Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2019 Article IV Consultation with the Republic of North Macedonia







January 27, 2020















On January 22, 2020, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation
with the Republic of North Macedonia and considered
and endorsed the staff appraisal without a meeting.

[1]

,
[2]

Economic activity is strong. Real GDP growth is estimated to have
strengthened to 3.2 percent in 2019, supported by buoyant private
consumption and a rebound in investment. Export growth remained high
despite the slowdown in key trading partners, while imports were boosted by
the solid domestic demand. Helped by sizeable inflows from remittances, the
current account deficit was modest. Inflation, which is mainly driven by
euro area inflation and food and energy prices, was low.

The overall fiscal deficit is expected to have remained below 2 percent of
GDP in 2019, keeping public debt broadly stable. Capital spending increased
markedly from 2018 but continues to be below budgeted amounts, despite the
country’s investment needs.

Credit growth is solid, and non-performing loans remain relatively low.
Against the background of low inflation, solid deposit growth, and
favorable foreign exchange market developments, the National Bank of the
Republic of North Macedonia has continued to accumulate international
reserves and further cut its policy rate in January 2020, keeping monetary
policy accommodative.

Executive Board Assessment

In concluding the Article IV consultation with the Republic of North
Macedonia, Executive Directors endorsed the staff’s appraisal as follows:

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.

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.

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.

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.

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.

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.

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.

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.

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.



North Macedonia: Selected Economic Indicators

2014

2015

2016

2017

2018

2019 (e)

2020 (p)

Year-on-year change, unless otherwise specified

Real GDP

3.6

3.9

2.8

1.1

2.7

3.2

3.4

Real domestic demand

4.4

5.4

5.0

0.5

2.0

4.2

3.7

Consumption

2.4

4.3

2.1

0.4

2.4

2.9

3.1

Gross investment

10.7

8.3

12.5

0.8

0.9

7.4

5.2

Net exports

-8.0

-14.1

-16.7

-0.1

-1.2

-5.8

-5.2

CPI inflation (annual average)

-0.3

-0.3

-0.2

1.4

1.5

0.9

1.2

Unemployment rate (annual average)

28.0

26.1

23.8

22.4

20.7

17.9

16.8

Private Sector Credit

9.8

9.5

0.0

5.3

7.3

6.7

6.3

In percent of GDP

Current account balance

-0.5

-2.0

-2.9

-1.0

-0.1

-1.0

-1.2

Goods and services balance

-17.2

-16.2

-15.2

-14.1

-12.8

-12.7

-12.2

Exports of goods and services

47.7

48.8

50.9

54.9

60.4

63.0

64.0

Imports of goods and services

64.9

65.0

66.2

69.0

73.2

75.8

76.2

Private transfers

17.3

16.8

15.4

15.9

15.9

15.3

14.8

External debt

70.0

69.3

74.7

73.4

73.4

74.2

74.0

Gross investment

30.3

30.4

32.5

32.3

31.9

32.9

33.3

Domestic saving

29.8

28.5

29.7

31.2

31.8

32.0

32.1

Public

-0.9

-0.1

0.2

0.5

0.1

0.3

0.0

Private

30.6

28.6

29.5

30.7

31.7

31.7

32.0

Foreign saving

0.5

2.0

2.9

1.0

0.1

1.0

1.2

General government gross debt 1/

38.0

38.1

39.8

39.4

40.6

39.8

40.4

Public sector gross debt 1/ 2/

43.3

44.0

46.7

46.1

47.6

47.6

49.1

Central government balance

-4.2

-3.5

-2.7

-2.7

-1.8

-1.8

-2.5

Memorandum items:

Nominal GDP (billions of denars)

527.6

559.0

594.8

618.1

658.1

692.7

730.9

Nominal GDP (billions of euros)

8.6

9.1

9.7

10.0

10.7

11.2

11.9

GDP per capita (euros)

4138

4380

4657

4837

5145

Sources: NBRNM; SSO; MOF; IMF staff estimates.

1/ 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.

2/ Includes general government and public sector
enterprises.




[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.


[2]

The Executive Board takes decisions under its lapse-of-time
procedure when the Board agrees that a proposal can be considered
without convening formal discussions.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Wafa Amr

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson








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