Petar Goshev: Monetary policy challenges under a current account deficit Introductory speech by Mr Petar Goshev, Governor of the National Bank of the Republic of Macedonia, at the international conference “Monetary policy challenges under current account deficit”, during the 60th anniversary of central banking in the Republic of Macedonia, Skopje, 21 October 2006. *  *  *  Honorable President of the Government of the Republic of Macedonia, Mr. Nikola Gruevski, Honorable Minister of Finance, Mr. Trajko Slaveski, Honorable Ministers, Distinguished colleagues, Dear Malcolm, Your Excellencies, Distinguished participants in the Conference, Dear friends, I am deeply honored that I can welcome you to the first international conference organized by the National Bank of the Republic of Macedonia. To be emphasized even more is that the reason for having this conference organized, i.e. six decades of central banking on the territory of the Republic of Macedonia, is extraordinarily important for the Macedonian state. The topic of the conference, Monetary policy challenges under current account deficit, is not selected by chance. It is contemporary both for the Macedonian economy and for a number of transition economies whose transition path is also followed by our economy. If we consider addressed the issue of price stability, as a primary objective of the monetary policy, then the issue of how to achieve this objective in conditions of globalization of the financial markets, balance of payments' deficits and an intensified trend of liberalization of the capital flows, becomes the basic puzzle. Therefore, today we would like to discuss these issues.

The experiences of the transition countries in dealing with this problem vary. One can notice, though, that in most of them the process of structural reforms implementation and conduct of sound and consistent macroeconomic policies, with the EU integration being a clearly defined objective, produced positive achievements in the external sector. Nevertheless, registered improvements in the exports are still insufficient for a more significant reduction of the trade deficit, having in mind the initially high imbalance in the foreign trade, which is a logical consequence of the inherited economic structures, whose main  1  P. Lane, G.M. Milesi-Ferreti, "Capital Flows to Central and Eastern Europe, Working Paper 188, 2006, IMF. 2  It refers to 11 countries from Central and Eastern Europe-CEE. BIS Review 100/2006  1  feature is lack of flexibility and import dependence. The problem regarding the balance of payments current account deficit is even bigger if one has in mind the fact that the negative trade balance is to a large extent compensated with the positive achievements in services and private transfers, as current account components, which in 2003 (according to BIS 3 calculations) compensated over 45 percent of the negative trade balance. Vulnerability of the transition economies with respect to the sustainability of the current account balance is additionally increased, if it is considered that in the process of creating a "market economy", these economies faced also with a process of trade liberalization, which, especially in a short run, may additionally contribute to the trade imbalance.