Document of The World Bank Group FOR OFFICIAL USE ONLY Report No. 186064-MK INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY COUNTRY PARTNERSHIP FRAMEWORK FOR THE REPUBLIC OF NORTH MACEDONIA FOR THE PERIOD FY24-FY28 December 8, 2023 Western Balkans Country Management Unit Europe and Central Asia The International Finance Corporation Europe The Multilateral Investment Guarantee Agency This document is being made publicly available after Board consideration. It may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information. The date of the last Country Partnership Framework was April 18, 2019. CURRENCY EQUIVALENTS Exchange rate effective as of November 30, 2023 Currency Unit = North Macedonia Denar (MKD) MKD1 =0.0177 USD FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS ABP Animal Byproduct MICs Middle Income Countries AF Additional Financing MIGA Multilateral Investment Guarantee Agency AFD French Agency for Development MKD Macedonian Denar ASA Advisory Services and Analytics MoF Ministry of Finance BESS Battery Energy Storage System MPA Multiphase Programmatic Approach BETA-PFM Building Effective, Transparent, and MSIP Municipal Services Improvement Project Accountable PFM Institutions MSME Micro, Small and Medium Enterprise CBAM Carbon Border Adjusted Mechanism NATO North Atlantic Treaty Organization CCDR Country Climate and Development NDC Nationally Determined Contributions Report NDS National Development Strategy CE Citizen Engagement NLB Nova Ljubljanska Banka CEM Country Economic Memorandum NRRRP National and Regional Roads Rehabilitation CERC Contingent Emergency Response Project Component NSW National Single Window CFAP Climate Framework Action Plan OBL Organic Budget Law CIF Climate Investment Fund OPEC Organization of the Petroleum Exporting CLR Completion and Learning Review Countries COVID-19 Coronavirus Disease PEFA Public Expenditure and Financial Accountability CPF Country Partnership Framework PEIP Primary Education Improvement Project CPI Corruption Perception Index PESR Public Enterprise for State Roads CSO Civil Society Organization PFC Public Finance and Competitiveness DPO Development Policy Operation PFM Public Financial Management DRM Disaster Risk Management PforR Program for Results EBRD European Bank for Reconstruction and PFR Public Finance Review Development PISA Program for International Student Assessment EC European Commission PIT Personal Income Tax ECA Europe and Central Asia PIU Project Implementation Unit ECD Early Childhood Development PLL Precautionary and Liquidity Line ECRP Emergency COVID-19 Response Project PLR Performance and Learning Review EIB European Investment Bank PPP Public–Private Partnership ERP Economic Reform Program PSEEP Public Sector Energy Efficiency Project ESF Environmental and Social Framework RAMS Road Asset Management System EU European Union RSPV Rooftop Solar Photovoltaic FAO Food and Agriculture Organization RTTFP Regional Trade and Transport Facilitation FDI Foreign Direct Investment Project FI Financial Institutions SAMIS State Aid Management Information System FITD Fund for Innovation and Technological SCD Systematic Country Diagnostic Development SDG Sustainable Development Goals FY Fiscal Year SDISP Skills Development and Innovation Support GAP Growth Acceleration Plan Project GDP Gross Domestic Product SECO Swiss State Secretariat for Economic Affairs GHG Greenhouse Gases SIAP Social Insurance Administration Project GMA Guaranteed Minimum Assistance SILC Survey for Income and Living Conditions HLO High-Level Outcome SME Small and Medium Enterprise IBRD International Bank for Reconstruction SOE State Owned Enterprise and Development SOGIESC Sexual Orientation, Gender Identity, ICR Implementation Completion Results Expression, and Sex Characteristics Report SSIP Social Services Improvement Project IFC International Finance Corporation TA Technical Assistance IFI International Financial Institution TFs Trust Funds IFMIS Integrated Financial Management TVET Technical and Vocational Education and Information System Training IMF International Monetary Fund UNDP United Nations Development Program IPA Instrument for Pre-accession UNICEF United Nations Children’s Fund IPF Investment Project Financing US$ United States Dollar KfW Germany’s Credit Institute for USAID United States Agency for International Reconstruction Development LGBTI+ Lesbian, gay, bisexual, transgender and VAT Value Added Tax intersex people and + is a denotation of WBG World Bank Group everything on the gender and sexuality WBIF Western Balkans Investment Framework spectrum LPI Logistics Performance Index LRCP Local Roads Connectivity Project MEPSO Electricity Transmission System Operator of North Macedonia MFD Maximize Finance for Development IBRD IFC MIGA Vice President: Antonella Bassani Alfonso Garcia Mora Ethiopis Tafara Director: Xiaoqing Yu Rana Karadsheh Yasser Ibrahim (Acting Task Team Leaders: Massimiliano Paolucci, Cveta Nicolas Marquier, Levent Director) Peruseska-Joncevska, Elene Karadayi, Visar Perani Gabisile Ndlovu Imnadze TABLE OF CONTENTS I. INTRODUCTION ................................................................................................................................... 1 II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA.......................................................................... 1 2.1 Social and Political Context........................................................................................................... 1 2.2 Recent Economic Developments .................................................................................................. 2 2.3 Poverty Profile .............................................................................................................................. 4 2.4 Main Development Challenges ..................................................................................................... 5 III. WORLD BANK GROUP PARTNERSHIP FRAMEWORK ....................................................................... 7 3.1 Government Program and Medium-term Strategy ...................................................................... 7 3.2 Proposed WBG Country Partnership Framework ......................................................................... 8 3.3 Objectives supported by the WBG Program............................................................................... 13 HLO 1: Improved Quality of Public Service Delivery .................................................................... 13 HLO 2: More Productive Private Sector Jobs ............................................................................... 15 HLO 3: Increased Climate Resilience ............................................................................................ 18 3.4 Implementing the CPF ................................................................................................................ 21 Financial Envelope........................................................................................................................ 21 Financial Management and Procurement.................................................................................... 23 Monitoring and Evaluation........................................................................................................... 23 Partnerships and Donor Coordination ......................................................................................... 24 IV. MANAGING RISKS TO THE CPF PROGRAM ..................................................................................... 24 Annex 1: Results Matrix for the North Macedonia CPF for FY24–FY28 ......................................... 26 Annex 2: Completion and Learning Review .................................................................................... 46 Annex 3: Active and Proposed ASA ................................................................................................. 84 Annex 4: Selected Indicators* of Bank Portfolio Performance and Management ........................ 86 Annex 5: IBRD Operations Portfolio ................................................................................................ 87 Annex 6. IFC’s Committed Portfolio* .............................................................................................. 88 Annex 7. MIGA’s Guarantee Portfolio............................................................................................. 89 Annex 8: Priority Areas of Development Partners’ Engagement ................................................... 90 Tables Table 1: North Macedonia: Key Macroeconomic Indicators, 2020–28 ................................................ 3 Table 2: HLOs and CPF Objectives.......................................................................................................... 9 Table 3: Indicative Lending Envelope .................................................................................................. 21 Table 4: Risks to the CPF Program ....................................................................................................... 24 Figures Figure 1: Higher Level Outcomes, CPF Objectives, and Selectivity Filters ............................................ 8 Figure 2: 2023 SCD Update – HLOs and Priorities ................................................................................. 8 Boxes Box 1: Country Climate Diagnostic Report - proposed focus and timeline ........................................ 10 I. INTRODUCTION 1. This Country Partnership Framework (CPF) outlines the priorities for the World Bank Group’s (WBG) engagement with the Republic of North Macedonia for FY24–FY28. It maintains the strategic directions of the CPF for FY18–FY23, with a sharpened focus on competitiveness, human capital development, and environmental sustainability in response to the country’s evolving development challenges, as outlined in the FY23 Systematic Country Diagnostic (SCD) Update,1 the draft Public Finance Review (PFR), and other major analytical works, such as the Trade Competitiveness Diagnostic and State Aid Effectiveness Report2 and the draft Country Climate and Development Report (CCDR). The CPF has also been informed by stakeholder consultations undertaken with the government, parliament, private sector, academia, civil society, and development partners in July 2023. 2. The proposed WBG program seeks to deliver solutions and impact at speed and scale for North Macedonia to become more competitive, sustainable, inclusive, and resilient, aligned with the strategic directions of the WBG Evolution Roadmap. The CPF aims to achieve these goals, in line with the WBG’s updated mission to end extreme poverty and boost shared prosperity on a livable planet, by: (a) delivering investments and operations that draw on country, regional, and global knowledge to address country-specific development constraints and, in doing so, contribute to advancing the global agenda in the areas of climate adaptation, energy transition, digitalization, and health system preparedness; (b) managing current and future projects more effectively and efficiently; (c) scaling up successful and impactful projects; (d) operationalizing One World Bank and Cascade Approaches in a more structured way, with a renewed focus on enabling and mobilizing private capital through the full range of instruments offered by the International Bank of Reconstruction and Development (IBRD), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA) (for example, in energy and micro, small, and medium enterprise (MSME) finance), while supporting domestic resource mobilization to leverage scarce public financing in areas where private sector engagement is not optimal; (e) leveraging expertise and financial support in partnership with other development partners to increase the coverage and impact of proposed development programs; and (f) presenting a results framework that aims to establish a more direct link between the CPF’s high-level outcomes (HLOs) and interventions with more realistic indicators that, to the extent possible, align with the spirit of the emerging World Bank Scorecard. 3. The CPF strategy is articulated along three HLOs: (1) improved quality of public service delivery, (2) more productive private sector jobs, and (3) increased climate resilience. It aligns well with the country’s National Development Strategy (NDS) 2022–42 (under preparation at the time of writing), the Economic Reform Program (ERP), and the Growth Acceleration Plan (GAP) for 2022–26, all of which embed EU accession as a cross-cutting strategic priority. II. COUNTRY CONTEXT AND DEVELOPMENT AGENDA 2.1 Social and Political Context 4. Since independence, the Republic of North Macedonia has made tangible progress on social, economic, and institutional development. Income per capita doubled, and the economy moved from lower-middle-income to upper-middle-income status. Thanks to its strategic location at the heart of the Western Balkans, a relatively low-cost labor force, and generous tax credits, the Republic of North Macedonia has attracted considerable foreign direct investment (FDI), and trade openness has more than doubled in the past two decades (with exports and imports increasing as a share of gross domestic product (GDP) from 70 percent in 2003 to 170 percent today—the highest in the region). 1 Report No. 185086 2 Report No. 176166 1 Living standards have improved, and extreme poverty and inequality have decreased, owing to the implementation of important social protection reforms that have endowed the country with functioning systems to protect the most vulnerable, especially during the recent crises. 5. The Republic of North Macedonia joined the North Atlantic Treaty Organization (NATO) on March 27, 2020, after resolving the long-standing name dispute with Greece through the Prespa Agreement, but is yet to join the European Union (EU). An EU candidate since 2005, North Macedonia secured the General Affairs Council’s formal endorsement to open accession negotiations in 2020. With the first Intergovernmental Conference on accession negotiations, the European Commission (EC) formally began the screening process, which has not yet been concluded. The official launch of negotiations depends on the parliament’s passage, with a qualified two-thirds majority, of a constitutional amendment in response to Bulgaria's demands regarding long-running historical and linguistic disputes. 6. Recent geopolitical fragmentation trends could potentially reverse the Republic of North Macedonia’s progress in catching up on per-capita income and poverty reduction through trade deepening. Integration of trade, finance, and technological know-how fostered an unprecedented income convergence in North Macedonia and narrowed the gap in living standards with EU countries. However, recent disruptions in trade and global value chains adversely affect North Macedonia’s economic growth, which relies on trade and external financing. At the same time, given the country’s geographical and cultural proximity to the EU and its well-established industries, particularly in the automotive sector, reconfiguring supply chains through nearshoring provides an alternative path and can strengthen the resilience of growth going forward. 2.2 Recent Economic Developments 7. North Macedonia achieved steady and inclusive economic growth before 2020, underpinned by sustained macroeconomic stability, deepened trade integration, and business-supportive reforms. Real growth averaged 2.4 percent during 2009–19, building on the government’s strategy to attract FDI in the labor-intensive car production value chain, which helped boost exports and reduce unemployment. However, the contribution of net exports to GDP growth has been negative in most years given the high import-intensity of exports, while the unemployment rate remained high, at 13.1 percent overall (25.6 percent among youth), in the second quarter of 2023, despite a significant reduction over the last ten years. 8. The regional and global impacts of the COVID-19 pandemic and Russia’s invasion of Ukraine brought growth to a halt and subsequently fueled inflation, stalling poverty reduction. Following a 4.7-percent decline in activity in 2020, the economy rebounded to pre-pandemic levels in early 2022 with the help of government crisis support transfers and pent-up demand. Inflation reached a 25-year high, at 14.2 percent, in 2022 due to sharp increases in food and energy prices. Monetary tightening by the central bank, including through an increase in the main policy rate to 6.3 percent by October 2023, price and margin caps, and government subsidies for electricity, eased headline inflation to 3.5 percent in October 2023. The pegged exchange rate stayed stable throughout the crises, owing in part to regular foreign exchange interventions by the central bank, while reserve losses observed at the outbreak of Russia’s invasion of Ukraine stabilized by end-2022 and reserves stood at around four months of imports in October 2023. Surging import prices and stockpiling doubled the external deficit in 2022, but FDI inflows remained robust thanks to car supply production nearshoring after the pandemic. Although external pressures are abating, with the current account deficit expected to decline toward 3.7 percent of GDP in 2023, external debt stood at 78.5 percent of GDP in early 2023, of which roughly half is private, amidst a tightening of external financing conditions. 9. Anti-crisis measures stretched public finances. The general government deficit (with the Public 2 Enterprise for State Roads finances included) increased to 8.6 percent of GDP and public debt increased by more than 10 percentage points in one year to 59.7 percent of GDP in 2020.3 Strong revenue performance helped to reduce the deficit in 2021 and 2022, although it is expected to remain at around 5 percent of GDP, on average, in 2021–23 as a result of spending pressures to mitigate the costs of the energy crisis and advanced payments for the Corridors VIII and X highway construction project. Public debt stayed roughly the same by mid-2023, while government arrears reached 3.2 percent of GDP. The country has been accessing the external capital market regularly, but the five- fold increase in the cost of financing (with interest rates well above 6 percent) shifted the focus to international finance institutions. 