Country brief 2007 Updated April 2008
With a gross national income per capita of around $3,090 in 2006 (GNI, Atlas method), the former Yugoslav Republic of Macedonia (fYR Macedonia) is a lower middle-income country. It is located at the crossroads of important transport routes connecting Central and Eastern Europe with South and South East Europe and beyond.
FYR Macedonia's landlocked position, small size, and relatively high degree of economic openness (foreign trade accounts for over 90 percent of GDP) make it highly dependent on external developments. As a result, the country is especially vulnerable to shocks, which have occurred frequently since the early 1990s.
Services - primarily in trade, transport, and telecommunications - accounted for 57 percent of GDP in 2006. 30 percent of GDP was generated by industry, dominated by iron and steel, textiles, and the exploitation of natural resources such as metals and minerals. Agriculture accounts for the remaining 13 percent.
The country has come a long way in its transition from a centrally-planned to a market economy, though reform efforts have been lackluster at certain times and frequently interrupted. Progress in reforms in recent years has certainly paid off, with the economy picking up and unemployment and poverty showing modest signs of declining. However, much remains to be done to create an environment that will create well-paid and stable jobs through private sector-led growth.
FYR Macedonia's overarching goal is to join the European Union (EU). It was the first country to sign the Stabilization and Association Agreement with the EU in April 2001 and the most recent country to receive EU-candidate country status (November 2005).
FYR Macedonia joined the World Bank and the International Development Association (IDA) in 1993. Since then, the World Bank has helped to promote private sector development in the country, support structural reforms through development policy lending and analysis, strengthen the social safety net, and improve infrastructure. Since the inception of the World Bank’s program in the country, 36 projects for a total amount of $822 million have been approved by the World Bank’s Board of Directors.
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Economy
Developments Since Independence
With an ethnically diverse population of two million, the country gained its independence under exceptionally difficult circumstances. The breakup of Yugoslavia in 1991 and the conflicts that followed resulted in the loss of a large and protected market and key transport routes. This led to a period of economic decline with high inflation, large fiscal deficits, and lack of foreign investment.
The government's stabilization program, initiated at the end of 1994 with the assistance of international donors including the World Bank and the International Monetary Fund (IMF), restored macroeconomic stability. Inflation was reduced to single digit levels, the fiscal imbalance was addressed, and structural reforms were initiated. Consequently, growth turned positive in 1996 and accelerated to 4.5 percent by 2000.
The positive trend came to an abrupt halt with the 2001 armed conflict between the government and ethnic Albanian rebels. The fiscal balance and balance of payments deteriorated severely, and reforms were stalled. Despite these developments, inflation remained modest and the exchange rate stable.
Recent Economic Performance
FYR Macedonia has made considerable progress in economic development since 2002. The structural reform agenda was reintroduced, and the large fiscal and external imbalances were corrected. With the economic environment improving and peace and stability restored, growth returned to pre-conflict levels.
GDP growth in 2003 reached 2.8 percent, with industry leading the recovery at a 6.5 percent rate of growth. The recovery accelerated in the last three years with GDP growth averaging around 4 percent in the 2004-2006 period, as structural reforms gradually improved the business environment and the economy responded to the favorable external developments.
The fiscal balance improved remarkably also in response to expenditure-cutting and revenue-increasing measures, resulting in largely balanced budgets. Surging private transfers and a slightly lower trade deficit resulted in a strong improvement in the current account balance in 2005-2006. Prices and the exchange rate remained stable.
Preliminary 2007 data suggest a pick-up in economic activity with growth expected to reach 5 percent, the highest since independence, as the economy responded to intensified reforms (the country ranked 4th on the list of top reformers in the 2008 Doing Business Report) and high world metal and food prices. In the first half of the year the economy expanded by 5.4%, and data on industrial production, credit growth, business confidence, and exports suggest that the positive trends have continued throughout the year. Despite tax cuts and a projected 1 percent of GDP fiscal deficit, the budget has over performed significantly and is likely to end the year with a surplus. At the same time, the positive developments in the external sector have continued, with the current account being largely balanced.
But despite solid recent economic performance and greater labor market dynamism, job creation remains insufficient to trigger a more substantial reduction in the unemployment rate which remains one of the highest in the region. One fifth of the population lives in poverty.
