to financial and nonfinancial sector.

Adjusted for unallocated provisions for potential loan losses.

Interest margin represents interest income less interest expense. Gross income includes net interest income, fees and commissions income.

Noninterest expenses include fees and commissions expenses, operating expenses and other expenses excluding extraordinary expenses.

Highly liquid assets are defined as cash and balance with the NBRM, treasury bills, NBRM bills, and correspondent accounts with foreign banks. Assets in domestic banks are excluded from total assets.

Short-term liabilities are defined as deposits and other liabilities with a maturity of one year or less (without deposits and borrowings from domestic banks).

FX indexed deposits include deposits and other FX indexed liabilities.

Table 7.

North Macedonia: External Sector Assessment

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Outlook and Risks

7. Real GDP growth is projected to reach 3.4 percent in 2020, up from 3.2 percent in 2019. Rising wages―including from minimum wage and public sector wage adjustments―are expected to provide a further, albeit temporary, boost to consumption in 2019 and 2020. In the medium term, potential growth is expected to increase moderately to 3½ percent reflecting growth dividends from past reforms and continued FDI inflows expanding export capacity. The current account deficit is projected to widen to 1.9 percent of GDP by 2024 as infrastructure-related imports pick up and private transfers in foreign currency (mainly remittances) gradually decrease.

8. Risks to the growth outlook are skewed to the downside (Table 8). Rising trade tensions and a protracted increase in global risk aversion are key downside risks to the outlook. Domestically, the further delay in securing a date for opening EU accession negotiations and the election period could trigger a new period of uncertainty and derail the reform momentum. Conversely, a decisive push for structural and institutional reforms, possibly associated with a decision to open EU accession negotiations, could boost capital inflows and confidence.

Table 8.

North Macedonia: Risk Assessment Matrix1

(Scale—high, medium, or low)

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The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent or more). The RAM reflects staff views on the source of risks at the time of discussions with the authorities.

Authorities’ Views

9. The authorities also expect growth to remain solid and broad-based, reflecting resilient exports and strong domestic demand. Their 2020 forecast is slightly higher than that of staff, reflecting more optimistic assumptions about domestic demand. Disposable income is expected to be boosted by increases in minimum wages, pensions and public sector wages. The investment rebound is expected to continue, supported by major infrastructure projects. In line with staff’s assessment, the authorities consider that risks are skewed to the downside. In particular, uncertainty during the election period could delay some investment plans and further global trade tension could dampen export growth. On the upside, NATO membership and progress toward EU accession negotiations would likely strengthen confidence and encourage investment. Finally, the authorities agree with staff’s external sector assessment.

Building Fiscal Policy Space

10. Fiscal developments over the past decade have reduced the policy space. Public debt has nearly doubled since 2009. Revenue has weakened—reflecting both cyclical factors and low collection efficiency—and transfers and subsidies have increased. While the deficit has narrowed in recent years, capital spending has been under-executed by more than one percent of GDP each year on average, in spite of large infrastructure and human capital needs. At the same time, subsidies and transfers, including for pensions, have exceeded budgeted amounts (Figure 4 and Box 1). In early 2019, the government put in place reforms that would, if fully implemented, increase the policy space. In particular, pensions were reformed—including higher contribution rates and CPI-only indexation of benefits—and social assistance spending was reoriented to better addressing inequality. Moreover, the personal income tax (PIT) was reformed, including by introducing a higher marginal tax rate for top earners and a higher tax rate for capital income.

11. Staff expect the fiscal stance to ease in 2020. According to the 2020 budget proposal, the key elements of the already implemented PIT reform will be suspended until January 2023. The CPI- only indexation for pension benefits has been altered to allow for additional pension increases in years where wage growth meet certain criteria. This will result in an increase in pension benefits of about 3½ percent more than what would be implied by the CPI-only indexation. Further wage increases are planned in the education sector (10 percent) and the health care sector (5 to 25 percent depending on job categories), on top of the wage increase that became effective in September. The VAT reimbursement scheme, implemented in July, and the subsidy on employers’ social security contributions, approved in October, will also add to spending. The total budgetary cost of these measures is estimated at 1.2 percent of GDP in 2020, which has been incorporated in staff’s baseline projections.

Estimated Effect of Recently Annouced Measures on the 2020 Budget

(Percent of GDP)

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Source: IMF staff calculations.

Included the cost of wage hikes for education sector workers (about 1.4 bn denars) and health care sector workers (about 1 bn denars).

Despite a neutral budgetary impact on the general government in 2020, this measure would increase pension expenditures in the future.

12. A continuation of current policies would reduce the ability to accommodate future shocks. Under the baseline scenario, the general government deficit would increase to 2.7 percent of GDP over the medium term. Public debt would continue its upward trajectory and reach around 52 percent of GDP in the medium term (Annex I). While the debt burden is expected to be sustainable, high gross financing needs, projected to peak at about 15 percent of GDP in 2021, and potential shocks to growth constitute important downside risks. Moreover, this path assumes that loan disbursements to the state-owned road infrastructure company (PESR) would decline over the medium term to about one third of the 2020 level. In case shocks materialize, increases in social spending and transfers would be difficult to reverse. At the same time, capital spending would be insufficient to meet development needs, reducing the long-term growth potential.

13. Staff recommend bringing the deficit closer to 1 percent of GDP over the medium term to build policy space, while reorienting spending to investment. Concretely, staff proposed a consolidation of V/2 percent of GDP over 2020–22, considering the strong cyclical conditions. The authorities should also strengthen tax revenue collection, to create space for higher capital spending over time. Together these measures should help bolster the resilience to shock and enhance the long-term growth potential:

  • Implementing recent reforms to pensions and social assistance. Pensions are in general more generous than in peer countries. Full implementation the CPI indexation of pension benefits approved in 2019 would save about 0.6 percent of GDP by 2022, compared to staff’s baseline which assumes that pension benefits will increase by CPI inflation plus a third of nominal GDP growth.

  • Implementing recent reforms to personal income tax. The personal income tax reform helped to make the tax system more equitable. Re-instating the reform, together with measures to address evasion, would provide 0.2 percent of GDP in additional revenue.

  • Rationalizing agricultural subsidies. Studies have found that agricultural subsidies do not considerably improve efficiency or reduce poverty.3 Lowering agricultural subsidies toward the EU-28 average could provide fiscal savings of about 0.4 percent of GDP.

  • Building the revenue base. An improvement in tax administration, a focus of Fund capacity development, is essential to reduce informality and increase the revenue base. This should be combined with measures to address policy gaps, in particular reducing preferential treatments in VAT and introducing a more broad-based property tax.

  • Raising capital spending and improving its quality. Considering North Macedonia’s large investment needs, the government should re-orient public spending toward investment. This should be underpinned by measures to strengthen the public investment management framework, including better prioritization and addressing bottlenecks in execution of planned projects.

uA01fig01

Fiscal Balances: Baseline and Recommendations

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: Macedonia Ministry of Finance; an d IMF staff calculations.

Recommended Fiscal Reforms and Estimated Fiscal Gains/Savings

(Percent of GDP)

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Source: Estimates by World Bank (VAT, subsidies) and IMF staff (pension, revenue adminsitration).

The letters in brackets stand for gains in the short (S), medium (M) and long (L) term.

Investment by PESR not included.

14. Public investment management should be improved, in particular with respect to Public Private Partnerships. An assessment of the framework for public investment management (PIMA) is planned for early 2020 and a new PPP law is under development with help from the World Bank. To improve the management of PPPs, it is essential to establish a strong legislative and institutional framework to analyze project feasibility, assess costs, and monitor fiscal risks. Accordingly, while acknowledging the large investment needs, staff suggest waiting to approve new PPPs until a strengthened framework is in place. Moreover, to improve fiscal transparency, non-market SOEs should be covered in general government data, consistent with recommendations from Fund capacity development and standards for public finance statistics.4

Implementation of Past Policy Advice

The authorities remain constructively engaged with the Fund and the traction of Fund advice has been good in recent years.

  • Fiscal. In 2019, the frameworks for pension and social spending were strengthened, and taxation was made more equitable, improving the sustainability of public finances. However, recent modifications (alteration of the CPI-only indexation of pensions; three-year suspension of the progressive PIT rate and capital gains tax) are scaling back some of the gains.

