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Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 59914-MK
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT
FOR A PROPOSED POLICY BASED GUARANTEE OF EUR 100 MILLION
(US$134.9 MILLION EQUIVALENT)
TO
THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA
October 14, 2011
Poverty Reduction and Economic Management Unit (ECSPE)
South East Europe Country Unit (ECCU4)
Europe and Central Asia (ECA)
This document has a restricted distribution and may be used by recipients only in the
performance of their official duties. Its contents may not otherwise be disclosed without
World Bank authorization.
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GOVERNMENT FISCAL YEAR
January 1 – December 31
CURRENCY EQUIVALENTS
(Exchange Rate Effective as of October 13, 2011)
Currency Unit Macedonian Denar
MKD 1.00 US$ 0.02
US$ 1.00 MKD 44.7
WEIGHTS AND MEASURES
Metric System
ABBREVIATIONS bp Basis Points
CAD Current Account Deficit
CAR Capital Adequacy Ratio
CBMIS Cash Benefits Management and Information
System
CCT Conditional Cash Transfer
CFA Country Fiduciary Assessment
CPI Consumer Price Index
CPS Country Partnership Strategy
CSW Center for Social Works
DB Doing Business
DIF Deposit Insurance Fund
DPL Development Policy Loan
DRG Diagnosis Related Group
EBRD European Bank for Reconstruction
and Development
EC European Commission
ECA Europe and Central Asia
ECB European Central Bank
EU European Union
EUR Euro
FDI Foreign Direct Investments
FSAP Financial Sector Assessment Program
FX Foreign Exchange
FY World Bank Fiscal Year
FYR Former Yugoslav Republic
GDP Gross Domestic Product
HBS Household Budget Survey
HCI Health Care Institution
HI Health Insurance
HIF Health Insurance Fund
IBRD International Bank for Reconstruction and
Development
ICR Implementation Completion Report
IDF Institutional Development Fund
IFC International Finance Corporation
IMF International Monetary Fund
ISR Implementation Status and Results Report
JMAP Joint Management Action Plan
KfW Kreditanstalt für Wiederaufbau
LDP Letter of Development Policy
MOF Ministry of Finance
MOLSP Ministry of Labor and Social Policy
MOU Memorandum of Understanding
MKD Macedonian Denar
NBFI Non-bank Financial Institution
NBRM National Bank of Republic of Macedonia
(Central Bank)
NPL Non-performing Loans
OC Operations Committee
OECD Organization for Economic Cooperation
and Development
OP/BP Operational Policy and Bank Procedure
PAR Public Administration Reform
PBG Policy Based Guarantee
PDIF Pension and Disability Insurance Fund
PCL Precautionary Credit Line
PER Public Expenditure Review
PFM Public Financial Management
PPP Public Private Partnership
ROAA Return On Average Assets
SDR Special Drawing Rights
SFA Social Financial Assistance
SIC Social Insurance Contribution
TA Technical Assistance
UN United Nations
USAID United States Agency for International
Development
US$ United States Dollar
VAT Value Added Tax
WEO World Economic Outlook
WHO World Health Organization
Vice President:
Country Director:
Sector Director:
Sector Manager:
Task Team Leader:
Philippe H. Le Houerou
Jane Armitage
Yvonne Tsikata
Satu Kahkonen
Evgenij Najdov
FORMER YUGOSLAV REPUBLIC OF MACEDONIA
POLICY BASED GUARANTEE
TABLE OF CONTENTS
I. INTRODUCTION ........................................................................................................................................ 1
II. COUNTRY CONTEXT ............................................................................................................................... 2
A. POLITICAL CONTEXT .................................................................................................................................. 2 B. MACROECONOMIC PERFORMANCE ............................................................................................................. 3 C. ELIGIBILITY FOR POLICY-BASED GUARANTEE .......................................................................................... 16
III. THE GOVERNMENT’S PROGRAM ................................................................................................. 23
IV. BANK SUPPORT TO THE GOVERNMENT’S STRATEGY ......................................................... 34
A. LINK TO CPS ........................................................................................................................................... 34 B. COLLABORATION WITH THE IMF AND OTHER DONORS .......................................................................... 35 C. RELATIONSHIP TO OTHER BANK OPERATIONS ......................................................................................... 35 D. LESSONS LEARNED .................................................................................................................................. 36 E. ANALYTICAL UNDERPINNINGS ................................................................................................................. 36
V. THE PROPOSED POLICY BASED GUARANTEE .............................................................................. 37
A. OPERATION DESCRIPTION ........................................................................................................................ 37 B. POLICY AREAS ......................................................................................................................................... 39 C. GUARANTEE INSTRUMENT ....................................................................................................................... 40
VI. OPERATION IMPLEMENTATION .................................................................................................. 42
A. POVERTY AND SOCIAL IMPACTS .............................................................................................................. 42 B. IMPLEMENTATION, MONITORING AND EVALUATION ............................................................................... 43 C. CONSULTATIONS ...................................................................................................................................... 44 D. FIDUCIARY ASPECTS ................................................................................................................................ 45 E. ENVIRONMENTAL ASPECTS ...................................................................................................................... 47 F. RISKS AND RISK MITIGATION .................................................................................................................. 48
ANNEX 1. LETTER OF DEVELOPMENT POLICY ..................................................................................... 49
ANNEX 2: PBG POLICY MATRIX .................................................................................................................. 55
ANNEX 3: DEBT SUSTAINABILITY ANALYSIS ......................................................................................... 57
ANNEX 4. IBRD GUARANTEE ........................................................................................................................ 63
ANNEX 5. IMF APPROVAL OF FIRST REVIEW OF PCL PRESS RELEASE ........................................ 69
ANNEX 6: PROCUREMENT PROCESS FOR A LOAN WITH AN IBRD GUARANTEE ....................... 70
ANNEX 7: COUNTRY AT A GLANCE ........................................................................................................... 71
MAP IBRD 33438 ................................................................................................................................................ 74
Table 1: Selected macroeconomic indicators (2000-2010) ..................................................................... 6 Table 2: Balance of payment (2006-2011), percent of GDP ................................................................... 7 Table 3: Central government finances (2006-2010), percent of GDP ..................................................... 8 Table 4: Macroeconomic data and projections ...................................................................................... 11 Table 5: Fiscal financing requirements and sources, percent of GDP ................................................... 12 Table 6: External financing requirements and sources, percent of GDP ............................................... 13 Table 7: WBI governance indicators (percentile rank) ......................................................................... 19 Table 8: Pension system at-a-glance ..................................................................................................... 27 Table 9: Selected financial sector soundness indicators ........................................................................ 33 Table 10: Bank analytical work by area and links to proposed operation ............................................. 37 Table 11: Proposed prior actions for the PBG ....................................................................................... 38
The Policy-Based Guarantee was prepared by an IBRD team consisting of Evgenij Najdov (Task Team
Leader), Marina Wes, Mismake Galatis and Nancy Davies-Cole (ECSP2), Rajna Cemerska (ECSH3), Rekha
Menon (EASH1), Ronald Hendriks (Consultant), Johannes Koettl (ECSHD), Martin Melecky (ECSF2),
Aurora Ferrari (ECSF1), Daniel Bruncic (Consultant), Snjezana Plevko (ECSH3), Bojana Naceva (ECSH2),
Lewis Hawke (ECSC3), Julie Rieger and Nikolai Soubbotin (LEGEM), Thomas A. Duvall, Neil Ashar and
Pilar Gonzalez (LEGCF), Jose C. Janeiro (CTRFC), Gianfranco Bertozzi and Ricardo Tejada (BDM), George
Wolf and Tomoko Matsukawa (FEUFS) and Jasminka Sopova (ECCMK).
ii
LOAN AND PROGRAM SUMMARY
FORMER YUGOSLAV REPUBLIC OF MACEDONIA
POLICY BASED GUARANTEE
Borrower Former Yugoslav Republic of Macedonia
Implementing
Agency
Ministry of Finance
Financing
Data
IBRD policy-based guarantee
The guarantee will cover EUR 100 million of the EUR 130 million principal
of a commercial loan by Deutsche Bank and Citibank to the former Yugoslav
Republic of Macedonia (FYR Macedonia) with five-year bullet maturity. The
interest rate on the commercial loan will be the five year euro swap rate plus
234bp and the lenders will charge a 130bp arrangement fee.
Operation
Type
The proposed Policy Based Guarantee (PBG) supports the government’s
program aimed at strengthening sustainability of public finances, improving
the performance of social protection and functioning of labor markets and
strengthening resilience of the financial sector. The PBG is a stand-alone
operation building on the First Programmatic Development Policy Loan
(DPL1) disbursed during the fiscal year 2010.
The PBG in an amount of EUR 100 million (equivalent of US$134.9 million)
will be used to enhance a borrowing transaction in the amount of EUR 130
million from the international loan markets. The guarantee is expected to
lead to improvements in pricing and tenor, and contribute to enhancing the
country’s access to international capital/financial markets.
Main Policy
Areas
The PBG supports the following three pillars of the government’s program:
i. Strengthening sustainability of public finances and functioning of
labor markets;
ii. Improving performance of social protection; and
iii. Strengthening resilience of the financial sector.
Key Outcome
Indicators
1. Government independently raises funding from international markets
in 2012.
2. Government raises euro loan/bond funding with a maturity of at least
five years at an interest rate below Euribor plus 500bp.
3. The general government wage bill maintained at below 32 percent of
general government revenues in 2011.
4. Increase in the number of formal workers with paid social insurance
contributions from 407,887 in 2009 to 420,000 in 2011.
5. Pension spending is maintained at less than 9 percent of Gross
Domestic Product in 2011.
6. Arrears in the public health sector (Health Insurance Fund and Health
Care Institutions) do not exceed 1.7 billion Denars (0.4 percent of
Gross Domestic Product) in 2011.
7. Comprehensive financial reports on public health institutions available
publicly on monthly basis in 2011.
8. Processing time for Social Financial Assistance application reduced
iii
from a baseline of 30 days in 2011.
9. Percentage of cash benefits going to the poorest quintile increased
from 37 percent in 2009 to 40 percent in 2011 and further increases
thereafter.
10. Financial soundness indicators regularly reported and monitored and
the Financial Stability Report discussed and acted upon by the
Financial Stability Committee, and policy responses coordinated
among the National Bank of Republic of Macedonia, Ministry of
Finance and Deposit Insurance Fund.
Project
Development
Objective and
Contribution
to CPS
The main Program Development Objective is to help reduce future risks to
stability by strengthening sustainability of public finances and the resilience
of the financial sector and to support improved protection of the most
vulnerable and to enhance incentives for formal labor market participation.
This objective is closely aligned to the following expected outcomes of the
recently approved Country Partnership Strategy (CPS): (i) continued
macroeconomic stability; (ii) improved effectiveness of the social safety net,
and (iii) reduced labor market impediments.
The proposed reform program is also consistent with the government’s
aspiration for eventual membership in the European Union (EU). The
operation is expected to have a positive impact on the functioning of labor
markets, the conduct of economic and monetary policy and social cohesion,
which have been identified as critical benchmarks to begin membership
negotiations.
Risks and
Risk
Mitigation
The proposed PBG has substantial risks, largely reflecting the deteriorated
external environment:
Current policies appear adequate and supportive of macroeconomic
stability and economic recovery. However, external risks have lately
considerably increased with the turmoil in the Eurozone countries and
challenges in the US economy as well as in Japan. There is an
increasing risk of a sharp global slowdown. If this risk materializes, it
would suppress demand for exports and capital inflows, put pressure
on fiscal and external balances and, as a result, undermine growth
prospects. Ensuring growth in a prolonged sluggish global growth
environment will depend on FYR Macedonia’s ability to strengthen its
credibility with investors and trade partners. This puts even stronger
emphasis on prudent macroeconomic policies going forward and may
require reconsidering some measures promised during recent elections
to limit threats to stability, support economic activity and ensure
sustainability. This would need to be complemented by structural
reforms. The Precautionary Credit Line (PCL) with the International
Monetary Fund will help assure that the program is financed in case
unexpected shocks lead to balance of payments problems. Over the
medium term, increasing exports diversification should mitigate these
risks.
Political risks remain. The government has a stable majority in the
Parliament following the June 2011 early elections. However, lack of
progress in the resolution of the dispute on the name of the country
could potentially trigger political instability.
iv
Operation-specific risks also exist. Some of the reforms, such as cuts
in entitlements resulting from improved targeting of social protection
and free health insurance, could be difficult in the current
environment. These risks are partially mitigated by the careful
approach taken in the design and sequencing of reforms, including
extensive analysis and involvement of stakeholders. Given the
medium-term nature of some of the actions, increased attention to
communicating the reform agenda would be warranted.
Operation ID P125837
1
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT FOR A
PROPOSED POLICY BASED GUARANTEE TO THE FORMER YUGOSLAV
REPUBLIC OF MACEDONIA
I. INTRODUCTION
1. This program document describes the Policy Based Guarantee (PBG) to the former
Yugoslav Republic of Macedonia (FYR Macedonia) to support the government’s program
aimed at strengthening sustainability of public finances and functioning of labor markets,
improving performance of social protection, and strengthening resilience of the financial
sector. The medium-term fiscal policy supported by the program will remain supportive of
macroeconomic stability, as well as nascent growth recovery. The program, among others,
supports measures to enhance incentives for formal labor market participation. In addition, the
program will continue to support social protection reforms to ensure that future growth is more
inclusive than before, and financial sector stability, including by supporting an independent and
accountable monetary authority and strengthening contingency planning.
2. The PBG is proposed in light of the country’s strong track record in macroeconomic
management, improving structural and social policies and adequate external financing
plan. FYR Macedonia restored macroeconomic stability early in the transition process and has
maintained it for almost one and a half decades. This, combined with structural reforms,
facilitated stronger growth prior to the crisis while keeping internal and external balances
manageable. Frequent shocks (including the 2008-2009 global financial crisis) have adversely
affected living conditions, but reforms are being introduced to promote social cohesion. A
prudent fiscal policy is embodied in the medium-term public debt management strategy which
caps public debt at 40 percent of GDP. The debt management department within the Ministry of
Finance manages public financing and the authorities have committed to strengthen debt
management policies and practices, including through technical assistance from the International
Monetary Fund (IMF). A more detailed analysis of how FYR Macedonia meets the eligibility
criteria for a policy based guarantee (PBG) is presented in Section II.C.
3. This operation is an important element of the October 2010 Country Partnership
Strategy (CPS) and builds on the program supported by the First Development Policy
Loan (DPL1) in 2009/10. The PBG addresses the following expected CPS results: preserving
macroeconomic (including the financial sector) stability and improving the performance of the
social safety net. It builds on the program that was envisaged to be supported by the DPL series
initiated in 2009/10. In the context of the preparation of the second operation under the DPL
series (DPL2), the authorities requested a PBG rather than a loan. In line with Bank’s policies
on DPL lending and guarantees, the DPL series was terminated after DPL1, and DPL2 has been
converted to a stand-alone PBG operation, with largely the same policy matrix as originally
envisaged to be supported by the DPL2.
4. FYR Macedonia is facing significant market access challenges. Although FYR
Macedonia went to the eurobond markets in 2005, this first transaction was made in a more
favorable pre-crisis environment. The global crisis has significantly constrained access. The
2009 eurobond was issued at very unfavorable terms (3.5 years and 9.875 percent interest). The
2
attempt to tap the bond market again in 2010 was cancelled after the investor road show, as
emerging market spreads spiked due to the Greek crisis and subsequent market turbulence. Risk
perception in the Eurozone continue to impair market access particularly for smaller and less
well known borrowers such as FYR Macedonia. Yields on FYR Macedonia bonds fell somewhat
prior to the most recent turmoil, but have increased markedly over the last few weeks and remain
among the highest in the region. Similarly, spreads over benchmark bonds increased as investors
turned to high-grade assets.
5. With FYR Macedonia facing significant market access issues, the proposed EUR
100 million PBG has greater financial efficiency than the alternative of a DPL. In line with
the IBRD’s policy on PBGs, the proposed operation: i) provides incremental market access; ii)
leverages the Bank’s capital better than a DPL; and iii) improves FYR Macedonia’s borrowing
terms considerably. The PBG will improve market access by enabling FYR Macedonia to tap
funding from the international bank loan market, which it has not done before. The PBG thus
presents an opportunity to expand the investor base on favorable terms, and it could have
positive spillover effects for corporate borrowers. Second, the proposed PBG would also
leverage better Bank’s capital by allowing FYR Macedonia to issue a relatively sizable
commercial loan of EUR 130 million, out of which EUR 100 million, equivalent of US$134.9
million, would be guaranteed by IBRD. Additionally, IBRD capital may be recycled more
quickly than it would in case of a DPL with longer maturity. By tying up IBRD capital for only
five years, resources are made available sooner for other development initiatives in FYR
Macedonia. The PBG will also allow FYR Macedonia to borrow at improved terms, including
longer tenor and lower cost. Preliminary market soundings suggest that the PBG could reduce
financing costs by at least 200-300bp. In the current market environment, the savings may be
300-400bp, and the PBG would allow FYR Macedonia to borrow at a time when euro funding
for others in the region is virtually closed. Beyond the current turmoil, the PBG will help FYR
Macedonia in restoring market access at reasonable terms and becoming a borrower in its own
name in new markets over the medium term. The benefits of the PBG are discussed in more
detail in Section II.C.
6. The design of the underlying financing and guarantee coverage was driven by
government’s priorities, reflecting FYR Macedonia’s debt management strategy and the
guidance received during the review process. The proposed guarantee will partially cover the
principal redemption of a five-year loan with a bullet repayment. The PBG will provide coverage
of EUR 100 million of the EUR 130 million principal of a loan from Deutsche Bank and
Citibank (the lenders) with an interest rate of five year euro swap rate plus 234bp and a 130bp
arrangement fee. Negotiations on the Loan Agreement are expected to commence shortly. The
transaction would be contingent on the IBRD guarantee being in place at the time of signing of
the Loan Agreement between the government and the lenders. More details on the public
procurement process of the borrower and required steps are included in Annex 6.
II. COUNTRY CONTEXT
A. POLITICAL CONTEXT
7. FYR Macedonia is a young democracy with an overarching goal to join the
European Union (EU). It has established a track record of free and fair elections and during the
20 years of independence it has introduced a number of democratic and EU-compliant
3
institutions. Unlike most countries in its immediate neighborhood, FYR Macedonia was able to
peacefully declare independence in 1991 and resolve its 2001 conflict through mediation. Given
the relatively short time to build institutions, a number of processes are still evolving, but the
commitment towards EU integration considerably mitigates political risks.
8. The political scene has stabilized after the early elections that were held on June 5,
2011. The center-right VMRO-DPMNE continues to lead the Government in coalition with the
Democratic Union for Integration (DUI), the largest ethnic Albanian party. The ruling coalition
has a stable majority in the Parliament. This has largely resulted in continuity of priorities and
policies focusing on maintaining macroeconomic stability, growth acceleration, poverty and
unemployment reduction and EU and NATO integration.
9. In late 2009, the European Commission (EC) proposed to start negotiations on full
EU membership, a conclusion that was repeated in the 2010 Annual Report1. However,
further progress has been blocked as a consequence of the name dispute with Greece2. In
addition to opening the EU negotiations, the resolution of the dispute would also open the way
for immediate NATO membership (also blocked in 2008). In the meantime, the failure to reach a
solution is polarizing the public and the party rhetorics. Combined with a potential economic
slowdown and lack of improvement in living conditions, it could increase political risks, slow
progress on the reform agenda and further dent growth prospects.
B. MACROECONOMIC PERFORMANCE
10. FYR Macedonia has maintained a strong record of macroeconomic management,
even during periods of severe shocks. The peg to the euro introduced in 1995 (with a single
15.5 percent devaluation in 1997) has helped keep domestic prices stable for a decade and a half,
with average inflation of 2.4 percent. This strong commitment to price stability has also been
reflected in other macroeconomic policies geared towards keeping risks and the external balance
manageable, and reserves at levels that can support the peg. Fiscal policy has been relatively
tight and monetary policy has responded quickly to limit any threat to the peg. In spite of the
small size of the economy, its import-dependence, and the tight financing constraint, successive
governments have managed to preserve stability. In addition, numerous external and domestic
shocks have necessitated frequent policy shifts. Strong structural reforms after 2006 led to
accelerated growth rates prior to the 2008-2009 global crisis and helped moderate its impact.
Growth has returned over the last year with macroeconomic policies aiding the recovery, though
the renewed turmoil threatens to slow the recovery.
Pre-crisis
11. Despite relatively poor economic indicators, the first decade of independence (1991-
2000) demonstrated the resilience of FYR Macedonia’s economy. FYR Macedonia’s initial
conditions were rather unfavorable: it was the least developed of the republics of the former SFR
1 ―The Former Yugoslav Republic of Macedonia: 2010 Progress Report‖ – European Commission, Commission
Staff Working Document, Brussels, 9 November 2010. 2 Greece objects to the use of the constitutional name of the country Republic of Macedonia suggesting that it
implies territorial claims over its northern province with the same name. The country has been admitted into the
United Nations (UN) under the temporary reference Former Yugoslav Republic of Macedonia. UN-sponsored
negotiations are underway to resolve the dispute.
4
Yugoslavia and went on to face a number of shocks — external and domestic — in its early
years of independence. Still, macroeconomic stability was restored following the hyperinflation
of the early 1990s through tight fiscal and monetary policies that kept demand manageable and
through early structural reforms. Growth, though modest, returned in the second half of the
1990s and macroeconomic balances improved. Despite this, by 2000 output was below the level
of the early 1990s, and the unemployment rate as well as poverty had increased compared to the
start of the decade.
12. The positive trend was abruptly halted in 2001, when an internal conflict broke out
between security forces and ethnic Albanians. While direct damages from the 6-month
conflict were limited, the economic impact was significant – exports and investment collapsed,
and defense-related expenditures increased fiscal and current account deficits. Also, business
confidence plummeted and as a result investment and export growth remained sluggish for a
prolonged period.
13. However, strong stabilization efforts during 2003-2005 reduced threats to
macroeconomic stability. A mix of expenditure cuts and revenue generating measures
succeeded in swiftly eliminating the fiscal deficit in 2003. Fiscal policy was tightened further in
subsequent years: the budget moved to a surplus in 2004 and 2005, and general government debt
at the end of 2005 had fallen to below 40 percent of GDP (down from around 50 percent of GDP
at the start of the decade). Monetary policy was also kept relatively tight throughout the period.
Some export recovery and a surge in private transfers3 improved the external balance with the
current account deficit falling to 2.7 percent of GDP in 2005. The overall balance of payments
strengthened considerably. Foreign exchange reserves increased to about 4.3 months of imports,
while gross external debt stabilized at around 50 percent of GDP.
14. Such strong macroeconomic performance facilitated the country’s first access to the
international capital markets. In late 2005, the government issued a 10-year Eurobond in the
amount of EUR 150 million with a coupon rate of 4.625 percent, or around 125bp spread over a
corresponding high-grade bond.
15. Growth began to recover after 2002, but the performance of the economy lagged
compared to most countries in the region. Recorded growth averaged 3.9 percent during
2003-2005, placing the country among the slower growing economies in ECA in this period.
Also, the recovery remained narrowly based on a few key sectors and few jobs were created, as
the country continued to struggle to increase domestic investments and attract FDI which had
played such a critical role in the new member states of the European Union (EU) in transferring
technology and know-how and providing market access and crucial intra-industry trade linkages.
16. However, the economy responded to stronger reform efforts prior to the global
crisis. Output expanded significantly between 2006 and 2008 when growth averaged 5.4 percent
and approached the regional average. Domestic demand led the pick-up in activity. Investment
increased from 21.3 percent of GDP in 2005 to 26.8 percent in 20084, in parallel with
3 Data on private transfers reported by the NBRM also include unregistered and undervalued exports of goods and
services. For more on this, see FYR Macedonia Moving to Faster and More Inclusive Growth: A Country Economic
Memorandum (2009). 4 The pick-up in investments was roughly equally split between construction works and machinery and equipment,
with most investments going into construction, gas, electricity and water distribution, transport and trade.
5
improvements in the investment climate. Fees and charges of various agencies were reduced to
cut the cost of doing business, markets were liberalized, procedures eliminated, and labor
relations overhauled. Reforms in the judiciary and cadastre strengthened property and creditor
rights and competition in the banking sector increased the availability of credit and reduced the
cost of finance. Modest employment and real wage growth fueled private consumption. Exports
also performed well as prices and demand for metals surged. Price stability was maintained with
inflation picking up somewhat in late 2007 and early 2008 as a result of the surge in world prices
of food and energy.
17. Macroeconomic policies supported growth and kept imbalances more moderate
than in other countries in the region. Tax policy and tax administration reforms further
reduced the fiscal burden on economic activity but also expanded the tax base. At the same time,
the budget was largely balanced which contributed to keeping the aggregate demand at
manageable levels and avoided crowding out financing for the private sector. Government debt
fell to around 21 percent of GDP by end-2008, reflecting considerable pre-payment of external
liabilities5. While the external balance deteriorated significantly (to 7.4 percent of GDP in 2007
and further to 12.6 percent of GDP in 2008 largely due to developments in the second half of the
year when the first signs of the crisis emerged), it was almost fully financed by growing FDI
which averaged 5.8 percent of GDP during 2006-2008, also allowing for build-up of reserves.
18. The strong balance of payments position allowed an easing of monetary conditions.
Robust international reserve growth, continued fiscal prudence and low and stable inflation
resulted in lower interest rates. In addition, credit to the private sector grew, increasing by
around 35 percent annually on average during 2006-2008, albeit from a relatively low base, and
was largely financed by strong deposits growth.
19. Prudent regulation and supervision of the banking sector and limited cross-border
borrowing further mitigated economic risks. As a result, credit growth was more moderate
than in other countries in Central and Eastern Europe, and the financial sector remained sound.
The capital adequacy ratio remained above 16 percent, and liquidity was strong while non-
performing loans fell to below 7 percent and were almost fully provisioned.
20. Private sector external indebtedness was also modest. Although it almost doubled in
nominal US$ terms between 2006 and 2008 reaching 31.5 percent of GDP (22.2 percent if trade
credits are excluded), most of the increase was due to long-term loans and FDI-related mother-
daughter firm transactions. The exposure to the commercial banking sector was limited.
According to Bank of International Settlements (BIS) data, foreign banks claims on the FYR
Macedonian non-bank private sector were 4.8 percent of GDP, one of the lowest in the region.
Impact of the 2008-2009 global economic crisis
21. Reduced exports and private capital inflows were the main transmission channels of
the global crisis in FYR Macedonia. The first signs of slowing exports and FDI emerged in the
second half of 2008. Prices and demand for FYR Macedonia’s main exports (metals and
garments) fell rapidly as the crisis spread, while a number of announced FDIs were cancelled and
5 The liabilities to the London Club of Creditors were pre-paid in 2006, and to the IMF and partially to the IBRD in
2007.
6
ongoing investments were delayed. While exports began to recover by the second half of 2009,
FDI continued to underperform.
22. An adequate policy response and a resilient banking sector kept the impact of the
crisis moderate. In response to a collapse in exports and private capital flows, fiscal policy
turned countercyclical. The authorities carried out a sizable fiscal stimulus in late 2008 (largely
discretionary) and increased the 2009 deficit to 2.7 percent of GDP (largely as a result of
automatic stabilizers), still one of the lowest deficits in ECA and in line with sustainable long-
term solvency indicators and available financing. General government debt increased, but only to
24 percent of GDP, and debt-servicing indicators remained generally favorable. The resilience of
the banking sector also had a considerable role in moderating the impact of the crisis as FYR
Macedonian commercial banks were largely financed by domestic deposits and, as a result, an
abrupt credit crunch was avoided.
23. While supportive of demand, such measures kept the current account deficit high. The trade deficit surged in the last quarter of 2008 and in the first half of 2009 as exports
collapsed and private transfers decreased while strong demand kept imports high. In the absence
of other capital inflows, pressures on the foreign exchange market emerged forcing the central
bank to sell reserves.
