Overview

COUNTRY CONTEXT

FYR Macedonia

2016

Population, million

2.1

GDP, current US$ billion

10.1

GDP per capita, current US$

5,232

School Enrollment, primary (% gross) (2015)

60.98

Life Expectancy at Birth, years

75

 

 

FYR Macedonia is an upper-middle-income country that has made great strides in reforming its economy over the past decade. Following strong economic growth during the period 2002–08 averaging 4.3%, average GDP growth has declined to 2.1% per year since 2009. The main drivers of growth since 2009 have been construction (supported by sizable public investments), industry (particularly manufacturing), and wholesale and retail trade.

Although the country has made significant progress in terms of its economic development, efforts are still needed across a range of areas to generate economic growth that will create jobs and improve living standards for all. However, real GDP growth would need to accelerate to around 4.5% for FYR Macedonia’s living standards to converge with those of the new European Union (EU) member states within the next 20 years.

Accession to the EU remains the anchor of the Government’s reform agenda. FYR Macedonia became an EU candidate country in 2005, and since 2009 the European Commission (EC) has recommended opening accession negotiations. However, the decision continues to be postponed, in part due to the dispute with Greece over the country’s name. The EC has an active program of assistance to FYR Macedonia, including Instrument of Pre-Accession (IPA) funding, the largest source of concessional funds in the country.

Economic growth did not translate into significant poverty reduction in FYR Macedonia before 2008, but poverty seems to have declined somewhat in recent years.

As a small, open economy, FYR Macedonia needs to rely on further growth in exports and increased competitiveness to answer its long-term growth challenges. The political situation remains the primary downside risk to the economy in the near term. Prolonged political uncertainties could affect investment decisions and slow economic activity. In addition, the country is facing growing fiscal risks in the rapidly rising public debt. These dynamics could threaten stability and undermine growth prospects in the medium term if not addressed.

Last Updated: Apr 20, 2017

Number of Active Projects

7
Lending $331.18 million

IBRD

6 projects ($313.96 million)
EU IPA  2 projects ($37.18 million)

The 2015–18 Country Partnership Strategy that was approved in October 2014 is defined around two pillars:

  • Growth and Competitiveness – improvements in the business climate and trade regime are essential to attracting private investment and improving export performance in order to achieve sustained private sector–led growth and job creation.
  • Skills and Inclusion – interventions that increase skills and improve inclusion are crucial to ensure that all segments of society benefit from economic growth through greater employability and more efficient public and municipal services.

Since the country aspires to EU membership, the World Bank Group strategy supports progress on the accession agenda as a cross-cutting theme. Bank resources are used to complement and improve absorption of the EU’s IPA funds.

Overall, the World Bank Group is supporting the Government with a full range of financial, knowledge, and convening services and providing assistance in several sectors, such as transport, energy efficiency, public financial management, and social protection.

KEY ENGAGEMENT

Skills Development and Innovation Support

Project is aimed at improving the transparency of resource allocation and promoting accountability in higher education, and also enhancing the relevance of secondary technical vocational education while supporting innovation capacity in the country. The project development objective derives from the CPS’ skills and inclusion pillar.

The country’s tertiary and vocational education systems will be more focused on skills relevant to the labor market, because better skills will help people take advantage of better jobs. The total financing provided by the project is US$24 million, divided between four components: improving the transparency of higher education; modernizing secondary technical vocational education and training; improving the innovative capacity of enterprises and collaboration with research organizations; and administering project management and monitoring and evaluation. 

National and Regional Roads Rehabilitation Project

The National and Regional Rehabilitation Project is aimed at enhancing the connectivity of selected national and regional roads, primarily to Corridors X and VIII, by providing improved mobility and reduced travel time, vehicle operating costs, and road crash risks.

The project also aims to improve the capacity of the Public Enterprise for State Roads in road asset management and road safety. A further objective is enhancing climate resilience in the specified road network by incorporating climate resilience designs in road plans, thereby ensuring improved sustainability in transport service quality.

The project provides financing of US$70.98 million in a loan by the International Bank for Reconstruction and Development (IBRD) and US$12.74 million from the borrower. The project consists of two components: road civil works and institutional strengthening and project management. 

Last Updated: Apr 20, 2017

 

RECENT ECONOMIC DEVELOPMENTS

Political uncertainty took a toll on growth in 2016, slowing it from 3.8% in 2015 to 2.4%. Growth in 2016  was largely driven by household consump-tion, contributing 3 percentage points (pp), and supported by rising employment, wages, pensions, and household lending. Relatively flat government consumption contributed just 0.2 pp to growth.