  • Structural. The authorities have stepped efforts to implement ambitious institutional and governance reforms in the past years, and continued efforts are needed. The formalization of the minimum wage setting in 2019 was a step forward, but more attention is needed to ensure that the minimum wage is aligned with productivity developments.

  • Financial. In line with recommendations from the 2018 FSAP, the authorities have started to enhance the supervisory and regulatory framework. They have also embarked on the preparation of legislative packages to strengthen the macroprudential mandate of the NBRNM and improve the financial safety net.

Authorities’ Views

15. The 2020 budget aims to support domestic activity and tackle the informal economy, within a limited budget envelope. The authorities found it necessary to pause and reevaluate the progressive income tax and the higher tax rate on capital income, because the measures likely triggered tax evasion while yielding only modest revenue gains during the first six months of implementation in 2019 . However, the income tax from games of chance will remain with the same tax rate as 2019 (15 percent). The costs of the VAT reimbursement scheme are expected to be modest given limited take-up, and over time more than offset by higher revenues from increased VAT registration by business. The additional increase in pension benefits is needed to avoid pensioners falling behind, given high wage growth. The subsidies to social security contributions are expected to support formal employment by lowering the employers’ burden from higher wages, while at the same time curtailing informal wage payments.

16. The authorities agree with staff’s recommendation to consolidate public finances over the medium term and stabilize public debt. They expect the deficit to decline to 2.3 percent of GDP in 2020, consistent with the government’s fiscal strategy. The medium-term fiscal strategy targets a reduction in the deficit to 2 percent of GDP by 2022. They agree on the need to consolidate the pension deficit by implementing the pension reform and will consider ways to rationalize agricultural subsidies over time. They highlight the potential gains from better revenue administration, including making use of new technologies, integrating IT systems, and increasing the capacity of the Public Revenue Office.

17. Raising productive capital spending remains a priority. To address under-execution, the authorities have created a new transparency tool to better monitor the realization of capital expenditure. The Fund’s upcoming PIMA will also help strengthen the public investment management framework. In this respect, the authorities agree on the need to strengthen the capacity to consider and monitor PPPs, taking into account the potential fiscal implications. They plan to re-establish a central PPP unit to fully implement the responsibilities prescribed by the new PPP law, including the feasibility study and the process for tender and monitoring.

Figure 5.
Figure 5.

North Macedonia: Fiscal Policy Recommendations

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: Agricultural Policy Plus; IMF WEO; OECD; United Nations; World Economic Forum; and IMF staff calculations.

Structural Policies

18. Institutional reforms are critical to boost income convergence. Since 2000, North Macedonia’s real GDP per capita has grown from 20 to just below 30 percent of the EU-15 average. Over the same period, new EU member states closed the gap with the EU-15 by more than 20 percentage points. Staff’s analysis suggests that the opening of EU accession negotiations is associated with higher growth of GDP per capita (see Selected Issues Paper). This is found to be related to efforts to improve institutional quality that took place in new member states in the years running up to EU accession, as institutional quality is positively associated with higher growth of GDP per capita. North Macedonia should therefore continue to make progress in areas such as rule of law and control of corruption to improve the business environment, living standards, and bring forward EU accession.5

uA01fig02

Real GDP per Capita, PPP

(Percent of EU-15)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: Penn World Tables; and IMF staff calculations.

19. A comprehensive set of policies is needed to shift economic activity to the formal sector to achieve more inclusive growth and better protection of workers. Staff estimates suggest that more than a third of economic activity could be in the informal sector, above the average of Western Balkans and EU countries (see Annex II). While the shadow economy can create opportunities that are not available in the formal economy, it is detrimental to growth because formal businesses face unfair competition from the ones that do not pay taxes or comply with regulations. Moreover, informal workers are deprived of many labor rights. Further efforts should prioritize strengthening revenue administration efficiency and compliance tools and raising public trust in tax administration and tax morale. The authorities should take stock of the efficiency of tax incentives in reducing informality (MyVAT and the subsidy on employers’ social security contributions). Experience in other countries suggests that these incentives are costly, make the tax system complex, and do not meaningfully improve tax morale.

20. Elevated long-term and youth unemployment call for further efforts to address labor market weaknesses. Challenges associated with high structural unemployment and deficiencies in the education system are compounded by emigration of skilled labor (Figure 6). At the same time, improved employment prospects, together with better governance and institutions, could help curtailing net emigration flows.6 Against this background, to address skill shortages and mismatches, education reform should focus on increasing completion rates and quality of secondary education and modernizing the vocational educational system. This should be complemented by active labor market policies (ALMP) focused on skill-enhancing, such as training and internship programs. Wage subsidies and self-employment grants are costly and require rigorous monitoring.

Figure 6.
Figure 6.

North Macedonia: Labor Market and Education Policies

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Note: 1/ After December 2019. 2/Before December 2019Sources: Eurostat; MakStat; North Macedonia authorities; OECD; and IMF staff calculations.

21. Reform efforts could also help attract foreign investment to sectors with high value added. Experience of new EU member states shows that FDI inflows, facilitated by financial incentives, skilled low-cost labor and a predictable business environment, can act as a strong anchor for export-driven growth and convergence. At the current juncture, given that several companies in the Technological Industrial Development Zones (TIDZ) are nearing capacity and that low-skilled labor supply is scarce, a key challenge will be to attract higher value-added FDI. This will require decisive progress in addressing labor market weaknesses discussed above. Finally, efforts to improve the ability of domestic suppliers to meet technical and safety requirements for exports to the EU could increase positive spillovers from the TIDZ to the domestic economy, which remain limited.

22. Increases in the minimum wage could hurt employment and may not effectively reduce poverty. The net minimum wage has been raised by 44 percent cumulatively since 2017 while productivity remained mostly stagnant. It is expected to reach 53 percent of the average wage in 2020, which is high by regional standards. Moreover, in purchasing power parity terms, the new minimum wage is relatively high compared to regional peers. While higher minimum wage can reduce poverty among the working population, it may not be effective in reducing overall poverty because most of the persons at risk of poverty are not working. Moreover, higher minimum wages could reduce formal employment (see Box 2). To preserve competitiveness, staff recommend aligning minimum wage increases with productivity growth.

Authorities’ Views

23. The authorities consider reforms crucial to improve citizens’ living standards. In particular, they continue the implementation of important institutional and governance reform to boost growth prospects. They have undertaken substantial efforts to attract FDI to higher value-added sectors. Moreover, they are currently designing a national strategy for human capital, aimed at improving the education system and reducing skill shortages and mismatches. Finally, they have increased the budget allocation for active labor market policies, with a focus on internship and training programs as well as self-employment grants, given the demonstrated effectiveness of these programs.

24. The minimum wage hike aims to improve living standards and reduce poverty. It was agreed with labor unions and the business community. The authorities are confident that it will not significantly hamper competitiveness, as the minimum wage level is still moderate compared to regional peers. Moreover, the subsidy on social security contributions is expected to mitigate any potential effect on formal employment. Higher wages are seen as an important lever to stem emigration and ensure adequate living standards for the working population, of which about 9 percent were at risk of poverty before the minimum wage increase.

25. Tackling informality is high on the authorities’ agenda. They are currently updating their Action Plan, considering new measures that have been effective in EU countries, such as a new voucher system for wage payment in sectors like agriculture and household services, identification cards to facilitate labor inspections, and a public campaign to increase tax morale. They concurred with staff that stronger tax administration and labor inspections are essential to reduce informal activity, but also emphasized the role of fiscal incentives such as MyVAT to encourage VAT registration and the subsidy on social security contributions to reduce envelope payments.

Bolstering Monetary and Financial Stability

26. Monetary policy is appropriately accommodative. North Macedonia has a de facto stabilized exchange rate arrangement7 The NBRNM has traditionally kept the interest rate spread with the ECB main refinancing rate at about 300 basis points in non-crisis times. Against a background of continued foreign exchange inflows and low inflation over the past year, the NBRNM has continued to accumulate and has been able to reduce the policy rate spread to 225 basis points. While reserve coverage is broadly adequate, it is somewhat lower than for regional peers and favorable conditions should be used to build further buffers against possible domestic or external shocks in the context of the de facto exchange rate peg. Moreover, the policy rate cuts have been transmitted to money market rates and bank deposit and lending rates, and credit growth is now solid (Box 3). If global financial conditions were to tighten, the NBRNM should stand ready to increase its policy rate and reserve requirements, as needed.

uA01fig03

International Reserves

(Percent of ARA metric)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: IMF Staff calculations
Figure 7.
Figure 7.

