Nominal convergence about which we, central bankers, speak the most, is consisted mainly of convergence of price levels, but also of exchange rate changes, interest rates and budget deficits to EU levels. As an empirical fact, rises in relative CPI usually move together with rises in relative GDP, and emerging Europe was not immune to this trend. The CPI level in the new EU member states in 1995 ranged from 29.2% of the EU-15 level in Lithuania to 44.9% of the EU-15 level in Poland. In 2006, the CPI level ranged from 42.7% in Bulgaria to 71.8% in Slovenia, which clearly shows fast price rises in these countries. 5 It is obvious that the parallel processes of real and nominal convergence of countries in transition pose numerous challenges for their economic policies in general and particularly for their monetary policies. The process of real convergence creates inflationary pressures through a number of channels, thus making it difficult to fulfill one of the Maastricht criteria for entering the monetary union, and also the higher inflation generates negative effects on the competitiveness of the domestic economy. The BalassaSamuelson effect is one of the most frequently indicated channels through which real convergence leads to higher inflation rates. According to this concept, the faster productivity growth in the tradables sector compared to the non-tradables sector of a country will cause a positive inflation differential and afterwards real appreciation – through the rise of marketdetermined prices of non-tradable goods.
In such circumstances, the only way to maintain the competitiveness of the Macedonian producers was the specialization and exports of lower quality products. These developments did not generate inflationary pressures, which caused absence of real appreciation that was evident in the other transition countries. In the past several years, Macedonia is quickly moving closer to the more advanced transition economies. Several years in a row we have achieved positive and stable growth rates, equaling 5.1% in 2007, which is the highest growth rate since independence. Even though economic growth rates are lower than the ones in Baltic countries as well as some of the countries in the region, this is a sure sign for the acceleration of the process of real convergence. This process is also supported by the foreign direct and portfolio investments (6.3% of GDP in 2007) and the faster credit expansion, with annual growth rate of 39% in 2007. As far as nominal convergence is concerned, Macedonia is facing challenges that are common for most of the economies in the region and elsewhere. Since the last quarter of 2007, we are having an acceleration of the inflation rate, which is mostly caused by the global rise of food and energy prices. Therefore, the uncertainty regarding the movement of these prices, as well as the expectations for pressures initiated by the process of real convergence are the main challenges for monetary policy in the medium term.