(GAP) may boost human capital devel- opment, accelerate the green transition NORTH Key conditions and and digitalization, helping to boost po- tential growth. challenges MACEDONIA With eroded fiscal space and rising public debt, the reform agenda in the near to Following a decade-long relative macro- medium term needs to focus on improved economic stability, in 2020 the economy targeting of crisis-related support, boost- Table 1 2021 plunged into a recession with the outbreak ing tax compliance, restructuring and Population, million 2.1 of the global pandemic. As the recovery reprioritizing spending towards the GAP, GDP, current US$ billion 13.9 took hold, on the back of buoyant domestic addressing long-term structural bottle- GDP per capita, current US$ 6696.8 and external demand, the energy crisis as necks and improving the efficiency of pub- Upper middle-income poverty rate ($5.5) a 17.9 well as the war in Ukraine in early 2022, lic investment management. The generous a 33.0 bring new challenges and seek continued fiscal transfers, untargeted subsidies, and Gini index b fiscal support despite elevated debt levels. broad tax exemptions, including frequent School enrollment, primary (% gross) 98.2 b Support measures introduced by the gov- changes of pension policy with sizeable fis- Life expectancy at birth, years 75.8 ernment (i.e., subsidies and social security cal implications are not sustainable and Total GHG Emissions (mtCO2e) 10.4 contributions to private firms and cash could derail the macroeconomic stability Source: WDI, Macro Poverty Outlook, and official data. benefits and vouchers for vulnerable peo- in the given context. a/ Most recent value (2018), 2011 PPPs. b/ WDI for School enrollment (2018); Life expectancy ple) helped alleviate the impact of the pan- (2019). demic on poverty in 2020. After an estimat- ed increase in 2020, poverty likely resumed decline in 2021 (using the upper middle in- Recent developments As the economy rebounded, the energy come class poverty line). The medium-term outlook remains pos- The real growth rebounded by 4 percent crisis and the war in Ukraine brought itive, but downside risks are elevated. in 2021, following a deep contraction new challenges. With rising public debt, The war in Ukraine, sanctions to Russia in 2020. The recovery was broad-based, the authorities need to replace Covid-19 and Belarus, prolonged supply chain driven by a boost in personal consump- support with targeted fiscal support to the disruptions, rising inflationary and min- tion, and a growing investment contri- most energy vulnerable households and imum wage pressures, weak political bution. Exports and imports bounced stability and the energy crisis continue back, but the trade balance worsened. firms. Monetary policy needs to strike a to weigh on the outlook. Heightened po- On the production side, growth was dri- balance between supporting a fragile re- litical uncertainty, and delayed EU ac- ven by services, as the industry strug- covery amidst rising inflation. The medi- cession negotiations, may lead to weaker gled with supply-chain blockages and um-term outlook remains positive, but reform effort needed to boost potential reduced external orders. growth and consolidate public finances. The labor market witnessed a slow im- short-term risks are all tilted downside Further, tightening financial conditions provement despite government support. and intensified. globally may affect options and costs The unemployment rate decreased to 15.2 to meet financing needs. On the posi- percent at end-2021, in part due to a small tive side, the Growth Acceleration Plan increase in the employment rate (at 47.3 FIGURE 1 North Macedonia / Fiscal performance FIGURE 2 North Macedonia / Labor market indicators, 2020-21 Percent of GDP Percent of GDP Percent 70 1 60 55.9 55.7 Q4 2020 0 60 Q4 2021 -1 50 47.3 46.8 50 -2 -3 40 40 -4 30 30 -5 20 -6 20 -7 16.1 15.2 10 -8 10 0 -9 2014 2015 2016 2017 2018 2019 2020 2021 Domestic debt Foreign debt 0 Guarantees Fiscal deficit (rhs) Activity rate Emp. rate Unemp. rate Sources: North Macedonia State Statistics Office, Ministry