North Macedonia: Monetary Policy Stance

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: Haver Analytics; NBRNM; IMF staff calculations.1/ Policy rate spread with the ECB modeled as a function of its own lagged value and the reserve gap, credit growth, domestic and euro area inflation, deposit euroization and EMBI.

27. The banking system remains well capitalized and profitable, but efforts are needed to further mitigate credit risk. At end-June 2019, capital adequacy ratios stood at 17.4 percent, one percentage point higher than last year. Non-performing loans remain relatively low, at 5.4 percent of total loans, and have declined, helped in part by accelerated NPL write-offs in the third quarter of 2019. Nevertheless, the still high share of FX and FX-linked loans (around 50 percent) in household loans and limited hedging of borrowers create vulnerabilities. The NBRNM is taking steps to access granular household data to improve their systemic-risk monitoring. Moreover, implementation of measures envisaged in the denarization strategy could help curb FX lending. An ongoing bank merger between two subsidiaries of euro area banks will help consolidate the relatively overcrowded banking system and improve efficiency.

Figure 8.
Figure 8.

North Macedonia: Banking Sector

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: NBRNM and IMF staff calculations

28. The authorities are stepping up their efforts to implement the 2018 FSAP recommendations (Table 9). Capacity development by Fund staff is planned to support these efforts. Many of the substantial changes envisaged require legislative change that, given the elections, is expected to be submitted to Parliament in the fall of 2020.

  • Macroprudential policy framework. Amendments to the central bank law are being drafted to give the NBRNM a clearer mandate for macroprudential policy and, as discussed above, access to more granular data for better systemic risk monitoring. In parallel, a memorandum of understanding for the Financial Stability Committee (FSC) is being finalized to improve interagency coordination of macroprudential policy.

  • Supervision and regulation. The NBRNM has adopted a new Decision on risk management to strengthen banks’ internal liquidity monitoring and is drafting a new regulation on liquidity risk management, which closely follows requirements under Basel III. A full-scope inspection of one D-SIBs has been completed but a shortage of experienced supervisors is an important hurdle for increasing inspection frequency.

  • Crisis management and resolution. New laws are being prepared to (i) modernize the bank resolution framework in line with international best practice and (ii) strengthen the Deposit Insurance Fund respectively. A new resolution unit in the NBRNM has not been fully staffed and work on new resolution toolkit and contingency planning has been delayed.

  • AML/CFT. A national strategy has been adopted to address the weaknesses identified by MONEYVAL. Guidelines for effective implementation of the new AML/CFT law have been published by the relevant sector supervisors and staffing at the Financial Intelligence Office has been strengthened. However, a closer coordination among government agencies is needed to further improve the registries of beneficial owners and politically exposed persons and the integrated database for identification and combating money laundering.

Table 9.

North Macedonia: Implementation of Key 2018 FSAP Recommendations

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Authorities’ Views

29. The monetary policy stance has supported private sector borrowing, while at the same time allowing the NBRNM to accumulate further foreign exchange reserves. The NBRNM considers the level of reserves to be adequate based on a range of reserve adequacy metrics, and noted the large share of inter-company lending and trade credits in short-term debt, which would likely not require swift use of reserve in case of an external shock. Given the uncertainty, both domestically and externally, they agreed on the need to carefully assess any further move in the policy rate.

30. Тhe NBRNM is monitoring credit risk and is prepared to deploy additional measures, if needed. The higher risk weight (of 150 percent) has helped moderate the rapid growth of long-term consumer loans with maturity of eight years or longer. The denarization strategy, published in December 2018, envisages measures to reduce deposit-driven euroization, such as further differentiation of reserve requirements based on the currency structure. Several additional measures are also embedded in the strategy, such as possible gradual reduction of the limit on banks’ open FX positions, and measures for further development of the domestic capital markets.

31. The authorities are committed to timely implementation of the FSAP recommendations. Efforts are ongoing to craft on an ambitious legislative package to upgrade and modernize the macroprudential, supervisory, and resolution frameworks. However, they stressed the recruitment challenges they faced to intensify supervision and welcomed the ongoing capacity building from developing partners, including from the Fund. On the AML/CFT, the authorities are closely monitoring the implementation of the national action plan to address remaining vulnerabilities identified by MONEYVAL in 2014 and 2018.8

Staff Appraisal

32. After a protracted political crisis, the economy has entered a period of solid growth and stability. Over the recent years, the authorities have reviewed the reform momentum, with crucial institutional and governance reforms and efforts to make public finances more sustainable and equitable. Through these actions, they have gained substantial policy credibility and the economy has rebounded.

33. Growth is expected to accelerate in 2020. Lower taxes and higher pensions and wages―including public sector and minimum wages―are expected to provide a further, albeit one-off, stimulus to consumption. Export and investment growth would remain robust but slow somewhat, reflecting weak growth in trading partners. This moderation could become more pronounced if global trade tensions worsen or investment plans are delayed due to uncertainty during the election period.

34. Staying on the path of reform is essential to further bolster the economy’s resilience to shocks and durably raise income levels. This period of solid growth should be used to rebuild fiscal space, in order to strengthen the economy’s ability to cope with future shocks. Going forward, speeding up income convergence and improving living standards will necessitate a more growth-enhancing fiscal policy mix and an unwavering commitment to the ambitious structural reform agenda.

35. An ambitious consolidation is needed to rebuild fiscal policy space and re-orient public spending toward investment. A cumulative consolidation of 1½ percent of GDP over 2020–22, compared to staff’s baseline projections, would achieve primary budget balance and ensure that there is policy space to act in an economic downturn. The consolidation would require steadfast implementation of already approved reforms to pensions and personal income tax, as well as enhanced revenue administration and rationalization of agricultural subsidies. These measures would also make space in the budget to increase essential capital expenditure to narrow the investment gap. This should be underpinned by measures to strengthen the public investment management framework, including better prioritization and addressing bottlenecks in execution of planned projects. To safeguard against fiscal risks, the authorities should wait to approve new PPPs until a strengthened framework is in place.

36. Reforms to address key labor market and institutional weaknesses will help lift medium-term growth and speed up income convergence. Although growth has been solid in the past two decades, it has not been enough to substantially narrow North Macedonia’s large income gap with the EU. To accelerate convergence, it is essential to continue reforms to improve the public administration, rule of law, and control of corruption. This should be complemented by efforts to build physical capital given infrastructure gaps and to boost human capital to address skills shortages and mismatches, including through vocational education and training and more use of skill-enhancing active labor market policies. Reforms to tackle informality would help improve the business climate and protect workers, with potential large revenue gains. Strengthening revenue administration efficiency and compliance should be the priority, combined with measures that raise public trust in institutions and tax morale.

37. The minimum wage should be aligned closely with productivity. The net minimum wage has been raised by 44 percent cumulatively since 2017 while productivity growth has been low. The minimum wage is estimated to reach 53 percent of the average wage in 2020, which is high by regional standards. These increases may not be effective in reducing overall poverty and may have adverse effects on formal employment and competitiveness.

38. The monetary policy stance is appropriate. The NBRNM has appropriately used the favorable conditions to accumulate reserves within the de facto exchange rate peg. While reserve coverage is broadly adequate, the central bank should continue building buffers against possible domestic or external shocks. Going forward, should the external environment worsen, the NBRNM should stand ready to tighten monetary policy.

39. The banking system is healthy, but efforts are needed to further mitigate credit risk. The banking system is well capitalized and liquid. Steps to further increase deposit denarization, coupled with carefully calibrated measures to curb foreign currency lending to households, as needed, would help strengthen financial system resilience. Amid continued high credit growth to households, closer monitoring, including by collecting granular household data, is warranted.

