Overview

The Former Yugoslav Republic (FYR) of Macedonia is an upper middle-income country that has made great strides in reforming its economy over the last decade. While the country has made significant progress in terms of its economic development, efforts across a range of areas are still needed to generate economic growth that will create jobs and improve living standards for all.

The government and the World Bank Group are currently working on boosting competitiveness while creating a favorable environment for local businesses that is necessary for putting the FYR Macedonia on a sustainable growth path, create more and better jobs, and promote shared prosperity of the bottom forty percent of the population. Policies to improve educational outcomes and other public services, and to remove labor market constraints will be needed to support growth and make sure that a large part of the population reaps the benefits of sustained growth.

FYR Macedonia’s growth reached 3.7 percent in 2015, supported by rising private consumption and higher public spending. The continued expansion in economic activity reflects on the labor market outcomes as unemployment dropped to 26.1 percent in 2015, from 28.1 percent in 2014.

The trade deficit narrowed in 2015, but net FDI inflows declined. The fiscal deficit was slightly lower than the budget had projected (in part due to some payments that were deferred to 2016), but still higher than that in the Medium Term Fiscal Strategy. Growth is expected to accelerate gradually in the medium term, but a prolonged political turmoil would affect this outlook negatively.

After declining in the first half of the year, public debt rose in the second half to a level higher than a year earlier i.e. 46.4 percent of GDP. Debt is expected to continue to expand in 2016 driven by increasing financing needs for the still high deficit level and the sizable State Owned Enterprises investment portfolio.

FYR Macedonia has been a member of the World Bank Group since 1994 and currently receives funding from the International Bank for Reconstruction and Development (IBRD).

The new Country Partnership Strategy that was approved in October 2014 builds on the strength of the partnership between FYR Macedonia and the World Bank Group, which has been a steadfast support to the country in its development and aspiration to join the European Union.

The Country Partnership Strategy 2015 - 2018 is defined around two pillars:.

  • Growth and Competitiveness – improvements in the business climate and the trade regime are essential to attract private investment and improve 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 the European Union (EU) membership, the World Bank Group Strategy will support progress on the accession agenda as a cross-cutting theme. The strategy is consistent with the new EU Assistance Country Strategy Paper for 2014-2020, and the World Bank resources will also be used to complement and improve absorption of the EU’s Instrument of Pre-Accession (IPA) funds. Overall, the World Bank Group will support the Government with a full range of financial, knowledge, and convening services, and provide assistance in several sectors, such as transport, energy efficiency, public financial management, and social protection.

Since joining the World Bank Group in 1994, FYR Macedonia has leveraged more than $2.0 billion in loans to support the country’s transition to a market economy and build effective institutions, improve education, social protection and pensions, build and rehabilitate basic transport and energy infrastructure, and preserve natural and cultural heritage.  This work is complemented by the work being carried out by the International Financial Corporation (IFC), which has committed more than $401.8 million to FYR Macedonia since 1993.

The current investment portfolio of the World Bank-financed operations in FYR Macedonia consists of 8 projects, totaling $378, 25 million. These projects support investments in the area of transport, energy, education, social protection and employment services, municipal development, and tourism development.

Over the last 20 years, assistance from the World Bank Group has helped the country transition to a market economy while simultaneously building effective institutions, improving education, increasing social protection, and building and rehabilitating transport and energy infrastructure. In addition to lending, FYR Macedonia has also benefited from the World Bank Group’s Analytical Advisory Activities (AAA) - which have, inter alia, included a Green Growth assessment to help the government mainstream sustainable development and climate change issues into its planning and design, and a review of public expenditure in agriculture and labor markets.

Some areas of World Bank engagement in FYR Macedonia include:

Social Protection and Labor: The connection between the poverty and education level has a long history. While FYR Macedonia has demonstrated solid economic growth, poverty has not decreased significantly since 2002, and remains to be a major development challenge for the country. Different studies have shown that poverty is driven by unemployment, and directly related to low education. The Government recognized the need to act fast and carefully target the root of the problem, by increasing the access to education and breaking the poverty cycle. With the World Bank assistance, the Conditional Cash Transfer Project was designed and is being implemented since 2009. The Program provides EUR 200 annually to families that receive social financial assistance and have children who regularly attend secondary schools.  Through this project, in the school year 2014–15, approximately 7,200 children from poor families regularly attended secondary schools due to the CCT benefit.

