North Macedonia: Country Manager on Western Balkans Regular Economic Report Spring 2022

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00:03 Just as the economy of the Western Balkans

00:05 were looking to growth recovery beyond the pandemic,

00:09 a new set of challenges confronted the region.

00:12 Output for the Western Balkans has now surpassed pre-pandemic levels,

00:16 but the response to the COVID-19 pandemic

00:19 has resulted in higher public debt

00:22 and has left lasting scars on the labor market.

00:26 Rapid growth in 2021

00:28 saw the creation of more than 200,000 new jobs in the Western Balkans

00:32 helped by a resumption in tourism and construction.

00:36 The employment rate

00:38 reached historical high for the Western Balkans

00:40 led by return of women and youth to sectors disproportionately hit

00:45 by the pandemic.

00:47 However,

00:48 labor force participation rates remain low across the region,

00:52 and unemployment in the Western Balkans rose to 13.7% in 2021

00:57 as labor market support programs were gradually tapered off

01:01 and people re-entered the labor market after pandemic induced inactivity.

01:06 With a recovery of employment demand,

01:09 the poverty rate was reduced below pre-pandemic

01:12 levels across all the Western Balkans economies.

01:16 With slightly over than 400,000 people being lifted out of poverty in 2021.

01:21 However,

01:22 rising energy and food prices across all countries in the Western Balkans

01:27 are expected to weigh heavily on low income households

01:31 which spend a much higher share of their income

01:34 to cover their basic needs.

01:37 Buoyant economic activity across the

01:39 region resulted in improved revenue performance

01:43 that brought fiscal deficits down by 4% points of GDP

01:47 compared to 2020 to 3.3% of GDP.

01:52 Pandemic-related fiscal support has been gradually unwarmed,

01:56 although governments across the region

01:58 are now facing increased pressure to help alleviate

02:01 the impact of rising food and energy prices.

02:04 Sharp rises in global commodity prices and stronger demand

02:07 fed into higher inflation across the Western Balkans.

02:11 Core inflation in the region also accelerated as persistent

02:15 supply shocks and wage increases fueled inflationary expectations.

02:20 Consumer price inflation growth in January 2022

02:24 ranged from 3.7% in Albania to 8.2% in Serbia.

02:30 The conflict between Russia and Ukraine

02:33 has added significant further pressures.

02:37 Financial stability in the region remains sound due to ample support measures,

02:42 but vigilance will be needed given exceptional uncertainty.

02:46 The financial systems of the Western Balkans economies

02:49 have remained resilient throughout the pandemic

02:53 with adequate capital and liquidity buffers

02:55 and the maintenance of asset quality.

02:59 Policy support,

03:00 including borrower relief measures

03:03 coupled with the growth recovery

03:05 helped reduce banking sector risks and

03:08 even increase commercial bank profitability.

03:11 There are several channels of impact from the

03:14 war in Ukraine and the Western Balkans.

03:17 It is certain

03:18 that inflation will be

03:19 even higher because of additional increases in food and energy prices,

03:24 and that lower exports,

03:25 disruption in supply chains,

03:27 and lower tourism revenues would also likely lead to a slowdown in growth.

03:33 Direct trade and investment linkages with Russia and Ukraine

03:37 are more limited

03:38 except in Serbia and Montenegro.

03:41 But a broad shock to business confidence across Europe

03:44 would have implications for investments into,

03:47 into and demand from Western Balkans

03:50 and for the flow of remittances.

03:53 In this context,

03:54 policymakers in the region need to focus

03:56 on building resilience and undertaking structural reforms

04:00 to support growth and steer through the crisis.

04:04 With limited fiscal space,

04:06 Western Balkan countries will need to carefully weigh

04:09 the costs and benefits of new spending commitments

04:12 and to prioritize vulnerable households.

04:16 Improving tax compliance

04:18 and increasing progressivity should be a priority across the Western Balkans

04:22 as much as building energy resilience

04:24 through investing in renewables and energy efficiency

04:27 that the report talks about.