10. The medium-term outlook remains positive, but risks are tilted to the downside. Growth in 2023 is expected to slow to 1.8 percent as the country faces a slowdown in external demand and the highway construction project slowly takes hold (Table 1). Boosting potential growth will require the implementation of structural reforms needed to enhance productivity, advance on inclusion, and enhance fiscal and environmental sustainability. While underlying risks remain skewed to the downside and are closely tied to the outlook for the country’s main trading partners in the EU, moving ahead with the EU accession negotiations may provide a much-needed boost to reforms and unlock higher growth prospects. Macro-fiscal risks are mitigated in part via the International Monetary Fund’s (IMF) Precautionary and Liquidity Line (PLL) and a new World Bank Sustainability and Resilience Development Policy Operation (DPO), presented to the Board in December 2023, along with related policy dialogue, macroeconomic monitoring, and surveillance. Fiscal consolidation remains a priority, as the general government deficit4 is envisaged to decline to 3 percent (a newly introduced fiscal rule) only in 2027. This would be achieved mainly through: (a) improved revenue collection (currently 33 percent of GDP), owing to tax reforms and strengthened compliance; and (b) cuts in non-productive spending, better-targeted social spending, and removal of crisis support subsidies to make space for capital investments, such as the highway project. This should reduce public debt toward the fiscal debt rule of 60 percent of GDP by 2028, which, however, will still be well above the pre-pandemic level. Table 1: North Macedonia: Key Macroeconomic Indicators, 2020–28 Outturn Projections 2020 2021 2022 2023f 2024f 2025f 2026f 2027f 2028f Real GDP (% change) -4.7 3.9 2.1 1.8 2.5 2.9 2.3 2.4 2.5 Contributions (pp) Consumption -1.5 6.4 2.9 1.2 1.2 1.9 1.4 1.4 1.8 Gross investment -5.7 0.3 4.9 2.1 1.8 1.9 1.8 1.9 1.6 Net exports 2.5 -2.7 -5.7 -1.5 -0.6 -0.9 -0.9 -0.9 -0.9 Unemployment rate 16.4 15.4 14.4 13.0 12.8 12.5 12.0 11.8 11.5 Consumer inflation, period average 1.2 3.2 14.2 9.1 3.0 2.0 2.0 2.0 2.0 Fiscal accounts1/ (Percent of GDP) Overall general government balance -8.2 -5.3 -4.4 -4.7 -3.6 -3.3 -2.9 -2.6 -2.0 Primary general government balance -7.0 -4.1 -3.3 -3.1 -1.9 -1.3 -0.6 -0.1 0.3 Overall balance with roads2/ -8.6 -5.8 -4.7 -4.8 -4.0 -3.6 -3.2 -2.8 -2.2 Total revenues with roads2/ 31.0 33.2 33.3 35.0 36.0 36.6 36.6 37.4 37.6 Total expenditures with roads2/ 39.6 39.0 38.0 39.8 39.9 40.2 39.8 40.2 39.8 Public debt / 59.7 61.0 59.7 60.2 60.9 61.5 61.1 59.8 58.1 Selected Monetary Accounts (Percent) M2, national currency (change, in percent) 10.6 5.5 4.9 5.6 … ... … … … 3 Public debt includes general government debt, publicly guaranteed debt, and a small amount of non-guaranteed public debt. 4 General government and the fiscal transactions of the state road public enterprise. 3 Credit to private sector (percent of GDP) 53.4 53.3 52.2 51.6 52.2 53.1 53.9 54.7 55.6 Key policy interest rate (percent) 1.50 1.25 4.75 6.30 … ... … … … Balance of payments (Percent of GDP unless otherwise indicated) Current account balance -2.9 -2.8 -6.2 -3.7 -3.2 -2.8 -2.5 -2.2 -1.8 Trade balance -16.6 -20.0 -27.0 -25.4 -24.9 -24.6 -24.2 -23.7 -23.3 Foreign direct investment (net) 1.4 3.3 5.1 5.2 4.7 4.2 3.8 3.4 3.1 Gross reserves in months of G&S 5.3 4.5 3.8 4.0 4.2 4.4 … … … Gross external debt 78.7 80.8 82.8 80.0 82.7 82.8 82.1 81.3 80.4 Other memo items 669,28 729,44 803,14 863,94 913,19 960,67 1,012,55 1,067,23 1,123,79 Nominal GDP (in millions of Denars) 0 5 1 5 0 6 3 1 4 Nominal GDP (in millions of EUR) 10,852 11,835 13,034 14,020 14,819 15,590 16,432 17,319 18,237 Notes: Data for 2019-21 are actuals, for 2022 are preliminary. f denotes forecasts. Labor data from 2023 are not comparable with the previous years due to changes in methodology and alignment with the new census. 1 Fiscal projections take into account the government Fiscal Strategy but are Bank staff own projections. 2 General government here includes Public Enterprise for State Roads (PESR) fiscal accounts, estimated for 2022–28. The full alignment with the ESA2010 and GFS2014 has not yet taken place. 3Public debt include non-guaranteed debt of public enterprises and does not include arrears amounting to 3.1 percent of GDP in June 2023. Source: State Statistics Office, MOF, and National Bank of the Republic of North Macedonia; WB Staff estimates and projections. 2.3 Poverty Profile 11. Poverty and inequality fell significantly during the decade preceding the COVID-19 pandemic. The poverty rate (US$6.85/day in 2017 purchasing power parity terms) has decreased from approximately 41 percent in 2009 to about 19 percent in 2019, with over 440,000 individuals lifted out of poverty in the past decade. The decline in poverty was driven by strong growth in the incomes of those in the bottom 40 percent of the distribution, particularly labor earnings, and pensions. Income growth contributed some two-thirds of overall poverty reduction during this period. While the Gini index fell from 42.8 in 2009 to 33.6 in 2019, the level of inequality in North Macedonia is still above that of other Western Balkan countries, such as Albania and Kosovo. 12. Despite recent progress, more than 395,000 individuals lived in poverty as of 2019, and about one-third of the population remained vulnerable to falling into poverty if hit by a shock. Rural areas, the country’s northern regions (Polog and Northeast, where three out of four people live in poverty), and the metropolitan area of Skopje continue to experience higher poverty rates, at above 30 percent, compared to less than 10 percent in the Eastern, Southeastern, Pelagonija, and Vardar regions. With the latest available poverty data dating back to 2019, the actual impacts of the COVID-19 pandemic and of the subsequent energy and food price shocks remain unknown. Simulations based on pre- pandemic data suggest that the COVID-19 crisis increased poverty by more than 1 percentage point,5 with subsequent poverty reduction efforts challenged by a disproportionate erosion in the real incomes of the relatively less well-off. 13. Reducing poverty will require significant effort to increase labor participation and improve gender equality and social inclusion. Even with robust 5 percent economic growth since 2023, maintaining the income distribution constant, more than 235,000 individuals are projected to remain poor by 2030, emphasizing the need for faster and more inclusive growth to tackle poverty effectively. In particular, the labor market—a key driver of poverty reduction—remains anemic. The reduction in the overall unemployment rate, from 15.4 percent in 2021 to 14.4 percent in 2022, was driven primarily by the increase in inactivity of those aged 50–64, rather than transitions into employment, while the job vacancy rate remains low, despite a slight increase during 2022. Youth unemployment, 5 The poverty rate calculation for North Macedonia is based on the ECAPOV harmonization, using data from the Survey for Income and Living Conditions (SILC). The most recent poverty rates for North Macedonia are simulated, as the latest edition of the SILC dates from 2020, capturing income information from 2019. 4 at 25.6 percent in the second quarter of 2023, is among the highest in the region and significantly above the EU27 average. 2.4 Main Development Challenges 14. North Macedonia’s potential GDP growth rate has fallen to less than 2 percent per yea r in the aftermath of recent crises. Productivity indicators are low and declining, and the economy is struggling to create more high-paying jobs. Microenterprises dominate and are responsible for 88 percent of economic output, but these firms are characterized by weak competitiveness; low productivity; limited capacity for innovation, exports, and job creation; and insufficient access to finance. Foreign firms, especially automakers that source components from North Macedonia, generate around 3.5 percent of jobs, but their spillover on the national economy is limited, and they are mostly tax-exempt. At its current growth rate, it will take several decades for North Macedonia to transition from middle-income to high-income status and to reach the average EU income level. North Macedonia currently stands at 42 percent of EU27 GDP per capita in purchasing power parity terms. 15. North Macedonia has made some progress in improving human capital development, although its Human Capital Index still stands at a disappointing 0.56. This level of human capital, among the lowest in the Europe and Central Asia region, points to efficiency and quality issues, especially in the education and health sectors, which remain ill-equipped to respond to traditional and emerging challenges, with a direct impact on the country’s productivity level. North Macedonia faces a critical loss of human capital due to high youth unemployment, with young graduates spending an average of 2.5 years searching for stable employment. Inadequate job opportunities were cited as the biggest challenge by approximately 57 percent of the population in 2022. 16. The lack of job prospects, coupled with perceived higher quality of services abroad, have fueled a constant outmigration of nationals since the early 1970s, especially among those aged 25–49, and recently a significant “brain drain” of highly educated individuals. Migration can have serious implications for growth and productivity. As the population shrinks and ages,6 skilled labor may be in short supply despite high unemployment rates. Brain drain can lead to significant skills gaps in vital sectors and impede the country’s ability to capitalize on investments in human capital. The aging of the population will intensify pressure on the social protection system and on the provision of public services, as fewer working-age people will need to support an increasing number of retirees, together with increasing pension and health care costs. On the other hand, migration can offer significant opportunities, including increased remittances, acquisition of new skills, and FDI. Despite having one of the largest diasporas in the world, remittances have been limited in North Macedonia (3.5 percent of GDP in 2021)7 and have not usually been directed toward productive investments. 17. Gender inequality and social exclusion hamper economic growth and poverty reduction. Women in North Macedonia have lower access to productive assets and economic opportunities and are often exposed to gender-based violence. Women continue to shoulder a disproportionate share of unpaid domestic work, including childcare, which adversely affects their ability to complete their studies and/or earn an income. The female labor force participation rate is among the lowest in the Europe and Central Asia region, at 44.3 percent in 2022, which is 20 percentage points below that of men. Women’s employment rates and average wages are similarly behind those of men. The Roma community lacks access to basic services and economic opportunities, which leads to higher poverty rates; about 75 percent of Roma individuals were at risk of poverty in 2021. Discrimination based on 6 Life expectancy is increasing, currently at 74.7 years, but fertility is decreasing, with less than 1.5 children born per woman. 7 World Bank North Macedonia SCD (2023); World Development Indicators (last update 03/01/2023). 5 sexual orientation, gender identity, expression, and sex characteristics (SOGIESC) is prevalent.8 Ensuring equal access to fundamental opportunities for these groups is essential in continuing poverty reduction efforts and enabling vulnerable groups to contribute to economic growth. 18. Inadequate modernization and poor maintenance of road, rail, energy, and digital networks, as well as increased vulnerability to natural disasters and extreme weather, hinder economic development and slow regional economic integration. North Macedonia has embarked on a regional integration effort, focusing on improving trade facilitation, upgrading transport infrastructure, and leveraging deep trade agreements within the region and with the EU. This effort is yet to produce transformative changes, however, in market access for domestic companies and job creation. At least one-fifth of firms regard the quality of transportation and digital infrastructure as subpar, with logistics and connectivity problems contributing to high trade costs. Although the country’s broadband network coverage is comparable to the EU average, the availability of ultra-fast (download speed greater than 100 Mbps) internet reached 63.1 percent in 2020, below the EU average. The domestic energy sector is three times more carbon-intensive than the EU average, and 40 percent of total exports and 5 percent of total jobs are linked to it. The implementation of climate adaptation and decarbonization measures, as well as mitigation efforts made in the EU (such as the Carbon Border Adjusted Mechanism, CBAM, and the Supplier Due Diligence Act), will be crucial to enhance North Macedonia’s trade and competitiveness levels and FDI inflows. More decisive progress on the EU accession process is expected to accelerate reforms and investments needed to bridge the connectivity gap with Europe and, with that, help strengthen economic competitiveness. 19. Weak governance and control of corruption undermine North Macedonia’s development. In the past two decades, North Macedonia has engaged in reforms to improve the quality and transparency of public institutions and processes. However, as noted in the 2023 EU Progress Report for North Macedonia accompanying the 2023 Communication on the EU Enlargement Policy, the reform momentum needs to be sustained and accelerated to meet the EU accession targets.9 Low administrative capacity, political disagreements over high-level policy objectives, politicization of the public sector, and frequent changes in ministerial leadership undermine service delivery and slow the implementation of reforms. Strategic planning is not aligned with budgeting, while policy reversals and entrenched interests frequently thwart reform efforts. The government’s inability to provide high- quality services and the judiciary’s struggle to control corruption and safeguard the rule of law weaken public trust in the state.10 Inadequate budget allocations, in a context of narrowing fiscal space and inefficient spending on education and health, result in poor human development outcomes by the standards of both the EU and other Western Balkan countries. The transparency and efficiency of state aid continues to be hampered by the large number of state aid providers, the lack of an updated registry, and the still marginal competences of the Commission for the Protection of Competition in state aid supervision. Finally, owing to weak public investment management and the lack of a national development strategy aligned with the national budget, the rate of return on public investments in North Macedonia is among the lowest in the region. 20. To achieve its development goals, North Macedonia will need to boost GDP growth to its potential rate, while making sustained progress in regional integration within the Western Balkans region and with the EU. Evidence from other middle-income countries of comparable levels of 8 North Macedonia loses over 0.5% percent of GDP due to SOGIESC-based exclusion in the labor market. See World Bank. 2023. “The Economic Cost of Exclusion Based on Sexual Orientation, Gender Identity and Expression, and Sex Characteristics in the Labor Market in the Republic of North Macedonia. Washington, DC: World Bank. 9 Commission Staff Working Document, North Macedonia Report Accompanying Document, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee of the Regions. 2023 Communication on EU Enlargement Policy. SWD (2023) 693 Final. 10 According to Eurothink, Center for European Strategies, January 2023, public trust in the judiciary stands at 8 percent, notwithstanding an improvement over time in Transparency International’s Corruption Perception Index, from 107 out of 180 countries in 2017 to 85 in out of 180 countries in 2022. 6 economic and institutional development show that, to increase factor accumulation and productivity growth and, therefore, achieve its growth potential and development goals, North Macedonia will need sustained investments and reforms to consolidate macro stability and fiscal prudence; to strengthen human capital, infrastructure, and basic governance; and to decarbonize growth. The EU accession process and the implementation of the forthcoming EU Growth Plan for the Western Balkans11 offer a key opportunity to accelerate key reforms. An important reform effort concerns the role and performance of state-owned enterprises (SOEs), with a view to opening space for the private sector to compete and contribute to enhanced service delivery.12 Together, these reforms can help promote frontier innovation and shift capital and labor to more productive sectors, such as services, to grow the supply of qualified labor, especially among women and youth, increase productivity, and incentivize private sector investments. Moreover, a smarter investment policy and more judicious use of state aid could help shift the role of the state toward promoting higher-quality foreign investments. Reducing the costs of cross-border trade can attract FDI by instilling investor confidence in the country’s institutions, policies, and currency. At the same time, North Macedonia will benefit from greater market integration with the rest of the Western Balkans and with the EU to take advantage of external economies of scale, increase productivity, and provide better jobs to the population. 21. Reforming the economy requires a broad consensus among all stakeholders on strategic development goals and priority reforms, closer coordination among development partners, and the mobilization of sufficient resources to implement the reform agenda. It also requires a professional, non-politicized, and competent public administration that provides high-quality services to all citizens, designs evidence-based policies, and carries forward the demanding EU accession process to bring about transformational change. III. WORLD BANK GROUP PARTNERSHIP FRAMEWORK 3.1 Government Program and Medium-term Strategy 22. The proposed CPF objectives align closely with the government’s ERP 2023–25, the GAP 2022– 26, and the NDS 2022–42, which is still under preparation. As an EU candidate country, North Macedonia is undergoing a process of pre-accession harmonization of its economic policies, through the ERP, which defines the government’s medium-term macroeconomic and fiscal framework priorities. Its main objectives are to: (i) improve education quality and relevance; (ii) enhance the competitiveness of domestic companies, integrate them into global value chains, and reduce the informal economy; (iii) modernize the energy sector and transition to green energy; and (iv) ensure sustainable economic growth and development. The ERP is complemented by the GAP and the related implementation roadmap, which aim to boost job creation and accelerate growth through fiscal consolidation and increased public and private investment. Finally, the CPF is informed by the most relevant priorities included in the emerging outline of the NDS: (a) green and digital transformation; (b) competitiveness and innovation; (c) resilience; and (d) territorial development in a context of evolving demographic trends. 