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Macedonia - Economy (Notes)

ECONOMY Macedonia is a small economy with a gross domestic product (GDP) of about $6.2 billion, representing about 0.01% of the total world output. It also is an open economy, highly integrated into international trade, with a total trade-to-GDP ratio of 99.2%. Agriculture and industry have been the two most important sectors of the economy, but the services sector has gained prominence in the past few years. Economic problems persist, even as Macedonia undertakes structural reforms to finish the transition to a market-oriented economy. A largely obsolete industrial infrastructure has not seen much investment during the transition period. Labor force education and skills are competitive, but without adequate job opportunities, many with the best skills seek employment abroad. A low standard of living, high unemployment rate, and relatively modest economic growth rate are the central economic problems. Five years of continuous economic expansion in Macedonia was interrupted by the 2001 conflict, which led to a contraction of 4.5% in 2001. Growth started to pick up in 2003 (2.8%) and continued in 2004 (4.1%), 2005 (3.8%), and 2006 (3.1%). Living standards still lag behind those enjoyed before independence. In 2007, real growth is projected to reach a rather optimistic 6% annually, with inflation of up to 3.2%. The United States is supporting Macedonia's transition to a democratic, secure, market-oriented society with substantial amounts of assistance. Background After the breakup of Yugoslavia in 1991, Macedonia, the former Yugoslavia's poorest republic, faced formidable economic challenges posed by both the transition to a market economy and a difficult regional situation. The breakup deprived Macedonia of key protected markets and large transfer payments from the central Yugoslav government. The war in Bosnia, international sanctions on Serbia, and the 1999 crisis in neighboring Kosovo delivered successive shocks to Macedonia's trade-dependent economy. The government's painful but necessary structural reforms and macroeconomic stabilization program generated additional economic dislocation. Macedonia?s economy was hurt especially by a trade embargo imposed by Greece in February 1994 in a dispute over the country's name, flag, and constitution, and by international trade sanctions against Serbia that were not suspended until a month after conclusion of the Dayton Accords. The impact of the 2001 ethnic Albanian insurgency in Macedonia, decreased international demand for Macedonian products, canceled contracts in the textile and iron and steel industry, and poor restructuring of the private sector affected Macedonia's growth and foreign trade prospects through 2004. Macedonia's political and security situation is stable. This has allowed the government to refocus energies on domestic reforms, boosting economic growth, and attracting increased levels of foreign investment. In 2004, the government passed a progressive Trade Companies Law aimed at easing impediments to foreign investment, providing tax and investment incentives, and guaranteeing shareholder rights. In 2006, the government began implementing a one-stop procedure for business registration that considerably shortened the time required to register a new business. The government?s fiscal policy, aligned with International Monetary Fund (IMF) and World Bank policies, helped maintain a stable macroeconomic environment. Legislation that would further liberalize the telecommunications market, and completion of the first phase of privatization of the electricity sector, sent promising signals to investors. However, economic growth remained sub-par in 2005 and 2006, due in part to poor government results in combating corruption and a weak judiciary, as well as high domestic finance costs and continued bureaucratic obstacles to doing business. The new Government of Macedonia that took office in August 2006 put the fight against corruption and attracting foreign investors at the very top of its priority list. In 2007, it launched an expensive marketing campaign promoting the country as a good investment destination. It provided business incentives by cutting rates on profit tax and personal income tax, while implementing a ?regulatory guillotine?--an activity which aims to significantly reduce procedures and legislative requirements for doing business. Macroeconomy The upward trend of real GDP continued in 2006 as well. After growing by 4.1% and 4% respectively in 2004 and 2005, it grew by 3.1% in 2006. The growth was broad-based as value added increased in all sectors, except in health and social protection. Mining and quarrying led the growth with a 26.8% annual increase, capitalizing on favorable world prices for various metals. Services grew by 3.6% on average, and trade was higher by 5%. Industrial output in 2006 was 3.6% higher than in 2005. The annualized consumer price index (CPI) rose by 3.2%. The official unemployment rate came down a bit to 36.0% in 2006. A conservative and poorly structured fiscal policy has kept the budget in a negligible budget deficit of 0.2% of GDP, well below the revised 0.8% annual target. In such circumstances, monetary policy provided for credit to households and enterprises to expand by 30.5% in 2006, and interest rates have continued to come down. Although export growth topped import growth by one percentage point in 2006, the trade deficit remained high at 21.9% of GDP. In spite of that, the current account deficit was only 0.4% of GDP, primarily due to large private transfers inflow. External debt remained stable at 39.3% of GDP. In late 2005, Macedonian authorities concluded a new Stand-By Arrangement (SBA) with the IMF and a Programmatic Development Policy Loan (PDPL) with the World Bank. In 2006 both financial institutions positively assessed their first review of enforcement of the programs, which resulted in the Macedonian Government withdrawing $12 million from the IMF and $30 million from the World Bank. Since that, the SBA has turned to be only precautionary as balance-of-payment support is not needed anymore. In March 2007, the World Bank Board approved the PDPL 2 arrangement, allowing the Government of Macedonia to withdraw another tranche worth $30 million. In late April 2007, the IMF Board approved the second positive review of the SBA. Trade Macedonia remains committed to pursuing membership in the European Union and global economic structures. It became a full World Trade Organization (WTO) member in April 2003. Following a 1997 cooperation agreement with the European Union (EU), Macedonia signed a Stabilization and Association Agreement with the EU in April 2001, giving Macedonia duty-free access to European markets. In December 2005, itmoved a step forward, obtaining candidate country status for EU accession. Macedonia has had a foreign trade deficit since 1994, which reached a record high of $1.362 billion in 2006, or 21.9% of GDP. Total 2006 trade (imports plus exports of goods and services) was $6.163 billion, or 99.2% of GDP. Macedonia's major trading partners are Serbia, Montenegro, Germany, and Greece. In 2006, total trade between Macedonia and the United States was $63.4 million. U.S. exports accounted for 1.1% of Macedonia's total imports. U.S. meat, mainly poultry, and electrical machinery have been particularly attractive to Macedonian importers. Principal Macedonian exports to the United States are tobacco, apparel, footwear, and iron and steel. Macedonia has Free Trade Agreements with Ukraine, Turkey, and the European Free Trade Association countries. Bilateral agreements with Albania, Bosnia and Herzegovina, Croatia, Serbia, Montenegro, UN Mission in Kosovo, and Moldova were replaced with the membership in the Central European Free Trade Agreement (CEFTA), which the other countries joined in December 2006.