Category: English Language

Source: IMF – News in Russian

(As prepared for delivery)

May 7, 2025

Good afternoon. It is a pleasure to be with you here at this critical juncture for the global economy. Since early April, the US effective tariff rate has increased to levels last seen over a hundred years ago, and the uncertainty surrounding trade policy and geopolitics has surged.

The economic effects of these developments are expected to be sizeable. Our World Economic Outlook ‘reference scenario’ projects that tariffs will reduce both global and emerging market (EM) output growth by roughly 0.5 percentage points relative to our forecast prior to the April tariffs. Countries imposing high tariffs, or those that are heavily dependent on trade with those countries, will be hit the hardest. But no country is likely to emerge unscathed: we have downgraded our forecasts for 127 countries that account for 86 percent of global GDP.

The impact on inflation is more varied. For countries facing higher tariffs on their exports, the tariffs are expected to mainly operate as a negative demand shock and exert mild downward pressure on inflation.  For countries imposing much higher tariffs, notably the United States, the tariffs will likely act more as an adverse supply shock, boosting inflation while lowering growth.

There are several reasons why economic outcomes could be much worse than our WEO reference scenario. As of now financial conditions have not tightened much, including in emerging markets, and many EM currencies have remained surprisingly resilient against the dollar. If, however, trade policy discussions do not yield lower tariffs soon, financial conditions could tighten abruptly, with major effects on capital flows to EMs.  Knightian uncertainty abounds as the global economic order transforms. How should central banks in emerging markets steer through this fog? I will address this question in today’s lecture.

 

EM central banks have developed much stronger monetary policy frameworks since the late 1990s, often in the context of adopting inflation targeting. They have benefited from major improvements in governance, with clear mandates focused on price stability.  Their operational independence has also increased substantially — both de jure and de facto — and they have strengthened their public accountability, as well as transparency. These advancements were invaluable in helping them respond quickly both to COVID and to the subsequent inflation surge, raising interest rates sharply in the latter case to contain inflation and keep inflation expectations anchored.

Even so, significant differences remain between EMs and AEs, especially regarding the strength of the exchange rate channel and the degree to which global factors influence monetary transmission. Several features deserve particular attention: 

Transmission of policy actions and shocks differs in EMs

First, monetary policy transmission appears noticeably weaker in EMs than in AEs, and dependent both on global financial conditions and on the reliance of EM banks on external financing. In advanced economies, an easing of policy rates quickly translates into lower market rates — which is what matters for the borrowing decisions of households and firms — and this boosts the economy.

By contrast, my research with Sebnem Kalemli-Özcan and Pierre De Leo (De Leo, Gopinath and Kalemli-Özcan, 2024) shows that when EM central banks loosen policy, the transmission to short-term market rates depends critically on what happens to global financial conditions. If global financial conditions tighten enough – as often follows a surprise tightening in US monetary policy – then domestic market rates may even rise when the EM central bank lowers policy rates.  The implicit rise in the risk spread facing borrowers clearly blunts the effectiveness of monetary policy and makes it harder for EMs to cushion the effects of shocks. This is particularly relevant at the current juncture where trade shocks could play out as negative demand shocks in many EMs, calling for looser monetary policy. At the same time, they could play out as negative supply shocks in the US and call for tighter US monetary policy.

The changing mix of EM external financing also raises new vulnerabilities. EMs have become more dependent on external financing from foreign nonbank financial institutions, including insurance companies and investment funds, with their share of external portfolio financing growing to about 40 percent. While nonbanks help diversify emerging market funding sources and reduce borrowing costs, these types of capital flows are also very sensitive to the global financial cycle.[1] At times of financial stress, investment funds—such as exchange traded funds and open-end mutual funds in particular—are more susceptible to investors withdrawing their money, which in turn causes investment funds to withdraw from the riskiest markets.  Consequently, the volume and speed of exit of capital flows have increased over time, as was evident at the start of Covid-19.

This sensitivity of EMs to global stress may also increase given that crypto assets are playing a larger role in cross-border financial intermediation and payments, often spurred by the desire to achieve cost-efficiencies, but also to circumvent capital flow restrictions in some cases.  In most EMs, crypto asset use doesn’t yet appear high enough to present imminent systemic risks.  Even so, crypto assets are growing rapidly in many EMs, and overall usage has become a noticeable share of GDP in some EMs with high inflation and lower macroeconomic stability. For example, Cerutti, Chen and Hengge (2024) find that several EMs in Latin America and Eastern Europe fall in the upper quartile of countries in terms of the magnitude of their bitcoin inflows as a share of GDP, with monthly inflows in the range of 0.1 to 0.8% of GDP. Focusing on a wider set of crypto assets, Cardozo, Fernández, Jiang and Rojas (2024) find that cross-border crypto outflows have reached as much as a quarter of gross portfolio outflows in Brazil.

Use of crypto requires a careful understanding of the risks.  Crypto may increase capital flow volatility and exacerbate financial stress, including by allowing investors to easily shift their deposits out of domestic banks into foreign exchange-denominated stablecoins.  If crypto flows grow large enough, such disintermediation from the banking system and associated capital outflows could cause financial conditions to tighten and the exchange rate to weaken, and potentially spur a significant economic downturn.

Weaker policy credibility complicates monetary policy trade-offs

A second difference between AEs and EMs is the relatively weaker credibility of EM monetary policy to deliver low inflation. While EMs have improved their frameworks substantially, inflation expectations still tend to be less well-anchored than in AEs. Consequently, there is a higher passthrough of cost shocks to inflation, as they feed through much more into inflation expectations as well as through other channels such as wage indexation.  Oil price shocks tend to impact core inflation more than twice as strongly in a sample of emerging market economies, relative to advanced ones.[2] This high passthrough makes dealing with external shocks particularly difficult for EM central banks, as second-round effects could be sizeable, including from ongoing shocks to trade policy that could disrupt supply chains and raise input costs.

Inflation expectations also tend to be more sensitive to fiscal policy and debt in EMs. This likely reflects increased risks of fiscal dominance and political interference in central bank decisions, which can undermine the public’s confidence in the central bank’s ability to fight inflation. A surprise increase in government debt tends to boost medium-term expected inflation in EMs significantly, while having little effect in advanced economies.[3]

 

Exchange rates have a much larger imprint on price and financial stability

A third critical distinction between EMs and AEs is that the exchange rate has a much larger imprint on price and financial stability in EMs.  While passthrough of exchange rate changes to inflation has declined considerably for many EMs, it remains significantly higher than in advanced economies. A 10 percent depreciation of EM currencies against the dollar causes EM price levels to rise by about 2 percent, several times larger than in advanced economies.[4]

The presence of foreign exchange mismatches increases the financial stability risks from exchange rate depreciation. While many EMs have reduced FX mismatches – or lowered the risk through the development of derivatives markets that allow for better hedging — reliance on dollar funding within the financial system remains an important source of fragility for some EMs. This weakens monetary transmission, as lowering interest rates causes the balance sheets of corporates with unhedged FX liabilities to deteriorate and financial conditions to tighten, which offsets some of the stimulus from easing. EMs that have shifted to relying more on local currency financing also can experience sharp increases in currency premia and local borrowing costs when foreign investors exit these shallow markets. This makes it harder for EMs to deal with an environment of bigger external shocks: even if a tariff abroad would look like a demand shock from the standpoint of an AE economy, the exchange rate depreciation it induces raises risk spreads and makes it harder for the EM central bank to cushion the impact on the economy. 

Steering through the fog: How should policy respond?

Having outlined some of the unique challenges emerging market central banks face in the current global context, I will next lay out some broad principles that can help steer through the fog. EMs clearly will differ in how they respond to the shocks and the uncertainty depending on their cyclical conditions and on structural features such as the extent of their exposure to trade and financial disruptions.

This said, and despite the fog, EM central banks should respond forcefully to upside inflation risks if they materialize to ensure that high inflation does not get embedded into inflation expectations. While I’ve noted that we see the current configuration of tariffs as likely to be slightly disinflationary for many EMs in our reference scenario, there is a significant risk that inflationary pressures could emerge — from supply chain disruptions and higher input cost pressures in a fragmenting world or from exchange rate depreciations. 

Given the high passthrough of both exchange rate changes and cost shocks to inflation in EMs, a major risk is large and persistent second round effects, especially if inflation has been running persistently above target and the fiscal position is weak. History has shown that once inflation becomes embedded in expectations—often through wage and price indexation mechanisms—it becomes significantly more difficult to reverse. If the risk materializes, timely and firm action is critical to keep inflation expectations anchored and reassure the public of the central bank’s unwavering commitment to sound monetary policy and price stability.