11 The EU’s €6 billion growth plan for the Western Balkans aims to bring to the region some of the benefits of EU membership ahead of accession, boost economic growth, and accelerate much-needed socioeconomic convergence. The growth plan should significantly speed up the enlargement process and the region’s economic growth, based on four pillars: (a) enhancing economic integration of the region into the EU single market; (b) boosting economic integration within the Western Balkans through the Common Regional Market; (c) speeding up fundamental reforms; and (d) increasing financial assistance to support the reforms. 12 Despite being limited in number and government ownership, the role, performance, and governance of the country’s network SOEs remains important to the development of critical network infrastructure for private sector development. Their disappointing performance calls for sustained reforms, including: (a) pricing their services at market value; (b) improving operational efficiency; (c) investing in outdated infrastructure to reduce losses; and (d) improving compliance and collection. 7 3.2 Proposed WBG Country Partnership Framework 23. The WBG CPF for FY24–28 seeks to support North Macedonia to improve productivity, create more productive jobs, and accelerate convergence with the EU. The proposed WBG program speaks to all four HLOs of the SCD Update but focuses on those priorities for which the application of the following selectivity criteria demonstrates a compelling case for WBG support (Figure 1): (i) alignment with North Macedonia’s long-term strategic objectives and country development goals (Section 3.1); (ii) alignment with the development priorities identified in the SCD Update (Figure 2); and (iii) support to truly transformational initiatives that promote greener growth and, with that, the creation of more productive jobs and support for EU integration. The CPF will focus on areas that are at the intersection between the country’s most pressing development priorities and global challenges, and that reflect the WBG’s comparative advantage, while optimizing the use of the WBG toolbox. Figure 1: High-Level Outcomes, CPF Objectives, and Selectivity Filters Figure 2: 2023 SCD Update – HLOs and Priorities 8 24. This CPF continues the WBG’s engagement in the areas supported under the previous CPF for FY19–23, such as road infrastructure and delivery of social services at the municipal level. At the same time, it steps up engagement on human capital development, private sector development, and climate change, in response to: (a) the impact of global challenges and multiple crises in recent years; (b) the expected acceleration of the EU accession process; and (c) the government’s medium- to long- term strategic development priorities (see sections on HLOs below). Barring any change in investment priorities following dialogue on the implementation of the draft CCDR and other core analytical reports, this CPF will not support any International Bank for Reconstruction and Development (IBRD) investment that does not meet the selectivity criteria and, in principle, where other development partners are currently active through respective operations, including solid and water waste management, civil service reform, and justice sector reform. However, in specific sectors where other development partners have already taken the lead, the World Bank may consider engaging alongside them when the complexity and level of ambition of envisaged policy reforms and related investments may require pooling of resources (for example, in the areas of corridor development as part of the broader Western Balkans–EU regional integration and in energy transition from coal). 25. This CPF is informed by stakeholder consultations undertaken in July 2023 with representatives of the government legislature, private sector, civil society, academia, parliament, and development partners to discuss North Macedonia’s main development challenges and opportunities and the proposed program of engagement. The consultations highlighted a broad consensus on the WBG’s proposed areas of intervention under this CPF. Central government authorities and members of parliament welcomed the CPF’s focus on the country’s most pressing development priorities. Civil society representatives endorsed the proposed focus on jobs and inclusion, while highlighting the importance of promoting a more efficient and accountable civil service. The business community reiterated the importance of financial stability, digitalization, and export promotion as key factors for private sector development and adherence to international standards. Development partners confirmed the focus on continued engagement in civil sector reform and accountability, and committed to enhancing collaboration to minimize the duplication of effort while improving the absorption of funding. The final CPF also builds on feedback obtained through a recently completed Country Survey, which pointed to the need to: (i) focus more sharply on education sector reform, from early childhood development (ECD) to secondary education; (ii) enhance dialogue and investment support on private sector development, from skills to access to finance and infrastructure; (iii) step up engagement in the energy sector to accelerate the energy transition; and (iv) enhance collaboration among development partners to accelerate reforms in critical areas, such as human capital development, public financial management (PFM), and energy transition, through both policy dialogue and investment lending. Table 2: HLOs and CPF Objectives HLO 1: HLO 2: HLO 3: CPF HLOs Improved Quality of Public Service More Productive Private Increased Climate Resilience Delivery Sector Jobs Objective 1.1: Strengthen financial Objective 2.1: Increase market Objective 3.1: Sustain the management and accountability of access transition to greener energy public institutions sources Objective 1.2: Strengthen fiscal Objective 2.2: Strengthen Objective 3.2: Scale up CPF sustainability foundational skills climate-resilient Objectives infrastructure Objective 1.3: Improve social services, in particular for vulnerable populations 26. Building on the implementation of the previous CPF, the findings of the SCD, and the outcome of consultations, the CPF identifies three HLOs that will guide the WBG’s partnership with North 9 Macedonia over the long term. The CPF for FY24–28 supports seven objectives across three HLOs: (1) improved quality of public service delivery, (2) more productive private sector jobs, and (3) increased climate resilience (Table 2). 27. For each of the HLOs and related objectives, the CPF proposes a strategy that combines a more dynamic approach to implementing existing projects and a strategic focus in delivering new ones. This approach focuses on: (a) improving project performance through active portfolio management; (b) scaling up existing programs with a proven impact on people’s lives through IBRD additional financing and, when feasible, co-financing from other development partners; (c) leveraging digital development across sectors, while enhancing operational efficiency and effectiveness across the portfolio; and (d) delivering new and transformational projects by drawing on country, regional, and global analytics. In doing so, this CPF aims to pursue better alignment with the strategies and instruments of other Box 1: Country Climate and Development Report—Proposed Focus and development partners, Timeline such as the EU and IMF, The regional CCDR for the Western Balkans will be completed by the end of as well as a more FY24, and some of its preliminary findings and proposed recommendations structured and deliberate are already incorporated in this CPF. The ongoing CCDR takes stock of the One World Bank current state of affairs and the risks and opportunities related to climate approach, building on the change and energy transition, reviews domestic and external drivers, and explores policy and institutional arrangements for climate change mitigation comparative advantages and adaptation and for sustainable and just socioeconomic transitions. The and instruments of WBG report then takes deep dives into the transformation of the energy sector, institutions to promote the interplay between climate change and human development, and specific domestic public and hot spots where climate vulnerability exacerbates existing development private resource weaknesses. After assessing the impact of climate change and the climate mobilization, as well as transition on fiscal and financial sector sustainability, growth, and income FDI inflow. Core advisory distribution, the report makes recommendations on no-regret and short- services and analytics term policy actions, prioritized based on their urgency, their feasibility (ASA), such as the within the political economy landscape, and their potential for synergies planned Country between climate action and development. The Western Balkans CCDR will consist of a regional report and six country notes focusing on country- Economic Memorandum, specific challenges and recommendations. the Public Finance Review, and the CCDR (Box 1),13 in addition to regular ASA, such as macro monitoring and regional poverty and equity work, will underpin a series of IBRD DPOs to help strengthen the country’s fundamentals in PFM, human capital, and energy transition, in support of EU accession negotiations. IFC and MIGA will complement IBRD DPOs and investment project financing (IPF) operations by supporting private sector investment (for example, in implementing the country’s export strategy) and enhancing the implementation of the country’s broader reform agenda in collaboration with other development partners. Synergies are expected to be generated on the green transition by aligning the proposed DPOs with the EC’s ongoing Macro-Financial Assistance Program and the IMF’s PLL, as well as by leveraging traditional and blended grant financing for investment lending, such as through the Western Balkans Investment Framework (WBIF). Moreover, this CPF proposes to scale up the Trade and Transport Facilitation Program and work in close collaboration with the EU and EU-based financial institutions (FI) to accompany the country’s renewed ambitions for faster integration with EU markets in the context of a reinvigorated Berlin process. Common features of existing and planned operations are: (i) a deliberate focus on enhancing economic agency and social inclusion of women, youth, and vulnerable groups, such as the Roma and LGBTI+ individuals; and (ii) stronger coordination across sectors to enhance opportunities 13The new Country Economic Memorandum will help to set out the key medium-term priorities to support income convergence with EU peers and will explore competition policy and the role of the state. The upcoming CCDR will propose concrete actions to step up climate adaptation and resilience in light of the country’s ambitious Nationally Determined Contributions (NDCs) by identifying opportunities for investment in energy transition and climate resilience. 10 offered by digital development. 28. HLO 1 focuses on improving the quality of public service delivery by enhancing its efficiency and transparency. The HLO speaks directly to the priorities under the SCD HLO on enhancing the accountability of service delivery systems for citizens. The CPF envisages a program of closely aligned and complementary interventions to strengthen: (a) administrative capacity at central and municipal levels, addressing limitations that hinder the delivery of public services, the quality of infrastructure asset management, and the ability to raise revenues; and (b) the efficiency of public expenditures in key areas such as education, health, and social protection. CPF program implementation is expected to contribute to improved governance as measured by the Bertelsmann Transformation Index, which at 6.3 out of 10, was assessed as “good” in 2022. The Human Capital Index will be used to monitor the progress made toward this HLOs as a result of more efficient service delivery. 29. HLO 2 speaks to the creation of more productive private sector jobs by strengthening the enabling conditions for private sector-led growth and foundational skills. This HLO aligns with the policy priorities identified under the SCD HLOs 2 and 3, with Pillars 1–5 of the NDS that is under preparation, with the thrust of the GAP, and with the main reform priorities of the ERP. Digitalization is an important cross-cutting theme. The CPF program will contribute to this HLO by: (a) promoting the conditions for increased access to regional and global value markets through better physical and digital connectivity, stronger alignment with EU and global export requirements, and more efficient trade facilitation, while (b) supporting the implementation of the country’s long-term human capital strategy in the areas of foundational skills in ECD, primary, and secondary education (technical and general); transition to jobs; and the care economy. Labor force participation, the labor productivity index, and logistics performance scores will be applied to track advancement toward this HLO. 30. The transformational changes needed to boost the competitiveness of North Macedonia’s economy and, with that, create better-paid jobs will require innovative thinking, stronger alignment with other development partners, and blending of WBG instruments. Implementation of the GAP and the Smart Specialization Strategy,14 a more focused approach to digital development across the whole portfolio, increased alignment with other development partners, and the leveraging of migration as a positive factor for development will together provide opportunities to test new delivery models. This CPF will support the continuation of traditional IBRD lending on connectivity and human capital development. At the same time, it proposes to complement IBRD technical assistance (TA) and lending on regional integration in trade and transport facilitation and payment systems with MIGA’s guarantees to enhance access to finance and IFC advisory in the areas of competitiveness, productivity, and export promotion. Furthermore, IFC will provide specific support for North Macedonia's integration into regional value chains, tapping into nearshoring opportunities with EU markets, including through the Western Balkans Manufacturing Value Chains and eco-industrial zones projects. IFC lending to private sector companies will target the higher value-added, export-oriented manufacturing and services sectors and the financial sector to help expand access to finance for MSMEs. Advisory support and finance for MSMEs through FI will target priority areas, including green, inclusive, and digital finance, with a focus on underserved segments, such as women entrepreneurs, young and small enterprises, rural customers, and agribusinesses/farmers. 31. HLO 3, on increased climate resilience, emphasizes support to North Macedonia in addressing key environmental constraints to safeguard the sustainability of economic growth and the quality of life of its population, while contributing to the resolution of global environmental challenges, with a focus on adaptation. The CPF will continue to advance the energy efficiency and energy 14The Smart Specialization Strategy is a successor of the former Competitiveness and Innovation strategies, which are mandatory for all EU members and accession countries. Its vision is to foster green and sustainable growth by embedding knowledge, innovation, and technology for creating high value-added products and services competitive on international and domestic markets. 