MACEDONIA'S MAIN ECONOMIC GOAL: ACCELERATED GROWTH

UNCLAS SECTION 01 OF 03 SKOPJE 000070 SIPDIS SENSITIVE SIPDIS DEPT PLS PASS TO USAID, DEPT FOR EUR/SCA P.PFEUFFER AND Y.IVANOVA TREASURY FOR TPHILLIPS AND W.LINDQUIST E.O. 12958: N/A TAGS: EFIN ECON PGOV EAID MK SUBJECT: MACEDONIA'S MAIN ECONOMIC GOAL: ACCELERATED GROWTH REF: SKOPJE 0053 Summary -------------- ¶1. (U) In its macroeconomic policy for 2008, the GOM focuses on policies that it hopes will lead to GDP growth of six percent in each of the next three years. Macedonia's macroeconomic foundation remains sound. GDP growth in 2007 was estimated at about five percent, an increase over the preceding year, but has not yet reached the GOM's six percent target. Unemployment has declined slightly but remains stubbornly high. The GOM expects that continued structural reforms in key sectors will further improve the investment climate, attracting more investors and leading to higher growth. If the country is able to sustain this higher level of economic growth, the average Macedonian should begin to feel the impact in terms of greater job opportunities, higher wages, and an overall improved standard of living. End summary. Ambitious Goals Continue in 2008 -------------- ¶2. (U) In its macroeconomic policy for 2008, the GOM outlined the economic developments it expects for the period 2008 - 2010. The GOM's overall economic goals in 2008 are a continuation of its 2007 goals: accelerating economic growth accompanied by low inflation, which would lead to higher disposable household income and improved living standards. The GOM forecasts that GDP growth in this period of between 6 and 6.5 percent. ¶3. (U) The main drivers of accelerated growth on the demand side are expected to be private consumption and foreign direct investments, while on the supply side the GOM anticipates higher growth in services. Personal consumption is forecast to account for 3.5 to 4 percentage points of GDP growth, based on projected growth in net wages of 5 percent, a 30 percent increase in household credit, lower personal income taxes, and an expected stable level of private transfers (including remittances). The GOM also expects that growth in services will outpace growth in the industrial sectors that grew rapidly in recent years, such as metal processing and mining. Inflation To Remain Tame -------------- ¶4. (U) Price stability is the GOM's primary monetary policy goal in ¶2008. The stable denar-euro exchange rate will continue to serve as an anchor for maintaining low inflationary expectations and supporting a predictable business environment. Even taking into consideration world market prices for food, oil and energy, the GOM projects the CPI-based inflation rate will be 3 percent in 2008 and 2.5 percent in 2009 and 2010, due to prudent monetary policy. In addition, net real wages are expected to rise by five percent in 2008 and six percent in 2009-2010. ¶5. (U) The money supply is projected to grow by a significant 27.6 percent in 2008. Reserve money (i.e., cash in circulation and vaults) will grow by 17.4 percent, denar and foreign currency deposits will grow by 40.2 and 17.5 percent respectively, generating a 37.2 percent increase in credit to the private sector, according to government estimates. Fiscal Policy: Tax Reform and Higher Spending -------------- ¶6. (U) The GOM's tax cuts will take full effect in 2008, with both personal income tax and the profit tax falling to a flat 10 percent rate. Tax reform is also scheduled to continue, leading to a simpler, more efficient tax system that the GOM hopes will do its part to stimulate growth. Currently the calculation and collection of various employer contributions (i.e., employee pensions, healthcare, personal income tax, and unemployment insurance) is complex and burdensome. During 2008, the GOM plans to ease the burden on business entities by streamlining the calculation and collection of employer contributions. According to Macedonia's WTO-membership obligations, further reduction of import duties and excises will continue on selected products. SKOPJE 00000070 002 OF 003 ¶7. (U) The 2008 budget will increase government spending significantly, with expenditures up more than 12 percent over 2007 and a higher projected deficit of 1.5 percent of GDP (septel will report on the 2008 budget). Infrastructure expenditures in Macedonia have been relatively low in recent years, but the GOM expects them to increase with implementation of its Public Investment Program. With funds from the budget, private investors, foreign grants, and foreign loans, the GOM plans to direct