Foreign exchange intervention should be used prudently

Second, in a more turbulent external environment, foreign exchange intervention (FXI) can help address disorderly market conditions that undermine financial stability. The Fund’s Integrated Policy Framework is helpful in identifying conditions when it may be possible to improve tradeoffs facing central banks using FXI and other tools (IMF, 2023; Basu, Boz, Gopinath, Roch and Unsal, 2023).

Notably, central banks can reduce exchange rate pressures by selling FX during episodes of capital flight when FX markets are shallow, allowing central banks not to have to hike policy rates sharply. This can improve macroeconomic outcomes as well as lower financial stability risks.

However, it is important that FXI is not used to reduce exchange rate volatility per se, or to target a particular level of the exchange rate, as such misuse could easily weaken confidence in the central bank’s commitment to stabilizing inflation.  Moreover, given the finite level of reserves, the bar for FXI should be high to ensure that FX liquidity can be provided when it is really needed. As of now financial conditions have tightened in an orderly manner, which means that when it comes to FXI the advice is to keep the powder dry.

Build financial and fiscal resilience

Third, efforts to build financial resilience through strengthening prudential policies are also desirable. As I have emphasized, EM financial systems remain quite exposed to geopolitical shocks and face growing risks from heightened external finance from foreign nonbanks and potentially crypto. Prudential policies can help them build adequate buffers as well as reduce vulnerabilities arising from high leverage, volatile capital flows, and FX mismatches. On the crypto side, it will be important to develop comprehensive legal, regulatory and supervisory frameworks for crypto assets, including through cooperative global efforts given their cross-border nature (IMF, 2023b).  The authorities should also ensure that capital flow management measures, when appropriate, remain effective and not undermined by the use of crypto.  And EMs should continue to strengthen macroeconomic frameworks to reduce the risk of currency and asset substitution into crypto assets (often called “cryptoization”).

Fiscal policy also plays a critical role in helping ensure macroeconomic stability. Uncertainty shocks have much bigger effects on sovereign spreads when EM debt servicing costs are relatively high. Ensuring that tax and spending policies adjust to keep debt on a sustainable path helps provide buffers to respond to downturns and lowers financial stability risks.

Improve central bank communication, governance, and policy strategy

Lastly, there is a high premium on further strengthening policy frameworks to continue building resilience in a more shock-prone environment. 

Clarity of communication has become more critical than ever. Effective communication about the central bank’s reaction function –in qualitative terms – is likely to be useful in helping better anchor inflation expectations and thus improve tradeoffs.

Improved governance – including to strengthen central bank independence – can increase public confidence that the central bank will have latitude to achieve its objectives. Central banks will inevitably make mistakes—no forecast is perfect. But what must be clear is that any deviation from target is the result of uncertainty, not political interference.

EM central banks, as for their AE counterparts, must also adapt their policy strategies to focus more on the distribution of outcomes rather than the modal outlook, and to take more account of risk management considerations. Monetary policy must navigate a world shaped by a multiplicity of shocks—some persistent, some temporary, and some with offsetting effects on inflation where it is difficult to assess the net impact.

Accordingly, many central banks should continue to take steps to revise their frameworks to move away from excessive reliance on central forecasts. This can be facilitated by increasing use of scenario analysis in decision-making.

Conclusion

To conclude, EMs have made major strides in improving their monetary policy frameworks, and this has enabled several of them to respond effectively to unprecedented shocks like the pandemic. They are now being tested again as the global economic order is reset and Knightian uncertainty prevails. This uncertainty does not, however, imply gradualism in all matters. If inflation pressures rise, EM central banks will need to respond quickly using policy rates to prevent higher inflation from getting entrenched as they did during COVID. We must recognize that the road ahead may have many unforeseen turns, which calls for further strengthening financial and fiscal resilience and navigating with monetary policy clarity, credibility, and discipline.

References

Baba, C., and J. Lee. 2022. “Second-round effects of oil price shocks – implications for Europe’s inflation outlook”. IMF Working Paper no. 2022/173.

Basu, S.S., Boz, E., Gopinath, G., Roch, F., and F.D. Unsal. 2023. “Integrated monetary and financial policies for small open economies”. IMF Working Paper no. 2023/161.

Brandão-Marques, L., Casiraghi, M., Gelos, G., Harrison, O., and G. Kamber. 2024. “Is high debt constraining monetary policy? Evidence from inflation expectations”. Journal of International Money and Finance 149(C).

Brandão-Marques, L., Górnicka, L., and G. Kamber. 2023. “Exchange rate fluctuations in advanced and emerging economies: Same shocks, different outcomes”, in Shocks and Capital Flows, edited by Gaston Gelos and Ratna Sahay, IMF.

Cardozo, P., Fernández, A., Jiang, J., and F.D. Rojas. 2024. “On cross-border crypto flows: Measurement, drivers, and policy implications“. IMF Working Paper no. 2024/261.

Cerutti, E.M., Chen, J., and M. Hengge. 2024. “A primer on Bitcoin cross-border flows: Measurement and drivers“. IMF Working Paper no. 2024/85.

Chari, A. 2023. “Global risk, non-bank financial intermediation, and emerging market vulnerabilities”. Annual Review of Economics 15: 549-572.

De Leo, P., Gopinath, G., and S. Kalemli-Özcan. 2024. “Monetary policy and the short-rate disconnect in emerging economies”. NBER Working Paper no. 30458.

IMF. 2023. “Integrated Policy Framework – Principles for use of foreign exchange interventions”. IMF Policy Paper no. 2023/061.

IMF. 2023b. “Elements of effective policies for crypto assets”. IMF Policy Paper no. 2023/004.

https://www.imf.org/en/News/Articles/2025/05/07/sp050725-science-of-monetary-policy-in-emerging-markets-gita-gopinath

MIL OSI

Source: IMF – News in Russian

May 7, 2025

Lusaka, Zambia: Mr. Nigel Clarke, Deputy Managing Director of the International Monetary Fund (IMF), issued the following statement at the conclusion of his visit to Zambia from May 4-6:

“I would first like to thank H.E. President Hakainde Hichilema, Minister of Finance and National Planning Situmbeko Musokotwane, and Central Bank Governor Denny H. Kalyalya for their warm hospitality and constructive discussions on my first visit to Zambia as Deputy Managing Director of the IMF.

“Progress on Zambia’s economic reform program supported by the IMF’s Extended Credit Facility has been strong, despite repeated external shocks. Since the program was approved in August 2022 and augmented in 2024 (See Press Release 24/242), it has provided critical support—both financial and policy-based—and helped to anchor Zambia’s landmark debt restructuring under the G20 Common Framework and navigate last year’s severe drought.

“Zambia’s remarkable progress has centered on restoring macroeconomic stability, including fiscal and debt sustainability, and implementing reforms. Notable reforms include the removal of fuel subsidies, strengthened debt management, and the roll-out of a reformed agricultural input subsidy—the e-voucher system—which increased competition in input delivery, reduced costs, and supported job creation.

“These achievements have been particularly impressing given the challenging external and domestic environment. In my discussions with the authorities, I also welcomed their commitment to strengthen governance and anti-corruption policies.

“Going forward, the policy environment remains challenging. As in many sub-Saharan African economies, Zambia must navigate weaker global trade, elevated uncertainty, and declining external assistance. Continued reform momentum will be essential to build resilience, mobilize domestic revenues, and create fiscal space to support inclusive growth. Structural reforms to improve productivity and support private sector activity will help boost inclusive growth, delivering the much-needed jobs for Zambia’s vibrant youth.

“I am also grateful for the opportunity to engage with University of Zambia students and faculty, representatives of the private and banking sectors, and Zambia’s development partners. I appreciated the candid discussions on the impact of recent global and domestic economic developments on Zambia and exchanged views on how we can best partner with Zambia on its journey towards a more resilient and inclusive future.

“I leave Zambia optimistic about the country’s future—encouraged by the authorities’ determination to continue on their reform path, and reassured by the Zambian people’s resilience. The IMF remains a close partner in supporting the country’s journey to lift the living standards of the Zambian people.”

https://www.imf.org/en/News/Articles/2025/05/07/pr-25131-zambia-statement-by-imf-deputy-managing-director-nigel-clarke-after-his-visit

MIL OSI

Source: IMF – News in Russian

May 6, 2025

• Economic growth continues to be strong in the WAEMU. Inflation has fallen back to its target range, and recent improvements in regional external imbalances are supporting a strong recovery in reserves.
• The Council of Ministers has agreed to submit for approval by Heads of State a proposal by the WAEMU Commission for a revised Convergence Pact maintaining the previous fiscal deficit and public debt ceilings of 3 and 70 percent of GDP, respectively.
• Rapid adoption of this pact would signal a stronger commitment to debt sustainability and help guide sound fiscal policies. The WAEMU’s institutions should also continue to promote regional integration.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the annual discussions on common policies of member countries of the West African Economic and Monetary Union (WAEMU)[1]. The authorities have consented to the publication of the Staff Report prepared for this consultation.[2]

Economic growth continues to be strong in the WAEMU, with heterogeneity across countries, while inflation has fallen. Economic growth rose above 6 percent in 2024, near the average of the past decade, although gaps in per capita income among member countries have continued to widen due to significant variations in economic growth. After rising above target for much 2024, inflation has also fallen back within its target range since November 2024, due to easing regional food price inflation and an appropriately tight monetary policy. The banking system remains resilient, although it maintains large exposures to regional sovereigns.

