Address of the Governor of the NBRM, Ljube Trpeski, Ph.D., to the Parliament, April, 1998
In 1997 the Republic of Macedonia continued the economic growth, started in 1996. The rate of gross domestic product real growth of 1.5%, although twice higher then in the previous year, was below expectations. However, it is very important that positive economic growth trend is retained, especially having in mind the difficulties which Macedonian economy faced in the first half of 1997.
Namely, in the first half of 1997 the unfavorable developments in foreign trade balance which started in 1996 were deepened, therefore the deficit in exchange of goods to abroad in the amount of USD 214.3 million surpassed the long term capital inflow in the country. In a situation when further short-term borrowing from abroad was impossible, the deficit was determined to be financed by decrease of the foreign exchange reserves of the monetary system on permanent basis.
In these conditions, exchange rate stability, as main objective of the monetary policy, was maintained in two ways: a/ by sale of foreign exchange on the foreign exchange market and decrease of foreign exchange reserves of the National Bank of the Republic of Macedonia. Thus, foreign exchange reserves in the first six months of 1997 decreased by USD 11.7 million, which was the amount of the net sale of foreign exchange by the Central Bank for maintaining the denar exchange rate and; b/ by automatic increase of the tightness of the monetary policy. Namely, according to adopted monetary strategy, the National Bank of the Republic of Macedonia did not neutralize the monetary effects of unissued reserve money on the basis of foreign exchange transactions, because of the possibility to endanger in that way the maintenance of the denar exchange rate stability. Such a policy, also characteristic for 1996, made it possible to maintain the exchange rate stability in the first six months of 1997, but at the same time necessitated too restrictive monetary policy.
The responsibility of maintaining a stable, but overvalued exchange rate in that way fell entirely upon the back of the monetary policy, causing loss of foreign exchange reserves, high and long term unsustainable monetary contraction and high real interest rates. Thus, the negative rates of money supply growth, which were for the first time registered at the end of 1996, were also retained in the first six months of 1997. At the end of June 1997 money supply M1 realized a negative annual rate of growth of 3.3%, while money supply M2 - denar in the same period realized a negative growth rate of 0.2%. In addition, the real lending rates of the banks were retained at a high level of over 20% on annual basis.
This situation definitively confirmed that the initially determined level of the denar exchange rate against Deutsche mark (27 denars for a Deutsche mark) is not the equilibrium one, i.e. maintaining overvalued exchange rate caused high and unsustainable economic cost. For these reasons at the beginning of July 1997 (09.07.1997) a onetime devaluation was undertaken, by which denar exchange rate was set up on the level of 31 denars for a Deutsche mark. Stability of the denar exchange rate at the newly established level was maintained without serious problems in the second half of the year, in conditions of excess foreign exchange on the foreign exchange market, improvements in the balance of payments and acceleration of monetary growth rates.
The effects of the devaluation regarding the restoration of monetary growth, revival of export and rebuilding foreign exchange reserves became evident in the first months after the correction of the domestic currency value. However, the effects of the devaluation, especially upon export, are not entirely drained, so that the improvement of price competitiveness of the Macedonian economy is expected to be performed with certain time lag, i.e. in the first half of 1998. Expectations in this direction are based on the fact that the nominal devaluation degree (16.1%), meant a degree of real denar devaluation, having in mind that correction of domestic currency value was accompanied by adequate measures in income policy, by which wages of employees in all not completely privatized enterprises were practically “frozen”. Nevertheless, it should be taken into consideration that the slow character of regaining confidence in saving and in the banking system on one hand, and the need for investment intensification on the other, will determine continuation of structural imbalance between saving and investments in the following years. Thus, the high level of the deficit in current account of the balance of payments of the Republic of Macedonia will be retained.
It is of vital importance that in spite of the corrected external value of the domestic currency, its internal value in 1997 remained stable, which is its main characteristics over the past three years. With an inflation rate time series of 9.2%, 0.2% and 4.5% in the last three years, the Republic of Macedonia, according to the price stability criterion, is among the most successful countries in transition and very close to the developed industrial countries. Permanent maintenance of low and stable inflation rate as long-term policy makers' orientation, is certainly the most favorable macroeconomic environment for reviving the investment activity and accomplishing dynamic economic growth.
In 1997, the fiscal policy continued its adjustments towards compliance of the size and structure of revenues and expenditures with the needs of the country at the attained level of development. Because of the drop in revenues in the first half of 1997 due to the deteriorated liquidity and profitability of the economic subjects, in the middle of 1997 some measures for further budget expenditure reduction and revenue collection improvement were undertaken. Realization of these measures enabled the maintenance of the 1997 public sector deficit at low level of 1.8% of GDP, which is very important according to the Maastricht criterion. Sound fiscal policy, besides being indispensable factor for reducing the balance of payments deficit, also takes part in the process of projected tightening of the public sector role and expanding the scope of the private sector operations, as a long-term strategy.
By all means, the transition process brings numerous temptations and social expenditures, among which the most apparent in the Republic of Macedonia are the high unemployment problem and the low living standard of the population. Solving these problems, as well as their generating, is a long-term process whose dynamics can be hastened by hastening the structural reforms in the companies, higher wage flexibility, labor market reforms, saving reaffirmation as a factor for domestic investment reviving, more aggressive and more organized presentation for attracting foreign investors, etc. In alleviating these problems, the inflow of foreign funds for structural adjustment and private sector development has had positive influence, for which purpose in 1997, USD 18.4 million were withdrawn from the International Bank for Reconstruction and Development and USD 8.4 million were withdrawn from the European Bank for Reconstruction and Development for small and medium size enterprises' development. There are credit funds, left to be withdrawn in the next year, for private sector development, based on the current, as well as on new credit arrangements.
During 1997, the enterprises restructuring process, which is the key element for the success of the post privatization reforms, evolved slowly. Due to the insufficient level of domestic accumulation and indigent foreign capital inflow in form of direct investment, in 1997, the defensive way of enterprises restructuring continued, and it consisted mostly of firing the outnumbered workers. This has resulted in increasing unemployment, with simultaneous increase of the bankrupted enterprises and inter-enterprise arrears. That implies the need in this domain, in which in 1997 was done less than expected, for more intensive engagement in order to compensate for what was omitted and to catch the pace with more developed countries in transition.
Problems which started or continued to be solved in 1997, and still remain open for the next period, can be connected with the problem of capital increasing and banking system modernization. It is expected that these problems will be solved with the forthcoming entering of several foreign financial institutions in the Republic of Macedonia, which at the same time will provide increased competition in the banking system. In order to regain depositors' confidence and create more solid and more liquid banking institutions, Deposit Insurance Fund (March 1997) and Inter-bank Money and Securities Market (November 1997) were established. In that way the Republic of Macedonia almost entirely completed its own financial system, whose solid base and functioning are main prerequisites for achieving permanent economic development.