IMF AND ITS MACEDONIAN TANGO

Pavlina Petrova
Yordanka Gancheva

In May 2005 the International Monetary Fund (IMF) completed the negotiations with Macedonian Government for the new stand-buy agreement, which will cover four fiscal years from 2005 to 2008 and which main goal is to stimulate the Macedonian economy growth and to decrease the current account deficit through structural reforms targeting better competitiveness. The main structural reforms are directed toward increasing the flexibility of labor market, increasing the efficiency of court system, bettering business environment and the public sector management, which is expected to lead to a better productivity and to attracting more investments. Key component of the negotiated program continue to be further maintenance of the macroeconomic stability through fiscal and monetary policy instruments. The negotiated program will be discussed on the IMF Board of Directors in the first week of August 2005.
There is nothing strange in concluding that agreement - that is why the IMF exists for anyhow. The statements and the assessments preceding the agreement however raised some questions among the local economic policy analysts. If we make a brief overview of the events and reports from the year 2004 and the beginning of 2005 we will see something like inconsistency and even contradictoriness in the IMF policy toward R. Macedonia.
In the middle of 2004 different IFIs, including IMF, EBRD and WB, announced their conclusions regarding the economic development of Macedonia as well as their vision for the direction of eventual future relations with the country. The comments of all three organizations coincided to a great extent. Summarized in few words the conclusions were that during the years since independence the Macedonia’s economic performance has featured by both notable achievements in macroeconomic management, as well as some disappointments in the area of structural reforms. Important progress has been made in financial sector reforms and trade liberalization; further progress is needed in reforming labor market institutions and the judiciary and in strengthening governance. Privatization has been largely completed but the method of privatization gave insiders a dominant role, resulting in a smaller boost in efficiency than had been expected. Partly as a result of the unfinished structural agenda, economic growth has been lackluster. The average annual growth rate since the mid-1990s was around 1.5 %, well below other transition economies. Unemployment figures have remained high. In the external sector, the current account deficit has widened in recent years while foreign direct investment has been generally low, because of the unfriendly investment climate and the high levels of political and security risks.
In its Second Review Under the Stand-By Arrangement and Ex Post Assessment of Performance Under Fund-Supported Programs the IMF staff emphasized its disappointment from the state of structural reforms in R. Macedonia. In the staff report we could read that:
“The experience points to a lack of desire for reform on the part of the authorities. This may in part have reflected other aspects of FYR Macedonia’s situation and in particular the relative attractiveness of rent-seeking versus entrepreneurship. The power of vested economic interests appears to have been a stronger brake on reforms than the ethnic differences.
... In some instances, weak implementation reflected unforeseeable developments—notably the 2001 security crisis. But implementation was weak even in relatively calm times prevailing during 1997-98, suggesting that the authorities’ commitment to reforms was lacking. In hindsight, the Fund should have been more cautious in entering a program relationship once stabilization was completed, particularly in light of delays in implementing reforms (under the 1995 SBA and the 1997 ESAF). “
The IMF Executive Board Assessment says that “most Directors agreed with the view that the disappointing progress in the area of structural reforms and the repeated program interruptions suggested that the Fund should have been more cautious in entering into new program relationships, once macroeconomic stabilization was achieved in the context of Fund-supported programs. It is also suggested that the alternative of an arrangement not involving the further use of Fund resources should not be ruled out.”
All of this should have been a clear warning sign for the Macedonian Government that without further structural reforms there would not be further financial support.
Between August 2004 and May 2005 the Macedonian Government did almost nothing in respect of structural reforms. Furthermore, during its February mission the IMF desk chief Franek Rozwadowski addressed sharp critiques regarding the (non)implementation of the healthcare reform and the lack of transparency in healthcare budget spending, which have leaded to inefficient spending of taxpayers money and worsening the overall quality of healthcare services in Macedonia. The course of February negotiations was kept by the Macedonian Government in deep secrecy as usual. All information available came from the Rozwadowski’s press statements and from some unofficial sources. For example Seeurope.com, quoted Utrinski vesnik, which has quoted “informed sources as saying that Rozwadowski is very skeptical about the capacity of the government to conduct reforms. Reportedly, he also doubts whether the new government will stick to the assumed obligations for reforms.” We cannot be certain if Mr. Rozwadowski has really expressed such skepticism or not. However, having in mind the state of structural reforms in R. Macedonia and the political willingness for their implementation such statement would be right. We - the local analysts - who don’t come only on missions but live here, witness the fact that the present Government, as those before it, is just loudly announcing the forthcoming “beginning” of the reforms, which seems to be stuck on that stage for years.
In August 2004 the IMF expressed its disappointment from the state of structural reform and sent the clear message that without further reforms, there would not be further financial support. Ten months latter, although the fact that the reforms did not move further by inch and is not expected to move in the remaining pre-election year, IMF negotiated new agreement. The main question is why? We are aware of the fact that the Fund policy is to continue negotiating even with countries which do not fulfill the previous agreements. However, if in the case of Argentina this is absolutely understandable (let us don’t forget that Argentina’s debts to IMF has represented almost 15% of the IMF credit portfolio), in case of Macedonia we just cannot get the picture. The new arrangement is most probably result of a political decision. But what will be its impact on the reforms in Macedonia?
The money will be lent for reforms which IMF has been assessing as disappointing during the last 5-10 years. Furthermore, during the February joint IMF and World Bank’s mission the IMF representative Rozwadowski expressed his concern that it seems to be not clear how the World Bank’s $17 mln. loan for the healthcare reform has been spent. Here we tempted to ask - if IMF thinks that the Macedonian Government has spent the money of one financial institution for some unclear reforms with suspicious effect why has decided to finance the same reforms for second time!?
The IMF policy toward Macedonia has been criticized a lot within the Macedonian politicians and economic experts. IMF became the “usual suspect” and the usual excuse for all troubles - increase of prices, increase of unemployment, decrease in life quality, etc. Very often IMF is blamed for having “too harsh” requirements toward Macedonian Government, which have made the overcoming of the economic crises and the achieving of economic growth impossible. But the awful truth is that there is no credible threat on behalf of IMF. It seems like the Macedonian Government doesn’t feel some strong neither internal nor external pressure for structural reforms. The internal factor in Macedonia - the opposition and the civil society - is not a factor at all. The external factor - the IFIs - threaten that without proper further reforms there will not be further loans, but at the ends there are no reforms, however the next loan is negotiated. We are fully aware of the fact that IMF cannot easily say - “It was enough guys! We warned you, you didn’t take it seriously, so now go on without our support”. It is not necessary to be a Nobel priced economist to understand that Macedonia has no chance to go beyond the transition without external financial help. After 15 years of transition most of the Macedonian citizens even doubt that such thing is achievable at all with whoever’s help. However this tango policy (two steps forward, one backward) will not help as well. It is almost for sure that the current government will spend the money without conducting serious reforms in the last pre-election year. The reforms will continue being present only in the tons of programs, strategies and action plans, which circulate within the Macedonian public space. The next government will blame the previous one and will count on future negotiations with the Fund. Till when?