Table 1: Selected macroeconomic indicators (2000-2010)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
National Accounts
GDP (US$ billion) 3.6 3.4 3.8 4.8 5.5 6.0 6.6 8.2 9.8 9.3 9.2
Real GDP growth (%) 4.5 -4.5 0.9 2.8 4.6 4.4 5.0 6.1 5.0 -0.9 1.8
Investments (% of GDP) 22.3 19.1 20.6 19.1 22.0 21.3 21.5 24.6 26.8 25.9 25.4
Fiscal Accounts (% of GDP)
Revenues 36.2 34.3 35.2 37.4 35.5 34.2 32.4 32.7 33.1 31.2 30.8
Expenditures 33.7 40.3 40.5 37.4 35.2 34.0 32.9 32.1 34.0 33.9 33.3
Balance 2.5 -6.0 -5.3 -0.1 0.4 0.2 -0.5 0.6 -0.9 -2.7 -2.5
Government debt 48.4 49.1 43.1 38.0 35.6 38.3 32.0 24.0 20.7 23.8 24.6
External Accounts (% of GDP)
Exports of goods and service 48.6 42.7 38.0 38.1 39.9 44.1 46.6 52.4 50.9 39.0 47.3
Imports of goods and service 63.5 56.6 58.2 54.5 60.1 61.1 64.5 70.8 76.2 60.6 66.0
Current account balance, after grants -2.9 -6.8 -10.0 -3.9 -8.2 -2.7 -0.4 -7.4 -12.6 -6.4 -2.8
Official reserves (months of imports) 4.3 4.1 3.3 3.2 3.2 3.7 3.9 3.5 4.5 4.5 3.8
External debt
Gross external debt (% of GDP)
51.3 49.8 50.3 51.1 47.4 58.2 59.4
Debt service (% of exports of goods
and services) 15.0 20.1 18.8 15.2 11.5 9.9 18.5 16.4 7.2 10.0 9.4
Prices
Consumer Prices (period av.) 5.8 5.5 1.8 1.2 -0.4 0.5 3.2 2.3 8.3 -0.8 1.6
Source: Ministry of Finance, NBRM and State Statistics Office
24. Policies were also introduced to rebuild confidence and reduce pressures on
reserves. Monetary policy was tightened – the rate of central bank bills was increased to 9
percent (up from 5 percent prior to the crisis) – and additional requirements on liquidity
management and bank exposure were introduced. At the same time, in order to support foreign
reserves, the fiscal deficit was financed by issuing a new Eurobond (EUR 175 million), though
under considerably unfavorable terms, including a very short (3.5 year) maturity and high
7
interest rate (9.875 coupon rate)6. Also, a EUR 100 million credit line was negotiated with the
European Investment Bank to support access to credit for the private sector. These measures
helped narrow and also finance the trade deficit, improved confidence and alleviated pressures
on reserves with the current account deficit narrowing to 6.4 percent of GDP in 2009.
The recovery
25. The post-crisis recovery of the economy has been gradual. After GDP fell by 0.5
percent during the first quarter of 2010, economic activity picked up gradually with the growth
rate reaching 1.8 percent for the year. GDP growth accelerated to around 5.2 percent in the first
half of 2011. Exports recovered from their collapse in 2009 and grew strongly (by 24.3 percent
in 2010 and by 34.8 percent in early 2011) reflecting strong world metal demand as well as
market diversification as a result of pre-crisis FDI. Investments were largely depressed in early
2010, but added strongly to the recovery in the second half of 2010 and in early 2011 as
monetary policy was loosened and business confidence improved. Private consumption has
picked up only very recently reflecting largely stagnant labor markets and poor consumer
sentiments. Most recently, these trends have slowed down but remain positive. Average annual
inflation picked up in mid-2011 as a result of higher world food and energy prices, but has
moderated recently and should stabilize around 4 percent by the end of the year provided current
trends in world oil and food prices continue.
Table 2: Balance of payment (2006-2011), percent of GDP
2006 2007 2008 2009 2010 2011
Act. Act. Act. Act. Act. Proj.
Current Account -0.4 -7.4 -12.6 -6.4 -2.8 -5.5
Goods, net -19.2 -20.1 -26.3 -23.2 -21.2 -23.0
Exports, fob 36.7 41.6 40.5 28.8 35.8 39.0
Imports, fob -56.0 -61.6 -66.8 -52.0 -57.0 -62.0
Services, net 0.4 0.4 0.1 0.4 0.9 0.6
Income, net -0.5 -4.7 -1.2 -0.9 -2.2 -2.2
Current Transfers, net 18.9 16.9 14.8 17.2 19.6 19.0
Capital and Financial Account 0.4 7.9 12.5 6.1 2.9 5.5
Capital Account, net 0.0 0.1 -0.2 0.3 0.1 0.1
Financial Account, net 0.4 7.9 12.7 5.7 2.7 5.4
Direct Investments, net 6.5 8.6 6.1 2.0 3.2 4.9
Portfolio Investments, net 1.4 1.9 -0.7 1.6 -0.9 -0.8
Other Investments, net -1.8 -0.9 6.9 3.6 1.0 4.6
Loans -0.1 -1.5 3.5 1.1 1.7 4.6
Gross Official Reserves (- = increase) -5.7 -1.8 0.5 -1.5 -0.6 -3.4
Errors and Omissions 0.1 -0.5 0.0 0.4 0.0 0.0
Source: NBRM
6 Research by the IMF on the determinants of borrowing costs suggests that around 1/3 of the cost of the 2009
Eurobond issue could not be explained by economic fundamentals and global conditions. See International
Monetary Fund: The Role of External Sovereign Debt in the Medium-term Financing Strategy for Macedonia –
Former Yugoslav Republic of Macedonia: Selected Issues, IMF Country Report No. 11/33, February, 2011.
8
26. The external current account has improved markedly. The improved trade balance
due to sluggish domestic demand and faster export recovery as well as unexpectedly strong
private transfers further narrowed the external current account deficit to 2.8 percent of GDP in
2010. The current account widened slightly in early 2011 reflecting the pick-up in economic
activity and higher oil prices. Private transfers declined likely owing to uncertainty triggered by
early elections in June 2011. Some improvement in capital flows (FDI, trade credits) helped
finance the current account deficit, leading to an increase in reserves which were also bolstered
by drawing EUR 220 million of the EUR 400 million available under the Precautionary Credit
Line (PCL) with the IMF. At the end of August 2011, reserves were above US$2.4 billion (EUR
1.8 billion) or above four months of imports of goods and services.
Table 3: Central government finances (2006-2010), percent of GDP
2006 2007 2008 2009 2010
Act. Act. Act. Act. Act.
Total revenues 32.4 32.7 33.1 31.2 30.8
Taxes 28.3 28.3 28.0 26.7 26.3
VAT 8.5 9.0 8.8 8.6 8.8
Social insurance contributions 9.6 9.2 9.3 9.5 9.1
Non-tax revenues 3.3 3.0 3.5 3.4 3.3
Capital revenues 0.3 1.2 1.3 0.9 0.9
Grants 0.4 0.2 0.3 0.2 0.3
Total expenditures 32.9 32.1 34.0 33.9 33.3
Wages and allowances 7.3 6.5 5.1 5.5 5.3
Goods and services 4.0 4.1 4.6 3.9 3.4
Transfers 17.7 17.1 18.9 20.6 20.3
Pensions 8.4 7.7 8.1 8.9 8.8
Social Benefits 1.3 1.1 1.0 1.0 1.1
Health care 4.9 4.4 4.6 4.6 4.5
Transfers to local governments 0.7 1.0 2.5 3.1 3.1
Interest 1.0 0.8 0.6 0.6 0.7
Other 0.1 0.0 0.0 0.0 0.0
Capital expenditures 2.8 3.7 4.8 3.2 3.5
Budget balance -0.5 0.6 -0.9 -2.7 -2.5
Source: Ministry of Finance
27. Fiscal policy has continued to be prudent given the exchange rate peg and financing
constraints. The 2010 fiscal deficit of 2.5 percent of GDP provided some stimulus to the
recovery, but was also consistent with short-term financing constraints and longer-term
sustainability of public finances. Meeting the deficit target required one budget revision in mid-
2010 which cut expenditures by around 1.2 percent of GDP as well as some further cuts later on
to reflect lower-than-planned revenues. The deficit was financed by drawing down deposits
(including from the 2009 IMF Special Drawing Rights allocation) and through some domestic
debt issuance. The crisis in select Eurozone countries kept financing costs in international
markets for FYR Macedonia very high despite its generally favorable economic indicators,
forcing the authorities to cancel the issuance of a planned Eurobond in 2010. The authorities aim
to maintain the deficit at 2.5 percent in 2011, with the actual deficit in the first eight months of
the year reaching around 2 percent of annual GDP. So far, revenues are in line with projections
9
with tax revenues increasing by around 6.7 percent (y-o-y). The deficit will be largely financed
by proceeds from foreign loans (mostly the IMF’s PCL proceeds drawn in March 2011).
28. Monetary policy has been loosened to stimulate demand. With the external account
performing well and core inflation running low in 2010, the central bank reduced its intervention
rate (from 9 percent in late 2009 to 4 percent by late 2010). With the current account widening
slightly and prices increasing in early 2011, the central bank has kept policies largely unchanged.
Banks have responded by gradually lowering interest rates (rates on new Denar loans fell to 8.8
percent by mid-2011 down from 9.6 percent a year earlier), while the private sector credit growth
rate accelerated to 7-8 percent (up from the low of 2.7 percent in February 2010) facilitating
some recovery of demand.
29. The banking sector has remained liquid and broadly sound, though the quality of
the portfolio has yet to fully recover to pre-crisis levels. Deleveraging did not occur in the
financial sector with claims on the banking sector remaining stable (liabilities towards non-
residents accounted for only 10 percent of total liabilities excluding capital and were largely in
long-term deposits and subordinated loans). The Capital Adequacy Ratio has remained high
(16.5 percent at the end of the second quarter of 2011, with most of it being Tier 1). Still,
profitability indicators remain below pre-crisis levels. Non-performing loans (NPLs) peaked at
above 10 percent at the end of the third quarter of 2010, but retreated to 9.3 percent by the
second quarter of 2011 and remain fully-provisioned.
30. Poverty increased during the crisis. Living conditions failed to improve even during
the pre-crisis period when growth picked up. Unemployment fell to 34.0 percent7 in 2008, down
from 37.6 percent in 2005. Still, the absolute poverty rate remained stagnant and increased in
2008 to around 23.6 percent as jobs created were neither skilled nor well paid and there was a
surge in world food and oil prices. Unemployment declined further to 32 percent during 2009
despite the contraction of the economy, reflecting the offsetting impact of government policies
(such as, a reduced tax wedge, increased public sector works) but also some labor market
outflow. However, in parallel, the poverty rate reached 26.6 percent in 2009. With the 2010
recovery being modest, the unemployment rate remained flat. This was accompanied by higher
inequality which partly prompted the government to embark on a comprehensive reform of the
social protection system (including measures supported by the proposed PBG). Characteristics of
the poor include low educational attainment, ethnicity, number of children, unemployment
(though there are growing numbers of employed poor).
31. A long-standing challenge in FYR Macedonia is to increase employment rates, by
both raising labor force participation and reducing unemployment. Labor force participation
among those aged 15-64 was 64 percent and the unemployment rate was 32 percent in 2010.
Women’s labor force participation is especially low, at only 50 percent in the 15-64 year-old age
group. Furthermore, many workers remain unemployed for a long time and informality is high
(estimated at over 40 percent in the private sector). The authorities are taking measures to reduce
labor costs, but costs for low-wage earners could still be high and regressive as social insurance
contributions are based on a reference wage that is often higher than their actual wage. However,
7
This is a Labor Force Survey (LFS) measure of unemployment. It is widely acknowledged that the reported
unemployment rate is probably overestimated. Alternative measures of the unemployment rate - either through using
stricter filters in the LFS or using the Household Budget Survey (HBS) - suggest that the unemployment rate is
lower (around 25 percent).
10
despite high unemployment there appears to be some unmet demand for labor suggesting
existence of broader issues like skills, incentives for formal work (including the reform of the
provision of free health insurance supported by the proposed PBG) and overall functioning of the
labor market (information asymmetries, mobility, active labor market policies etc.). A reduction
in the unemployment rate would hence require stronger economic growth but also labor supply
and demand interventions.
32. The IMF has broadly endorsed the government’s macroeconomic policies and
supported these by a Precautionary Credit Line (PCL). The PCL was approved in January
2011 on the grounds of the country’s strong macroeconomic fundamentals (including a moderate
fiscal stance and adequate monetary policy), limited balance of payments needs and generally
favorable economic prospects. The first review of the PCL was completed in September 2011
and noted that the recovery was underway benefiting from strong exports and recovering
investments. Risks identified stemmed largely from uncertainties and risks in the external
environment. These risks, together with the implications of the early elections, significantly
constrained the country’s access to capital markets resulting in the decision to draw funds from
the PCL in March 2011. However, the IMF continues to endorse the set of macroeconomic
policies, noting that these strike an appropriate balance between supporting economic recovery
and guarding against risks. The close of the first review has provided the country with access to
the remaining funds under the PCL as an insurance mechanism in case of ―unexpected balance of
payment shocks‖. Going forward, in the government’s baseline macroeconomic scenario, there
are no balance of payments needs, and the country is not expected to draw again on the PCL.
Medium-term macroeconomic outlook and debt sustainability
33. Growth is expected to average around 4 percent over the medium term, though
downside risks have increased. GDP is projected to grow by 3 percent in 2011, as positive
trends from the first half of the year slow down slightly in response to the most recent global
economic turmoil. While most indicators of domestic economic activity remain up-beat (pick-up
in credit growth, resumption of investments, and improved business confidence), the external
environment has become riskier with 2012 growth forecasts for the main trading partners
significantly reduced. Therefore, the baseline scenario envisages output growth accelerating only
slightly in 2012 driven by domestic demand and shifts in the export structure as a result of past
and ongoing FDI. Further improvements are expected beyond 2012; however, return to pre-crisis
growth rates of 6 percent is unlikely. Output growth is projected to average around 4 percent.
Exports are expected to perform well with growth rates of around 10 percent per year as major
trading partners recover and investments translate into higher exports. Domestic savings are
projected to improve only marginally as higher investments (including public sector investments
in infrastructure) are accompanied also by some widening of the external current account deficit.
Inflation is expected to remain low anchored by the commitment to the exchange rate peg. These
outcomes reflect current trends in the FYR Macedonia economy and are largely in line with the
macroeconomic framework presented in the recent IMF PCL review. However, a downside
scenario reflecting global uncertainties is elaborated below.
34. The projected recovery would require supportive macroeconomic policies,
continued structural reforms and accelerated progress on the EU accession agenda. This is
further amplified by the long-standing exchange rate regime (a de-facto peg to the euro since
1995) which constrains government policies, putting emphasis on prudent fiscal policy and
11
flexible labor and product markets. On the upside, major adjustments in macroeconomic policies
may well not be needed given the relatively low fiscal and external current account deficits.
However, reducing the large trade deficit critically depends on the ability to improve the
productivity of the corporate sector and attract FDI which can only be achieved by continued
reforms and progress in EU accession. Ongoing and planned reforms in education, health and
social protection should improve human capital, while infrastructure investments, regulatory,
judicial and public administration reforms will continue to reduce costs for businesses. The
government has also taken an active approach in attracting foreign investments over the last few
years. While a number of investments were postponed during the crisis, there has been progress
in re-engaging with investors recently.
Table 4: Macroeconomic data and projections
2010
Act.
2011
Proj.
2012
Proj.
2013
Proj.
2014
Proj.
2015
Proj.
National Accounts
GDP (US$ billion) 9.2 10.1 10.7 11.3 12.1 12.8
Real GDP growth (%) 1.8 3.0 3.7 4.2 4.0 4.0
Gross domestic investments (% of GDP) 25.4 27.4 28.5 28.5 28.6 28.4
Fiscal Accounts (% of GDP)
Revenues 30.8 31.0 31.1 31.5 31.7 31.9
Expenditures 33.3 33.5 33.6 33.9 34.2 34.4
Balance -2.5 -2.5 -2.5 -2.5 -2.5 -2.5
Government debt 24.6 26.7 27.8 28.6 29.4 30.2
External Accounts (% of GDP)
Exports of goods and service 47.3 49.1 50.6 53.1 55.6 57.8
Imports of goods and service 66.0 71.5 73.2 74.5 76.1 77.5
Current account balance, after grants -2.8 -5.5 -6.7 -5.8 -5.5 -5.5
Official reserves (months of imports of
goods and services) 3.8 4.0 4.0 4.2 4.2 4.2
External debt
Gross external debt (% of GDP) 59.4 58.4 59.2 59.6 57.7 56.4
Debt service (% of exports of goods and
services) 9.4 8.0 7.9 11.0 9.1 11.7
Prices
Consumer Price Inflation (period average) 1.6 4.4 2.0 2.0 2.0 2.0
Source: WB Staff estimates
35. The banking sector is well placed to support the recovery and contain risks. Risk-
averse banking practices and prudent regulation and supervision practices have kept the banking
sector adequately capitalized and liquid and non-performing loans well provisioned. With the
loan to deposit ratio well below one, banks have ample liquidity to support a pickup in credit
activity. In addition, banks have low external exposure, which is mostly towards relatively
healthy parent banks8. Sound supervision practices will continue to ensure that risks remain
manageable while improvements in contingency planning in the financial sector - including
through the establishment of the Financial Stability Committee (FCS) - better equip the
authorities to deal with potential shocks.
8 According to the 2011 European Banking Authority (EBA) stress test, none of the EU banks covered by the test
and with subsidiaries in FYR Macedonia is likely to see its core tier 1 capital fall below 5 percent.
12
36. Standard measures do not indicate significant exchange rate misalignment. The
recent analysis by the IMF, suggests that the exchange rate is broadly appropriate. Stabilization
of inflation at around 2 percent and modest wage growth should keep the real exchange rate
stable. As noted earlier, improvements in competitiveness are expected to come from structural
reforms that lower costs and increase productivity.
37. Fiscal policy is planned to continue to support macroeconomic stability, but will also
be accommodative to the slower growth environment. The authorities are projecting
moderate levels of fiscal deficits between 2 and 3 percent of GDP during 2012 – 2015 and the
IMF’s PCL has a target of 2.2 percent of GDP for 2012. Also, spending is projected to be
increasingly targeted towards productive expenditures supported in a number of areas by the
proposed operation. The low government debt level suggests that the proposed deficit levels are
sustainable. However, greater caution may be warranted given the pegged exchange rate, the
high trade deficit and the significantly increased uncertainty of the external environment and
capital markets. Still, the track record of the authorities, including during the crisis, gives
credibility to their plans and their readiness to adjust policies in case of unforeseen events.
Table 5: Fiscal financing requirements and sources, percent of GDP
2011 2012 2013 2014 2015
Financing requirements 4.4 3.7 5.8 4.8 5.5
Fiscal deficit 2.5 2.5 2.5 2.5 2.5
Repayments - foreign 0.8 0.7 2.9 1.9 2.6
Repayments - domestic 1.1 0.4 0.4 0.4 0.4
Financing sources 4.4 3.7 5.8 4.8 5.5
External borrowing 4.2 3.5 5.5 4.4 5.0
Foreign Financed projects 1.2 1.0 1.0 1.0 1.0
Other external borrowing 3.0 2.5 4.5 3.4 4.0
Domestic borrowing 0.2 0.2 0.3 0.4 0.5
Source: WB Staff estimates
Note: Financing requirements, with short-term debt presented on net-basis.
38. Budget financing requirements are projected to remain moderate under the baseline
scenario. As presented in table 5 above, the budget deficit is projected to be between 2 and 3
percent during the projection period while repayments on medium and long term debt are
expected to augment financing requirements by more than 2 percent of GDP on average. Sizable
repayments are due in 2013 and 2015 as the 2009 and 2005 Eurobonds mature, though retirement
of domestic debt in 20119 is expected to slightly alleviate the pressure. Given the relatively
shallow domestic capital market, financing over the medium term will need to largely come from
external capital markets. The proposed PBG should help the country meet its financing needs in
2011 and a considerable part of its 2012 financing needs and enhance the country’s access to
financial and capital markets over the medium-term. The gradual development of the domestic
capital market should help reduce reliance on external creditors. Also, the PCL with the IMF
considerably mitigates financing risks through mid-2013 in case of large unexpected shocks.
9 Debt issued to compensate depositors for foreign exchange deposits frozen in commercial banks during the break-
up of SFR Yugoslavia matures in 2011.
13
39. External financing requirements are projected to remain modest as well. The current
account deficit is projected to increase somewhat largely as a result of stronger FDI-related
imports (failure to attract FDI would translate into a lower trade deficit). Amortization is
projected to increase slightly reflecting the repayment of the Eurobonds (expected to be rolled-
over) and the disbursed portion of the IMF’s PCL and be comfortably covered by financing
sources (capital market borrowing but also loans from EIB, IBRD, EBRD).
40. The external current account balance is expected to remain at levels consistent with
medium-term debt sustainability. The deficit is expected to widen to around 6.7 percent of
GDP in 2012 as FDI-related investments recover. Over the medium term, the current account
deficit is projected to moderate to around 5.5 percent of GDP. Export growth is projected to
moderate at around 10 percent over the medium term, similar to the growth rate registered in the
pre-crisis period (excluding the 2001 crisis). These projections assume a pick-up in foreign
markets (growth in the EU economies stabilizing at around 2 percent by 2015 and the return of
Greece to positive growth territory as projected in the September 2011 IMF World Economic
Outlook). Further gains are expected from penetration of new markets and diversification of
export products as ongoing FDI brings the country closer to the technological frontier. There is
some evidence already in 2010 and 2011 that pre-crisis FDIs have opened up new markets for
FYR Macedonian exports10
. Private transfers are projected to remain stable. Imports are
projected to increase as consumption and investment recover over time. However, prudent
macroeconomic policies should keep imports growth manageable.
41. Foreign investments are projected to gradually return to the pre-crisis levels. FDI
has performed well so far in 2011. Investments in airport concessions, agro-processing and real
estate have already resumed. Also, the pipeline for new investments appears strong and includes
respectable global companies (most notably in the energy sector, car parts and electronics).
According to the IMF, FDI inflows are expected to largely finance the current account over the
medium term.
Table 6: External financing requirements and sources, percent of GDP
2007 2008 2009 2010 2011 2012 2013 2014 2015
Financing requirements 15.8 14.5 10.4 6.1 11.4 10.9 13.3 10.7 12.7
Current account deficit 7.4 12.6 6.4 2.8 5.5 6.7 5.8 5.5 5.5
Amortization 6.6 2.4 2.5 2.7 2.5 2.3 4.1 3.2 4.8
Reserve changes 1.8 -0.5 1.5 0.6 3.4 1.9 3.3 2.0 2.3
Financing sources 15.8 14.5 10.4 6.1 11.4 10.9 13.3 10.7 12.7
FDI 10.5 5.4 1.0 2.3 4.1 5.0 5.2 5.8 5.8
External borrowing 4.5 6.5 5.7 4.0 7.1 5.7 8.0 4.7 6.8
Other capital flows 0.9 2.6 3.7 -0.2 0.2 0.2 0.1 0.1 0.1
Source: WB Staff estimates
Note: FDI includes non-bond portfolio investments. Short-term debt is presented on net-basis
42. The current coverage of foreign exchange reserves of four months of imports of
goods and services provides a reasonable buffer which is expected to be maintained over
10
For example, China and Ukraine became top-ten export destinations for FYR Macedonia in 2010 and 2011, up
from 33rd
and 26th
in 2009, respectively. Also, ―miscellaneous chemical products‖ were the country’s 4th
most
exported item in 2010 compared to 28th
in 2009, largely due to exports of car parts produced by pre-crisis FDI.
14
the medium term. In addition to decent coverage of months of imports, at above EUR 1.8
billion, reserves cover around 140 percent of short-term debt, above 200 percent of M1 money
supply and close to 50 percent of broad money. Reserves are expected to remain above four
months of imports over the projection period.
43. Still, external risks have substantially increased lately and may require an
adjustment in macroeconomic policies. A global slowdown driven by concerns over fiscal
imbalances and the financial sector weaknesses in developed economies (especially in the
Eurozone) and a deceleration of activity in developing countries could undermine growth
prospects in FYR Macedonia. A double dip recession triggered by a potential default of some
Eurozone member countries would reduce the demand for exports and depress capital flows (FDI
and portfolio investments). The experience from the past couple of years suggests that borrowing
costs could become prohibitively high in case of a larger disturbance. Under such a scenario,
macroeconomic policies would need to focus on preserving macroeconomic stability. The PBG-
supported transaction and the IMF PCL would cover the 2012 and part of 2013 financing
requirements. However, a much faster fiscal adjustment and tightening of monetary policy
might be needed to limit financing needs thereafter.
44. Under such a scenario, growth would be significantly undermined, but an
appropriate policy mix would maintain stability. Still, it would be important to ensure that the
adjustments do not impact negatively on productive expenditures and that the poor and
vulnerable remain protected to preserve social cohesion. Disturbances in the financial sector,
such as a deposit outflow or a failure of a smaller bank could not be ruled out in response to a
sharp Eurozone crisis or a potential failure of Greek banks. However, this risk is mitigated by
the relatively healthy balance sheets of banks, (including of the country’s largest banks and of
the subsidiaries of Greek banks – see Box 1) and the evolving institutional framework to deal
with disturbances. The NBRM recently revised the Lender of Last Resort regulations increasing
the scope for the use of the Lender of Last Resort instrument in times of crisis. The central bank
also established a special monitoring regime for some banks and introduced regulations that limit
the possibilities for outflows of assets from the sector (for example banks are not allowed to hold
more than 10 percent of their own assets with their parent institutions). Banks have also
developed basic risk management functions. The newly established Financial Stability
Committee (FSC) is also going to strengthen the role of the government in dealing with potential
problems in the sector.
45. Under the baseline scenario of gradual recovery, public and external debt will
remain sustainable. Despite slight widening of the external current account deficit over the
medium term, external debt (as percent of GDP) is envisaged to gradually decline as the deficit is
increasingly financed through non-debt creating flows (FDI and portfolio investments). At the
same time, the general government debt is projected to increase to slightly below 31 percent of
GDP by the end of the projection period, a relatively moderate (to low) level compared
internationally. Public debt is expected to stabilize afterwards. The projected scenario assumes
an IBRD-guaranteed borrowing in 2011 with a five year maturity, a 5 percent interest rate and
similar terms for the borrowing in the medium term. Though solvency indicators on public and
external debt do not point to significant risk of unsustainable debt under the base case scenario,
increased roll-over needs give reasons for policymakers to be cautious.
15
46. The move towards market-based financing will increase the sensitivity of debt
dynamics to interest rate developments. Standard debt sustainability analyses (DSA) do not
point to significant vulnerability of public and external debt to interest rate shocks reflecting the
relatively favorable structure of debt. However, standard tests may not be able to capture the full
extent of the shock. Shocking rates by 500bp results from the baseline (evidence from recent
years suggest that such shock could happen) in 2012 and 2013 will increase external debt to 65.5
percent of GDP and government debt to 31.3 percent of GDP as early as 2013.
47. However, debt sustainability would be tested if the fiscal deficit is not controlled
over the medium-term or if the current account widens significantly. Given the relatively
low starting debt level, general government debt remains below 40 percent of GDP (the limit set
by the strategy on public debt) under all scenarios considered in the standard debt sustainability
framework (alternative scenarios with growth and fiscal balance at historical levels and no
change in fiscal policy, as well as stress test including shocks to interest rate, growth and
exchange rate). However, general government debt does not stabilize in the scenario where the
fiscal balance is maintained at -2.5 percent of GDP throughout the projection period (2011-2015)
and beyond or GDP growth remains sluggish. This underscores the importance for timely
gradual reduction of the fiscal deficit. The PBG-supported program will contribute to ensuring
Box 1: Impact of the Debt Crisis in select Eurozone countries
Since 2009, a number of Eurozone countries have been facing a crisis of market confidence owing to a large
degree to their high fiscal deficits and public debt levels. With the exception of Greece, FYR Macedonia has
only limited economic ties with most of these economies and has not been affected by developments in these
countries. Italy was its sixth largest trading partner in 2010, but accounted for only around 6 percent of total
trade, while Spain, Portugal and Ireland together accounted for around 2 percent. In addition, these countries
are not an important source of investments and their financial sectors do not have a presence in FYR
Macedonia.
However, the developments in Greece have had a significant impact. Greece is an important economic partner
of FYR Macedonia, and a prolonged recession in Greece will negatively impact growth prospects. To date,
indicators suggest a relatively modest impact on FYR Macedonia’s economic activity; however, FYR
Macedonia’s proximity to Greece has contributed to a significant impact over the country’s access to the
capital markets.
Greece is the second most important trading partner of FYR Macedonia. The decline in trade in 2010 and so
far in 2011 has been compensated by stronger recovery of trade with other countries. Greece is also a major
transport corridor, with foreign trade in critical FYR Macedonian products (oil, iron and steel etc.) largely
going through the Greek port of Thessaloniki. Prolonged closures of the port due to strikes add to the costs of
doing business in FYR Macedonia. However, Greece’s importance as a foreign investor has receded in recent
years. Furthermore, risks are somewhat mitigated by the fact that most of the investments are from retained
earnings.
In the financial sector, two banks, including the largest bank in the country, are subsidiaries of Greek banking
groups. These Greek owned banks together hold nearly 30 percent of total deposits. So far, risks from these
two banks appear manageable. Both banks are well-capitalized, have sound liquidity and solvency indicators
and limited exposure to mother banks. According to recent stress-test results, both banks should be able to
withstand significant withdrawal of deposits as they do not rely on short-term wholesale financing from their
parent companies or others.
