The Economy of Macedonia

THE "BALKAN TIGER" ON HIS KNEES

AIM Skopje, November 8, 1999

As the year is nearing its end Macedonia, unfortunately through its own fault, is getting further and further from world financial institutions whose presence in developing countries, in most cases, means the confirmation of their political stability and economic security which attracts foreign capital and much more than that. Instead of progressing in the implementation of planned structural reforms, by spinning its wheels. i.e. stagnating, it is irrepressibly going backwards. Very soon everyone in the country will much more drastically fell the consequences of this than now, the economists are warning politicians.

Namely, the negotiations on the establishment of FSAL arrangement with the World Bank, aimed at introducing structural reforms of the economy, especially the adjustment of the financial and enterprise sectors to the international standards, have been recently postponed for a third time. The economist remind that this entails the postponement of negotiations with the IMF for a new ESAF arrangement worth USD 40-80 million needed for supporting the Government's macro-economic policy over the next next three-year period. Incidentally, negotiations were scheduled for this January. According to Finance Minister Boris Stojmenov, they were first postponed because of different views of his Ministry and the Ministry of the Economy about the way of introducing reforms in enterprises which have been operating poorly for years. It was jointly concluded that the "reforms are progressing slowly, that the number of illiquid firms is growing, that the granting of bank loans has not changed, that the Government should stop subsidizing loss making enterprises and instead channel the funds to more profitable purposes.

As an example, it was stated that USD 105 million is allocated annually from the state budget for covering overhead costs of 42 loss-making enterprises, including several largest ones which are first on the elimination list. Renowned experts have calculated that one job in such enterprises costs the state USD 3,5 thousand which doesn't exit anywhere else in the world. That is why Adzej Ciber, World Bank Director for Macedonia insisted that after the closing down of loss-making enterprises these funds be channelled to the financing of workers' social needs. Incidentally, in the last couple of years two arrangements amounting to USD 14.5 and 7.5 million were approved to Macedonia for emergency purposes, which should have been more than enough.

The second time the dialogue with "world policemen" was interrupted because of the unwillingness of the Macedonian side to finally liquidate at least two out of eight large loss-making enterprises which have remained on the list of enterprises envisaged for winding up or sale. Those were the metallurgy combine "Feni" from Kavadarci and the Skopje textile complex "Hemteks", whose workers are still publicly protesting demanding that everything be done so as to save them, as well as their firms. The IMF and World Bank officials, Michaeal Camdessus and James Wolferson who were visiting Skopje trying to discover the reasons for the Government's indecision and show their intention to help, reacted to this. It was obvious that the ball was in the Macedonian court. The third break happened now because the problem is still on the agenda while the new ones are cropping up.

Unofficially, Washington is not very pleased with the fact that instead of the old small the Macedonian Government has appointed a new large negotiating team, which includes representatives from all competent ministries who are not authorised to make decisions which can influence the (in)efficiency of their work and prolong negotiations. This is contrary to the traditional, almost "cliched" working method of the world bankers. They are displeased by the fact that Finance Minister Boris Stojmenov, until now the first negotiator, is no longer directly involved in the "game" and that he will now serve as President of the negotiating teams. The newly appointed manager of the enterprise sector reform team, the current Minister of Agriculture, Marjan Gorcev, is also out of the picture. They were specially surprised by the increasingly loud announcements that the Government is preparing its own strategy for pulling the country out of the crisis, in collaboration with the well paid international advisors, including the last Prime Minister of the former SFRY, a businessman and an engineer Ante Markovic, and the well-known Israeli financial expert, Sam Wacknin.

Its publication is expected by the end of the year. This is nothing bad in itself, but the fact that the document envisages the abandonment of the stable exchange rate for the denar and restrictive macro-economic policy, which the IMF and the WB are insisting on, and the introduction of "the expected economic growth with the calculated productive inflation" give rise to mistrust and skepticism.

Combined with the uncertainty prevailing in the country after the publicized results of the voting in the first round of presidential elections and the possible major reconstruction of the Cabinet, the latest two-month postponement of negotiations on the new World Bank's arrangement for the Republic of Macedonia, becomes much more clear. Many domestic economists and analysts estimate such course of events to be devastating for country's interests, but hope that the Government will find the way to patch up the differences.

How deep is the crisis in relations between Macedonia and the World Bank and the International Monetary Fund is best illustrated by the fact that for the first time this year the state has been practically left "high and dry" without any arrangement and has thus placed itself in an unenvious position, on the verge of total economic confusion and social explosion. And all this has happened to Macedonia at the moment when it most needed one, after NATO operations against the FRY. This is a precedent in the more recent history of this country, which received commendations for the success achieved with economic reforms in the last six years and even called by some "the Balkan economic tiger".

It was much ahead of other countries in the region in transition. A lump sum assistance of USD 32 million which it got from the CCFF Fund for alleviating the consequences of a force majeure is not considered a regular arrangement, nor is USD 50 million worth credit granted in May. The size of losses that Macedonia has suffered are most frequently illustrated by the following figures: a balance of payment deficit of USD 320 million, budget deficit of USD 190 million, 20 thousand new jobless people, 10 thousand new socially unprovided for and the negative economic balance which is close to billion dollars. In return Macedonia got promises which no one is fulfilling. After the Paris Donor Conference it only got USD 60 million (out of demanded USD 450 million and approved USD 252 million) in the form of credits, which is just a drop in the ocean. "They have left us to struggle alone to remain on the surface", Finance Minister Stojmenov frequently points out with bitterness.

According to analysts, in addition to the Kosovo crisis, basic reasons for the freezing of relations and cooperation with world financial "bosses" are not only of economic, but psychological and political nature. Most economists, but also many managers and workers, think that the overestimated value of the denar is dragging enterprises, especially exporting ones, to abyss.

It has been pointed out on various occasions and more recently at the gathering of economists in the Macedonian Academy of Sciences that the remedy proposed by the IMF for the stabilization of the Macedonian economy in the form of a fixed exchange rate for the national currency is "poisonous" and leading to the disintegration of the system. The required discipline and insistence of the world financial "policemen" on the reduction of subsidies, tightening of conditions for the functioning of economic entities and further restriction of workers' rights to be introduced through reforms of labour, pension and health legislation are seen here as a "noose around the neck". In addition, Trade Unions, which are pressurizing the Government to loosen the belt and increase wages (which haven't been changed for a whole decade and amount to DEM 300 on average per month) find it hard to understand that there could be no progress without sacrifices and that reforms produce short term unpopular effects and that it is necessary to endure them for one's own sake! They emphasize that they refuse to pay for the consequences of the Kosovo crisis which has happened "through no fault of theirs" and that they feel abused by the international community.

Despite such sentiments, the Macedonian Government is trying to convince them, as well as all others, that it will fulfill the conditions laid down by the international financial institutions, that a standstill in the implementation of reforms is due to objective reasons, while the temporary postponement of negotiations does not mean their final termination. It particularly points out that it will not be hard to continue the negotiations and that the main emphasis will be on the transformation of the banking sector, public administration and loss-making enterprises.

In order to get a FSAL arrangement Macedonia will have to "plunge deep" into the banking system and make 5 large and healthy banks out of the existing 22 "sick" banks with two General Managers in each and supervisors who will know and apply the world standards and prevent the financial indiscipline which has permeated the entire system. It will have to privatize that sector, but also to establish financial institutions without surplus labour and administration whose only preoccupation is what to eat during their lunch break. The world bankers demand the improvement of privatized management of enterprises, of business climate, strengthening of the judiciary and definition of all regulations necessary for attracting foreign capital.

They have promised that the arrangement will envisage funds necessary for compensating or retraining labour force that will become redundant as a result of these reforms. The second thing the world bankers insist on is the relation between the budget and its users. They have assessed the Macedonian public expenditures scandalous since they find it hard to explain how 60 percent of assets, or to put it more precisely, DEM 650 thousand is allocated annually for the income bill of 90 thousand public servants. They say that for a country of Macedonia's size 20 thousand public servants would be more than enough. They have proposed phased rationalization which is rather hard to implement as some 70 thousand workers will be thrown out on the streets, at the time when out of two million people 320 thousand are unemployed, 120 thousand are working with irregular wages and 100 thousand are on the dole.

The problem of privatization or liquidation of the remaining eight out of 12 large loss-making firms, for which the deadline was end this year, has been postponed for the next year(the coming millennium). The world bankers are adamant that there will be no continuation of negotiations nor FSAL arrangement until this problem is resolved. Incidentally, Macedonia has already been granted one such credit of USD 85 million in 1995. The World Bank is this country's largest financial partner which until now has supported its structural adjustment programme with four projects amounting to USD 254 million. From 1993 till today, Macedonia has also received USD 500 million for 17 projects from the International Association for IDA Development.

Macedonia's negotiations with the IMF were always difficult because of its rules. And the ESAF arrangement is extremely important for attracting potential investors from all over the world. It guarantees discipline, as well as political, economic and social stability. Therefore, no matter how much they are against the iron strictness of world monetary lords, the Macedonian Government and experts will have to accept and carry out all that is demanded of them. We have learned that they will try to secure certain loosening of the stabilization belt since it will be necessary to define the living conditions until the year

1. The 5 percent rate of inflation would suit them best. Possibly, the exchange of view will be organized on the new government national platform for getting the country out of crisis and its further development. The arrival of the negotiating monetary team has been announced for mid November.

AIM Skopje

BRANKA NANEVSKA