40. Further strengthening the financial stability framework remains a priority. In line with the recommendations of the 2018 FSAP, the authorities have started to enhance the supervisory and regulatory framework, including by enhancing banks’ liquidity risk reporting and increasing the supervisory intensity for domestic systemically important banks. It is important to strengthen the macroprudential mandate of the NBRNM, together with improved systemic risk identification. Further progress is needed on the financial safety net, by introducing a comprehensive bank resolution framework and buttressing the deposit guarantee scheme.

41. It is recommended that the next Article IV consultation takes place on the standard 12-month cycle.

Improving Government Spending Efficiency

Despite large infrastructure needs, capital spending has declined in recent years. Capital spending by the central government was on average 2.9 percent of GDP over the past five years (2014–18). Accounting also for investment by the state-owned road infrastructure company (PESR), capital spending in North Macedonia, at about 4.2 percent of GDP, is slightly below the level in CESSE countries over the same period. Partly reflecting the decisions to stay away from less productive investment, total capital spending declined to 3.3 percent of GDP in 2018 and is projected to remain weak in 2019. And, according to the Ministry of Finance, less than 50 percent of capital spending was in infrastructure investment.

Growth-enhancing spending should be protected. The relatively small revenue base—about 9.3 percent of GDP below the average of CESEE countries in 2018 – is limiting the space for higher capital spending. This calls for strengthening the revenue base, including by resisting the roll-back of the personal income tax reforms. Meanwhile, there is also a need to improve the efficiency of spending. In recent years, capital spending has been under-executed by about one percent of GDP or more per year, while subsidies and transfers, including for pensions, exceeded budgeted amounts.

Pension spending and untargeted subsidies and transfers should be contained, to preserve fiscal sustainability. In 2019, total subsidies and transfers (projected at 21.4 percent of GDP) are close to 5 percent of GDP higher than the pre-crisis level in 2007. The bulk of the increase is in non-pension/non-health related transfers and subsidies. As discussed in previous staff reports, untargeted budget subsidies could be rationalized, in particular in the agricultural sector, while preserving space for other priority spending. Higher pension spending has gradually but steadily increased public finance burdens. This is partly related to demographic factors, but it is also due to increase in pension benefits over time. The replacement ratio increased by 0.15 points since 2012 to 0.70 in 2017, based on latest available data from Eurostat.1 The stronger wage increases in recent years have likely led to a smaller replacement ratio. Nevertheless, the replacement ratio is still higher than in peer countries and pension expenditure is higher than in countries of similar demographic profile. The recent pension reform that adopts a CPI-only indexation to pension benefits was an important step to improve fiscal sustainability of the pension system in the face of a rapidly aging population.

uA01fig04

Aggregate replacement ratio

(Percent)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: Eurostat.Note: Latest available data are used: 2017 for North Macedonia and 2018 for the rest.
1/ The replacement ratio is defined as the median individual gross pension in the 65–74 age category relative to the median individual gross earnings of the 50–59 age category, excluding other social benefits.

Minimum Wage Policy

The government has raised the minimum wage with the objective of improving living standards for lower-income earners. The net minimum wage has been raised by 44 percent cumulatively over the past two years. In the government’s Economic Reform Program, it is targeted to increase further to 16,000 denars per month by 2020, which would represent an additional 10 percent increase.

With minimum wage growth significantly outpacing productivity growth, further increases could harm competitiveness. Over the past decade, the minimum-to-average wage ratio has increased from 38 percent to an estimated 53 percent in 2020 if no further increase is enacted.

• The impact on labor costs may be large. The passthrough of a one percent increase in the minimum wage to the average wage has recently been around 0.3–0.5 percentage points, in line with estimates for CESEE countries (IMF, 2016), and slightly above those for the euro area (IMF, Forthcoming). The average wage could therefore increase by 9–14 percent cumulatively by 2020. Given high labor-intensity and stagnant productivity growth, this could reduce competitiveness.

• The skill premium may decline, reducing the incentives for human capital accumulation. Further wage compression without significant improvements in skills of minimum wage earners could imply a lower premium for skilled workers and, in turn, disincentivize efforts and human capital investment, thereby hurting labor quality and productivity (Dube et al, 2007; Hirsch et al, 2011; IMF, 2016).

Although minimum wage can reduce in-work poverty, it may not reduce poverty overall:

• A minimum wage increase is not a well-targeted measure. In 2018, the risk-of-poverty rate was 22 percent for the population overall, whereas for employed persons it was about 9 percent.

• Further minimum wage increases could be associated with dis-employment effects and subsequently increase the risk of poverty. The limited adverse employment effects so far could be attributed to subsidies and other financial incentives for employment, which temporarily reduce labor costs. Moreover, the dis-employment effects could become stronger for higher minimum wage levels. For CESEE countries, the reduction in youth employment after a minimum wage increase is more than five times higher when the initial minimum-to-average wage ratio is about 45 percent (IMF, 2016).

• Without efforts to increase tax and wage compliance, generous minimum wages are also found to be associated with a larger share of informality (Lotti et al, 2016). If minimum wages are too high compared to labor productivity, they could disincentivize employers to create formal jobs.

uA01fig05

North Macedonia. Net Wage Distributions

(Percent of total wage employed)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: State Statistical Office.

References:

1 Dube et al., 2007, “The economic Effects of a Citywide Minimum Wages,” Industrial and Labor Relations Review, 60, pp.522–543. 2 Hirsch, Kaufman, and Zelenska, 2011, “Minimum Wage Channels of Adjustments,” IZA Discussion Paper No. 6132. 3 IMF, 2016, “Cross-country Report on Minimum Wages – Selected Issues,” IMF Country Report No. 16/151. 4 IMF Staff Discussion Note, Forthcoming, “A European Minimum Wage: Options and Tradeoffs,”. 5 Lotti, G., J. Messina, and L Nunziata, 2016, “Minimum Wage and Informal Employment in Developing Countries”.

Corporate and Household Credit Risk

Household debt has been rising rapidly from a low base, but debt service capacity remains strong. Household indebtedness is low (25 percent of GDP at end-2018) but has grown steadily since 2011. However, households’ repayment capacity remains strong, with debt servicing at only 8.8 percent of disposable income, and low default rates on banks’ loan exposures (2 percent).

uA01fig06

Household Debt Ratios

(in percent)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: NBRM and IMF staff calculations

Household vulnerabilities warrant close monitoring. Debt maturities are lengthening amid easing credit standards and a rising share of debt goes to lower-income households (around 40 percent of consumer loans are to households earning less than the average wage). Furthermore, the share of FX loans is large (45 percent of total), and most household loans have variable or adjustable rates (52 percent). Household FX risks are in part mitigated by large FX deposits (about 32 percent of bank deposits), albeit with dispersion across households. Further, household confidence plays a key role for banks’ funding stability, with households providing about two-thirds of banks’ deposits. During distress, households typically convert quickly denar deposits into euro deposits, thus straining domestic FX liquidity.

Corporate borrowing from domestic banks is limited. It has been at about 28 percent of GDP since 2011, with 36 percent of all firms borrowing from domestic banks. However, inter-company debt from FDI investment has risen significantly, at 19 percent of GDP (from 10.6 percent in 2011), amidst an expansion of Technological Industrial Development Zones (TIDZ) firms which largely rely on foreign parent financing. Importantly, spillovers from an external slowdown to the domestic financial sector appear limited, given minimum real-sector linkages between TIDZ and domestic corporates (based on episodic evidence).

uA01fig07

Corporate Debt by Sources

(in percent of GDP)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: NBRM and IMF staff calculations

The domestic corporate sector is subject to vulnerabilities. In aggregate, firms that borrow from domestic banks have sound debt service capacity, with an interest coverage ratio of 7.2. However, corporate reporting quality remains weak and impairs assessment of firms’ financial conditions. Corporate domestic borrowing in FX has been declining gradually, but the aggregate FX exposure of the sector remains large (74 percent of corporate debt). Domestic corporates appear unhedged, and collection of hedging information by domestic corporates (including natural versus financial hedging), e.g., via a periodic survey, is highly encouraged for monitoring systemic risks. Firms that borrow domestically are also exposed to interest rate risk, with their total domestic and external borrowing mostly in variable or adjustable rates (54 percent of total).

