Tighter monetary policy pays dividends
Overview:
The combination of a fixed exchange rate regime and a large current account deficit made the Macedonian economy vulnerable to a slowdown in external financing inflows as the global financial crisis worsened. The level of foreign exchange reserves fell sharply as the central bank tried (successfully) to defend the peg to the Euro. A small fiscal deficit, low public debt, a healthy banking sector and a sizable cushion of FX reserves gave the authorities the basic wherewithal to defend the currency. They then responded appropriately by tightening monetary policy and minimising the deterioration in the fiscal deficit with offsetting expenditure cuts. Now that the balance of payments situation is stabilising the central bank is slowly reducing interest rates and the Government aims to cut the fiscal deficit in 2010.