The World Bank in North Macedonia

COUNTRY CONTEXT

Last Updated: May 06, 2025

The World Bank's Country Partnership Framework (CPF) 2024-2028 for North Macedonia was endorsed by the Board of Directors on January 23, 2024. The CPF’s overarching objective is to support North Macedonia in becoming more competitive, sustainable, inclusive, and resilient, with a focus on competitiveness, human capital development, and environmental sustainability. Building on lessons from the previous CPF, the new framework focuses on three high-level objectives:

1: Improve public service delivery by enhancing efficiency and transparency. This includes strengthening administrative capacity at central and municipal levels, improving infrastructure asset management, and increasing revenue-raising abilities. It also aims to make public expenditures more efficient in education, health, and social protection.

2: Create more productive private sector jobs by strengthening conditions for private sector-led growth and foundational skills, with digitalization as a cross-cutting theme. This involves promoting access to regional and global markets through better connectivity and trade facilitation and supporting the human capital strategy in areas like early childhood development, education, school-to-job transitions, and the care economy.

3: Increase climate resilience by addressing environmental constraints to ensure sustainable economic growth and quality of life. The CPF will advance energy efficiency and transition agendas, focus on decarbonization, reduce air pollution, and improve transport and connectivity infrastructure. It also commits to scaling up climate-resilient infrastructure in response to climate change adaptation and natural disaster preparedness priorities.

The recently published North Macedonia Public Finance Review: Ensuring Stability and Boosting Resilience highlights that the recent strategy of relying on economic growth to reduce North Macedonia’s fiscal imbalances has not produced sufficient results. Over the past decade, the country has faced higher fiscal deficits than its peers in the Western Balkans, with a debt level exceeding 62% of its gross domestic product (GDP). Consequently, increased efforts are necessary to ensure that North Macedonia remains on its path toward convergence with the European Union (EU).

Last Updated: May 06, 2025

Recent Economic Developments

After a significant revision of national accounts, real GDP growth moved up to 2.8% in 2024. Output growth was driven by government consumption and investments, while net exports dived into negative territory. On the production side, growth was led by services and construction, largely related to highways, while manufacturing battled with weak external demand for car-supply parts.

Labor market indicators (15+) improved further in 2024, with a 0.4 percentage point increase in the employment rate and 0.1 percentage ppoint increase in the participation rate to 45.8% and 52.3%, respectively, but gains were not uniform. While the total unemployment rate dropped to 12.4%, this was driven by those with primary and secondary education. The unemployment rate among those with higher education increased by 1.7 percentage points. The youth unemployment rate (15-24) remains high at 28.9%.

Headline inflation went up from a 3-year low of 2.2% in August 2024 to 5% in February 2025, in part due to high food prices despite the introduction of price and margin caps for over 1,000 products. Both core inflation and producer prices surged above 5%, as wages, albeit decelerating, continued growing. As inflation decelerated to 2.7% in March 2025, the Central Bank kept the main policy rate unchanged at 5.35%.

The fiscal deficit (general government) increased to 4.6% of GDP in 2024, with significant under-execution of capital spending and reallocation to rising current spending. The public debt to GDP ratio surged to 62.4%, with arrears at 4.1% of GDP in 2024. The stability of the banking sector has been strengthened with an increase in the capital adequacy ratio to a historical high of 19% in Q3 2024, and solvency at above pre-pandemic value, while the liquidity rate has been steady, around 20%. Credit growth, at 11.2% at end-2024, picked up by close to 6 percentage point relative to end-2023, while the NPL ratio remained stable at 2.6% at end-2024. The current account deficit deepened to 2.25% of GDP in 2024, as the trade deficit widened to 20%, financed by strong foreign direct investment (FDI) inflows, services exports and remittances. External debt stood at 76.9% of GDP in Q3 2024, of which 56.4% is long-term.

Economic Outlook

The medium-term outlook remains positive, but underlying vulnerabilities are rising. The recent shifts in global trade policy and increased uncertainty, while having a low direct impact, will indirectly affect the economy through multiple channels. Growth is expected to average 2.8% during 2025-2027, below earlier projections, as higher spending on public investment projects is offset by slowing private consumption and exports. Headline inflation is projected to remain above the long-term average until 2027, but to fall towards the 2% target thereafter.

Supported by the positive growth outlook, the $6.85 poverty rate is projected to decline by a further 1.4 percentage points by the end of 2027, but implications of rising trade policy costs on the labor market and poverty remain uncertain in the short-term, and improvements in the labor market participation among youth and those with lower levels of education would be needed to sustain poverty reduction in the medium-to-long term.

The medium-term growth forecast relies on the assumption of the accelerated pace of EU accession negotiations and stronger reform effort to support the structural transformation of the economy. Low diversification of products and markets undermines the focus of an export-led long-term growth strategy. Moreover, the persistence of low productivity, inefficient capital allocation, weaker external demand, and inflation-suppressed consumption continue to overshadow the projection horizon. In this context, advancing on the EU Reform Plan, including on green transition goals, is crucial for fostering sustainable growth over the medium to long term.

Last Updated: May 06, 2025