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Mace­do­nia’s eco­nomic growth will ac­cel­er­ate in 2014 with sup­port from an in­cip­i­ent re­cov­ery in ex­ports, a rise in pub­lic in­vest­ment in in­fra­struc­ture and projects funded by for­eign in­vest­ment. The re­cov­ery is still nar­rowly based but the econ­omy should strengthen fur­ther in the medium term, ap­proach­ing 4.0% per year. How­ever, the stock of FDI is lower than the re­gional av­er­age, and sub­stan­tially less than in Bul­garia, Croa­tia and Ro­ma­nia. Mace­do­nia has some of the low­est wage costs in Europe. Mace­do­nia ex­pe­ri­enced a mild re­ces­sion in 2009. Weaker ex­port de­mand and tighter con­di­tions on for­eign lend­ing were the main cul­prits. The econ­omy staged a mod­est re­bound in sub­se­quent years but con­tracted again 2012. Growth re­turned in 2013, how­ever at a pace that has con­sis­tently been in­suf­fi­cient to raise liv­ing stan­dards.

Mace­do­nia was gen­er­ally shielded from the im­pact of the euro­zone cri­sis due to the coun­try's pru­dent fis­cal pol­icy, an ab­sence of ma­jor im­bal­ances and a fi­nan­cial sys­tem that is not de­pen­dent on sig­nif­i­cant par­ent bank cap­i­tal.

Am­bi­tious pro­grammes to im­prove roads, power, water and other in­fra­struc­ture - mainly through in­ter­na­tion­ally-funded projects are un­der­way and could lay the ba­sis for sus­tain­able growth in the fu­ture. In­fla­tion has been ris­ing but wage hikes have pre­vented a drop in con­sumer in­come.

Eco­nomic prospects

Mace­do­nia's econ­omy will im­prove in 2014 when real GDP growth is ex­pected to ac­cel­er­ate to 3.2% from 2.2% in 2013. Sup­port should come from an in­cip­i­ent re­cov­ery in ex­ports, a rise in pub­lic in­vest­ment in in­fra­struc­ture and projects funded by for­eign in­vest­ment. The re­cov­ery, how­ever, is still nar­rowly based. Growth is ex­pected to ac­cel­er­ate in the medium term, ap­proach­ing 4.0% per year.

In­fla­tion was 2.8% in 2013 and prices are ex­pected to rise by 2.5% in 2014. In­fla­tion gen­er­ally tracks the rate of price in­crease in the euro­zone.

Of­fi­cials in­tend to boost in­vest­ment spend­ing for roads, rail­roads, gasi­fi­ca­tion, and other en­ergy in­fra­struc­ture. In­cen­tives in­clude a 10-year tax hol­i­day for com­pa­nies set­ting up in a spe­cial de­vel­op­ment zone, sub­si­dies for green­field plants and some of the low­est wage costs in Europe. In ad­di­tion, the gov­ern­ment of­fers in­vestors an “in­vest­ment premium” to re­pay 50% of the cost once a pro­duc­tion fa­cil­ity is com­pleted. Mace­do­nia's 10% flat tax along with a favourable busi­ness and in­vest­ment en­vi­ron­ment is also an ad­van­tage.

The real value of pri­vate fi­nal con­sump­tion rose by 1.6% in 2013 while gains of 1.9% are ex­pected in 2014. Stronger rates of growth are fore­cast in the medium term.

Un­em­ploy­ment was 29.7% in 2013 and is ex­pected to edge down to 28.7% in 2014. Youth un­em­ploy­ment is thought to be close to 50%. How­ever, many of those re­ported of­fi­cially as un­em­ployed work in the in­for­mal sec­tor. The in­for­mal market rep­re­sents 20-45% of GDP. Ed­u­ca­tion and labour skills are re­garded as in­ad­e­quate.

Eval­u­a­tion of market po­ten­tial

Real growth of GDP should ac­cel­er­ate in 2015 and 2016. The gov­ern­ment's tar­get is to achieve sus­tain­able growth of at least 6.5% over the medium term. How­ever, the stock of FDI is lower than the re­gional av­er­age, and sub­stan­tially less than in Bul­garia, Croa­tia and Ro­ma­nia. A sus­tained im­prove­ment in in­vest­ment is badly needed.

