20220215-IMF-Republic_of_North_Macedonia_2021_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_the_Republic_of_North_Macedonia_74页_1mb

Summary of IMF Country Report No. 22/47: Republic of North Macedonia

Core Content

The IMF Country Report No. 22/47 outlines the results of the 2021 Article IV Consultation with the Republic of North Macedonia, conducted through videoconferences between November 23 and December 10, 2021, and finalized by the Executive Board on February 14, 2022. The report evaluates the economic recovery from the pandemic, fiscal and monetary policies, financial sector stability, and structural reforms. It also provides policy recommendations and an outlook for 2022 and beyond.

Main Economic Developments

• Economic Recovery: After a 6% decline in real GDP in 2020, the economy rebounded with an estimated 4% growth in 2021, driven by domestic consumption, increased diaspora remittances, and continued policy support.
• Fiscal Performance: The fiscal deficit decreased from 8.2% of GDP in 2020 to 5.5% in 2021 due to strong revenue performance and reduced pandemic-related spending.
• Monetary Policy: The National Bank of the Republic of North Macedonia (NBRNM) maintained an accommodative stance, with inflation rising to 3.2% in 2021 and expected to reach 4.3% in 2022.
• Financial Sector: The banking system remains well-capitalized with a low rate of non-performing loans, and private sector credit growth is robust.
• External Position: The current account deficit narrowed in 2021, but supply chain disruptions and higher import prices negatively impacted the external position.

Key Policy Recommendations

Fiscal Policy

• Targeted Support: Fiscal support for pandemic relief should become more targeted and gradually scaled down as the pandemic's impact diminishes.
• Health Spending: Health spending should remain at a high level to ensure long-term resilience.
• Fiscal Strategy: A credible medium-term fiscal strategy is essential to balance rebuilding fiscal space with increased investment.
• Tax Reform and Revenue Administration: Tax policy reform and improved revenue administration are key to fiscal consolidation.
• Public Financial Management: Further improvements in public financial management are needed to reduce fiscal risks and support the government's investment plan.

Monetary Policy

• Inflation Monitoring: The NBRNM should be prepared to tighten monetary policy if inflation diverges significantly from the euro area or if there are sustained pressures on foreign exchange reserves.
• Operational Autonomy: The operational independence of the central bank should be preserved.

Financial Sector Policies

• Asset Recognition: Banks should continue to identify and address problem assets as support measures are phased out.
• Macroprudential Reforms: Continued efforts to strengthen the macroprudential policy framework and financial safety net are essential.
• Bank Resolution and Deposit Insurance: The bank resolution framework and deposit insurance should be further developed to enhance financial stability.

Structural Policies

• Resource Reallocation: Policies should support job-to-job transitions and reduce economic scarring from the pandemic.
• Education and Labor Market: Improving education outcomes and increasing labor participation among women and youth is crucial.
• Informality Reduction: Efforts to combat informality should continue to enhance economic efficiency.

Key Issues and Outlook

• Economic Outlook: Real GDP growth is expected at 4% in 2022, but the recovery is weaker than anticipated due to the resurgence of the pandemic.
• Inflation: Headline inflation is projected to rise to 4.3% in 2022, with core inflation expected to stabilize around 2.5%.
• Employment: The unemployment rate has decreased to 15.8% in 2021, but the recovery is expected to be gradual.
• Fiscal Space: The fiscal balance is expected to remain in line with the IMF's baseline, with the deficit projected at 4.3% of GDP in 2022.
• EU Accession: Prospects for EU accession remain a key driver of reform and economic convergence, although progress has been hindered by political instability and opposition from Bulgaria.

Risks and Challenges

• Downside Risks: The resurgence of the pandemic, low vaccination rates, and geopolitical tensions could deepen economic disruptions and increase inflation.
• Supply Chain Disruptions: Continued global supply chain issues affect export-oriented sectors and worsen the external position.
• Fiscal Risks: Persistent second-round effects from inflation could dampen demand and hurt competitiveness.
• Political Instability: A reemergence of political instability could delay legislative reforms and fiscal consolidation.
• Productivity and Employment: A slow recovery in employment and productivity poses risks to the medium-term growth outlook.

Conclusion

The IMF Executive Board welcomed the economic rebound and emphasized the need for continued flexibility in policies to address the ongoing pandemic uncertainties. It encouraged the authorities to focus on long-standing reforms, including improving public financial management, enhancing the financial safety net, and addressing structural issues to support sustainable growth and reduce economic scarring. The report also highlighted the importance of maintaining central bank independence and ensuring the effective implementation of the Growth Acceleration Plan to foster inclusive and green growth.