Improving the country’s labor market performance and economic competitiveness requires a more skilled and better educated labor force, as well as increased technology absorption and diffusion of knowledge and innovation.

The Skills Development and Innovation Support Project ($24 million), whose objective is to improve higher education resource allocation transparency, as well as promote accountability, enhance the relevance of secondary technical vocational education, and support innovation capacity in FYR Macedonia is being implemented since 2014.

Trade and Competitiveness: In the past several years FYR Macedonia has made significant progress in improving the business climate beyond the "first generation” of reforms often related to the scope of measurement of the Doing Business (DB) Report. Going beyond this type of reforms and aiming to help improve FYR Macedonia’s competitiveness, a series of two World Bank-financed Programmatic Competitiveness Development Policy Operations (DPOs) during 2012-14 and totaling USD 100 million in Bank funding supported the country’s competitiveness agenda by strengthening policies and institutions aimed at: (1) attracting FDI and developing high value-added manufacturing; (2) facilitating restructuring of the agribusiness sector; (3) improving trade logistics and (4) fostering a more dynamic labor market and strengthening skills and innovation capacity.

For instance, the DPO series supported the adoption of the Export Promotion Strategy and exporter support programs with high potential impact, and the management and governance of the special economic zones, the centerpiece of the government’s FDI promotion efforts. As a result of the FDI attraction strategy and export promotion efforts, merchandize exports increased by 11% from 2011 to 2014 [UNCOMTRADE]. This achievement is remarkable when taken against the background of decline in global prices for FYR Macedonia’s traditional exports – metals and minerals, which comprised 31% of Macedonia’s export basket in 20115, as well as weak economic recovery in Europe.

The reforms supported under the DPO series included enactment of the Law on Innovation Activity and establishment of the Fund for Innovation and Technological Development (FITD which has launched financing instruments in support of entrepreneurship, innovation commercialization and in-house business innovation at the pre-commercial and growth stages.

Complementing the Programmatic Competitiveness DPO series, the FYR Macedonia Competitive Industries and Innovation Support Program (MCIISP), a three-year US $1.6 million grant from the Competitive Industries and Innovation Program Multi-Donor Trust Fund, provides technical assistance in developing supplier capabilities among domestic small and medium size enterprises for their integration in the supply chains with large foreign companies operating in FYR Macedonia. MCIISP provided knowledge and technical assistance which improved the capacity of the national authorities and the regulatory and operating environment for administration of state owned agricultural land and for introduction of a risk-based approach to the technical inspections involved in trade of goods across borders.

MCIISP provides analytical services and technical assistance in the tourism sector, addressing the the binding constraints and opportunities to improve sector competitiveness.  This engagement has resulted in the identification of a new four-year investment operation (the Local and Regional Competitiveness Project) with a focus on tourism, which will be funded with a EUR 18 million grant from the EU. The project aims to increase the contribution of tourism to local economic development and shared prosperity by improving the enabling environment and critical infrastructure for tourism development at the destination, cluster, and circuit levels.

Transport: .Investments in transport infrastructure are crucial for FYR Macedonia’s competitiveness and growth The landlocked country needs investment in transport infrastructure to ensure connection to regional markets, and to become a more attractive destination for investors. Better roads are also crucial for local competitiveness and development of tourism.”  Since its independence, the main challenges facing the government have been to reduce the economic distance to markets and costs of transportation arising from the poor condition of the transport network and lessen delays at key border crossing points. The World Bank Group is helping FYR Macedonia address these challenges by focusing on improvements of road and rail facilities and simplify the movement of traffic through key border crossings. Part of these efforts have been through the Regional and Local Roads Program Support Project, which has helped rehabilitate and upgrade 284km of regional roads and over 400 km of local roads, including rehabilitation of landslide –prone sections of selected roads, , improve design of future roads to be more resilient to the expected impacts of climate change, and boost road safety throughout the country.

 

 


LENDING

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

*Amounts include IBRD and IDA commitments