The crisis has however had a major impact on access to capital markets. It has increased risk perceptions and
kept risk premiums elevated. This has lowered the availability and increased the costs of foreign capital and
required an adjustment in macroeconomic policies. The cancellation of the 2010 Eurobond issue was largely
due to rising risk premium as a result of the continuing Greek debt crisis.
16
that public debt remains sustainable. Keeping the public wage bill and pension spending under
control will limit financing needs and help shift spending towards more productive purposes.
Also, reduced risks in the financial sector will prevent the creation of contingent liabilities on the
budget. Similar conclusions apply to external debt sustainability. The current level of external
debt of around 60 percent of GDP increases continuously only under the scenario in which the
current account is not kept under control (slower growth of exports or higher imports). The
recent global economic turmoil has increased the probability of such a scenario, and it would
require an adjustment in policies to limit external financing needs. Moreover, swings in
unexplained private transfers or volatility in non-debt creating inflows may impact the
sustainability of external balances with external debt to exports ratio increasing to above 100
percent.
48. Despite increased downside risks, the macroeconomic environment is considered
adequate for the purposes of the proposed PBG. The set of current macroeconomic policies
provide solid grounds for a recovery in 2011 and beyond, provided there is no sharp crisis in the
Eurozone. These should support economic activity but also keep the external and fiscal balances
manageable. Still, policy-makers need to remain vigilant and adequate measures need to be
undertaken in case of a slower than expected recovery. The Bank will closely monitor the
situation and coordinate with the IMF and other partners to ensure that the environment remains
adequate for such an operation.
C. ELIGIBILITY FOR POLICY-BASED GUARANTEE
Criterion A: The country should have a strong track record of performance, and its structural,
social and macroeconomic policy package should be satisfactory.
49. As described earlier, FYR Macedonia has established a strong track record on
macroeconomic stability. It restored macroeconomic stability in the mid-1990s and has
maintained it since despite difficult circumstances. Consecutive governments have remained
committed to fiscal prudence, in the context of the exchange rate peg. An independent central
bank implements monetary policy with a clear price stability objective and from recently a
financial sector stability objective. Capacity in key agencies to analyze, plan and implement
policies has been continuously evolving.
Structural reforms in factor markets (labor, land and capital)
50. Structural reforms have been advanced in a number of areas over the last decade
giving a boost to economic growth. While growth underperformed compared to other countries
in the region in the first half of the last decade, economic activity did pick up prior to the global
crisis in response to improvements in the investment climate. In addition, some of these reforms
helped mitigate the impact of the crisis and have contributed to the recent acceleration of
economic activity. The country now ranks 38th
out of 183 economies on the ―ease of doing
business‖ in the 2011 World Bank Group Doing Business Report, up from 92nd
in 2006, while
GDP per capita (PPP, current international US$) has risen from about US$6,200 in 2000 to
around US$9,700 in 2010.
51. The labor market has been revamped over the last decade. A new Labor Code
(introduced in 2005 and amended in 2008) introduced greater flexibility in employment
17
relations. Reforms in recent years streamlined procedures and reduced the tax wedge. According
to the 2008 BEEPS survey, labor regulations were a constraint for doing business for 22 percent
of firms (down from 28 percent of firms in 2005 and below regional averages)11
. The reforms are
having positive effects; participation jumped by more than 5 percentage points since 2004 and
unemployment declined by 5 percentage points.
52. Property and creditors’ rights have been strengthened. Reforms in the real estate
cadastre have increased the coverage to 99 percent of the territory; nearly tripled the number of
mortgages; doubled the number of registered transactions; and shortened the period for
transaction registration. In addition, the court system is better organized and new laws, including
ones on Administrative Procedure and Enforcement, are reducing the backlog of cases and
strengthening the enforcement of court judgments.
53. Better infrastructure and regulation are reducing business costs. Roads have been
rehabilitated and the average border crossing time has decreased by two-thirds. Similar progress
has been achieved in railways and the energy sector. The time to register a company was cut
from 48 days in 2006 to 4 in 2009; and the cost to less than euro 50. Business regulation also
improved through the ―Regulatory Guillotine,‖ which reviewed more than 2,000 laws and
bylaws, out of which 64 laws and 482 bylaws were amended.
54. Reforms have resulted in a stable and sound banking sector. The legal framework
now provides sufficient power to the central bank to regulate and supervise the banking sector
which has resulted in sound practices and kept banks well capitalized and liquid. Risk-based
supervision has been introduced, and there is increasing compliance with Basel II requirements.
Efforts have increased in recent years to deal with weaknesses in the insurance sector by
establishing an independent supervisor in 2010. Most recently, stronger oversight and fit and
proper criteria are being introduced in the leasing sector and for non-bank credit institutions.
Building human resources
55. FYR Macedonia is building a well-targeted social safety net. The existing system
performs reasonably well by regional standards, but exclusion and leakage exist. The
government launched a broad reform agenda to improve the effectiveness of the system.
Administrative improvements are being introduced and the integrated cash benefits information
systems is being developed to allow better monitoring and use of funds. At the same time,
means-tested programs, such as the conditional cash transfer (CCT) program for secondary
education and the energy poverty program are being introduced.
56. The country has come a long way in reforming the pension system to meet the
challenges of an aging population, but risks remain. Parametric reforms to the defined benefit
(PAYGO) system were introduced over the last decade, including an increase in the retirement
age and contribution rates and a reduced replacement rate. Further, a mandatory defined
contribution component was added in 2006 and a voluntary one in 2009. These are important
measures, but the fiscal strains of the global crisis and the slow recovery are placing these
achievements at risk and would require a prudent approach to pension policies, especially with
respect to ad-hoc pension increases.
11
Also, according to the 2010 World Economic Forum Global Competitiveness Report, the country scores 5.2 on
the labor flexibility indicator, above the 4.7 average for the new EU member states.
18
57. Particular attention has been directed to improving education outcomes. Poor
performance on international assessments (TIMSS, PIRLS and PISA) in 2000 and 2001 has
triggered wide reforms in the education system. Recent reforms have aimed to modernize the
curricula and improve access to education services at all levels. Public funding of education was
also increased in recent years. Between 2004 and 2008, secondary enrollment increased from 85
to 95 percent, and dropout rates for primary school decreased to below 2 percent. A stronger
focus is currently being given to improving quality of education.
58. Progress is also underway toward ensuring the sustainability of the health system. Reforms over the last decade aimed to streamline the operations, decision-making and
transparency in the health sector and facilitate a move towards more efficient (output-based)
payment systems for health care providers. As a result, accounts payable of the public health
sector fell from 1.7 percent of GDP in 2004 to 0.3 percent in 2008, though the recent crisis has
challenged some of these accomplishments.
Public sector reforms
59. Tax policy and tax administration reforms have reduced costs of compliance and
expanded the tax base. The tax system has been reformed resulting in relatively few taxes and
low tax rates. Consumption is taxed by a functioning VAT system (introduced in 2000) with few
rates. Income is taxed at low and flat rates of 10 percent, while social insurance contributions are
below regional levels. Tax administration reforms accelerated since 2006, including
establishment of large taxpayer office responsible for collecting taxes and providing advisory
services to the largest taxpayers in the country, introduction of e-filing of tax records and
integrated collection of personal income tax and social insurance contributions12
.
60. Risks from contingent liabilities appear limited. The country has largely liquidated the
legacies of the past, including compensating the depositors for foreign exchange deposits lost
during the break-up of SFR Yugoslavia and largely settling the restitution process for land
nationalized after World War II. Reforms to the pension system have largely addressed the aging
problem and state involvement remains limited to few sectors. While commercial orientation of
public enterprises is limited; emergence of contingent liabilities that could threaten stability is
unlikely.
61. Despite considerable public sector reforms over the last decade, a number of
challenges remain. FYR Macedonia developed an integrated strategic planning and budgeting
process governed by a common calendar. This includes among other things multiyear fiscal plan
(though the budget is still a single year document) as well as the adoption of government
priorities and expenditure ceilings per function. Extra-budgetary funds (EBFs) and agency
accounts have been integrated (most recently also the public health institutions) under the
Treasury Single Account (TSA) and reporting has improved. The capacity of the independent
external auditor has come a long way since it was established over a decade ago. In 2008, a new
Law on Public Procurement, fully harmonized with the EU acquis was adopted and activities are
underway to ensure its effective implementation. However, considerable efforts are still needed:
a number of agencies remain unreformed, and there are frequent allegations of politicization of
institutions.
12
The country ranks 33rd
on the 2011 Doing Business Paying taxes indicator, up from 79th
in the 2007 report.
19
62. Legislation and institutions covering the governance framework is extensive and
mostly in line with good international practice (see section VI.D Fiduciary aspects), though
enforcement needs to improve. According to Global Integrity, the country scores 86 points out
of 100 on the legal framework for governance and corruption, but 65 points out of 100 for
implementation. The country ranks 62nd
on the Transparency International Corruption Perception
Index, up from 102nd
in 2003 and around the average for new EU member states. Though the
country still lags behind more advanced transition economies, its percentile rank on the
Worldwide Governance Indicator regarding the control of corruption increased to 57 in 2009 (up
from 34 in 2000). Similar improvement was registered on the rule of law indicator.
Table 7: WBI governance indicators (percentile rank)
Indicator 2000 2004 2009
Voice and Accountability 38.5 45.7 53.1
Political Stability 20.2 15.9 37.3
Government Effectiveness 24.3 52.9 50.5
Regulatory Quality 44.4 53.2 59.5
Rule of Law 31.4 47.6 47.6
Control of Corruption 34.0 39.8 57.1
Source: Worldwide Governance Indicators
Criterion B: The country should have a sustainable external financing plan.
63. The country’s external debt is moderate. Gross external debt (public and private) at the
end of the second quarter of 2011 was around 63.5 percent of GDP. Government external debt
accounts for around 18.1 percent of GDP and, with the exception of two Eurobond issues
(around 4.5 percent of GDP), is largely on concessional terms. Non-government external debt
accounts for around 45.4 percent of GDP, out of which 13.4 percent is in the form of FDI-related
transactions, additional 8.4 percent in bank sector debt and 20.9 percent in non-bank corporate
sector debt. Net external debt (gross external debt adjusted by gross external claims) was only
17.3 percent of GDP. Exposure to volatile capital flows is small (net external short-term debt is
negative) and debt servicing indicators are generally favorable.
64. External financing requirements also remain moderate. The external current account
deficit is projected to widen somewhat, but also to be increasingly financed by a recovery in FDI
and other private capital inflows. Debt amortization is not excessive, reflecting relatively small
external borrowing by commercial banks and little direct cross-border lending to the non-bank
sector. However, amortization will increase going forward reflecting the shift towards market
based financing which typically has shorter maturities compared to concessional financing. More
specifically, the repayment of Eurobonds in 2013 and 2015 will increase financing needs, but
these are expected to be rolled over at maturity. As noted earlier, under a downside scenario the
financing needs are expected to be lower as the current account deficit adjust to the slower
demand; however, securing financing will be more challenging.
65. The moderate fiscal deficits will keep financing requirements manageable.
Furthermore, securing external financing for a significant part of the deficit will safeguard
investor confidence, attract foreign capital to support the exchange rate peg and avoid crowding-
out of credit for the private sector. The debt issue supported by the proposed PBG will cover
slightly less than half of financing needs in 2012. A sizeable portfolio of projects with bilateral
20
and multilateral creditors (IBRD, EBRD, EIB, Council of Europe Development Bank, KfW) will
also bring foreign financing as will increasing absorption of EU pre-accession funds.
66. The PCL with the IMF will help assure that the program is financed in case of
unexpected shocks over the next eighteen months. In January 2011, the IMF Board approved a
two-year PCL arrangement for FYR Macedonia, the first country to receive this facility. The
authorities drew part of the available funds in March 2011, as early elections and the Eurozone
turmoil undermined their ability to borrow. Based on continued sound macroeconomic
fundamentals, the remaining EUR 260 million will continue to provide an ―insurance
mechanism‖ in case of unexpected shocks.
67. Prudential regulations introduced by the central bank should ensure that banks do
not build sizable liabilities based on short-term or volatile inflows. The central bank
introduced regulations on managing liquidity risk which requires banks to match liabilities with
assets by both currency and maturity. According to the NBRM, banks are largely in compliance
with these regulations.
Criterion C: The country should have a coherent borrowing strategy, which will enable it to
become a borrower in its own name without a guarantee in the medium term.
68. The legal and institutional framework for debt management is sound. Financing
requirements are managed within the framework of a three-year public debt strategy (as of 2011
the public debt strategy will be fully integrated with the fiscal strategy and closely linked to
macro policies). The guiding principles of the strategy are to support macroeconomic policies,
ensure regular servicing of liabilities and limiting/eliminating risks to the sustainability of public
finances. The law on public debt prescribes a relatively detailed and transparent process for
incurring debt for the entire public sector (including guarantee issuance). The public debt
department in the Ministry of Finance has most features of a good practice debt management
framework, with operations segmented along the lines of front, middle and back office.
Summary reports on general government debt are published on monthly basis. The authorities
plan to further strengthen debt management policies and practices and will work with the IMF to
develop an action plan on debt management reform. Future DPLs focusing on competitiveness
issues can support the implementation of this action plan.
69. Despite some shift towards more commercial terms in recent years, a sizable part of
the country’s government debt remains concessional. The average maturity of general
government debt is above five years and more than half of it is denominated in euro. External
debt accounts for more than 70 percent of government debt. Around 60 percent of the debt is
with variable interest rates. With the exception of the two Eurobond issues (2005 and 2009), it is
mostly on concessional terms or with very low interest rates (i.e. structural bonds issued as part
of the restitution process13
or the clean-up of the financial sector in the late 1990s). Guarantees
account for less than 4 percent of GDP and refer largely to guaranteed loans from multilateral
creditors to public enterprises.
13
In 2002, the authorities initiated a process to restitute property nationalized after the end of Second World War.
The compensation involves the return of assets or in case assets are no longer existing, issuance of long-term (10
year) government bonds paying 2 percent interest rate. So far, around 4 percent of GDP were issued in the form of
public debt for restitution, out of which around 1.8 percent of GDP is outstanding.
21
70. With concessional financing sources becoming more limited, the country has started
the process of transition to market financing. The country has already graduated from
International Development Association (IDA) financing and concessional financing sources are
likely to become even more limited given the level of income. While the domestic government
bond market is currently very shallow, plans have been announced to develop it over the next
few years. Against this background, the public debt management strategy envisages borrowing
from the private international markets to meet most financing needs over the next several years.
Moreover, having a PCL arrangement in place can be expected to help strengthen confidence.
71. The country has accessed the international capital markets independently on two
occasions in the past. FYR Macedonia issued a euro 150 million 10-year Eurobond in 2005 with
a coupon rate of 4.625 which was used to retire old London Club debt14
. A euro 175 million 3.5-
year Eurobond was issued in 2009 with a coupon rate of 9.875 for budget financing. Plans to
issue a third Eurobond in 2010 were pulled due to the unfavorable market terms prevailing.
Neither of these bonds are traded frequently, and yields for the more liquid issue maturing in
2015 are currently over 7 percent with some volatility reflecting the proximity to the troubled
Eurozone countries.
72. The authorities have also borrowed domestically. The first government 1-month bills
were introduced in early 2004; by late 2008 the portfolio of domestic government debt securities
was expanded to include maturities of up to five years. However, the T-bills/bonds portfolio was
largely consolidated into 3 and 6-month T-bills over the last two years, reflecting increased
market uncertainty and a desire to reduce interest expenditures as pressures over the budget
emerged. Furthermore, domestic borrowing has come under increased scrutiny for crowding-out
financing for the private sector, though abundant liquidity in the banking sector suggests that this
may not be the case. Currently, the stock of domestic T-bills outstanding is around 4.5 percent
of GDP equally split into 3-month and 6-month bills with an interest rate slightly above 4
percent. Demand for government paper has been stable, mostly coming from domestic banks.
Going forward, the authorities plan to further develop the domestic debt market and increase the
average maturity. As the first step, a five-year domestic bond was successfully issued in late-
September 2011. This strategy may help to reduce market risks ahead and reliance on external
financing to cover the budget, but also support the development of the broader financial sector in
the country (including pension funds and financial intermediaries).
73. Despite relatively sound fundamentals, financing conditions for FYR Macedonia
remain tight and have deteriorated notably amidst Eurozone volatility and fears of even
sharper global slowdown. Global investors are increasingly risk-averse, reflecting widespread
uncertainty about the direction of the financial market over the months ahead. Also, some
conditions inherent to FYR Macedonia (such as, small and infrequent issuances, vulnerability to
external factors, proximity to troubled Eurozone countries) will likely render access to market
tight or sovereign debt issuance problematic. For FYR Macedonia, current market sounding
suggests a maximum feasible tenor of five years (in the absence of a high-grade guarantee). The
spread likely achievable in the current market may figure in the range of 650-700bp over the
high-grade swap rate (about 8-9 percent in aggregate), with a number of financial institutions
sounding skepticism that an unenhanced transaction in euros could even be closed for FYR
Macedonia in this climate.
14
Obligations inherited from the former Socialist Federal Republic of Yugoslavia and rescheduled in 1995.
22
74. The proposed PBG supports the government’s borrowing strategy and is financially
more efficient compared to a conventional DPL. In line with the IBRD’s policy on PBGs, the
proposed operation would: i) provide incremental market access; ii) leverage the Bank’s capital
better than a DPL; and iii) reduce FYR Macedonia’s borrowing costs considerably. In the current
market environment, the savings may be much greater, and the PBG may allow FYR Macedonia
to borrow at a time when euro funding for others in the region is virtually closed. Beyond the
current turmoil, the PBG will help FYR Macedonia in restoring market access at reasonable
terms and becoming a borrower in its own name in new markets over the medium term.
75. The proposed PBG improves market access by enabling FYR Macedonia to tap
funding from the international bank loan market, which it has not done before. The PBG
will expand the investor base by catalyzing new interest among large foreign banks and financial
institutions that may currently have little exposure to the country, and ultimately introducing
FYR Macedonia credit to a new pool of investors and diversifying sources of financing. The
government has never borrowed from the international loan market, and in addition, few of the
banks participating in the process15
have any exposure to the country. By establishing itself as a
global borrower, the authorities will further reduce portfolio risks, as future market borrowing
should occur at increasingly improved terms. FYR Macedonia’s integration into markets will be
strengthened and its relationship with lenders will be solidified. Given the considerable links
between corporate and sovereign credit risk, it is expected that gains in creditworthiness at the
sovereign level will be transferred to corporate borrowers as well.
76. The proposed PBG would also leverage better Bank’s capital and help FYR
Macedonia increase the amount borrowed. In order to maximize debt capacity, the PBG will
guarantee a partial amount of principal (around 65 percent of all debt service). This will allow
FYR Macedonia to issue a relatively sizable commercial loan of EUR 130 million, out of which
EUR 100 million would be guaranteed by IBRD. The loan would carry a higher rate compared to
a full principal guarantee; however, the rate will be significantly lower than for a non-guaranteed
instrument. In this way, the PBG supported borrowing is expected to cover almost half of the
financing needs of the budget in 2012. Additionally, IBRD capital may be recycled more quickly
than would occur in case of a DPL with longer maturity. By tying up IBRD capital for only five
years, resources are made available sooner for other development initiatives in FYR Macedonia.
77. The PBG also allows FYR Macedonia to borrow at improved terms, including
longer tenor and lower rates. The PBG helps FYR Macedonia reenter the international money
market under reasonable terms, following the difficulties it has faced in recent years. The PBG
allows FYR Macedonia to borrow with a five-year maturity, or about 50 percent longer tenor
than was achieved through the last market borrowing (3.5 years). In addition, the terms of the
borrowing will be significantly below the rates FYR Macedonia received in 2009, as well as
rates currently available in today’s volatile market, in the absence of an IBRD guarantee.
Including arrangement fees and the IBRD guarantee fees, the loan should be extended at about 5
percent, well below the 8-9 percent rate that FYR Macedonia would expect to pay in today’s
market, assuming access for borrowers in the region is restored.
78. The design of the instrument underlying the proposed IBRD PBG and the coverage
of the latter was driven by the country’s debt management needs, i.e. securing financing at
15
The Request for Proposal was sent to thirteen banks, out of which only one has a presence in the country.
23
reasonable costs and minimizing risks. The amount borrowed would cover a significant part of
the 2012 budget financing needs thus reducing market risks until the second half of 2012.
Reducing financing costs is another important objective of the authorities, but was considered in
parallel with the amount and tenor of the loan. In that regard, in order to minimize liquidity risks,
the authorities have opted for an instrument with a maturity of five years, which will ensure that
repayments do not add to the debt service burden during 2013 - 2015.
79. Preliminary market soundings indicated that the guarantee would add more value
when combined with a commercial loan than with a global bond. According to market
soundings conducted earlier, a guaranteed global bond transaction would cost at least 150bp
more than a loan or privately placed security. This can in part be explained by the fact that the
low yielding bond issuance would not be attractive for the majority of standard emerging bond
market investors who search for yield and have strong preference for liquid assets. The size of
the transaction, in bond format, would be much smaller than that required by the JPMorgan
Emerging Market Bond Index, which is another important consideration for emerging markets
funds. High value assigned to IBRD guarantees in the commercial loan markets derives from the
effect of the IBRD guarantee on the capital treatment of the instrument. Triple A credit
enhancement can substantially reduce the capital that a bank needs to allocate against a loan
which can allow many banks to more efficiently price the overall risk, rendering a high quality
balance sheet investment with extra yield (and not a widely distributed security that would
compete with similarly rated and higher yielding emerging market bonds). Going forward, and
even more so once FYR Macedonia borrows independently, its financial credibility will be
strengthened which may further reduce the country risk premium. Regional experience with
PBGs is encouraging. Following the PBG-supported borrowing, Serbia was able to issue a 15
year domestic euro T-bond at favorable rates. In late September 2011, moreover, Serbia managed
to issue a 10-year Global Bond and raise US$ 1 billion, further reflecting improved market
access.
80. However, execution risks have increased in the current environment. While market
soundings do confirm the interest for an IBRD-guaranteed borrowing by FYR Macedonia, the
current environment is highly unpredictable resulting in growing risk-aversion among investors.
For example, while earlier market soundings might have indicated the highest market efficiency
(cost versus guarantee coverage) at around 65-75 percent coverage, the recent turmoil has
increased this to around 80-90 percent.
III. THE GOVERNMENT’S PROGRAM
81. The overarching goal of the country is EU integration, improved economic
performance, and reduction in unemployment and poverty. While FYR Macedonia does not
have a single national development strategy statement, key strategic guidance is provided by a
number of EU accession-related documents16
, while the Ohrid Framework Agreement regulates
the relationship with minority communities in the country.
82. The current government was elected on the basis of an ambitious economic reform
agenda in July 2006, but mid-course corrections were required to effectively manage the
16
Stabilization and Association Agreement, National Plan on Adoption of the Acquis and the Pre-accession
Economic Program.
24
global crisis. The government’s program focuses on reforms needed to improve the business
environment, increase human and physical capital, and meet EU accession priorities. Section C
above discussed in greater detail the policies implemented to promote growth. As mentioned
earlier, these policies have allowed FYR Macedonia to improve its ranking on the Ease of Doing
Business Indicator from 92nd
in 2006 to 38th
in 2010. While FYR Macedonia could be considered
a good-practice example in number of areas (such as starting a business and paying taxes),
further efforts are needed in other areas (for example in judiciary and licensing), and in
implementation of adopted legislation.
83. As discussed in further detail below, the government’s reform program that would
be supported by the proposed PBG focuses on supporting fiscal stability and improvements
in public expenditure outcomes that should ensure that future growth is inclusive and
future risks are reduced. The fiscal policy underlying the program will remain supportive of
macroeconomic stability, as well as nascent growth recovery and provide incentives for formal
labor market participation. In addition, the program supports social protection reforms to ensure
that future growth is more inclusive, and financial sector actions contributing to a more
independent and accountable monetary authority and reduced risks.
PUBLIC SECTOR EXPENDITURE REFORMS
84. While the government sector in FYR Macedonia is not excessively large, there is
scope to improve efficiency and outcomes of public spending. The size of budget revenues
and expenditures place FYR Macedonia among the ECA countries with a moderate government
size. However, wages and pensions account for more than half of public spending, while
historically relatively small amounts have been allocated to capital expenditures. Moreover,
spending patterns remain rigid, especially given the impact of certain policies implemented prior
to the crisis. Some progress in tackling inefficiencies has been made (for example, move to per-
capita financing of primary and secondary education, strengthening financial management
practices in health, improved allocation of funds and monitoring and evaluation in the road
sector), but considerable inefficiencies remain.
85. Addressing these inefficiencies would help mitigate fiscal risks and enhance
incentives for formal labor market participation. The main areas of focus would include the
public sector wage bill, which currently accounts for a large share of the budget. Strong control
over the wage bill would allow increased resources to be allocated for much needed capital
projects. At the same time, the payroll taxes remain high and created disincentives for
participation in formal labor markets. To reduce payroll taxes in a fiscally sustainable manner,
parallel reforms in two areas would be required. These would include a reduction in social
insurance contributions, and a reform of the pension system to ensure its fiscal sustainability as
contribution rates decline. In addition, the practice of providing free health insurance to those
registered as unemployed is creating significant distortions in the labor markets while also
adding to public health spending, and would need to be reformed. The estimated fiscal impact of
these reforms together is expected to be around 0.5 percent of GDP a year, with gains from the
free health insurance reform expected over the medium-term. These, combined with other
ongoing interventions (reforms in education and social protection, active labor market policies,
improvements in the business etc.) is expected to gradually lead to improvements in the
functioning of the overall labor market.
25
Public Sector Wage Bill and Public Administration Reform:
86. The authorities have taken temporary measures in the past couple of years to
control wages and public sector employment. The public sector wage bill (including health
and education sector staff) increased to almost 10 percent of GDP in 200917
from about 8.9
percent of GDP in 2008, reflecting the full impact of wage increases in earlier years as well as
the decline in nominal GDP. This prompted the authorities to freeze wages and employment
(with exception of positions required for the implementation of EU-accession priorities and the
Ohrid Framework Agreement) in 2009 and 2010, as well as to cut entitlements and allowances.
In addition, recent cuts in social insurance contribution rates have been used to reduce the gross
wage rather than increase net wages in the public sector. These measures have helped contain
public sector wages, with the wage bill expected to have fallen to 9.7 percent of GDP in 2010.
The government is committed to continuing to carefully control these costs in 2011 through a
continued nominal wage freeze and public sector employment control. This is supported by the
proposed PBG.
87. These temporary measures would need to be replaced with a comprehensive reform
strategy over the medium term. A long term freeze on salaries will make it difficult to attract
and retain competent staff, while hiring freezes run the risk of generating skill gaps, as the key
staff that leave the administration are not replaced. A comprehensive reform of the government’s
wage bill policy would need to revise the salary structure in the public administration to ensure
consistently competitive but also fiscally sustainable remuneration across required types of
human capital. A similar reform was completed for the civil servants (accounting for around 15
percent of the public sector employment) during 2004-2006. The impact of the recent crisis has
highlighted the importance of the reform, and the authorities are committed to tackling this issue
as part of a broader public administration reform initiated in 2010 (see Box 2).
88. However, given the significant fiscal impact and technical requirements, the reform
of the salary system will only be undertaken over the medium term. A payroll reform
covering the entire public administration will have significant fiscal costs, as wages are
decompressed for critical positions and the staff at lower levels is grand-fathered18
. This would
make the implementation of the reform risky in an environment of slow growth and fiscal
consolidation. Also, drafting of the Law on Public Sector Wages is a complex undertaking
requiring data about pay and jobs in the administration, which is currently not available (a
compete registry of public administration employees with detailed terms of references and
remuneration details etc.). Furthermore, the reform will take few years to implement as
secondary legislation is adopted and collective agreements are renegotiated. The tight controls
over employment envisaged in the PAR strategy (reduction in public sector employment of
around one percent on annual basis) should also help moderate the fiscal impact of the reform
once it is implemented. According to the action plan for the implementation of the PAR strategy,
the Law on Public Sector Wages will be adopted by 2013, and its implementation is expected to
be completed by 2015.
17
The second phase of decentralization transferred responsibility for payment of wages in some sectors (primary
and secondary education, culture, social protection etc.) to the municipal level and these are now captured under
transfers in the central government accounts. The health sector wage bill is also classified under transfers. 18
The fiscal cost of the implementation of the wage section of the Law on Civil Servant covering only around 15
percent of the entire public sector introduced during 2004-2006 was around 0.2 percent of GDP.
26
Reforming payroll taxes in a fiscally sustainable manner
89. To facilitate employment creation the government is reducing labor taxation. As
mentioned earlier, the reduction of payroll taxes requires measures in two areas: social insurance
contribution rates and pensions.
