The World Bank in North Macedonia

COUNTRY CONTEXT

Last Updated: Oct 12, 2022

The current World Bank Group program in North Macedonia is being implemented through the Country Partnership Framework (CPF) for 2019–2023, and is based on three interconnected focus areas that will help the country: 1) improve the environment for a dynamic private sector to enhance export-led growth, 2) strengthen human capital for inclusive development, and 3) build sustainability. 

The CPF is expected to enhance private sector growth through several projects, including the Road Upgrading and Development Project the Local and Regional Connectivity Project, the Agriculture Modernization Project and the Western Balkans Trade and Transport Facilitation Project. The latter two projects aim at improving access, readiness to, connectivity and integration of North Macedonia’s goods and exports to EU markets. 

The CPF contributes also to North Macedonia’s efforts to boost human capital, through the Social Services Improvement project, as well as through the Primary Education Project. The latter aims to improve the conditions for learning in primary education, while also mitigating and addressing learning losses generated by COVID-19. Through the Social Insurance Administration Project, the Bank aims to improve the quality of social insurance service provision, while strengthening the regulatory framework for people with disabilities and hazardous occupations. 

The CPF supports sustainable growth by strengthening the country’s public financial management system and accelerating the country’s transition to a more sustainable energy mix. The Public Sector Energy Efficiency Project will directly contribute to the reduction of CO2 emissions, through energy efficiency retrofitting of public buildings, both at the municipal and central level, as well as public lighting.  

This CPF includes Advisory Services and analytical studies to advance key reform areas and address major knowledge gaps, such as public spending, through the Public Finance Review. The Innovation and Competitiveness technical assistance helps promote firm-level innovation through both public and private resources and integrating climate perspectives into fiscal policy and the PFM agenda.  

KEY ENGAGEMENT

The World Bank Group program in North Macedonia is in its second half of implementation under the Country Partnership Framework (CPF) for 2019–2023. The total envelope of the CPF was US$420 million, but US$508 million has been approved so far, due to the COVID-19 crisis, including the activation of a US$44.8 million CERC component of the Local Roads Connectivity Project. The CERC component provided liquidity to the government and the private sector to pay for salaries and social security contributions for April, May and June 2020, in an effort to preserve jobs. An update to the Systematic Country Diagnostic has been initiated, as the basis for preparation of the new Country Partnership Framework, for 2024–2028.

Last Updated: Oct 12, 2022

Recent Economic Developments

After a 4-percent growth in 2021, output increased by 2.6 percent in the first half of 2022, helped by continued recovery in investments and a moderate consumption stimulus. Imports surged, leading net exports into negative territory. Growth was driven by services, as industry struggled, and construction saw a further decline in activity. The census-adjusted activity rate declined to 55.3 percent in Q2 2022, led by a drop in female participation.

The employment rate stood at 47.3 percent in Q2 2022 and remained below the pre-pandemic peak. The unemployment rate decreased to 14.5 percent, but the youth unemployment rate remained high at 30.9 percent. The banking sector remained stable, but the liquidity and the capital adequacy ratios decreased to 20.5 and 17 percent in Q1 2022, respectively. Credit growth continued at 9.7 percent in July 2022, led by accelerated corporate and mortgage lending. Consumer price inflation surged to 16.8 percent in August 2022, with food and energy prices rising by more than 20 percent.

To tame inflation expectations, the Central Bank increased the main policy rate four times within a year, to 2.5 percent until August 2022. The pegged exchange rate remained stable with FX interventions to contain sustained pressures, leading to a more than 20 percent loss of reserves since mid-2021. With the supplemental budget in May, the government’s projected fiscal deficit for 2022 increased by 1 percentage point to 5.3 percent of GDP, marked by a rise in current expenditures, along with cuts in capital expenditures.

Total revenues surged by close to 14 percent y-o-y, helped by inflation, which led to a decline in public and publicly guaranteed debt towards 55.4 percent of GDP in June 2022. However, expenditure arrears remained high at 3 percent of GDP in Q2 2022 owing to health sector, state enterprises, and local governments. 

Economic Outlook

Output growth over the medium term is expected to moderate and downside risks remain elevated. The 2022 growth forecast is downgraded further to 2.1 percent as the energy crisis and the war in Ukraine continue to take a toll on the domestic economy. Disruptions related to the war in Ukraine, overstretched supply chains, mounting inflationary and wage pressures, and the intensifying energy supply crisis continue to weigh on the outlook. 

The baseline scenario is built on the assumption that the impact of the energy crisis and the war in Ukraine on the domestic economy will gradually subside, while inflationary pressures tail off over the forecast horizon. However, the underlying assumptions are significantly tilted to the downside, dampening growth, and lifting inflation at the same time. With looming stagflation risks, the country will need to start delivering on reform promises that can reinvigorate potential growth momentum over the medium term. 

Policy efforts need to be geared towards restoring fiscal and financial sustainability, while building social and climate resilience that will reduce the country’s vulnerability to shocks and revamp the country’s long term growth prospects. At the current juncture, heightened political uncertainty and a parliamentary impasse, following the results of local elections and a removal of obstacles for opening EU accession negotiations, amidst a food and energy crisis, may lead to delays in reform implementation, which is needed to boost potential growth and consolidate public finances. 

Moreover, lower domestic and external demand, high input costs and liquidity shortages could lead to further layoffs and increase poverty, stretching already tight public finances. Finally, tightening financial conditions may affect financing options and costs going forward.

Last Updated: Oct 12, 2022