The World Bank in North Macedonia

COUNTRY CONTEXT

On January 28, 2024, the Parliament of North Macedonia appointed a technical government with the main mandate of ensuring that the presidential and parliamentary elections are conducted in a free, fair, and democratic manner. Formed 100 days prior to the election date, the Government also includes members of the opposition. Mr. Talat Xhaferi, a former Parliamentary speaker, has been appointed as Prime Minister.

The initial round of North Macedonia's presidential elections is scheduled for April 24, 2024 with a subsequent round to be held concurrently with the parliamentary elections on May 8, 2024.  

Last Updated: Apr 19, 2024

The new World Bank 's Country Partnership Framework (CPF) 2024-2028 for North Macedonia was endorsed by the Board of Directors on January 23, 2024 and aims at supporting the country creating better formal jobs for its people through a combination of technical assistance, advisory work, lending and guarantees. Building on the lessons learned from the previous CPF, the new one focuses on three high-level objectives (HLOs) that will guide the partnership between the World Bank Group and North Macedonia.

HLO 1 focuses on improving the quality of public service delivery by enhancing its efficiency and transparency, through a program of closely aligned and complementary interventions to strengthen: (a) administrative capacity at central and municipal levels, addressing limitations that hinder the delivery of public services, the quality of infrastructure asset management, and the ability to raise revenues; and (b) the efficiency of public expenditures in key areas such as education, health, and social protection.

HLO 2 speaks to the creation of more productive private sector jobs by strengthening the enabling conditions for private sector-led growth and foundational skills, with digitalization as cross-cutting theme. The CPF program will contribute to this HLO by: (a) promoting the conditions for increased access to regional and global value markets through better physical and digital connectivity, stronger alignment with the EU and global export requirements, and more efficient trade facilitation, while (b) supporting the implementation of the country’s human capital strategy in the areas of foundational skills in Early Childhood Development, primary and secondary education (technical and general); transition from schools to jobs; and the care economy.

HLO 3, on increased climate resilience, emphasizes support to North Macedonia in addressing key environmental constraints to safeguard the sustainability of economic growth and the quality of life of its population, while contributing to the resolution of global environmental challenges, with a focus on adaptation. The CPF will continue to advance the energy efficiency and energy transition agendas and, with the upcoming NDS, focus on accelerating the decarbonization of economy, reducing air pollution, and closing transport and connectivity infrastructure gaps in line with the SCD pathway on accelerating decarbonization and ensuring energy security and with the emerging findings of the CCDR. The CPF commitment to scale up climate-resilient infrastructure responds to policy priorities on climate change adaptation and natural disaster preparedness and response.

Last Updated: Apr 19, 2024

Recent Economic Developments

Real growth continued to slow down for the third year in a row after the brisk post-pandemic recovery in 2021. Inflation eased from double-digit growth in 2022 to a rate of 9.4% in 2023. However, rising wages risk keeping inflation higher for longer and a slower return to the long-term average. Poverty reduction is estimated to have continued in 2023, albeit at a slower pace vis-à-vis pre-pandemic trends, with the poverty rate projected to fall marginally by 0.3 percentage points in 2023, given the rise in real incomes as employment stagnates.

Fiscal consolidation continues to be challenging as the deficit remains at above 5% and recent spending commitments related to the construction of a major highway to Albania and public sector wage increases have put additional spending pressure on medium-term fiscal plans. New strategic investments in the energy sector that have come with new tax expenditures also add to rising fiscal risks, including through guaranteed purchase liabilities for the energy sector SOE. Public debt increased back to 62% of GDP at end-2023, breaching the newly introduced fiscal rule (effective from 2025), while expenditure arrears remain continuously high at around 3% of GDP.

Monetary tightening has helped contain still-high inflation expectations amid lowered imported price pressures from food and energy. The main policy rate has been stabilized at 6.3% since September 2023, but increased interest rates have slowed the pace of private sector corporate borrowing to 3.3% YoY in December 2023.

Navigating overlapping crises has left lasting scars in North Macedonia, slowing the pace of growth and income convergence with the EU. The growth recovery post-pandemic has been slower than in regional peers. Bolstering sustainability, boosting productivity, and bridging structural reform gaps will be critical to enable long-term growth in the context of heightened uncertainty and vulnerability.

Economic Outlook

The medium-term outlook remains positive, but risks are tilted to the downside. While real GDP growth ended 2023 at 1%, reflecting delays in the take-off of highway construction works, weaker external demand, and lingering price pressures, it is expected to step up in the medium term. GDP growth is forecasted to be 2.5% in 2024, rising towards 3.0% over the medium term. This projection assumes strong growth in public investments and a gradual recovery of consumption and exports.

Inflation is projected to remain above the long-term average at 3% in 2024, but to slow thereafter to 2%. The baseline scenario is built on the assumption that the impact of geopolitical tensions subsides over the forecast horizon, and that the focus on the EU accession agenda remains in place after the general elections in May 2024. Poverty rates are projected to maintain a slow decline, falling by a further 1.8 percentage points over the forecast period.

Against several downside risks over the medium term, further progress with EU accession negotiations can provide an impetus for growth and accelerate income convergence with EU peers. Following up on pending structural reforms and ensuring fiscal sustainability is critical for boosting potential growth, which has declined to below 2% in the post-pandemic period. Importantly, scaling up decarbonization efforts accompanied by putting a price on carbon can strengthen domestic public revenues and maintain international competitiveness ahead of the implementation of the EU Carbon Border Adjustment Mechanism.

Last Updated: Apr 19, 2024