(i) Reducing social insurance contribution rates
90. A major reform to reduce labor taxation and streamline payroll administration was
launched in 2007 to help create jobs. Prior to the reform, as in other parts of former
Yugoslavia, overall labor taxation was high largely because of social insurance contribution
rates. Low-wage earners were further disadvantaged because of the high minimum basis for
social contributions, which also had important distributional impacts and offered a disincentive
for formal employment. During 2007 and 2008, income taxation was reformed with the
introduction of a flat and reduced rate. Efforts in this area were continued with the payroll reform
initiated in 2009 which introduced greater transparency and streamlined wage contracting,
simplified wage payments, and reduced the social insurance contribution (SIC) rates. The reform
also expanded the tax base which helped contain the impact of reduced contribution rates.
91. After two rounds of reduction in SIC rates, the labor tax wedge has been reduced to
below regional levels. As of January 2009, the total SICs rates were reduced from 32.5 percent
of the gross salary to 28.4 percent. The second stage of SIC rates reduction was implemented in
2010 reducing these to 27.0 percent of the gross salary. The Law on Contributions from
Compulsory Social insurance was amended in late 2009, a prior action for the proposed PBG.
The SIC rates have remained unchanged in 2011 with further small reductions envisaged during
Box 2: Public Administration Reform
In December 2010, FYR Macedonia adopted a strategy on Public Administration Reform (PAR) which calls
for the creation of a public administration that is effective, efficient, and accountable, with citizen-oriented
services that operate in a transparent and open way. The PAR is closely linked to the EU integration process.
While there is no acquis for public administration, the EU-accession process requires the adoption of critical
―good governance‖ principles as well as having a public administration capable of taking up the obligations
for membership.
The PAR strategy envisages reforms in the following areas: (i) administrative procedures and services; (ii)
strategic planning, policy making, coordination and regulation; (iii) civil service reform and human resource
management; (iv) finance management in the public sector; (v) e-government and e-administration; and (vi)
anticorruption policy.
As part of the implementation of the PAR strategy, the authorities already adopted a Law on Public Servants,
which establishes a comprehensive definition of the public service as well as common principles for
employment, responsibility, and assessment of public servants. The authorities also extended the mandate of
the Ministry for Information Technologies to cover public administration, thus consolidating the various
agencies dealing with these issues into one body. Furthermore, the inclusion of the public administration
reform as an EU-accession priority will ensure that progress is being made in implementation of the PAR
strategy.
27
2012 – 201519
. However, the authorities have made it clear that these reductions will be
undertaken only after a detailed analysis of their impact on the finances of the social insurance
funds.
(ii) Reaffirming the sustainability of the pension system
92. While pensions provide subsistence to a large part of the population and are an
important buffer against poverty, past policy measures resulted in significant increases in
pension spending. Around 273,000 persons (14 percent20
of the population) receive pensions
from the Pension and Disability Insurance Fund. Expenditures had been on a declining trend
until 2007, falling from above 9 percent of GDP at the start of the decade to 7.7 percent of GDP
in 2007. This trend was, however, reversed, reflecting a change in the indexation formula21
,
additional ad hoc increases in pensions in 2007 and 2008, and the fall in GDP, resulting in
pension expenditures reaching close to 9 percent of GDP22
in 2009.
Table 8: Pension system at-a-glance
Pension expenditures
Insurees
LFS
employ-
ment Pensioners
Insurees
per
pensioner
in MKD
million
in % of
GDP
Annual
pension
increase
Replace-
ment
rate
2001 351,009 583,205 247,200 1.42 21,180 9.1 1.8% 61.7
2002 332,728 549,492 249,421 1.33 22,091 9.1 6.6% 60.2
2003 321,105 535,246 254,262 1.26 24,023 9.6 5.7% 61.4
2004 348,212 516,269 260,075 1.34 25,148 9.5 1.2% 59.3
2005 348,500 536,335 265,152 1.31 24,969 8.7 0.4% 56.9
2006 394,882 562,938 269,681 1.46 26,735 8.4 2.7% 55.5
2007 424,338 582,605 272,386 1.56 28,185 7.7 1.7% 50.5
2008 451,491 601,883 273,281 1.65 33,366 8.1 21.7% 55.0
2009 475,780 623,128 273,977 1.74 36,455 8.9 5.6% 49.1
2010 466,280 630,154 273,751 1.70 37,614 8.8 1.4% 47.9
Source: Annual Reports of PDIF.
93. Despite the expenditure increases in 2007 and 2008, the pension system remains
largely sustainable although the economic slowdown and reduction in SIC rates present
challenges going forward. As noted in the PER of 2008 the system benefited from important
parametric reforms to the PAYGO system over the last decade (including an increase in
retirement age and lowering benefits) as well as the introduction of a mandatory defined
contribution component in 2006. Moreover, the most recent actuarial report of the Pension and
19
The pension insurance contribution rate will be reduced by a total of 0.8 percentage points during 2012 – 2015. In
addition, during the same period, the health insurance and the unemployment insurance contribution rates will be
reduced by 0.3 percentage points and 0.2 percentage points, respectively. 20
In addition, a considerable part of the population is excluded from the system. The high unemployment rate and
the large informal sector have resulted in relatively low coverage of the pension system. As a result, over the
medium to long run, a growing number of citizens will not meet the minimum requirements for receiving a pension.
The authorities still have to define a long-term strategy to deal with these issues. 21
The 80:20 weights of Consumer Price Index (CPI) and wages in the indexation formula were replaced by 50:50. 22
Including 0.7 percent of GDP in transition costs for the second capitally-funded pillar but excluding health
insurance costs for pensioners of around 1 percent of GDP.
28
Disability Insurance Fund (PDIF) confirmed the sustainability of the system (the required budget
transfers is expected to increase somewhat and average 3.2 percent of GDP during 2012-2024 as
transition costs increase and fall afterwards). Still, the report highlighted certain vulnerabilities of
the pension system owing to the crisis and reduced contribution rates as well as potential ad hoc
pension increases.
94. To ensure fiscal sustainability of the pension system the government has introduced
measures recently. As an immediate reaction to the findings of a 2009 actuarial analysis, the
indexation formula was amended to limit the impact of the change in the wage definition on
pension growth. Further, revisions to the Law on Pension and Disability Insurance were adopted
in December 2009 revising valorization coefficients in the pension determination formula for the
wages received during the 2009-2011 period. In addition, amendments to the same law in late
2010 generated expenditure savings by tightening eligibility criteria for survivor pensions. Also
somewhat related, amendments to the Law on Compulsory Capitally Funded Pension Insurance
lowered administrative costs of the pension system by reducing the transaction fees, and the roll-
out of the new information system in the PDIF earlier this year is expected to reduce the
potential for fraud and corruption. The authorities remain committed to safeguarding the
sustainability of the pension system and will implement further reforms if needed. The Bank’s
past experience in this area and its ongoing engagement through the Conditional Cash Transfers
(CCT) project place it well to support the authorities in designing future reforms.
Reforming free health insurance
95. To enhance incentives for formal labor market participation as well as to control
health spending, the authorities have also recently decided to tackle labor market
distortions created by the provision of free health insurance for the registered unemployed,
and these efforts would be supported by the proposed PBG. The provision of free health
insurance to those registered as unemployed with the Employment Agency (with relatively
limited checks on the accuracy of information provided) grossly inflated the number of
registered unemployed. In addition, it put a considerable administrative burden on public
agencies, and enabled informal workers to easily free ride on health insurance. According to
Employment Agency estimates, around 20 percent of all registered unemployed were registering
only for the purpose of receiving free health insurance.
96. With the proposed reforms, free health insurance will be provided only to the
vulnerable. The reform would start to align the country’s system to the prevailing standards in
EU countries with similar social insurance systems and could increase revenues in the health
sector. The government adopted amendments to the Law on Contributions from Compulsory
Social Insurance which delink the provision of free health insurance from the unemployment
status and introduce an income test for those requesting free health insurance. The income test is
in the form of self-declaration of income that will be checked by the Public Revenues Office.
Free health insurance will be provided only to individuals with income levels below 30 percent
of the average annual income. The reform became fully effective on September 1, 2011. Going
forward, through the Labor Market non-lending activity, the Bank will continue the policy
dialogue in this area and will work with the authorities in refining the income test and providing
recommendation reflecting good international practice in this area.
29
Improving the fiscal sustainability of the health sector
97. Reforms in the health sector in recent years have improved the fiscal sustainability
of the health sector, though quality and access issues remain. The Health Insurance Fund
(HIF) has been overhauled with greater transparency introduced in HIF decision-making,
procurement, as well as in contracting procedures. As a result, public health spending fell from
5.5 percent of GDP in 2003 to 4.4 percent in 2010. Stronger financial controls eliminated the
arrears of the HIF towards suppliers by 2007, while accounts payable of the entire public health
sector fell from 1.7 percent of GDP in 2004 to 0.3 percent of GDP in 2008. Still, public opinion
polls consistently rate health services as ―poor or very poor‖, while household budget surveys
show that out-of-pocket payments for health care are significant and pose access barriers for poor
households.
98. The crisis and growing cost pressures have increased the fiscal risks in the health
system. Accounts payable increased to 0.5 percent of GDP by the end of 2009 and further to 0.6
percent of GDP by end-2010 (out of which 0.3 percent is classified as arrears). Stricter controls
and some improvement of revenues have so far managed to contain the situation. Still, the
gradual recovery and growing costs of health services delivery will continue to put pressures on
health sector financing, with a potentially significant adverse impact on the poor.
99. The authorities are committed to improving the sustainability of health sector
finances as well as access to and quality of health infrastructure. In light of that, the
authorities decided to keep the health insurance contribution rate at 7.8 percent in 2011 and
reduce it to only 7.7 percent over the medium term (against earlier plans to reduce it to 6.5
percent). Also, reforming the provision of free health insurance should ensure that the vulnerable
have access to free health insurance, but the reform could also bring in fresh resources to the
system. Financing of health services is moving towards output-based mechanisms, with
Diagnosis Related Group (DRG) financing being well advanced and most recently specialist care
packages being rolled out. To improve access to health care, the authorities have begun to
rehabilitate hospitals and are partnering with the Council of Europe Development Bank in
procurement of modern medical equipment. Also, innovative private-public partnerships (PPPs)
in the delivery of public health services are being piloted with assistance from the International
Finance Corporation (IFC).
100. The introduction of a treasury function within the HIF will increase efficiency in
spending and is thus an important step forward. This is a PBG prior action. The system
became fully functional on January 1, 2011, and it provides a second line of defense against
budget over-commitment or spending by the HIF and health care institutions (HCIs). Early
results are positive with improving financial management in the public hospitals and better
planning and liquidity management by the HIF.
101. Bold reforms would be needed to achieve sustainability of health spending over the
long term and improve efficiency and patient satisfaction. Currently, the benefits package
provides (at least on paper) a comprehensive coverage for outpatient and inpatient health
services for more than 90 percent of the population enrolled in the HIF. In contrast to EU
countries, non-medical benefits, including sick leave and maternity benefits, are also included in
it. However, the available health sector finances are insufficient to cover the costs of services
included in the package. Also, the package has not been evaluated using cost-effectiveness and
30
allocative efficiency criteria. In addition, existing inefficiencies in the sector result in high costs
for number of drugs and devices as well as poor health services. A detailed actuarial analysis,
supported by the proposed PBG, reiterated the need for reforms in order to prevent further
deterioration in the system.
102. The authorities are committed to improve the efficiency and sustainability of the
system, though the implementation of the proposed measures will stretch beyond the
timeline of the proposed PBG. In September 2011, the government adopted a program to
improve efficiency and financial sustainability of the health system. It draws on extensive
analysis of the sector, including through detailed analysis of the operations of HCIs and the
actuarial analysis of the sector. The program, supported by the proposed PBG, outlines the
proposed direction of the reforms and the timeline for their implementation. It includes a
comprehensive set of measures aimed to improve efficiency and generate costs savings in the
sector to be implemented over the next few years. Among other things, the program includes
measures such as the gradual shift from non-medical benefits from the health sector to the central
government budget, further regulation of the copayment policy, setting of standards for
consumables and implants, and procurement reform. Given the political sensitivity of these
reforms, they need to be carefully assessed and gradually phased in. The World Bank will
continue to be involved, including by potentially undertaking a poverty and social impact
analysis of the proposed measures.
103. While the program contains a number of positive reforms, over the long run, the
whole health system will need to be right-sized. Ensuring sustainability of the system given the
relatively low health sector utilization rates will be a challenge. The recently introduced output-
based financing mechanisms can give strong incentives for increasing the efficiency and should
be effectively implemented. However, bolder efforts may be needed in certain areas such as
rationalization of the network.
STRENGTHENING SOCIAL SAFETY NETS
104. In a country with high and stagnant level of poverty, a well functioning social safety
net can help mitigate the impact of the slow recovery from the global economic crisis as
well as any possible adverse impacts of above mentioned fiscal adjustment and reforms.
However, this requires sufficient resources, both financial (fiscal resources) and institutional
(existence of country system to channel the resources to the ones needing them most). The
government program tries to strengthen the social safety net along these lines.
105. The safety net performs reasonably well by regional standards, but still suffers from
both leakage and exclusion. According to a recent regional report on the performance of social
safety nets, the FYR Macedonia coverage of the poorest quintile at around 30 percent
outperforms Albania, Montenegro and Bosnia and Herzegovina, but falls behind those of Kosovo
and Serbia. That being said, the performance of social assistance schemes in the Western
Balkans region is generally poor. Leakage is also substantial, with slightly less than half of all
social assistance resources going to the poorest quintile. This reflects a significant number of
categorical transfers, failure of means testing to properly screen out ineligible households or
individuals, but also complicated and non-transparent eligibility determination which result in
errors of exclusion. At the same time, the system is one of the least generous in the region.
31
106. Despite fiscal pressures, the authorities have preserved social spending and
introduced new programs to assist the most vulnerable. Despite cutting expenditures by
around 10 percent during 2009 and a further 2.5 percent in 2010, the budgetary allocation for
social protection transfers has been preserved. In addition, new programs were introduced over
the last year. An energy poverty program, at a cost of around 0.1 percent of GDP (prior action
for the PBG) is expected to help the vulnerable cope with the impact of expected energy price
increases (see Box 3 for details), while also improving the viability of the energy sector by
reducing non-payment. Also, the Conditional Cash Transfer (CCT) program was introduced to
assist the most vulnerable in developing their human capital. The well-performing Social
Financial Assistance (SFA) program is used to administer both programs thus ensuring that
resources are relatively well targeted without additional administrative burden.
107. Recent reforms of the legal framework for social protection represent an important
step in improving the performance of the system. The new Law on Social Protection approved
by Parliament in June 2009 streamlined the procedures regulating the social protection system,
opened up the option for potential harmonization in the future and allowed for a rapid response
of the system to emerging crisis. An important next step was achieved with the preparation and
adoption of the bylaws needed for effective implementation of the recent amendments. A critical
factor for the effectiveness of these bylaws has been the adoption of a comprehensive definition
of countable income for social assistance purposes, which can be expected to reduce the leakage
of transfers to the non-poor.
Box 3: The Energy Poverty Program
By ratifying the Athens Energy Treaty, the FYR Macedonia joined the Southeast Europe Energy Community
and committed to gradual liberalization of the electricity market aimed at its integration into the EU internal
electricity market. The Treaty calls for the establishment of energy market models based on competition in
generation and supply that would ensure cost recovery and a reasonable rate of return for energy market
participants. The recently adopted Energy Law, harmonized with the EU acquis, envisages the completion of
the process of transition from the current (largely regulated market) to a liberalized energy market by 2015.
This transition will result in higher prices for consumers in a country where energy affordability is already an
issue. Despite cumulative price increases of around 30 percent over the last few years, current electricity
prices in FYR Macedonia do not cover long-run costs of electricity generation and distribution, and are
significantly below prices of imported electricity. At the same time, affordability is an issue even at these low
prices. According to a 2007 report prepared for the Ministry of Economy (Social Protection against Energy
Poverty), close to ¾ of the poorer population had problems paying their bills, with non-payment reaching 50
percent.
Given the significant poverty impact of the expected increase in prices, in late-2010, the authorities
introduced an energy poverty program. It is providing a subsidy of MKD 600 on monthly basis (or around 1/3
of the average monthly bill) as a top-up to the social financial assistance (SFA). The full cost of the program
is estimated at around 0.1 percent of GDP a year and so far around 19,000 of the potential 55,000 SFA
recipients have applied. The subsidy is provided by the central government budget. It is part of the Athens
Energy Treaty and EU accession requirements, which will ensure that resources continue to be allocated for
the program at least until the transition to market prices is completed.
In line with good international practice the link to the existing SFA will ensure that it is relatively well
targeted without producing additional administrative burden. Also, targeting assistance to the end-user is
generally viewed to be least distorting to the power market: producers and consumers face the correct market
signals and unfair competitive advantage is eliminated. Finally, the design of the scheme requires that bills
are paid prior to receiving the subsidy which should also improve collection rates.
32
108. In parallel, the authorities are developing the informational and institutional
infrastructure necessary for effective implementation of adopted social policies. The
network between the Ministry of Labor and Social Policy (MOLSP) and the Centers for Social
Works (CSW) (prior action for the proposed PBG) has been established and allows them to share
data, match files for the comparison of data for fraud prevention and improve the administration
of the social benefits. This is complemented by the unique registry of social cash beneficiaries
(Cash Benefit Management Information System – CBMIS) that is currently being developed and
supported by the PBG. It will contain information on all social rights and allow more efficient
administration and effective targeting of social programs by also revamping the financial
management processes in the social sector. Having the CBMIS in place will also completely
reform the resource management procedures in the MOLSP, including planning and budgeting,
budget execution and accounting and financial reporting. The CBMIS is currently in advanced
testing phase and is expected to be fully functional by end-2011. Finally, a policy evaluation
unit has been formed in the MLSP which should build capacity to analyze policies and evaluate
their effectiveness. The unit is currently being staffed.
109. The recruitment of consultants has been initiated to work on the preparation of a
comprehensive review of all social programs that would form the basis for the development
of a strategy on social safety nets, to be prepared once the CBMIS is fully functional. The
strategy will outline the direction for future development of the system. The establishment of the
unique registry will allow for a detailed analysis of the existing cash benefits and the preparation
of a comprehensive strategy for future development of the social cash benefit system.
PRESERVING FINANCIAL SECTOR STABILITY
110. The banking system weathered the crisis relatively well, but further measures are
required to improve its stability and resilience. The banking sector entered the period of the
global crisis in a relatively healthy state partly due to the prudent regulation and supervision in
the recent past as well as central bank’s earlier move to increase prudential requirements23
.
Although the resilience of the banking sector does not raise major immediate concerns, NPLs24
remain above pre-crisis levels and a possible failure of individual (smaller) banks cannot be ruled
out.
111. The authorities are committed to strengthening the resilience of the financial sector.
A strong financial sector that is properly regulated and supervised is important for
macroeconomic stability as well as ensuring sufficiently competitive markets that will improve
access to financing. The framework for the financial sector is generally well designed25
and the
2008 Financial Sector Assessment Program (FSAP) mission and follow-up assessments by the
IMF and the World Bank have identified additional measures that could enhance crisis
preparedness, but also build capacity for addressing medium-term structural issues. A recently
23
The NBRM prudential measures included an increase in reserve requirements, risk weights for consumer loans,
credit cards and overdrafts exposures, and in loan-loss provisioning requirements. In addition, NBRM required
banks to improve matching of assets and liabilities across currency and maturity. 24
There are no major concern regarding the accuracy of data on the soundness of the financial sector and the size of
NPLs. There is strict adherence to good international practice on classifying NPLs with an even more conservative
treatment of provisioning (for example, collateral in the form of mortgages is not taken into consideration). 25
The sector is generally liberalized, credit and property rights are improving, the regulatory framework is sound
and credit information systems are improving. Initial consumer protection legislation has also been implemented.
33
introduced Law on Financial Institutions regulates credit activities of non-bank financial
institutions (NBFIs), such as loans, credit cards, factoring, and guarantees, and introduces fit-
and-proper and minimum capital criteria as well as reporting and oversight mechanisms. Similar
prudential requirements are also contained in the amendments to the Law on Leasing adopted in
March 2011.
Table 9: Selected financial sector soundness indicators
2005 2006 2007 2008 2009 2010 Q1-2011
All Banking Sector
Capital adequacy ratio (%) 21.3 18.3 17.0 16.2 16.4 16.1 16.8
Return on average assets (ROAA) 1.2 1.8 1.8 1.4 0.6 0.8 -0.1
Liquid assets to total assets (%) 15.0 18.0 20.9 16.9 20.6 25.3 24.2
NPLs to total loans (%) 15.0 11.2 7.5 6.7 8.9 9.0 9.1
NPLs, net of provisions / capital (%) 2.9 0.7 -5.0 -6.2 -0.6 -0.3 -1.5
C, D and E loans / total loans (%) 10.9 7.6 5.7 6.4 7.9 7.1 7.3
FX and FX indexed loans / total loans (%) 49.2 52.7 54.7 57.0 58.5 58.8 58.3
Three Largest Banks
Capital adequacy ratio (%) 13.7 12.4 12.7 13.4 13.8 14.1 15.5
Return on average assets (ROAA) 1.1 1.8 2.0 2.1 1.3 1.4 0.7
C, D and E loans / total loans (%) 11.7 8.2 6.2 6.5 7.1 6.7 7.0
Source: NBRM Quarterly Supervision Report
112. Strengthened information systems will considerably reduce credit risks. The public
credit registry, maintained by the central bank, was upgraded few years ago and now includes
credit information on almost 100 percent of the portfolio of commercial banks on a monthly
basis. A private registry, with greater coverage, began its operations in January 2011. In addition
to credit information from banks, the private registry covers insurance companies and leasing
companies, utilities, state agencies (the Public Revenue Office, Pension and Disability Insurance
Fund, municipalities) and other companies. So far, the private registry has 90 members with 18
members already contributing information on around 60 percent of the adult population and
around 85 percent of companies.
113. To enhance financial stability, the authorities have adopted a new NBRM Law
which increases the central bank’s accountability and independence standards to EU levels,
a prior action for the proposed PBG. The law has been drafted in close consultation with the
World Bank, IMF, EC and European Central Bank (ECB). The law extends the mandate of the
central bank to cover financial stability issues, increases its independence and accountability and
regulates the conduct of monetary policy during the EU accession process of FYR Macedonia
and the eventual euro adoption.
114. In addition, efforts are under way to introduce more efficient coordination and
adequate crisis preparedness and contingency planning. Following the signing of a
Memorandum of Understanding (MoU) between the NBRM and the Ministry of Finance (MOF)
in 2009, the authorities have appointed members to the Financial Stability Committee (FSC).
The FSC objective is to monitor and regularly assess macro-prudential vulnerabilities, and agree
on (in the form of minutes) and coordinate policy responses to address any build-up of systemic
risks and resolve systemic events and crises. The FSC met for the first time in September 2011.
During its first meeting, the FSC concluded that the financial sector remains stable and agreed to
34
explore options to further improve the legal framework and contingency planning in the sector.
The FSC will also satisfy the requirement following an EC decision in late 2007 that all EU
member states are required to establish a Domestic Standing Committee.
IV. BANK SUPPORT TO THE GOVERNMENT’S STRATEGY
A. LINK TO CPS
115. The proposed operation is consistent with the 2010 CPS. The main objective of the
Bank’s partnership over the FY2011-2014 period is to support progress towards the EU
membership with the focus on: (i) promoting faster growth; (ii) ensuring more inclusive growth;
and (iii) promoting green growth. The proposed PBG contributes to the first CPS outcome of
ensuring faster growth by supporting macroeconomic stability (including stability of the
financial, pension and health sectors), and the second outcome of promoting inclusive growth by
strengthening social safety nets, improving health sector outcomes, reducing distortions on the
labor market by decreasing the tax wedge. A number of CPS results indicators are included in
the proposed PBG results framework.
116. The proposed PBG, while being a stand-alone operation, builds on the DPL series
launched in 2009. In the context of the preparation of the second operation under the DPL series
(DPL2), the authorities requested the conversion of the loan into a PBG. As PBG is not a DPL
governed by OP 8.60 (Development Policy Lending) and a "Programmatic PBG" option does not
exist under OP 14.25 (Guarantees), the DPL series was terminated after DPL 1, and DPL 2 was
transformed into a stand-alone PBG operation, with largely the same policy matrix as originally
envisaged for DPL 2.
117. Given the medium-term nature of a number of measures supported by the proposed
PBG, the Bank will continue to maintain an active policy dialogue and support their
effective implementation. The existing portfolio but also future lending, non-lending TA and
ESW work will allow the Bank to remain engaged in a number of areas. The ongoing
Conditional Cash Transfers (CCT) project could facilitate the policy dialogue in the area of
Box 4: Financial Stability Committee
The FSC strengthens transparency and accountability of the crisis policy response by engaging the main
stakeholders in a policy dialogue on key financial stability matters in normal times, and functions as the main
decision-making body in times of financial crisis and resolves systemic disruptions to the financial system.
As a financial crisis evolves, the leading crisis management agency usually shifts from the supervisory
agency/central bank to the MOF, which has the final responsibility in deciding on support operations involving
public money. The NBRM, in its capacity as monetary authority and micro and financial stability supervisor is
best equipped to identify problems in advance. Ideally, the build-up of vulnerabilities is contained at an early
stage through remedial macro-prudential and micro-prudential policy measures. Nonetheless, despite these
efforts, periodic instances of systemic distress can occur in which case the FSC will need to formulate a
resolution approach, including loss-sharing arrangements between the financial sector and taxpayers.
The FSC will be the forum for the NBRM and the MOF (other entities will be invited if needed) to calibrate
the appropriate response. Ultimately, the MOF needs to decide whether or not to spend public resources,
balancing stability concerns with fiscal constraints and moral hazard considerations. In formulating the policy
response, the NBRM is likely to have the lead advisory role.
35
social protection as well as in pensions. The planned DPL series on competitiveness will allow
the Bank to maintain the productive dialogue on macro-fiscal issues and advance reforms in the
financial sector and in public debt management. The implementation of the health reforms will
be supported initially through an ongoing IDF and possibly through a new Health Project. The
ongoing labor market technical assistance activity is assisting the authorities on measures to
enhance incentives for labor market participation and employment creation. Poverty impacts of
reforms will be monitored under the Western Balkans Programmatic Poverty Program. Finally,
the Bank will continue to provide advice and technical assistance to strengthen the financial
sector through the Western Balkans Financial Sector TA Facility.
B. COLLABORATION WITH THE IMF AND OTHER DONORS
118. The Bank maintains close working contacts with the IMF and other development
partners for the purposes of harmonizing policy recommendations, seeking synergies
among the respective operations, and avoiding overlaps. As noted in the recent Joint
Management Action Plan (JMAP) of the World Bank and the IMF, the teams agree that there is a
high degree of coordination between the two institutions in an environment of open and frequent
dialogue. Such close coordination with the IMF has resulted in largely shared views of the
economic situation in the country.
119. The Bank has maintained a robust dialogue with the donor community on issues
related to the proposed PBG. Frequent discussions are conducted with other development
partners, most notably the European Commission given its large and increasing role. For
example, the new NBRM Law has also been endorsed by the European Central Bank and the
European Commission, while the PAR strategy has been prepared in close cooperation and
coordination with the European Commission. Also, the EBRD took the lead on advising the
authorities on energy poverty issues. The financial sector activities supported by the proposed
PBG were designed in close coordination with the IMF, and the PBG is complementary to the
recently approved PCL. The Bank also coordinated its activities on reforms in the health sector
with the World Health Organization (WHO).
C. RELATIONSHIP TO OTHER BANK OPERATIONS
120. The World Bank’s lending program consists of nine lending operations and one
grant, totaling around US$287 million, grouped into three outcome clusters: (i) the growth and
competitiveness cluster; (ii) the human development cluster and (iv) sustainable development.
121. Activities on other operations have underpinned the program supported by the
proposed PBG operation. The proposed PBG builds on the program supported by the preceding
DPL1. The Conditional Cash Transfer project is closely linked to the proposed PBG, as both
operations reinforce each other in a number of important areas, including the adoption of a
suitable policy and administrative framework for the improved functioning of the social safety
net system. There are also synergies between the recently closed Social Protection
Implementation Loan and the proposed PBG in the area of pension and social protection reform.
The proposed PBG has also benefited from non-lending technical assistance (TA), for example,
on energy sector issues covering the area of energy poverty. Also, the financial sector actions
supported by the proposed PBG are closely aligned with the Balkan Financial Sector TA activity.