Annex I. Debt Sustainability Analysis

General government and public debt are projected to gradually increase over the forecast horizon. Public debt is assessed sustainable under staff’s baseline projection, but high gross financing needs and potential shocks to growth continue to constitute major risks. Durable fiscal consolidation is therefore needed to rebuild fiscal space and put debt on a downward path.

A. Background

1. North Macedonia’s public debt, which includes guaranteed debt of state-owned enterprises, has nearly doubled since 2008, reaching about 48 percent of GDP in 2018.1 Over this period, general government debt has increased by 20 percentage points to about 41 percent of GDP. Despite increases in pensions and subsidies, the fiscal deficit has narrowed in recent years due to less spending on goods and services, as well as lower capital investment spending. Publicly guaranteed debt of state-owned enterprises rose from 2½ percent of GDP in 2008 to about 8 percent of GDP in 2019, mainly due to public transport infrastructure projects by the Public Enterprise for State Roads (PESR). Meanwhile, medium-term gross financing requirements of the non-financial public sector are expected to peak at about 15 percent of GDP in 2021 due to high rollover needs.

2. There have been improvements in the public debt structure, particularly in domestic public debt. The average maturity of outstanding government securities increased significantly from less than 12 months in 2011 to close to 8 years by October 2019, reflecting increasing reliance on long-term borrowing. In the meantime, the share of domestic government securities that are denominated in FX declined from 95 percent in 2009 to around 60 percent in 2017. Interest rates on all types of securities have decreased noticeably. However, most of the public debt is external, resulting in around three-quarters of public debt being FX-denominated.

3. External debt has increased by 26 percent of GDP since 2008, reaching 73 percent of GDP in 2018. The main drivers of the increases in external debt have been public sector borrowing and FDI-related intercompany borrowing. External gross financing needs were stable at 20 percent of GDP in 2018, as a moderate increase in debt service was mostly offset by a moderate improvement in the trade balance.

B. Public DSA Results

Baseline

4. The baseline scenario assumes that the fiscal deficit increases to 2.5 percent of GDP in 2020, followed by a gradual increase over the medium term. It is underpinned by the following assumptions.

  • Real GDP growth is projected to increase to 3.2 percent in 2019, driven by higher investment. Medium-term growth is projected to pick up to its potential of around 3½ percent, supported by investment, expanded export capacities, and continued improvements in the labor markets.

  • Headline inflation is projected to gradually reach 1.6 percent by end-2021.

  • The general government overall deficit is projected to stay at 1.8 percent of GDP in 2019 and rise to 2.5 percent of GDP in 2020, mainly due to higher public investment spending and transfers. The deficit is expected to increase modestly to 2.7 percent of GDP by 2024, reflecting gradually increasing capital spending.

5. Forecast error analysis suggests no systemic bias in historical estimations of real GDP growth and primary balance, but some negative bias on inflation. Primary balance forecasts were optimistic between 2012 and 2014. However, this bias has disappeared in recent years as the projections became more conservative. Growth projections have remained broadly within the interquartile range in the past five years, except for in 2017 when growth slowed because of the political crisis and a halt in investment.

6. Under the baseline scenario, public debt is expected to rise to around 52 percent in the medium term, with gross financing needs reaching about 15 percent of GDP in 2021. General government debt would continue its upward trajectory to about 43 percent at end-2024. Publicly guaranteed debt is expected to grow by around 2 percentage points of GDP between 2019 and 2022, reflecting continued borrowing to finance public infrastructure investments, before gradually declining at the end of the projection period. Baseline public gross financing requirements are projected to remain high and peak in 2021 above the 15-percent benchmark, mainly due to the general government’s amortization of Eurobonds and syndicated loans.

Macro-Fiscal and Additional Stress Tests

7. Macroeconomic and fiscal shocks can significantly increase public debt and public gross financing needs relative to the baseline. Among all stress test scenarios, North Macedonia has the highest vulnerability to a combined macro-fiscal shock and the real GDP growth shock of one standard deviation in 2020–21.2 Under these stress test scenarios, public debt would rise to about 59 percent of GDP in the medium term with gross financing needs peaking at about 17.6 percent of GDP in 2021. Closing the real exchange rate gap implies a small exchange rate appreciation which will result in a slight decline in external public debt and external gross financing needs.3 Nonetheless, the still substantial share of FX-denominated public debt poses general vulnerability to exchange rate risks.

8. In addition, fan charts illustrate the possible evolution of public debt over the medium term. They present a spectrum of possible outcomes for the public debt level based on a probabilistic view of uncertainty around the baseline. Under a symmetric distribution, the public debt stock at end-2024 would be above 54.5 percent of GDP in 25 percent of the simulated outcomes. Under a restricted distribution, which precludes positive shocks to the primary balance, public debt would be above 57 percent in 25 percent of simulations.

C. External Debt Sustainability

9. External debt is expected to peak in 2019 before gradually declining thereafter. The debt level is expected to peak at 74 percent of GDP in 2019 and gradually decline thereafter. Trade deficits are projected to decrease moderately but steadily from 13 percent of GDP in 2019 to 11 percent in 2024. The projected expansion in private sector borrowing in medium and long-term loans is expected to be remain modest while public debt service is set to decline gradually starting in 2022.

10. The external debt path is particularly sensitive to real exchange rate depreciation and non-interest current account shocks. Under a 30 percent exchange rate depreciation shock, the external debt level would increase to 108 percent of GDP in 2020 and stay above 106 percent afterwards. A shock to the current account of half a standard deviation (around 2 percent of GDP) would cause a more gradual deterioration in external debt, with external debt stabilizing over the forecast horizon around 77 percent of GDP. A higher fiscal deficit than assumed under the baseline could also have a significant impact on external debt dynamics by leading to larger and more expensive external borrowing as well as higher trade deficits (Figure 9).

Figure 1.
Figure 1.

North Macedonia: General Government Debt Sustainability Analysis (DSA)—Baseline Scenario

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF staff.1/ Public sector is defined as general government2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r -π(1 +g) – g + ae(1 +r)]/(1 +g+π+gn)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g - real GDP growth rate; a = share of foreign-currency denominated debt and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r – π(1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 +r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure 2.
Figure 2.

North Macedonia: General Government DSA—Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF staff.
Figure 3.
Figure 3.

North Macedonia: General Government DSA—Realism of Baseline Assumptions

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF Staff.1/ Plotted distribution includes all countries, percentile rank refers to all countries.2/ Projections made in the spring WEO vintage of the preceding year.3/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.
Figure 4.
Figure 4.

North Macedonia: General Government DSA—Stress Tests

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF staff.
Figure 5.
Figure 5.

North Macedonia: General Government DSA Risk Assessment

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.4/ Long-term bond spread over German bonds, an average over the last 3 months, 17-Sep-19 through 16-Dec-19.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
Figure 6.
Figure 6.

North Macedonia: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF staff.1/ Public sector is defined as non-financial public sector.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r -n(1 +g) – g + ae(1 +r)]/(1 +g+n+gn)) times previous period debt ratio, with r = interest rate;n = growth rate of GDP deflator; g = real GDP growth rate; a = shareof foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r-n(1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1 + r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure 7.
Figure 7.

North Macedonia: Public Sector DSA—Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF staff.
Figure 8.
Figure 8.

North Macedonia: Public Sector DSA—Stress Tests

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF staff.
Figure 9.
Figure 9.

North Macedonia: Public Sector DSA Risk Assessment

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF staff.1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.4/ Long-term bond spread over German bonds, an average over the last 3 months, 17-Sep-19 through 16-Dec-19.5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

D. Conclusion

11. Stronger fiscal consolidation is needed to create fiscal space to counter shocks and increase capital spending. While the level of public debt is not alarmingly high, the speed of debt accumulation since the financial crisis calls for caution. Baseline gross financing needs are above the 15 percent of GDP benchmark, and adverse shocks, particularly in GDP growth, could raise general government and public debt to about 46 and 55 percent of GDP respectively by 2024. Space for fiscal policy, the main countercyclical stabilization policy tool in North Macedonia, is limited. The general government’s primary deficit is expected to be about 1.6 percent of GDP by 2024, higher than the debt-stabilizing primary balance. This implies a need for fiscal consolidation to put public debt firmly on a downward path. In addition, public debt sustainability depends on sound macroeconomic management and continuing progress on institutional and structural issues which would help unlock the economy’s growth potential and reduce its vulnerability to shocks.

