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Accelerated Reforms will Carry Forward Macedonia’s Hard-Won Economic Achievements

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
August 2006
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After a decade of sluggish growth, in part the result of external shocks, the former Yugoslav Republic of Macedonia’s economic growth reached 4 percent for two years in a row in 2004-05 and is expected to stay at that rate in 2006. Inflation has also remained under control, the current account deficit has narrowed, international reserves have increased, and the fiscal position is sound, the IMF said in its recent economic review.

Despite recent progress, structural weaknesses constrain the economy’s ability to increase employment and achieve more rapid growth. Recorded unemployment is one of the highest in the region, and financial intermediation and foreign direct investment remain low. In addition, Macedonia ranked low in international comparisons of the business environment because of the high costs of opening and closing businesses, hiring and laying off workers, and enforcing contracts. Property rights are also poorly defined; the tax wedge on labor is high; and telecommunications services are expensive.

FYR Macedonia
Prel.Proj.Proj.
2004200520062007
Real GDP (percent change)4.14.04.04.0
Consumer prices (percent change, period average)-0.30.52.92.0
Unemployment rate (percent of labor force, average)37.237.3
Central government balance (percent of GDP)10.40.3-0.6-0.6
Official gross reserves (million euros)7171,1231,6021,699

In 2005, the central government spent an additional 0.4 percent of GDP on its recapitalization.

Data: Macedonian authorities and IMF staff projections.

In 2005, the central government spent an additional 0.4 percent of GDP on its recapitalization.

Data: Macedonian authorities and IMF staff projections.

IMF Executive Directors commended the Macedonian authorities for their sound macroeconomic policies, which have now started to deliver economic recovery. Considerable challenges lie ahead, however, including raising living standards closer to European levels, reducing unemployment, and keeping the current account deficit under control. The best way to meet these challenges, Directors said, would be by maintaining the country’s hard-won macroeconomic stability and accelerating structural reforms. Judicial reform and improving public governance will be essential to developing a functioning market economy. Unemployment can be reduced through active labor market policies, reduction of the tax wedge, and elimination of barriers to part-time employment. Financial market development is also needed—notably to lower intermediation costs, improve the credit culture, and enhance banking supervision.

Directors cautioned that loosening the fiscal stance would be premature in view of uncertainties about the true size of the current account balance, medium-term fiscal challenges, and the limited institutional capacity to spend additional funds efficiently. Rationalization of the public sector should be undertaken before spending increases are envisaged. Directors also encouraged efforts to strengthen the fiscal revenue base and reduce nondiscretionary spending.

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