Recent progress in reducing the WAEMU’s external imbalances, albeit with notable divergence among members, is supporting a strong recovery in reserves. After widening in 2021-2023, the WAEMU’s current account deficit narrowed significantly in 2024. The Central Bank of West African States’ (BCEAO) response to external reserves pressures has also been broadly appropriate, by tightening monetary policy via raising rates and containing the quantities of liquidity injected into the regional banking system. Reserves rebounded in late 2024 and early 2025, and are back above minimum adequate levels due mainly to windfall revenues from the annual cocoa harvest, high commodity prices, several IMF disbursements, and exports of new hydrocarbon resources in Niger and Senegal. The WAEMU’s external position is assessed to have been moderately weaker than fundamentals and desirable policy settings in 2024.

Public debt ratios have increased significantly and heterogeneously in recent years due to large fiscal deficits and stock-flow adjustments. Ongoing progress in union-wide fiscal consolidation is welcome, although it is proceeding at a slower pace than anticipated mainly because of large data revisions in Senegal. Public debt continued to increase in 2024 beyond the level projected during the previous discussions on common policies, with considerable variation across the WAEMU (and particularly high debt in Senegal). Higher debt issuances are leading to heavier reliance on financing on the regional market, which has limited absorptive capacity and relatively high costs, and could pose a risk to external reserves.

 

Executive Board Assessment[3]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed that the WAEMU is benefitting from strong growth, inflation within the target range, and progress in reducing fiscal and external imbalances, while also noting the significant divergence within the region. Highlighting that the region remains vulnerable to a wide range of shocks, Directors stressed the importance of prudent policies to ensure macroeconomic and financial stability and structural reforms to foster inclusive growth. They looked forward to the Fund’s continued support through tailored policy advice and financial and capacity development assistance.

Directors stressed the importance of a commitment to debt sustainability, grounded in progress towards fiscal consolidation, measures to contain debt‑creating stock‑flow adjustments, and close monitoring of regional financing capacity. In that context, they commended the proposed reintroduction of the WAEMU Convergence Pact with the previous fiscal deficit and debt ceilings and called for its rapid adoption with a well‑designed escape clause, a correction mechanism, and credible enforcement. Fiscal adjustment should be driven by revenue mobilization to protect priority spending. Directors also stressed the importance of transparent and accurate reporting of fiscal data and enhanced debt transparency.

Directors welcomed BCEAO’s tight monetary stance which helped bring inflation back to the target range and support reserves. Directors agreed that monetary policy should continue to be closely calibrated to external buffers and inflation developments, and that a cautious stance remains appropriate until there is a sustained recovery in reserve adequacy.

Directors welcomed the resilience of the financial system but noted that the sovereign‑bank nexus continues to pose risks to financial stability. They encouraged the introduction of macroprudential regulatory measures to help restrain sovereign exposures, and capital surcharges to manage concentration risk. Directors stressed the importance of closely monitoring bank soundness indicators, addressing the remaining FSAP recommendations to strengthen financial stability and deepening, and taking the necessary additional steps to facilitate the removal of WAEMU members currently on the FATF grey list.

Directors agreed that prosperity in the WAEMU will depend on progress on political cohesion, economic integration, and strengthening the regional institutional framework and infrastructure. A planned stabilization fund to support members impacted by idiosyncratic shocks could demonstrate regional solidarity, but contingent liability risks through leveraging should be avoided. Directors welcomed progress on the new fast payment system, which would promote efficiency, inclusion, and regional integration. Policies to diversify the economy and strengthen resilience would also be important.

The views expressed by Executive Directors today will form part of the Article IV consultations with individual member‑countries that take place until the next Board discussion of WAEMU common policies. It is expected that the next regional discussions with the WAEMU authorities will be held on the standard 12‑month cycle.

Table 1. WAEMU: Selected Economic and Social Indicators, 2021–29
Social Indicators
GDP				Poverty (2021, latest available)
Nominal GDP (2024, millions of US Dollars)	219,784			Headcount ratio at $1.90 a day (2011 PPP, percent of population)								23.1
GDP per capita (2024, US Dollars)	1,447			Undernourishment (percent of population)							12.5
Population characteristics				Inequality (2021, latest available)
Total (2023, millions)	145.3			Income share held by highest 10 percent of population								28.4
Urban population (2023, percent of total)	40.6			Income share held by lowest 20 percent of population								7.7
Life expectancy at birth (2022, years)	61.1			Gini index							35.4
Economic Indicators
	2021	2022		2023	2024		2025	2026	2027	2028	2029
				Act.	SM/24/90. 1	Est.	Projected
	(Annual Percentage Change)
National income and prices
GDP at constant prices 2	6.2	5.9		5.3	6.8	6.3	6.4	5.8	5.9	6.0	5.9
GDP per capita at constant prices	3.2	2.9		2.4	3.8	3.3	3.4	2.8	2.9	3.0	2.9
Consumer prices (average)	3.6	7.6		3.7	3.2	3.5	2.9	2.3	2.0	2.0	2.0
Terms of trade	-6.3	-12.3		7.9	4.2	12.4	9.3	3.6	-1.3	-1.0	-0.7
Nominal effective exchange rate	1.2	-2.3		6.3	3.5	…	…	…	…	…	…
Real effective exchange rate	1.5	-3.6		3.9	3.0	…	…	…	…	…	…
	(Percent of GDP)
National accounts
Gross national savings	20.4	18.8		18.8	22.4	20.8	21.7	23.1	23.2	23.4	23.8
Gross domestic investment	26.5	28.8		28.7	27.5	26.9	26.2	26.3	26.7	27.3	27.7
Of which: public investment	6.8	7.8		7.7	8.8	6.8	6.7	7.2	7.5	7.8	8.2

	(Annual changes in percent of beginning-of-period broad money)
Money and credit
Net foreign assets	1.7	-7.9		-7.2	0.5	6.1	2.7	2.1	3.2	3.2	2.2
Net domestic assets	16.9	20.7		10.0	12.6	3.4	9.9	10.3	9.9	9.7	10.2
Broad money	18.0	11.4		3.5	12.4	8.9	11.4	12.4	12.8	12.6	12.1
Credit to the economy	8.1	9.0		6.8	6.7	2.7	7.2	7.0	6.6	6.5	6.3
	(Percent of GDP, unless otherwise indicated)
Government financial operations
Government total revenue, excl. grants	16.1	15.8		16.5	17.3	16.6	17.3	17.7	18.2	18.5	18.8
Government expenditure	23.9	24.7		23.8	22.6	22.4	22.0	21.8	21.9	22.2	22.5
Overall fiscal balance, excl. grants	-7.8	-9.0		-7.3	-5.3	-5.8	-4.6	-4.1	-3.7	-3.7	-3.7
Overall fiscal balance, incl. grants	-6.3	-7.8		-6.3	-4.2	-5.2	-3.8	-3.3	-3.0	-3.0	-3.0
External sector
Exports of goods and services 3	20.0	19.6		17.7	21.4	18.8	21.3	21.8	21.4	20.9	20.7
Imports of goods and services 3	25.9	29.7		27.5	26.5	24.6	24.4	23.8	23.4	23.3	23.2
Current account, excl. grants	-6.6	-10.7		-10.2	-5.4	-6.5	-4.9	-3.5	-3.7	-4.1	-4.1
Current account, incl. grants	-5.9	-9.8		-9.5	-4.8	-6.1	-4.5	-3.3	-3.5	-3.9	-3.8
External public debt	36.3	37.0		38.9	36.1	39.9	37.8	36.6	35.5	33.8	32.6
Total public debt	58.5	61.5		64.0	59.6	65.0	63.4	61.9	60.4	58.8	57.5
Broad money	40.7	40.8		39.1	40.6	38.8	39.4	41.0	42.8	44.6	46.3

 

