Neglecting Regulatory Environment, Monetary Policy, and Operations: A Recipe for Disaster

As the global economy navigates uncertain waters, it is crucial that countries like Macedonia take a proactive approach to managing their debt and finances. Unfortunately, recent developments suggest that the country’s authorities have been neglecting key aspects of its regulatory environment, monetary policy, and operations.

Reigniting Concerns Over Debt Sustainability

Macedonia’s external debt has grown significantly in recent years, with almost 90% of general government debt denominated in or linked to foreign currency. This exposes the country to significant currency risk, which could have devastating consequences in the event of an unforeseen shock. Moreover, the short average maturity of domestic debt means that the government must constantly roll over existing debt, leaving it vulnerable to refinancing risks.

Failing to Mitigate Risks

• The recent cancellation of a planned Eurobond issuance and the need for net new private external debt to meet fiscal financing needs are clear indicators of this failure.
• The lack of progress in developing the domestic yield curve and strengthening institutional arrangements has hindered the country’s ability to manage its debt sustainably.

Institutional Weaknesses

The Ministry of Finance’s Public Debt Management Department is severely understaffed and lacks a department head, preventing it from adequately performing its tasks. This weakness is further exacerbated by the lack of capacity enhancement for the department.

Strengthening Institutional Arrangements

• Strengthening these institutional arrangements is crucial to supporting market development, risk analysis, and mitigation.
• Developing a comprehensive medium-term debt strategy requires strong institutional arrangements.

A Recipe for Disaster

The neglect of regulatory environment, monetary policy, and operations has significant implications for Macedonia’s economic stability. The country risks facing a debt crisis, which could have far-reaching consequences for its economy and citizens.

Recommendations

• Develop and follow a comprehensive medium-term debt strategy
• Strengthen institutional arrangements, particularly the Ministry of Finance’s Public Debt Management Department
• Gradually increase domestic non-FX-indexed denar issuance to reduce currency risk
• Pre-fund rollovers and lengthen domestic maturities to mitigate refinancing risks
• Develop the domestic yield curve to promote greater use of denars in financial transactions

Conclusion

Macedonia’s failure to address its debt sustainability concerns and neglect of regulatory environment, monetary policy, and operations puts the country at risk of economic instability. It is crucial that the government takes immediate action to develop a comprehensive debt strategy, strengthen institutional arrangements, and mitigate risks. Only through these measures can Macedonia ensure a stable and sustainable economic future for its citizens.