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Annex 12: Fund Relations Note
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| Annex 12: Fund Relations Note
This Fund Relations Annex includes: (i) the February 5, 2007 statement of the IMF mission to Skopje, which includes an assessment of the macroeconomic outlook and the status of the IMF Second Review; and (ii) the August 11, 2006 Public Information Notice at the conclusion of the 2006 Article IV Consultation. Statement of the IMF Staff Mission An IMF mission headed by Mark Griffiths has visited Skopje January 25 – February 5, 2007 to discuss the Second Review under the Stand-By Arrangement. The mission found that good progress has been made towards completing the review. The program’s macroeconomic targets for 2006 were met. The fiscal position remains strong, international reserves have increased, and interest rates are low. Preliminary official data estimate 2006 real GDP growth was broadly unchanged from 2005, but other indicators suggest that growth may well have been considerably higher. The economic outlook for 2007 and the medium term is favorable. To secure macroeconomic stability, the 2007 budget that was approved by parliament in late December 2006 limits the fiscal deficit to 1 percent of GDP—slightly higher than the target for 2006. The additional resources will be used to finance important reforms, including harmonization of social security contributions, higher investment, the second pillar pension system, and lower tariffs and income taxes. The mission welcomes the recent agreement with Paris Club creditors regarding debt prepayment. These prepayments are expected to be completed by end-April 2007. As a result, interest payments will decline, and medium-term debt sustainability will further improve. In the view of the mission, it is crucial that the government adheres to its fiscal targets, and that fiscal risks stemming from problems in a few sectors of the economy—in particular, the health and energy sectors—are mitigated. Steps have been taken. However, the mission encouraged the authorities to develop a comprehensive action plan to restore the financial viability of the energy sector, in close collaboration with the World Bank. The mission reached understandings on almost all elements of a draft letter of intent. A few issues still need to be discussed in greater detail, including: (i) clarification of the strategy for liberalization and reform of the telecommunications sector; (ii) next steps in harmonizing the bases of social security contributions and the personal income tax; (iii) improving tax collections, through integrating the social funds to collect social security contributions and, eventually, consolidating these reponsibilities within the public revenue office; and (iv) the new draft banking law. Provided sufficient progress is made in the coming weeks, an IMF Executive Board meeting to complete the Second Review could be held in March 2007. Finally, the mission would like to thank the Macedonian authorities for their continued cooperation, and for their generous hospitality. Skopje
February 5, 2007
International Monetary Fund 700 19th Street, NW Washington, D. C. 20431 USA
Public Information Notice (PIN) No. FOR IMMEDIATE RELEASE August xx, 2006 IMF Concludes 2006 Article IV Consultation with the former Yugoslav Republic of Macedonia On July 28, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the former Yugoslav Republic of Macedonia.23 Background Economic performance has started to improve. After a decade of sluggish growth, in part the result of external shocks, growth has reached 4 percent for two years in a row. In 2005, growth was driven by strong exports. A broadly balanced fiscal position and the fixed exchange rate have kept inflation under control. The external position has strengthened, with gross reserves rising from €700 million at end-2004 to around €1,200 (more than 4 months of imports or 25 percent of GDP) by May 2006. The recorded current account deficit fell sharply to 1.3 percent of GDP in 2005 driven by increased private transfers, though these may also capture capital account transactions. The increase in reserves has allowed the central bank to cut interest rates. Bank credit has expanded, especially to households and in foreign currency, though from a low base and less rapidly than in the region’s other countries. The overall fiscal position showed a small surplus in 2005. Last year’s 0.3 percent of GDP central government budget surplus was better than projected by 1 percent of GDP, reflecting continuing underperformance of ministries’ Special Revenue Accounts, restraint in public employment, and procurement delays. One-off revenue developments, including the unusually high telecom monopoly dividend and advancing VAT payments by importers, also contributed. In 2006, growth is projected to remain at 4 percent, with higher domestic demand offsetting some decline in net exports. Inflation is expected to increase to 3 percent, driven by supply factors, including higher tobacco taxes and oil prices. The official current account deficit is projected to widen to 3 percent of GDP due to higher oil prices, lower interest rates stimulating imports, and some slowing in last year’s increase in private transfers. Despite recent progress, structural weaknesses constrain the economy’s ability to increase employment and achieve more rapid output growth. Recorded unemployment in 2005 reached 35 percent, one of the highest in the region, as employment has barely increased since 1995. Levels of financial intermediation and the stock of foreign direct investment remain low. Macedonia ranked poorly in international comparisons of the business environment due to high costs of opening and closing a business, hiring and laying off workers, and enforcing contracts. Property rights are poorly defined with the land cadastre incomplete, the tax wedge on labor remains high, and telecommunications services are expensive. The government has amended the constitution and passed new laws to introduce comprehensive judicial reform, yet implementation has just started. Executive Board Assessment Executive Directors commended the Macedonian authorities for their sound macroeconomic policies which, after a decade of sluggish growth, have now started to deliver economic recovery. Inflation has remained under control, the current account deficit has narrowed, international reserves have increased, and the fiscal position is sound. Directors noted that, despite these successes, considerable challenges lie ahead. These include raising living standards closer to European levels, reducing unemployment, and keeping the current account deficit under control. Directors stressed that the best way to meet these challenges would be by maintaining the country’s hard-won macroeconomic stability, and accelerating structural reforms. Directors viewed the 0.6 percent of GDP fiscal deficit target as one of the anchors of macroeconomic stability. They cautioned that loosening the fiscal stance would be premature in view of uncertainties about the current account’s true size, medium-term fiscal challenges, and the limited institutional capacity in line ministries to spend additional funds efficiently. Rationalization of the public sector should be undertaken before spending increases are envisaged. Going forward, Directors also encouraged efforts to strengthen the fiscal revenue base and reduce nondiscretionary spending. Directors considered that the exchange rate peg is appropriate given the Macedonian economy’s size and openness, and its limited international financial market integration. The peg has kept inflation low, and, although there are structural weaknesses in the economy, price competitiveness and the level of the exchange rate seem broadly satisfactory. Directors considered it important to continue to strengthen the central bank’s policy instruments. They welcomed the central bank’s recent interest rate cuts, but with euro-area rates higher and the need to see the effects of the cuts on credit and the real economy, a pause now seems appropriate. Directors stressed the importance of structural reforms for accelerating growth. Institutional reforms, ranging from judicial reform and improving public governance to market liberalization and privatization, will be essential to developing a functioning market economy. Reducing the very high unemployment rate should be a priority, and can be achieved through active labor market policies, reducing the tax wedge, and eliminating barriers to part-time employment. Financial market development is also needed, notably to lower intermediation costs, improve the credit culture, and enhance banking supervision. Such reforms would boost investment and employment, strengthen total factor productivity, and increase Macedonia’s attractiveness for foreign direct investment. Directors noted that although these tasks are immense, so too are the potential rewards, and they encouraged the authorities to implement these reforms expeditiously. Macedonia’s provision of data to the Fund is broadly adequate for surveillance purposes. Directors nevertheless underscored the need for continued efforts to improve the quality and coverage of statistics, including in the area of fiscal transparency.