Memorandum items:
Nominal GDP (billions of CFA francs)	100,963	112,343		121,414	131,429	133,227	145,965	157,833	170,313	183,993	198,973
Nominal GDP per capita (US dollars)	1,308	1,259		1,356	1,436	1,446	1,508	1,588	1,663	1,744	1,831
CFA franc per US dollars, average	554.2	622.4		606.5	606.2	…	…	…	…	…	…
Gross international reserves
In months of next year’s imports (of goods and services)	5.0	4.1		3.5	3.5	4.6	4.7	4.8	4.9	5.1	5.2
In percent of current GDP	13.9	10.1		7.8	8.2	10.1	10.0	10.1	10.3	10.6	10.7
In percent of the BCEAO’s sight liabilities	79.7	63.8		56.9	58.1	66.9	67.1	66.5	66.0	66.2	66.0
In millions of US dollars	24,172	18,398		15,764	17,872	21,593	24,165	26,254	28,967	32,156	35,185
Sources:  IMF, African Department database; World Economic Outlook; World Bank World Development Indicators; IMF staff estimates and projections.
All projections presented were prepared in April 2025.
1 Shows data from the IMF Country Report 24/90 issued on March 1, 2024.
2 The acceleration in GDP growth in 2024 is due to the start of production of large hydrocarbon projects in Niger and Senegal.
3 Excluding intraregional trade.

https://www.imf.org/en/News/Articles/2025/05/06/pr25130-imf-executive-board-concludes-2025-discussions-common-policies-member-countries-waemu

MIL OSI

Source: IMF – News in Russian

May 6, 2025

• Growth in North Macedonia is anticipated to reach 3.3% in 2025, driven by domestic demand and public investment projects, although heightened external risks and uncertainties may weigh on this outlook.
• The National Bank has effectively managed recent challenges including bringing down inflation after the energy cost shock and is cautiously easing monetary policy. However, risks remain particularly linked to persistent core inflation driven by strong wage growth.
• The fiscal budget recorded a deficit of 4.4% of GDP, while public debt rose to 63% of GDP in 2024. Fiscal consolidation is essential to abide by fiscal rules and build policy buffers in an uncertain environment.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation for North Macedonia[1] and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis[2]. The authorities have consented to the publication of the Staff Report prepared for this consultation.

Economic growth in North Macedonia is gaining momentum in an environment of increased uncertainty. Growth is expected to reach at 3.3 percent in 2025, driven by stronger domestic demand as public investment projects (including the Corridor 8/10d road project) intensify and consumption is supported by government transfers and real wage growth. However, weak external demand, influenced by structural shifts in the European automotive sector and global uncertainties, is expected to weigh on growth.

Inflation has been volatile, increasing towards the end of 2024, but has fallen recently, in line with energy and food prices. Core inflation has become the main driver and remains persistent, fueled by strong wage growth. The National Bank of the Republic of North Macedonia (NBRNM), which has effectively managed recent challenges including the energy cost shock, has begun easing monetary policy more cautiously and with a lag following the European Central Bank.

The pace of fiscal consolidation in 2024 was slower than anticipated, in the context of an election year. Spending increases, including on wages and a new pension law replaced indexation with an ad-hoc 20 percent increase of the monthly average pension, resulting in a budget deficit of 4.4 percent of GDP. Public debt continues its upward trend, reaching 63 percent of GDP by end-2024. Fiscal rules include a limit on the budget deficit of 3 percent of GDP and a limit on general government debt of 60 percent of GDP, requiring the government to commit to a 5-year corrective plan when these limits are breached.

Domestic risks are elevated and the external outlook more uncertain. Weak public investment, stalled productivity reforms, emigration, and slowing activity of key trade partners threaten growth in the medium-term. Meanwhile, high real wage growth without productivity gains and increased fiscal transfers could further fuel inflation and erode competitiveness. Trade policy shifts and shocks to FDI may suppress exports and tighten financial conditions.

Following the Executive Board discussion, Mr. Bo Li, Deputy Managing Director and Chair, issued the following statement:

Executive Board Assessment

In concluding the 2025 Article IV consultation with North Macedonia, Executive Directors endorsed staff’s appraisal, as follows:

The economy is expected to gain momentum, though risks are tilted to the downside. Growth is projected to reach 3.3 percent in 2025, driven by stronger domestic demand as public investment projects, including the Corridor 8/10d road project, intensify and consumption is supported by government transfers and real wage growth. However, inflation has accelerated with high food inflation despite administrative price controls and other interventions. Core inflation remains persistent fueled by strong wage growth. Domestic risks from weak public investment, emigration and stalled productivity reforms are elevated, while the external outlook has become more uncertain due to shocks to external demand from structural shifts in key partners and trade policy tensions. The external position in 2024 was assessed as stronger than the level implied by medium-term fundamentals and desirable policies.

A credible fiscal strategy is essential to rebuilding buffers, reducing debt and ensuring compliance with fiscal rules. This is key to maintaining market confidence, ensuring access to international capital, creating room for investment, and enhancing resilience against future shocks. The focus should be on:

• Controlling current spending: Further pension increases in September 2025 should be omitted and the authorities should return to a rule-based pension system in 2026—indexing only to inflation—to support consolidation while protecting pensioners’ purchasing power. Public wage increases should be limited to inflation in the near term. The authorities should strengthen oversight to ensure public wage increases are consistent with achieving the fiscal rules. Over time, unifying the fragmented wage negotiating system will help prevent unexpected budget pressures.
• Mobilizing revenues. Tax reforms should focus on reducing tax expenditures, limiting reduced rates and exemptions, improving tax compliance, and revamping property tax.

Structural fiscal reforms are needed to strengthen fiscal governance and improve spending efficiency. Key steps include implementing the Public Investment Management decree and manual, adopting the PPP law, and conducting spending reviews to optimize budget spending. Managing fiscal risks, especially from SOEs and major projects like the Corridor 8/10d road, is crucial. The state-owned electricity generator, ESM, requires investments in technology and efficiency improvements to lower production costs and expand production, while gradually reducing its role in the subsidized, regulated market. Risks to the budget remain if production expansion falls short of the ambitious goal. The operationalization of the Fiscal Council is a positive step and it is encouraged to strengthen its independent assessments.

Administrative price controls will not stem long-term food inflation and may create distortions and hinder competition in the sector. Food inflation remained elevated in 2025, despite frequent use of administrative price controls. Future use may delay price increases, quelling short-term inflation, but does not solve underlying structural factors and can lead to large price increases once measures are removed. Additionally, continued reactionary interventions create uncertainty that may deter potential entrants hurting competition. To counter inflation, the authorities should instead focus on tightening fiscal policy and maintaining a tight monetary stance.

Policy rates should remain on hold and liquidity measures should be tightened until inflation steadily declines. Given the recent acceleration in both headline and core inflation, the NBRNM should remain on hold until there is clear evidence of sustained disinflation, including in core. At the same time, liquidity conditions should be tightened using tools such as reserve requirements to absorb excess liquidity. The NBRNM must stay alert to inflationary risks from domestic factors, including wage and pension increases, as well as heightened external risks from trade uncertainties. If these risks materialize, the NBRNM should be prepared to tighten rates to prevent inflation from becoming entrenched.

Macro prudential settings may need to be tightened to slow credit growth. The implemented loan-to-value and debt service-to-income ratios help safeguard financial stability by reducing pressures in the real estate market and preventing higher levels of indebtedness. Staff support the NBRNM’s gradual tightening of the countercyclical capital buffer and additional capital requirements to ensure banks maintain adequate loss-absorbing and recapitalization capacity, in line with EU regulations. Should lending and real estate prices continue growing briskly, further tightening of macroprudential instruments may be warranted.

Preserving central bank autonomy is crucial for maintaining price stability, exchange rate stability, and financial stability. The recent amendments to the National Bank law, adopted without prior consultation with the NBRNM, reallocate a larger share of NBRNM profits to the budget and revert the profit retention mechanism to a static core capital number instead of being dynamic, based on monetary liabilities. These changes undermine the previously established risk-based profit retention, which was designed with IMF advice to strengthen the bank’s reserves, and risk weakening the financial and policy autonomy, and credibility of the NBRNM.

Structural reforms are needed to boost productivity, offset the drag from emigration, and advance in the EU accession process. Reducing informality through streamlined business registrations and expanded digital public services is a priority to improving the business environment and supporting productivity growth. Capital expenditures should be safeguarded in the budget and public investment management should be strengthened to prioritize high-impact projects. The ongoing road projects should be completed. Investing in education, incentivizing higher participation, particularly among women, better matching of skills, and simplifying work permit procedures for foreign workers would help address labor shortages. Expanding affordable childcare and gradually raising the retirement age of women would help to offset workforce losses from high emigration. Ad hoc adjustments to minimum wages should be avoided to contain inflation and preserve competitiveness. Public resource efficiency, accountability, and transparency could be improved through increasing digitalization, reassessing state aid schemes, and strengthening procurement systems and management of SOEs.

