Monitoring Macedonia

By: Sam Vaknin, Ph.D.

Also published by United Press International (UPI)

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Close to 500,000 people - one in four - live under the poverty line in a country where the average monthly salary is less than 150 US dollars. More than one in three members of the workforce are chronically unemployed. With inflation up 5.5% in the last 12 months and taxes - borne disproportionately by the poor and the working class - at 37% of GDP, life is tough in this small, landlocked country. When faced with the choice between raising VAT from 5% to 19% on bare necessities (such as bread and milk), or extending the "temporary" "war" tax (0.5% on all financial transactions) - the finance minister of Macedonia, after an emotional all-night consultation involving the Prime Minister, chose the latter. The "war" tax brought in the equivalent of 2% of GDP (on an annualized basis) since it was introduced in July this year and helped to contain a dangerously soaring budget deficit, now at 9% (and rising) of a shrinking GDP. Yet, the controversial decision to extend it brought on sharp rebukes by local tax experts. The finance ministry also plans to cut expenditures by a further 50 million US dollars.

This gaping hole in public finances is not the result of profligacy. Most of the government's budget is "locked" into paying pensions, state obligations, wages, and other mandatory items. Only 2% are discretionary. The vertiginous 15% of GDP tilt from surplus to deficit is the direct result of the six months of civil war that gripped Macedonia between February and August this year. The damages were direct - in new military spending, increased security expenditures, and about 500,000 US dollars a day used to accommodate and feed c. 80,000 internally displaced citizens, most of them non-Albanian Macedonians. But the war also had indirect consequences. The tax base shrank as GDP collapsed by at least 4-5% and industrial production contracted by 9-10%. The direct damages to the agricultural sector alone are estimated to be c. 100 million US dollars. The textiles sector has suffered even more. At least 17% of the country became physically inaccessible and the panic that gripped the population well into July interrupted tax collection. Tax, customs, and excise revenues, VAT excepted, decreased by 20-40% (!). The government was forced to use some of the proceeds of the sale of the telecom company, Makedonski Telekom, to MATAV.

In an effort to stem the monetary flood and to fend off potential currency speculation (which consumed more than 100 million US dollars of the National Bank's reserves by mid-June) - the central bank was forced to raise interest rates and to absorb excess liquidity. On October 15, one week and two weeks treasury bills (zero coupons) yielded 11% to maturity - and the same bills for 28 days yield 17%, a yield curve which signals distrust in the macroeconomic stability of the country. Eerily, after a brief, speculation driven, spurt, the currency settled to its 4 years old average exchange rate of 31 to the DM and 67 to the US dollar.

In its ten years of independence - mostly due to external shocks such as trade sanctions and wars - Macedonia has developed a chronic case of acute trade deficit, equal to c. 15% of GDP (c. half a billion US dollars annually). Luckily for it, unilateral transfers - remittances by expatriates, international aid and grants, international credits, and growing, though small, foreign direct investment - served to ameliorate the problem. The World Bank alone has invested more than 550 million US dollars in Macedonia since 1991. But a sharp collapse in exports (by c. 20%), coupled with increased foreign exchange expenditures on weaponry, and the drying up of Albanian remittances (at least through official channels) - have exacerbated the financing gap that Macedonia faces from a projected zero to more than 100 million US dollars in 2001.

The Macedonian side has a vested interest in exaggerating both the damages of the civil war and its financing needs. Macedonia, to its great detriment, has long been addicted to foreign aid. Nor does it seem to have any coherent plan to cope with the crisis - ad hoc, stopgap, measures notwithstanding. The IMF was forced to place Macedonia under "Staff Monitoring" - the equivalent of freezing of all credit arrangements with the fund for a period of 6 months. This, though, does not prevent Macedonia from reverting to a standby arrangement down the road, or from participating in a donor conference.

Actually, Macedonia has received more financing and pledges for financing during the first 9 months of 2001 than during the comparable period last year. Spain has promised to finance the "Lera" hydroelectric power station. Italy has granted Macedonia 4 million US dollars in "urgent financial aid". The EU has earmarked 198 million euro to remedy war damages. The EU CARDS program (project financing) was signed (43 million euro). The World Bank added 37 million US dollars to 3 new projects since March 2001and has disbursed 15 million to projects already approved. And this is a partial list.