Sources: Data provided by the authorities, and IMF staff projections. 1/ In 2005, central government spent an additional 0.4 percent of GDP on the NBRM recapitalization. 2/ In 2005 and 2006 the change in stock reflects a major debt management operation. Net debt is defined as gross debt minus government’s deposits with the NBRM. 3/ Debt service due, including IMF, as a percent of exports. For 2006, includes a major debt management operation. Excludes rollover of trade credits. 4/ Total external debt, including trade credit. For 2005, includes a Euro 150 million Eurobond issue. 1 According to the 2002 census, the population consists of ethnic Macedonians (64 percent), ethnic Albanians (25 percent), ethnic Turks, (4 percent), ethnic Serbs (1.7 percent), Roma (2.7 percent), and some other small minority communities. 2 The new Labor Law adopted in July 2005 significantly eased labor market restrictions. The new government has already reduced the tax wedge and is contemplating a switch to general budget financing of health expenditures in an effort to further reduce payroll taxes. 4 The share of the population aged over 15 that actually was employed 5 This approach is consistent with the MILES framework that has been used in recent labor market assessments. 6 EBRD-World Bank Business Environment and Enterprise Performance Survey 2005 (BEEPS) 7 UNDP Early Warning Report Macedonia, December 2006. http://www.undp.org.mk; While only 3.9% of respondents said that reducing corruption should be the top priority of the government, some 42% said that corruption was one of the top three issues that worry them. 8 Doing Business 2007 9 Exception include the railways, the airport, road maintenance, forestry, public housing. 10 For example, almost one-third of participants in the higher education report to have been asked for a bribe at some point during the last five years. 11 The largest corruption case currently being prosecuted came to light when the Commission for the Prevention of Corruption (CPC) noted a single sentence in an SAO report to the effect that the SAO could not uncover why the Ministry of Defense paid a large sum in damages from a court case without first appealing the verdict. After investigation, the CPC determined that the court case was an elaborate method of defrauding the state of some 700,000 Euros. 12 “Conference on assessment of the implementation of the State Programme for Prevention and Repression of Corruption”, Conference materials – November, 2006. 13 For example, for primary education the highest cost municipality spends 4.3 times per student what is spent in the lowest cost municipality. 14 This information is not currently gathered on a systematic basis. 15 This information should be gathered through the Education Modernization Project. 16 Lending rates have fallen from 19 and 18 percent in 2001 and 2002, respectively, to 11 percent in 2005. Recent reductions in benchmark National Bank rates have led to further reductions in lending rates in 2006. 17 Credit growth to the private sector has risen from negligible levels in 2001 and 2002 to more than 20 percent in 2004 and 2005. This growth has continued in 2006. 18 The effective period of the TSS was extended through FY03 following further program delays in FY02. 19 European Community CARDS Programme - Albania Country Strategy Paper, 30 November 2001. 20 The European Council in Feira confirmed that its objective remained fullest possible integration of the countries in the region into the political and economic mainstream of Europe through the SAp, political dialogue, liberalization of trade and cooperation in Justice and Home Affairs. http://www.euoparl.eu.int/summits/fei1_en.htm. 21 The European Council in Copenhagen 1993 spelled out the Copenhagen criteria, by which candidate countries would be judged for accession on: (i) stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities; (ii) existence of a functioning market economy, as well as capacity to cope with competitive pressure and market forces within the EU; and (iii) ability to take on obligations of membership, including adherence to the aims of political, economic and monetary union – i.e. the acquis communautaire. 22 Engineered similarly to the Europe Agreements that were signed between the EU and the 10 countries of Central and Eastern Europe at the beginning of 1990s, the SAAs focus on respect for democratic principles and integration of the countries of the region into the EU single market. They foresee the establishment of a free trade area with the EU and set out rights and obligations in areas such as competition and state aid rules, intellectual property and establishment, which will allow the economies of the region to begin to integrate with the EU. The conclusion of such Agreements represents the signatories’ commitment to complete over a transition period a formal association with the EU, tailored to the circumstances of each country but based on the implementation of the same core obligations. 23 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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the July 28, 2006 Executive Board discussion based on the staff report. Download 2.05 Mb. Share with your friends:
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