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More Aid for Macedonia? - 2002-02-21

Though the International Monetary Fund declines to lend it more money, the former Yugoslav Republic of Macedonia is nevertheless about to receive a substantial infusion of foreign assistance at a donor's conference next month. Aid donors are ignoring what the IMF considers to be the Macedonian government's lax economic policies in order to reward it for taking a bold political stance.

After being delayed four times, the donors' conference for Macedonia is scheduled for Brussels on March 12. Donors, mainly in Western Europe, are expected to commit $173 million in aid for this year. Much of the cash, some already distributed, will be used to repair infrastructure in areas damaged during last year's insurgency by ethnic Albanian rebels.

Typically, the IMF decides whether a government's policies are stringent enough to assure that aid money will be productively used. The IMF does not believe that is the case in Macedonia, where enterprise restructuring lags and the government's budget deficit is very high, mainly because of increased military spending.

Nevertheless, other lenders are willing to support Macedonia because they believe the government should be rewarded for taking the political heat from the implementation of an unpopular peace agreement giving new powers to the Albanian minority.

Sam Vaknin, an Israeli economist who last year was an advisor in the Macedonian finance ministry, worries that the new aid money will be misused. "Previous funds provided by the European Union and even by the World Bank and the International Monetary Fund, and in a series of donor conferences, have been squandered," he says. "The money has not been used properly. In a single case of funds provided for the construction of a railway, it was found in an audit, that more than 90 percent of the funds have vanished."

Biswajit Bannerjee has been the IMF official responsible for Macedonia for the past three and one-half years. He says that because the IMF is not lending to Macedonia, the responsibility for monitoring how the aid money is used shifts to the donor countries. Mr. Bannerjee cautions Macedonian policy makers to resist pressures for profligate spending.

"The challenge will be to reverse the fiscal expansion of 2001 and continue to strengthen the fiscal balances," says Mr. Bannerjee. "Because, over the medium term, policy tensions will arise because of new expenditure needs directly out of the peace framework agreement... There will be a lot of temptations to have an expansionary fiscal stance. And I think those demands will have to be rebuffed."

But Sam Vaknin is not optimistic. He notes that with an election coming later this year, fiscal discipline will be particularly hard to achieve. He is unsettled by the absence of the conditions that accompany an IMF-approved loan.

"The IMF has been sidestepped and sidetracked for political reasons," says Mr. Vaknin. "This undermines not only the IMF's ability to monitor funds given through a donors conference, it also undermines the message the IMF has been sending to Macedonia for the past decade. A message of reform, institution building, and the construction of a free market economy."

Worse, Mr. Vaknin fears that instead of taking responsibility for its economic future, Macedonia is becoming dangerously dependent on outside assistance. "This is the continuation of the former republic of Yugoslavia, where Macedonia benefited from unilateral transfers from Belgrade to the tune of 40 percent of its gross domestic product," he says. "So Macedonia is a welfare case. So instead of weaning Macedonia off its addiction, the forthcoming donors conference is going to enhance this addiction and entrench it."

Biswajit Bannerjee of the IMF is less pessimistic. He notes that donors seek continued IMF engagement in Macedonia and that if government policy becomes more disciplined, the IMF could resume lending in the second half of this year.