Governance reforms to improve predictability of legal and regulatory environment, functioning of the rule of law, and anti-corruption efforts are crucial. Improving judicial independence and impartiality would strengthen contract enforcement and help reduce informality. The Criminal Code should be aligned with international standards and resource adequacy in key anti-corruption institutions further enhanced. The predictability of the legal and regulatory environment could be improved by limiting the use of expedited procedures in Parliament, increasing stakeholder consultation, and consistently applying regulatory requirements. The upcoming new national anti-corruption strategy is an opportunity to accelerate reforms through stronger accountability and coordination.

Republic of North Macedonia: Selected Economic Indicators, 2020–30 (Year-on-year percentage change, unless otherwise indicated)

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030       Projections         Output         Real GDP -4.7 4.5 2.8 2.1 2.8 3.3 3.2 3.2 3.1 3.1 3.0 Domestic demand -5.3 5.9 5.8 -1.7 4.1 3.8 3.6 3.6 3.5 3.6 3.4 Exports -10.9 14.3 10.6 -0.6 -3.8 3.2 3.7 3.6 3.8 3.8 3.8 Imports -10.9 14.8 9.3 -2.1 -0.6 3.9 4.1 4.0 4.1 4.2 4.1 Contributions to growth 1/                     Domestic demand -7.2 8.1 4.1 0.5 5.0 4.7 4.5 4.5 4.4 4.5 4.3 Net exports 2.5 -3.6 -1.3 1.6 -2.2 -1.4 -1.3 -1.3 -1.3 -1.4 -1.3 Output gap (percent of potential GDP) -3.3 -1.8 -1.5 -1.5 -0.7 -0.4 -0.3 -0.1 0.0 0.0 0.0 Consumer prices                       Period average 1.2 3.2 14.2 9.4 3.5 3.4 2.2 2.0 2.0 2.0 2.0 End-period 2.3 4.9 18.7 3.6 4.3 2.3 2.0 2.0 2.0 2.0 2.0                       Central government operations (percent of GDP)                       Revenues 28.4 30.0 29.8 30.9 32.3 34.1 34.0 34.2 34.4 34.6 34.8 Expenditures 36.4 35.3 35.0 35.5 36.7 39.2 38.5 38.2 37.9 37.6 37.8 Of which: capital expenditures 2.4 3.2 3.5 4.8 3.0 4.9 4.9 5.0 5.0 5.0 5.2 Balance -8.0 -5.3 -5.2 -4.6 -4.4 -5.0 -4.5 -4.0 -3.5 -3.0 -3.0 Gross general government debt 2/ 50.8 52.7 50.4 50.8 54.8 52.9 54.5 55.4 56.1 56.2 56.2 Public and publicly guaranteed debt 2/ 3/ 59.4 61.3 58.4 58.7 63.0 61.2 62.7 63.5 64.2 64.3 64.2                       Savings and investment (percent of GDP)                       National saving 27.0 29.4 30.0 30.0 26.3 26.8 27.3 27.7 28.0 28.3 28.9 Public -5.6 -2.1 -1.7 0.2 -1.4 -0.1 0.4 1.0 1.6 2.1 2.3 Private 32.6 31.5 31.7 29.8 27.7 26.9 26.9 26.7 26.4 26.3 26.6 Foreign saving 2.9 2.8 6.1 -0.4 2.3 2.4 2.5 2.5 2.5 2.5 2.5 Gross investment 29.9 32.2 36.0 29.6 28.6 29.3 29.8 30.2 30.5 30.8 31.4                       Credit                       Private sector credit growth 4.9 8.0 9.3 5.3 10.3 9.2 8.7 8.1 7.0 6.8 6.6 Balance of payments Current account balance (percent of GDP) -2.9 -2.8 -6.1 0.4 -2.3 -2.4 -2.5 -2.5 -2.5 -2.5 -2.5 Foreign direct investment (percent of GDP) 1.4 3.3 4.9 3.3 7.1 4.7 4.0 4.0 4.0 4.0 4.0 External debt (percent of GDP) 78.7 80.9 81.5 77.9 79.9 76.7 76.8 76.6 75.6 75.1 74.7 Gross official reserves (millions of euros) 3,360 3,643 3,863 4,538 5,029 4,966 5,214 5,407 5,464 5,555 5,742 in percent of IMF ARA Metric 113 110 101 114 120 111 113 112 110 108 107 in percent of ST debt 102 109 82 100 97 93 101 101 111 110 113 in months of prospective imports 4.2 3.5 3.9 4.7 5.0 4.7 4.7 4.6 4.4 4.3 4.2                       Memorandum items:                       Nominal GDP (billions of denars) 669 729 816 898 949 1022 1082 1146 1208 1272 1343 Nominal GDP (millions of euros) 10,852 11,836 13,243 14,583 15,411 16,604 17,583 18,619 19,621 20,668 21,819                       Sources: NBRNM; SSO; MOF; World Bank; and IMF staff estimates and projections. National accounts are revised by SSO using ESA 2010. 1/ The inconsistency between real GDP growth and contributions to growth results from discrepancies in the official data on GDP and its components. 2/ The historical debt ratios differ slightly from the numbers reported by MoF due to using end-year debt in local currency divided by local currency GDP. 3/ Includes general government and non-financial SOEs.

[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.  

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

https://www.imf.org/en/News/Articles/2025/05/06/pr-25129-republic-of-north-macedonia-imf-concludes-2025-article-iv-consultation

MIL OSI

Source: IMF – News in Russian

May 6, 2025

Washington, DC: An International Monetary Fund mission, led by Magnus Saxegaard and comprising Thomas Gade, Amit Kara, and Yurii Sholomytskyi, conducted discussions for the 2024 Article IV consultation with Iceland virtually during April 7-11, 2025, and in Reykjavik, Iceland, during April 28 to May 5, 2025. At the conclusion of the visit, the mission issued the following statement:

A successful tightening of macroeconomic policies has slowed the economy and reduced imbalances accumulated after the pandemic. The challenges now are to fully return inflation back to target while ensuring a soft landing for the economy; to build resilience by gradually increasing fiscal buffers; and to strengthen productivity and further diversify the economy to support medium-term growth and reduce Iceland’s vulnerability to shocks.

The economy slowed sharply in 2024, but growth is expected to pick up in 2025 and medium-term prospects remain favorable. Growth slowed to 0.5 percent in 2024 (from 5.6 percent in 2023) due largely to idiosyncratic factors (e.g., a disappointing fishing season and constraints on energy supply) that reduced exports, as well as subdued consumption growth. Growth is expected to rise to 1.8 percent in 2025 and 2.4 percent in 2026 supported by a recovery in exports, higher real wages, and continued monetary easing. The direct impact of escalating global trade tensions is projected to be limited given that most goods exports are destined for Europe; this projection assumes that the pharmaceutical sector, which is more reliant on the US market, remains exempt from tariffs. However, Iceland will be indirectly affected by lower growth in its trading partners. Inflation is projected to remain sticky due to elevated inflation expectations and still high wage growth, declining gradually to the Central Bank of Iceland’s (CBI’s) 2.5 percent inflation target in the second half of 2026. The medium-term growth outlook is positive, with the expansion of higher value-added export-oriented sectors expected to boost productivity growth, and migrant labor inflows facilitating a modest increase in employment.

Risks to growth are tilted to the downside while risks to inflation are broadly balanced. The impact of rising trade tensions could be larger than projected if US tariffs are extended to pharmaceuticals products, or if Iceland is affected by potential EU retaliation. Also, a reduction in the number of tourists travelling to and from the US could negatively impact tourism. Inflation could rise if trade tensions trigger supply chain disruptions or capital flight weakens the exchange rate. Conversely, capital inflows could put upward pressure on the exchange rate and weaken competitiveness. On the domestic side, attacks on physical or digital infrastructure could disrupt payment flows and thus economic activity and financial stability. A continuation of recent years’ dry weather could curtail energy supply and weaken exports. Second-round effects from higher wage growth could keep inflation elevated, while a premature loosening of monetary policy could further de-anchor inflation expectations. Upside risk include a reduction in household savings that would bolster consumption, and a faster-than-anticipated expansion of activity in pharmaceuticals and aquaculture.

