The 2011–12 Eurozone turmoil created strong headwinds for FYR Macedonia’s economy. Weak export demand produced negative spill-over effects into the fiscal accounts, leading to poor tax performance, increased budget pressures, and weakening financial discipline. Large public arrears to private businesses for contracted goods and services and value added tax (VAT) refunds accumulated. This started a destructive cycle of unpaid Government obligations and depressed private sector activity and growth that in turn led to lower revenues—in turn leading to continued public arrears.
The World Bank helped the Macedonian Government to obtain a large commercial loan of €250 million, leveraged by a World Bank guarantee. The guarantee covered a portion of the loan, allowing the Government access to essentially closed international financial markets and a market where funding of this volume would have been otherwise impossible. This created a fiscal buffer that enabled the fast repayment of arrears and support for reforms to prevent the reoccurrence of this economically harmful problem. The loan guarantee also improved the risk perception of FYR Macedonia and expanded its visibility in international markets. Most importantly, the extended maturity significantly reduced the cost of borrowing, saving the country over €50 million in interest costs over a seven-year period.