Yet, the majority of these funds - whether approved or pledged - are conditioned upon the fulfillment of the August 13th Ohrid Framework Agreement between the Macedonian and the Albanian political parties. The EU has made it abundantly clear that its financial assistance will be withheld if what it calls "Macedonian intransigence" continues. A donor conference, already postponed three times, had to be put off yet again indefinitely (though the World Bank expresses unfounded optimism regarding a date sometime in December). Such a conference is supposed to tackle Macedonia's balance of payments needs and the costs of reconstruction and implementation of the Framework Agreement. With each postponement, Macedonian disappointment and xenophobia grow. The West is seen widely as interested mainly to assist the Albanians at the expense of all other segments of the population. The euphoria that gripped Macedonia after the September 11 attacks on the USA ("now they will understand what it means to confront terrorism") - has evaporated. It was replaced by grim realism. The USA and the EU are bent on securing a pacified Macedonia. The IMF and the World Bank are subject to political considerations, constraints, and arm twisting. The economy is fast deteriorating. Macedonia has very few choices.


On May 29, 2002, the IMF and the government of Macedonia, failed to reach a new Standby Agreement.

Franek Rozwadowki, the new Chief of Mission for Macedonia implored the government to "implement prudent fiscal and monetary policies, particularly on wages (which impact) the budget, employment, and growth." The government - facing elections in September - and the IMF failed to conclude a standby agreement for 2002-2003.

Subsequently, I granted this interview to "Media Press":

Q: What is the outcome of the "negotiations" after months of armed conflict, as far as the implementation of the Ohrid Framework Agreement is concerned?

A: The Ohrid Framework Agreement contains both legislative and operational aspects. The legislative agenda - with one or two minor exceptions - has been completed.

Not so the operational undertakings. The census is forever postponed, the devolution to the local administration is moving ahead at a glacial pace, the integration of police and army forces is incomplete, the resolution of the issue of kidnapped Macedonians is far, many Albanian forces haven't disarmed and are militarily still active.

Q: Does that outcome of the negotiations with IMF ensure the economic stability and progress of Macedonia? Furthermore, do the IMF proposals contradict the spirit of the Ohrid Agreement?

A: The current round of negotiations with the IMF ended in failure. The IMF could not accept the government's bailout of savers in three failed savings institutions, amongst them TAT. There was also disagreement about applying the government's wage policies prior to the impending September 15 elections. Tax revenues exceeded expectations, so the IMF demanded that the excess be used to reduce the budget deficit that was projected last December.

This would have led to a contractionary fiscal swing of well over 5% of GDP. No government could accept such policies in the midst of a decade long depression compounded by last year's civil strife. The IMF probably guessed as much. Naturally, it prefers not to reach an agreement with a lame duck administration. It would rather wait til after the elections and conclude an agreement in October-November with the new government.

The IMF's policies not only contribute to Macedonia's economic stability - but ensure it. Alas, a country like Macedonia needs growth more than it needs stability. It is here that a decade of IMF and World Bank administered policies - the notorious "Washington Consensus" - failed dismally. While the IMF's policies definitely do not contradict the letter of the Ohrid Agreement - they contravene its spirit by inhibiting growth. The key to the success of the Framework Agreement is the economy. Economic failure will result in renewed civil strife.

Q: Do you believe that this economic agreement will assist the "smoothing" of the relations between the two communities in Macedonia (Slav and Albanian)?

A: As I said, there is no agreement with the IMF at this stage. Generally speaking, the more resources are available to rebuild this damaged country and restart its moribund economy - the more pacific it is likely be. Poverty leads to monopolizing behaviour - various groups in the population try to secure the scarce economic resources to themselves. A lack of agreement with the IMF means that a sizable chunk of the money pledged in the donor conference in March will not be coming. It is a dangerous and slippery game. One cannot have economic stability - let alone growth - without political stability. A modicum of intellectual flexibility is called for. Dogmatic economic thinking may be appropriate for Scandinavia - but it is entirely wrong headed here.

Q: Do you believe that the economic prosperity of the Albanian community will prevent a new wave of conflict in the country or minimize provocations from the Albanian Liberation Army?

A: Prosperity hasn't prevented bloody wars from erupting in Croatia and Slovenia. Albanians in Macedonia are far more prosperous than their Kosovar and Albanian cousins. Yet, war has erupted here. The key is not prosperity or absolute wealth - but relative wealth. Redistribution of wealth, participatory democracy, rule of law, and equal opportunities are important. These can be achieved only when economic scarcity is vanquished - i.e., as a result of economic growth.

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