12. Efforts to improve public debt management should continue. Notwithstanding positive progress to date, efforts to further lengthen the average maturity of domestic debt and deepen the secondary market would help reduce the domestic debt rollover and interest rate risks. With a large share of public debt being external, the medium-term fiscal strategy should be accompanied by a debt management strategy that strikes a balance between achieving an efficient mix of external and domestic financing to maintain overall macroeconomic stability.

Table 1.

North Macedonia: Non-Financial Public Sector Debt Stress Test Scenarios

article image
Source: IMF staff estimates.

Percentage points in excess of the baseline at the end of the projection period.

Table 2.

North Macedonia: External Debt Sustainability Framework, 2008–2024

(In percent of GDP, unless otherwise indicated)

article image

Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 10.
Figure 10.

North Macedonia: External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.4/ One-time real depreciation of 30 percent occurs in 2020.

Annex II. Tackling Informality1

North Macedonia suffers from widespread informality. While the shadow economy can contribute to economic growth by creating opportunities that are not available in the formal economy, it creates inefficiencies and reduces the economy’s long-term growth potential. A comprehensive set of policies is needed to shift economic activity to the formal sector. It should combine measures that strengthen tax compliance and improve tax morale with policies to incentivize more formal job oportunities.

1. More than one third of North Macedonia’s economic activity could be in the informal sector. Estimates run from 10 to 45 percent of GDP, depending on the definition of the shadow economy and methodology employed. A recent IMF study (Kelmanson et al., 2019) estimates the share of the informal economy in North Macedonia at 38 percent in 2016 (Text Figure 1). Accordingly, informal employment is also frequent. Based on State Statistical Office statistics, 19 percent of employment was informal in 2018. For the young population, measured by those below 24 years, an even larger share of employment, at 29 percent, was found to be informal in 2018.

Text Figure 1:
Text Figure 1:

Size of the Shadow Economy in Europe, 2016

(Percent of GDP)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF staff estimates (Kelmanson eta l.,2019).

2. The economic costs of a large informal sector are substantial. While the shadow economy can contribute to economic growth by creating opportunities that are not available in the formal economy, it creates inefficiencies and reduces the economy’s long-term growth potential:

  • For businesses, informality is a key obstacle, encouraging a race to the bottom as legitimate businesses face competition from shadow businesses which disincentivizes investment, human capital formation and technological innovation. Meanwhile, lack of verifiable information about the financial position may make undeclared businesses’ access to financing more difficult. Informality is considered as the largest obstacle by a third of firms according to the World Bank Enterprise Surveys (see Text Figure 2).2

  • For informal workers, undeclared work deprives them of many labor rights, such as sick leave, unemployment benefits and minimum wages. Also, the absence of formal training or employment history makes it more difficult for workers to enter the formal economy, resulting in high and persistent unemployment.

  • For the public sector, the inability to collect taxes on shadow economic activity weakens public finances, with adverse impact on public investment, and public goods and services, including education and training programs.

Text Figure 2:
Text Figure 2:

Biggest Obstacle Reported by Firms

(2013 or latest, percent of firms)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: World Bank Enterprise Surveys.Black bars represent 90 percent confidence interval.

3. The informal sector tends to be smaller for countries with higher income levels. Countries such as North Macedonia, which have a lower level of income per capita, have larger informal sectors (Text Figure 3).3 The link with income inequality is ambiguous. Informality has been found to reduce inequality through the introduction of allocative distortions that compress the skill premium. However, informality may also generate inequality, as wages are generally lower in the informal sector, especially for low-skilled workers, and transitioning to the formal economy maybe difficult without formal experience. Messina and Silvia (2018) show that in Latin-American countries where informality delined substantially in the 2000s and 2010s, pay among workers with similar skills became more equal (and the more so for low-skilled workers), the pay gap between high- and low-skilled workers declined, and levels of education rose.

Text Figure 3:
Text Figure 3:

Size of the Shadow Economy and GDP per Capita, 2016

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF staff estimates (Kelmanson et al, 2019). Western Balkans in yellow.

4. Escaping taxes and regulation may be easier for smaller firms, which could restrain firm growth and reduce economies of scale. There are 27 formal businesses per 1000 inhabitants in North Macedonia, compared to 48 in the EU-28.4 As in the EU, most businesses are micro firms, with 91 percent of firms employing less than 10 persons (94 percent in the EU).

A. Drivers of Informality

5. The motivation behind operating in the shadow economy, beyond criminal activities, is usually to evade taxes and regulations. While North Macedonia has a relatively low regulatory burden as well as low tax pressure, factors such as a high tax wedge for low-income earners, inefficient tax administration, low tax morale linked to low trust in public institutions, persistently high unemployment and skill shortage are likely to be behind the elevated level of informality.

Taxation and Minimum Wages

6. The tax burden overall does not appear a major obstacle to formal businesses. Both corporate and value added tax rates are low compared to other European countries (Text Figure 4). The average labor tax wedge among low-income earners is also lower than in peer economies. However, a high marginal tax wedge for lower-income earners could prevent workers to join the formal labor market. The minimal basis to social security contributions is set at half the average gross income, making marginal rates of social security contributions high at low levels of income (Text Figure 5), which could reduce the incentives either to take up formal employment or to report the full wage earnings. Moreover, unemployed retain access to certain social assistance benefits, though the coverage appears limited and only a small share of the unemployed are captured.

Text Figure 4:
Text Figure 4:

Tax Rates in Europe

(2019 for CIT, indirect tax rates, latest for others)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Sources: KPMG; World Bank; Eurostat; IMF staff calculations.1/ Indirect tax rate usually corresponds to the standard VAT rate.2/ Labor tax wedge is calculated for single earner at 67 percent of national average wage (2018 data).3/ 2017 data.
Text Figure 5:
Text Figure 5:

North Macedonia: Labor Income Taxation

(2016, single person, no children)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: IMF Working Paper WP/17/194.

7. A high minimum wage could increase the incentives for informal employment. The minimum wage is elevated compared to peers, at 53 percent of the average wage.5 A higher wage could attract more workers to the formal sector. However, it also increases the cost of labor to firms, potentially reducing the number of formal jobs available. If the minimum wage is set too high, workers may be forced to move to the informal sector.

Tax Administration, Fiscal Transparency, and Institutional Quality

8. Ineffective tax administration provides incentives for tax evasion and undeclared work. Tax collection efficiency is weak in North Macedonia.6 Partly reflecting a lack of resources, the extent of initiatives to detect unregistered taxpayers and inaccurate reporting is limited. Moreover, shortfalls in fiscal transparency could diminish tax morale and the willingness to pay taxes, as it may hamper the perception that the tax system is fair and citizens may not have enough information about how tax revenue is spent.

9. A high perception of corruption and weak quality of public institutions could also diminish trust and lower tax morale. North Macedonia scores on perceived control of corruption and rule of law are substantially lower than EU NMS and similar to other Western Balkan countries, according to the “Worldwide Governance Indicators” (see Text Figure 6). Weak institutions and high corruption reduce the incentives of operating a registered business (Hassen and Schneider, 2016). In particular, Litina and Palivos (2016) show that in countries with a higher perception of political corruption, tax evasion is more accepted.

Text Figure 6:
Text Figure 6:

Governance Quality Percentile Score

(2017, from-2.5 (lowest) to 2.5 (highest) in standard normal unit, and 90% confidence interval)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: Worldwide Governance Indicators.

10. On the upside, perceived higher government effectiveness and regulatory quality, tend to encourage the establishment of formal businesses. The World Bank Doing Business Indicators also suggest a low regulatory burden (see Text Figure 7)7 However, there is still scope for improvement on government effectiveness and regulatory quality, reflecting shortcomings in the application of regulations.

Text Figure 7:
Text Figure 7:

Doing Business in Europe

(2020, scores)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: WorldBank Doing Business.Higher score means greater ease of doing business.

