Macedonia & IMF

The End of a Love Affair

A donors' conference scheduled for December has been cancelled due to unstable political and security conditions, lack of economic strategy and discipline, and squandering by the ruling group. Consequently, relations between Macedonia and the IMF have been frozen for an unspecified period. The country faces bankruptcy, and the people will have to pay the cost of the war.

AIM Skopje, November 8, 2001

A donors' conference for Macedonia will not be held this year. After being postponed several times (for July, September, October, and December), it was finally postponed indefinitely. This time around the reason isn't problems with adopting constitutional amendments or implementing the Ohrid peace plan. International officials say it has nothing to do with politics anymore but purely with economics.

The event that pushed international financial organizations, under whose close scrutiny Macedonia has been since 1994 (when it received the first installment of a STF arrangement) over the brink was the cabinet's decision to, without consulting the IMF and getting its approval, reduce existing 25 and 50 percent tax rates on imported cars to only 7.5 percent. The government did this in a bid to raise much needed cash and boost its rating ahead of early elections for the Macedonian Parliament. The decision violated an IMF request that budget revenues be gathered by regular means, from taxes, deductions, customs duty, excise taxes and reduced spending at all levels, instead of by squandering and stimulating expenditure.

Unofficially, international monetary experts are angry with the Macedonian government not only because of that, but because Macedonian officials recently, again without consulting them, have been purchasing large amounts of weaponry. According to EU experts, the government has been using up to 10 percent of GDP for that purpose. It is estimated that budget spending is out of control, which has resulted in a huge, DM700 million deficit. The biggest spenders are the Ministries of the Interior and Defense. In order for them to fight armed ethnic Albanian extremists and defend the country they were given additional funding, much more than initially planned. Thus the Macedonian Army, instead of an initial DM123 million, received DM440 million, and the police were given DM276 million instead of DM120 million. It is feared that even this money was insufficient to wet the appetites of certain individuals who, for the sake of "higher goals," have uncontrollably spent state money on equipment the army and police need and do not need, and, it is suspected, on their relatives, friends and themselves. In doing so, according to international observers, Macedonian officials failed to observe procedure. Public tenders are not called and contracts are made secretly and illegally. What is particularly concerning is the fact that tax evasion is on the rise, which further deepens the gap between public revenues and spending. This gap currently amounts to DM158 million. In only three months since the budget was rebalanced, except for DM82 million gathered by VAT, all other revenues were negative. The biggest deficit is in collecting customs duty and excise tax -- DM47 million and DM186 million respectively. This is explained away as being due to a drop in imports, unrealistic plans and the security crisis, but the IMF is unconvinced.

All this has led to the postponement of the donors' conference for better times. No one seems willing to explain to the people, who will bear the brunt of the political and economic crisis, what this actually means.

Because of this IMF decision Macedonia will lose a lot. Not only the DM150 million donors were expected to give for the elimination of the damage caused by the war, but also about EUR50 million in EU assistance, DM45 in already approved grants by the Dutch government which has to be used by Nov. 20 because they cannot be transferred into next year, and so on. To cover the budget deficit and pay foreign debts, the government will have to use hard currency reserves, putting at risk the stability of the national currency, with a high likelihood of inflation and other negative consequences.

