The IMF lowered Macedonia’s GDP growth forecast to 1.9% from 2.5% in its Autumn WEO report in October, according to its latest Article IV-related report released on Wed. The IMF said that the poor performance of the economy in H1, resulting from the prolonged political crisis, was the main reason behind the weaker economic growth this year. The fund said that the political uncertainty restrained investments and slowed down lending to companies. The IMF also noted the expansion of the CA deficit in recent years due to higher profit repatriation by foreign companies operating in Macedonia, weaker remittances and the tendency of households to increase their foreign currency cash holdings. It added that the banking system remains stable as the lenders are well-capitalized, profitable and liquid.
The IMF said that the formation of the new government in late May is a turning point for the local economy and called for structural reforms, aimed to stop the rapid public debt growth. The fund said that fiscal consolidation efforts are needed and that the cabinet should introduce durable measures to reduce fiscal deficits. The called on the government to improve tax collection and raise the energy and property taxes to boost tax proceeds. On the spending side, the IMF called on the government to improve the targeting of social expenditures, rationalize subsides and ensure the sustainability of the pension system. The fund welcomed the government’s plan to reduce the fiscal deficit gradually to 2% of GDP in the medium term and its reforms to improve fiscal transparency and the management of the public finances.
The IMF said that the current monetary policy of the central bank to keep the key interest rate low is appropriate due to the subdued CPI inflation and external stability. Still, the IMF urged the central bank to tighten the monetary stance in case of higher inflation and loss of market confidence. The fund also said that the central bank should remain vigilant regarding the high degree of euroization in the banking sector and the moderate deleveraging risks. The IMF also called on the local authorities to implement further micro- and macro-prudential measures to ensure financial stability and counter possible risks to the sector.
The IMF also called on the government to conduct vital structural reforms to boost productivity and reduce unemployment. The fund welcomed the government’s plan to support social inclusion and take measures to improve employment, although it said that those measures should be carefully targeted. The IMF also said that the growth in salaries should be kept in line with the developments related to productivity to ensure that the economy remains competitive. The fund also called on the government to take measures to improve labour force participation, especially that of women. The fund called for various measures to attain this goal, including tax relief, social assistance, family leave policy reforms and active labour market policies. The IMF added that the authorities should also take measures to improve trade-related logistics, workers’ skills and public administration governance to boost FDI inflows to the country.