investments in roads, bridges, energy transmission power lines, hydro power plants, a natural gas network, electricity generating capacity, railways, water supply, and irrigation and sewage systems. The GOM plans to implement these investments using two main mechanisms: granting concessions to private investors and forming public/private partnership. Structural Reform Efforts -------------- ¶8. (U) In order to make Macedonia more attractive to investors, the GOM promises to continue ongoing reform efforts. The GOM's structural reform agenda aims to attract more foreign investors and stimulate domestic businesses. This is projected to increase employment by four percent and labor productivity by four to five percent in 2008. The main focus of the reforms will be in the judiciary, the labor market, the health sector, energy, agriculture, the real estate cadastre, transportation, communications, and decentralization. However, the GOM does not intend to privatize any of the utilities that remain state owned, including energy generation. Trade Deficit to Widen -------------- ¶9. (U) The GOM expects its aggressive campaign for attracting foreign investors to produce results in 2008, and is projecting FDI of $403 million in 2008. This level of FDI would contribute about two percentage points to GDP growth. Import growth of 14 percent is expected to outpace export growth of nine percent in 2008, raising the trade deficit to a relatively large 26.2 percent of GDP. The current account gap will increase to 5 percent of GDP, as the trade deficit grows faster than the inflow of private transfers. Public Debt Falling -------------- ¶10. (U) The GOM expects total public debt will decline further in 2008, to 28.8 percent of GDP from the current 33.1 percent. In terms of the currency structure of the debt, the GOM intends to switch to more denar and euro denominated debt, and away from dollar denominated debt. The GOM also plans for further development of the primary and secondary market for government debt, including issuing longer-term debt. The GOM also intends to provide greater transparency of total government debt by establishing a unified public debt register. Currently, there is no integrated register of all public debt, including the debt of municipalities and public enterprises. Public Still Waiting For Economic improvement -------------- ¶11. (U) Macedonians are intensely concerned about their economic situation. According to a public opinion poll conducted by the International Republican Institute (IRI) in December (reftel), Macedonians view economic problems as the single most important issue facing the country. When asked to choose Macedonia's most critical issue, 50 percent of respondents said it was unemployment, and an additional 31 percent chose other economic problems. ¶12. (U) According to the same poll, most Macedonians have not yet felt significant economic improvement in their lives, but they are still fairly optimistic that the economy will improve. 70 percent of respondents said they had not felt any effect from the government's measures over the past year. However, 44 percent thought the economy would get better over the next two years, while only 18 percent thought it would get worse. Comment SKOPJE 00000070 003 OF 003 -------------- ¶13. (SBU) After 18 months in office, the GOM's economic policies have not yet had a significant impact on citizens' lives. While the economy is stable and inflation remains low, the unemployment rate has barely budged and real wage growth has not been high enough for workers to see a substantial improvement in their standard of living. The GOM appears committed to continuing with structural reforms, while accelerating infrastructure investments. Government leaders continue to promise that these policies will lead to higher levels of private and public investment, and that Macedonians will in turn finally experience a real economic boost. The one worrying cloud on the horizon is the widening trade deficit. So far this has not led to a large capital account deficit, but that is projected to begin growing next year. ¶14. (U) The GOM's main macroeconomic indicators: 2007 2008 est. proj. GDP real growth rate 5.1 6.0 Inflation (CPI, average) 2.0 3.0 Wages (real growth rate) 4.3 5.0 Employment growth rate 4.0 4.0 Budget deficit (% of GDP) -1.0 -1.5 Exports growth rate 35.6 9.0 Imports growth rate 30.2 14.0 Trade balance (% of GDP) -22.6 -26.2 Current account balance (% of GDP) -2.9 -5.0 Public debt (% of GDP) 33.1 28.8 FDI (in mln. US$) 363.0 403.0 Credit to private sector (growth rate) 20.0 37.2 MILOVANOVIC