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Feature -- Monitoring Macedonia

By SAM VAKNIN, UPI Correspondent

SKOPJE, Macedonia, Oct. 18 (UPI) -- Close to 500,000 Macedonians -- about one quarter of the population -- live under the poverty line in a country where the average monthly salary is less than $150.

More than 1 in 3 members of the workforce are unemployed. With inflation up 5.5 percent in the last 12 months and taxes -- borne disproportionately by the poor and the working class -- at 37 percent of gross domestic product, life is tough in this small, landlocked country.

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When faced with the choice between raising value-added tax from 5 percent to 19 percent on bare necessities (such as bread and milk), or extending the "temporary" "war" tax (0.5 percent 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 percent 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 percent (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.

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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 percent of the budget represents discretionary expenditures. The vertiginous 15 percent 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 a day used to accommodate and feed about 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 percent and industrial production contracted by 9-10 percent. The direct damages to the agricultural sector alone are estimated to be about $100 million. The textiles sector has suffered even more. At least 17 percent 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 percent. The government was forced to use some of the proceeds of the sale of the telecom company, Makedonski Telekom, to MATAV.

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In an effort to stem the monetary flood and to fend off potential currency speculation (which consumed more than $100 million of the national bank's reserves by mid-June) -- the central bank was forced to raise interest rates and to absorb excess liquidity. On Monday, 1-week and 2-week treasury bills (zero coupons) yielded 11 percent to maturity -- and the same bills for 28 days yield 17 percent, 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 deutsche mark and 67 to the U.S. dollar.

In its 10 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 about 15 percent of GDP (about $500 million per annum). 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 in Macedonia since 1991. But a sharp collapse in exports (by about 20 percent), 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 in 2001.

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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 in "urgent financial aid." The EU has earmarked $180 million to remedy war damages. The EU CARDS program (project financing) was signed ($39 million). The World Bank added $37 million to three new projects since March 2001 and 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.

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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 Sept. 11 attacks on the United States ("now they will understand what it means to confront terrorism") -- has evaporated. It was replaced by grim realism.

The United States and the European Union 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.

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