An IMF team headed by Ms. Ivanna Vladkova Hollar conducted post-program monitoring of the Macedonian economy during October 29–November 8, 2013. The post program monitoring (PPM) process is intended for member countries that have substantial IMF credit outstanding following the expiration of their programs. After the mission, the team will draft a report which will be submitted to the IMF Board.
1. Macroeconomic prospects are improving, even as the external environment remains uncertain. Policies should therefore start shifting away from providing stimulus to the economy and focus on preserving fiscal and external sustainability. Doing so will require a pace of fiscal consolidation that is attuned to the speed of the economic recovery and provides space for growth-enhancing capital expenditure. Over the medium term, FYR Macedonia needs to unlock stronger flows of foreign direct investment and strengthen their linkages with the domestic productive sector to help ensure faster and more balanced growth.
2. Macroeconomic prospects are improving, and FYR Macedonia is well-positioned to return to growth on the back of a gradual recovery in Europe. Growth of about 2½ percent in 2013 appears achievable, largely driven by public investment and a better performance of net exports. However, against the backdrop of a still uncertain external environment, a broadening of the growth base towards domestic private demand and signs of a stronger pickup in private credit would help balance the risks to the outlook.
3. As growth continues to strengthen, policies should start shifting away from providing stimulus—ending the monetary policy loosening cycle and implementing the planned reduction in fiscal deficits, starting with the 2014 budget.
Fiscal Policy and Debt Sustainability
4. The publication of a medium-term fiscal strategy is a welcome contribution to fiscal transparency and helps better anchor medium-term expectations. The authorities’ fiscal targets through 2016, if met, would secure a decline in the ratio of central government debt to GDP starting in 2017, to about 36 percent in 2018. However, if demand shows signs of recovering faster than expected, the authorities should consider a more frontloaded consolidation. This would prevent the emergence of internal and external imbalances and reduce debt levels earlier, boosting policy credibility and creating room for a countercyclical response to any future economic downturn.
5. Fiscal adjustment needs to protect the execution of priority capital spending, even if overall revenues fall short of the authorities’ projections. In this respect, the multi-year budgeting framework should help ensure a spending mix that will help address infrastructure gaps, particularly in roads, railways, and energy. Collecting and disseminating information on the implementation of strategic investment projects will also help in this respect.
6. The spending that occurs off-budget through public enterprises, and in particular through the Public Enterprise for State Roads (PESR), calls for a continued tight control over the pace of the indebtedness of these enterprises, as well as a continued analysis of the evolution of and risks to the broader public sector debt.
External Sustainability
7. Capacity to service outstanding external debt obligations, including to the IMF, remains adequate. However, in a context of structurally large trade deficits, if FDI and private transfers were to turn out weaker than expected, the accumulation of international reserves would increasingly depend on public external borrowing. This, in turn, could eventually diminish the country’s resilience to external shocks.
8. At the same time, the government’s gross financing requirements for 2014 are expected to be largely covered by domestic resources, contributing to a subdued pace of reserve accumulation. Fiscal policy and the public debt management strategy need to be carefully calibrated to ensure that the competing objectives of reducing external risks and ensuring adequate financing to the private sector can both be met.
Growth and Competitiveness
9. Expanding and diversifying Macedonia’s export base is necessary to accelerate income convergence towards Western European economies, and would also help bolster external sustainability. Big multinationals who are increasingly finding Macedonia an attractive location are already starting to provide a notable impulse to exports—and to job creation. To ensure more balanced growth, it will be important to strengthen the linkages between FDI and the domestic productive sector. The emergence of a competitive and qualified domestic supply chain would reduce imports and help improve the structural trade balance.
10. To facilitate this, the authorities should capitalize on their successful strategy to provide an effective high-level one-stop shop in free trade zones, and continue improving the operating environment for smaller investors. Finally, the authorities should continue prioritizing capital expenditure so as to develop the needed infrastructure connecting Macedonia to larger markets.
The IMF team is grateful to the authorities and private sector representatives for their hospitality and open and constructive discussions during the mission.
Source: IMF
