The World Bank in North Macedonia

COUNTRY CONTEXT

The main stated priorities of the government led by Prime Minister  Dimitar Kovachevski are to: (a) manage the aftermath of the COVID-19 pandemic; (b) overcome the economic and energy crisis; and (c) pass the constitutional amendments required to continue the EU accession process, in line with the so-called “French Proposal” that triggered the beginning of negotiations with the EU on July 19, 2022. These constitutional amendments, including the inclusion of the Bulgarian minority in the Constitution of the Republic of North Macedonia, need to be approved by a qualified majority of two-thirds of the Members of Parliament. To date, the discussions in Parliament on the amendments are still ongoing and the final vote has yet to be scheduled.   

Last Updated: Oct 10, 2023

The World Bank Group is currently preparing the new Country Partnership Framework (CPF), which will outline the Bank Group’s engagement with North Macedonia for the period 2024- 2028. The new CPF will continue to build on the priorities of the CPF 2019 – 2023 and will be also based on the recently completed 2023 Systematic Country Diagnostic (SCD) update, with a sharpened focus on human capital development, private sector development and the green transition.

The 2023 SCD Update identified four development priorities for faster, more inclusive, and sustainable growth:  

(1) more accountable service delivery to citizens; 

(2) strengthened human capital formation and closing opportunity gaps for all;  

(3) induced creation of better paid jobs  

(4) strengthened household resilience to climate change and lowered carbon intensity and air pollution.

The new CPF will also be aligned with the emerging National Development Strategy (NDS) 2022-2042, the Economic Reform Program (ERP), and the government’s Growth Acceleration Plan (GAP) for 2022–2026. Both, the draft NDS and the GAP embed EU accession as a cross-cutting strategic priority.

The new CPF will build on the results of the current portfolio in the areas of public financial management, early childhood education and care, and more, while filling knowledge gaps to move from first to second generation reforms. The new CPF will also propose to pursue a more structured One World Bank Group-approach through the blending of the institution’s instruments, which will help strengthen the country’s fundamentals in the areas of public financial management, human capital, and energy transition, in support of the EU accession negotiations.  

KEY ENGAGEMENT

The ongoing Public Finance Review: Ensuring Stability and Boosting Resilience will provide analytical support to the Ministry of Finance and other line ministries in designing a sustainable medium-term fiscal strategy for the post-COVID-19 recovery. The planned Country Economic Memorandum for North Macedonia will help to set out the key medium-term priorities to support income convergence with EU peers and will explore competition policy and the role of the state.

Last Updated: Oct 10, 2023

Recent Economic Developments

Output increased by 1.6% in H2 2023, led by decelerating consumption and exports, as imports and stockpiling pressures subsided. Growth was driven by services and industry, which is slowing due to lower external demand, while agriculture and construction remained negative. The Q2 2023 labor market data, lacking comparability due to census and methodological changes with previous years, reveal an unemployment rate of 13.1%, with youth unemployment rate declining to 25.6%. The labor force participation rate (ages 15+) stood at a low 52.4% (for women at 42.5%), while the employment rate remained stagnant at 45.5%.

Wage growth surpassed inflation as of April 2023 after the minimum wage correction. Wages will increase further as the government signed a new collective agreement for the public sector that includes a 10% wage rise from September 2023 and a revision to the wage setting methodology from 2024 linking the public sector wage to the national gross wage; an annual leave bonus at 30% of the average net wage; as well as loyalty bonuses.

The fiscal deficit (with the State Roads) will likely remain at 4.8% of GDP for 2023 after the technical budget reallocation to accommodate new spending commitments. The central government deficit reached 2.7% of GDP by June as revenue growth decelerated and spending increased led by investments and social spending. Public debt to GDP stood at 59.1% of GDP in June 2023 and is expected to rise by 2025.

The banking sector’s stability was preserved with an increase in the capital adequacy ratio to 18% in Q1 2023 despite a drop in the liquidity rate to 19.1%. At the same time, the NPL ratio declined to 2.8%. Headline inflation fell to 8.4% in July 2023, but core inflation remains sticky at above 8%. The pegged exchange rate has remained stable and FX reserves have recovered from losses incurred largely at the start of the war in Ukraine, standing at more than four months of imports in June 2023.

Economic Outlook

The medium-term outlook is positive, but risks are tilted to the downside. Growth in 2023 is expected to increase modestly by 1.8%, reflecting a slowdown in external demand, and a persistent cost-of living crisis, offset in part by the impact of the highway construction. Growth is expected to moderately accelerate in the medium term led by the rise in public investments, recovered consumption and exports, before slowing towards the potential growth trend thereafter. Annual inflation is projected to remain elevated at 9.1% in 2023 and fall to the long-term average of 2% in 2025. The baseline scenario is built on the assumption that the impact of overlapping crises will subside over the forecast horizon. While underlying risks remain largely skewed to the downside and reflect the outlook for the country’s main trading partners, moving ahead with EU accession negotiations may accelerate critical reforms and unlock growth. However, heightened political uncertainty and a prolonged parliamentary impasse due to lack of consensus for constitutional changes and upcoming elections may delay reform implementation. Finally, policy slippages may risk fiscal sustainability and inflation persistence in turn requiring further monetary tightening that can further restrict financing options and decelerate economic activity going forward.

Last Updated: Oct 10, 2023