Concern about the political situation affected investment, which fell by 4.3% from 2015 and subtracted 1.4 pp from growth in 2016, despite signifi-cant investment in roads. Net exports added 0.7 pp to growth, as goods and services trade balances were in small surplus, supported by solid foreign direct investment (FDI)-related exports and growth in IT and transport services. Affected by political uncertainties, industrial output declined by 2.2% in 2016.

Deflation persisted in 2016 for a third year in a row. Low international food and oil prices, combined with lower domestic utility prices, led to a price deflation of 0.2% in 2016.

Unemployment continued to fall in 2016 because of fiscal interventions to create jobs and contrac-tions in labor force participation. Employment grew 2.1% year-on-year (y-o-y) in 2016, in part supported by government stimulus programs. Yet, labor force participation fell to 56.8% in 2016, the lowest rate since 2012. As a result, the average unemployment rate was 23.7% at end-2016. Despite a government stimulus for youth employment in particular, mainly in the form of exemptions from social contribu-tions, youth unemployment increased from 47.4% in 2015 to 48.3%. Youth is the only age group whose participation in the labor force has been declining since 2012. Long-term unemployment remains high at 81% of all unemployed.

The fiscal deficit declined in 2016, largely due to the underexecution of capital spending. The deficit declined to 2.6% of GDP, significantly lower than the 4% announced in the second budget revision. The decline relates mainly to a low execution of capital spending in the context of a prolonged election cycle. Total revenues were 27.9% of GDP, declining from 2015 by 1 pp, due to lower personal income tax and contributions related to the tax-exempt job creation. 

Poverty is estimated to have declined in 2016 on account of better labor market outcomes and increased productivity and real wages. Using the US$5/day and $2.5/day lines (2005 purchasing power parity), poverty rates were projected to have fallen to 30.7% and 11.3% in 2016, down from 34.3% and 12.7% in 2013 and continuing a decreas-ing trend present at least since 2009.

In 2016, reductions in unemployment and ris-ing real wages, as well as employment growth in unskilled labor intensive sectors (i.e., construction), are expected to have contributed to poverty reduction, since rising labor income constituted the most important driver of income growth at the bottom of the distribution.

ECONOMIC OUTLOOK

Growth is expected to accelerate to 2.8% in 2017 and continue on up to 3.3% in 2018, assuming that political uncertainties are resolved in early 2017, which would improve the confidence of both consumers and private investors.

The fiscal deficit is expected to remain a sizable 3.2% of GDP in 2017 but then decline gradually to 2.3% in 2019. As a result, PPG debt is expected to increase to 55% by 2019 (of which 13 pp are guarantees). The current account deficit (CAD) is expected to average 2.6% of GDP in 2017–19, driven by consumption and investment demand.

Poverty is expected to continue its downward trend in the next few years. Higher productivity and real wage growth and the continuous improvement in labor market indicators will play a critical role in poverty reduction. However, if employment opportunities among the less-skilled decline or fiscal consolidation efforts lead to a contraction of the construction sector, poverty reduction may stall.

Last Updated: Apr 20, 2017

Active Projects

PROJECT SPOTLIGHT

In 2009, the World Bank approved the Municipal Services Improvement Project (MSIP) of €18.9 million. The MSIP focuses on improving the transparency, financial sustainability, and delivery of targeted services under the responsibility of competitively selected municipalities and their communal service enterprises (CSEs).

The project promotes responsible local borrowing for investment, accountability to citizens and consumers by encouraging local voice and transparency, and the creation of more sustainable financial and supervisory relationships between local governments and CSEs.

The first MSIP loan was followed by two additional financings, the first, €37.2 million provided by the World Bank in 2012, and the second, €15.5 million approved by the EU with IPA financing specifically to support a Rural Investment Window within the MSIP and to improve infrastructure services in rural settlements. The IPA grant funds primarily target rural municipalities, but urban municipalities with rural settlements are also eligible for financing if the investments are targeted at rural settlements within their jurisdictions.

Of the country’s 80 municipalities, 57 decided to participate in the MSIP and are implementing or have already completed priority infrastructure projects, which include local roads and street rehabilitation, water supply improvements, rehabilitation of municipal buildings (including kindergartens and schools), energy-efficiency improvements, solid waste management, and procurement of communal service vehicles or other priorities.

Some MSIP accomplishments to date include: more than 7,300 households with piped water connections; about 466,935 people with access to regular solid waste collection; all project participating municipalities/utilities publishing their budget information online, and 65% of participating municipalities reporting cost savings from the subprojects implemented.

In January 2016, the World Bank approved a new lending operation that represented the second phase of MSIP (MSIP2) of €25 million, which aims to improve transparency, financial sustainability, and the inclusive delivery of municipal services across the country.


LENDING

FYR of Macedonia: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments