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Macedonia - Economy

By 2018 Macedonia's economy was sputtering after a two-year financial crisis that pushed unemployment above 20 percent, one of the highest rates in the Balkans, and an average monthly net salary of about $400, the lowest in the region. Macedonia is a small economy with a gross domestic product (GDP) of about $9.4 billion, representing about 0.01% of the total world output. It is an open economy, highly integrated into international trade, with a total trade-to-GDP ratio of 81.6% at the end of 2009. Agriculture and industry have been the two most important sectors of the economy in the past, but the services sector has gained the lead in the last few years. Economic problems persist, even as Macedonia undertakes structural reforms to finish the transition to a market-oriented economy. A largely obsolete industrial infrastructure has not seen much investment during the transition period. Labor force education and skills are competitive in some technical areas and industries but significantly lacking in others. Without adequate job opportunities, many with the best skills seek employment abroad. A relatively low standard of living, high unemployment rate, and modest economic growth rate are the central economic problems.

Five years of continuous economic expansion in Macedonia was interrupted by the 2001 conflict, which led to a contraction of 4.5% in 2001. Growth started to pick up in 2003 (2.8%) and continued in 2004 (4.1%), 2005 (4.1%), 2006 (4.0%), 2007 ( 5.9%) and 2008 (4.8%). In 2009, the economy was affected by the world economic crisis, although the financial sector remained sound. Real GDP is estimated to fall by 1.5% for 2009, and CPI-based inflation was negative 0.8%. Living standards still lag behind those enjoyed before independence. The United States is supporting Macedonia's transition to a democratic, secure, market-oriented society with substantial amounts of assistance.

After the breakup of Yugoslavia in 1991, Macedonia, the former Yugoslavia's poorest republic, faced formidable economic challenges posed by both the transition to a market economy and a difficult regional situation. The breakup deprived Macedonia of key protected markets and large transfer payments from the central Yugoslav government. The war in Bosnia, international sanctions on Serbia, and the 1999 crisis in neighboring Kosovo delivered successive shocks to Macedonia's trade-dependent economy. The government's painful but necessary structural reforms and macroeconomic stabilization program generated additional economic dislocation. Macedonia's economy was hurt especially by a trade embargo imposed by Greece in February 1994 in a dispute over the country's name, flag, and constitution, and by international trade sanctions against Serbia that were not suspended until a month after conclusion of the Dayton Accords. The impact of the 2001 ethnic Albanian insurgency in Macedonia, decreased international demand for Macedonian products, canceled contracts in the textile and iron and steel industry, and poor restructuring of the private sector affected Macedonia's growth and foreign trade prospects through 2004.

Macedonia's political and security situation is stable. This has allowed the government to refocus energies on domestic reforms, boosting economic growth, and attracting increased levels of foreign investment. In 2004, the government passed a progressive Trade Companies Law aimed at easing impediments to foreign investment, providing tax and investment incentives, and guaranteeing shareholder rights. In 2007, the government implemented a one-stop procedure for business registration that considerably shortened the time required to register a new business. The government's fiscal policy, aligned with International Monetary Fund (IMF) and World Bank policies, helped maintain a stable macroeconomic environment which sent promising signals to investors. However, economic growth remained sub-par in 2005 and 2006, due in part to poor government results in combating corruption, weak judiciary, poor contract enforcement, and high domestic finance costs.

The new Government of Macedonia that took office in August 2006 put the fight against corruption and attracting foreign investors at the very top of its priority list. In 2007, it launched an expensive marketing campaign promoting the country as a good investment destination. It provided business incentives by cutting rates on profit tax and personal income tax, implemented a so-called "regulatory guillotine"--an activity which reduced procedures and legislative requirements for doing business. In addition, reinvested profits became tax free, social contributions rates on salaries are being gradually reduced, while a regulatory impact assessment (RIA) procedure is being implemented to re-evaluate legislation for doing business. The moderate economic growth was halted by the world economic crisis in 2009, which hit the real sector strong, although the financial sector remained sound and stable. Exports dropped dramatically and the economy entered into a recession, which was by far less severe than in many transition and developed economies.

Real GDP dropped in Q3 of 2009 by 1.8% on annual basis, thus annulling the progress of 5.9% in 2007 and 4.8% in 2008. The biggest fall of 13.4% was in the mining, quarrying and manufacturing industry, followed by 4.1% drop in hotel and restaurant services and 2.3% drop in transport and communication services. Industrial output in 2009 was by 7.7% less than in 2008 A very conservative monetary policy caused the economy to enter into deflation, with the cumulative consumer price index (CPI) dropping by 0.8% . Lower price indices for transport by 10% and for recreation and culture by 4.2% were the main drivers of CPI's fall. The official unemployment rate came down a bit to 31.7% in Q3 of 2009. Faced with poor revenue collection, the GOM needed a fiscal adjustment twice in 2009 to fit within the budget deficit target of 2.8% of GDP. Total budget revenues in 2009 were 8.7 percent down from 2008, while the expenditures remained about the same. In addition, the fiscal policy had to borrow at high rates domestically and abroad, to be able to cover fiscal expenditures. It resulted in increased public debt to 32.4% of GDP at end-November 2009, a level that is till considered moderate, but could raise concerns if fiscal performance continues this pattern on a middle to long term.

The monetary policy responded to the increased T-bills rates with its own increased Central Bank bills rate in 2009 to 9%. In addition, the Central Bank introduced new liquidity indicators for banks, increased the reserve requirement and put a ceiling on credit to households, which ultimately curbed credit to private sector expansion to merely 3.5%. Trade terms in 2009 significantly worsened due to the world economic crisis, imports fell down by 26.4% and exports by 32.3%, creating a huge trade deficit of about 25% of GDP. The current account balance significantly improved in the second half of 2009 and is expected to be within the targeted 9.5% of GDP by the end of 2009. This is primarily due to a large inflow of private transfers in the second half of 2009, despite the poor FSIs of about $170 million by end-October 2009. Foreign currency reserves significantly dropped in the first half of 2009 to a level that seriously threatened the ability of the Central Bank to preserve the stability of the domestic currency. However, GOM's borrowing 175 million euros (about $245 million) abroad by selling a Eurobond, withdrawing $65 million from the IMF quota, and the recovery of the private transfers, brought up the reserves to the pre-crisis level of about $2.3 billion, or well over four months of import coverage.

After the conclusion of the three-year Stand-By Arrangement (SBA) with the IMF in August 2008, the GOM decided not to request additional financial assistance from the IMF. The IMF concluded its regular Article IV Consultation with Macedonia in October 2009 and the IMF Board approved the Staff report in January 2010. In March 2007, the World Bank Board adopted a new four-year Country Partnership Strategy for Macedonia, which could potentially bring to the country total lending of up to $280 million. In 20009, the WB approved to the GOM a credit facility for local government development worth $19 million, and $20 million in direct support.

Macedonia became a full World Trade Organization (WTO) member in April 2003. Following a 1997 cooperation agreement with the European Union (EU), Macedonia signed a Stabilization and Association Agreement with the EU in April 2001, giving Macedonia duty-free access to European markets. In December 2005, it moved a step forward, obtaining candidate country status for EU accession. Macedonia has had a foreign trade deficit since 1994, which reached a record high of $ 2.873 billion in 2008, or 30.2% of GDP. Total trade in 2009 (imports plus exports of goods and services) was $ 7.734 billion, and the trade deficit amounted to $ 2.352 billion, or about 25% of GDP. A significant 53.6% of Macedonia's total trade was with EU 27 countries. By separate countries, Macedonia's major trading partners are Germany, Serbia, Russia, Greece and Italy. In 2009, total trade between Macedonia and the United States was $120.2million. U.S. exports accounted for 2.2% of Macedonia's total imports. U.S. meat, mainly poultry, and electrical machinery and equipment have been particularly attractive to Macedonian importers. Principal Macedonian exports to the United States are tobacco, apparel, and iron and steel.

Macedonia has free trade agreements with Ukraine, Turkey, and the European Free Trade Association countries. Bilateral agreements with Albania, Bosnia and Herzegovina, Croatia, Serbia, Montenegro, UN Mission in Kosovo (UNMIK), and Moldova were replaced with the membership in the Central European Free Trade Agreement (CEFTA), which the other countries joined in December 2006.

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Page last modified: 01-10-2018 11:49:20 ZULU