Unemployment and Education

11. High unemployment can drive workers to the informal sector.8 With unemployment around 17 percent, job opportunities in the formal sector are limited. Moreover, long-term unemployed (75 percent of the unemployed have been out of a job for more than a year) and young unemployed (17 percent of the unemployed) are more vulnerable. Long-term unemployed may be forced to take up jobs in the informal sector for subsistence, and young employed may not have the experience required to get a job in the formal sector.

12. Low educational attainment may also represent a barrier to formal employment. Most jobs in the informal sector are for low-skilled workers.9 The competencies of 15-year-old students are lower than in new EU member states and Western Balkans (see Text Figure 8). The overall enrolment rate in higher education has increased to more than 40 percent in recent years, but the tertiary education completion rate remains low at 30 percent, against 40 percent in the EU and Western Balkans. Higher investment in education is found to significantly reduce informality in economies where institutional quality is high.10 To the extent that wages are lower in the informal sector, individual returns to education are lower in the informal sector, which reduces incentives to invest human capital. 11

Text Figure 8:
Text Figure 8:

Educational Attainment at the Age of 15

(2015, PISA score)

Citation: IMF Staff Country Reports 2020, 024; 10.5089/9781513527925.002.A001

Source: OECD PISA.

B. A Set of Policies to Reduce Informality

13. A comprehensive set of policies is needed to tackle informality. The government’s 2018 Strategy for Formalization of the Informal Economy aims to improve the detection of informal activity, reinforce the business environment, provide incentives for formalization and strengthen the tax morale. The implementation of actions should be evaluated, and further efforts should be put in place to strengthen tax administration and tax compliance.

14. Improved tax administration would increase tax revenues and represent a key deterrent to informal activity. Efforts have been made to improve tax administration efficiency, including via the development of electronic payment systems. However, the Tax Administration Diagnostic Assessment Tool (IMF, 2016) highlights that the capacity of tax administration risk management and audit units should be raised further. The extent of initiatives to detect unregistered tax payers is limited and the tax audit program does not provide adequate coverage, is under-resourced and poorly focused. Focus should be on improving the Public Revenue Office (PRO)’s identification and treatment of compliance risk, and implementing better targeted audits. This will require addressing the PRO’s underfunding and capacity constraints.

15. Better tax administration can also help boost tax morale. Improving taxpayers’ trust in fair tax administration is a precondition for improved voluntary tax compliance and higher revenues without excessive recourse to enforcement.12 This will need to include reforms to make self-assessment by taxpayers more effective, such as providing every taxpayer with swift and impartial review of their complaints through an independent review process inside the tax administration. Ongoing measures to improve governance and the rule of law are also likely to improve the tax morale.

16. It is also important to ensure that all parameters of tax and benefits systems are compatible with formalization of activity.

  • The tax wedge for low-income earners should be evaluated. In particular, a reduction in the minimum social security contribution base could help lower the labor income tax wedge for low-paid workers. Nonetheless, to avoid under-reporting, this would have to be accompanied by efforts to strengthen the audit and compliance processes.

  • Conditional on a strong tax administration, in-work tax credits could be considered to stimulate formal employment of low-income workers. In many advanced economies, tax credits constitute a net transfer to an individual whose earned income falls below income tax liabilities. These tax credits increase the net income gain from accepting a job, compared to the alternative of being out of work (and receiving other benefits that would likely be withdrawn once taking a job). Minimum hours-worked requirements could be used to avoid providing income support to high-skilled workers in part-time jobs. However, this requires a strong tax administration, as in-work tax credits may be costly and ineffective if most low-income earners are not filing tax returns, or if there is no effective withholding system.

17. The minimum wage should take into account productivity developments, to avoid becoming an obstacle for formal employment. Ensuring that the minimum wage is fully enforced throughout the economy is essential to protect workers. However, if the minimum wage is too high relative to productivity, it may reduce formal employment.

18. The effectiveness in reducing informality of recent tax incentive schemes should be evaluated.

  • The VAT reimbursement scheme (July 2019) (“MyVAT”). The scheme provides taxpayers a 15 percent rebate on VAT paid, up to a certain cap, after submitting fiscal receipts. The scheme aims to increase formality by incentivizing taxpayers to ask for a VAT receipt and has been made possible by improvements in electronic tax systems. International experiences suggest that VAT reimbursement schemes in general have had limited impact on informality, unless accompanied by reinforced administrative capacity and better enforcement. Moreover, the scheme will be costly and a framework for evaluation and audit needs to be established to avoid abuse.

  • Subsidy on employers’ social security contribution (October 2019). The government will subsidize, for the next three years, social security contributions for employers on net salary increases of up to MKD 6000 per month. In addition to helping firms raise salaries, the intention is to reduce the incidence of ‘envelope payments’ by encouraging workers and firms to declare the full wage. Although the government estimates that the measure would be budget-neutral, it would increase long-term pension liabilities. At the same time, the subsidy will make the tax system more complex.

References

  • Atoyan and Rahman (2017) “Western Balkans: Increasing Women’s Role in the Economy,” International Monetary Fund.

  • Buehn and Farzanegan (2013) “Impact of education on the shadow economy: Institutions matter,” Economics Bulletin 33.3, 2052–2063.

  • Docquier, Muller and Naval (2014) “Informality and long-run growth,” IZA Discussion Papers 7883, Institute of Labor Economics.

  • Elgin and Oztunali (2012) “Tackling the Undeclared Economy in FYR Macedonia.”

  • Garvanlieva, Andonov and Nikolov (2012) “Shadow Economy in Macedonia.”

  • Hassan, M., & Schneider, F. (2016). Size and Development of the Shadow Economies of 157 Worldwide Countries: Updated and New Measures from 1999 to 2013. J Glob Econ, 4(218), 2.

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  • Herrera-Idárraga, López-Bazo and Motellón (2013) “Double Penalty in Returns to Education: Informality and Educational Mismatch in the Colombian Labour market,” Research Institute of Applied Economics Working Paper 07.

    • Search Google Scholar
    • Export Citation

  • International Monetary Fund (2016), FYR Macedonia Tax Administration Diagnostic Assessment Tool.

  • Jovanovic (2015) “Kalman Filter Estimation of the Unrecorded Economy in Macedonia.”

  • Kelmanson, Kirabaeva, Medina, Mircheva and Weiss (2019) “Explaining the shadow economy in Europe: size, causes and policy options,” Working Paper No. 19/278, International Monetary Fund.

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  • Litina and Palivos (2016) “Corruption, tax evasion and social values,” Journal of Economic Behavior & Organization, Vol. 124, issue C, 164–177.

    • Search Google Scholar
    • Export Citation

  • Messina and Silvia (2018) “Wage Inequality in Latin America: Understanding the Past to Prepare for the Future,” Latin American Development Forum, Washington, DC, World Bank.

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    • Export Citation

  • Schneider, Buehn and Montenegro (2010) “New estimates for the shadow economies all over the world.” International Economic Journal 24.4, 443–461.

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1

The incumbent government will appoint an interim Prime Minister. Two ministerial posts (the Ministry of the Interior and the Ministry of Labor and Social Affairs) will be given to opposition members and additional deputy ministers from the opposition will be appointed for three ministries including the Ministry of Finance.

2

Actual unemployment could be lower, as suggested by anecdotal evidence of firms’ difficulties in filling vacancies. Official statistics may not fully capture informal employment and rely on 2002 census data which does not properly account for the sizable emigration in the last two decades. A new census is planned for April 2021.

3

See “Sowing the Seeds of a Sustainable Future” Republic of North Macedonia Public Finance Review, World Bank Group, March 2019.

4

The public road company PESR has a 0.7 percent of GDP deficit in 2018 (latest available) which is not included in general government statistics.

5

See IMF country report No 19/32 – Annex I “Judicial Reform and Anti-Corruption Efforts in FYR Macedonia: Recent Progress and Next Steps” for staff analysis of governance issues.

6

See “Emigration and its economic impact on Eastern Europe”. IMF Staff Discussion Note SDN/16/07. July 2016

7

Price stability is the primary objective of the NBRNM as specified by the law, and the maintenance of the denar/euro exchange rate stability serves as an intermediate target for achieving price stability. When there is full capital mobility, monetary policy is ineffective under such an arrangement. However, in North Macedonia, imperfect capital mobility provides the central bank with some degree of autonomy in the short run.

