North Macedonia

major macro economic indicators

(e): Estimate (f): Forecast  

RISK ASSESSMENT

Investment-driven growth

Growth remained modest in 2023 due to domestic demand that continued to be affected by inflation and sluggish economic activity among the country's main partners, such as Germany, which absorbs almost half of the country's exports (52% of GDP)., Exports should gradually pick up again in 2024, but the net contribution of trade to growth will remain negative since imports will also increase, stimulated by infrastructure construction. Public investment will largely support economic activity by accelerating the development of transport infrastructure, such as Corridor VIII. The project aims to deploy and electrify two axes, one road and the other rail, linking Albania to Bulgaria and crossing Northern Macedonia. In December 2023, as part of its Global Gateway initiative, the European Union announced that it was granting financial and technical assistance of EUR 560 million to Northern Macedonia, together with the European Investment Bank (EIB) and the EBRD, to complete the third phase of the eastern section of the local portion of the rail corridor (construction of a 24km section between Kriva Palanka and the border with Bulgaria), and the electrification of 88km between Kumanovo and the border. European funds support both public and private investment, particularly for energy development. In March 2023, for example, the government signed a EUR 70 million investment loan with the EIB for the construction of a treatment plant in the capital Skopje. The country is also looking for investors to build two hydrogen power stations, with a combined capacity of 1.1GW. North Macedonia aims to eliminate its dependence on coal by 2030, which currently accounts for 40% of the energy mix; this initiative will be supported by a EUR 3 billion plan from the EBRD. In addition, household incomes will continue to rise as a result of the reforms announced in 2023 regarding public sector pay and pension increases. Combined with lower inflation, this will increase purchasing power and stimulate private consumption. The disinflationary trend will continue following monetary tightening and the fall in world food prices. The central bank (NBRNM), whose currency is pegged to the euro, raised its key rate in September 2023 for the fifth time this year; it now stands at 6.3% and should be maintained at this level, at least during the first half of the year, even if rising wages are creating new inflationary pressures. Tighter financing conditions will continue to weigh on key sectors, such as construction, which will nonetheless benefit from the government's infrastructure projects. The industrial sector (manufacturing, construction) will remain a major contributor to growth (25% of GDP), driven mainly by textiles and clothing, as well as the production of automotive components.

Twin deficits financed by multilateral funds and FDI

The budgetary reforms adopted in 2023 will come fully on stream in 2024, helping to reduce the public deficit, according to the 2024-2028 budget strategy road map. Changes to taxation rules will increase revenues; in September 2023, the government announced the reduction of VAT and corporation tax exemptions, as well as the introduction of a 30% solidarity tax for corporate income taxpayers. In addition, the phasing-out of energy support measures on top of economic growth will improve the fiscal base. Nevertheless, the reform of public wages, the 5.3% rise in pensions and public investment in infrastructure will limit the decline in the deficit. In addition to a 10% increase implemented in September 2023, public salaries are now indexed to the gross national wage, and new holiday allowances have been introduced. The increase in capital expenditure, notably linked to the motorway project to Albania, and which has been budgeted at 10% of GDP over the 5 years of its construction, will also weigh on public finances. The deficit will be largely financed by regional and multilateral aid. The European Union is providing macro-financial assistance of EUR 100 million to help Northern Macedonia meet its financing needs in 2023 and 2024. This aid, in the form of a loan in two equal instalments, runs parallel with the IMF's Precautionary and Liquidity Line, granted in November 2022 for a total of EUR 530 million over two years. In January 2024, around EUR 200 million was released under this line to support the fiscal consolidation programme. The country will also benefit from a loan from the World Bank, granted in December 2023, for a period of 11 years and amounting to EUR 93.8 million. Public debt is mainly external (66%), with 78% denominated or indexed in foreign currencies, mainly in euro (almost 70% of public debt). Two-thirds of the external debt is held by private creditors and the remainder by government officials.
The trade balance is structurally heavily in deficit due to the country's major dependence on imports (over 70% of GDP), mainly energy, intermediate products, components and machinery. However, it improved in 2023 thanks to the gradual fall in world energy prices, enabling the current account deficit to return to its moderate level prior to the war in Ukraine. With the gradual normalisation of European trade in 2024, both imports and exports (car parts, electrical appliances, furniture, clothing) should pick up, albeit subject to German activity. Large-scale public investment in infrastructure will generate imports, which will widen the deficit. The services balance will nevertheless remain positive, thanks to manufacturing services and, to a lesser extent, transport and tourism. The country will continue to benefit from remittances from its expatriate workers. Conversely, foreign investors will continue to repatriate dividends and other investment income. FDI will amount to 3.7% of GDP, which will finance the entire current account deficit and maintain reserves at a level equivalent to four months' imports. External debt represents 80% of GDP, 60% of which is owed by the private sector, notably in the form of intra-group loans related to foreign direct investment.

EU membership, a source of hope and discord

Public foreign policy will remain focused on joining the European Union. However, progress remains subject to constitutional amendments, proposed by France in 2022, to lift Bulgaria's veto. Northern Macedonia has agreed to recognise the existence of a Bulgarian minority in the country, but the constitutional amendments have not yet been introduced as they require a two-thirds majority in Parliament, which is difficult to obtain. The main (right-wing) opposition party, VMRO DPMNE, which won 44 seats out of 120 in the Assembly at the last legislative elections in 2020, is hostile to such a change. The government that preceded the technical interim government was led by the social-democrat and pro-European Dimitar Kovačevski (2022-2024). He reshuffled his government at the beginning of 2023 to broaden his parliamentary majority by integrating the Albanian-Macedonian party. The next presidential – the President has a symbolic role – and parliamentary elections will be held in May 2024 and are likely to crystallise identity-related tensions. Problems of inter-ethnic cohesion are compounded by high youth unemployment (25.5%) and corruption scandals that are eroding the popularity of the outgoing majority party, the SDSM (Social Democratic Union of Macedonia). The legislative elections could therefore be won by the VMRO DPMNE, which is likely to encounter difficulties in forming a coalition if it wins. Its reticence about the constitutional changes required for European accession has deprived it of significant support from Albanian parties.
In addition, Northern Macedonia will further reduce its energy dependence on coal and Russia through the construction of a 68km section enabling interconnection with the Trans-Adriatic Pipeline (TAP) in Greece, supported by the EIB for a total of EUR 2.475 billion. This is in line with Northern Macedonia's ongoing regional integration and connectivity efforts (Corridors VII and X supported by the EU, Open Balkan initiative with Albania and Serbia).

Last updated: April 2024