11 transition agendas and, with the upcoming NDS, focus on accelerating the decarbonization of economy, reducing air pollution, and closing transport and connectivity infrastructure gaps in line with the SCD pathway on accelerating decarbonization and ensuring energy security and with the emerging findings of the CCDR. The CPF commitment to scale up climate-resilient infrastructure responds to policy priorities on climate change adaptation and natural disaster preparedness and response. CO2 intensity and the air pollution index will be used to measure the achievement of this HLO, to be supported through a coordinated program of lending, ASA, TA, and guarantees provided by the three WBG institutions. More specifically, this CPF envisages combining the implementation of the ongoing World Bank Public Sector Energy Efficiency IPF with the proposed delivery of a Sustainability and Resilience DPO and separate investment operations in the energy transition and environmental sectors. IFC’s roles as both an adviser in structuring public–private partnerships (PPPs) and an investor, especially in the renewable space, are crucial. This will include potential engagements in renewable energy infrastructure development (including generation, battery storage, and transmission) and alignment with IFC’s initiatives on decarbonization in the manufacturing sector, especially in view of CBAM implementation. IFC will work closely with the World Bank to support enabling reforms and policies that aim to maximize finance for development (MFD), particularly in the energy sector, including through upcoming DPOs and policy dialogue. MIGA aims to continue its support to the financial sector through capital optimization guarantees, aiming to enable lending for climate finance activities. At the same time, MIGA will seek opportunities to use its political risk insurance and credit enhancement guarantees to facilitate foreign investment. Engagement in this area will be further refined in the first years of CPF implementation, ahead of the preparation of a Performance and Learning Review (PLR), in light of the recommendations emerging from ongoing analytics on air quality management, the forthcoming CCDR, and the North Macedonia Integrating Climate Change Perspectives into Fiscal Policy ASA. 32. The proposed CPF reflects lessons learned in implementing the CPF for FY19–23. As outlined in the Completion and Learning Review (Annex 2), the previous CPF was buffeted by a series of shocks, including the regional and global impacts of the COVID-19 pandemic and Russia’s invasion of Ukraine, as well as the ensuing period of political and economic volatility in North Macedonia. These shocks created delays in the approval and processing of World Bank-financed projects, affecting the degree to which the CPF’s strategic objectives were achieved. Through close collaboration with government champions and flexible adjustments in programming, however, good progress was made in key areas, including improving trade logistics, boosting innovation and resilience in the private sector, strengthening the quality and relevance of technical and vocational education and training (TVET), and enhancing tax revenues. This experience demonstrated the importance of integrating political economy considerations into the design of the CPF program, drawing on high-level government commitment and sequenced, multiannual engagements to make progress where there was traction to move forward despite the stalemate at the political level. Similarly, in small markets like North Macedonia, IFC and MIGA can deliver a more sizable impact in infrastructure if there is political will and capacity to undertake strategic projects where private sector participation or foreign investment are beneficial. Leveraging IBRD support as part of the Cascade Approach—which aims to maximize financing to meet development challenges by prioritizing private sector solutions, when sustainable, to limit public debt and contingent liabilities—can open new markets in areas such as renewable energy, thereby enabling IFC and MIGA to provide financial support and guarantees to attract private capital. A key lesson of the previous CPF speaks to the importance of anchoring structural reforms within the EU accession process, in coordination with other development partners, and of ensuring project readiness, flexibility, and proactivity in implementation to smooth out the potential challenges posed by North Macedonia’s political economy and institutional capacity context. Finally, the CLR emphasized the importance of defining CPF indicators and targets to ensure that expected results are attributable to WBG interventions and directly linked to advancing the CPF objectives and, ultimately, the HLOs. 12 3.3 Objectives supported by the WBG Program HLO 1: Improved Quality of Public Service Delivery Objective 1.1: Strengthen public financial management and accountability of public institutions 33. Strengthening the management and accountability of public service delivery remains a critical priority. The enactment of the new Organic Budget Law in September 2022 provided a new legal framework for the PFM system, with a greater focus on enhancing efficiency, transparency, and accountability. It provided the legal basis for establishing a Fiscal Council and introducing quantitative fiscal rules and fiscal responsibility statements and paved the way for improved regulation of the entire budget process. To maximize the efficiency of public spending and enhance control of spending commitments, the allocation of public resources needs to be aligned with strategic priorities. A lack of standardized regulations for the identification, appraisal, prioritization, and selection of public investment projects that are not externally financed, along with gaps in project monitoring, has weakened public investment management. Integrating planning and monitoring systems, operationalizing a central public investment management unit, and linking priorities with investment strategies will enable more informed decision making and more efficient implementation monitoring. 34. The proposed WBG program will contribute to the achievement of this objective through ongoing and planned World Bank investment and policy-based lending, complemented by ASA and IFC advisory services. These interventions will inform and support government efforts to scale up PFM reforms, advance on the digitalization agenda, and enhance infrastructure governance. The introduction of an Integrated Financial Management Information System (IFMIS), along with policy reforms supported by the Sustainability and Resilience DPO—targeting the operationalization of the Fiscal Council, and the launch of medium-term gender budgeting—are expected to strengthen the transparency, efficiency, and accountability of PFM. The ongoing Building Efficient, Transparent and Accountable PFM Institutions (BETA PFM) project (P176366) supports the introduction of the State Aid Management Information System (SAMIS) for more efficient implementation, monitoring, and evaluation of the performance of state aid provided to support private sector development. TA provided under the Strengthening Fiscal Governance in the Western Balkans ASA (P180191) is expected to improve the capacity of the Fiscal Council, strengthen macro-modelling and revenue forecasting capacity, and address frontier challenges linked to the green and digital transformation of public investment and asset management. The proposed Sustainable Municipal Development Project (P180587) aims to help strengthen municipal fiscal discipline and performance, including strategic planning and asset management. The IBRD ASA program will review public finances and growth fundamentals, PPPs, infrastructure governance and institutional strengthening, and SOE engagement. The new Country Economic Memorandum will help set out the key medium-term priorities to support income convergence with EU peers and will explore competition policy and the role of the state. Objective 1.2: Strengthen fiscal sustainability 35. Safeguarding fiscal sustainability is central to securing macroeconomic stability and promoting growth. Minimizing fiscal risks, improving the efficiency of spending programs, and enhancing revenue mobilization will ensure fiscal sustainability over the medium to long term. Prolonged crisis-related fiscal stimulus since 2020 led to a sharp increase in the deficit and debt, which, at 59.5 percent of GDP in the second quarter of 2023, remained elevated compared to the pre-crisis period. Strong revenue performance in the aftermath of the pandemic, fueled by inflation, helped contain the deficit, but fiscal sustainability risks loom as growth has slowed and financial conditions tightened, increasing the 13 need to rebuild fiscal buffers. Deficit reduction efforts require boosting domestic revenues by improving tax compliance and widening the tax base, as well as strengthening spending efficiency by lowering operational costs and rationalizing mandatory spending. Increased municipal arrears, weak revenue collection and revenue use, and recurrent bailouts by the central government have heightened sustainability concerns and elevated fiscal risks at the municipal level. 36. The CPF will help promote fiscal sustainability at the central and local government level through a combination of ongoing and planned IBRD financing operations and ASA, with potential IFC PPP operations and financing. It is envisaged that the regulatory, PPP framework, and tax-related reforms supported by the DPOs will strengthen the overall sustainability of public finances. A new PPP framework—in the context of more consistent and deliberate policy direction by the government to prioritize the use of private capital over limited public resources to address the existing infrastructure gap and to decarbonize the economy—could, in turn, enable potential IFC infrastructure PPPs, particularly in renewable energy, wastewater management, transport, and eco-industrial parks (supported also under objective 2.2). Key areas for improvement include: (i) integration of PPPs into national investment strategies; (ii) PPP approvals in the budget; (iii) improved procurement (e.g., competitive bidding) and contract management (e.g., renegotiation and termination); (iv) transparent management and reporting of contingent liabilities from PPPs (e.g., ceiling on PPPs, assessing contingent fiscal risks, PPP costs in budget documents); and (v) strengthening the oversight capacity and mandate of the central PPP unit.15 The proposed Strengthening of Municipal Development IPF will promote the conditions for funding and delivering sustainable, resilient, and climate-smart municipal services. World Bank ASA and IFC advisory programs will conduct country-specific and regional studies on strengthening fiscal and infrastructure governance, integrating climate change and whole-of- economy perspectives into policymaking, PPPs, and the sustainability of pension systems in the context of an aging population. Objective 1.3: Improve social services, in particular for vulnerable populations 37. Improving social services, especially for vulnerable groups, is a precondition for people to fully exercise their right to social and economic agency and to contribute to economic growth. Uneven access to services disproportionately affects families in the lowest income quintile, many of whom live with disabilities, reside in rural areas and in areas with increased climate risks, and belong to ethnic minorities, such as the Roma. The lack of citizen-centred service provision and proper GovTech solutions, combined with cumbersome administrative procedures, poses barriers to accessibility. Increased access to high-quality services at the municipal level could be achieved by addressing the urban–rural divide and closing infrastructure gaps in transport, water and wastewater management, and disaster risk management. The comprehensive social protection reform of 2019 provides a solid basis for scaling up current mechanisms for social service provision by making in-home services for the elderly and social services for the disabled available in all municipalities, while continuing reforms in service delivery, financing, licensing, evaluation, and monitoring. However, the sustainability of these services depends on strengthening fiscal planning and management, building the capacity of local institutions, and enhancing collaboration between local and central agencies. Inadequate budget allocations and inefficient spending on education and health have led to a significant decline in the quality of these essential services, bringing human development outcomes below regional averages. Limited policy and budget focus have led to insufficient availability of early childhood education and childcare services, disproportionately affecting underprivileged children and those residing in remote areas, and thus perpetuating educational disparities in the compulsory education cycle. Limited ECD service offerings particularly affect mothers, who disproportionately bear the burden of childcare responsibilities, contributing to a startlingly low female labor force participation rate of 44 percent. 15 IMF, 2023, The Future of PPPs in the Western Balkans 14 38. Envisaged CPF interventions aim to advance sector policy reforms through regional ASA, combined with scaling up successful projects and launching new ones with a focus on decentralized service delivery. Building on the implementation of social protection systems in times of crisis and the results achieved under the first Social Services Improvement Project (SSIP, P162246), the second SSIP will further reform efforts to promote equitable and sustainable access to good-quality social and early childhood education and care services at the national level, with an emphasis on vulnerable population groups and the disabled. The ongoing Social Insurance Administration Project (P170343) and the new Sustainability and Resilience DPO will support social administration reforms, including the approval and initial implementation of the Law on Disability Assessment Systems to harmonize disability assessments and the Law on Mandatory Social Insurance Registry to improve compliance across social insurance schemes. These efforts will be complemented by the proposed Sustainable Municipal Development Project, which will help build institutional capacity at the municipal level to plan, finance, and deliver high-quality services to the population, while investing in and managing high-impact municipal infrastructure. The regional study on Promoting Jobs and the Care Economy (P180684) will fill knowledge gaps on constraints to developing the long-term care economy. The Western Balkans Pension ASA will support this objective by formulating sustainable short-term pension policies, designing systemic pension reforms for improved sustainability and coverage, and strengthening analytical capacity within the pension system. The Western Balkans Poverty and Equity Program will generate evidence on the drivers of poverty and equity and support policies to address these issues. HLO 2: More Productive Private Sector Jobs Objective 2.1 Increase market access 39. North Macedonia has achieved considerable progress in opening its economy over the past two decades. While integration with the EU remains a priority, integration within the Western Balkans—a necessary intermediate step—is still not complete. Export diversification is low, with exports being concentrated in a few foreign firms that are supported by generous state aid and supply a handful of EU automotive companies. MSMEs and the service sector play a marginal role in creating jobs and supporting growth. Linkages between (larger) foreign-invested and (smaller) domestic firms are weak. As a result, North Macedonia’s success in attracting foreign investment (and mobilizing remittances from the country’s large diaspora) has come at a high fiscal cost,16 with limited economywide spillovers and weak productivity growth. Greater diversification in the context of broader integration within the region and with the EU, particularly given supply chain nearshoring trends, a recalibration of state aid policy, and more favorable conditions for the productive use of remittances, would achieve several, interlinked objectives, notably: (i) accelerating job creation; (ii) increasing business survival; (iii) attracting FDI in higher-value-added segments of high-priority and greener value chains; and (iv) strengthening the resilience of the economy. 40. Constraints in the quality of physical and digital infrastructure, access to finance, technology adoption (including public service delivery portals), funding for innovation, and market and product diversification weaken the country’s competitiveness and productivity. Firms owned by domestic investors, predominantly MSMEs, have exhibited weak or stagnant productivity growth in recent years. These businesses primarily serve the domestic market, with few links to regional or global value chains, and their progress on digitization and the green transition tends to lag behind that of regional peers. In addition, MSME access to finance has traditionally been limited and tightened further after COVID-19, particularly for farmers, companies outside of Skopje, and female-headed companies. 16The total direct cost of tax exemptions is estimated (using the revenue foregone method) to have grown from US$15.2 million in 2013 to US$45.2 million in 2020 (World Bank 2022). The customs duty exemption made up roughly half the cost of all tax exemptions. 15 Credit constraints are mostly the result of a shallow domestic private sector—in absolute terms and when compared to EU averages, as confirmed by the limited availability of firms providing leasing and factoring, a more accessible alternative for financing MSMEs. North Macedonia’s digital coverage, both in terms of infrastructure and e-services, remains below that of regional peers, and its road infrastructure is old and in need of sustained investment to boost connectivity with the rest of Europe. 41. The CPF will support this objective by blending IBRD investment and development policy lending with IFC lending and advisory and MIGA guarantees, as well as leveraging financing from other development partners, in support of the country’s strategy to increase private sector competitiveness. These efforts will focus on promoting the export of higher-value products and services and improving productivity through digitalization and greening of businesses’ processes and financing, thus contributing to the creation of better-quality jobs. 42. Proposed interventions will support both the domestic real sector and the financial sector, including investments in the enabling environment, infrastructure, and the private sector. The ongoing IBRD Road Upgrading and Development project (P149955) and related additional financing (AF, P181422) will continue to support improvements in transport connectivity for road users along Corridor VIII between Skopje and Deve Bair. The ongoing Local Roads Connectivity Project (P170267) and proposed AF will contribute to enhancing government capacity to manage local roads and improve access to markets and services. Interventions under the Agriculture Modernization project (P168014) seek to improve competitiveness in targeted subsectors and strengthen the readiness of the domestic agriculture sector ahead of EU accession. IFC will continue exploring opportunities in the manufacturing and services segments, including modern commercial and industrial infrastructure, green-certified buildings, food and non-food retailers, and logistics and eco-industrial parks. 43. Building on the ongoing IBRD Regional Trade and Transport Facilitation project (RTTFP, P162043) and on IFC’s advisory work on design of the National Single Window (NSW), the CPF proposes a coordinated program of interventions to advance trade integration within the Western Balkans and with the EU to connect local manufacturers to new markets and pan-European value chains. This strategic approach is expected to enable North Macedonia to capitalize on potential FDI opportunities associated with the growing nearshoring trend. The proposed program includes: (a) the second phase of the RTTFP; (b) the continuation of IFC’s Western Balkans Manufacturing Value Chains project; (c) potential IFC operations to bring foreign players into key export-oriented value chains, such as light manufacturing and auto parts (in which North Macedonia has already developed significant capacity, yet with limited spillovers to domestic players) and into emerging related industries, such as the electric vehicles and e-Mobility ecosystem; and (d) potential new IFC advisory services in logistics. Working closely with the World Bank and IFC, MIGA will seek opportunities to provide political risk insurance guarantees and credit enhancement guarantees to support developmentally impactful projects in strategic sectors that require foreign investment. 