December 17, 2021
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. 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 Executive Board for discussion and decision.
Washington, DC: An International Monetary Fund mission conducted the 2021 Article IV Consultation between November 23 and December 10, 2021. At the end of the virtual visit, the mission issued the following statement:
Forceful policy support has cushioned the economic impact of the pandemic. Fiscal lifelines helped prevent large job losses and protect the most vulnerable, while monetary and financial measures kept credit flowing to the economy. With uncertainty remaining high, policies need to be kept flexible. Emphasis should be on limiting the economic scars from the pandemic crisis while making progress on long-standing reform priorities such as further strengthening public financial management and revenue administration, and buttressing the financial safety net.
Economic recovery underway, but uncertain pandemic prospects
The economic recovery is expected to continue in 2022. Growth is forecast to pick up from 4 percent in 2021 to 4.2 percent in 2022, driven mainly by strong domestic demand. While employment is likely to recover more gradually, high wage growth, rising remittances and the release of some pent-up savings would boost disposable income. Export growth is expected to be solid, although dampened by supply chain disruptions, notably in the automobile sector, whereas strong domestic demand implies high import growth. However, vaccine coverage is still low, and the global resurgence of the pandemic and new virus variants present downside risks to growth. Moreover, political instability could dampen confidence and hamper policy implementation. On the upside, a start of the EU accession negotiations could provide an impetus for reform, lifting growth.
As in other countries, inflation is likely to remain higher for longer than previously thought, coming down in the second half of 2022. Rising global energy and food prices have fueled higher inflation in 2021 and may continue to add to inflation in early 2022. This is affecting many households, as more than half of their consumption spending is on food and energy. Measures of inflation which strip out volatile prices, including food and energy prices, have also increased, suggesting that higher inflation is becoming more broad-based. Overall, IMF staff expect inflation to reach 3.9 percent on average in 2022, before stabilizing at around 2 percent in 2023 and thereafter. While there is considerable uncertainty regarding the future path of inflation, higher wage growth poses upside risks.
Rebuilding fiscal space and strengthening economic governance
The 2022 budget appropriately scales back pandemic-related spending, while continuing to support economic activity. On a preliminary basis, staff expect the fiscal deficit to narrow to 4.3 percent of GDP in 2022, from 5.9 percent in 2021. The budget provides for higher health spending, including for vaccines. It also provides an envelope to allow a flexible response to pandemic-related spending needs. If the demand for emergency lifelines continues to wane, as expected in the baseline, the funding could be used to support the reallocation of resources across sectors including by training and reskilling workers, incentivizing hiring and investment, and strengthening the social safety net. An allocation for targeted assistance exists in the budget, but additional funds may be needed to mitigate the impact of higher energy prices on vulnerable groups, especially when the reduced VAT rate on electricity is normalized starting in July. Continuing to provide subsidies to energy companies or maintaining the reduced VAT rate, which affect all households irrespective of their income level, would be more costly to taxpayers than targeted assistance to households with lower incomes.
A credible medium-term fiscal strategy is key to rebuilding fiscal space while creating room for more investment. Staff recommend bringing the fiscal deficit close to 1 percent of GDP over the next five years, which would ensure that the government has adequate fiscal space to respond to any future shocks. This can be achieved mainly through tax policy reform—including streamlining preferential treatments, reversing tax cuts taken during the pandemic, and making the system more progressive—combined with much needed efforts to strengthen collection capacity and combat tax evasion.
Further improvements in public financial management would support the government’s plan to scale up investment and, more generally, limit fiscal risks. In particular, to improve the management of public investment, the plans to set up a dedicated unit in the Ministry of Finance should be completed soon and public-private partnerships need to be fully integrated in the public investment framework. Notwithstanding progress to date, it is important to continue efforts to ensure transparency and accountability in the use of public money, including through further improvements in public procurement practices. Safeguards are needed to manage fiscal risks related to state-owned enterprises and local government finances.
Maintaining monetary and financial stability
The de facto peg has served as an anchor of stability over the past decades, and the level of international reserves remains appropriate to support the peg. None of the global factors driving inflation would respond to changes in domestic monetary policy. However, the National Bank of the Republic of North Macedonia (NBRNM) needs to continue to carefully communicate its assessment of inflation developments, while standing ready to tighten policies if inflation in North Macedonia becomes persistently higher than inflation in the euro area, which is currently not the case, or significant and sustained pressures materialize on foreign currency reserves.
Banking system strength has held up well during the pandemic, but continued vigilance is essential. The banking system overall remains well capitalized and profitable. Initiatives to improve the framework for stress tests of banks are welcome, together with intensified supervisory efforts to ensure that banks recognize any problem assets and provision adequately for potential loan losses on a forward-looking basis. Given the still high share of FX or FX-linked loans in household loans, with limited hedging of borrowers, the NBRNM should maintain its carefully calibrated measures to limit FX lending. Moreover, rising private sector debt, albeit from low levels, and the high growth in mortgage lending, coupled with an acceleration in house prices, warrant further scrutiny.
The frameworks for macroprudential policy and the financial safety net should be strengthened. Preparations have been ongoing since the IMF’s 2018 Financial Sector Assessment Program (FSAP) and the legislative process should be completed without further delays. Priorities include improving macroprudential oversight and coordination across institutions, and ensuring that macroprudential instruments are available. Modernized frameworks for bank resolution and deposit insurance are crucial to bolster the financial safety net. The operational autonomy of the NBRNM should be preserved.
Limiting economic scarring
Efforts to support reallocation are important to limit the economic scars from the pandemic crisis. The drop in labor force participation accelerated during the crisis and needs to be counteracted, including by policies to support job-to-job transitions, through reskilling and retraining, and to strengthen education outcomes to reduce skill shortages. To preserve jobs and competitiveness, staff recommend adhering to the minimum wage mechanism, while aligning it more closely with productivity developments. Any ad hoc increases in the minimum wage should be accompanied by further measures to strictly enforce the minimum wage to prevent that jobs shift to the informal sector. A further strengthening of the bankruptcy and insolvency framework, including through implementation of the new bankruptcy law, can also help resource reallocation going forward.
The team is grateful to the authorities and other counterparts for the constructive dialogue.