Fiscal Policy: Building Buffers to Bolster Resilience

The authorities’ fiscal targets are suitably ambitious. The Medium-Term Fiscal Strategy (MTFS) projects a general government deficit this year of 1.3 percent of GDP, close to staff’s projection of 1.2 percent of GDP and down from 3.5 percent of GDP in 2024. The resulting 0.6 percentage point contractionary fiscal impulse is appropriate given still elevated inflation. The authorities’ medium-term fiscal targets, which entail turning the fiscal deficit into a surplus by 2028, are suitably ambitious considering that Iceland’s public indebtedness is higher than that of most Nordic countries despite the economy being more shock prone.

The consolidation measures in the MTFS will help the authorities achieve their fiscal targets. Staff welcomes that this year’s MTFS identifies all fiscal measures planned by the authorities to achieve their medium-term fiscal targets; this significantly increases the credibility of the consolidation. Measures appropriately include a combination of expenditure reductions (e.g., streamlining operations and merging of institutions) and revenue measures (e.g., expanding kilometer-based taxation to all vehicles and increasing natural resource rent taxation on tourism and fisheries). Staff projections that only include measures that have been presented to Parliament in a legislative proposal, indicate that about 0.5 percent of GDP in additional measures will be needed over the next five years to meet the authorities’ targets. The measures outlined in the MTFS would cover this gap, but additional fiscal effort could be necessary if spending increases more than anticipated or if the yield from revenue measures falls short of expectations (see below).

Increasing infrastructure spending while safeguarding fiscal sustainability would bolster Iceland’s growth prospects. The government’s intention to scale up public investment is welcome given infrastructure gaps in transport and energy. However, the MTFS projects a medium-term decline in government investment as a share of GDP compared to recent years. Staff recommends to, at a minimum, maintain the current level of government investment within the MTFS deficit targets. As noted in the MTFS, identifying opportunities for Iceland’s pension funds to scale up their financing of infrastructure in a manner consistent with their fiduciary duties could help complement these efforts, though care should be taken to contain any increase in fiscal risks. Partnering with multilateral investment banks or international infrastructure funds could provide useful expertise with private financing of infrastructure projects. Streamlining permitting and licensing procedures would help speed up infrastructure deployment.

Additional fiscal effort could be required if planned measures fall short of expectations, or to scale up government investment. In such a scenario, the authorities could consider: (i) increasing the preferential VAT rate and/or limiting the items that benefit from it; (ii) increasing housing taxation (see below); (iii) streamlining R&D incentives including by reassessing the 2020 increase in the ceiling on eligible business R&D expenditure (see below); and (iv) carrying out a comprehensive review of public expenditure to identify potential savings.

Activation of revised fiscal rules in 2026 is welcome; however, their credibility would be enhanced by strengthening the Fiscal Council.

• The revised fiscal framework—which broadly aligns with staff’s recommendations in the 2024 Article IV—includes a net expenditure growth rule instead of the previous budget balance rule. It preserves the 30 percent of GDP net debt ceiling though the speed at which this is to be achieved will be more flexible than in the past. The revised framework will allow the authorities to factor in the state of the economy in their consolidation plans and reduce procyclicality.
• The Fiscal Council, which will be responsible for monitoring compliance with the fiscal rules, should be tasked with evaluating the macroeconomic and fiscal projections underpinning the MTFS. The intention is also that the Council will be responsible for monitoring productivity developments and for making proposals for reforms. This would require a significant increase in the capacity and resources of the Fiscal Council.
• To bolster transparency and enable the Fiscal Council to monitor fiscal developments and compliance with the fiscal rules on an ongoing basis, the authorities should start publishing fiscal data corresponding to the coverage of the fiscal rules on a quarterly rather than annual basis as is currently the case, and ensure that these data are independently verifiable. Expanding the coverage of the budget and the fiscal rules to encompass the entirety of the central government would facilitate these efforts. This would also reduce incentives to shift spending and borrowing to parts of the government not covered by the fiscal rules.

Monetary Policy: Calibrating the Pace of Monetary Easing

As inflation declines toward the target, the policy rate should be reduced. The current monetary stance is appropriately tight given still elevated inflation and inflation expectations. Staff’s inflation forecast, which envisions reaching the 2.5 percent target in the second half of 2026, is in the IMF’s view consistent with a 250 basis points reduction in the policy rate over the next 4–5 quarters. This policy trajectory, which maintains a tight policy stance (but progressively less so) until inflation expectations become reanchored to the inflation target, would balance the trade-offs between bringing inflation sustainably to target and the risk to the economy from an overly restrictive policy stance. Persistent wage increases above productivity growth or a rise in imported inflation would warrant a more gradual easing of the monetary policy stance, while indications that inflation is likely to undershoot the target on a sustained basis would call for a more rapid reduction in the policy rate. The current elevated uncertainty suggests the pace of monetary easing should be guided more than usual by incoming data. As uncertainty declines the CBI should transition to a more forecast-based inflation targeting environment to increase predictability and reduce financial market volatility.

The CBI’s decision to commence regular purchases of foreign exchange is opportune given current favorable market conditions and will strengthen its ability to stabilize the foreign exchange market during times of stress. The purchase program, which will be revised as conditions warrant, will help offset a projected decline in reserve coverage over the next two years. Staff agree that, given the current uncertain external environment and the shock prone nature of the economy, it is prudent to maintain a level of reserves well above the lower end of the 100-150 percent of the Fund’s Reserve Adequacy (ARA) range. As noted in the 2024 Article IV consultation, the authorities should also explore options to gradually deepen the foreign currency derivatives market when conditions allow, to encourage greater participation of foreign investors in the domestic bond market and to facilitate hedging of foreign currency risk.

Financial Sector: Maintaining a Robust Financial System

The banking system remains resilient and systemic risks are contained, but pockets of vulnerabilities remain that require continued vigilance. Financial institutions are well capitalized and have ample liquidity buffers, while non-performing loans remain low compared to their pre-pandemic average. The financial cycle has decelerated but remains somewhat elevated, while the CBI’s domestic systemic risk indicator has increased slightly although it is below its long-term average. These indicators suggest risks are primarily concentrated in the housing market. An abrupt fall in house prices combined with higher-for-longer interest rates and an economic slowdown could result in a deterioration in asset quality. Risks are partially mitigated by conservative loan-to-value ratios and the strong equity position of most borrowers. Corporate credit risk has increased modestly, including in the hospitality sector, and could rise further if rising trading tensions trigger a decline in tourist arrivals. Meanwhile, cybersecurity threats are an increasing concern, and staff welcomes the authorities’ efforts to enhance operational security and enhance the resilience of the domestic payment system.

The current macroprudential stance is broadly appropriate, though there may be scope for some easing if financial conditions improve as anticipated. Overall capital requirements on Icelandic banks are relatively high compared to other European countries, bolstering banks’ resilience in a shock prone economy. While these requirements are broadly appropriate given still elevated risks in the housing market, there may be scope for some easing if systemic risks recede. It would be prudent to defer such a decision until the impact of the Capital Requirements Regulation (CRR) III—expected to take effect by mid-2025—is clear. Any easing of the macroprudential stance should take care to safeguard the availability of releasable capital under the countercyclical capital buffer (CCyB). Borrower-based measures (BBMs) have contributed to contain household credit risk and should remain on hold for now. The government’s plans to reduce the prevalence of CPI-indexed mortgage loans should be carefully timed given the beneficial impact indexation has had on borrower resilience and financial stability.

Sustaining the momentum in implementing Financial Sector Assessment Program (FSAP) recommendations will require continued efforts. Staff welcomes the significant progress achieved in implementing the recommendations from the 2023 FSAP. Since the 2024 Article IV, progress has been made on operationalizing an Emergency Liquidity Assistance (ELA) framework, while efforts are ongoing with technical assistance from the Fund to enhance AML/CFT supervision of banks. Steps have been taken to strengthen the supervision of pension funds, but more progress is needed on legislative changes to enhance pension fund governance, internal risk controls, and risk management. Focusing on incremental changes rather than comprehensive reforms may facilitate progress moving forward. Further steps are also needed to safeguard the independence and effectiveness of the CBI’s supervisory activities, including through a streamlined and independent budgetary process for financial supervision and improved legal protection for supervisors. Lastly, efforts should continue to strengthen the CBI’s and the financial sector’s operational risk management capacity.

Structural Policies to Boost Productivity and Diversify the Economy

Investments in physical and human capital, along with continued efforts to promote innovation and improve allocative efficiency are needed to sustain productivity growth.