Projected Growth
The growth of the economy is projected to further accelerate to 5.5 percent in 2008, largely reflecting stronger domestic demand (consumption and investments) as competitive pressures in the domestic financial sector increase and investors respond to the improved environment (few investors have already announced ambitious plans). This will most likely widen the current account deficit to around 4 percent of GDP in 2008. The authorities are targeting a more expansionary fiscal policy with a fiscal deficit target of around 1.5 percent of GDP over the medium term. Such deficit levels, in coordination with the monetary policy focused on maintaining the de facto exchange rate peg, should keep inflation stable at around 2-3 percent in 2008.
Challenges Ahead
FYR Macedonia needs to focus on the following priority areas:
Intensifying economic growth. For the country’s income level to converge rapidly to that of the new EU, economic activity needs to be increased and sustained.
Sustaining reforms in the judiciary, public sector, and business environment. Further reforms are needed to provide the foundation for sustainable economic growth.
Implementing poverty-reduction measures to alleviate the negative effects of reforms. With a high unemployment and poverty rates, programs to train and re-qualify workers are needed as well as to protect the most affected by markets’ liberalization and the end of subsidies.
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Program to date
- Landmark Projects
- More projects
Since FYR Macedonia joined the World Bank in 1993, Bank financing has helped the government maintain macroeconomic stability and develop a sound financial sector.
The World Bank has facilitated trade and transport by easing the transit of goods through border crossing points. This is vital in a landlocked country like FYR Macedonia where the foreign trade accounts for a large share of GDP. The Bank has supported local communities in the decentralization process and helped renovate the country’s largest hydropower plants. In fiscal year 2006, the World Bank commitments to the country were $87 million. Overall commitments for active projects total $122 million.
Going Forward
The new Country Partnership Strategy (CPS) covering the period 2007-2010 aims to facilitate the country’s EU ambitions and promote economic growth. The CPS aims to support the government’s program around two core pillars: i) fostering economic growth, job creation, and increasing the living standards of all; and (ii) improving the governance and transparency of public service delivery to support the market economy.
Infant mortality declined after 50 percent of Macedonia's doctors providing care for newborns received specialized individual training.
Read morePillar 1: Foster Growth and Job Creation, Increase Living Standards for All. The World Bank Group supports the governments’ ambitious goals on accelerated growth and job creation through an integrated and multi faceted program. Under this pillar, the World Bank Group aims to (i) maintain macro economic stability, while ensuring proper integration of EU priorities into the budget; (ii) improve business environment, including regulatory reform and proper enforcement of contract and creditor rights; (iii) reduce the costs of capital; (iv) improve the enterprise sector’s competitiveness, (v) improve agricultural competitiveness; (vi) establish a functioning land market and institutions; (vii) improve infrastructure for growth by strengthening the framework for public-private partnerships and invest selectively in energy and transport; (viii) remove rigidities in labor market regulations and reduce the labor tax wedge; (ix) develop a productive and appropriately skilled labor force; and (x) use cash transfer systems to encourage school enrolment and preventive health.
Pillar 2: Public Service Delivery and Supporting Good Governance. Under this pillar, the CPS supports fYR Macedonia in continuing the progress made in improving governance and reducing corruption, while deepening reforms in key sectors where governance weaknesses continue to undermine progress in the economic reforms necessary to strengthen the economy and create jobs. Improved transparency and accountability in service delivery is critical to meet the government program on growth, foster human capital, and meet EU standards. The World Bank Group supports fYR Macedonia in its efforts to (i) continue its efforts to improve the environment of legal uncertainty and lack of confidence in the judicial system; (ii) apply proper public finance principles and governance standards at the municipal level, including to municipal public enterprises and utility companies; (iii) continue improving the efficient use of public resources and performance monitoring in the provision of affordable and quality health services, and (iv) make cash transfer systems more targeted and introduce incentives to encourage school enrolment and preventive health.
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of June 2006
(US$ millions)
The Country Aggregate Report provides more lending data for FYR Macedonia
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Mr. Denis Boskovski
External Affairs Officer
dboskovski@worldbank.org
34 Leninova Street
1000, Skopje, Republic of Macedonia
Tel: +389 2 3117 159
Fax: +389 2 3117 627
Website: http://www.worldbank.org.mk
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