04:30 Policymakers will also need to resist

04:33 the temptation to impose restrictions on trade,

04:36 especially on food,

04:37 which will cause market distortions.

04:40 Structural measures to reduce business regulatory costs,

04:44 increase market competition,

04:45 support labor market participation,

04:48 and strengthen the independence of public institutions can help

04:51 support growth in this uncertain environment

04:54 that the region is now facing.

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Just as the economy of the Western Balkans were looking to growth recovery beyond the pandemic, a new set of challenges confronted the region. Output for the Western Balkans has now surpassed pre-pandemic levels, but the response to the COVID-19 pandemic has resulted in higher public debt and has left lasting scars on the labor market. Rapid growth in 2021 saw the creation of more than 200,000 new jobs in the Western Balkans helped by a resumption in tourism and construction. The employment rate reached historical high for the Western Balkans led by return of women and youth to sectors disproportionately hit by the pandemic. However, labor force participation rates remain low across the region, and unemployment in the Western Balkans rose to 13.7% in 2021 as labor market support programs were gradually tapered off and people re-entered the labor market after pandemic induced inactivity. With a recovery of employment demand, the poverty rate was reduced below pre-pandemic levels across all the Western Balkans economies. With slightly over than 400,000 people being lifted out of poverty in 2021. However, rising energy and food prices across all countries in the Western Balkans are expected to weigh heavily on low income households which spend a much higher share of their income to cover their basic needs. Buoyant economic activity across the region resulted in improved revenue performance that brought fiscal deficits down by 4% points of GDP compared to 2020 to 3.3% of GDP. Pandemic-related fiscal support has been gradually unwarmed, although governments across the region are now facing increased pressure to help alleviate the impact of rising food and energy prices. Sharp rises in global commodity prices and stronger demand fed into higher inflation across the Western Balkans. Core inflation in the region also accelerated as persistent supply shocks and wage increases fueled inflationary expectations. Consumer price inflation growth in January 2022 ranged from 3.7% in Albania to 8.2% in Serbia. The conflict between Russia and Ukraine has added significant further pressures. Financial stability in the region remains sound due to ample support measures, but vigilance will be needed given exceptional uncertainty. The financial systems of the Western Balkans economies have remained resilient throughout the pandemic with adequate capital and liquidity buffers and the maintenance of asset quality. Policy support, including borrower relief measures coupled with the growth recovery helped reduce banking sector risks and even increase commercial bank profitability. There are several channels of impact from the war in Ukraine and the Western Balkans. It is certain that inflation will be even higher because of additional increases in food and energy prices, and that lower exports, disruption in supply chains, and lower tourism revenues would also likely lead to a slowdown in growth. Direct trade and investment linkages with Russia and Ukraine are more limited except in Serbia and Montenegro. But a broad shock to business confidence across Europe would have implications for investments into, into and demand from Western Balkans and for the flow of remittances. In this context, policymakers in the region need to focus on building resilience and undertaking structural reforms to support growth and steer through the crisis. With limited fiscal space, Western Balkan countries will need to carefully weigh the costs and benefits of new spending commitments and to prioritize vulnerable households. Improving tax compliance and increasing progressivity should be a priority across the Western Balkans as much as building energy resilience through investing in renewables and energy efficiency that the report talks about. Policymakers will also need to resist the temptation to impose restrictions on trade, especially on food, which will cause market distortions. Structural measures to reduce business regulatory costs, increase market competition, support labor market participation, and strengthen the independence of public institutions can help support growth in this uncertain environment that the region is now facing.

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worldbank/North Macedonia World Bank Country Menager Massimiliano Paolucci - WBRER Spring 2022

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North Macedonia World Bank Country Menager Massimiliano Paolucci - WBRER Spring 2022

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North Macedonia World Bank Country Menager Massimiliano Paolucci - WBRER Spring 2022

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