36
D. LESSONS LEARNED
122. The program supported by the proposed PBG builds on lessons learned from earlier
activities. These include the following:
a) Bank assistance in aligning government policies with EU requirements has
been largely successful. Supporting policies which are harmonizing national
systems with the EU norms and practices considerably strengthens the ownership
of the program. Reforms in the financial sector and the provision of free health
insurance supported by the proposed PBG are aiming to bring the country in
closer compliance with prevailing practices in some of the EU countries.
b) Strong analytical basis and close involvement of all stakeholders in program
design increases the ability to respond quickly and adequately to
government demands. The program supported by the PBG has benefitted from
extensive analytical work performed by the Bank both on FYR Macedonia and
other countries for example on social safety nets, pensions, and health. At the
same time, the existing close cooperation with the IMF and the EC has
contributed to reaching a consensus on the reforms in the financial sector pillar.
c) Coupling technical assistance with policy dialogue on a timely basis can help
promote results. In the case of FYR Macedonia, significant technical assistance
was provided which facilitated the policy dialogue on health and financial sector
issues.
E. ANALYTICAL UNDERPINNINGS
123. Extensive analytical work undertaken by the World Bank in recent years has
underpinned the program supported by the proposed operation (see Table 10). The 2008
Country Economic Memorandum focused on reforms needed to improve growth performance
and also called for more inclusive policies to ensure shared growth. The 2009 Poverty
Assessment shed light on the stagnant living conditions including the functioning of the social
safety net. The 2007 Public Expenditure Review analyzed spending patterns in a number of
sectors, including education, health and social protection. The 2008 FSAP noted considerable
progress in the financial sector, but also provided recommendations to strengthen its resilience.
37
Table 10: Bank analytical work by area and links to proposed operation
AAA work Main recommendation PBG-supported agenda
Public
Expenditure
Review (2008)
o Review and begin reforming the generous
health benefit package;
o Consider an increase in retirement age;
o Strengthen the capacity of the HIF, MOH and
the HCIs to help limit cost pressures and
eliminate wasteful spending.
o Roadmap on reforms of the Basic
Benefit Package;
o Improve sustainability of pension
system;
o Introduce a Treasury Function in public
health sector.
Country
Economic
Memorandum
(2009)
o Maintain a strong regulatory and supervisory
stance over financial sector;
o Mitigate impact of electricity tariff adjustment
over the poor.
o Adopt a new Central Bank Law;
o Adopt energy poverty program.
Poverty
Assessment
(2009)
o Improving the social welfare system,
especially the social assistance program, can
help to reduce poverty by expanding coverage
of the poor while reducing leakage to the
affluent.
o Amend SP legislation to improve
targeting of social assistance;
o Improve administration in the system
by establishing a network between the
MLSP and SWCs and developing the
CBMIS;
o Introduce energy poverty program.
FSAP (2008) o Further refine financial safety net
arrangements;
o Strengthen NBRM independence and
supervisory powers.
o Implement the MoU on crisis
preparedness;
o Adopt a new Central Bank Law.
Policy Note
(2009)
o Refrain from pension increases in excess of the
legally mandated percentage;
o Reconsider non-means-tested transfers.
o Improve sustainability of pension
system;
o Complete review of social safety net.
Regional Social
Safety Net
Report (2010)
o Increasing coverage and improving
transparency;
o Increasing generosity;
o Improving implementation.
o Establish a network between MLSP and
SWCs and develop the CBMIS
o Introduce energy poverty program
Balkan Financial
Sector TA
(2010)
o Strengthen institutional preparedness for crisis
prevention.
o Establishing a Financial Stability
Committee.
V. THE PROPOSED POLICY BASED GUARANTEE
A. OPERATION DESCRIPTION
124. The proposed PBG supports reforms to strengthen sustainability of public finances
and functioning of labor markets, and support the most vulnerable, while reducing risks to
financial stability. The actions proposed to be supported are important for reducing future risks
to public finances and macroeconomic stability in light of the gradual recovery, while ensuring
improved public service delivery and enhancing incentives for formal labor market participation.
In addition, the proposed PBG supports implementation of critical reforms that will protect the
most vulnerable.
125. A policy matrix, containing all policy actions, is attached as Annex 2. The expected
outcomes of the policies supported by the PBG are featured in the last column of the policy
matrix. The table below lists the prior actions, while the remainder of this section outlines policy
areas supported by the proposed operation in greater detail.
38
Table 11: Proposed prior actions for the PBG
1) The Member Country has, through enactment of the Law on Amendments to the Law on Payment of
Wages of July 20, 2010 (Official Gazette 97/2010) frozen nominal government wages until September
2012.
Status: The action has been completed.
2) The Member Country has, through enactment of the Law on Amendments to the Law on
Contributions from Compulsory Social Insurance of December 25, 2009 (Official Gazette 156/2009)
reduced the social insurance contribution rates; and has, through enactment of the Laws on
Amendments to the Law on Pension and Disability Insurance of December 25, 2009 and of December
6, 2010 (Official Gazette 156/2009 and 156/2010, respectively)), reduced pension expenditures through
reduced valorization coefficients and tightened eligibility criteria for survivor pensions.
Status: The action has been completed.
3) The Member Country has, through enactment of the Law on Amendments to the Law on
Contributions from Compulsory Social Insurance of April 14, 2011 (Official Gazette 53/2011) de-
linked the provision of free health insurance to registration as unemployed and introduced an income-
based test for provision of free health insurance.
Status: The action has been completed and implementation of the reform started on September 1, 2011.
4) The Member Country has adopted a Program to improve the efficiency and sustainability of the
Health Sector.
Status: The action has been completed.
5) The Health Insurance Fund has adopted by-Laws and a rulebook regulating the operations of the
new Health Single Treasury Account covering all public health institutions.
Status: The action has been completed and as of January 1, 2011 the HIF Single Treasury Account has
been functioning.
6) The Ministry of Labor and Social Policy has developed a functional Cash Benefits Management
Information System to testing stage, and has established a network between Social Welfare Centers
and the Ministry of Labor and Social Policy.
Status: The action has been completed and as of late-September 2011 the CBMIS is in intensive testing
phase.
7) The Member Country has adopted the Program on Subsidizing Energy Consumption in 2011
(Official Gazette 6/2011) which introduces a mechanism for providing support to the poor and
vulnerable against electricity prices increases.
Status: The action has been completed.
8) The Member Country has, through enactment of the Law on the National Bank of Republic of
Macedonia on December 12, 2010 (Official Gazette 158/2010), increased accountability and
independence of the central bank to EU standards.
Status: The action has been completed.
9) The Member Country has established the Financial Stability Committee and this Committee has
adopted rules of procedure for its operations.
Status: The action has been completed.
39
B. POLICY AREAS
PILLAR I – Strengthening sustainability of public finances and functioning of labor
markets
126. Pillar I of the proposed PBG supports measures aimed to reduce fiscal risks and
enhance incentives for formal labor market participation. It includes measures to control
spending pressures as well as improve the functioning of the labor market by reducing costs and
removing incentives for informal labor participation.
Public Sector Wage Bill
127. The proposed PBG supports the tight management of the wage bill (PBG prior
action) which should allow for redirection of scarce resources to more productive goals.
Keeping the wage bill under control will reduce fiscal risks but will also support a shift in the
composition of spending towards well-performing social transfers and capital expenditures
needed to improve the competitiveness of the economy.
Enhancing formal labor market participation in a fiscally sustainable manner
128. The proposed PBG also supports measures to reduce the tax wedge while
safeguarding the long-term sustainability of the pension system (PBG prior action). The
authorities implemented the second stage of payroll tax reform reducing the social insurance
contribution rates from 28.4 percent of gross wage to 27 percent. In parallel, the authorities
introduced measures to reduce the costs of the pension system, including tightened eligibility
criteria for survivor pensions and reduction of valorization coefficient which should result in
lower budget transfers to the pension system over the long term. The ongoing CCT project and
DPLs planned for FY13 will allow for the Bank’s engagement in this important area over the
medium term.
129. The PBG supports reforms in the provision of free health insurance with potentially
considerable impact on the labor market functioning (PBG prior action). The authorities
have adopted legislation to de-link provision of free health insurance (HI) from registration as
unemployed. Rather than providing free health insurance on the grounds of being registered as
unemployed, provision of free health insurance will be income tested while an affordable access
to HI will be provided for the others. The legal framework was amended by early 2011 and the
reform was launched in September 2011. The Bank will continue to support this and other labor
market reforms through the ongoing labor market technical assistance activity.
Health
130. Measures to improve efficiency in health spending are also supported by the PBG.
The new Health Single Treasury Account covering all public health institutions was introduced
and is expected to result in improved financial management practices in the public health sector
(PBG prior action).
131. The PBG also supports the early phase of the longer-term reforms required to
strengthen sustainability of the public health sector. The government’s reform agenda has
40
been summarized in its program to improve the efficiency and sustainability of the sector (PBG
prior action). The program draws on the actuarial analysis of the health sector as well as
extensive analysis and discussions of various issues. The program includes a comprehensive set
of measures (gradual move of non-medical benefits from the health sector to the central
government budget, further regulating the copayment policy, and procurement reforms) expected
to generate savings and improve efficiency in the sector. The policy dialogue established during
the preparation of the proposed PBG will be continued through the ongoing Institutional
Development Fund (IDF) grant for the Ministry of Health to ensure effective implementation of
the program.
PILLAR II: Strengthening social safety nets
132. Pillar II of the proposed PBG supports efforts to protect vulnerable groups in the
short term, but also structural reforms to improve effectiveness and administration of
social benefits over the medium term. It supports greater allocation of resources for well-
targeted social financial assistance and reforms that should eventually result in better targeting
and lower leakage and exclusion.
133. The authorities are introducing an energy poverty program under the PBG (PBG
prior action). The program provides a direct payment to the poor to cover their energy bills (see
Box 3 for details) and to mitigate the impact of expected energy price increase over the medium
term. The design of the program (i.e. a top-up to the social financial assistance (SFA)) ensures
relatively little additional administrative burden and minimizes distortions on the market.
134. Critical infrastructure improvements are also supported. The network between the
SWCs and the MLSP has already been established and the CBMIS has been developed to testing
stage (PBG prior action). The CBMIS will reform the budget planning and execution process and
the financial management and reporting processes in the social sector and contribute to improved
administration for most of the social spending.
PILLAR III: Strengthening Resilience of the Financial Sector
135. The PBG supports measures aimed at enhancing the resilience of the financial
sector. These include measures that increase independence and accountability of the monetary
authority as well as measures to reduce further risks in the financial system.
136. The PBG supports the new central bank law aimed at increasing independence and
accountability of the NBRM (PBG prior action). In addition to price stability, the new law
extends the objective of the NBRM to financial sector stability. It also strengthens the
independence of the NBRM Council and is harmonized with the EU acquis.
137. The functioning of the Financial Stability Committee should help reduce risks (PBG
prior action). Its objective is to regularly monitor and assess systemic risks and coordinate
policy response to address potential build-up of risks and resolve systemic events and crises.
C. GUARANTEE INSTRUMENT
138. The terms and conditions of the IBRD Guarantee to FYR Macedonia have been defined
in close consultation with the government. An outline of these terms is included below.
41
139. Borrower and Guarantee Amount: The Borrower is the FYR Macedonia and the
operation is a Policy-based Guarantee from the IBRD in the amount in EUR 100 million, the
equivalent of US$134.9 million.
140. Structure of the instrument: The PBG will partially guarantee a loan from Deutsche
Bank and Citibank. The guarantee will cover EUR 100 million of the EUR 130 million principal
of the loan. The obligation will have a five year maturity and a bullet repayment structure.
141. Interest rate: The interest rate structure will be a fixed rate, equivalent to the five year
euro swap rate plus 234bp. The lenders will also charge an arrangement fee of 130bp.
142. The procurement process will follow national legislation. The procedure for selecting
the loan is relatively simple and requires issuance of a Request for Proposals from the Ministry
of Finance to a number of market participants. According to national legislation, once bids are
received and there is a government decision on the winning bid, a parliamentary approval is
required for effectiveness of the guaranteed Loan Agreement. The Indemnity Agreement
between the Bank and FYR Macedonia will also require parliamentary approval. The Bank will
work closely with the authorities to minimize risks during the process. Furthermore, the
guaranteed Loan Agreement to be signed will have provisions that cover Sanctionable Practices
at all stages of the proposed operation. Under these provisions, IBRD is allowed to withhold
payment if evidence arises at any time between the date of the guaranteed loan agreement and
the final maturity date of the guaranteed loan that the lender has engaged in a Sanctionable
Practice in connection with the guaranteed loan agreement.
143. Disbursement: Upon approval of the guarantee and notification by the Bank of the
effectiveness of the Guaranteed Loan Agreement among the lenders (the ―Private Lenders‖), the
Bank and FYR Macedonia and the effectiveness of the Indemnity Agreement between the Bank
and FYR Macedonia, the Borrower may request withdrawal of the loan proceeds from the
Private Lenders within a defined drawdown period. The front-end fees and the annualized
guarantee fee will be paid from the Loan proceeds.
144. Guarantee Fees: Consistent with the current Bank policy, there is a front-end fee of 25
basis points on the face value of the guarantee exposure (EUR 100 million) and a guarantee fee
of 50 basis points per annum (equivalent to the contractual spread for loans) on the present value
of Bank’s exposure from the transaction. The guarantee fee will also be collected upfront, on a
present value basis, to strengthen the transaction terms for all parties.
145. Callability of the Guarantee: As the borrower, the FYR Macedonia has the obligation
to ensure timely repayment to the lenders. Details of the callability of the Guarantee will be
defined at a later stage once the instrument is more precisely defined. Following payment by the
Bank under its guarantee, the Bank would have sole discretion to decide whether to demand
immediate repayment from FYR Macedonia or to extend terms for repayment over time, and in
the latter case, would have sole discretion as to the terms to be extended.
42
VI. OPERATION IMPLEMENTATION
A. POVERTY AND SOCIAL IMPACTS
146. This section reviews the poverty and social impact of key reforms covered by the
policy matrix of the proposed PBG. In broad terms, the program is unlikely to have an adverse
impact on living standards of the poor and vulnerable. The objectives of the reforms in public
finance and social sector are to better identify the poor and improve targeting of government
expenditures and launch a new program to compensate for energy price increases. Analysis of
recent Household Budget Surveys (HBS) indicates that some elements of the program, such as
the energy poverty program, will help protect the poor, while other aspects, such as the public
sector wage freeze, will not have a direct impact on the poor.
147. The public sector nominal wage freeze is not expected to adversely affect the level of
poverty. In the current environment of low inflation (3.6 percent year-on-year), the freeze on
wages is likely to result in a relatively small reduction in real incomes of government sector
employees. Also, at above MKD 8,000 per month, the minimum wage in the public sector is
considerably above the World Bank estimate of the poverty line. 26
Those earning the minimum
public sector wage are above the poverty line even when one takes into account the needs of
dependent household members. HBS data show that households with monthly formal sector
income of MKD 8,000 per household are in the 39th income percentile. Furthermore, a single
person receiving the minimum public sector wage falls in the top 35 percent of the population
based on the average consumption expenditures per capita.
148. The poverty and social impact assessment (PSIA) of the preceding DPL1 informed
the design of the PBG supported program. The DPL1 PSIA noted a positive impact from the
reduction in the social insurance contribution rates, but raised concerns that further larger cuts in
the rates may require more drastic changes in the pension system benefits and these may have a
long-term negative impact on pensioners. Pensions are an important buffer against poverty.
Poverty incidence among households with pension income is lower compared to the national
average (22.9 percent for pensioners compared to 26.6 percent for the entire population). In
addition, a lot of extended households depend on pension income. As a result, the reform
supported by the PBG was adjusted to reduce potential adverse consequences.
149. The implementation of some of the measures to improve efficiency and
sustainability of the health sector could potentially negatively impact some groups, though
this is unlikely. Under Pillar 1, the authorities have committed to implementation of a
comprehensive program to improve efficiency and sustainability of the health sector. Most of the
efficiency-improving measures are unlikely to have a negative impact, instead, they can be
expected to have a positive impact as patients get access to cheaper drugs and devices, and the
introduction of performance-based pay mechanisms provides incentives for doctors to improve
client service. However, implementation of measures affecting the co-payment policy or setting
service standards may limit the available health services to some insurees if not appropriately
designed. The authorities are committed to ensure that the reforms do not affect the vulnerable.
For example, the revision of the co-payment policies will take into account the income status of
26
The monthly poverty line per person was MDK 3,369 in 2009, the most recent year for which HBS data are
available.
43
patients to ensure the poor and vulnerable are protected. Also, the introduction of the new
referral system will ensure that genuinely needed services continue to be provided. Furthermore,
the authorities plan to carry out jointly with the Bank poverty and social impact assessments of
key reforms prior to their implementation. The results of these assessments will further inform
the authorities about the appropriate design of reforms and allow them to take measures to
mitigate potential adverse effects. This will also require strengthened consultation with relevant
stakeholders, including patients’ organizations, medical staff unions, which the authorities are
committed to do.
150. The reform of the free health insurance and the introduction of the energy poverty
program should help direct resources towards the poor. The provision of free health
insurance on an income-tested rather than on categorical basis should ensure that insurance is
extended to the most vulnerable. Currently, around 10 percent of the population27
is not covered
by health insurance, including poor persons who are excluded from the system. Similarly, the
introduction of the energy poverty program through the relatively well-targeted social financial
assistance program is expected to have a considerable positive impact over living conditions.
Expenditure data from the HBS show that the MKD 600 monthly energy poverty top-up payment
should be sufficient to cover the expected increases in energy prices associated with
liberalization. The analysis also shows that the benefits of the energy poverty payment are likely
to be gender-neutral. Still, certain social groups, such as poor excluded from the social system,
could be by-passed by the reform, though improved targeting over the medium term should
ensure that an increasing percentage of the vulnerable are covered by the program.
151. Over the medium term, the strengthening of the social safety nets supported by the
PBG can also be expected to help reduce poverty and foster social inclusion, given the
substantial leakage and exclusion in the system. By introducing a comprehensive definition of
income for the assessment of eligibility for social assistance benefits, the bylaws for the social
protection law ensure that social transfers are directed towards the most vulnerable. At the same
time, the recently established network between the MOLSP and SWCs, as well as the CBMIS
should considerably improve administration of the entire cash benefit system, and enable
improvements in targeting of the programs.
152. The supported reforms in the financial sector are critical to the stability of the
sector and its ability to provide financing to the private sector and thereby help job
creation. An improved functioning of the monetary authority and better contingency planning
increase the stability of the banking sector. It ensures that deposits remain safe while efficiency
of intermediation increases, thus improving access to credit and helping job creation.
B. IMPLEMENTATION, MONITORING AND EVALUATION
153. The Ministry of Finance will be responsible for overall implementation of the
proposed operation and for coordinating actions among other concerned ministries and
agencies. Other agencies involved include the Ministry of Labor and Social Policy, Ministry of
Health and the National Bank of Republic of Macedonia. The Bank will monitor actions and
review progress of the implementation of the proposed operation, as well as the subsequent
27
According to administrative sources from the HIF. Survey-based data suggest that a much smaller percentage
(around 3 percent) of the population is not covered by health insurance.
44
actions of the government program by using the baseline and expected overall program outcomes
outlined in the Policy Matrix.
154. As specified in paragraph 31 of BP 14.25 (Guarantees), supervision will be carried
out in accordance with procedures applicable to Development Policy Lending (OP/BP
8.60). An ICR evaluation of the PBG transaction will be completed within one year of its
financial close (i.e. within one year after the issuance of the Guarantee). The policy impact of
the PBG will be evaluated in a manner similar to development policy loans; the impact will be
assessed against the specific indicators detailed in the results framework for this operation in
Annex 2, including incremental market access, leverage and the costs to the borrower.
155. As specified in paragraph 32 of BP 14.25, Implementation Status and Results
Reports (ISRs) will be completed annually until Guarantee expiration. These ISRs will
assess compliance of the authorities with contractual undertakings under the financing agreement
and whether circumstances exist that would lead to a call on the guarantee. ISRs will also assess,
in more detail as new information comes to light, the financial impact of the PBG in terms of
increased market access, and leverage. The ISRs will be prepared in collaboration with the staff
from the World Bank’s Treasury.
C. CONSULTATIONS
156. The government’s program outlined above largely draws from the VMRO-
DPMNE’s Election manifestos for the 2011 rounds of Parliamentary elections as well as
additional analysis and consultations. The election program calls for prudent fiscal policy and
a sustainable deficit level as well as a reduction of non-priority spending and an increase in
capital spending. It also envisages reforms in social protection to improve protection of the most
vulnerable largely along the lines outlined above (i.e. reform of the legal framework, investments
in the information systems and efforts to reduce leakage and expand coverage). Also, it calls for
more effective management of resources in the health sector (i.e. the introduction of the treasury
function) and identifies the need for improved efficiency. The program also proposed actions to
improve the performance of the financial sector, including in the area of supervision of the
overall financial sector. On the basis of this program, the current government was recently
reelected for a third term in office. Furthermore, the overarching goals are broadly shared across
the political spectrum, which provides relatively broad consensus for the reform program.
157. The framework in place allows for extensive consultative process in decision
making, but, certain aspects of the consultations and communications processes are still
evolving. Consulting and communicating reforms with relevant stakeholders are even more
important given the ethnic and social diversity of FYR Macedonia. While there is a shared view
about the necessity for reforms, implementing these can be difficult, especially if the
deteriorating external environment slows growth, resulting in slow improvements in living
conditions. The reforms need to be articulated to all constituencies that are affected. The
government has established a number of bodies and channels to discuss planned policies; but,
additional efforts are needed to build capacities among stakeholders in order to be able to
constructively engage in these processes.
158. The program above reflects input from various stakeholders. The government has
had regular and extensive consultations with the Chambers of Commerce representing the
45
business community where the fiscal policy stance, and more specifically the financing of the
deficit, has been discussed extensively. Reforms related to the social protection and labor
markets have benefited from consultation in the Socio-economic Council, a tri-partite body
bringing together representatives of the government, unions and the business community, while
the changes to the pension system were discussed with the Association of Pensioners. The
introduction of the energy poverty program was informed by the public debates required as part
of the Law on Energy. The authorities have also taken considerable efforts to communicate the
health insurance reform. The sequencing of the reforms in the health sector, a highly sensitive
reform, has been changed as a result of consultation of the Ministry of Health with interested
stakeholders and the program to improve efficiency and sustainability of the health sector
contains specific actions related to better informing the insurees about planned reforms. The
authorities have also requested assistance from the World Bank in conducting poverty and social
impact assessments of proposed measures in the health sector.
159. Consultations and discussions of World Bank analytical work played a role in the
design of policy options and mobilization of stakeholders. For instance, the findings of the
2008 Financial Sector Assessment largely informed the government’s program in the financial
sector outlined above. Furthermore, the findings of the 2007 Public Expenditure Review, served
as the analytical underpinning for many of the reforms in the health and pensions sectors. The
broad consultation process in the preparation of all Bank operations have resulted in broad
consensus for the recommendations proposed.
D. FIDUCIARY ASPECTS
160. Two aspects of FYR Macedonia’s fiduciary arrangements are relevant to the
operation: the implications for the Bank assets of the guarantee and the consequences of
activating the guarantee; and the public financial management (PFM) arrangements underpinning
the government’s capacity to manage resources to meet its obligations to the Bank under the
facility.
161. The guarantee would involve no immediate transfer of funds from the Bank, but
sufficient funds would need to be provisioned from the Bank assets to meet a call on the
guarantee if required. When called under conditions provided for under the Agreement, the
payment from the Bank will be made as a single payment to the lenders or agent of the lenders.
The indemnity agreement between FYR Macedonia and the World Bank provides that the former
will repay the latter on demand or as the Bank otherwise directs, if the guarantee is called.
162. The overall fiduciary risk is moderate. A 2007 Country Fiduciary Assessment (CFA)
rated the financial management risks as ―moderate‖ and there appears to have been further
progress since. A 2009 review of the National Public Procurement System also noted
improvements in the procurement system. The 2010 OECD SIGMA assessment of public
expenditure management noted that the systems contain many of the attributes of an effective
and efficient administration. Although there were few significant recent improvements. The
strengths of the system include tight treasury expenditure controls, timely and informative
reporting and a good record of liquidity management. Areas for improvement noted in the
assessment include staff retention, lack of information on future year impacts of budget decisions
and absence of a consolidated end of year accounts for parliamentary approval.
46
163. Public procurement: Improvements have taken place after the 2002 CPAR noted
several deficiencies in the Law on Public Procurement (LPP). A new LPP in line with
international standards (however not harmonized with the EU acquis) was enacted in 2004 as
part of the Public Sector Management Adjustment Loan (PSMAL). The government adopted
comprehensive implementing regulations, promulgated standard procurement documents and
forms of contract, and established a state administrative body for public procurement within the
MOF (made fully operational with staff, resources, and terms of reference). The law was
amended in 2005 to introduce electronic procurement, a ―one-stop-shop‖ system for central
registration of tenderers’ qualifications, and the requirement for publishing all contract notices
on the website of the Public Procurement Bureau. In 2008, a new Law on Public Procurement,
fully harmonized with the EU acquis was adopted and activities are underway to ensure its
effective implementation. Consequently, the review of the national Public Procurement System
undertaken in 2009 noted considerably improvement in the legislation, some improvement in
implementation and relatively limited progress in remedies.
164. Budgeting, accounting and reporting: The government has made progress in
improving central budgeting processes since 2007. Improvements include the implementation of
a multiyear fiscal plan, the preparation of government priorities and expenditure ceilings for the
coming fiscal year, and the introduction of functional budget classification coding.
Extrabudgetary funds (EBFs) and agency accounts, and most recently the public health sector,
have been integrated under the Treasury Single Account (TSA). Improved ex-ante controls
resulting from the TSA now apply to all budget entities, the EBFs as well as the public health
sector. Budget reporting has improved, with MOF producing reports for the central government
using the TSA within 40 days from the end of the month.
165. Internal controls and internal audit: Following the adoption of the Law on Internal
Audit in 2004, internal audit units were formed across the government and the municipalities
with a MOF central unit coordinating the reform. Over the next few years the number of auditors
and audits performed continuously increased. The authorities adopted a new Law on Public
Internal Financial Control (PIFC) in 2009 and are building capacity for its effective
implementation. A major challenge is the adoption of a risk management culture amongst
managers and internal auditors.
166. External audit: There has been substantial progress in strengthening the Supreme Audit
Office (SAO). The SAO is independent from the executive branch (with further financial
autonomy being provided with the 2010 amendments to the Law on State Audit) and its mandate
covers all public sector activities. The government increased resources for the SAO and
amended legislation to: require an annual audit opinion on the government’s annual financial
statements; require the auditor to summarize the audit findings for the year into common themes
on high-risk areas for the government to address; adopt a risk-based audit approach to the annual
audit planning process; report on the government’s progress in implementing current and all
outstanding audit recommendations; perform performance-based audits; and implement
international auditing standards covering all aspects of its work.
167. Further improvements in several areas of procurement and public finance
management would be necessary, including: (i) improved reporting on state-owned enterprises;
(ii) strengthening the budget preparation process; (iii) completing the legal framework for public
47
procurement in line with EU requirements and ensuring effective implementation; (iv)
strengthened internal financial controls in some institutions.
168. Anticorruption measures: Several anticorruption measures have been put in place,
including the internal and external audit functions and anticorruption laws and institutions.
Institution building and improvements of standards in the areas of the judiciary, police, health,
and customs is ongoing as well as strengthening of controls and penalties for those who do not
respect laws and regulations. The areas mentioned are also supported by the Bank, the EU and
other donors. Even if more transparency is introduced and civil society engaged in this fight as
planned by the government, the level of corruption will remain a challenge. The ongoing
improvements in the areas of public procurement, internal audit, and strengthening of the role of
the SAO contribute to the fight against corruption. The 2008 BEEPS shows an improvement
(compared to the 2005 round of the survey) in the percentage of firms indicating corruption as a
problem of doing business.
169. The latest IMF update of the safeguards assessment was completed in May 2011.
The assessment found that a good governance framework is in place and the NBRM had taken
steps to strengthen its safeguards framework and implemented recommendations from the 2005
assessment. Reinforcement of governance practices and implementing an internal risk
management framework was recommended by the IMF and the NBRM has already started
implementing the main recommendations. The actions taken by the NBRM to safeguard funds
are deemed adequate.
E. ENVIRONMENTAL ASPECTS
170. The specific policies supported by the PBG are not likely to have significant effects
on the country’s environment and natural resources. The measures proposed to be supported
by the operation are primarily geared towards supporting government reforms in fiscal
management, social protection, and the financial sector. The energy poverty program supported
by the proposed PBG may have some, most likely positive, effects on the environment since the
subsidy is likely to prevent poor households from switching to more polluting heating sources. In
addition, the requirement to present invoices for purchased wood can be expected to contribute
to decreased illegal deforestation since about 80 percent of the poor rely on wood for heating and
cooking.28
Although the nominal wage and employment freeze in the public sector will make it
difficult to attract and retain competent staff if continued for a longer period of time, the current
macroeconomic environment (low inflation and limited private sector job opportunities) can be
expected to limit any significant negative impact on the enforcement of environmental
regulations.
171. The legal framework for environmental management has undergone significant
reforms along the lines of the EU acquis. New Laws on Environment, Nature, Air Quality and
Waste Management have been passed by the parliament, in compliance with EU requirements,
though implementation is uneven. Further regulation, regarding the drafting of secondary
legislation in the environmental sector as a whole is an on-going process, guided and supervised
with EU technical assistance. FYR Macedonia has also signed the South Eastern European
Energy Community Treaty which subjects it to key pieces of the acquis, notably the Large
28
―Social Protection against Energy Poverty‖ – Ramboll Danmark A/S, March 2007.
48
Combustion Plants Directive. This directive places restrictions on local pollution emissions
(sulfur dioxide, nitrogen oxides and particulate matter). The country has also ratified the Kyoto
Protocol.
F. RISKS AND RISK MITIGATION
172. The proposed PBG has substantial risks, largely reflecting the deteriorated external
environment:
Current policies appear adequate and supportive of macroeconomic stability and
economic recovery. However, external risks have lately considerably increased with the
turmoil in the Eurozone countries and challenges in the US economy and Japan. There is
an increasing risk of a sharp global slowdown. If this risk materializes, it would suppress
demand for exports and capital inflows, put pressure on the fiscal and external balances
and as a result undermine growth prospects. Ensuring growth in a prolonged sluggish
global growth environment will depend on FYR Macedonia’s ability to strengthen its
credibility with investors and trade partners. This puts even stronger emphasis on prudent
macroeconomic policies going forward and may require reconsidering some measures
promised during recent elections to limit threats to stability, support economic activity
and ensure sustainability. This would need to be complemented by structural reforms.
The Precautionary Credit Line (PCL) with the IMF will help assure that the program is
financed in case unexpected shocks lead to balance of payments problems. Over the
medium term, increasing exports diversification should mitigate these risks.
Political risks remain. The government has a stable majority in the parliament following
the June 2011 early elections. However, lack of progress in the resolution of the dispute
on the name of the country could potentially trigger political instability.
Operation-specific risks also exist. Some of the reforms, such as cuts in entitlements
resulting from improved targeting of social protection and free health insurance, could be
difficult in the current environment. These risks are partially mitigated by the careful
approach taken in the design and sequencing of reforms, including extensive analysis and
involvement of stakeholders. Given the medium-term nature of some of the actions,
increased attention to communicating the reform agenda would be warranted.
49
ANNEXES
ANNEX 1. LETTER OF DEVELOPMENT POLICY
1_-Mlnlalry o f _ .....
To:
Au,,:
SubjKl
The World Hank 1818 II Stre,· •. N.W. Wu.hinRton O,c. 2{""B
M. Rot...rt ZoelUck. P"~sld .. nt
I .... t ~r of [)o>veloplr ... nt Policy
Dca, Mr. ",,,,,IIICk,
No. \,. 3' '2.1 41..fz. SI.opj<I-B -1D:.1D.!J..: GowIn,",,"' '" ~,""'k of ---Mini,,,, of f lu . ..
M~.H_o.IIov\ll>. --.....-of ............ TtL •• l89 HU1 :sa
rHo" '" HI17 280 ....... , fkltnr:r4tl!ymr _ ... _ "'.' ...... Oql Da ",.ml:
I am .. ,lllng to requ ... ' on b<>halfof the Government .,rthe Repubtk of Ma<e<Ioni. a Polley Based Gua ranI"" of (100 mill ion (\JS$ll1t9 mUilon "'IUivalem) 10 5Uppo.t Our program Ihal SIrl'lIglherl:[l , ,,,,.Inabllily of ,he p.lbUc $<'Clor, 5UPPO'Ul ,he vul ..... abl .. groups and en<lllelI a subk-lh .... Jld.Ist<: .... _
1lIe cu' l'I'1ll globall'rnROmiC turmoil I. th ... al~lng to slow down the gradual ""''''''''y of our """""tn)'. 'j,.,,, RepublJc of M.""""nla .. as able \n weather lhe 2008·2009 global """nomic nisi, rel.llvely we ll thanh 10 OUI ><lund macroeconomic fundamental •• nd "n ap propriau; policy ,,".pons .. , The ",covery of l'<lmomic a<.:tlvUy has been gr3du~I., dom('$Uc demand has ~n beld bilek by lhc Mill uneenaln i'Cooomic environmenl, Howe""" gro ... th picked up suongly 0 .... ' lh~ La" yellr. jusl 10 be th,,,,"wMd 00'" by lhe ",,,,,....-<I ,lobit1 turmoiL Oulpu! expandrd by 5.2 JlI'rcenl In the fir;t half cl2011 . ...., \<IWI' able 10 all,,,,,1 a number ()l f""'igo In .... lon, and nr$( signs of Improv>d job emallon emergO'd WhiIe ...... 1 I'I!CeIII !r,'nds,.,.main p<Ki' '-. _ al'9 aware .ha, ,he onggi", ,1obo.1 ... ..--n ,h", ... "", ' 0 ~"" ~.h p~s.
w~ aR'" Conndenllhat \he IBRD Polley 6itscd Gual<lllu,,, ... ill help uS further improve our ""Ci"S' to Inlern~lional capital aod I""n m.rlwU Despite <111., $<lund fundiJmcnlols. our prn><im lty to "' ... ell as lrdde .nd r,nanc!al In(egraUon with truobl..d I::uru~one "",mbe" II significant ly Increa.lng 'he c,,",1 01 borro ... lnll from interna' ional c~pllaJ mUrk"ts, 11", IIlkD guuant .... has mltlg"'ed Ih ..... rlsl.& and en"blt"<l us 10 borro ... al longer maturity and lower ron ... The PUG I. also helping us tl ...... lfy ou, J(}Urceo of finandng by f~lilaling DUr fim arce.. 10 ,"" Inle rn.aU"",,11oan ""'rket . Th t'Ollgh the psuao."mcnt prO<:t.'SS r(Or the Poo ...... eslabUd.....:l rnnlacll "'llh a numhr· of prominent financial imtl\utlon5 which we bel_ 10'111 imprnn OIl. 1\1[0." ~ 10 inteffhltionalmiuket$ and ><ill ho"" a pOSitive spnlo...,. effect (0<
Ih~ priv.t~ se<'l o. as .... 11.
50
I RopWk~M ___
~ Mini_try of "n.nce
This Lell~r or O" .... lopnwnt Potkysets out I"" key o<:' ;"ns ,hiU our Governnwntls commltt...t to u",,",rlak<> 10 oow" prepare fo •• pot~nllal sIow-down in It... .hoIt-term b~1 also to support ......diurn·l~nn structural reforms lhal ... m .... Ip maintain macro·fiocal liability and prumot~ ...,nomic grow.h and pow.ty redoelton. The reform agenda Is a rontin"",,,,,,of,he program that WlI1 Supported by .t... pn-ri;tus First ~""'nl Policy l. ... n (DPI.I) in 2009. Our program envlUII"" a n"",1 policy staJ>C(' sl lmulus that ",ill prt.-se"", the macro<.'<:ooomk slablllty ""g, ~s wdl a. introd l>Cl' a Mgh quality fiscal adju,unent Ih.I Increases prooucllv~ s!", nding "lid provides ""uer suwort or 1 h~ vu\tterable, At the ".me II",". "'" continu e '" rna." efforts 10 mlnimi.e ris' " to the fi"ancl&] .«<t<".
The prop<)R<l program will .... ppon the lIb""'ti ..... oullirM'<l abow through refom" "\"'Clured around lh.~ by pulley a",as:: (I) pobllc .. , ,,,,,,cllture MOrm!; (II) reform of sud .. ] oare'y net'"'
and (m) s'R'n/llhl'nlnll resllle~ or."" nnaM1al sector. Below ..... bri<ofty describe our ..,fOrm pi"'" In all ofth~ area ..
Public tJc~ndl t ur~ Reforms
We h."" contin ued implementing public e' l",ndl.ure I",lid ... up~' tlve of macroeconomic stability and ,",cell·r.,ion of eroncml<: activity. Ou r prudent fiscal pOIlde'S have ,esulted in • ..,laUwly mod",t lI»YI'rnment _ tu' "t><! low deficit levels. Our Howrnment _tor. at arout><! JS I"'",.ot of GOP. I. rel<tU""ly small by regklnal stat><!."Is. Fuuh.rmo.., . ...., • .., continuing our dToru to .!.'dI,lC«.he fISCal bunkn 00 economic "".Wi.y. A. a r"""lt. ge ....... III"""'nment debt stood at around 26 P"'ftent of GDP by mld·20lI.
In "'"1""'''' to tM sluggish """'"'rr. we havt' continued to puQUf! counterevcllcal fiscal poilC}' to "Imulate tlte economy ~h ilc taking Into consldoor". I"" nn.onclng conn",lnt .. We are un U"dck 1<> nl",,' our ~dt torgN of 2.5 pC~nt of GOP. The denclt In the IIrSt .,jght month . of 2011 ..... arou nd l percent of GOP, ... ith """nues pcrformln~ In line ... ith proje<tlons. Furt hermore. by secu .ing ~.tcrnal financing for tm, deficit (drawi ng on the IMr. Precautlon.ry C. edlt Une~ ...., augmented oor oflldal re""rYO$ an.d reduced pr ... su ..... 01\
domestic (apltal marke •• • h.reby fadlltatlng Inc..,. ""\ bank Icn.dlng 10 the private .... ctm_
Going forward. our in.ention i. to contln"" wilh d"dpli~ fi"",,1 poIky with o\o,Odt """'Is bel ...... n 2·] p ..... :"nt of GOP, reI1""Unlllnc!'NS<'d $pf'ndlnllOll priority Infrutructure projKlS.
The defit:1t will depend on the ~ of ~y and "'" ""lIhy to ftO:II.., fin.ondng al rea..,nab", I ~rm,. To reduce ",Ii.nr~ on etle'n"1 creditOr<; _ a", also \irkjng ~.ep< '0 furthe..""""lop th~ don>e$llc capi",1 rn.-rrlo;:, .. W~ are planning '0 hold two auclkln • ..r lonll'·Herm bond.(S.jlNrl by th. ~nd of 2011 , aCId wmlnue wilh slICh iosues In 2012. Wilh .u~h mod<>",,~ deficit leVl'ls Ih~ lIt: neml govern"."" debt I. proj<'C ted to '!<lUIII'''"1 around JO percent of GDP by2015.
51
I Ropublio o! M~ Min i_by of lin."".
In addition 10 dlKlpllned fl$<;~1 policy,..., i.!'e also I~king bold "", ions to Imp..,..., the qu~l;ty or 1i",,~1 s""ndlng. w~ ~"",".ed ,"" /.oiw on Amt'"d"",,,,s to ,he /.Jow on 1'.ym<'nI ofw"g.. ... on July 20, 20IfJ to (,.....;u: nominal """","""'''I "'"-"""" unlil S<-pre"","" 2012 .... '~ also continued the Ilghl ronl roI on employment, with the UO'ption or employme"lS requh..t for the EU· Int~glatl"" PI"(I«'$"'" and Ohrld f,a_"""'" log""''''''"! Imp"''''''nt~uon, We uncl.ntand . hat th~ ""'>Jures ... !II haw to Ix· ~Ia<td with a romp",he"., ..... reform of the public adminl ..... ,lon 0...,' the medium~erm. In Ihal regard, we ,""""I ly o<loplO'II • Strategy on Public i\d", I" I~lralion R~form . "d are com mit""! to it. implem,·n'atlon. We are well .<lvann":! ln the preparation of Ih" '~Kls'ry of public .... ""nts, a nl"Cessa. y r..-qul ",men' for a broad pubUc _tor pay ",(orm OI,,,,nlly planowd for 2013·2015. 0.... cum mltment to light control on'Jl'lOn·pHtduc'i..., spending has enabled u' to inc", .. .., .Ignlflcantly allocat;oos fo, ..... n ""rfOl'mlnl .ocial uan.fers ud capital ~pending.
.... '" undMstand the Impotlanu 01 job CI'NIIon and .... maln ",mmllll'd 10 rd'o,m. Ih~1 will imp......, 11>0: funcllonlng of . he I;,bo. ma,h! We"'"" "<m,inued th" 1""'1,1;11 ""'<K"lion of Soc;;.1 Ins"",n.:e C"n,ribu,ion. ,.to'S (Slet). In II"" with ou, finaflC'lng posslbllil ies. As "f 'anuar)', 2009, Im al SiCs we,e ""'oc.-.l (n,m )2.5 pe,cent of the gross sala,y to 28.4 percent. We al.", .. ,.. •• " .. llh" La ... on Am.nd"","" to Ihe taM' On Cumrlbut/oM from Compulsory Social In.'''''''''''' on Dffe,.,ber 15. lOO9 10 fur. I,,,, ,-",juee .hl! SICs "'/e. 10 17 pt'l't't'nt in 10/0. n,l< bmullhl the labor lax ",edge In Macedonia bel"", ..,!{iona] """rag..'" Ket.plng wage costs rnoJI" ... te 1';0 key componen' of our 'l"'leg)' I" ImP«"'" competili""nt.'SS.
.... ·e ~] ... UhMrs ... nd the Importa:ote of prewrYlng Ihe sustai .... biU.y of $OCIa1 Insu.a""" syst'-"'llS. Through enact ........ of rho- /..i>"", on Amendmenrs ,<> .he UlW OIl p,._ and IJisabi/iry Insu"'nu of Dr<-""",-,< 6. 1010 and De«-mbtr 1S. 1009. "'I' reducH pt'ttSion ,.~pt"fldirurt'S Ihrough righ.ened cl/g/biUry cr/.~ria fo, ."rvl..,,- /H-",,,I,,,,,- ~nd r<'<Iu<:ed valoriza!ion «,..fficil·ms. We ha"" al.u ",ducre! Ihe coslJl of the """rall ~Y"I .. m by reducing f ..... of .~rlous "I(cncles. Furth .. "" .. .." we Inl,()duc...! an ...... Informmlon systen> in Ihe I"'nslon 'y~t em In 2011 which "'ill n:<:Iuc~ polential for f,;lud and (orrupUon In the sy.lem. We .n: (~ ... ("lIy a.sessin~ Ih~ pe, formanc. o( the pension systom by und .. rtakin.o; " 'gular 1tC1"",I.1 analr.l,., and ",main commlttod I" lIdtu'<l ""nslon sy.tem pollet .... If needed. 10 saf<>gu:ard 1M Iong-Ie,m s ustai .... Wlty of the sY't~ m.
Our policy 0( pnwlding r"", l>o:<lIth Insuntnce 10 regisle....! u .... mplo)-ed w.u plIJvidlng di<incenll¥fl (or (ormall;>bor marut panlcipation. Hence. _ <Iedded to "'(Dml Ihe syslem to O'liminale I hi. di.iflC'enU"" ... hlr .1", en .... ln,g that llIe ,,,Incrable ... n>aln owe<l'd. A> a ,esuit. th'''''Nh emoc"',..,,' of th~ I .. ", on A",,-,ndment .• /" rhe L.o .... tm Qm rr;oo.1on< from Compul.<I)ry Social Imura"",. of ,IWi! 14, 1011 ,... de-linked Ih,· proVision of free health io,umn{'t· ,0 r~gls'rd 'i"n as "Ill'mpluy.<j Hnd Introduced an Inru_·""scd I." wr provis/"n orrn~' health I",ur."" ... As of s.,pt .. ,.,bt,r lOt I, (TIl<' heallh lnout~nc. il provided on based on i""o"><' rdlhe, than unemployment SUltu,- In addition. the-..drnlni.tradon off~ health
52
" ... '" 1-"'-• Mlnl.try 01 nn. nc.
In.o'.nc~ ...... ITIOYO!'CI from the Employ""""l Ag.:....-y (EA) to ,h~ HNlth In.ur."K~ f ond which ... iIl allow.hI'.:A.o bNtel ""'(0'" lIS COI'~ mandate to a .... ' 'he pr1'3On5 gmuinely looking for lobs.
We a", also unde' lakiBj[ a num~ of .... fnn". In , ......... al.h _.m 1M 1,....,,1t ' .... ",o."", F,,,,.I has IJdopftd by-I .. 1>'5 aoo a ru/cloook ,~gulall"" .he ope,,";on< or ,iko ....... U""I.h SinghTn""ury A,""""t (STA) rove,ing ,/I puhllr l>I'alrh institulion •• nd !.TA "'05 Introduced in th" publ k h~ahh '''''tot In january 2011. The fuoc!!onlng of the Sfi\ h ~s I mpro~ed budget planning and c~C'CU li"n in public health C' r~ lnotito!!u". IHel.) a. \oIdl "-, liquid ity manas""",", in th. ov~r.1I s..:lOr.
We und."land that challenge< faring OUr twalth 51'S"'''' .... large, and ... 111 . eq ui'" concerted erro ... OWr the medium 'eTTrL .u a .-esult . """ ha ..... adopted a Prosr.tm 10 j~ the etfld .. nc,. .n,h""ai ... biliry of ,1>1' """hh 5«''''', n... pmgr.llm d..-aws on e'nens .... analysis of 1M _ .. ". Including through detailed analysis of HCls ol>"T"lioos and Ihe acluarlal allillysls
or \ht, """lor. II Includes a romp"'_"''''''''' ... 1 01 ... " asu ...... imt'<l al IrnprO"lng efYklency and generale COliIS J;lvl"gs In Ihe sectnr lu be, Impl~menl<>d over the nexl few ~ar$. W. strongly be,1I""" th"t th~ program r.pr • ..,n«. c"-'<Ilble...,, of measures Ihal, OnCe I mplement~'<I, ... iIl con.idm.tbly Improve the functiuning lind suStalnabllity of the "-,,,10', We h ....... "".dy boogun ... itn Ihc Implcn~ nl "llon of Ihe prog",m b)' Init ialing amend"'en" III Ihe I~g~t framework for prucu •• "",nl In HCls and for ..,ll.ng of d.ug prkn. n- should ",nerale saving. In Ihe .y5l~m.
Reformllll! Social SafelY Nets to Support The Mosl Vulnerable
w~ ",main comml",'" '0> i'<""'''y ""'",,' Ion. "pKt.olly gf,..,n t ho "row!"" rbk. Dr m ,low<"< and job"'" t<-<:o ..... ,y, Ou, agenda In Ihi. are;< Is focused un two ;,opec,., I) ....... ring a<\equate
support W Ihc most vulne,able; and III Impf\)\llng th e admini.lTallon and cff«; liV<''''''s of the ... dol .afcly net. Despite an u"" ... lIllgh\ nscal "nvel""" ovcr the last few yea,s. we !\ave manag<>d 10 alk"'"le sufficient fuods (or Unln l"rrupled functioning uf Ih~ soeiat safely net ~nrl. f"flh~.mo",. 10 Increase resiNm'O for well' l"',ftWmlng and Inn" ... li..., pfOR",ms. W. Ita"" Inlroduced a Program "" s~Jdjtlng e""'X)' CtJf<sumption I .. xm ""'kh 15 providing suppor. 10 ,/\Eo poor and vu/ne ... b,.. agalnsl ~""triciIY prke ilK" ... .u6 The progrnm prondes Il'(ipientl of _ial financial asstilBnc. (SFA). a lop·Up aimed to alievLate lhe burden <Ji growing .. nergy prk .... Providlnll thr asslstal"tO' "" B top·up 10 .hr ..... U·perl'orm ing; Sf A e!\SUm that funds a", BpJlTOPn alOiy largt't<>d al minimum addillonal administrative burden. We hn" also Introduced a Progr.om for Coodltlon~' Ca.h T"'nsf~rs .. '~Ich Is prwldihg .<lditlo ... 1 Teso>urCe. 10 Sf A , ,,,,_plenr. ... lth clo lld~n enroll<>d In _""dary ~'<Iucation. proyided Ihe dlldren "'gularly all .nd .chool , Thl' Is expecled to relUll ln Krealcr R'<;OndJ'l' '>ChOOI com pletion ""Ies, help neat , . kllls among the poor and enabl" Ihem 10 II"t boon", jobs.
53
""I RopubIie 01 MIK*donIo Mlnl. try .. llln.nel
We are atoo "'~nl[lh"ning 1110- , ... tllutlonal and physical infra'I""'!"'" in 1M $)'5t~m lh~1 will { .. rtlMo. Imp ....... the ;w!mlnistratllln and ~ff<,<,,;""~ of the ..xlal safety nel . Following 'hr adoption of Ihe new Social Prntll!Clion Law In 2009, we have adopt'" the by-ia ..... ""cn .. .,. r.". I .. Impk"",nt~';';"_ '111<: by-la .... [ndu.J.,J d ~",,,~,~h~,,.I.~ .kr. .. iU", . ....
coontablc 11ICiIm;, for ....:ial a •• i.:a",,, purpoS<!$, thus lirnitinK the pol~nlial {or leakage of fUM. (lOrn Ih. oy.tern, We are a"'" oo",mltl~ tn ""'"glhenin!! the In,lhullo",,1 ca~ilY and In{raSIr"CI uf" ''''Iuire<! for more eff~'CII"" admlni'I",!ion of the s(X'11I1 safely "el. We hove ~.Iabll,hed a /lCtwork bt't""",n tb~ Allnl.try vf s..abor and Social Pvlley l/oIolSP! alld lb.Sod,,) Il10'* C(-III",n; ",hleh has irap"""",, Ih~ romrnunication belwel!n tht key agent;". and sl .... nglt>.1\I'd I'Unlrui> in the .y.t.-m. As of September 2<111, _ ",""" al"" d ........ ,ope<! 10 a ,_1"8 SlaS" I flllX"tional Cash Bt .... flIJ Ma""B"""'"f /"(""",,firm SY5f ... m {(B.IIIS) .... hich i • .. X.,...,I .... to cotIMd ..... bly contrllw .. 10 ron.oIidaling and coordln~llng ,he pfOn'SSl'S lOt applications, dM~rmlning .. lIgiblll:y, ."ljjning bmcr.ts, and "",naglng Ihe ca ... load. Th...,.
"'ill also Ju,lp PO"" th .. way 10. imp"",,-..:I monh<.>ring and .... aluallon of OIl. pollci ....
The fu nctloning of the CB).IIS wgl .11 ..... u. to belle. understand th~ .. rreo:t l""n ..... of our I"'lldc' and "'Ill Inform our dedsbn, about the future d .... do~mcnt of th" 50<1.1 assi"an(~ 'ystem, \.I'e pl~n to adopt a compn:l1('n~lve s(.al"SV fur the future development of the social cash ben~nt system by mid-201lthat will review ~I I bcnents and r«ommend opUons for the I"'sslble hannonl .. tion of the cash bond'it • . ')'!item. We h ..... already InlUated the procur ....... nt j>fOCf'H for consultanls 10 ..tvl ... tM gowmmenl on lhl! Iml"'rtant a~oo...
Finally, _ ha .... rslabllshed a Policy Ewoluallon Unit In !he MoLSP and a.., UP"Cting to be abR 10 fully ,lalf 'M unl' !IOorL
The teiall""ly healthy nnanclal _ 10' In the Republic of Maced""la, In parlleular I "" bonking sy.tem, por(ly ~xpl alns the rdativrly mild (mfl'lct of the 2()()1l-lOO9 crl,l. on .he Macedonian c>«Jnomy As ~ r •• ul, of prude" tnacn""'·on<>mlc policies and wuod .egulation ~nd supervl.lon. the bonking seclor ent" • ..d the global uuls In a ",iatlvely hr.lthy ",~nce. SillCO! thell "" h""" contlnu.-d Implementing polkle!l that fllrth'" ' '''engl hen ,"" $yslem and ~ble It to .uwo" the .~t)". c..piI~1 ;w:Ieq~ and liquidity h,;o"" rcrBalntd !IOUnd. """~onnlng loans h,;o"" de<:rea""" and aA! fuJ!r-p~ned. and the SYSlcm I. profitable (tbough protltabllilY indkato .. aA! .... """ p ...... "'i. kvels~
Still. given the In.;",~<ed likelihood of fUflMr 't.~ .. , ROing ahNd. we are committed 10 further <1"'''iI' hening .he fl"Siliell<'t' of .lte _,or froru indirect effects of the "Isis. FOT th~t purl"'s~, W1l arc continuing to Improve tlte cr i~l~ preparedn"", frdmewotk. «,,,,,i,,,,n' ",i.1t the Memorandum of Underst~ndi.g (Motl) on nisi, p"'l"'.-edn.,., from la.c 200\1, we haw ",xlabUshed II>< .. Finaoc/al St~bili'r ~omml'trt' {f"SC) and adopl<"'/ t~ lui", or procpdure fur its <>P<'",'ions. '\"he FSC provides a plalform fOllnfOl'rnalion t llChanlC, monitoring of ~emlc
54
• \ RopubIic: 01 M---' -A Mlnl.try ollln.nc.
risk., ('(Ins~hitlons on fi"""d.1 stabllhy ind olsl. rnanaK~""'nl a"""'l1 t~ Mlni.try of Flnanc1' and th~ National Bank of ~bll( of Macedon;" (NeRM~ 1be NBRM has also Il'Cf!nlly ...... ndfod lh~ noguialioM on I", Lendef of Lasl Resort ri1dllW 10 enable il 10 beller inle"","" In..a ... ,.rI~'W'. ~i<l"""'''''''''
w~ ha"" al!;() ~dopl<'" a "" ... I ...... on rhe /IIaUlmaJ Blmk of ,h~ RepubJIc of Ma«<Ionia ..mkh inc ..... S< ... lu ""t'"u"Mbilily ami ind .. P<!mi<.·".... In Iifit' ... ilh PTe""Jlins IOU ~rallddrd •. The La ... e. plldlly Im,,~luce, financial sl abil lty, In addition to price stability. u an Gb)ecll,e of Ihe central bonk, '-U.the. I ndel"'n""n~ Is provldl'\l 10 Ihe Go,e."", and N BRM Cou ndl m .. mbe •• _ Th~ Law also IE'IIuiat'" the pm<1'S! of Ih~ ~"'~n\ual EUTu adoption.
In addition. ..... """" adopted amend"",n", 10 lhe law 00 Leasing to fu.lhe. st.engthen fit and prDpII" crl,,~.I. and adopted a """ taw on Noo-bank Credit [nslltutlons 10 beue. '''It''lal ~ .beso- .",.s, FInally, •• of janU<l'Y 2011. the P.lvate Credit Regblry brgan 10 publl"" ..".,..1 "'hich ~ twl""'" should con,i<k>fi>bly redu« risks in the sy>t~rn and Imp""'" """""' 10 financing.
Co nclu ,lon:
We.re ronAdenllhallhi, INte. OUIIIIII'I a (<>he ... "! pros",m of .do.ms that .", focused on c.ltlcal poIky prlo.'ties. We a", :unvln<rd ,""I lhese reforms a.~ ",sendal to <UPJ>OTt • <u"a' ... bI~ n'tOYe'Y and be"", prtP"~ the IWpubUc ol M"""""nia 10 "".1 wilh the un<e.taln ~vimn""'l\t , \I'e .rust that this ""Iuesl fo. World Hank '''wort for the Impl"""'ntatloo of this refOfm prog .... m ... ill n'tei"" }'Cu. "ndors.:....,n •.
VI CE PRI ME MlNISTER AND M 'R OF FINANCE
vrMkl
ANNEX 2: PBG POLICY MATRIX
Objective PBG actions Expected results
The IBRD guarantee will improve access to international financial/capital markets.
Government raises funding independently from
international markets in 2012.
Government raises euro loan/bond funding with a
maturity of at least five years at an interest rate below
Euribor plus 500bp.
PILLAR I – Strengthening sustainability of public finances and functioning of labor markets
Reduce fiscal risks and
enhance incentives for
formal labor market
participation.
The Member Country has, through enactment of the Law on Amendments to the
Law on Payment of Wages of July 20, 2010 (Official Gazette 97/2010) frozen
nominal government wages until September 2012.
The general government wage bill maintained at
below 32% of general government revenues in 2011.
The Member Country has, through enactment of the Law on Amendments to the
Law on Contributions from Compulsory Social Insurance of December 25, 2009
(Official Gazette 156/2009) reduced the social insurance contribution rates; and
has, through enactment of the Laws on Amendments to the Law on Pension and
Disability Insurance of December 25, 2009 and of December 6, 2010 (Official
Gazette 156/2009 and 156/2010, respectively)), reduced pension expenditures
through reduced valorization coefficients and tightened eligibility criteria for
survivor pensions.
Increase in the number of formal workers with paid
social insurance contributions from 407,887 in 2009
to 420,000 in 2011.
Pension spending is maintained at less than 9 percent
of GDP in 2011.
The Member Country has, through enactment of the Law on Amendments to the
Law on Contributions from Compulsory Social Insurance of April 14, 2011
(Official Gazette 53/2011) de-linked the provision of free health insurance to
registration as unemployed and introduced an income-based test for provision of
free health insurance.
