FYR of Macedonia Stabilizes Economy and Seeks to Deepen Structural Reforms

• Pages: 173-174

Page 173

The following article is based on staff reports prepared in conjunction with the IMF's annual consultation with the former Yugoslav Republic (FYR) of Macedonia and the country's request for resources under the IMF's enhanced structural adjustment facility (ESAF). It examines the country's progress to date and its objectives for continued reform.

Amid sometimes turbulent regional developments, the FYR of Macedonia has taken strong steps to stabilize its economy. Its inflation rate-the lowest of all the transition economies-is now at the level of advanced countries. Yet the process of creating a vibrant market economy is far from complete. Over the medium term, it will be crucial for the FYR of Macedonia to reduce its large current account deficit, tackle high and rising unemployment, and address weaknesses in its financial system. To this end, the authorities are committed to maintaining the sound financial policies that have characterized the country's transition efforts and to deepening structural reforms.

Background

In many respects, the FYR of Macedonia had a tough birth. When it became independent in 1991, the country's traditional trading markets were disrupted-a result of ongoing conflicts in the region-and it lost substantial transfers from the Yugoslav federation that had helped to underwrite the cost of infrastructure and subsidize agriculture and industry. The scale of the adjustment was enormous and created numerous attendant problems.

As a result of a refocusing of monetary policy that was supported by an impressive fiscal consolidation, the FYR of Macedonia was, by mid-1995, able to arrest the decline in output and stabilize prices. Only two years earlier, inflation had topped 240 percent. Price and exchange rate stability provided the authorities with an environment in which to introduce needed structural reforms. In particular, the FYR of Macedonia slashed the fiscal deficit to just 1 percent of GDP in 1995 from 13 percent in 1993, but still found budget resources for a comprehensive rehabilitation package and for a restructuring program for many of the largest public enterprises. The authorities also began privatization in earnest.

New challenges emerged in 1996, as exceptional foreign exchange inflows-related to the regional situation-evaporated and increased consumer confidence stimulated domestic demand and led to sharply higher imports...