of Finance and World Source: World Bank calculations based on LFS 2020 and 2021. Bank staff calculations. MPO 29 Apr 22 percent), but also due to a lower activity improvements in the execution rate. Cur- 2022 to alleviate the energy crisis through rate (at 55.7 percent in Q4 2021). rent spending declined as crisis-related indirect tax cuts, supplemental social bene- Banking sector performance remained sol- support decelerated. In November 2021, fits to pensioners and low-income groups, id in 2021, with the liquidity ratio at 22 per- the government declared an energy crisis and concessional credit lines to firms. The cent, and an increase of capital adequacy and transferred sizeable budget funds to fiscal deficit will remain elevated in 2022 ratio to 17.3 percent. Credit growth con- cover the loses of energy companies and with further rise in public debt projected tinued, led by FX-denominated mortgage took over the private heating company. to above 62 percent of GDP. However, the lending, while non-performing loans ratio Public and publicly guaranteed debt stood Ukraine war, if prolonged, would further stood at 3.5 percent. The inflation acceler- at 60.8 percent of GDP, while arrears in- reduce external demand, increase key ated in the second half of 2021, to reach 7.6 creased to 3.3 percent of GDP by yearend. commodity and energy prices, hamper percent in February 2022. The surge is fu- mobility, and result in investment delays. eled by energy and food price hikes, but This scenario would result in even lower spillovers to core inflation widened. While growth and fiscal revenues, as well as ris- wage growth was service sector-led in Outlook ing requests for fiscal support and a surge 2021, in February 2022, government in- in financing costs. creased the minimum wage by 18.5 per- Growth is projected to decelerate to 2.7 In the medium term, the country needs to cent and subsequently provided a tempo- percent in 2022 affected by the economic set public finances back on a sustainable rary compensation to firms through the consequences of the Russian invasion, war path and shift its focus to resolving struc- contribution subsidy. in Ukraine, and associated sanctions. The tural challenges, including low and declin- The fiscal deficit declined to 5.4 percent inflationary pressures (particularly food ing human capital, weak regulatory frame- in 2021. Yet, payment arrears increased by and energy prices) will increase the cost of works, poor competition policy and judi- 0.6 pp of GDP. Tax revenues increased living and hurt the poor despite sizeable cial independence declining productivity, along with capital spending, which saw government support adopted in March and out-migration. TABLE 2 North Macedonia / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 3.9 -6.1 4.0 2.7 3.1 3.2 Private Consumption 3.7 -4.5 5.9 2.8 2.5 3.3 Government Consumption 2.5 6.4 4.1 1.0 0.3 0.2 Gross Fixed Capital Investment 8.7 -14.8 6.8 6.0 8.0 8.0 Exports, Goods and Services 8.9 -10.9 12.3 7.2 7.0 6.0 Imports, Goods and Services 9.5 -10.0 12.9 6.5 6.2 6.0 Real GDP growth, at constant factor prices 3.8 -5.2 2.5 2.7 3.1 3.2 Agriculture 0.1 -3.2 -1.2 2.5 2.0 1.5 Industry 3.4 -9.1 -2.4 3.4 4.9 5.3 Services 4.4 -3.9 4.7 2.5 2.6 2.6 Inflation (Consumer Price Index) 0.8 1.2 3.2 5.5 2.0 1.8 Current Account Balance (% of GDP) -3.3 -3.4 -3.5 -4.0 -3.9 -3.4 Net Foreign Direct Investment (% of GDP) 3.2 1.5 3.7 3.8 3.8 3.9 Fiscal Balance (% of GDP) -2.1 -8.3 -5.4 -5.3 -4.7 -3.7 Debt (% of GDP) 49.2 61.0 60.8 62.7 64.3 64.1 Primary Balance (% of GDP) -1.0 -7.1 -4.1 -4.0 -3.5 -2.5 a,b Upper middle-income poverty rate ($5.5 in 2011 PPP) 16.5 18.3 17.2 16.4 15.9 15.1 GHG emissions growth (mtCO2e) 4.7 -6.0 0.9 0.3 0.4 0.5 Energy related GHG emissions (% of total) 69.4 67.5 67.9 67.9 67.7 67.5 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Calculations based on ECAPOV harmonization, using 2018-SILC-C.Actual data: 2018. Nowcast: 2019-2021. Forecasts are from 2022 to 2024. b/ Projection using neutral distribution (2018) with pass-through = 0.87 based on GDP per capita in constant LCU. MPO 30 Apr 22