8

The next MONEYVAL review is expected in 2021.

1

This debt sustainability analysis covers general government debt, see Figures 1–5, and public debt, see Figures 6–9. Public debt is equal to general government debt plus government-guaranteed debt of state-owned enterprises.

2

Stress tests include individual shocks to macro variables (real interest rate, real GDP growth, real exchange rate) and primary balance. The combined macro-fiscal shock incorporates the largest effect of individual shocks on all variables.

3

The real exchange rate gap is estimated to be around 2.3 percent.

1

This note was prepared by Louise Rabier (IMF Brussels Office). It builds on previous work by the North Macedonia team on the informal sector and a recent cross-country study by Kelmanson et al. (2019).

2

The World Bank Enterprise Survey presents perceptions.

3

Throughout this report, North Macedonia will be compared to other Western Balkan economies (Albania, Bosnia and Herzegovina, Kosovo, Montenegro, and Serbia), and new EU member states, who joined after 2004.

4

Eurostat, 2016.

5

This ratio might be biased upward given that declared wages are often lower than actual wages. On the other hand, it may be biased downward if on average, undeclared wages in the informal sector are lower than wages in the formal sector.

6

See the IMF’s Tax Assessment Diagnostic Assessment Tool (TADAT).

7

“Getting electricity” component excepted, because of high costs and lengthy procedures.

11

See Herrera-Idárraga et al. (2013) for evidences in Colombia.

12

In this respect, the Public Revenue Office has organized a national campaign to increase citizens’ tax morale and public awareness of the benefits of paying taxes and is envisaging one on informal work within the project “Improvement of work conditions.”

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Cover IMF Staff Country Reports
Republic of North Macedonia: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of North Macedonia
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2020: Issue 024
Publisher:
International Monetary Fund
ISBN:
9781513527925
ISSN:
1934-7685
Pages:
75
DOI:
https://doi.org/10.5089/9781513527925.002
  • Figure 1.
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    Figure 1.

    North Macedonia: Recent Developments

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    Figure 2.

    North Macedonia: External Sector Developments

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    Figure 3.

    North Macedonia: GDP Growth

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    Figure 4.

    North Macedonia: Fiscal Developments

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    Fiscal Balances: Baseline and Recommendations

    (Percent of GDP)

  • Figure 5.
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    Figure 5.

    North Macedonia: Fiscal Policy Recommendations

  • View in gallery

    Real GDP per Capita, PPP

    (Percent of EU-15)

  • Figure 6.
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    Figure 6.

    North Macedonia: Labor Market and Education Policies

  • View in gallery

    International Reserves

    (Percent of ARA metric)

  • Figure 7.
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    Figure 7.

    North Macedonia: Monetary Policy Stance

  • Figure 8.
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    Figure 8.

    North Macedonia: Banking Sector

  • View in gallery

    Aggregate replacement ratio

    (Percent)

  • View in gallery

    North Macedonia. Net Wage Distributions

    (Percent of total wage employed)

  • View in gallery

    Household Debt Ratios

    (in percent)

  • View in gallery

    Corporate Debt by Sources

    (in percent of GDP)

  • Figure 1.
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    Figure 1.

    North Macedonia: General Government Debt Sustainability Analysis (DSA)—Baseline Scenario

    (in percent of GDP unless otherwise indicated)

  • Figure 2.
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    Figure 2.

    North Macedonia: General Government DSA—Composition of Public Debt and Alternative Scenarios

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    Figure 3.

    North Macedonia: General Government DSA—Realism of Baseline Assumptions

  • Figure 4.
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    Figure 4.

    North Macedonia: General Government DSA—Stress Tests

  • Figure 5.
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    Figure 5.

    North Macedonia: General Government DSA Risk Assessment

  • Figure 6.
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    Figure 6.

    North Macedonia: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

    (in percent of GDP unless otherwise indicated)

  • Figure 7.
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    Figure 7.

    North Macedonia: Public Sector DSA—Composition of Public Debt and Alternative Scenarios

  • Figure 8.
    View in gallery
    Figure 8.

    North Macedonia: Public Sector DSA—Stress Tests

  • Figure 9.
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    Figure 9.

    North Macedonia: Public Sector DSA Risk Assessment

  • Figure 10.
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    Figure 10.

    North Macedonia: External Debt Sustainability: Bound Tests 1/ 2/

    (External debt in percent of GDP)

  • Text Figure 1:
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    Text Figure 1:

    Size of the Shadow Economy in Europe, 2016

    (Percent of GDP)

  • Text Figure 2:
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    Text Figure 2:

    Biggest Obstacle Reported by Firms

    (2013 or latest, percent of firms)

  • Text Figure 3:
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    Text Figure 3:

    Size of the Shadow Economy and GDP per Capita, 2016

  • Text Figure 4:
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    Text Figure 4:

    Tax Rates in Europe

    (2019 for CIT, indirect tax rates, latest for others)

  • Text Figure 5:
    View in gallery
    Text Figure 5:

    North Macedonia: Labor Income Taxation

    (2016, single person, no children)

  • Text Figure 6:
    View in gallery
    Text Figure 6:

    Governance Quality Percentile Score

    (2017, from-2.5 (lowest) to 2.5 (highest) in standard normal unit, and 90% confidence interval)

  • Text Figure 7:
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    Text Figure 7:

    Doing Business in Europe

    (2020, scores)

  • Text Figure 8:
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    Text Figure 8:

    Educational Attainment at the Age of 15

    (2015, PISA score)

Figure 1.

North Macedonia: Recent Developments
Figure 2.

North Macedonia: External Sector Developments
Figure 3.

North Macedonia: GDP Growth
Figure 4.

North Macedonia: Fiscal Developments

Fiscal Balances: Baseline and Recommendations

(Percent of GDP)
Figure 5.

North Macedonia: Fiscal Policy Recommendations

Real GDP per Capita, PPP

(Percent of EU-15)
Figure 6.

North Macedonia: Labor Market and Education Policies

International Reserves

(Percent of ARA metric)
Figure 7.

North Macedonia: Monetary Policy Stance
Figure 8.

North Macedonia: Banking Sector

Aggregate replacement ratio

(Percent)

North Macedonia. Net Wage Distributions

(Percent of total wage employed)

Household Debt Ratios

(in percent)

Corporate Debt by Sources

(in percent of GDP)
Figure 1.

North Macedonia: General Government Debt Sustainability Analysis (DSA)—Baseline Scenario

(in percent of GDP unless otherwise indicated)
Figure 2.

North Macedonia: General Government DSA—Composition of Public Debt and Alternative Scenarios
Figure 3.

North Macedonia: General Government DSA—Realism of Baseline Assumptions
Figure 4.

North Macedonia: General Government DSA—Stress Tests
Figure 5.

North Macedonia: General Government DSA Risk Assessment
Figure 6.

North Macedonia: Public Sector Debt Sustainability Analysis (DSA)—Baseline Scenario

(in percent of GDP unless otherwise indicated)
Figure 7.

North Macedonia: Public Sector DSA—Composition of Public Debt and Alternative Scenarios
Figure 8.

North Macedonia: Public Sector DSA—Stress Tests
Figure 9.

North Macedonia: Public Sector DSA Risk Assessment
Figure 10.

North Macedonia: External Debt Sustainability: Bound Tests 1/ 2/

(External debt in percent of GDP)
Text Figure 1:

Size of the Shadow Economy in Europe, 2016

(Percent of GDP)
Text Figure 2:

Biggest Obstacle Reported by Firms

(2013 or latest, percent of firms)
Text Figure 3:

Size of the Shadow Economy and GDP per Capita, 2016
Text Figure 4:

Tax Rates in Europe

(2019 for CIT, indirect tax rates, latest for others)
Text Figure 5:

North Macedonia: Labor Income Taxation

(2016, single person, no children)
Text Figure 6:

Governance Quality Percentile Score

(2017, from-2.5 (lowest) to 2.5 (highest) in standard normal unit, and 90% confidence interval)
Text Figure 7:

Doing Business in Europe

(2020, scores)
Text Figure 8:

Educational Attainment at the Age of 15

(2015, PISA score)