The Member Country has adopted a Program to improve the efficiency and
sustainability of the Health Sector.
Arrears in the public health sector (HIF and Health
Care Institutions) do not exceed 1.7 billion Denars
(0.4 percent of GDP) in 2011.
Comprehensive financial reports on public health
institutions available publicly on monthly basis in
2011.
The Health Insurance Fund has adopted by-Laws and a rulebook regulating the
operations of the new Health Single Treasury Account covering all public health
institutions.
56
Objective PBG actions Expected results
PILLAR II: Strengthening social safety nets
Ensure adequate support
to vulnerable groups and
improve administration of
social safety system
The Ministry of Labor and Social Policy has developed a functional Cash Benefits
Management Information System to testing stage, and has established a network
between Social Welfare Centers and the Ministry of Labor and Social Policy.
Processing time for Social Financial Assistance
application reduced from a baseline of 30 days in
2011.
The Member Country has adopted the Program on Subsidizing Energy
Consumption in 2011 (Official Gazette 6/2011) which introduces a mechanism for
providing support to the poor and vulnerable against electricity prices increases.
Percentage of cash benefits going to the poorest
quintile increased from 37% in 2009 to 40% in 2011
and further increases thereafter.
PILLAR III: Strengthening resilience of the financial sector Identify and address
systemic financial sector
risks.
The Member Country has, through enactment of the Law on the National Bank
of Republic of Macedonia on December 12, 2010 (Official Gazette 158/2010),
increased accountability and independence of the central bank to EU standards.
Financial soundness indicators regularly reported and
monitored and the Financial Stability Report
discussed and acted upon by the FSC, and policy
responses coordinated among the NBRM, MOF and
DIF. The Member Country has established the Financial Stability Committee and this
Committee has adopted rules of procedure for its operations.
57
ANNEX 3: DEBT SUSTAINABILITY ANALYSIS
FYR Macedonia does not face major or immediate threats to debt sustainability. Prudent policies
over the last decade have kept public and external debt under control and resulted in relatively
favorable debt servicing indicators. At around 24.8 percent of GDP, FYR Macedonia’s government
debt level is one of the lowest in the Europe and Central Asia (ECA) region. Further, at around 60
percent of GDP, gross external debt is not excessive and still below the average for the countries in the
ECA region.
The debt sustainability outlook remains favorable under the baseline scenario. Stronger growth,
exports, and FDI together with fiscal consolidation over the medium-term is expected to keep the
general government debt stable and gradually reduce the external debt to GDP ratio to the pre-crisis
levels by 2016. Debt servicing indicators are also projected to remain generally favorable.
However, debt sustainability could be challenged in the absence of fiscal adjustment, lower than
projected economic growth and FDI, or a failure to manage the external current account. The
government debt level does not stabilize if the fiscal policy stance is not adjusted as envisaged over the
medium term, or if GDP growth remains sluggish. Gross external debt is also sensitive to developments
in the external current account (slower growth of exports and transfers or higher imports) and FDI,
which could keep debt and debt servicing indicators elevated.
Government Debt
FYR Macedonia came a long way over the last decade in improving public debt sustainability.
General government debt fell from around 50 percent of GDP at the start of the last decade to around
20.7 percent of GDP by 2008. This improvement reflected low levels of the primary fiscal deficit
during this period (around 0.4 percent of GDP) as well as early pre-payment of external obligations.
Furthermore, this reduction came during a period in which the country issued sizable debt to liquidate
the legacies from the restitutions process29
. The recent global crisis reversed this trend as general
government debt increased slightly to around 24.8 percent of GDP by 2010, reflecting widening of the
fiscal deficit as well as slow economic growth.
Table A.3.1: Government debt indicators
00 01 02 03 04 05 06 07 08 09 10
Government debt, % of GDP 48.4 49.1 43.1 38.0 35.6 38.3 32.0 24.0 20.7 23.8 24.6
External debt 29.9 31.3 27.4 23.9 22.3 25.8 19.6 14.7 13.7 16.5 16.9
Domestic debt 18.5 17.9 15.8 14.1 13.3 12.5 12.4 9.3 6.9 7.3 7.7
Government debt, % of revenues 133.7 143.2 122.5 101.6 100.2 112.1 98.8 73.3 62.5 76.2 79.9
Interest payments 1.8 1.9 1.5 1.1 0.9 0.9 1.0 0.8 0.6 0.6 0.7
Source: Ministry of Finance
29
In 2002, the authorities initiated a process to restitute property nationalized after the end of World War 2. The
compensation involves the return of assets or, in case assets are no longer existing, issuance of long-term (10-year)
government bonds paying 2 percent interest rate. So far, around 4 percent of GDP were issued in the form of public debt for
restitution out of which around 1.8 percent of GDP is outstanding.
58
In addition to the relatively low overall debt stock, its structure is generally favorable.
Government external debt accounts for 17.0 percent of GDP, down from around 29.9 percent of GDP
in 2001, of which about 12.2 percent of GDP is on concessional terms. External debt extended on
commercial terms accounts for less than 5 percent of GDP (two Eurobonds issued in 2005 and 2009).
Domestic debt accounted for around 7.7 percent of GDP at the end of 2010 (down from 18.4 percent of
GDP in 2000) and is equally split between structural bonds issued to liquidate legacies of the past
(restitution, freezing of foreign currency deposits in the early 1990s, bail-out of banks during the
1990s) and T-bills. The average duration of the portfolio is above five years. External government debt
is largely medium and long-term, while domestic short-term debt account for around 4.5 percent of
GDP.
Table A.3.2: Summary of government debt sustainability framework, in percent of GDP
2011 2012 2013 2014 2015 2016
General Government Debt
Baseline 26.7 27.8 28.6 29.4 30.2 30.7
Key variables are at their historical averages in 2011-2016 26.7 26.7 26.5 26.3 26.2 26.1
No policy change (constant primary balance) in 2011-2016 26.7 27.9 28.9 29.8 30.9 31.9
Real interest rate is at baseline plus one-half st. dev. 26.7 27.9 28.7 29.6 30.6 31.1
Real GDP growth is at baseline minus one-half st. dev. 26.7 28.5 30.6 33.2 36.4 39.9
Primary balance is at baseline minus one-half st.dev. 26.7 28.9 30.7 32.5 34.3 35.7
Combination of B1-B3 using 1/4 st. dev. Shocks 26.7 28.7 30.4 32.1 33.8 35.1
One time 30% real depreciation in 2012 5/ 26.7 37.2 37.5 37.9 38.3 38.3
10% of GDP increase in other debt-creating flows in 2012 26.7 37.8 38.3 38.8 39.4 39.7
Gross financing needs
Baseline 8.7 7.9 9.9 8.3 8.9 7.4
Key variables are at their historical averages in 2011-2016 8.7 6.4 8.1 6.5 6.7 5.6
No policy change (constant primary balance) in 2011-2016 8.7 8.0 10.1 8.6 9.2 7.9
Real interest rate is at baseline plus one-half st. dev. 8.7 7.9 10.0 8.5 9.1 8.2
Real GDP growth is at baseline minus one-half st. dev. 8.7 8.2 11.2 10.4 12.2 12.2
Primary balance is at baseline minus one-half st.dev. 8.7 9.0 11.4 10.0 10.8 9.3
Combination of B1-B3 using 1/4 st. dev. Shocks 8.7 8.6 11.0 9.5 10.4 8.9
One time 30% real depreciation in 2012 5/ 8.7 8.0 12.4 10.2 10.8 9.4
10% of GDP increase in other debt-creating flows in 2012 8.7 8.3 12.8 10.6 11.2 9.2
Debt to revenue ratio
Baseline 86.1 89.5 91.0 92.7 94.9 91.3
Key variables are at their historical averages in 2011-2016 86.1 85.9 84.3 83.1 82.3 79.6
No policy change (constant primary balance) in 2011-2016 86.0 90.9 93.8 96.8 100.2 97.9
Real interest rate is at baseline plus one-half st. dev. 86.1 89.5 91.3 93.4 95.9 97.5
Real GDP growth is at baseline minus one-half st. dev. 86.1 91.6 97.1 104.7 114.3 124.9
Primary balance is at baseline minus one-half st.dev. 86.1 92.9 97.6 102.4 107.6 106.8
Combination of B1-B3 using 1/4 st. dev. Shocks 86.1 92.3 96.6 101.1 106.0 104.7
One time 30% real depreciation in 2012 5/ 86.1 119.6 119.2 119.4 120.1 118.4
10% of GDP increase in other debt-creating flows in 2012 86.1 121.6 121.8 122.5 123.7 118.8
Source: Staff calculations
Note: Financing needs for short-term debt are presented on gross basis.
Other public debt indicators also confirm the relatively favorable debt profile, though its large
foreign exchange exposure is a risk. Most of domestic debt (except treasury instruments) has been
issued at very low interest rates (2 percent in nominal terms), while considerable part of the external
59
debt (with the exception of the two Eurobonds issued in 2005 and 2009) is on concessional terms. As a
result, interest payments on general government debt have been below one percent of GDP over the last
decade. The ratio is likely to increase over time as the country starts to increasingly rely on commercial
markets for financing. At the same time, government debt to revenues (and grants) ratio improved from
142 percent at the start of the last decade to 62 percent in 2008. It has increased to around 80 percent of
GDP by 2010, but remains still favorable.
Under the baseline scenario presented in the program document, general government debt
gradually increases but remains sustainable. Government debt is projected to reach 30.7 percent of
GDP in 2016 and stabilize around that level afterwards. This reflects an average fiscal deficit of 2.5
percent of GDP during the projection period, and gradually declining afterwards. Gross financing needs
are also expected to remain moderate, and increase slightly in 2013 and 2015 when repayment of the
Eurobonds is due.
Preserving sustainability will depend on continued control of the fiscal accounts and resumption
of growth. An alternative scenario with a higher fiscal deficit (baseline plus one-half standard
deviation) will result in a considerably faster increase in the debt stock. Given the relatively low
starting base, debt will reach only 36.0 percent of GDP by 2016; however, the gross financing needs
and the debt to revenues ratio will remain elevated. Furthermore, sharper economic downturn without a
corresponding adjustment in policies (simulated by slower growth rates during 2012-2016 and fiscal
deficit levels increasing to slightly below 4 percent of GDP) would result in government debt surging to
40 percent of GDP by 2016, gross financing needs reaching 13 percent of GDP, and the debt to revenue
indicator reaching 124 percent. Temporary shocks (devaluation, recognition of contingent liabilities or
strong interest rate shocks) would also result in higher debt and debt servicing indicators suggesting
higher liquidity risks.
External debt
FYR Macedonia is a moderately indebted country. Gross external debt stood at around 60 percent of
GDP at the end of 2010, up from 51.3 percent in 2004 (the first time external debt was reported
according to the gross external debt methodology – a broader definition of external debt which also
includes trade credits, currency and deposits and FDI-related transactions). The gross external debt was
relatively stable until 2008, with increases in private sector debt partially offset by reductions in
government debt as a result of the early pre-payment of government liabilities towards the London and
Paris Clubs, the IMF and IBRD in 2006 and 2007. It picked up in 2009 and 2010 reflecting increased
borrowing and FDI-related transactions in an environment of stagnant nominal GDP.
External debt sustainability indicators continue to be relatively favorable. Government debt
accounts for around one quarter of total gross external debt. Non-bank commercial sector accounts for
one third of the debt, while banks account for 12.4 percent of debt. In terms of maturity, around two-
thirds of the external debt is long-term. The remaining short-term debt is largely in fully collateralized
trade credits and FDI-related transactions. In addition, debt servicing accounts for around 10 percent of
exports. The external debt to exports ratio had been on a declining trend prior to the crisis, however, the
collapse in exports due to the global crisis pushed it up to above 150 percent of GDP in 2009. With
exports recovering in 2010, the external debt to GDP ratio fell back to 131 percent.
External debt remains sustainable under the baseline scenario presented in this document.
Despite some widening of the external current account, it is projected to be increasingly financed
through non-debt creating inflows and the gross external debt is projected to gradually return around 55
percent of GDP. Gross financing needs are expected to average around 10 percent of GDP (net of short-
60
term debt not subject to repayment), reflecting a current account deficit of around 5-6 percent of GDP,
loan amortization of around 2-3 percent of GDP and some reserve accumulation. Debt service to
exports is expected to remain at around 10 percent with the exception of 2013 and 2015 when
Eurobond repayments are due. The external debt to exports ratio is expected to gradually decline to the
pre-crisis level of around 90 percent by the end of the projection period.
Table A.3.3: Gross external debt, by maturity and by sector, in percent of GDP
2004 2005 2006 2007 2008 2009 2010
Total external debt 51.3 49.8 50.3 51.1 47.4 58.2 59.4
by maturity:
Short-term liabilities 15.5 13.3 14.6 20.4 16.7 19.1 19.0
Long-term liabilities 35.8 36.5 35.7 30.8 30.7 39.1 40.3
by sector:
Government 25.1 25.3 21.4 16.2 13.0 16.3 15.9
Monetary sector 1.4 1.2 1.0 0.2 0.1 1.1 1.1
Banking sector 3.0 3.8 5.4 7.0 5.5 7.2 8.3
Other 14.8 14.2 15.8 20.1 18.9 20.7 20.5
FDI 7.0 5.3 6.6 7.8 9.8 12.9 13.5
Source: NBRM
The external sustainability of the country could be challenged if the current account is not kept
under control or FDI does not materialize as envisaged. Failure of exports or transfers to perform as
projected, or higher than projected imports that would increase the current account above the baseline
would keep the external debt at around 60 percent of GDP and the debt to exports ratio at around 110
percent by the end of the projection period. The impact of underperforming FDI or a strong interest rate
shock would be similar. A 30 percent depreciation of the currency would increase external debt to
above 80 percent of GDP and also push the debt to exports ratio to above 160 percent.
Table A.3.4: Summary of external debt sustainability framework, in percent of GDP
2011 2012 2013 2014 2015 2016
Gross external debt
Baseline 58.4 59.2 59.6 57.7 56.4 54.6
Key variables are at their historical averages in 2011-2016 58.4 58.6 59.7 59.4 59.5 59.1
Nominal interest rate is at baseline plus one-half st. dev. 58.4 59.4 59.9 58.1 56.9 55.2
Real GDP growth is at baseline minus one-half st. dev. 58.4 60.1 61.4 60.2 59.6 58.4
Non-interest current account is at baseline minus one-half st. dev. 58.4 61.1 63.2 63.1 63.5 63.4
Combination of B1-B3 using 1/4 st. dev.shocks 58.4 60.7 62.4 61.9 61.9 61.3
One time 30% real depreciation in 2012 58.4 84.5 83.2 78.9 75.5 71.5
External debt to exports
Baseline 119.0 117.1 112.2 103.9 97.7 91.9
Key variables are at their historical averages in 2011-2016 119.0 115.2 113.7 109.0 105.0 101.9
Nominal interest rate is at baseline plus one-half st. dev. 119.0 117.3 112.6 104.5 98.5 92.9
Real GDP growth is at baseline minus one-half st. dev. 119.0 118.9 115.5 108.4 103.2 98.2
Non-interest current account is at baseline minus one-half st. dev. 119.0 125.3 123.3 117.4 113.6 110.1
Combination of B1-B3 using 1/4 st. dev.shocks 119.0 122.2 119.6 113.2 108.8 104.7
One time 30% real depreciation in 2012 119.0 167.0 156.6 142.0 130.7 120.3
Source: Staff calculations
61
Table A.3.5. General government debt sustainability framework, 2006-2016
(in percent of GDP, unless otherwise indicated)
Projectio n s Actv.al
' 00' 1010 lO ll lOll lOB 101~ 1016 Ihbt s .abilizinIJ:
Ras .,l ine : P u b l ic s.,.,t o r d ebt II
o / w f Ol"";gn-curT<ncy d=ominated
2 Change. in public nctor deb. 3 I dentifie d debt-="",.ting flows (-1+ 7+ 12) 4 Primary deficit 5 Revrnue and gr.utts
6 Primary (n orrint etut ) exp enmtute 7 Aut omatic deb. d'lnamic ~ II 8 Contribution from in. ere .. <>lte/growth dift"er...,ti.al. 31
9 Ofwhich contribution from r e a! in. ere .. r.!Ite 10 Ofwhich contribution from .. a! GDP growth 11 Contribution from exchange tate depreciation-ll 12 Other identifi e d d e b t -=e a ting flows 13 Privatization teceipts (n egative) 14 Recognition of implicit Ot conting=t liabilitiu 15 Other ( specify. e.8 . ban.l.: tecapit alization) 16 R esidual, including a s . e . change. (2-3) ~I
Pubb c s ect Ol" d.,b t _to-<evenu e rn.tio 1/
Gross finan c inIJ: De.rc\ 6 1 in million ofEuro
S c e nario ..-ilk k .,y ,·ariables at the i r b is . o ri ca l .... e .... g es 7 1
S c e nario ..-ilk DO polic~· cbang e (coDs tant primar,. balanc e ) in 2 0 11_2016
K .,y U a c roeconom i c and F iscal .-\.s s umptioDS Un de rlyin g Baselin.,
R e a! GDP growth (in perc=t ) Ave.,.ge n ominal in.ere .. <>lt e on p ublic d ebt (in p e rcent) 81 Avern.ge r e a! in. ere .. r.!Ite (nomin.al rn.1e minus change in GDP d e flatOl", in perc...,': N otrun.al a p prectatlon (tncreaoe .... I:.uro value onoca! currency. on perc=t) Inflation tale (GDP d eflat Ol". m perc=t) Gt-o".."th o f r ea! prima.y .p=ding ( d eflated by GDP d e flatOl", in p erc.,..,t) Primary deficit
n .o 19.6
l-I .o 1-1.7
10.7 B.7
no 1 6.~
l-I.6 16.9
-6.3 _1 .0 _33 3. 1 O.B _~ .9 _7 .-1 _1.1 2. 7 1.-1 -'l.-I _1 -1 03 2. 1 1.7 n . ..t. 31.7 H. I 31.1 30.B
.H .9 31.3 H.4 H3 31.~
_1 .0 _3 . 1 _2. 1 0 .6 -'l.-I _1 .0 _3 .1 _2. 1 0 .6 -'l.-I -'l.2 _1 -1 _1.0 O.~ 0..2 _1.1 _1.7 _1.1 0..2 -'l.7
0 .0 0 .0 0 .0 0 .0 0 . 1 _3 .-1 _1 .9 0 .0 0 .0 0 .0
0 .0 0 .0 0 .0 0 .0 0 .0 0 .0 0 .0 0 .0 0 .0 0 .0
_3 . ..t. _1 .9 0 .0 0 .0 0 .0 -'l.-I -'l6 _U 0 .-1 -'l.~
91.1 ]J.J 62. ~ 76..2 BO. I
7.9 !I .I -19 6.~ 7.2 -1 13.6 -1 8-1 . 1 H2.7 -IH.7 ~013
" " ~,
" " " _1 -1
'.0 '.0 ~.
" " 1 1.1 03
~,
" U
" 0 .'
· 02
" 1/ 1ndico..eCO';~ of public <ee'",". e.lh g-ner.al. !"'-e-rnmetl' ot nonlinaocial public we''''' Also .... he,heI- ne' or yon ~' i1 u>ed.
2 6.7 1 1.-1
2 7 .8 l-I3
28.6 m
29.-1 no
30..2 21.-1
1 .0 1..2 0 .1 0 .8 O.B O.~
1.2 1.0 0 .1 O.B O.B O.~
1.1 1.7 1.6 1.6 1.6 1.2 H .O 3 11 3U 31.7 31.9 31.0 n .1 311 H. I H.3 J3.~ 333 -'l.6 -'l.7 -'l.1 -'l.B -'l.B -'l.B -'l.6 -'l.7 -'l.1 -'l.B -'l.B -'l.B 0.2 03 0..2 03 03 0 .-1
-'l.9 _1. 1 _1.0 _1.1 _1.1 _1.1
0 .0 0 .0 0 .0 0 .0 0.0 0 .0 0 .0 0 .0 0 .0 0 .0 0.0 0 .0 0 .0 0 .0 0 .0 0 .0 0.0 0 .0 0 .0 0 .0 0 .0 0 .0 0.0 0 .0 0 .9 0..2 0 .0 0 .0 0.0 0 .0
86. 1 89 . ~ 91.0 <n.7 9-1.9 9~ .B
1 . 7 7 .9 9.9 B3 B.9 B.6 63!1 . ..t. 61U Bll.7 72 B.8 IIlB.I 1·123
2 6.7 2 6.7
n
" ' .0
" ., "
2 6 .7 2 7.9
" " U
2 6.5 28.9
' .0 U
'0
u
" "
2 6.3 29.8
-1 .0 U
" " -1 .8
"
26..2 30.9
-1.0
" U
" -1.-1
"
26. 1 31.9
-1.0
" 1.-1
" 3.-1 U
prima~'
balanc e 91 _0.8
_0.8 _0.8
]J D erivN n [(t _ p(1-'-tl-! - o.o(l ..... »)/( ITP+!P» .imes p<=->OU. period deb. ""'io, w i.h t - in.er .... .... , e ; p - gowth ",,'e of GOP deflalor,! - rea1 GOP gowth .... t e ; ... - .hate offote-igt-cun<-ney de<wminaled deb.; and e - nomin.al eschanV nl e depreci.o.inn (measu.-ed by to.ctea.., in loeo.l currency ,-aloe of U .S. dollar). 31 The rea1 in.e<es' n.e con.ribu.inn i~ derive.:! from the de<wminat"'" in footnote ]J as t _ ,. (I-'-tl and .be t eal yowth cOD.ributinn .... -J!.
41 The ~e ",'e COtt,ribution i1 dem.-ed from the """"""""'" in foo'no'e]J as 0.0(1.....-) . ~I F ot projec'iota . • hi~ line ic.clud= ~ ",'e changes. 6/ Defined n public <ee'ot defici. , plu~ amoniz.o..ion of medium and 1onJ! . • erm public sec.or &,b •. plu. olton ·.erm~' a. end of pt""-;ous period. 71 The I<ry .-ari:ab1.-. include rea1 GOP !l"owth; rea1 in'er ... ' ",'e; and primMybaia<>ce in percent of GOP . 81 Derr.-ed n nomina1 in.er ... , exPft1<lituce <li.-\ded by pt""-Krus period deb. >lock. 9 1 A n umes ,boa. key variables (rea1 GOP Uowth. rea1 in.enos . n. e. and o.her iden.ified deb.-er~tin!! !1ow~) <e<nain .... . he 1""..,1 of the b. .. ptojection year.
62
Table A.3.6. External debt sustainability framework, 2006-2016
(in percent of GDP, unless otherwise indicated)
2 Change in enernal d ebt 3 Idrntified enernal debt-cru.ting flo",. (4-8-9) <I Currrn. account de~ exchuling in . ... e " p :I.)"mrnu 5 D<6cit in balance of goods and • .,.,,-ic ..
6 £..:po." 7 Import. 8 ;Snnon-d ebt 'nating capitalinflo .... (ney-Ii,·e) 9 Automotic debt ct.,-rutmic . II
10 Contribution from n ominal in.rrn . "" e 11 Contribution from .. al GOP gro ... -m 12 Contribution from price and nchange n.e chang .. 1I 13 Re>idual, indo change in gro .. for';gn ane .. (2-3) 31
External d ebt_.<>-=pon. ",-Iio (in p=rn.)
Gross u ..... 1 r",,",,cia, nHd (ia bilLiou of US dolbrs) 41
in p=<-n' o f GOP
Scenario ..-ith key ,.,.rialtles a. their his. orical anr.llles 51
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o f 'M In. prnjcrtiDa)"ftf.
63
ANNEX 4. IBRD GUARANTEE
OUTLINE OF INDICATIVE TERMS AND CONDITIONS OF POTENTIAL WORLD BANK
GUARANTEE OF LOAN TO MACEDONIA
This term sheet contains a summary of indicative terms and conditions of a potential IBRD Policy-
Based Guarantee (the IBRD Guarantee) for a private-sector loan to the Republic of Macedonia.
This term sheet does not constitute an offer from IBRD to provide an IBRD Guarantee. The provision
of the Guarantee is subject, inter alia, to satisfactory appraisal by IBRD of the related Program, review
and acceptance of the financing structure and transaction documentation, and the approval of the
Management and the Board of Directors of IBRD in their sole discretion.
IBRD Guarantee and Guaranteed Loan:
Guarantor:
International Bank for Reconstruction and Development (IBRD).
Borrower: Republic of Macedonia.
Guarantee Beneficiaries:
Commercial bank lender to be identified (the Lender).
Purpose: The proposed Policy Based Guarantee (PBG) supports Macedonia’s
program aimed at improving public expenditure outcomes and
supporting the most vulnerable, while reducing risks to
macroeconomic and financial stability. The PBG is a stand-alone
operation building on the Programmatic Development Policy Loan
(DPL1) disbursed during the fiscal year 2010.
Guarantee Term: Five years.
Guaranteed Event: Failure by the Borrower to repay the principal amount of the IBRD
Guaranteed Loan at stated maturity.
Guarantee Support: The IBRD Guarantee would cover any outstanding scheduled payment
of principal (up to EUR 100 million), which the Lender would have
otherwise received from the Borrower under the IBRD Guaranteed
Loan Agreement, but for the occurrence of a Guaranteed Event.
IBRD Guaranteed Notes
Principal Amount:
Principal amount of EUR 130 million.
IBRD Guaranteed Loan
Interest Rate:
A fixed interest rate equivalent to 5-year EUR swap rate plus a margin
of 234bp.
Maturity: Five year bullet maturity.
Currency: Euro.
64
IBRD Guarantee Provisions:
Governing Law: [England] [New York].
Negative Pledge: The terms of the IBRD Guaranteed Loan and the IBRD Guarantee will
restrict the ability of the Borrower and IBRD, as the case may be, to
create certain liens on their property or assets without equally and
ratably securing the IBRD Guaranteed Loan or the IBRD Guarantee,
respectively.
Status of the IBRD
Guarantee:
The obligations of IBRD under the IBRD Guarantee will constitute
direct, unsecured obligations of IBRD ranking pari passu, without any
preference among themselves, with all its other obligations that are
unsecured and unsubordinated.
Status of the IBRD
Guaranteed Loan:
The IBRD Guaranteed Loan will constitute direct, general,
unconditional, unsecured and unsubordinated external indebtedness of
the Borrower ranking pari passu with all other unsecured and
unsubordinated external indebtedness of the Borrower.
IBRD Policy-Based
Guarantee:
IBRD will guarantee to the Lender the payment by the Borrower of
the principal of the IBRD Guaranteed Loan at scheduled maturity and
will agree to pay on demand from the Lender\ as provided in the IBRD
Guaranteed Loan Agreement, the amount of the principal which is due
and payable by the Borrower, provided that the maximum aggregate
amount of principal for which IBRD shall have liability shall not in
any circumstances exceed the amount of the IBRD Guarantee as
described above (see Guarantee Support).
Demand Notice for
Payment under the IBRD
Guarantee:
The Lender will notify IBRD no later than ten business days after the
scheduled maturity date of any amount of principal that has fallen due
and payable and remains unpaid after the scheduled maturity date.
Such notice shall also constitute a demand on IBRD for payment.
IBRD shall have 30 days from and inclusive of its receipt of such
demand notice to make payment in respect thereof.
The obligations of IBRD under the IBRD Guarantee constitute a
guarantee of payment and not of collection. Any demand notice must
be received by IBRD within ten (10) business days of the date any
amount of principal referenced in such demand notice becomes due
and payable under the IBRD Guaranteed Loan Agreement.
Reduction of Demand: If after the Lender has made a demand on IBRD for payment under
the IBRD Guarantee but before IBRD has made payment of the
amount so demanded , the Borrower pays the Lender (or the Lender
recovers otherwise than from IBRD) any sum which is applied to the
satisfaction of the whole or any part of the such principal amount, the
Lender shall promptly notify IBRD of such fact and IBRD’s liability
65
under the IBRD Guarantee in respect of such demand shall be reduced
by an amount equal to the portion of principal so paid by the Borrower
(or so recovered by the Lender) and so applied.
No Discharge: Neither the obligations of IBRD under the IBRD Guarantee nor the
rights, powers and remedies conferred upon the Lender with respect to
IBRD by the IBRD Guarantee or by applicable law or regulation shall
be discharged, impaired or otherwise affected by: (i) any insolvency,
moratorium or reorganization of debts of or relating to the Borrower;
(ii) any of the obligations of the Borrower under the IBRD Guaranteed
Loan Agreement being or becoming illegal, invalid, unenforceable,
void, voidable or ineffective in any respect; (iii) any time or other
indulgence being granted to the Borrower in respect of its obligations
under the IBRD Guaranteed Loan Agreement or (iv) any other act,
event or omission (other than the failure of the Lender to make a
demand under the IBRD Guarantee) which might otherwise operate to
discharge, impair or otherwise affect any of the obligations of IBRD
under the IBRD Guarantee or any of the rights, powers or remedies
conferred on the Lender by the IBRD Guaranteed Loan Agreement or
be applicable law or regulation.
No Amendment without
IBRD Consent:
The IBRD Guarantee shall terminate and any written demand from the
Lender pursuant to the IBRD Guarantee shall be void if any
amendment is made to the IBRD Guaranteed Loan Agreement, or any
waiver or consent is given in writing with respect thereto, without
IBRD’s prior written consent.
IBRD Obligations Binding: IBRD’s obligations under the IBRD Guarantee shall be binding upon
IBRD and inure to the benefit of the Lender and shall be enforceable
only by the Lender, provided that the obligations of IBRD under the
IBRD Guarantee shall not be treated as a separate obligation of IBRD
independent from the principal amount guaranteed, and the benefit of
such obligations may only be transferred by a Lender in accordance
with the provisions below, as more fully described in the IBRD
Guaranteed Loan Agreement.
Assignment: Except as IBRD may otherwise agree, any assignment of the IBRD
Guaranteed Loan may be made only to an assignee established as a
bank or financial institution duly licensed to carry out banking or
financial business in its country of domicile. Such assignee may be a
partly or wholly government-owned institution, but cannot be an
export credit agency, multilateral institution or state entity. Such
assignee must not have been declared ineligible to be awarded an
IBRD- or IDA-financed contract in accordance with World Bank
Sanctions Procedures and must not be an entity included on the
consolidated list of individuals and entities maintained by the United
Nations Security Council Committee established pursuant to United
Nations Security Council Resolution 1267.
The assigning Lender shall provide advance notice of potential
66
assignments to IBRD as provided in the IBRD Guaranteed Loan
Agreement.
Subrogation: Upon payment by IBRD of amounts under the IBRD Guarantee,
IBRD shall, to the extent it has not been reimbursed by the Borrower
under the Indemnity Agreement (as discussed below), be immediately
entitled to recover from the Borrower the amount so paid by IBRD in
respect of principal and for this purpose IBRD shall be immediately
subrogated to the rights of the Lender to the extent of the amount in
respect of principal so received by such Lender, regardless of whether
such Lender has been fully prepaid or repaid by the Borrower, and the
Lender shall forthwith assign or transfer to IBRD, without
representation, warranty or recourse, all of such Lender’s claims,
interests, rights and security which it then has against Macedonia
under the IBRD Guaranteed Loan Agreement in respect of principal
so received.
Withholding of Payment: If at any time between the effective date of the IBRD Guaranteed
Loan Agreement and the maturity date of the IBRD Guaranteed Loan
(i) there is substantial evidence that the Lender has, in connection with
the IBRD Guaranteed Loan, engaged in fraudulent, corrupt, coercive
or collusive practices or (ii) the Lender has been declared ineligible to
be awarded a contract financed by the International Bank for
Reconstruction and Development or the International Development
Association in accordance with the World Bank Sanctions Procedures,
then IBRD shall be entitled to withhold payment of all amounts
otherwise payable under the IBRD Guarantee by IBRD on account of
such Lender.
Role of IBRD: The Lender will acknowledge and agree that IBRD will be acting
under the IBRD Guaranteed Loan Agreement solely in its capacity as
guarantor of the principal of the IBRD Guaranteed Loan as provided
therein and in no other capacity. IBRD shall incur no liability under
the IBRD Guaranteed Loan Agreement nor have any other duties or
responsibilities, except to the extent expressly specified in the IBRD
Guaranteed Loan Agreement or in any document delivered by IBRD
under or pursuant to that agreement.
Cross-Default Restriction: IBRD may require a cross-default provision in the IBRD Guaranteed
Loan Agreement, including a restriction on the ability of the Lender to
accelerate the IBRD Guaranteed Loan upon a default by the Borrower
under any World Bank loans such that the IBRD Guaranteed Loan
may only be accelerated in the event of a material default on World
Bank loans.
67
IBRD Guarantee-Related Fees:
IBRD Guarantee Fees:
IBRD charges a guarantee fee of 0.5% per annum on the present
value of IBRD’s exposure under the IBRD Guarantee, payable up
front in advance by the Borrower. IBRD may terminate the IBRD
Guarantee if the IBRD Guarantee Fee is not paid by either of the
Borrower or the Lender on or before the fourteenth (14th) business
day following the date of a notice provided by IBRD to the Lender.]
IBRD Front-end Fees:
IBRD charges a front-end fee of 0.25% of its maximum exposure (in
this case, an amount of up to EUR 100 million) for Policy-Based
Guarantees. This fee is payable by the Borrower.
Stand-by Fees: None.
Conditions Precedent to the IBRD Guarantee:
Conditions Precedent:
Usual and customary conditions for financing of this type including
the following:
a) Relevant programmatic conditions precedent;
b) Provision of relevant legal opinions satisfactory to IBRD;
c) Payment in full of the Front-end Fee and the Guarantee Fee;
d) Conclusion of an IBRD Guaranteed Loan Agreement among
the Lender, the Borrower and IBRD and an Indemnity
Agreement between IBRD and the Borrower.
IBRD Documentation:
IBRD Guaranteed Loan
Agreement:
The terms and conditions of the IBRD Guarantee would be contained
in the IBRD Guaranteed Loan Agreement among IBRD, the
Borrower and the Lender.
IBRD will represent and warrant to the Lender that (in addition to
standard representations about due authorization, enforceability and
power to execute) its obligations pursuant to the IBRD Guaranteed
Loan Agreement rank pari passu with all other unsecured and
unsubordinated obligations of IBRD.
The Lender will represent and warrant that it has not engaged in and
are not engaging in fraudulent, corrupt, coercive or collusive
practices, and will covenant, inter alia, to apply all amounts received
68
by them under the IBRD Guaranteed Loan Agreement towards
payment of the principal amounts covered by the IBRD Guarantee
which were the subject of the demand notice.
Indemnity Agreement: The Borrower would enter into a separate Indemnity Agreement with
IBRD. Under the Indemnity Agreement, the Borrower would
undertake to indemnify IBRD on demand, or as IBRD may otherwise
determine, for any payment made by IBRD under the terms of the
Guarantee. The Indemnity Agreement will follow the legal regime,
and include dispute settlement provisions, which are customary in
agreements between member countries and IBRD.
Any obligation by the Borrower to reimburse IBRD for payments
made under the IBRD Guarantee will rank pari passu with all other
external indebtedness of the Borrower, including external
indebtedness of the Borrower to IBRD.
The Indemnity Agreement will also contain provisions on the deposit
and use of proceeds of the IBRD Guaranteed Loan. The Borrower
shall agree to deposit the proceeds of the IBRD Guaranteed Loan in
an account acceptable to IBRD, with appropriate tracking of amounts
deposited therein in the Borrower’s budget management system. The
Borrower will make withdrawals from such account for use in
support of its development policy program, and will agree not to use
such withdrawals to finance any excluded expenditures, which shall
include, inter alia, goods included in groups or subgroups of the
United Nations Standard International Trade Classification, Revision
3, military goods, environmentally hazardous goods, certain
payments prohibited by a decision of the United Nations Security
Council taken under Chapter VII of the Charter of the United
Nations, or expenditures with respect to which IBRD determines that
corrupt, fraudulent, collusive or coercive practices were engaged in
by representatives of the Borrower. If any such withdrawals are used
for excluded expenditures, the Borrower shall deposit an equivalent
amount in the account or prepay the Lender an equivalent amount.
In the event that the Borrower fails to make any payment to or to
indemnify IBRD under the Indemnity Agreement or otherwise
defaults on its obligations under the Indemnity Agreement, IBRD
shall be entitled, in addition to any other rights and remedies it may
have, to suspend or cancel in whole or in part the Borrower’s right to
make withdrawals under any loan or guarantee between IBRD and
the Borrower or under any development credit agreement or
financing agreement between IBRD and the Borrower, or to declare
the outstanding principal and interest of any such credit or loan due
and payable immediately.
69
ANNEX 5. IMF APPROVAL OF FIRST REVIEW OF PCL PRESS RELEASE
IMF Completes First Review Under the Precautionary Credit Line with the
Former Yugoslav Republic of Macedonia Press Release No. 11/322
September 2, 2011
The Executive Board of the International Monetary Fund (IMF) today completed the first review of Macedonia’s performance under an economic program supported by a two-year
Precautionary Credit Line (PCL) arrangement and reaffirmed Macedonia’s continued qualification to access PCL resources. The PCL was approved on January 19, 2011 (see
Press Release No. 11/14) in the amount equivalent to SDR 413.4 million (about €463.3 million, 600 percent of quota). The access under the arrangement in the first year is
equivalent to SDR 344.5 million (about €386.1 million, 500 percent of quota), rising in the second year to cumulatively SDR 413.4 million. In March 2011, the Macedonian authorities drew SDR 197 million (about €220.8 million, 286 percent of quota) of the
resources available to them in the first year under the PCL (see Press Release No. 11/98).
Following the Executive Board’s discussion, Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, said: “Macedonia continues to pursue sound economic policies that are
consistent with the program supported by the Precautionary Credit Line (PCL) arrangement. Growth has picked up, underlying inflation remains low, international
reserves have been broadly stable, and the 2011 fiscal deficit target under the program is within reach.
“Nonetheless, Macedonia’s decision in March 2011 to make a purchase under the PCL arrangement highlighted remaining external vulnerabilities. The authorities are
strengthening debt management policies and practices, focusing both on improving access to external funding and on developing the domestic public debt market. This will
help to ensure that Macedonia is able to meet its financing needs from private market sources in the future. In this context, the authorities intend to publish an action plan on debt management reforms and will draw upon IMF technical assistance for this initiative.
“Despite sound policies and fundamentals, Macedonia remains exposed to unusually high
levels of risk related to global growth and financial conditions as well as regional developments. This calls for continued vigilance and further efforts to address remaining
vulnerabilities and improve data adequacy. The PCL plays a valuable role in supporting market confidence by signaling Macedonia’s commitment to prudent policies and
strengthening its reserve buffers. While Macedonia is not expected to require further purchases under the PCL, the availability of these resources provides additional insurance against adverse external developments.”
IMF EXTERNAL RELATIONS DEPARTMENT
Public Affairs
Media Relations
E-mail: [email protected] Phone: 202-623-7100
Fax: 202-623-6278 Fax: 202-623-6772
70
ANNEX 6: PROCUREMENT PROCESS FOR A LOAN WITH AN IBRD
GUARANTEE
The procurement process of the Loan follows national legislation and was officially launched
following the OC approval of the PBG. The procurement process envisages a relatively simple
process of sending out Request for Proposal (RFP) to identified participants and evaluation and
selection of the winning bid. The process was officially launched on September 7, 2011 when RFPs
were sent to thirteen banks and financial institutions.
The RFP package also includes the Guarantee Term Sheet and the basic Terms of Transaction
sheet. The RFP was prepared by the authorities in close cooperation with the Bank and also included a
Guarantee term sheet prepared largely by the World Bank. Banks and financial institutions were given
three weeks to prepare and submit bids. By September 27, 2011, the deadline for submission of bids
stipulated in the RFP two bids were received; one bid for a privately placed note from one bank and
one bid for a syndicated loan by two banks. Following the evaluation process, the Ministry of Finance
decided to accept the offer for a loan.
The negotiations of the Indemnity Agreement between the IBRD and FYR Macedonia were
conducted on October 3, 2011. The Indemnity Agreement between FYR Macedonia and the World
Bank provides that the former will repay the latter on demand or as the Bank otherwise directs, if the
guarantee is called.
The negotiations of the IBRD Guaranteed Loan Agreement among the private lenders, the IBRD
and the Government of FYR Macedonia will take place following the selection of the winning bid.
This would ensure that the details of the transaction are known and properly reflected in the agreements
for this operation. Following the selection of the winning bidder, the authorities will invite the private
lenders to negotiate the Guaranteed Loan Agreement. The details of the loan transaction, availability of
proceeds and repayments will be decided at this stage. The Guaranteed Loan Agreement will need to
incorporate the IBRD Guarantee.
The Guaranteed Loan Agreement as well as the Indemnity Agreement require Parliamentary
Approval. The formal issuance of debt is regulated by the Law on Public Debt and requires
parliamentary approval. Once the World Bank Board approves the PBG and the Indemnity Agreement,
and the IBRD Guaranteed Loan Agreement is negotiated, the Government of FYR Macedonia will
approve the agreements, prepare a Law on Indebtedness with an IBRD Guarantee and forward it for
approval to the parliament.
Signing of the agreements can take place only after the parliament approves the agreements. No
ratification of the signed agreements is required. Following the signing of the agreements, the Minister
of Justice will provide a Legal Opinion to the Bank and the Lenders. The Legal Opinion submitted to
the Bank will need to confirm that the Indemnity Agreement has been duly authorized, executed and
delivered on behalf of the Member Country and is legally binding on it.
71
ANNEX 7: COUNTRY AT A GLANCE
Macedonia, FYR at a glance 10/6/11
Europe & Upper
Key D evelo pment Indicato rs M acedonia, Central middle
FYR Asia income
(2010)
Population, mid-year (millions) 2.0 404 1,002
Surface area (thousand sq. km) 26 23,549 48,659
Population growth (%) -0.2 0.3 0.9
Urban population (% of to tal population) 66 64 75
GNI (Atlas method, US$ billions) 9.4 2,746 7,515
GNI per capita (Atlas method, US$) 4,610 6,793 7,502
GNI per capita (PPP, international $) 10,880 12,609 12,440
GDP growth (%) 1.8 -5.8 -2.6
GDP per capita growth (%) 2.0 -6.1 -3.4
(mo st recent est imate, 2004–2010)
Poverty headcount ratio at $1.25 a day (PPP, %) <2 4 ..
Poverty headcount ratio at $2.00 a day (PPP, %) 4 9 ..
Life expectancy at birth (years) 75 70 72
Infant mortality (per 1,000 live births) 8 19 19
Child malnutrition (% of children under 5) 1 .. ..
Adult literacy, male (% of ages 15 and o lder) 99 99 94
Adult literacy, female (% of ages 15 and o lder) 96 97 91
Gross primary enro llment, male (% of age group) 98 100 111
Gross primary enro llment, female (% of age group) 98 98 110
Access to an improved water source (% of population) 100 95 95
Access to improved sanitation facilities (% of population) 89 89 84
N et A id F lo ws 1980 1990 2000 2010 a
(US$ millions)
Net ODA and official aid .. 3 250 193
Top 3 donors (in 2008):
European Union Institutions .. 3 86 53
United States .. 0 37 30
Japan .. 0 8 24
Aid (% of GNI) .. 0.1 7.1 2.1
Aid per capita (US$) .. 2 124 94
Lo ng-T erm Eco no mic T rends
Consumer prices (annual % change) .. 114.9 5.8 1.6
GDP implicit deflator (annual % change) .. 93.7 8.2 2.2
Exchange rate (annual average, local per US$) .. 0.1 65.9 46.5
Terms of trade index (2000 = 100) .. 98 100 106
1980–90 1990–2000 2000–10
Population, mid-year (millions) 1.8 1.9 2.0 2.0 0.6 0.5 0.2
GDP (US$ millions) .. 4,472 3,587 9,196 .. -0.8 3.3
Agriculture .. 8.5 12.0 11.3 .. 0.2 1.9
Industry .. 44.5 33.7 27.8 .. -2.3 3.3
M anufacturing .. 35.7 20.7 15.6 .. -5.3 1.9
Services .. 47.0 54.2 60.9 .. 0.5 3.6
Household final consumption expenditure .. 72.3 74.4 74.9 .. 0.1 4.3
General gov't final consumption expenditure .. 19.0 18.2 18.3 .. -0.4 0.5
Gross capital formation .. 18.7 22.3 25.4 .. 3.6 4.8
Exports o f goods and services .. 25.8 48.6 47.3 .. 4.2 2.6
Imports of goods and services .. 35.9 63.5 66.0 .. 7.5 3.8
Gross savings .. 9.3 22.4 24.2
Note: Figures in italics are for years other than those specified. 2010 data are preliminary. Group data are for 2009. .. indicates data are not available.
a. A id data are for 2009.
Development Economics, Development Data Group (DECDG).
(average annual growth %)
(% of GDP)
6 4 2 0 2 4 6
0-4
15-19
30-34
45-49
60-64
75-79
percent of total population
Age distribution, 2009
Male Female
0
10
20
30
40
50
60
1990 1995 2000 2009
Macedonia, FYR Europe & Central Asia
Under-5 mortality rate (per 1,000)
-10
-8
-6
-4
-2
0
2
4
6
8
95 05
GDP GDP per capita
Growth of GDP and GDP per capita (%)
•
•
• •
-
•
72
Macedonia, FYR
B alance o f P ayments and T rade 2000 2010
(US$ millions)
Total merchandise exports (fob) 1,323 3,302
Total merchandise imports (cif) 2,094 5,451
Net trade in goods and services -642 -1,867
Current account balance -103 -262
as a % of GDP -2.9 -2.8
Workers' remittances and
compensation of employees (receipts) 81 381
Reserves, including gold 700 2,277
C entral Go vernment F inance
(% of GDP)
Current revenue (including grants) 36.0 30.0
Tax revenue 32.6 26.3
Current expenditure 31.0 29.8
T echno lo gy and Infrastructure 2000 2009
Overall surplus/deficit 2.5 -2.5
Paved roads (% of to tal) 63.8 56.5
Highest marginal tax rate (%) Fixed line and mobile phone
Individual .. .. subscribers (per 100 people) 31 117
Corporate 15 10 High technology exports
(% of manufactured exports) 1.2 3.0
External D ebt and R eso urce F lo ws
Enviro nment
(US$ millions)
Total debt outstanding and disbursed 1,548 5,460 Agricultural land (% of land area) 49 42
Total debt service 245 396 Forest area (% of land area) 35.6 36.6
Debt relief (HIPC, M DRI) – – Terrestrial protected areas (% of land area) .. ..
Total debt (% of GDP) 43.2 59.4 Freshwater resources per capita (cu. meters) 2,668 2,647
Total debt service (% of exports) 13.9 8.5 Freshwater withdrawal (billion cubic meters) .. ..
Foreign direct investment (net inflows) 216 294 CO2 emissions per capita (mt) 6.0 5.5
Portfo lio equity (net inflows) -1 -83
GDP per unit o f energy use
(2005 PPP $ per kg of o il equivalent) 5.4 5.8
Energy use per capita (kg of o il equivalent) 1,329 1,520
Wo rld B ank Gro up po rtfo lio 2000 2009
(US$ millions)
IBRD
Total debt outstanding and disbursed 123 269
Disbursements 13 30
Principal repayments 3 14
Interest payments 7 10
IDA
Total debt outstanding and disbursed 250 382
Disbursements 38 0
P rivate Secto r D evelo pment 2000 2010 Total debt service 2 9
Time required to start a business (days) – 3 IFC (fiscal year)
Cost to start a business (% of GNI per capita) – 2.5 Total disbursed and outstanding portfo lio 65 66
Time required to register property (days) – 58 o f which IFC own account 40 66
Disbursements for IFC own account 8 46
Ranked as a major constraint to business 2000 2010 Portfo lio sales, prepayments and
(% of managers surveyed who agreed) repayments for IFC own account 0 1
Access to /cost o f financing .. 41.0
Anticompetitive or informal practices .. 34.0 M IGA
Gross exposure 19 0
Stock market capitalization (% of GDP) 0.2 28.8 New guarantees 19 0
Bank capital to asset ratio (%) .. 11.3
Note: Figures in italics are for years other than those specified. 2010 data are preliminary. 10/6/11
.. indicates data are not available. – indicates observation is not applicable.
Development Economics, Development Data Group (DECDG).
0 25 50 75 100
Control of corruption
Rule of law
Regulatory quality
Political stability
Voice and accountability
Country's percentile rank (0-100)higher values imply better ratings
2009
2000
Governance indicators, 2000 and 2009
Source: Kaufmann-Kraay-Mastruzzi, World Bank
IBRD, 296IDA, 374
IMF, 103
Other multi-lateral, 334
Bilateral, 227
Private, 2,270
Short-term, 1,856
Composition of total external debt, 2010
US$ millions
~
I
• •
YI~ ~
~
~
73
Millennium Development Goals Macedonia, FYR
With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)
Go al 1: halve the rates fo r extreme po verty and malnutrit io n 1990 1995 2000 2009
Poverty headcount ratio at $1.25 a day (PPP, % of population) .. .. 2.9 <2
Poverty headcount ratio at national poverty line (% of population) .. .. 19.1 23.5
Share of income or consumption to the poorest qunitile (%) .. .. 6.7 4.4
Prevalence of malnutrition (% of children under 5) .. .. 1.9 ..
Go al 2: ensure that children are able to co mplete primary scho o ling
Primary school enro llment (net, %) 94 .. 92 91
Primary completion rate (% of relevant age group) .. 97 100 92
Secondary school enro llment (gross, %) .. 77 84 84
Youth literacy rate (% of people ages 15-24) .. 99 99 ..
Go al 3: e liminate gender disparity in educat io n and empo wer wo men
Ratio of girls to boys in primary and secondary education (%) 99 .. 98 93
Women employed in the nonagricultural sector (% of nonagricultural employment) 38 39 42 38
Proportion of seats held by women in national parliament (%) .. 3 8 32
Go al 4: reduce under-5 mo rtality by two -thirds
Under-5 mortality rate (per 1,000) 38 26 16 8
Infant mortality rate (per 1,000 live births) 33 23 14 8
M easles immunization (proportion of one-year o lds immunized, %) .. 97 97 94
Go al 5: reduce maternal mo rtality by three-fo urths
M aternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. 10
B irths attended by skilled health staff (% of to tal) .. .. .. 100
Contraceptive prevalence (% of women ages 15-49) .. .. .. 14
Go al 6: halt and begin to reverse the spread o f H IV/ A ID S and o ther majo r diseases
Prevalence of HIV (% of population ages 15-49) .. .. .. ..
Incidence of tuberculosis (per 100,000 people) 54 48 36 23
Tuberculosis case detection rate (%, all forms) 120 69 77 98
Go al 7: halve the pro po rt io n o f peo ple witho ut sustainable access to basic needs
Access to an improved water source (% of population) .. .. 100 100
Access to improved sanitation facilities (% of population) .. .. 88 89
Forest area (% of land area) 35.6 .. 35.6 36.6
Terrestrial protected areas (% of land area) .. .. .. ..
CO2 emissions (metric tons per capita) 5.6 5.5 6.0 5.5
GDP per unit o f energy use (constant 2005 PPP $ per kg of o il equivalent) 6.4 5.0 5.4 5.8
Go al 8: develo p a glo bal partnership fo r develo pment
Telephone mainlines (per 100 people) 15.0 17.9 25.2 21.7
M obile phone subscribers (per 100 people) 0.0 0.0 5.8 95.1
Internet users (per 100 people) 0.0 0.0 2.5 51.8
Personal computers (per 100 people) .. .. 3.6 36.8
Note: Figures in italics are for years other than those specified. .. indicates data are not available. 10/6/11
Development Economics, Development Data Group (DECDG).
M acedo nia, F YR
0
25
50
75
100
125
2000 2005 2009
Primary net enrollment ratio
Ratio of girls to boys in primary & secondary education
Education indicators (%)
0
20
40
60
80
100
120
140
160
2000 2005 2009
Fixed + mobile subscribers Internet users
ICT indicators (per 100 people)
0
25
50
75
100
1990 1995 2000 2009
Macedonia, FYR Europe & Central Asia
Measles immunization (% of 1-year olds)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
g g g 9 9 9 e 0 0 c
nn n.~ I ---- • • • •
Osogovske Mts.
Malesevske Mts.
Ni d
z e Mt n
.
Mt. KorabMt. Korab(2,753 m) (2,753 m)
SopotnicaSopotnica
PelinciPelinci
VratnicaVratnica
MedzitlijaMedzitlija
DrugovoDrugovo VraneshticaVraneshtica
TetovoTetovo
PetrovecPetrovec
TearceTearce
GostivarGostivar
DebarDebar MakedonskiMakedonskiBrodBrod
KavadarciKavadarci
GevgelijaGevgelija
KrivogashtaniKrivogashtani
BerovoBerovo
VinicaVinica
KratovoKratovo
KumanovoKumanovo
PrilepPrilep
StrumicaStrumica
ValandovoValandovo
OhridOhrid
StrugaStruga
ResenResen
BitolaBitola
VelesVeles
KrivaKrivaPalankaPalanka
SvetiSvetiNikoleNikole
Demir HisarDemir Hisar
ArachinovoArachinovo
BogdanciBogdanci
BogovinjeBogovinje
BosilovoBosilovo
BrvenicaBrvenica
Centar Centar ZupaZupa
ChaskaChaska
Chucher-Chucher-SandevoSandevo
Demir KapijaDemir KapijaDolneniDolneni
GradskoGradsko
IlindenIlinden
JegunovceJegunovce
KarbinciKarbinci
KoncheKonche
LipkovoLipkovo
LozovoLozovo
Makedonska Makedonska KamenicaKamenica
MogilaMogila
NegotinoNegotino
NovaciNovaci
NovoNovoSeloSelo
OslomejOslomejZajasZajas
PehcevoPehcevo
PlasnicaPlasnica
RankovceRankovce
SopisteSopiste
StaroStaroNagorichaneNagorichane
RosomanRosoman
StudenichaniStudenichani
VasilevoVasilevo
VevcaniVevcani
VrapchishteVrapchishte ZelenikovoZelenikovo
ZheinoZheino
ZrnovciZrnovci
KicevoKicevo
KrusevoKrusevo
RadovisRadovis
StipStip
DelcevoDelcevoProbistipProbistip
KocaniKocani
Star DojranStar Dojran(Dojran)(Dojran)
ObleshevoObleshevo(Cheshinovo)(Cheshinovo)
BelchishtaBelchishta(Debarca)(Debarca)
RostushaRostusha(Mavrovo &(Mavrovo &Rostusha)Rostusha)
SKOPJESKOPJE
Crna
Crni Drim
Vaarrddar
Bregain
ica
Sopotnica
Pelinci
Vratnica
Medzitlija
Drugovo Vraneshtica
Tetovo
Petrovec
Tearce
Gostivar
Debar MakedonskiBrod
Kavadarci
Gevgelija
Krivogashtani
Berovo
Vinica
Kratovo
Kumanovo
Prilep
Strumica
Valandovo
Ohrid
Struga
Resen
Bitola
Veles
KrivaPalanka
SvetiNikole
Demir Hisar
Arachinovo
Bogdanci
Bogovinje
Bosilovo
Brvenica
Centar Zupa
Chaska
Chucher-Sandevo
Demir KapijaDolneni
Gradsko
Ilinden
Jegunovce
Karbinci
Konche
Lipkovo
Lozovo
Makedonska Kamenica
Mogila
Negotino
Novaci
NovoSelo
OslomejZajas
Pehcevo
Plasnica
Rankovce
Sopiste
StaroNagorichane
Rosoman
Studenichani
Vasilevo
Vevcani
Vrapchishte Zelenikovo
Zheino
Zrnovci
Kicevo
Krusevo
Radovis
Stip
DelcevoProbistip
Kocani
Star Dojran(Dojran)
Obleshevo(Cheshinovo)
Belchishta(Debarca)
Rostusha(Mavrovo &Rostusha)
SKOPJE
B U L G A R I A
K O S O V OS E R B I A
G R E E C E
ALB
AN
IA
LakeOhrid
LakePrespa
LakeDojranCrna
Crni Drim
Vardar
Bregain
ica
To Pristina
To Nis
To Pernik
To Blagoevgrad
To Petrich
To Thessaloniki
To Kozáni
To Elbasan
To Korçë
Osogovske Mts.
Malesevske Mts.
Ni d
z e Mt n
.
Mt. Korab(2,753 m)
42°N
41°N
42°N
41°N
22°E
22°E 23°E
23°E
21°E
AERODROM
CENTAR
BUTEL
SARAJ
SUTOORIZARI
KARPOSH
KISELAVODA
GAZIBABA
GJORCEPETROV
CHAIR
THE CITY OF SKOPJE
SKOPJESKOPJESKOPJE
Skopje serves as theMunicipality Capital
for each of theseMunicipalities.
FYRMACEDONIA
FORMER YUGOSLAV REPUBLIC OFMACEDONIA
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.
0 10 20
0 105 15 20 Miles
30 Kilometers
IBRD 33438R2
JULY 2009
SELECTED CITIES AND TOWNS
MUNICIPALITY CAPITALS*
NATIONAL CAPITAL
THE CITY OF SKOPJE
RIVERS
MAIN ROADS
RAILROADS
MUNICIPAL BOUNDARIES
INTERNATIONAL BOUNDARIES
*In most cases, the names of the municipalitiesare identical to their capitals. Where theydiffer, the municipality is shown in green italic.
