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What's Wrong With Macedonia's Inflation and Trade Deficit Figures?

Sam Vaknin, Ph.D. - 6/19/2008

Something is not right with Macedonia's statistics.

I. TRADE DEFICIT

Macedonia's trade deficit in the first FOUR months of 2008 ballooned to 903 million USD, almost double the figure for the same period in 2007.

If this continues, Macedonia's trade deficit will equal 2.7 billion USD, or 35% of the GDP, an unprecedented figure and one of the highest in the WORLD.

But who is paying for all this?

There are FIVE SOURCES of foreign exchange flows that are then used to cover (pay for) the trade deficit:

1. Remittances from Macedonian workers abroad, as well as other unilateral transfers. These more or less stabilized over the last 8 months and now
stand at 1.8 billion USD annually.

Contribution to trade deficit coverage in first four months: c. 400 million USD.

2. Borrowing in foreign capital markets - virtually non-existent. Macedonia has issued Eurobonds only once, a few years ago, and these amounted to a paltry 150 million euros.

Contribution to trade deficit coverage in first four months: ZERO

3. Foreign aid and multilateral credits from international financial institutions.

Contribution to trade deficit coverage in first four months: c. 50 million USD net.

4. Using Macedonia's foreign exchange reserves to finance the trade deficit

But, according to Narodna Banka, foreign exchange reserves declined by a mere 22 million euros this year, owing mainly to interventions in the foreign exchange markets.

Contribution to trade deficit coverage in first four months: ZERO

5. Foreign Direct Investments (FDI)

The government claims that FDI reached 100 million euros in the first months of the year.

Contribution to trade deficit coverage in first four months: c. 200 million USD

Thus, the SOURCES of paying for (covering) the trade deficit give us 650 million USD, in the BEST of cases.

Who paid the difference between 903 million and 650 million USD?

II. INFLATION

Inflation in May 2008 declined, on an annual basis, from 10.2% to 9.5%.

The government claims that the sources of inflation in Macedonia are external and that inflation is imported INTO Macedonia through the ever-increasing prices of foodstuffs, raw materials, and energy.

In other words:

Prices INSIDE Macedonia are increasing because prices of foodstuffs and energy OUTSIDE Macedonia are increasing.

But, if this is true, inflation in May in Macedonia should have gone sharply UP, not down!

Global prices of foodstuffs and energy soared to their highest levels in April-May. Oil prices, for instance, increased more in April-May than they did in January-March. So did the prices of many foodstuffs.

Two possibilities:

(i) Either most of Macedonia's inflation is home-made, not imported (there is some evidence to support this view)

OR

(ii) The statistics are not to be trusted, especially prior to elections.

Is it true that there is little the government can do to combat inflation and the trade deficit?

Countries around the world - from Vietnam to Kazakhstan - have adopted these measures to reduce their burgeoning inflation and trade deficit:

Hedging (fixing the future prices of foodstuffs, oil, and commodities by purchasing forward contracts in the global markets)

Removal of import duties, excise taxes, VAT, and other taxes and fees on all energy products and foodstuffs

Subsidizing the consumption of the poorest 10% of the population

Introducing price controls and freezing the prices of essential products

Banning the export of foodstuffs (or introducing customs duties and quotas on such exports)

Raising interest rates and reserve requirements in the banking system to prevent new credit formation

Forcing banks to purchase government bonds to reduce liquidity in the market

Administratively capping credit growth and tightening lending to consumers and for real-estate transactions

Freezing, reducing or waiving public sector fees and charges

Releasing commodities, oil, and minerals from strategic reserves

Capping interest rates on deposits (to prevent credit formation using money from new deposits)

Reclaiming agricultural lands and modernizing farms and agriculture
(long-term measures)

Declaring a World Trade Organization (WTO) emergency and introducing import quotas and duties on non-essentials and luxury goods

Introducing an inflation target

Allowing for a gradual devaluation of the currency, within a band or range or as a crawling peg. A strong currency has anti-inflationary effects, so any devaluation must be minimal, slow, and subject to market forces.