1.      Designing of the monetary policy

The National Bank of the Republic of Macedonia (NBRM) is a central bank, and accordingly, the only bank of issue in the Republic of Macedonia. Its primary objective is to maintain the price stability, thus being independent in the performance of its functions. The National Bank supports the economic policy of the country and the financial stability of the country, without jeopardizing the achievement of the main objective, and adhering to the principles of market economy. In line with the legally set functions, the NBRM designs and conducts the monetary policy at a level of the national economy. At the end of the current year, in line with the previously determined macroeconomic framework, the NBRM works out the Projection of the monetary developments for the following year, adopted by the NBRM Council.

2.      Monetary policy goals

The maintenance of the price stability is a primary objective of the National Bank of the Republic of Macedonia, established by a Law. The establishment of this goal is in line with the current EU monetary policy layout, based on the empirically confirmed perceptions that the price stability creates most favorable macroeconomic environment for accelerated economic growth sustainable on a long run. Until 1999, the inflation in the Republic of Macedonia was measured through the retail prices index, while since 2000 it has been monitored by the costs of living index. In order to attain its ultimate goal, the NBRM determines an intermediary target of the monetary policy. Thus from April 1992 to September 1995, the NBRM was applying the strategy of targeting the money supply M1, as an intermediary goal of the monetary policy. Since October 1995, the NBRM has been implementing monetary strategy of targeting the nominal exchange rate of the Denar against the Deutsche Mark, i.e. against the Euro since January 2002. Accordingly, the maintenance of the Denar exchange rate stability is an intermediary goal of the monetary policy. The exchange rate targeting strategy is applied due to the following: a. the importance of the exchange rate in a small open economy (the Republic of Macedonia exchanges around 80% of the GDP with abroad); b. the need of nominal anchor for maintenance of financial discipline and credibility; c. high degree of currency substitution (over 40%) and d. exchange rate transparency and the possibility of daily monitoring by the economic agents.

3.      Money supply and money demand

The money supply in the Republic of Macedonia is subordinated to the maintenance of the Denar exchange rate stability, as a nominal anchor in the economy. The amount of money supply is determined in line with the need of regular execution of goods and money transactions, i.e. the economic activity in the country. The money supply is monitored through the following monetary aggregates: M0 - reserve money (currency in circulation, banks’ account with the NBRM and cash in the banks’ vaults), M1 (currency in circulation and transaction deposits), M2 (M1, Denar and foreign exchange deposits with a maturity of up to one year), M3 (M2 and restricted deposits) and M4 (M3 and Denar and foreign exchange deposits with maturity of over one year). The movement of these aggregates is monitored in line with the adopted projection. The money demand, by the definition, is determined by the income level, the price level and the short-term and the long-term interest rates. On the basis of the previous practical experience, the money demand in the Republic of Macedonia is relatively unstable, primarily due to the transitory and the external shocks, as well as the effect of the currency substitution.

4.      Interest rate policy and transmission mechanism

With the monetary policy being directed towards preserving the Denar exchange rate stability, the interest rates and the money supply are endogenous variables, determined by the achievement of the intermediary goal. The NBRM, through its interest rate policy, sends monetary signals to the banks, thus making efforts to influence their lending and deposit interest rates. The lowest interest rate of the NBRM is the discount rate, whereas the highest is the interest rate on the Lombard credit. Currently, the referential interest rate in the economy is the interest rate registered on the CB bills auctions, with respect to its close relation with the interest rate on the Money Market. Due to the higher liquidity in the banking system, no need of organizing credit auctions has been registered over a certain period. However, the transmission canal of the monetary policy through the interest rates in the Republic of Macedonia is still insufficiently developed, considering the insufficiently developed financial market, the rigid interest rate policy of the banks and their insufficient responsiveness to the monetary signals of the NBRM.

5.      Achievement of the primary goal of the monetary policy - result of mutual and coordinated effort

The achieved price stability in the Republic of Macedonia is a result of the successful coordination and the mutual effort of the monetary and the fiscal policies. From February 1995 to June 2003, a special Monetary Policy Support Fund existed within the total Government deposits with the NBRM, in which the funds from the Budget were paid in, intended for support of the Denar exchange rate stability, i.e. for sterilizing the effects of the interventions of the NBRM on the foreign exchange market. Simultaneously, since 1994, the budget deficit is preserved below the maximum EU level of 3% of the GDP set under the Maastricht Agreement, while 2000 registered budget surplus (2.5% of the GDP). 2001 and 2002 are exceptions, when due to the security crisis in the country, the deficit in the budget was over the maximum set Maastricht criteria.

5a. Compliance with the criteria of the European Union

From the aspect of compliance with the other basic criteria for membership in EMU (as a long-term orientation of the Republic of Macedonia), it should be underlined that the Republic of Macedonia is among the most successful countries in transition with regard to the inflation (over the period from 1996 - 2002, the average inflation rate equaled 2.9%). Also, the share of the public debt in the GDP is within the framework of the set criteria (maximum of 60% of the GDP). The interest rates have remained at relatively high level compared to the average level in the EU, with tendency of their gradual decrease.