• While the level of labor productivity is high, productivity growth has slowed since the global financial crisis due to lower total factor productivity (TFP) growth and decreasing capital intensity. Staff analysis suggests this is largely the result of a lower share of jobs in high productivity sectors (likely due to the financial sector shrinking to more sustainable levels and the expansion of the tourism sector) rather than a decline in within-sector productivity growth. Meanwhile, the share of fast-growing firms that can drive economy-wide productivity gains is below the EU average.
• The authorities’ ambition to increase productivity growth is welcome. To achieve this they should: (i) focus on improving infrastructure to facilitate firms’ access to domestic and international markets; (ii) continue their efforts to promote innovation and the creation of more high-growth businesses; (iii) work with stakeholders in the labor market to strengthen incentives for pursuing higher education in fields where there is a shortage of skills; and (iv) streamline professional licensing requirements for foreign nationals.

Incentives to promote innovation and diversification of the economy are bearing fruit, but there is scope to improve the efficiency of R&D support schemes. Generous tax incentives have made Iceland one of the most attractive jurisdictions in the OECD for R&D investment and contributed to the emergence of several fast-growing innovative firms. However, the sharp increase in public R&D spending has raised concerns about budgetary costs and efficiency. Plans to revise the R&D legislation provide an opportunity to clarify eligibility criteria and thus increase the predictability of the scheme. Also, as noted previously, there may be merit in reassessing the 2020 increase in the ceilings on eligible business R&D expenditures given that it primarily benefits medium and large firms where research suggests R&D support has less impact. Allowing businesses to deduct R&D expenses from payroll taxes could bolster the impact of the scheme given evidence that payroll tax offsets have a greater impact on firms’ R&D tax expenditure. This would also reduce administrative costs by eliminating the need for refunds to loss-making companies.

Integration of Artificial Intelligence (AI) could bolster productivity growth. Iceland’s strong digital infrastructure, relatively high levels of human capital, and robust legal framework suggest that it is well placed to benefit from AI. Staff analysis indicates that the proportion of jobs that are well positioned to take advantage of productivity gains from AI is higher than in other advanced economies. Conversely, the share of jobs at risk of displacement from AI is smaller, though still significant. To mitigate potential disruptions to the labor market the authorities should provide opportunities for re-skilling and scale up active labor market policies to facilitate the movement of workers between sectors and provide support to the most vulnerable.

Further efforts are needed to develop a housing strategy that meets the needs of Iceland’s growing population. The government’s plans to tighten control over short-term rentals and increase the supply of housing could help improve housing affordability. Targeted homeowner assistance programs can play a complementary role, though such programs would need to be designed in a way that minimizes fiscal risks and risks to macroeconomic and financial stability. Housing taxation can also play a supportive role in reducing housing market imbalances. For instance, increasing capital gains taxation on secondary homes and investment properties and raising the tax rate on vacant lots in urban areas could not only raise revenue but also play a supportive role in curbing speculative demand and incentivizing supply.

The IMF team would like to thank the authorities and other interlocutors for their generous hospitality and constructive dialogue.

https://www.imf.org/en/News/Articles/2025/05/05/mcs-iceland-staff-concluding-statement-of-the-2025-article-iv-mission

MIL OSI

Source: IMF – News in Russian

May 2, 2025

Washington, DC—On April 18, the Executive Board of the International Monetary Fund (IMF) approved the 2026-28 financial years (FY26-28) medium-term budget. While proving resilient in the post-pandemic period, the global economy is at a pivotal juncture amidst transformations in the economic landscape and shifting policy priorities around the world. Reflecting this complex economic backdrop, member countries continue to look to the IMF for support across the range of its operations.

While the issues that the Fund has been called on to address have become increasingly complex over the years, the Fund’s budget is roughly the same in real terms as it was two decades ago, reflecting the Fund’s longstanding emphasis on budget discipline. In the current context, budget management remains challenging given elevated demands and high budget execution rates, requiring difficult tradeoffs. In this context, the Board emphasized the importance of continued prudent stewardship of members’ resources and continued reprioritization to ensure that the Fund can keep responding with agility to the needs of its membership.

The approved net administrative budget for FY26 (May 1, 2025–April 30, 2026) totals US$1,551.7 million, consistent with projected income and the path for the precautionary balances target. The maximum amount of unused budget resources that can be carried forward from previous years will be reduced from 5 to 4 percent in FY26, with this level expected to decline further to 3 percent in FY27.

The FY26 capital budget is set at US$132.5 million and will support both facilities-related needs and IT-intensive investments, supporting end-of-life facilities replacements, field office support, ongoing IT-intensive modernization and legacy replacements, as well as investment in Artificial Intelligence and in the Fund’s cyber-security posture.

Additional information can be found in the staff paper on the FY26-28 Medium-Term Budget.

https://www.imf.org/en/News/Articles/2025/05/02/pr-25127-imf-executive-board-approves-fy2026-fy2028-medium-term-budget

MIL OSI

Source: IMF – News in Russian

May 2, 2025

• The Fund’s General Resources Account (GRA) net income is projected to remain strong for FY 2025, and is estimated at about US$3.0 billion (SDR 2.3 billion). The positive net income trend is expected to be maintained in FY 2026.
• The Executive Board approved the first annual distribution of net income, transferring about US$1.81 billion (SDR 1.38 billion) from the GRA into the Interim Placement Administered Account (IPAA) established in October 2024 as part of a framework to facilitate the generation of Poverty Reduction and Growth Trust (PRGT) subsidy resources.
• Precautionary balances are expected to remain above the medium-term target of SDR 25 billion and to reach SDR 25.9 billion (US$34.4 billion) by end FY 2025, after the distribution into the IPAA.

Washington, DC: On April 18, 2025, the Executive Board of the International Monetary Fund (IMF) completed its annual review of the Fund’s income position for the financial year (FY) ending April 30, 2025.

FY 2025 Income Position and Related Decisions

GRA net income, before the distribution and related transfer of about US$1.81 billion (SDR 1.38 billion) into the IPAA, is anticipated at about US$3.0 billion (SDR 2.3 billion). Total comprehensive income for FY 2025, including the estimated pension-related remeasurement gain[1] and the estimated retained income in the investment account of about US$1.3 billion (SDR 1.0 billion) in addition to GRA net income, is expected to reach US$4.5 billion (SDR 3.4 billion).

Given the strong income position, the Fund’s precautionary balances, after the distribution into the IPAA, are expected to increase to US$34.4 billion (SDR 25.9 billion) at the end of FY 2025, above the medium-term target of SDR 25 billion.

The Executive Board adopted several decisions that are relevant to the Fund’s finances. These included decisions to: (i) reimburse costs to the GRA for the expenses of conducting the business of the SDR Department and for the operational cost of administering the Resilience and Sustainability Trust (RST); (ii) transfer a portion of the income from the Fixed-Income Subaccount and the Endowment Subaccount to the GRA for meeting FY 2025 administrative expenses; (iii) place any pension-related remeasurement gain[2] to the Special Reserve; (iv) distribute US$1.81 billion (SDR 1.38 billion) from net income to facilitate new PRGT subsidy contributions and to place the distribution amount in the IPAA; (v) place residual GRA net income to the Special Reserve; and (iv) transfer currencies equivalent to the increase in the Fund’s reserves from the GRA to the Investment Account.

Projections of the Fund’s income and precautionary balances remain susceptible to risks stemming from the uncertain global economic environment and financial market volatility. The FY 2025 annual financial statements will update the income position for the impact of changes in key assumptions made at the time of the April projections.

FY 2026 Income Position and Lending Rate

GRA net income for FY 2026 is expected to remain strong, with projected annual net income of about US$2.3 billion (SDR 1.7 billion), before any distribution. However, these projections remain susceptible to financial market volatility, intensifying downside risks to global growth, and uncertainties around the global interest rate environment that are expected to impact the performance of the Fund’s investment and retirement plan asset portfolios. The projections are also sensitive to the timing and amounts of disbursements under approved and projected lending arrangements.

The IMF’s basic lending rate for member countries’ use of GRA credit is the SDR interest rate plus a fixed margin. The Executive Board agreed to keep the margin for the rate of charge at 60 basis points over the SDR interest rate, the level set by the Executive Board in October 2024 for the rest of FY 2025 and FY 2026.

[1] IAS 19 ‘Employee Benefits’, requires the actuarial remeasurement of post‑employment obligations.

