Transition Report 2013 Stuck in transition?


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Country assessments

FYR Macedonia

Main macroeconomic indicators %
  2009 2010 2011 2012
GDP growth -0.9 2.9 2.9 -0.3 2.4
Inflation (end-year) -1.7 3.1 2.7 4.8 2.0
Government balance/GDP -2.7 -2.4 -2.5 -3.9 -4.2
Current account balance/GDP -6.8 -2.0 -3.0 -3.9 -5.8
Net FDI (in million US$) 191 210 476 142 315
External debt/GDP 59.1 58.0 65.1 70.7 67.2
Gross reserves/GDP 23.8 24.3 27.3 29.3 n.a.
Credit to private sector/GDP 43.4 44.0 45.1 47.4 n.a.

2013 sector transition indicators





Source: EBRD.
Note: Water – Water and wastewater; IAOFS – Insurance and other financial services; PE – Private equity.


  • Economic performance worsened considerably in 2012, with tentative signs of recovery emerging in 2013. The economy slipped into recession in 2012, with GDP declining by 0.3 per cent. Some signs of recovery emerged in the first half of 2013, but weakness in the eurozone continues to weigh heavily on growth prospects.
  • Limited progress has been achieved on the privatisation front. Efforts to complete four remaining large-scale privatisations have been unsuccessful owing to limited investor interest.
  • Important reforms have been implemented in the roads sector. The formation of the independent Public Company for State Roads is expected to help accelerate the implementation of projects in this sector. In addition, the government has initiated the formation of a public-private partnership (PPP) for the construction of part of the Corridor 8 motorway.

Key priorities for 2014

  • Reforms in the power sector need to be accelerated. Electricity tariffs are among the lowest in Europe, and they are not reflective of costs. The regulator should proceed with plans for the liberalisation of the power sector.
  • Effective measures to strengthen the judiciary and the rule of law should be implemented. While the government has been successful in removing regulatory barriers to doing business, judicial independence and tackling corruption remain significant constraints on investment.
  • Efforts should be made to tackle unemployment. The unemployment rate in FYR Macedonia, at around 30 per cent, is high by regional standards, and is a major contributor to poverty.

Macroeconomic performance

The eurozone crisis had a significant impact on the economy in 2012. In contrast to the previous two years, when the economy grew by 3 per cent per year, GDP in 2012 contracted by 0.3 per cent due to declining exports, foreign direct investment (FDI) and remittance inflows. The economy has shown some signs of recovery in the first and second quarters of 2013. Output grew by 2.9 and 3.9 per cent year-on-year in those quarters, respectively, driven primarily by a continuing strong rise in (mainly public) investment. Consumption and export growth were still negative in year-on-year terms, but were considerably higher than in the second half of 2012. Inflation has generally moderated since September 2012, when it jumped to over 5 per cent year-on-year as a result of rising food prices, a rise in pensions and the introduction of a minimum wage.

Fiscal policy has loosened in the past two years. Given that the currency is pegged to the euro, and given the limited sources of external funding, the government has implemented a relatively supportive fiscal policy. The 2012 and 2013 growth targets were raised to 3.5 and 3.9 per cent of GDP, respectively (from 2.5 per cent in the previous two years), as a result of slower than expected growth and higher expenditures associated mainly with the reduction in pending value-added tax refunds and other arrears, as well as increased pension payments. In 2011 the government drew on the precautionary liquidity line (PLL) from the International Monetary Fund (IMF) to finance expenditures. However, the second review of the PLL was not completed, mainly because of the IMF’s concerns over the accumulation of government arrears, and the arrangement remained dormant until it expired in January 2013. The government has since made progress in clearing these arrears. Some infrastructure spending was shifted off-budget in 2013.

The economy is recovering after last year’s recession. GDP is expected to grow by more than 2 per cent in 2013. Growth should rise further in the medium term, as the regional economy recovers and as FYR Macedonia reaps the benefits of sustained macroeconomic stability and investor-friendly reforms that have been introduced in recent years. Unblocking obstacles to European Union (EU) accession would provide a further boost to investor confidence and economic growth.

