International finance corporation country partnership strategy

IX. Concluding Remarks

133. 
     FYR Macedonia has made an impressive leap from a post-conflict country to an EU candidate country in only four years, preserving its macroeconomic stability, which bodes well for the outcome of the overall reform program during the CPS period and building the level of confidence essential to fostering growth and investment. FYR Macedonia needs to accelerate and sustain the economic growth for the benefit of all citizens, while increasing the efficiency and transparency of the public services. The Bank will continue to be a strong partner with fYR Macedonia as it faces these challenges in the coming four years and is committed to helping the government to achieve the results described in this CPS. A mid-term review of the CPS (CPSPR in FY09) would take stock of progress towards achieving the CPS outcomes and results and propose appropriate adjustments to the support strategy for FY09-FY10.
     

Date of CAS :	September 9, 2003
Date of Completion Report:	February 2007
Period Covered by the CAS:	July 2003-June 2006
Prepared by:	Andrew Kircher

1. 
   The former Yugoslav Republic of Macedonia (FYR Macedonia)’s progress from a post-conflict country to an EU candidate in the space of the 2004-2006 CAS has been impressive. When the CAS04 was approved in September 2003, fYR Macedonia was still recovering from the economic, political and social fallout of the 2001 conflict. Today in 2007, fYR Macedonia is enjoying EU candidate status, albeit without a clear date to start the negotiations, making it the third country to emerge from the former Yugoslavia to become a candidate, after Slovenia (already a member since 2004) and Croatia. On the political front, successive governments in fYR Macedonia have made considerable efforts to implement the Ohrid Framework Agreement, which provided the basis for resolving the 2001 ethnic conflict.
   

2. 
   On the economic front, the Macedonian government has been pursuing an ambitious reform program and has successfully preserved macro-economic stability during the past few years, though its growth performance has not been stellar, especially by regional standards. Following the prolonged contraction of the early 1990s and stabilization in the mid-1990s, growth began to pick up in the period of 1998-2000, but was disrupted by the 2001 conflict. Growth averaged around 0.3 % in the period 2000-2002 and has accelerated to around 3.5% in the 2003-2005 period mostly driven by improved trade performance and modest pick-up in investment activity. This took a heavy toll on living standards as the unemployment rate (traditionally at very high levels), increased from around 30% in 2000 to 38% by 2002. Labor market data indicate that most of the growth has come from productivity gains as the unemployment rate remains at around 36.5% at end-2005.
   

3. 
   The fiscal adjustment during this period was remarkable, with large imbalances of 2001-2002 of -6.3 and -5.6 percent of GDP respectively being reduced to 0.1 percent of GDP fiscal deficit in 2003, and surpluses of 0.7 percent and 0.3 percent of GDP in 2004 and 2005 respectively. The central budget deficit is expected to average 0.6 percent of GDP in 2006, ensuring that government spending and public debt continue on a downward path (as % of GDP). The prudent fiscal policy enabled a slight loosening of the monetary policy, resulting in declining interest rates¹⁶ and expanding credit to the private sector¹⁷ without compromising price and exchange rate stability. The increase in private transfers and the inflow of portfolio investments are signs of improving business confidence in the economy and have contributed to a significant improvement in the Balance of Payments in 2005. The current account deficit is at sustainable levels as reserves increased to a comfortable level of four months of imports. The country remains moderately indebted and the debt service burden of about 5 percent of GDP since 2003 remains modest. This success was reflected in the improvement in the credit rating of the country and subsequently by a four-fold oversubscription to the government’s first issue in December 2005 of a 10-year, €150 million Eurobond. The money was used to pre-pay London Club debt in January 2006.
   

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4. 
   With an ethnically diverse population of 2 million, fYR Macedonia gained its independence under difficult circumstances. The breakup of Yugoslavia in 1991 and the conflicts that followed resulted in the loss of a large and protected market and key transport routes. This led to a period of economic decline with high inflation, large fiscal deficits, insider privatization and almost no foreign investment. The Government's stabilization program, initiated at the end of 1994 with the assistance of international donors including the World Bank and the International Monetary Fund (IMF), restored macroeconomic stability.
   

5. 
   Since fYR Macedonia joined the World Bank in 1993, IDA and IBRD commitments to the country through 38 operations total approximately $780 million; since fYR Macedonia became a member of the IFC, the country has received commitments of over $93 million in IFC funds and more than $25 million in syndications. Bank financing has helped the government maintain macroeconomic stability, reform the enterprise sector and develop a sound financial sector, and provided investment support in key sectors including energy, roads, irrigation, community development, health, education, and others sectors. Around half of all lending has been on concessional IDA terms. But because of improved economic performance and creditworthiness, fYR Macedonia graduated fully from IDA in 2003.
   

6. 
   During the three years of the World Bank’s Country Assistance Strategy (CAS) for fYR Macedonia during FY04-FY06 (hereafter referred to as CAS04), the country’s first IBRD-only CAS, the Bank moved to a high-case lending program in May 2004, based on the strong reform efforts by the Macedonian government. This is particularly noteworthy among the countries of the Western Balkans, where volume has been declining as IDA constraints have begun to apply and where the full transition to IBRD has proven to be difficult for creditworthiness reasons. In fact, fYR Macedonia’s strong performance has allowed the Bank to continue lending on full IBRD terms at a stable level over the past decade.
   

7. 
   The CAS04 Completion Report concludes that the Bank’s assistance to fYR Macedonia through FY04-FY06 was Satisfactory. The report evaluates the impact and effectiveness of the Bank’s assistance, and the outcomes achieved, through the implementation of the CAS04. While the CAS04 was not prepared using a Results-Based methodology, this report attempts to retrofit a results-based framework to it as a basis for a new Country Partnership Strategy (CPS) covering FY07-FY10. The retrofitted CAS04 Results Matrix has been prepared as if it had been done when the CAS was originally prepared in FY04.
   

8. 
   The CAS04 followed a Transitional Support Strategy (TSS) that was discussed by the Board in September 2001 and which covered FY02. The TSS had outlined a program of Bank assistance to support the post conflict priorities of the country as it emerged from an internal conflict in 2001. The TSS outlined a one year¹⁸ program of post-conflict Bank support primarily geared towards achieving four post-conflict priorities, namely (i) meeting balance of payments needs; (ii) reconstruction; (iii) strengthening social cohesion; and (iv) supporting decentralization.
   

9. 
   The CAS04 presented an IBRD program of support for the period FY04-06, which sought to build on the markedly improved macroeconomic management and structural reform progress since the 2002 elections. The IBRD program focused on promoting the effective management of public resources, tackling corruption, creating the conditions for private sector led growth, and ensuring an effective safety net is in place for the most vulnerable Macedonians.
   

10. 
    Although fYR Macedonia did not have a formal national development strategy at the time of the CAS04, the policy agenda of the government was clearly articulated in its political platform in the 2002 elections. The four pillars of the platform were (i) political and social stability; (ii) poverty reduction; (iii) job creation; and (iv) tackling corruption. This program enjoyed broad support throughout the country.
    

11. 
    The analysis of fYR Macedonia’s development challenges in the CAS04 were developed collaboratively by the Bank and the government, based on the overarching two-pronged framework provided by the Ohrid Agreement and the Stabilization and Association Agreement (SAA). The objectives of the CAS04 were drawn from this assessment, namely: (i) to promote the efficient management of public resources and tackle corruption; (ii) to promote the creation of jobs through sustainable private sector driven growth; and (iii) to promote social cohesion, build human capital, and protect the most vulnerable.