IMF Reaches Staff-Level Agreement on the First Review under the Precautionary and Liquidity Line and Conducts Discussions of the 2023 Article IV Consultation with North Macedonia

November 14, 2023

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.

IMF staff and the authorities have reached staff-level agreement on the First Review under the Fund’s Precautionary and Liquidity Line, subject to approval by the IMF Executive Board. Upon approval, North Macedonia will have access to around SDR161.35 million (around €200 million at current exchange rates.) The authorities intend to draw some three quarters of this and treat the rest as precautionary.

The agreement supports the authorities’ intentions to continue reducing budget deficits, rebuild fiscal buffers, fight inflation, and safeguard financial stability. Beyond macro-financial stability, improving living standards will require boosting investment, raising productivity growth, and accelerating the green transition.

Skopje, North Macedonia: An International Monetary Fund
(IMF) mission, led by Mr. Jacques Miniane, visited Skopje during October
31–November 13, 2023, to discuss economic and financial policies in the
context of the first review of the Precautionary and Liquidity Line (PLL)
and the 2023 Article IV consultation with North Macedonia. At the end of
discussions, the mission issued the following statement:

“The North Macedonian economy continues to recover from last year’s
European energy crisis. After strong economic growth in the first half of
2023, IMF staff project the economy to expand by 2.3 percent this year and
by 3 percent next year. In particular, domestic demand is projected to
accelerate going into 2024, supported by the scale-up in public investments
such as the Corridor 8/10d road project. The external trade balance has
also improved significantly relative to last year, helped in part by the
sharp decline in global energy prices. This, together with resilient foreign
direct investment, is supporting international reserves, which remain at
adequate levels. Risks to the outlook are obvious however, and include
global geoeconomic fragmentation, the intensification of regional
conflicts, and potential volatility in global commodity prices.”

“IMF staff supports the authorities’ intentions to reduce the budget
deficit next year. This year, we expect the authorities to meet the nominal
budget target (equivalent to 4.7 percent of GDP), supported by recent
solidarity tax and tax policy reform. Looking ahead, we fully support the
government’s intention to propose a budget consistent with a fiscal deficit
of 3.4 percent of GDP in 2024. Fiscal consolidation is challenging, but
there are three reasons why the government is right to pursue a lower
deficit next year. First, it will facilitate the transition towards the 3
percent of GDP deficit ceiling required by the Organic Budget Law. Second,
it is important to build fiscal buffers to help face increased global
uncertainty and any crisis that could stem from it, or in case the large
Corridor 8/10d road project ends up costing more than projected. Finally,
fiscal consolidation will work hand in hand with monetary policy to further
reduce inflation. To support fiscal consolidation, it will be key to:

· Keep current spending contained. In particular, the government and
unions have a key role to play in advancing prudent policies and keeping
spending at sustainable levels ahead of the elections. In this context,
wage increases next year should not exceed what has already been agreed in
the general collective agreement.

· Further reduce energy subsidies. While increases in electricity
tariffs have impacted households’ budgets, electricity tariffs remain
highly subsidized in North Macedonia, they are not targeted enough, and
they take resources away from other priority spending, such as
infrastructure, health, and education. Therefore, it is critical to
continue tariff reforms in the electricity market, instead providing better
targeted support to the vulnerable households that most need it.

· Continue with tax policy reforms. To enhance the mobilization of
tax revenues, the government has adopted tax policy reforms aimed at
extending the tax base for personal and corporate income taxation, reducing
VAT exemption, and increasing excises. Nevertheless, to support fiscal
consolidation efforts and ensure medium term fiscal sustainability, it is
key to continue undertaking tax policy reform so as to further reduce
exemptions and broaden tax bases.”

“Beyond reducing the deficit, several structural fiscal reforms are needed.
Continued staffing of the Public Investment Management to its full
capacity, together with the strengthening of methodologies for the
identification and costing of projects, will lead to more efficient public
investment. Separately, increasing tax compliance is crucial for improving
the fiscal position and ensuring a competitive playing field in the
economy. In this context, the reform efforts inside the Public Revenue
Office are welcome, but they should be accelerated further. Finally, we
welcome the appointment of the Fiscal Council and look forward to it
becoming fully operational in 2024; this will improve fiscal governance.”

“In the months to come, close attention to risks to public finances
stemming from the Corridor 8/10d project will be critical. This project
will have a large impact on the economy and on public finances. Ongoing
geo-technical studies will provide key information to validate the design
of the road in critical sections, and to see whether initial estimates of
the cost embedded in the contract hold up or not. The authorities’ plan to
publish the independent transaction advisor’s monthly monitoring reports of
the project to enhance transparency and accountability is also welcome.”

