PDPL 3

closed

The Third Programmatic Development Policy Loans (PDPLs) for Macedonia are to support the Government's medium-term reform program aimed at promoting growth and job creation through improvements in the investment climate and strengthening the governance and efficiency of the public sector. The reform program is consistent with the Government's aspiration for European Union (EU) integration and eventual EU membership. The current capacity of some public sector institutions to implement an ambitious reform agenda sustained over several years remains relatively weak. However, the risk is mitigated through the use of three donor financed grants providing technical assistance in key areas of the reform program and from Bank investment projects in the areas of health, social protection, judiciary, and the business environment. The risk is further mitigated through close cooperation with other donors working in these reform areas. The country also faces macroeconomic risks. Real Gross Domestic Product (GDP) growth picked in 2007, but still remains moderate compared with other countries in the region and could be negatively affected by ongoing turmoil in international financial markets and projected slowdown in the EU. Inflation has begun rising, in part due to higher prices for food and imported energy, and stronger expansion in domestic demand. The current account deficit is projected to widen measurably from one of the lowest levels in the region. Mitigating factors include the possibility that structural reforms, including those supported by the PDPL series, will help stimulate growth in productivity and exports and increase domestic saving. Further, ultimate improvements in the political dialogue should speed EU integration and, along with it, investor confidence. To the extent that the improved investor confidence helps attract larger inflows of foreign direct investment, even a larger current account deficit could be financed without reliance on foreign borrowing.