44. In the financial sector, the WBG’s ultimate objective is to enhance access to finance, with a focus on MSMEs and underserved groups, by maximizing synergies across the three institutions. IBRD will seek to support the crowding in of private sector resources by strengthening the role of the National Development Bank (a public financial institution (FI)) to provide guarantees, factoring, and targeted concessional credit lines. IFC and MIGA will prioritize the flow of MSME financing through private FIs. More specifically, IFC will leverage advisory services and lending in the following areas: (a) conventional credit lines, innovative lending instruments, and digital finance to bank and non-bank Fis, focusing on women-owned enterprises, small-scale businesses, rural customers, and agribusinesses/farmers; and (b) green finance for energy efficiency and renewable energy projects. Policy dialogue and advisory services will help to improve the insolvency framework and establish asset-based financing solutions and lending eco-systems. Recognizing the small market size, IFC and MIGA will leverage partnerships with regional players and platforms, such as regional banks, private 16 equity, and venture capital funds with exposure to North Macedonian markets. Moreover, building on the results of the Smart Specialization, Trade Competitiveness, and Financial Sector Deepening and Diversifying ASAs, completed under the previous CPF, and on FinSac’s assistance on Bank Resolution and Deposit Risk Insurance, IBRD proposes a Private Sector Development and Access to Finance operation to pursue the dual objective of enhancing MSMEs’ export potential through, inter alia, access to technology, innovation, and know-how, and increasing MSME access to finance through implementation of key ASA recommendations, such as increased coverage of MSME loans by the Credit Guarantee Fund in the Development Bank of North Macedonia, expanding reverse factoring (supply chain financing), and enhanced financial literacy and management programs (investment readiness), with a special focus on women-owned enterprises. MIGA will continue to provide capital optimization guarantees to international financial institutions (IFIs), with the aim of boosting SME access to finance and climate finance activities. A regional project on payment systems will help create conditions for reducing the cost of remittances17 and, with that, new opportunities for their productive use in support of the country’s investment priorities. Objective 2.2 Strengthen foundational skills 45. Addressing North Macedonia’s productivity challenge requires accelerating the transformation of its human capital base to align job seekers’ aspirations for good-quality, well-paid jobs with employers’ need for a dynamic and well-prepared workforce. The contours of North Macedonia’s productivity challenge are clear: 45 percent of the working-age population were economically inactive in 2022, many of whom were women and those aged 55 and above, while 18 percent of young people were not in employment, education, or training. Overall, the average worker in North Macedonia loses an estimated 23 years of productive employment over the course of their lifetime. Improving access to economic opportunities, particularly for those most disadvantaged, requires significant investment in building the cognitive, socioemotional, technical, and digital skills needed to meet labor market demand. It is also necessary to address the barriers that limit opportunities to use human capital productively in the labor market, notably issues around information, disincentives to work in the tax and benefit system, social norms, and the lack of child and elder care services. 46. The proposed WBG program will contribute to this objective by supporting government efforts to strengthen human capital throughout the life cycle. IBRD will focus on the supply side of the human capital agenda. Although IFC doesn’t envisage engagements that relate directly to this objective area, its support to firms in the manufacturing and services sectors will promote the creation of high-quality green jobs, which is key to attracting and retaining skilled labor. 47. This CPF will focus on foundational skills in, and financing of, primary education through the ongoing Primary Education Improvement Project (P171973) and policy engagement. In addition to helping improve access (see objective 1.3), the ongoing SSIP and the planned SSIP2 will work toward improving the quality of early childhood education at the preschool level, with a focus on vulnerable groups. The proposed Human Development IPF will accompany broader efforts to enhance the country’s human capital base, based on priorities to be identified in the North Macedonia Human Development Strategy, including by focusing on technical and general secondary education to facilitate the school-to-work transition and equip secondary education students with skills that align with the evolving needs of the domestic labor market. The CPF will complement investment lending with a solid ASA program on generating foundational skills and enhancing opportunities to use the resulting human capital more productively in the labor market. The ongoing Public Finance Review on Ensuring Stability and Boosting Resilience (P179795) will generate evidence to help policy makers enhance spending and optimize financing formulas from pre-primary to higher education by incorporating performance criteria and ensuring alignment with national priorities and available fiscal 17 Currently at 7% of total transfers, calculated on the basis of a US$200 amount. Source: Remittances database) 17 space. Additional ASA on migration, education, and employment services will provide the analytical underpinnings for policies and solutions to boost youth employment in higher-quality jobs. HLO 3: Increased Climate Resilience Objective 3.1 Sustain the transition to greener energy sources 48. North Macedonia has been decoupling its growth from emissions since 1990, but much more needs to be done to fully decarbonize the economy. Total greenhouse gas (GHG) emissions have declined since 1990, while GDP per capita has increased, pointing to ongoing decarbonization. However, the country’s growth is still highly carbon-intensive, as lignite and oil dominate the energy supply. This creates significant environmental and social externalities, including GHG emissions and air pollution. The country’s overreliance on fossil fuels makes it more vulnerable to energy price shocks, particularly in the context of high energy poverty, which suggests that energy efficiency measures have the potential to cushion the impact of high energy prices on the poorest. Despite substantial government support, the economy’s heavy dependence on energy imports and SOEs’ limited capacity to rapidly increase renewable energy hampered the economic recovery in late 2021, and GDP did not reach its pre-pandemic level until early 2022. Transforming the energy system will allow North Macedonia to achieve two goals: ensuring energy security and decarbonizing the economy. The government is pursuing ambitious mitigation targets, while attempting to safeguard energy security. The enhanced Nationally Determined Contributions (NDC, 2021) include a 51 percent reduction in GHG emissions relative to 1990 levels (82 percent in net terms).18 The National Strategy for Energy Development commits to significantly reducing local pollutants by 2027. The country has also adopted the National Energy and Climate Action Plan, in accordance with the EU Energy and Climate Package 2030 as well as the Strategy for Low Carbon Europe and committed to working toward the 2050 target of a carbon-neutral continent. For these commitments to materialize, the country needs to improve overall energy sector efficiency, accelerate the transition to renewable energy sources (including expanding the capacity of electricity grids to integrate larger volumes of renewable energy and storage), improve energy affordability, integrate the energy system with its neighbors, and support the transition to cleaner, more efficient household energy sources. Access to capital for renewable energy projects needs to be enhanced, along with strengthening regulatory and policy frameworks to ensure the integrity and transparency of wholesale energy and minimize the potential environmental disruption associated with renewable energy production. Private sector solutions and financing would also introduce best practices, stimulate competition, and undoubtedly accelerate the rollout of renewable energy in the country. As the shift toward sustainable energy sources can displace workers in high-emissions industries, leading to an increase in structural unemployment, due consideration will be given to addressing the mismatch between the skills of the existing workforce and the demands of employers in low-emissions industries.19 49. In line with the emerging findings of the CCDR, and with the strategic priorities of the World Bank Evolution Roadmap, the CPF will support the transition agenda with IBRD and IFC investments in energy efficiency, energy transition, and greener environmental growth. These will be complemented by policy dialogue, ASA, and IFC advisory services aimed at: (a) addressing the impact of the energy crisis; (b) advancing the climate change agenda; and (c) accompanying the country’s efforts to address the social implications of the transition from fossil to renewable energy sources. The North Macedonia Public Sector Energy Efficiency Project (PSEEP, P149990) will continue to finance municipal and central government energy efficiency projects to reduce energy consumption in the public sector, while IFC will promote energy efficiency in its engagements across sectors, for example 18 World Bank North Macedonia SCD (2023): The transport sector is responsible for the greatest share of the increase in GHG emissions in recent years, primarily associated with the increased motorization with old and inefficient vehicle fleets and will need improvement in the policy framework to manage road vehicle emissions. 19 World Bank North Macedonia SCD (2023). 18 in green buildings, EDGE certification, rooftop solar in commercial infrastructure, logistics projects, energy efficient production modes in manufacturing projects, and climate/green finance in financial sector interventions. Building on the work done under PSEEP, the IBRD Sustainability and Resilience DPO will support the establishment of the Energy Efficiency Fund as a sustainable financing mechanism for energy efficiency investments. The DPO will also support the introduction of prosumer regulation, allowing residential and small business consumers to place surplus electricity generated through rooftop solar photovoltaic installations back to the grid. The improvement of the legal and institutional framework for energy efficiency, facilitated by the proposed DPO, and the findings of the ongoing CCDR and of the World Bank’s ASA on “Market potential assessment, and design of financial support and capacity building program for Rooftop Solar Photovoltaic (RSPV) in North Macedonia,” could enable potential IFC investments in this market segment. To increase awareness and active management of climate change risks on the bank-dominated financial sector, the Sustainability and Resilience DPO (P180587) supports the decisions of the Central Bank to introduce obligations for commercial banks to publish data and information about the exposure to climate risks and the management of such risks. The Financial Sector Advisory Center of the World Bank will continue providing advisory services for climate stress testing and climate risk management. 50. IFC and IBRD will work closely together on advancing renewable energy markets and engaging with SOEs. This collaboration will focus on two main aspects: (i) assisting the government in establishing a sustainable, transparent, and efficient long-term approach to energy market development, including renewable energy capacity expansion; and (ii) addressing regulatory hurdles that may hinder lending to SOEs. In addition, the use of PPPs will create competition to set benchmarks for terms, conditions, and pricing of private sector companies; including to support the development of renewable energy and the decarbonization agenda. Leveraging private capital and expertise through PPPs will depend on the government’s approach to create a level playing field, and, therefore, to foster competition among private companies through well-planned, structured, competitive tenders. In this context, IFC’s PPP transaction advisory and financing together a strong one WBG collaboration within the Cascade/MFD approach may play a crucial role in shaping the renewable energy landscape. Furthermore, the proposed IBRD Energy Transition operation would leverage the Climate Investment Fund’s Accelerating Coal Transition initiative and the findings of the Land Use Repurposing Assessment of depleted coal mines to support the repurposing of mine assets and provide coal subsector workers with livelihood alternatives. Possible IFC investments in renewable energy (including hydro, solar, and wind) will accompany the country’s transition from coal-fired power generation to a cleaner energy mix, primarily through PPPs as well as leveraging other resources. Finally, and leveraging the results of ongoing ASA on air quality and analysis completed in previous CPF cycles, the World Bank will further the dialogue on negative local externalities from the use of fossil fuels. The potential Greener Environmental Growth Project could support a wider green environmental agenda, with the aim of reducing particulate emissions from targeted sources in selected areas of North Macedonia and strengthening environmental management capacity in the country. Objective 3.2 Scale up climate resilient infrastructure 51. North Macedonia is highly vulnerable to climate change. The country is exposed to increasing intensity and frequency of both onset hazards (such as increases in temperature and changes in rainfall) and sudden hazards (such as more extreme weather events), placing it at high risk of urban and river flooding, landslides, and wildfires, in a context of water scarcity and overall geological vulnerability.20 Disaster events recorded over the past two decades led to more than US$409 million in direct damage, excluding the loss of human lives. The SCD notes that average annual damage to 20 Global Facility for Disaster Reduction and Recovery Think Hazard platform: https://thinkhazard.org/en/report/241-fyr-of- macedonia 19 critical infrastructure from climate-related hazards could quintuple by 2080, with a major flood or other natural disaster potentially derailing economic growth, damaging agricultural incomes, and/or destroying critical infrastructure. The implementation of climate change adaptation measures needs to be accelerated, including a more robust national adaptation planning framework and the modernization of existing infrastructure to make it more climate-resilient. Inadequate and poorly maintained road and rail networks continue to hinder economic development and slow regional economic integration. Municipal infrastructure and services—including water, wastewater, urban transport, street lighting, and solid waste management—remains underdeveloped and requires significant investment. North Macedonia also lags in waste disposal, relying on polluting and inefficient landfills while recycling is almost nonexistent. 52. The CPF will contribute to this objective with significant investments to upgrade the road network and support municipal-level development. The Road Upgrading and Development Project (P14995) finances the construction of a new road alignment along the Trans-European Network of Transport Corridor VIII, in the segment between Skopje and Deve Bair, to improve transport connectivity for road users with a focus on the resiliency of infrastructure. Similarly, the Local Roads Connectivity Project (P170267) will continue to support resilient investments, but with a focus on local roads rehabilitation to improve access to markets, services, and opportunities. Both operations promote capacity building to enhance the asset management and planning functions of the Public Enterprise for State Roads (PESR), as well as institutional strengthening at the local level. Construction works under PSEEP are carried out in compliance with the construction and building codes, taking measures against disaster risks, such as floods, landslides, and earthquakes. The Agriculture Modernization Project (P168014) finances the construction of agri-food infrastructure, including collection and conditioning centers, an agri-food platform, and an animal byproduct (ABP) facility (rendering plant) that are climate-resilient. The agri-food infrastructure will help agriculture producers adapt to the risk of extreme climatic events, such as extreme heat and drought, by increasing storage capacity to help preserve produce during harsh winters and hot summers. The ABP facility is expected to significantly reduce GHG emissions from livestock disposal. The upcoming Sustainable Municipal Development Project will promote the financial and environmental sustainability of municipal services, improve their coverage and quality, and introduce urban climate change mitigation and adaptation measures. ASA will complement the investment projects. By mobilizing private expertise and financial resources, PPPs can accelerate the construction of municipal infrastructure, improve the efficiency of public services, and foster innovative solutions that offer a better response to user needs than poorly functioning public service provision. Additional support to the municipal development agenda may come from IFC, which will explore new opportunities to engage in regional projects in the areas of municipal finance, e-mobility, waste-to-energy, transport, and green industrial zones. However, additional IFC support depends on: (i) close collaboration with IBRD due to its active engagement in this area, (ii) a clearer central government approach to municipal borrowing, and (iii) the credibility of municipalities to borrow without sovereign guarantee. 