THE IMPACT OF THE CRISIS ON THE BALANCE OF PAYMENTS - THE CASE OF MACEDONIA (WHEN VULNERABILITIES COME TO THE FORE)

Abstract

The BoP position of the Republic of Macedonia is a textbook example of the reflection of the stages of a business cycle on the external sector of a small and open economy. The upswing and peak stages of the cycle were reflected in the increased amounts of FDIs and private transfers flowing into the country, the import induced by these investments and the higher personal and government consumption, as well as in the peak of the portfolio investments. The early signs of the recession were first felt by the reduction in exports and FDIs and the withdrawal of the foreign portfolio investors. After the initial shock in the current account, the deficit is beginning to take moderate levels as the import demand is slowing down. The major risk caused by these movements is the one related to the maintenance of the exchange rate at the fixed level. Although one may assume that the exchange rate adjustment is a proper tool to solve part of the large trade gap and alleviate BoP pressures, yet this is not straightforward. The cost-benefit analysis strongly suggests that any change in the exchange rate will pose much of a harm, than a benefit. This is particularly being supported by the previous research, which revealed the price elasticity of the Macedonian exports to be very low. Also, no study has found the exchange rate to be misaligned with the fundamentals, up to now, thus pinpointing the problem of structural, rather than price competiveness as an issue. The expectations are that the recovery in the BoP positions will not be fast and easy. Having in mind the structure of the Macedonian exports, one could reasonably expect that the impact of the higher world demand for metals will impact their prices and the value of the Macedonian exports of metals with a significant time lag. This creates an obligation for the Government to consider this issue with higher urgency and propose measures for restructuring the trade balance of the country which would help diminish this kind of vulnerabilities for the future.