[2] In case of a remeasurement loss, such loss up to SDR 1,020 million would be charged against the General Reserve and any loss exceeding that amount would be charged against the Special Reserve.

https://www.imf.org/en/News/Articles/2025/05/02/pr-25128-imf-executive-board-completes-review-of-the-funds-income-position-for-fy-2025-and-fy-2026

MIL OSI

Source: IMF – News in Russian

May 2, 2025

Washington, DC: An International Monetary Fund (IMF) mission led by Mr. Matthew Gaertner held the 2025 Article IV consultation and discussions on the second review under the Policy Coordination Instrument (PCI) with the Tajikistan authorities during April 2-15, 2025, in Dushanbe. At the conclusion of the mission, Mr. Gaertner issued the following statement:

Economic Developments, Outlook and Risks

Strong broad-based growth continued in 2024, and the external position remained favorable. Real GDP increased 8.4 percent in 2024, marking the fourth consecutive year of growth above 8 percent, as strong momentum in mining, manufacturing and agriculture was underpinned by public and private investment. Strong financial inflows, including remittances, have also supported domestic demand and liquidity and contributed to a current account surplus of 6.2 percent of GDP in 2024. This alongside the NBT’s purchases of domestic gold production has boosted FX reserves from $3.6 billion at end-2023 to $4.7 billion at the end of February 2025, amounting to 7 months import coverage.

Inflation remains well contained within the NBT’s target range. Twelve-month inflation stood at 3.7 percent in February, within the NBT’s updated target range of 5 percent (±2 percent) for 2025, reflecting stable prices for imported food and fuel and an appreciation of the somoni against key trading partner currencies. Reserve money growth has moderated since mid-2024 as the NBT stepped up its sterilization efforts but remained strong at 32 percent (y/y) in February, boosted by the NBT’s gold purchases.

Banks’ asset quality continued to improve in 2024, amid strong growth in consumer lending. Banks’ NPL ratio declined to 7.0 percent in February as they continued to clean up their balance sheets, largely through write-offs of legacy NPLs. Credit to the private sector grew at 29 percent (y/y) in February, boosted by a continued expansion of banks’ deposit base. This has been primarily driven by household loans in local currency, supported by the introduction of new retail lending products.

The medium-term outlook appears positive. Real GDP is projected to increase by 7 percent in 2025, retaining the current strong momentum. Twelve-month inflation (y/y) is projected to remain close to the mid-point of the NBT’s target range in 2025 and 2026, in line with stable inflation expectations. The current account surplus is expected to narrow in 2025 as financial inflows stabilize, with FX reserves projected to remain at comfortable levels. Financial inflows are expected to normalize over the medium term after the strong inflows experienced since 2022, heightening the importance of continuing to advance structural reforms to strengthen potential growth over the medium-term.

Risks to the outlook are tilted to the downside, in the context of significant regional and global uncertainty. A pronounced decline in financial inflows due to a less favorable environment for remittances or a slowdown in Tajikistan’s key trading partners would adversely affect growth, fiscal performance, and the banking sector. More frequent and severe natural disasters and heightened security risks can also strain budget resources. On the upside, continued strength in gold prices and rising demand for rare earth metals could attract increased investment in the mining sector.

Fiscal Policy

Fiscal performance remained well within the program target in 2024, with a fiscal surplus of 0.3 percent. The favorable fiscal outturn was underpinned by stable revenue growth despite a reduction in the VAT rate from 15 to 14 percent, while externally financed capital spending was lower than planned. Revenue collection reflected continued improvements in tax and customs administration supported by digitalization measures. The 2025 budget envisages a fiscal deficit of up to 2.5 percent of GDP, conditional on available financing. In this context, continuing to expand the domestic debt market is key to diversifying sources of financing. The MOF successfully launched market-based auctions of government securities in 2024; establishing a robust secondary market for these instruments will help to expand the investor base and further deepen the market.

The fiscal deficit target of 2.5 percent of GDP remains an important anchor to ensure that debt remains on a favorable medium-term trajectory. Prudent fiscal policy coupled with strong GDP growth has contributed to a notable reduction in the public debt ratio over the past few years, with public debt declining to 25 percent of GDP at the end of 2024. Public debt is assessed as sustainable but remains at high risk of distress due to large debt service obligations during 2025-2027; the first semi-annual Eurobond repayment was completed as planned in March. Building fiscal buffers is key to mitigating fiscal risks from potential shocks to revenue and expenditure in the context of the uncertain external environment, with contingency plans for spending reprioritization to protect social assistance and other critical spending.

Improved revenue mobilization and spending efficiency are key to increasing fiscal space for priority social and development projects. The Medium-Term Revenue Plan (MTRP) aims to raise total revenues by at least 2 percentage points to 26 percent of GDP in 2026 through a combination of tax policy, tax administration and SOE reform measures. In line with the MTRP, the MOF has taken steps to improve revenue mobilization through the expansion of digitalization of payments. Moreover, tax exemptions granted to several large investment projects were discontinued in 2024. A time-bound action plan is essential to anchor a further streamlining of tax exemptions and customs preferences over the medium-term. On the expenditure side, strengthening appraisal, selection and oversight of internally financed capital projects are crucial for enhancing the efficiency of public investment.

Strong corporate governance and oversight is essential to strengthen SOE efficiency and minimize fiscal risks. Recent reforms include the expansion of the MOF’s financial monitoring coverage from 27 SOEs to 77 entities with state participation, and amendments to the regulations for SOE board composition to ensure that board members are appointed through transparent and competitive procedures in line with best practices. The MOF has also continued to expand the scope of the annual fiscal risk statement, which provides an overview of SOE performance, including profitability, leverage, and budget allocations to SOEs. The publication of an updated SOE list and completion of the ongoing sectorization exercise will also improve monitoring and oversight.

Greater efforts are needed to improve the financial performance of the electricity sector. Low collection rates for key electricity consumers, together with high technical and commercial losses and end-user tariffs that are below cost recovery levels has led the state electricity generation company Barki Tojik to accumulate sizable arrears to suppliers and creditors. Reducing quasi-fiscal losses in the electricity sector will require sustained efforts to improve collection rates for the largest electricity consumers, as well as implementation of the authorities’ strategy to roll-out smart metering, increase penalties for electricity theft and improve cost controls across the electricity sector. The electricity tariff was increased by about 15 percent in April 2025, and further annual tariff adjustments are envisaged to reach cost recovery by 2027.

Monetary, Exchange Rate and Financial Sector Policies

Inflation remains well contained, but strong credit growth warrants continued vigilance. The NBT lowered its inflation target from 6 to 5 percent (±2 percent) for 2025 to reflect well-anchored inflation expectations, and the policy rate was lowered by 25 basis points to 8.75 percent in February 2025 as inflation remains close to the lower bound. Although the real policy rate is still relatively high at about 5 percent (based on realized inflation), monetary policy should remain data-driven and vigilant to potential upward demand pressure on inflation from strong credit growth and robust financial inflows. Proactive liquidity management also remains essential to moderate the impact of the NBT’s gold purchases and FX interventions on the money supply.

Enhancing exchange rate flexibility is essential to build resilience to external shocks. The NBT has taken several measures to modernize the local FX market, including ending auctions of inward transfers improving the mechanism for executing public sector FX transactions; enhancing the dissemination of information on FX rates; and introducing price-based auctions for FX interventions to facilitate price discovery. The NBT should also aim to limit its FX operations only to avoid disorderly market conditions to facilitate development of the FX market and further support greater exchange rate flexibility.

Strong macroprudential oversight and banking supervision are key to mitigating external risks to financial stability. The banking system has strengthened its balance sheet following the resolution of two troubled banks but may face possible challenges from the volatile external environment and any reversal of recent inflows. Strong lending to households warrants careful oversight of macroprudential norms to ensure prudent lending standards, and close monitoring of maturity mismatches and funding- and asset-side concentration risk. The planned introduction of macroprudential tools and forward-looking stress tests is essential to manage risks posed by strong credit growth.

Structural Reforms

Governance and transparency reforms across economic sectors aim to foster sustainable and inclusive growth. Structural reforms are underway to close existing governance gaps across the public and private sectors through upgrades to the legal and regulatory frameworks. The reforms aim to (i) improve public sector efficiency; (ii) foster financial and private sector development; and (iii) promote an enabling investment climate for private sector-led growth.

Transparent governance and policy frameworks and robust financial safety nets are key to further strengthen trust in public institutions. Good governance fosters macro-financial stability both directly and indirectly by enhancing the credibility and effectiveness of macroeconomic policies. Transparent corporate ownership is critical to promote an enabling business climate based on the rule of law and prudent AML-CFT standards.

Timely and comprehensive macroeconomic data is essential to economic policymaking. The authorities have started publishing fiscal statistics in line with GFS standards and broadened the coverage of state-owned enterprises. Compilation of quarterly demand-side GDP data and expanding the use of GFS-based fiscal data would further strengthen data quality.

Discussions on the policies to complete the second review under the PCI are well advanced and will continue following this mission. The mission would like to thank the Tajik authorities for their hospitality and close collaboration and express its appreciation for the constructive and insightful discussions.

 

https://www.imf.org/en/News/Articles/2025/05/02/mcs-tajikistan-staff-concluding-statement-for-the-2025-article-iv-mission

MIL OSI