Mace­do­nia has high rates of un­em­ploy­ment, high youth un­em­ploy­ment, and low rates of labour force par­tic­i­pa­tion and it ap­pears that much of the prob­lem is struc­tural in na­ture. This means it will be more dif­fi­cult to cut un­em­ploy­ment. Pro-growth poli­cies in­clude preser­va­tion of a low tax en­vi­ron­ment, in­vest­ments in in­fra­struc­ture and ed­u­ca­tion and the pro­mo­tion of FDI.

For­eign trade

In 2013, ex­ports were 40.0% of GDP com­pared to 39.9% in 2008. Ex­ports (in dol­lars) rose by 4.6% in 2013. Ex­port growth should be much stronger in the medium term, un­der­pinned by in­flows of FDI to the trad­able sec­tor, low wage lev­els rel­a­tive to neigh­bour­ing coun­tries and a notable con­tri­bu­tion from free trade zones. Presently, two-thirds of land­locked Mace­do­nia's trade moves though the Thes­sa­loniki port but the coun­try is up­grad­ing its road­way sys­tem to boost ex­ports.

Tar­iffs on more than 100 im­ported prod­ucts have been dropped as part of the coun­try's drive to im­ple­ment its Sta­bil­i­sa­tion and As­so­ci­a­tion Agree­ment (SAA) with the EU. Tar­iffs on agri­cul­tural prod­ucts will re­main par­tially in place. The gov­ern­ment is in­tent on pro­tect­ing do­mes­tic agri­cul­ture, which is not cov­ered by the SAA. Mace­do­nian ex­porters are ben­e­fit­ting from Kosovo's em­bargo on Ser­bian goods.

Both the man­u­fac­tur­ing sec­tor and the agri­cul­tural sec­tor are in­creas­ingly ex­port-ori­ented. In 2013, ba­sic man­u­fac­tures – typ­i­cally low-cost prod­ucts with lim­ited in­ter­na­tional com­pet­i­tive­ness – were 26.1% of the to­tal. In 2013, 59.8% of to­tal ex­ports went to the EU. The cur­rent ac­count deficit was 3.9% of GDP in 2012 and it widened to 5.8% in 2013 as cap­i­tal im­ports grew.

Busi­ness en­vi­ron­ment

The gov­ern­ment has in­tro­duced a se­ries of sig­nif­i­cant re­forms but there are lin­ger­ing con­straints on the pri­vate sec­tor. The clear­ance of pay­ment ar­rears be­gan in late 2012 and pro­vides busi­nesses much-needed liq­uidly. Prop­erty rights, how­ever, are weakly en­forced and cor­rup­tion in the cus­toms depart­ment adds to the cost of trad­ing. The op­er­at­ing en­vi­ron­ment for smaller in­vestors must also be im­proved.

Other re­forms in­tro­duced in re­cent years in­clude an over­haul of the busi­ness regis­tra­tion sys­tem, the sim­pli­fi­ca­tion of li­cens­ing pro­ce­dures and pri­vati­sa­tion of elec­tric­ity dis­tri­bu­tion. A flat tax rate for both cor­po­ra­tions and per­sonal in­comes has proved at­trac­tive to in­vestors. Mace­do­nia has also de­vel­oped free eco­nomic zones in Skopje, Te­tovo and Bi­tola. The gov­ern­ment is com­mit­ted to re­form its elec­tric­ity in­dus­try. A new en­ergy law is ex­pected to bring the coun­try in com­pli­ance with its treaty obli­ga­tions once it is fully im­ple­mented.

EU ac­ces­sion is the driv­ing force be­hind most of the re­forms. Na­tional leg­is­la­tion is be­ing re­aligned to meet EU spec­i­fi­ca­tions. Of­fi­cials have made spe­cific progress in fields such as pro­cure­ment, trans­port pol­icy, cus­toms union and tax­a­tion.


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