53. The investment program will be complemented by comprehensive ASA to deepen knowledge and underpin the policy dialogue. In addition to the ongoing CCDR, planned ASA includes a new study on Priorities for Climate-Ready Cities in Selected Western Balkan Countries (P177921), which promotes a better understanding of the impacts of climate change-related shocks and stressors on selected cities in the Western Balkans, including an assessment of potential policy responses—reforms and investments—that local and national-level policy makers, the private sector, and communities could deploy to mitigate the effects of a changing climate. In addition, the Western Balkans Whole-of- Economy Climate Action Support contributes to deepening knowledge on climate change trends and their implications for development in the region, and in North Macedonia in particular. The Water Governance Assessment conducted under the Water for Green and Resilient Growth for North Macedonia ASA highlighted priorities for investments (improving dam safety and dilapidated irrigation schemes and reducing flooding risks) and soft measures (updating the Water Master Plan and 20 reorganizing the sector to improve transparency and coordination between local and central government) in the water sector. The Greening Agriculture in the Western Balkans (P180312) ASA aims to generate knowledge and provide policy recommendations on enhancing the greening of agriculture to meet the requirements of the EU Green Deal and the new green aspects of the Common Agricultural Policy. Additional opportunities for ASA and investments to promote energy transition and climate resilience may be identified in line with the recommendations of the CCDR, which is expected to be delivered within the first year of CPF implementation. 3.4 Implementing the CPF Financial Envelope 54. Delivering on the CPF objectives will require blending the various instruments in the WBG’s toolbox, including IBRD instruments, IFC advisory, investment and private sector mobilization capacity, domestic resource mobilization, and additional funding from development partners. While the following sections present indicative program amounts for IBRD, the CPF’s overall envelope and expected outcomes are foreseen to result from close coordination through a One WBG approach. 55. The indicative CPF program amounts to approximately US$1,099.03 million of IBRD lending and US$27.46 million in TFs (Table 3).21 The CPF inherits an active IBRD portfolio of US$404.03 million in commitments and US$9.54 million in TFs, and proposes a program of approximately US$695 million of new IBRD lending, and two WBIF TFs of US$17.92 million. The current portfolio will contribute to CPF outcomes in the areas of PFM, education, social protection, transport, trade, agriculture, and energy efficiency. New activities will complement and scale up the existing portfolio, including by filling knowledge gaps to move from first- to second-generation reforms. Table 3: Indicative Lending Envelope Amount (USD HLO 1- HLO 2- HLO 3- million) Improved More Increased Operation quality of productive climate IBRD public service private resilience Lending TF/Grants delivery sector jobs Building Effective, Transparent and Accountable PFM Institutions 19.77 5.32 x [P176366] Social Insurance Administration 15.17 x [P170343] Social Services Improvement 33.40 x x [P162246] Primary Education Improvement 25.00 x x Active IBRD [P171973] Commitments Local Roads Connectivity [P170267] 122.80 x x x Road Upgrading and Development 79.99 15.47 x x [P149955] Agriculture Modernization [P168014] 50.50 4.22 x Public Sector Energy Efficiency 27.40 2.45 x [P149990] Regional Trade and Transport x Facilitation [P162043] 30.00 Subtotal Active Portfolio 404.03 27.46 21Actual IBRD lending volumes will depend on country demand, overall performance, as well as global economic/financial developments which affect IBRD’s financial capacity, and demand by other World Bank borrowers. 21 Amount (USD HLO 1- HLO 2- HLO 3- million) Improved More Increased Operation quality of productive climate IBRD public service private resilience Lending TF/Grants delivery sector jobs Sustainability and Resilience DPO 100.00 x x x New IBRD [P180587] Lending FY24 Social Service Improvement 2 30.00 x Road Upgrading and Development AF 30.00 x Sub-Total FY24 160.00 Local Roads Connectivity AF 25.00 x x x [P170267] Sustainable Municipal Development 50.00 x x [P174897] Private Sector Development and 40.00 x x New IBRD Access to Finance Lending FY25- Health 30.00 x FY26 Energy Transition 40.00 x Greener Environmental Growth 40.00 x Human Development 80.00 x x Development Policy Operation 100.00 x x Regional Trade and Transport 30.00 x x Facilitation 2.0 Sub-Total FY25-26 435.00 New IBRD Digital Development Agenda 50.00 x x Lending FY27- FY28 Agriculture 50.00 x Sub-Total FY27-28 100.00 Total 1099.03 27.46 56. IFC’s committed portfolio in North Macedonia stands at US$6.34 million as of the first quarter of FY24, in one direct investment (a long-time equity partner, Macedonia Telecom). In addition, IFC has outstanding exposure through regional projects, which is not reported separately as part of IFC’s North Macedonia portfolio (Schwarz and South-Central Ventures Technology III). To attract new private investment, synergy between IBRD’s reform work, IFC’s transaction-level advisory and investments, and MIGA guarantees will be crucial. With the new CPF, WBG agencies will systematically apply the Cascade Approach, prioritizing PPPs and private investments over public investments whenever feasible. This strategy will encompass rigorous analysis, competitive tendering, and institution building for effective oversight, including in the PPP framework. This more systematic approach will result in increased opportunities for IFC advisory and investment engagements, in line with those discussed under each HLO and objective. 57. As of the first quarter of FY24, MIGA guarantees stand at US$130.8 million, across two operations in the financial sector. Currently, MIGA is providing capital optimization guarantees to two IFIs with subsidiaries operating in North Macedonia. MIGA guarantees reduce the regulatory capital requirements for a portion the IFIs’ mandatory reserves held at the central bank of North Macedonia, freeing up regulatory capital to enable increased lending to SMEs and for climate finance-related activities in the country. Through the One WBG Approach, MIGA will continue to seek opportunities to provide credit enhancement and political risk insurance guarantees to de-risk and facilitate cross- border investments in sustainable public infrastructure, financial sector, renewable energy, and other critical sectors. 22 Financial Management and Procurement 58. A public procurement legislation system is in place and functioning well, but there is scope for improvement. Public procurement in North Macedonia is governed by the Public Procurement Law, which has been harmonized with the new corresponding EU directives.22 North Macedonia is a leading example of success in the implementation of red flag indicators in its public procurement system. This is an effective tool designed to identify suspicious patterns in procurement data that may indicate collusion or tender manipulation. North Macedonia’s procurement system also offers the option of e- marketplace for contracts up to EUR 10,000 to be used for very small purchases, usually defined as eligible under the projects’ operating costs. Some weaknesses remain, however. It is a decentralized system that suffers from low competition and annulments of tenders, and where any bidder can contest the bid evaluation process. A planned assessment of the country’s electronic procurement system will aim to determine if it could be used for contracts below the World Bank’s international procurement threshold. Provided that the system is found to be sound and meet the core principles of the World Bank’s procurement framework, the World Bank will recommend its use for contracts under IBRD-financed projects. Potential areas of further collaboration and reform discussed with the Public Procurement Bureau include capacity building on data analytics and related tools, green public procurement, and improvements of the red-flag indicators module in the e-procurement system. 59. World Bank investment lending in North Macedonia relies on country systems in almost all areas of financial management. These include budgeting and planning, treasury, flow of funds, accounting and financial reporting, and the internal control framework. Key strengths include the sound legal framework, the integrated central treasury system, strong budget classification, and a comprehensive and reliable accounting and financial reporting system. The 2022 Public Expenditure and Financial Accountability (PEFA) assessment registered an overall improvement, primarily on budget formulation, budget execution and reporting, and external oversight. The improved performance relates more specifically to the monitoring of arrears, assessed aspects of tax administration, internal controls, in-year budget reporting, external audit, and legislative scrutiny of the budget proposal and the final account. The World Bank will continue to support system strengthening, with scope to extend the use of other elements of country systems for World Bank investment lending. As part of these efforts, the Enhancing Infrastructure Governance in the Western Balkans ASA will aim to contribute to strengthening oversight, transparency, and accountability of PFM systems, with a focus on the role and capacity of the Supreme Audit Institution and of Parliament in evaluating the outcomes of public infrastructure investments. Monitoring and Evaluation 60. The CPF will contribute to enhancing the government’s monitoring and evaluation capacity. Delays in the processing and availability of micro-data constrain efforts to monitor and document changes in poverty and equity to inform effective, evidence-based policy making in North Macedonia. As part of the Western Balkans Poverty and Equity program, the World Bank will continue supporting the State Statistical Office of the Republic of North Macedonia to implement modern Computer Assisted Personal Interviewing technologies for the collection and management of Agricultural Census and EU Statistics of Income and Living Conditions (EU SILC) data, which will enhance its capacity for timely data processing and validation and will further enhance the quality and efficiency of the data collection and management process. On the macro side, data availability and compliance with international standards is sufficiently high, although frequent and large revisions to historical data may affect policy conduct and evaluation in the country. 22Directive 2014/24/EU on public procurement, and Directive 2014/25/EU on procurement by entities operating in the water, energy, transport and postal services sectors. 23 Partnerships and Donor Coordination 61. Strengthened citizen engagement (CE) and partnerships will underpin the implementation of the CPF program. The current CPF will build on the recommendations of the CLR. CE mechanisms in the portfolio will be leveraged through the provision of timely and accessible information to beneficiaries. In addition, the capacity of project implementation units (PIUs) to implement CE will be strengthened through in-country workshops and clinics, while good national CE practices will be captured. Meaningful engagement with citizens and stakeholders throughout the project cycle will ensure accurate targeting and program effectiveness. In parallel, the quality of CE mechanisms in the portfolio will be enhanced to ensure that beneficiaries are engaged throughout the project cycle, to close the feedback loop, to facilitate the provision of different types of feedback through a variety of channels, and to enhance the inclusiveness of CE mechanisms. Innovative CE approaches that rely on information and communication technology tools would also be incorporated into projects. 62. Collaboration with bilateral and multilateral organizations, as well as the private sector, will play a crucial role in achieving the objectives outlined in the CPF. The proposed program aims to support the country in its efforts to achieve integration with the EU. In that context, the IMF and the EU remain the WBG’s main partners in the dialogue on fiscal governance, and macroeconomic and social sector policies. Potential parallel financing to the DPOs will be explored with the Organization of the Petroleum Exporting Countries (OPEC) Fund and French Agency for Development (Agence Française de Développement—AFD). Meeting the objectives of the country’s ambitious investment agenda will require maximizing opportunities for financing transformative projects. In that context, the World Bank Group will continue to explore opportunities in the area of connectivity and climate resilience and adaptation with the EC through Instrument for Pre-accession (IPA) funding, with other EU international financial institutions, such as the EIB and the EBRD, as well as selected EU bilateral agencies, such as AFD and Germany’s Credit Institute for Reconstruction (Kreditanstalt für Wiederaufbau--KfW), and through the WBIF. Building on established coordination mechanisms, the WBG will foster close collaboration with other multilateral and bilateral partners, in particular in the fields of PFM (United Nations Development Program (UNDP), United States Agency for International Development (USAID)), agriculture (Food and Agriculture Organization (FAO)), education (United Nations Children Fund (UNICEF)), municipal financing (Swiss State Secretariat for Economic Affairs (SECO)), regional integration (EC), and social inclusion (UNDP, focusing on the issue of reintegration of Roma returnees). IV. MANAGING RISKS TO THE CPF PROGRAM 63. The overall risk to implementing the CPF program is assessed as substantial. Four of the eight categories in the WBG’s Systematic Operations Risk-Rating Tool warrant this rating (Table 4). While the EU accession negotiations represent a solid anchor to policy making, implementation of the CPF is expected to happen in a context of persisting political volatility and macroeconomic uncertainty. Future elections may lead to a change in key personnel in the ministries and in the PIUs, affecting and/or delaying the implementation of sector reforms and World Bank projects connected to them. Continuous engagement, at both policy and project levels, will help mitigate some of these effects. Table 4: Risks to the CPF Program Risk Rating Risk Categories (H, S, M or L) 1 Political and governance Substantial 2 Macroeconomic Substantial 3 Sector strategies and policies Moderate 4 Technical design of project or program Moderate 5 Institutional capacity for implementation and sustainability Substantial 24 6 Fiduciary Moderate 7 Environmental and social Substantial 8 Stakeholders Moderate OVERALL Substantial 64. Political and governance risks are substantial. With three elections scheduled between 2023 and 2025 (parliamentary, presidential, and municipal), policy continuity and coherence could be affected. To mitigate the risks associated with the alternation of political cycles, the CPF team conducted extensive consultations on the CPF strategy targeting the most relevant parliamentary committees, as well as other key stakeholders, to promote consensus on the CPF’s main strategic directions and proposed program. Although appropriate mitigation measures are embedded in project preparation and implementation—notably the flexibility to adjust the program to address political developments and/or other shocks, and a systemic approach (institutional strengthening pursued at the project level) to rule-based governance issues, in cooperation with leading partners such as the EU—potential reversals and protracted delays in project implementation and risks to the achievement of development objectives cannot be ruled out. 65. Macroeconomic risks are rated substantial. Macroeconomic risks have decreased with the main macroeconomic indicators (such as debt and deficit/GDP) expected to improve over the medium to long term, supported by the IMF PLL (paragraph 10), the reform impetus provided by the EU accession process and the constructive engagement by the authorities on structural reforms supported by the World Bank Sustainability and Resilience DPO [P180587]. However, growth in the medium term is expected to remain below potential, at less than 3 percent, owing to persisting uncertainties emanating from the geopolitical situation in Europe, slowing growth with the main trading partners in EU, and delayed implementation of structural reforms needed to ensure fiscal sustainability and unlock potential growth. For that reason and given that, at the time of writing, the possibility of cost overruns on the corridor X highway project, and subsequent deviation from the positive trajectory in the reduction of both deficit and debt/GDP cannot be ruled out, the macroeconomic risk over the medium term remains substantial, with the possibility of reviewing it at the time of the PLR. Achieving North Macedonia’s development prospects would require deeper attention to pending reforms in the broader context of the EU accession process, with a focus on deepening tax reforms, better targeting social spending, increasing market competition and labor market participation, and building energy resilience in the broader context of the green transition. Active macroeconomic monitoring and surveillance, and active policy dialogue on strengthening fiscal buffers to reduce the risk of fiscal shocks, in particular as crisis-related fiscal support is gradually withdrawn, would be maintained throughout the remaining CPF period. 66. Institutional capacity for implementation and sustainability risk is assessed as substantial. Frequent changes in leadership based on political patronage impede the continuity of reforms. Over the years, project teams have worked closely with counterparts, including many new officials, to build their project implementation capacity and experience. There are some early gains, yet there are important differences across implementing entities, calling for sustained efforts by the World Bank to strengthen implementation capacity more broadly. The CPF aims to address these shortcomings by pairing lending operations with more extensive TA, as well as through proactive portfolio management. 67. Environmental and social risks remain substantial. North Macedonia continues to be vulnerable to natural disasters, while climate change is expected to have a negative impact on the economy. The country’s coping capacity is low. The forthcoming CCDR, in addition to renewed engagement on disaster risk management, will provide the basis for implementing concrete measures to mitigate climate risks. 25 Annex 1: Results Matrix for the North Macedonia CPF for FY24–FY28 High-Level Outcome 1 (HLO 1) – Improved quality of public service delivery This HLO aims at improving the efficiency, transparency, and quality of public services with an emphasis on sustainability and inclusion. High-level Outcome Indicators Data Source Current Value 1. Government effectiveness index 1. Bertelsmann Transformation Index: 1. 6.3 (2022) Governance 2. Human Capital Index 2. The Human Capital Project, World Bank 2. 