The first and so far only devaluation of the domestic currency occurred in July 1997, when the exchange rate changed from 27 to 31 denars for a then German mark. At that time, Macedonia had a growing trade deficit, a modest level of foreign exchange reserves, problems with the balance of payments, and a restrictive monetary policy, i.e. high-interest rates. Since then, speculation about a possible devaluation has been heating up during almost every major political, economic, or “combined” crisis in the country, including the middle of the current COVID – 19 crisis. With the difference that Macedonia now has the highest level of foreign exchange reserves since it is an independent state, stable and well-capitalized banking system, historically lowest interest rates, current account deficit and external debt on a moderate level, as well as instruments available to the National Bank that can guarantee that the denar exchange rate against the euro will remain stable.

Igor Petrovski
A journalist in “Kapital”


Almost every major political, economic or “combined” crisis in the country in the last 20 years after the first and only single denar devaluation in independent Macedonia in July 1997 (as a reminder, then the denar devalued by 16% and the foreign currency exchange rate changed from 27 denars to 31 denars for the then German mark) was followed by speculation about re-devaluation, i.e. the decision of the central bank and the government to reduce the value of the domestic currency, the denar, against foreign currencies, in this case primarily the euro, the currency to which the denar’s fixed exchange rate is tied to.

This was also the case in 1999, when due to the war in Kosovo and the wave of refugees who came to the country from there, there was panic among Macedonian citizens who began to withdraw their foreign currency savings from banks and exchange denars for foreign currency. The National Bank and the commercial banks managed to solve the problem at the last minute, as evidenced by the testimonies of the actors involved at the time.

Then, in 2001, during the military conflict in Macedonia, the shadow of devaluation again hung high, but then the monetary authorities, richer in one experience, more easily mitigated the panic by intervening in the foreign exchange market.

There was speculation about the devaluation in 2008-2009 on the occasion of the global financial and economic crisis, which with some delay spilled over into the Macedonian economy, so in 2010, 2012, 2016-2017 during the political crisis, the period of “Przhin’s” governments … until the latest speculations released these days that due to the huge current account deficit, i.e. the budget gap and the deteriorating foreign trade balance, the country is “baked” for devaluation, and the exchange rate would change to 75 denars per euro.

On this occasion, I will not deal with the motives of the authors of these speculations (which, by the way, are extremely dangerous and can cause significant turbulence in the foreign exchange market – read: panic rushes to the banks to extract foreign currency savings and convert denars into euros – which in the end would only worsen the situation and go in favor of the theses of the speculations themselves), but I will only try to explain why a country actually decides to devalue its currency and whether Macedonia needs such a step at all, at the moment.

The three most common reasons why a country decides to devalue its currency are the following:


  1. Reason: to stimulate exports


Benefits: In the world market, goods produced in one country compete with goods produced in other countries. US carmakers are competing with manufacturers in Germany, Japan, Korea, etc. If, for example, the value of the euro depreciates against the dollar, then the price of vehicles sold by European manufacturers in the US market in dollars will become lower than it was before the devaluation of the euro. On the other hand, a stronger currency will make the export of the said country more expensive, i.e. the import of goods produced in it will be more expensive for the importing countries.

In other words, exporters are becoming more competitive in the global market, exports are stimulated, and imports are discouraged after a national currency devalues.

Risks: First, due to the higher demand for the products of the country that devalued its currency, the price of those products will start to rise, which may eventually lead to the annulment of the initial effect of the devaluation. Second, other countries, once they see that a country has devalued in order to stimulate its exports, can do the same, leading to an intergovernmental currency war that will eventually lead to increased inflation in all countries involved.

Otherwise, the reduction of exports as an argument for devaluation has been pointed out on several occasions by Macedonian economic entities, mainly from the lobby of large exporters, according to which the allegedly overestimated exchange rate of the denar is the main culprit for uncompetitive export of Macedonian products.

This is only partially true. Macedonian products are not competitive enough on the world market primarily because they have relatively low added value, low level of innovation, research and development, and not because the denar is overvalued. The devaluation can have a short-term effect of a few months and actually increase exports, but only those exporters who have relatively little or no import components in their products can benefit from the weakened denar. (for example, the export of agricultural products, minerals, metals, etc.) All others are import-dependent, so the devaluation will simultaneously increase the price of raw materials because imports will become more expensive. Thus, the confectionery, chemical, textile, automotive industry (which is currently extremely important for Macedonian exports, and is concentrated in a dozen foreign and domestic investors, mostly in free economic zones) and other import-dependent industries logically will have more expensive production, which will eventually only nullify the effect of the devalued currency. Without solving the structural problems in the economy, energy, infrastructure, abolishing all unnecessary customs duties, etc. the problems of the Macedonian production will remain and the devaluation of the exchange rate will not make the export competitive in the long run.