“Inflation is coming down thanks to monetary policy tightening and the
normalization of global energy and food prices; the recent government
measures have also provided some relief. However, upside risks to inflation
remain, and the central bank need to stand ready to tighten further if
these risks materialize. Over the last 18 months, the National Bank (NBRNM)
has appropriately tightened monetary policy. These efforts have translated
into a slowdown in credit growth and a deceleration in both headline and
core inflation, which have fallen by more than half relative to their
peaks. They have also helped stabilize the foreign exchange market.
However, high nominal wage growth of around 15 percent, if sustained,
creates risks that inflation will reaccelerate. Given these latent risks,
monetary policy needs to remain tight for the time being, and the NBRNM
should stand ready to tighten further if these risks were to materialize.
The government and unions have a key role to play in this regard, by
pursuing prudent wage and pension policies. The recent administrative
price-control measures provide only temporary relief against inflation, and
they should not be counted as a lasting solution to inflationary issues.”

“IMF staff welcomes the National Bank’s plans to improve the transmission
from its policy rate into market rates.

The NBRNM has a robust monetary framework, with a clear mandate and
instruments to deliver it. In the last eighteen months, inflation
expectations have remained anchored, and the foreign exchange market has
been stable in the face of shocks.

However, several issues, including structural features of the economy—such
as excess bank liquidity—pose challenges for the transmission of the
headline policy rate into market rates. This is one aspect and one channel
of monetary policy, but an important one. In this context, the central
bank’s plans to improve this transmission are welcome, though the exact
nature of the measures, and their sequencing, will need careful
calibration.”

“The banking system has proven resilient despite sizable global shocks.
This was thanks to strong balance sheets entering the pandemic and measures
taken since then by the central bank to bolster them. At present, banks are
liquid, well capitalized and profitable. At the same time, deposits and
credit continue to grow, and NPLs are at record lows. Staff welcomes the
phase-in of macroprudential tools to mitigate risks and build up financial
buffers. The new loan-to-value ratios and debt service-to-income ratios are
helping to safeguard financial stability by reducing pressures in the real
estate market. Also, in this context of high bank profitability, staff
supports the NBRNM’s objective to tighten capital requirements further.
Recent upgrades to the regulations on credit risk management and on banks’
disclosure, as well as the new bank-resolution law, are also good steps
forward. Looking ahead, upgrading the bank deposit insurance law should
remain a priority.”

“It is important to expeditiously approve amendments to the central bank
law. These amendments would establish a formal macroprudential and
resolution mandate, improve the NBRNM’s governance framework, and ensure
autonomy to set employment conditions–which matters for central bank
independence.”

“North Macedonia has achieved macroeconomic stability, but it now needs to
unlock higher growth. North Macedonia’s income per capita was 27 percent of
the EU level in 2000, 38 percent in 2010, and still slightly below 40
percent now. Accelerating structural reforms to lift living standards is
therefore a priority. Reigniting convergence will require a multi-pronged
approach towards reducing the flow of emigration, boosting investment and
productivity, and accelerating the green transition. This can be achieved
by:

· Improving the business environment and rule of law. In particular, it
will be important to reduce informality, not least through a more effective
Public Revenue Office and lower bureaucratic delays, and to combat
corruption. On the latter, IMF staff fully shares the concerns expressed by
the European Commission on the recent changes to the criminal code.

· Preserving room in the budget to support public infrastructure and
education. A key reason for the slowdown in potential growth in North
Macedonia lies in relatively weak investment levels. Therefore, recent
increases in the size of the budget for capital expenditures are welcome and
should be preserved going forward. Improving public investment management
will also help better prioritize public investment projects.

· Accelerating the green transition and adapting to climate change.
Scaling-up green investments is needed because, ultimately, the
decommissioning of old and polluting power plants before the end of the
decade cannot be avoided if North Macedonia is to meet its emission targets.
Setting the right incentives for the transition towards energy efficiency
and preparing for the phasing in of the EU’s Carbon Border Adjustment
Mechanism are also important objectives. Adding emission and resilience
objectives in public investment will help with climate mitigation and
adaptation. Ongoing progress in greening the financial sector will
facilitate the climate transition.”

“These reforms will be crucial in laying the foundations for strong,
sustained growth, and will support the country on its path to EU
accession.”

“The mission would like to thank the authorities and other counterparts
for their warm hospitality as well as open and productive discussions.

”