56 (2020) High-Level Outcome description Rationale: Weak governance and corruption have long hindered North Macedonia’s development. Significant gaps in terms of the rule of law, the accountability of public institutions, and long-term fiscal sustainability have undermined efforts to accelerate inclusive growth. North Macedonia’s governance indicators la g those of aspirational peers, and insufficient improvements could delay the country's EU accession—the last set of countries that joined the EU in 2004 had higher governance indicators during the pre-accession period than North Macedonia today. Poor governance and limited administrative capacity, particularly at the municipal level, negatively affect the delivery of public services, adequate infrastructure asset management and ability to raise revenues. Weak public institutions and political volatility— including frequent changes in leadership and politicized hiring—undermine governance quality and slow reform implementation, resulting in inefficient spending, inadequate public infrastructure and services, and the perception of unequal treatment by the authorities. In addition, broad tax exemptions, compliance challenges, and widespread informality weaken the tax system. There is scope to increase tax revenue by improving collection efficiency, reducing the regressivity of the tax structure, and broadening the tax base. Signs of expenditure inefficiency in key areas, including education, health, infrastructure, and agricultural subsidies, suggest that the same output levels could be achieved at a lower fiscal cost. For example, cross-country evidence indicates that North Macedonia’s current level of public educa tion spending could yield eleven learning-adjusted years of schooling instead of the current seven. As a share of GDP, North Macedonia spends slightly more on education than its regional peers but far less than other EU countries. Public spending on health remains low and inefficient, contributing to a high level of out-of-pocket spending. Social assistance programs have made a significant contribution to poverty reduction, particularly during recent crises, but the coverage of means-tested programs is limited. There is significant space to improve the quality of services provided, particularly for the most vulnerable. The country’s Human C apital Index stands at 0.56, meaning that children born today will be about 44 percent less productive than they would have been, had they enjoyed full health and complete quality education. The index score is the second lowest in Europe and Central Asia (ECA). In terms of education, a child who starts school at age four can expect to complete 11 years of education by the age of 18, however, this number falls to 7.3 years when adjusted for learning quality. In terms of health, 55 percent of the 2022 Balkan Barometer survey respondents expressed dissatisfaction with the quality of health services, and the management of noncommunicable diseases remains a challenge. High out-of-pocket spending in health is particularly challenging for the less well-off. Coverage means-tested social assistance is limited and social protection services, such as elderly care, remain insufficient. 26 WBG Engagement: The WBG program will contribute to HLO1 by addressing governance challenges and increasing efficiency in and quality of public sector services. The objectives will support reforms on fiscal sustainability, such as public financial management, tax revenue, and digitalization. To address quality of services, the WBG will work with central and local governments to ensure adequate coverage and improve services with a focus on vulnerable populations. The WBG will use the whole suite of instruments, both lending and non-lending to contribute to policy development and implementation with the goal of facilitating North Macedonia's accession to the EU. SDGs associated: SDG1 (No Poverty); SDG 3(Good Health and Well-Being); SDG 4 (Quality Education); SDG5 (Gender Equality); SDG10 (Reduced Inequality). CPF Objective 1.1: Strengthen public financial management and accountability of public institutions This is a new objective. It builds on the previous CPF FY19-FY23 objective of strengthening fiscal and public finance management while concentrating more on the accountability aspects. Intervention Logic Rationale: Negative perceptions of governance and public integrity can erode trust, leading to lower investment levels, tax compliance, and reduced electoral and civic participation. In North Macedonia, perceptions of governance and public integrity are quite negative, as evidenced by the Balkan Barometer 2022 Business Opinion Survey, where the country ranked lowest in the Western Balkan region. Of the companies surveyed, 59 percent reported having a negative or very negative perception of governance, public integrity and corruption, and 38 percent had a negative view of transparency and decision-making in the public sector. The country has a poor digital infrastructure resulting in weak digital governance and poor transparency. According to the GovTech Maturity Index, North Macedonia outperforms its Western Balkan peers only in the indicator for public service delivery, which measures the maturity of online public service portals with a focus on citizen-centric design and universal accessibility. On the indicators for core government systems, digital citizen engagement, and GovTech enablers, North Macedonia trails both its peer countries and the EU27 member states. While the public sector maintains a skilled workforce, turnover rates are high, and political influence at both central and local levels remains a significant concern. Key laws aim to establish uniform rules for public-sector employees at the central and local levels, but merit-based recruitment, promotion, and dismissal processes fall short of the intended standards of professionalism, thus undermining citizen confidence in the public sector. Lessons learned and new knowledge at the program level: According to the CLR, anchoring structural reforms with the EU accession process, and embedding the thrust of some of them in the WBG Public Finance and Competitiveness DPO, has supported the government in significantly improving the quality and transparency of public institutions through, inter alia, the publication of reported arrears, which allowed for their public scrutiny. However, the SCD and the inputs collected through the consultation process, show that the country needs to focus further on governance and accountability, while intensifying efforts on judicial and public administration reform, and on the fight against corruption and organized crime. The restoring of public trust in the state institutions will depend on the financial and institutional independence of the oversight and regulatory institutions. The public sector is also in need of a digital transformation which would increase transparency and cross- government coordination, and make system interoperability possible, as necessary to enable the rollout of e-government systems for provision of e-government services for the population. The digital transformation could also be supported through the government taking steps to improve digital literacy among the public, with a particular focus on low-education and low-income groups, the elderly, and vulnerable households, which in turn will improve with the inclusion of these groups. WBG ongoing and planned support to this CPF Objective: The WBG will continue supporting, through existing and planned investments, reforms on public financial management and digitalization for enhancing public service delivery and transparency support accountability. Through the ongoing portfolio, the WBG is supporting the introduction of the Integrated Financial Management Information System (IFMIS), as well as introducing major reforms in public sector budget management, including 27 in state aid management, and tax revenue. A DPO program is expected to support reforms leading to transparency, efficiency, and accountability of public financial management. The proposed Sustainable Municipal Development IPF aims to enhance sustainable, resilient, and climate-smart municipal service delivery. A digital development IPF is proposed to help accelerate North Macedonia by enhancing digital infrastructure and digital skills. IBRD will carry out analytical work to inform the DPO, provide recommendations on infrastructure governance and institutional strengthening, as well as digitalization opportunities for SMEs. Key risks and mitigation: The political/electoral cycle could impact the continuity as well as the consistency of reforms. Mitigation includes: a) continued open dialogue with GoMk counterparts and the opposition to ensure broad support for reforms; b) close coordination with the IMF and other development partners on rule-based government; and c) flexibility of strategy implementation and project design to address political developments and/or other shocks. Supplementary Progress CPF Objective Indicators WBG Program Indicators Indicator 1.1.1: Payments SPI 1.1.1: New IFMIS is IBRD Ongoing Financing: processed through IFMIS (percent) operational • Building Effective, Transparent and Accountable PFM Institutions Project [P176366] Baseline [2024]: 0 Baseline [2024]: No IBRD Financing Pipeline: Target [2028]: 95 Target [2026]: Yes • Sustainability and Resilience DPO [P180587, FY24] Source: MOF IFMIS Reports Source: MOF IFMIS Report • Sustainable Municipal Development Project [P174897, FY24] • Digital Development IPF (FY27) IBRD Ongoing ASA: Indicator 1.1.2: SPI 1.1.2: Gender budget • North Macedonia Public Finance Review: Ensuring Stability and Boosting Resilience Comprehensiveness of publicly published (G) [P179795] available general government Baseline [2024]: No • North Macedonia Government Debt and Risk Management Program [P162741] reporting Target [2026]: Yes • North Macedonia Integrating Climate Perspective into PFM Agenda – Western Baseline [2024]: Annual Budget Source: MOF National Budget Balkans Green Recovery Support Grant [P177365 and P179264] preparation and budget execution • Western Balkans Road to Europe Program of Accounting Reform and Institutional reports do not cover all relevant Strengthening for Small and Medium Enterprises [P172296] institutions in accordance with • Enhancing Infrastructure Governance in Western Balkan Countries [P180720] international standards (ESA 2010 IBRD ASA Pipeline: and GFS) • CEM Target [2028]: Regulatory agencies, • Public Financial Management independent institutions, public • GovTech and Digital Development enterprises (PEs) are included as part of the budget preparation and execution reports through the new IFMIS, in line with the new PE Registry Source: MOF IFMIS Reports 28 Indicator 1.1.3: Integration of climate change considerations into project screening (CC): Baseline [2024]: Climate considerations not contemplated in project screening Target [2028]: 80 percent of new large projects have been screened for climate change mitigation or adaptation considerations Source: MOF IFMIS Reports CPF Objective 1.2: Strengthen fiscal sustainability This objective is a continuation of the previous CPF objective on strengthening fiscal and public finance management, with a stronger focus on the sustainability aspects. Intervention Logic Rationale: North Macedonia’s strong track record of sound macroeconomic policies and financial-sector stability has supported one of the world’s most inclusive economic expansions. However, successive shocks have tested the country’s fiscal resilience and left the country with very li mited space to respond to future shocks. While the government’s crisis-response measures helped to support growth, preserve jobs, and protect household welfare, they also increased fiscal sustainability risks as growth slowed and financing conditions tightened. Public and publicly guaranteed debt reached 59.7 percent of GDP in 2022. North Macedonia has run higher fiscal deficits than its EU27 and WB6 peers, with a 10-year average deficit of 4.2 percent of GDP. For a small, open economy with a pegged exchange-rate regime, fiscal policy is the primary instrument for managing the business cycle. Consequently, creating and maintaining fiscal buffers is vital to ensure responsiveness to future shocks. Bringing the public debt and fiscal deficit down after the consecutive crises requires efforts to mobilize additional domestic revenues, make spending programs more efficient, and bolster public finance management. The financial sustainability of municipalities is also of concern. Spending on urban infrastructure and social services continues to lag spending by peers at the regional level (64 percent and 84 percent of the regional average, respectively), and local sources of revenue make up only a small percentage of development expenditures, also because of weak management and collection capacity at the municipal level. The under-developed sub-national fiscal framework created recurrent problems of municipal arrears, though concentrated in a few municipalities, and repeated municipal bailouts by the central government. Fiscal transfers from the central government have remained too fragmented and erratic to promote municipal medium- to long-term financial planning. Lessons learned and new knowledge at the program level: The DPO-supported enactment of the law on Reporting and Monitoring of Liabilities helped identify and monitor general government arrears. Together with strong government ownership, the Government’s Debt and Risk management Prog ram was substantially strengthened. As the SCD points out, further efforts will be needed to ensure fiscal sustainability, through: (i) reducing fiscal risks, by assessing SOEs viability and implementing the fiscal consolidation strategy to create buffers and strengthen sustainability of public finances; (ii) improving spending efficiency, by reducing operational costs, and streamlining subsidies and categorical social benefits; (iii) enhancing revenue mobilization, by reducing tax exemptions, increasing health-related excise taxes, and expanding environmental taxation (see the Tax Reform Strategy); (iv) improving the tax administration, by building the capacity of the large-taxpayer office, enhancing tax audits, improving the efficiency and effectiveness of revenue collection, and strengthening tax administration through business-process 29 reengineering, integrated risk management, and systems modernization; and finally (v) modernizing the Treasury System, by prioritizing the streamlining of budget processes, the implementation of the new organic budget act, and the development of a digitized integrated financial management information system (IFMIS). WBG ongoing and planned support to this CPF Objective: Building on reforms described under CPF objective 1.1, IBRD will continue supporting the sustainability of public finances through sector spending and tax policy reforms aiming to support fiscal consolidation process. This will be done through the proposed DPO operations. The BETA PFM project will support the introduction of the State Aid Management Information System which will contribute to reevaluation of state aid programs and their rationalization. The proposed Sustainable Municipal Development Project will help ensure quality of expenditure at the municipal level and also help with municipal arrears’ reduction. The project is expected to contribute to improved municipal fiscal discipline and performance, inclusive strategic planning, and asset management. The CPF program will be informed by ongoing and planned ASAs that focus on tax policy, strengthening fiscal and infrastructure governance, integrating climate change and whole-of economy perspectives, as well as the sustainability of the pension system. Key risks and mitigation: The high interest rate environment, as well as the instability linked to spillovers from Russia’s invasion of Ukraine, could affect macro-fiscal stability. The persistence of inflationary pressures, as well as the instability linked to the political juncture could in turn undermine reform momentum. Mitigation includes continued open dialogue with GoMk counterparts and the opposition to ensure broad support for reforms, as well as close coordination with the IMF and other development partners on fiscal stability and debt sustainability. Supplementary Progress CPF Objective Indicators WBG Program Indicators Indicator 1.2.1: Central SPI 1.2.1: Fiscal Council IBRD Ongoing Financing: government arrears as a percent established • Building Effective, Transparent and Accountable PFM Institutions Project [P176366] of total government expenditures Baseline [2024]: No IBRD Financing Pipeline: Baseline [2023]: 8.9 percent Target [2026]: In place • Sustainability and Resilience DPO [P180587, FY24] Target [2028]: 5.9 percent Source: MOF • Sustainable Municipal Development Project [P174897, FY24] Source: MOF • Health Sector Financing (FY25) IFC Financing Pipeline Indicator 1.2.2: Excise revenues • IFC Potential PPP investment (on tobacco) IBRD Ongoing ASA: Baseline [2022]: 1.6 percent of GDP • North Macedonia Public Finance Review: Ensuring Stability and Boosting Resilience Target [2028]: 2 percent of GDP [P179795] Source: MOF and National • Strengthening Fiscal Governance in the Western Balkans [P180191] Accounts Data • North Macedonia Government Debt and Risk Management Program [P162741] • North Macedonia Integrating Climate Change Perspectives into Fiscal Policy - Western Indicator 1.2.3: VAT compliance Balkans Green Recovery Support [P179264] gap Baseline [2023]: 22 percent of • Enhancing Infrastructure Governance in Western Balkan Countries [P180720] VTTL* • Western Balkans Whole-of-Economy Climate Action Support [P180450] • Western Balkans Pension Advisory Services and Analytics FY2023-24 [P179828] 30 Target [2028]: 18 percent of VTTL IBRD ASA Pipeline: Source: National Accounts Data • CEM IFC Ongoing ASA: * VAT Total Tax Liability • Strengthening Public Private Partnerships in Western Balkans [#608312] • Gevgelija EIP PPP advisory [#507612] CPF Objective 1.3: Improve social services, in particular for vulnerable populations This objective is continuation of the previous CPF FY19-23, which had the objective of improving access and quality of social services. The current objective emphasizes the inclusiveness aspects of the engagement. Intervention Logic Rationale: Coverage of social services, including health, social protection, elderly care, or care for children with disabilities, has increased in recent years. For example, pre-primary education enrolment (ages 3-6) increased from 32 to 43 percent between 2011 and 2022. There have also been significant reforms that have improved the functioning of the overall system and the quality of services, such as the comprehensive 2019 social protection reform. However, as the Human Capital