The overall objective of this study on local government1 borrowing is to accomplish an all-encompassing
review that systematically captures the entirety of the fiscal decentralization processes with
an emphasis to the local government borrowing in each of the three transition countries: Romania,
Bulgaria and Macedonia. As part of this larger study, the main purpose of this country report is to provide
an overview of the progress in the process of decentralization after July 2005 when the process
started and an overview of issues with the local government borrowing in Macedonia.
This study is neither a credit rating analysis nor does it cover specific aspects of local government
borrowing in detail. Rather the study provides an overview of each of the building blocks of intergovernmental
fiscal relations (structure of the government sector, delineation of responsibilities for expenditure,
assignment of revenue sources, intergovernmental transfers, financial management issues,
subnational borrowing legislation, infrastructure and the financing side of the subnational budget and
the municipal debt characteristics). The study also considers the technical nature of the strengths and
weaknesses of the decentralization process, with a special emphasis on experiences in local government
borrowing and recommendations for further development.
Macedonia is in a position to develop the legal and policy framework first, in anticipation of the
future development of a municipality credit market. Macedonia can learn from the experience in
Romania and Bulgaria2 and from the risks that have become clear in other countries. Excessive borrowing
by sub-national government or debt issuance in the absence of an adequate legal framework
(one that clarifies critical issues like the status of guarantees and the remedies available to lenders in
the event of a municipality's non-payment) has exacerbated national economic crises. Premature borrowing,
before a municipality has established its creditworthiness and identified clear investment priorities,
is likely to drain local budget resources and to add risk to the fiscal system. The potential benefit
of soundly based local borrowing is great, but the risks involved in badly prepared borrowing also
are large. Stakeholders (LGU, national government, banks, and potential investors in municipal debt)
share an interest in ensuring that the policy issues surrounding credit market development are well
understood and that an appropriate legal framework is in place before the market actually opens.