A Painful Therapy

With USD 36 million worth arrangement Macedonia is returning under the IMF's wing. But, the dilemma remains whether more harm or good will come from it.

AIM Skopje, August 31, 2000

After two years the Government of Macedonia has finally managed to persuade international monetary institutions and world financial experts that it will continue to pursue reforms which it had abandoned for a time, mostly on account of the war in the neighbourhood and various subjective weaknesses, and that in the future it will honour all undertaken obligations in a disciplined manner so as to pull the country out of chaos and misery with which it is faced.

Negotiations on the definition of a three-year arrangement with IMF, which was agreed upon in mid August, were extremely difficult as it was necessary to restore the lost confidence and furnish enough convincing evidence on political readiness and capacity to persevere with reforms despite strict criteria. In addition, Nikola Gruevski, Minister of Finance, who is currently concluding negotiations on the FESAL arrangement with the World Bank in Washington, pointed to the importance of the reached agreement for the international reputation of the state as "more or less mature" and for the hope that it will ensure a speedier and greater inflow of foreign clean and legal capital, as opposed to dirty and dubious money which has practically flooded all domestic economic channels.

In other words, Macedonia has reached an agreement with IMF on a new three-year arrangement, which should be formally approved in September and become operational in October, 2000. It is USD 35.9 million worth and represents 40 percent of the Macedonian quota in this monetary institution. Out of almost 36 million dollars, 30 percent will be drawn under PRGF terms for the reduction of poverty and with favourable IDA interest rates of 0.75 percent and 30 year repayment period. The remaining 70 percent will be IFF credits for ensuring economic growth.

The arrangement envisages that the economic growth, or better said, gross domestic product in Macedonia in this and the next two years, should amount to 6 percent annually with one-digit and low inflation rate. By the end of this year it can reach 4.9 percent calculated on the basis of living costs, or 7 percent when compared to the price increase. Inflation rates for the next, 2001, would have to be much lower and can range between 2.2 and 3 percent.

Stabilisation of oil and electricity prices is counted on, as are reduced effects of value-added tax. Constant growth of foreign exchange reserves is projected: in 2000 by USD 144.5 million so as to reach USD 603 million in 2001, and then by additional USD 75 million in 2001 when they should reach the highest level ever since country won its independence and amount to 678 million green notes. Only then the IMF experts would be sure that their funds which they intend to invest are safe, and that the state will regularly repay its debts.

Promises were given that high growth rate would be supported by high rates of credit stock. Banks will be allowed to grant credits to private sector in the amount of 8 billion denars (i.e. DM 190 million) in 2000, and in 2001 in the amount of new DM 200 million. Money supply has been projected to grow by 13.7 percent in this, and by 13.2 percent in the next year. As sources from the Finance Ministry point out, monetary experts were allegedly satisfied with DM 200 million worth budget surplus realised in the first half this year and insisted that it should be kept as savings until the end of next year, so that appropriations from the economy wouldn't be too high during 2001 when a more balanced budget policy would have to be pursued. The Government is planning to use this surplus for the reduction of personal taxes and stimulating the development of small-scale business in private sector so as to alleviate the still extremely high 38 percent unemployment rate.

Negotiating teams of Macedonia and IMF also agreed on the details of other key economic parameters. For example, in the following three years, wages of public servants and employees of firms which are financed from the state budget, will be frozen. Up till the year 2003 the Government will not be allowed to even consider changing excise taxes, but will have to pursue flexible price policy in relation to oil and its derivatives in line with the developments on the world market and ensure stable budget revenues from these sources. By end this year, it will have to close all internal accounts of various ministries which in the past realised their own profit without any control, and to integrate them into the Central Bank's budget. The International Monetary Fund will constantly supervise the implementation of the treasury system, and management of cash, debts and budget accounting.

A special working unit would be set up under the watchful eye of monetary organisations, which would follow the Government debt and on the basis of its findings prepare a comprehensive list of debts, including guarantees given for various loans. Their experts would help prepare a strategy of guarantee policy and for undertaking obligations linked with the restructuring of enterprises and banks, which would progress at an accelerated pace, as well as assist in the drafting of the new Law on Mortgages. The mentioned arrangement also stipulates that the greatest number of reforms would be implemented in the banking system. They would start from the Central Bank and then would proceed with the full capitalisation of the Insurance Fund, introduction of side methodology for problem banks and elaboration of a diagnostic study for four largest banks in the country, excluding Stopanska Bank which the Greeks have recently bought.

It was laid down that all monetary flows from the Institute for Payment Transactions would have to transferred to commercial banks by the end of next year. June 2001 is the deadline for the banking register to start functioning. It was also agreed that the outstanding DM 20 million debt to pensioners on account of the earlier illegal 8 percent reduction of pensions, would be returned in 58 monthly instalments from the funds that are to be secured with the privatisation of social capital. When privatisation and enterprise sector reform are concerned, deadlines remain yet to be determined. They are closely linked with the outcome of the negotiations with the World Bank. Namely, the Washington twins have agreed that in the next three years IMF would closely monitor the overall monetary flows and statistical data, while the World Bank would supervise the implementation of structural reforms and help develop new legal projects for the reduction of benefits for the unemployed and pensioners.

Publication of the news that the country has returned under the "wing" of IMF at the height of the pre-electoral campaign for local elections was good marketing for the ruling coalition and will also be helpful to the united opposition's efforts to show in bad light everything that parties in power do, which is their common practice.

Everyone agreed in principle that it is good that the moratorium in the relations with IMF has been interrupted and that the arrangement has come at the eleventh hour, but many, especially the renown national economists, think that this time IMF was too harsh with Macedonia. They point out their conviction that the reached Agreement is not a confirmation of the implementation of reforms, but a commitment on the part of IMF to help this country overcome balance of payment difficulties after military intervention of the international community in FRY which is why its debt was rescheduled last year.

Doubts are expressed about the Government's ability to abide by the imposed financial discipline by restricting all forms of consumption, because of the disastrous state of the economy. It is generally believed that the value of the arrangement is too small to satisfy all the needs and there are various guesses as to why had monetary institutions reduced the original USD 70 million to less than 40 million.

In the first place it is supposed that the reason are the lost confidence in the Government's official policy, its readiness to repay its debts and the solvency of the budget. Next, there are opinions that the contents of the agreed elements are not in the interest of the state, that the arrangement should not have been accepted at all costs and that it will only increase the already existing poverty.

That means that, through no blame of theirs, the citizens will foot the bill and not the Government, which is infected with the most dangerous virus of transition - bribe and corruption. Still, there are those, especially from among opposition politicians, who think that IMF is doubting the Government's ability to carry out reforms, but has stayed in Macedonia because of all the time it wasted here, as well as too great a risk of destabilising the entire region if it withdrew from Macedonia. Finance Minister Gruevski has strongly denied such accusations.

AIM Skopje

BRANKA NANEVSKA