Some of the representatives of the scientific and monetary sphere in the country are also committed to the introduction of the so-called denar fluctuating exchange rate against foreign currencies, instead of the current fixed exchange rate, in order to encourage exports, but for now, the National Bank remains firmly on the strategy of defending the fixed and stable exchange rate of the denar.


  1. Purpose: To reduce the trade deficit


Benefits: As soon as the export increases and the import decreases as a result of the devaluation, the balance of payments of the state improves, i.e. the trade deficit decreases. After all, a permanent trade deficit is not uncommon today, so the United States, as well as other developed and less developed countries, has had a constant trade deficit for years and even decades. Economic theory, however, says that a large trade deficit is not sustainable in the long run and can lead to dangerous levels of external debt that threaten the economy. The devaluation of the domestic currency can help improve the balance of payments and reduce the trade deficit.

Risks: But this reasoning has another side to the coin: devaluation also increases the burden on a country’s debt to foreign creditors, denominated in foreign currency, and expressed in domestic currency. This is a major problem for developing countries, which have huge amounts of debt denominated in dollars or euros. These external debts are becoming increasingly difficult to repay, which reduces people’s confidence in their domestic currency.

Confidence in the domestic currency will actually decline in the first moment after the devaluation is announced, while citizens will become poorer by as much as the fall in the exchange rate of the domestic currency.

For example, if the Macedonian currency devalued at 75 denars per euro as some speculate these days, which is 22%, it means that if the average salary in the country is around 25,000 denars or 406 euros, after devaluation its value in euros would be only 333.

The import of all goods and services in the country will increase by the same percentage, and the value of all loans taken from citizens and companies that are mostly with a currency clause i.e. denominated in euros, will also increase. So, if your monthly loan installment was 5,000 denars, now it will be exactly 6,100 denars.

Given that Macedonia is a highly import-dependent country, raising the prices of many products and services could very easily open the spiral of inflation, which will have catastrophic consequences for the operation of businesses and living standards of citizens.

That is why speculation about a possible devaluation is very dangerous, as the National Bank estimates, even more, so that some of them were linked to alleged assessments by European and world financial institutions about the inevitable need for devaluation this summer.

“Citizens need to remain calm. The stability of the denar exchange rate has been, is, and will remain our priority. We guarantee that the denar is and will remain stable! We appeal for conscientious and responsible information and verification of the veracity of the information sources. Any arbitrary interpretation of the information, as well as the placement of inaccurate or unverified information about the domestic currency, can create negative effects on the Macedonian economy,” the National Bank said in a statement.

As arguments in support of this statement on guaranteeing the stability of the denar, the NBRNM said that foreign exchange reserves are at a correspondingly high level, which is the most important guarantee for the stability of the exchange rate of the domestic currency. At the end of April, they amounted to 3 billion and 159.6 million euros and compared to March increased by 142.3 million euros. Their level is almost twice as high compared to the 2008 crisis.

In addition, the National Bank has a number of instruments that guarantee that the denar exchange rate against the euro will remain stable. Furthermore, the projections of all relevant international institutions indicate that the level of foreign exchange reserves is and will remain adequate and that the stability of the denar is not expected to be jeopardized in any way.

Neither the National Bank nor the relevant international institutions expect an increase in the inflation rate, i.e. doesn’t expect an increase in prices. On the contrary – in terms of current inflation performance below expectations, as well as significant downward revision in import prices due to the shock of the pandemic of COVID-19, especially energy, estimates point to an inflation rate of about 0% for 2020.

The current account deficit is at a moderate level and according to the projections, it will remain at a moderate level, and the external debt will remain on the moderate level, with last year’s decrease.

The banking system is stable and according to all indicators is ready not only to deal with the shock of COVID-19, but also to continuously deliver credit support to the Macedonian economy and to contribute that it deals easier and faster with the challenges of the corona crisis, explained the National Bank.


  1. Purpose: To reduce the burden of external debt


Benefits: A country can decide to devalue its currency if it has a large external debt for servicing. If debt repayments are on fixed dates, a weakened currency makes them effectively cheaper over time.

Risks: But, then again, this tactic should be taken with caution. Most countries in the world have some kind of still unpaid debt in one form or another, so the so-called “Currency war”, or the magic circle of the constant devaluation of national currencies into which countries will enter, and ultimately cause more harm than good. Devaluations generally create uncertainty in global markets, resulting in declining capital markets, real estate and eventually recessions. An example that devaluation does not always bring the desired effects is the case of Brazil, whose national currency real has significantly lost value since 2011, but a series of devaluations could not compensate for other economic problems such as falling oil prices and other raw materials, as well as huge corruption scandals in the country. As a result of all this, the Brazilian economy has shown weak growth rates, even negative ones, in the period from 2012 onwards, although until the financial crisis of 2008-2009 it was among the fastest growing economies in the world.

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