Economic Analysis
North Macedonia

North Macedonia

Population 2.1 million
GDP per capita 6,109 US$
C
Country risk assessment
A4
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 2.7 3.6 -4.4 5.0
Inflation (yearly average, %) 1.5 0.8 0.9 1.5
Budget balance (% GDP)* -1.8 -2.0 -6.7 -4.5
Current account balance (% GDP) -0.1 -2.8 -3.4 -2.5
Public debt (% GDP)** 40.6 40.1 50.2 50.5

(e): Estimate (f): Forecast *Including public company in charge of national roads **Including public guarantees

STRENGTHS

  • Association and Stabilisation Agreement with the EU, candidate for accession since 2003
  • Integrated into the European manufacturing production chain
  • Close to factories in Central Europe and at the meeting point of two European corridors
  • Wage competitiveness
  • Support from European donors
  • High levels of remittances from expatriate workers
  • Denar pegged to the euro

WEAKNESSES

  • Low participation rate (47%), high structural unemployment and lack of productivity due to inadequate training
  • Large informal economy linked to the inefficient government and cumbersome regulation
  • Sustained emigration to the EU by young people, who face 35% of unemployment
  • High level of euroization (40% of bank deposits and credit)
  • Inadequate transport, energy, health and education infrastructure
  • Polarised political landscape
  • Tensions between the Slavic majority and the Albanian minority

RISK ASSESSMENT

Domestic and external demand drive the recovery

In 2020, the economy contracted due to the Covid-19 crisis. Household consumption, a key source of growth in recent years (75% of GDP), was severely impacted by the strict lockdown measures in place from March 2020 to the end of June 2020. declining to 16,2% in Q1 2020 because of labour market reforms in recent years, unemployment hit 20% at the end of 2020, causing household income to decline. Combined with the drop in remittances, this loss of income weighed on consumption, which dropped by an estimated 4% in 2020. Reduced demand from the European Union, which accounts for 75% of the country's exports, hurt foreign trade. Investment declined by around 10% in 2020.

Despite the continued presence of restrictive health measures, a recovery began in the second half of 2020, supported by accommodative fiscal and monetary policies and the start of EU accession negotiations. Stimulus measures include tax breaks for businesses, subsidies for specific sectors, notably agriculture and tourism, and loan assistance to borrow at preferential rates. The National Bank of the Republic of North Macedonia (NBRNM) has cut its policy rate twice since the beginning of the crisis, reducing it by a cumulative 50 basis points to 1.5% in March 2020 to stimulate economic activity through lending to households and businesses. The recovery is expected to continue in 2021, in line with the upturn in the EU, particularly in Germany (50% of exports). The country may then benefit from increased investor confidence following the end of the conflict with Greece, while investment projects (financed by the EBRD) will help the country’s competitiveness and regional integration (transport and energy).

 

A halt to fiscal consolidation

The public deficit widened significantly in 2020 on the back of increased health and social security spending. Revenues declined due to the downturn in economic activity, while stimulus plans worth EUR 1 billion (8% of GDP) were introduced in response. To compensate for the fall in tax revenues, borrowing increased, taking away the prospect of stabilising the debt, whose service represents 12% of GDP. Fiscal consolidation is hampered by tax evasion linked to the informal economy (estimated at between 30% and 40% of income and 18% of employment) due to shortcomings in tax administration and the labour inspectorate. Current expenditure on social assistance, wages and pensions leaves little room for public investment. Finally, the advantages granted to foreign investors, such as a ten-year tax exemption and free access to public services, are costly.

Regarding the external accounts, the current account deficit widened in 2020. It is expected to shrink slightly as exports return to pre-crisis levels in 2021, although the rebound in domestic demand and imports will counterbalance this. The income surplus coming from expatriate remittances and cash contributions (15% of GDP), as well as the services surplus (tourism and transport), will partly compensate for the trade deficit (15% of GDP) and the repatriation of income from foreign investments. The current deficit is financed by foreign investment. One-quarter of the external debt (80.3% of GDP as of June 2020) comes from commitments related to foreign investments, with the remainder divided between the public and private sectors. Foreign exchange reserves stood at more than four months of imports in 2020.

 

EU membership is a long way off

Initially scheduled for November 2020, the anticipated legislative elections of July 2020 resulted in a narrow victory for the coalition led by the Social Democratic Alliance of Macedonia (SDSM) and the Albanian party BESA, with Zoran Zaev holding onto his position as prime minister. The coalition agreement with the main Albanian party, DUI, states that Zaev will hand over his post to a member of the Albanian minority for a period of one hundred days following the expiry of a four-year period, before the next elections. Turnout was lower than in 2016 because of the epidemic, but also because people are fed up with the political class, which is accused of corruption and inaction in the face of economic stagnation. The new mandate should be marked by the country's desire to join the European Union. In addition to becoming NATO's 30th member state in March 2020, a political agreement has been reached to start EU accession negotiations. In November 2020, Bulgaria blocked talks between EU ministers on North Macedonia's bid to join the EU is thus delaying the start of negotiations. Beyond that, the launch of negotiations is likely to take time, as they are conditional on numerous reforms in the areas of the rule of law, independence of the judiciary and the fight against corruption. Regarding the business environment, while foreign companies enjoy considerable tax breaks and low wages within the Industrial and Technological Development Zones (free zones), outside these zones they have to contend with a shortage of skilled labour, poor infrastructure, weak research and development, issues relating to judicial independence, corruption and organised crime.

 

Last updated: February 2021

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