Relations between Macedonia and the International Monetary Fund are at an all time low, independent economic experts say. Since 1992, when Macedonia joined the IMF as a successor of the former Yugoslav federation, those relations have gone through several stages. The first arrangement, the so-called STF, intended for restructuring the system and worth US$40 million, was concluded in 1993, at a time when the budget deficit was much bigger. But back then times were different. Macedonia's oasis of peace has since turned into a desert. A US$30 million stand-by arrangement followed, to aid the government stabilization policy, concluded at the end of 1994 and becoming operational in 1995, when Macedonia was affected by U.N. sanctions against Yugoslavia. It lasted 13 months. The third, the ESAF arrangement, was granted to Macedonia in 1997, after all of 1996 passed without international support and under a Greek economic embargo. It was worth US$75 million and was supposed to last three years on condition that 12 companies that were making huge losses be liquidated. Today, there are at least three times that many money guzzlers. The ASAF arrangement was valid for a year and a half. Slow reforms, elections and the arrival of the Coalition for Change government were the main reasons why Macedonia spent another 365 days without international assistance. The CCFF arrangement followed in 1999, to prevent unexpected outside effects on the economy, but then the Kosovo crisis erupted. Then, Macedonia accepted 360,000 refugees, and the IMF allowed it to take out US$19 million from the so-called compensation loan quota. The other refugee accommodation costs, that were at least three times higher, were covered by Macedonia, Finance Minister Nikola Gruevski recalls with much bitterness, expressing fear that the same will happen with the costs of the last war. Only at the end of Nov. 2000 did developments take a turn for the better, and Macedonia concluded with the IMF the combined PRFG arrangement for reducing poverty (which replaced the ongoing ESAF) and the reform EFF agreement, worth a combined US$3.5 million. At this point, Macedonia is subject to a six-month monitoring period, and is on "the road to an arrangement," as the head of the IMF negotiating team, Bisvardjit Barnegee put it. This means cooperation with international financial experts in monitoring all economic trends, work towards determining areas that need funding and their presentation to possible donors when the time for that comes, preparing a macroeconomic policy for next year and a strategy to lead the country out of the crisis. In addition, the government will have to normalize economic trends and save the country from bankruptcy.

The public reacted differently to the postponement of the donors' conference. Some believe that the IMF's attitude towards Macedonia is unprincipled and extremely unfair, that the country was exposed to enormous pressure from all international factors to bow to ethnic Albanians' demands and reform the Constitution. In exchange, we should be rewarded, not punished, they say. Others are convinced that the denial of favors was unavoidable given that the ruling group wasted state funds during the biggest national crisis so far. They say the government should search for the reasons for the failure of negotiations with the IMF in its own back yard.

The war has brought Macedonia back to the beginning of transition, said independent economists at a panel discussion organized by Kapital magazine, a publication dealing with business and politics, at which future development prospects were debated. Because of incompetent and greedy managers and politicians, because of the overall situation, and the security and political crisis, Macedonia has failed to take full advantage of the development prospects it was offered. Economists focused their criticism on disastrous privatization and government hesitation in dealing with unprofitable companies and cutting back public sector employees. They also pointed an accusing finger at irresponsible budget spending, which in the period between 1996 and June 2001 grew by an incredible 77 percent. This alone has forced almost all foreign investors out of the country.

All the government has done so far is lie to the people, they said. Former finance minister Boris Stojmenov said that the foreign debt has reached 51 percent of GDP, which is causing liquidity problems. In plain English this means that Macedonia is already an international protectorate. It is a matter of days before the IMF introduces a currency board, in order to enable investors and creditors to collect their dues. Barnegee has already intimated such a solution, but allegedly Prime Minister Ljubco Georgijevski was strongly against such a move, because the country is still paying its financial obligations regularly. However, it remains to be seen how long it will be capable of doing so.

Some economists say that the attitude towards the IMF, from which Macedonia has received US$214 million altogether, ought to change. They say that the country should, like the old proverb says, "Praise the Lord and keep its powder dry." If applied consistently, they say, this will produce better results than all IMF assistance so far, and in a single government's term of office. Also urged are reforms in all segments of society. First of all, the public administration, which currently employs 90,000 people, should be substantially downsized. Only one-third of this number should be left on the state payroll, and this will save DM360,000 annually in public sector salaries alone. Secondly, all companies which are running losses should be shut down, regardless of how painful that could be, but while taking care of their employees. They should not be given only DM100 a month in assistance, but a chance to find new jobs.

Obviously, it is now up to government officials to take the next step. The future of the government, which at this point appears quite bleak, depends on whether it will face up to its mistakes and change its style.

Branka Nanevska

(AIM)