Major structural reform developments

Progress on EU accession remains stalled. The country obtained EU candidate status in 2005. The European Commission has issued recommendations to open accession talks five times. The most recent recommendation was issued on 16 October 2013 as part of the 2013 Enlargement Package. However, thus far this recommendation has not been upheld by the European Council. In 2012 the EU and FYR Macedonia began a so-called high-level accession dialogue, which was aimed at maintaining the country’s reform momentum in five key areas: rule of law, public administration, freedoms, electoral reform and the economy. In its annual report published in October 2013, the Commission noted that this dialogue has led to a sharper focus on, and better delivery of, EU-related reforms.

The state has not been able to complete four major, large-scale privatisations. The four large state-owned enterprises – chemicals company, Ohis, electrical engineering company, EMO Ohrid, tobacco company, Tutunski Kombinat AD Prilep, and weapons manufacturer, 11 Oktomvri Eurokompozit – still remain in state hands following repeated unsuccessful sale attempts. Investor interest has been lacking due to a combination of weak company fundamentals and a difficult economic environment.

Further steps in the restructuring of the power sector have been delayed. The energy regulator has continued to postpone the full liberalisation of the electricity market. The latest decision, which moved the liberalisation deadline to January 2014, appears to have been motivated by concerns over the consequent substantial increase in electricity prices for households. Under the existing system there is a sizeable cross-subsidy from industrial consumers to households. In a related move, the regulator decided to reduce the end-user electricity tariffs by 5 per cent, effective on 1 July 2013. With tariffs already below cost-reflective levels, this reduction will be a further disincentive to much-needed investments in this sector.

Road sector reforms are advancing. At the end of 2012 the government finalised the transformation of the Agency for State Roads into the Public Company for State Roads (PCSR). This restructuring removed the agency from the central government budget, and is intended to improve the lead time in implementing road projects in the country. Since the beginning of 2013 the government has been developing a new PPP initiative for the construction of the Corridor 8 motorway. Phase 1 of the engagement includes the preparation of a technical pre-feasibility assessment and financial modelling of the project, in order to structure a bankable and economically justifiable concession project.

The government is vigorously pursuing new foreign direct investment (FDI). Over the last few years the government has adopted a large package of reforms aimed at attracting FDI. FYR Macedonia is now actively marketing itself as an attractive investment destination because of its low tax rates (and considerable tax exemptions for investors in the technological industrial development zones), relatively low regulatory burden, stable macroeconomic environment, and free trade agreements with the EU and FYR Macedonia’s neighbouring countries. These positive factors are reflected in the country’s strong performance in doing business indicators, such as in the World Bank 2014 Doing Business report, in which FYR Macedonia is ranked twenty-fifth, of 189 countries. However, despite these efforts, the recovery in FDI has been slow after the 2009 collapse, due, at least in part, to the difficult global economic environment. In 2012 the country attracted only €100 million in inward FDI, which represents less than one-third of the level achieved in the previous year.

Competition in the telecoms sector is growing. Competition has increased continually over recent years, in both the fixed and mobile segments of the market. Furthermore, the market share of the fixed line incumbent, Makedonski Telekom, has been declining, to the point where alternative operators now hold a market share of around 20 per cent.

The financial sector remains stable. Over the past year, credit growth has slowed considerably, falling from over 7 per cent year-on-year in the first half of 2012 to under 4 per cent year-on-year in June 2013. In July 2013 the central bank decided to amend banks’ reserve requirements – from 10 per cent to 8 per cent for local currency, and from 13 per cent to 15 per cent for foreign exchange deposits – to provide an incentive to banks to increase lending in domestic currency. However, with economic growth subdued and the near-term outlook clouded by developments in the eurozone, weak demand is likely to constrain credit growth. Non-performing loans are at just over 10 per cent, and are fully provisioned.    

The government is undertaking initiatives to target the high level of unemployment, especially among young people. In June 2013 the government launched a subsidised lending programme for micro, small and medium-sized enterprises, aimed at incentivising new employment. Enterprises that meet the programme criteria are eligible to receive loans of €3,000 per new employee, up to a maximum of €9,000. These loans have a maturity of three years, with a grace period of one year, and a very favourable interest rate of 1 per cent. The government is also making efforts to reduce the rate of youth unemployment, which, at 54 per cent, is the highest in the south-eastern Europe region.