Index shows, significant gaps remain, and progress has been too slow and uneven to successfully tackle the triple challenge of low productivity, ageing and inequality. With high migration and rapid aging- by 2040, more than 20 percent of the population in North Macedonia will be over the age of 65—it is critical to maximize everyone’s human capital to meet both inclusion and productivity goals. Uneven access to services disproportionately affects families in the lowest income quintile, those who live in rural areas and particularly, those belonging to the Roma community and who have some kind of disability. Since many of the relevant social services are provided and at least partially financed at the local level, it is also necessary to strengthen municipal financing. Lessons learned and new knowledge at the program level: Economic growth since 2009 has significantly benefited less well-off households, contributing to a considerable decline in the poverty rate, but still, since 2019 about one-third of the population remained vulnerable to falling into poverty in the event of an economic shock. Ensuring that vulnerable groups have equitable access to quality public services and being able to exercise their social rights will be vital to enable them to improve their wellbeing, become more resilient, and fully contribute to economic growth. Social services are critical to build and protect human capital and their importance will only increase as the population ages. This engagement area will be built on lessons learned from previous or ongoing operations in health and other social services. A critical lesson has been the importance of sustained analytical and operational engagement to gaining trust and support for difficult reforms. Engagements in social services deepen reforms in areas where the Bank has been supporting the government for some time. A second lesson has been the importance of thinking ex-ante in the design of projects about the interactions across sectors or levels of government that can hinder or amplify impacts. This has been clear in the elderly care agenda where services are provided locally but the policy and regulatory framework and part of the financing are national; similarly, the provision of these services brings together social protection and health sectors. A third lesson is the importance of thinking beyond the narrow sector of intervention when accounting for results. As confirmed in the CLR, the Social Service Improvement Project (SSIP) promoted higher female participation in the labor market by increasing access to new kindergartens and establishing non-institutional social services for care of the elderly at home. WBG ongoing and planned support to this CPF Objective: The WBG program will continue to have a strong focus on quality of services particularly for vulnerable populations. Ongoing operations will promote the expansion and sustainability of social services and increased coverage of social insurance, and improved access connectivity. Looking forward, the WBG will continue supporting institutional development at the municipal level, by improving capacity in financial and social services management. Through the proposed DPO and ongoing SIAP, the program will support the reforms in social program administration, including implementation of the 31 Law on Disability Assessment System and the Law on Mandatory Social Insurance Registry, which aims to harmonize disability assessment across insurance systems. This objective also envisages a new operation in the health sector in response to current and emerging challenges, especially in the provision of primary health care. The WBG's Wester Balkan ASA program will provide technical assistance on pension policy reforms and analysis on poverty and equity, including policies to address them. Key risks and mitigation: There are two main sets of risks connected to this objective: a) policy continuity in Human Capital Development; and b) limited institutional capacity at the municipal level to implement the measures needed to improve funding and management of local connectivity infrastructure. On the former, the Ministry of Health, for example, has seen repeated changes in leadership, resulting in discontinuous policy and limited institutional capacity building. Mitigation measures include the constant engagement with a broad range of stakeholders with a clear interest in sustaining the implementation of the country’s human development agenda (Members of Parliament, CSOs, private sector representatives and other development partners), as well as intensified project supervision, particularly around leadership renewals. On the latter, while there have been some improvements over time, the level of institutional capacity remains low, with small and remote municipalities facing the dual challenge of shortage of qualified skills and limited availability of resources. To mitigate this risk, the program includes lending operations with a strong technical assistance component to strengthen core competencies in municipal service financing and management. Supplementary Progress CPF Objective Indicators WBG Program Indicators Indicator 1.3.1: Proportion of SPI 1.3.1: Single unified registry of IBRD Ongoing Financing: insured population whose social socially (SURS) insured individuals • Social Insurance Administration Project [P170343] insurance information is centrally developed and functional • Social Services Improvement Project [P162246] available to all social insurance Baseline [2024]: Inexistent IBRD Financing Pipeline: agencies Target [2026]: SURS established • Sustainability and Resilience DPO [P180587, FY24] Baseline [2024]: 40 and operational • Social Service Improvement Project 2 [P180350, FY24] Target [2028]: 100 Source: Ministry of Labor and • Health Sector Financing (FY25) Source: SURS Social Protection (MLSP) IBRD Ongoing ASA: • Western Balkans Pension Advisory Services and Analytics [P179828] SPI 1.3.2: Average time to issue a • Western Balkans Poverty & Equity Program FY22-FY23 [P177035] Indicator 1.3.2: Share of cash disability certificate (days) • Promoting Jobs and the Care Economy in the Western Balkans [P180684] benefit recipients and social Baseline [2024]: 120 services recipients (poor or Target [2026]: 60 • Western Balkans SPJ Situational Analyses [P176230] disabled) recertified and recorded Source: MLSP IBRD ASA Pipeline: in the new information system • Gender Report (percent) • Migration Baseline [2024]: 0 • Health Finance Of which women [2023]: 0 Target [2028]: 60 Of which women [2028]: 60 Source: MLSP 32 Indicator 1.3.3: Number of beneficiaries receiving noninstitutional social services (alternative/non-residential forms of care) from licensed providers Baseline (2023): 2602 Target: (2028): 5,000 Source: MLSP High-Level Outcome 2 (HLO 2) – More productive private sector jobs This HLO aims to support creation of more productive private sector jobs by addressing access to finance, connectivity, and human capital constraints. High-level Outcome Indicators Data source Current value 1. Labor Productivity (Gross Value Added Labor Force Survey 1. Labor Productivity Index (2022): 100 per worker EUR 12,876 in 2015 prices) index relative to 2022 (100) 2. Labor Force Participation Female: 44.3 percent (2022) 2. Labor force participation (female; male) Male 66.3 percent (2022)23 3. Increased connectivity World Bank Logistics Performance Index 3. LPI Score: 3.1 (2022) High-Level Outcome Description Rationale: North Macedonia has made important strides in enhancing its business environment and has successfully attracted foreign investment. However, persistent weaknesses in the institutional and policy framework constrains productivity growth. The domestic economy continues to lack the dynamism necessary to reach higher- income status, a challenge reflected in its low and declining productivity indicators. Firms owned by domestic investors, predominantly micro, small, and medium-sized enterprises, have exhibited weak or stagnant productivity growth in recent years. These businesses primarily serve the domestic market, with few links to regional or global value chains, and their progress on digitization and the green transition tends to lag that of their regional peers. To address its productivity challenge and to create better jobs, North Macedonia must continue to attract FDI to facilitate technology upgrading while implementing an ambitious strategic governance, human capital, infrastructure, regulatory, and firm-level reform agenda. Only half of North Macedonia’s firms report being able to find worker s with the necessary skills, and less than 10 percent report being in contact with educational institutions. Meanwhile, about one-quarter of Macedonians feel that the skills they learned in the education 23 https://www.stat.gov.mk/pdf/2023/2.1.23.05_mk.pdf 33 system did not prepare them for their current jobs. The mismatch between the skills that the education system imparts and those the labor market demands stems from very early gaps on the foundational cognitive and socio-emotional skills. These gaps emerge from the lack of school readiness and weaknesses in basic education, and greatly diminish the productivity of Macedonian workers later in life. What is more, addressing these early skills gaps will bring additional benefits as the lack of childcare is often a barrier to fully participating in the labor market, particularly among women. WBG Engagement: The WBG program will support efforts to increase productivity through better quality private sector jobs and skills investments. On the private sector side, the program will promote access to regional markets and value chains through improving access to finance, physical and digital connectivity, and alignment with EU and global export requirements to facilitate trade. On the human capital side, the program will take a life-cycle approach, working from early childhood education to secondary education and transition to jobs. SDGs associated: SDG 5 (Gender Equality); SDG8 (Decent Work and Economic Growth); SDG9 (Industry, Innovation, and Infrastructure) CPF Objective 2.1: Increase market access This objective builds on the previous CPF objectives related to improved connectivity and access to markets, and on increased private sector competitiveness, emphasizing the linkage between improved market integration and access to financial services, and firm-level competitiveness. Intervention Logic Rationale: A lack of diversification in markets and products weakens North Macedonia’s export performance. While the country’s FDI -supported export-oriented growth strategy has yielded gains, the survival rate of exports is low, especially products not covered by a regional trade agreement. On average, only half of medium and small exporters endure over the long term, while larger exporters have higher survival rates. Service exports have stagnated and continue to underperform their potential. Generous tax incentives, which cost around 5 percent of total tax revenue have not generated substantial spillover effects on the rest of the economy. Foreign firms continue to source only around 10 percent of their inputs from domestic suppliers. A strong trade and competitiveness strategy is essential for a small, landlocked country like North Macedonia. This strategy should facilitate climbing the global value chain ladder and expanding diversification in agriculture, agribusiness, services, and more complex manufacturing. Greater diversification would accelerate job creation, increase business survival, and strengthen the resilience of the economy. State aid and incentive programs should be adjusted to encourage greater levels of innovation and to enable firms to access higher-value-added segments of priority value chains. Adequate road infrastructure is currently an additional constraint due to inadequate modernization and poor maintenance. At least one-fifth of firms consider that poor road networks hinder economic development and slow regional integration. Limited access to finance also restricts firm growth. The 2019 Enterprise Survey showed that firms ranked access to finance among the top investment climate constraints. The depth of the financial sector, measured by private sector credit to GDP, stands at 55 percent in North Macedonia, in line with regional averages, while significantly below EU averages. Availability of alternative financial products which can cater to the MSME sector, such as leasing, factoring and financial companies are present, but limited with very little activity. Remittances could be directed to productive uses, especially in support of MSMEs, but the cost of remittances remains high. Credit constraints pose an especially acute challenge among smaller, younger firms and those located outside of Skopje. Subsequent surveys conducted to capture the impact of the pandemic reveal that the access to finance gap widened as more firms experienced decreased liquidity and delayed payments. On average, banks provide 35 percent of firms’ external investment financing, under conditions that are difficult for micro firms, small firms, and sta rtups to meet. Female entrepreneurs face a significant disadvantage as they encounter additional constraints in accessing funds and often lack strong business networks. 34 Lessons learned and new knowledge at the program level: The SCD update highlights several actions to foster increased market competition. Reforming national and local road infrastructure and management, as well as public transportation – from institutional and financial to technical and urban development perspective – is bound to improve access to jobs and services. Also, financial inclusion for individuals and SMEs can be improved through diversifying financing instruments, strengthening financial infrastructure and expanding government payments digitalization. The Development Bank will play a key role in alleviating these constraints. Encouraging the use of factoring, leasing, and other financial instruments that are particularly beneficial to MSMEs (micro, small, and medium enterprises) would be useful. Public support instruments such as credit guarantee programs for MSMEs or green-finance funds should be considered, as these measures would aim to maximize the efficiency of public resources, including those allocated through the Development Bank, in addressing market failures. Key initiatives should focus on digitizing person-to- government (P2P) and government-to-person (G2P) payments; incentivize the shift away from cash; improving rural payments infrastructure to encourage electronic payment acceptance among merchants; fostering the adoption of financial technology and broader sectoral innovation; and identifying and addressing constraints to digital payments through the development of a retail/digital payment strategy. In addition, greater emphasis must be placed on simplifying market entry by streamlining barriers for entry and conducting in network services, trade, as well as professional services. Existing RTAs and their range should be expanded to facilitate new market access opportunities. A comprehensive assessment of the legal, regulatory, tax, and market-infrastructure issues affecting the development of capital markets could identify bottlenecks and areas for improvement. Capacity-building initiatives would benefit numerous stakeholders across capital markets. Finally, to remain competitive and gain access to strictly regulated EU markets, decarbonizing production will be fundamental. WBG ongoing and planned support to this CPF Objective: The current program will address access to markets and increased productivity through contributions to the agriculture, transport, and trade sectors. The agriculture sector support will focus on ensuring products meet quality standards for export. Road infrastructure development, including investments in regional trade and transport facilitation, will continue to be part of the program as it is a key factor in facilitating the import and export of goods. A second phase of the Regional Trade and Transport Facilitation Project will extend the first phase with a focus on addressing barriers to closer economic integration with the EU. The proposed digitalization agenda would facilitate transaction processes for both Business to Business (B2B) and People to People (P2P) levels. The proposed Private Sector Development and Access to Finance program will help to ensure a focus on those sectors where the country can be more competitive within the EU accession framework, particularly by providing MSMEs access to innovation ecosystem services and country-specific access to finance options. A regional engagement in the area of digital payments, in the context of the revamped Berlin process, would help address the issue of high costs associated to remittances, thus potentially increasing the availability of remittances for productive purposes. World Bank, IFC and MIGA will work on increasing access to finance, strengthening financial stability and boosting financial inclusion. IFC will leverage its advisory and lending program to support private sector competitiveness and productivity with a focus on export-oriented manufacturing and services sectors, while also providing support to the financial sector to help expand access to finance of MSMEs. MIGA will continue to contribute to the financial sector by providing capital optimization guarantees to international financial institutions operating in the country, enabling increased access to finance among SMEs, and for climate finance related activities. MIGA will also work closely with the WB and IFC to explore opportunities to provide political risk insurance and credit enhancement guarantees to facilitate cross border investments in other strategic sectors identified under the CPF. Key risks and mitigation: The approval of new projects connected to Corridor VIII and Corridor X may pose further strain to the capacity of the country’s a uthorities in charge of the road infrastructure, compounded by possible reshuffling of apical positions may result in delays in the completion of existing roads and trade facilitation projects. Constant support to project implementation units, early engagement with new incumbents and coordination with other development partners engaged in the trade and transport portfolios would mitigate the risk of extended delays in implementation of sector reforms and concrete project activities. Supplementary Progress CPF Objective Indicators WBG Program Indicators 35 Indicator 2.1.1: Market SPI 2.1.1: Volume of freight along IBRD Ongoing Financing: accessibility index along Corridor Corridor VIII (section Rankovce – • Road Upgrading and Development [P149955] VIII (section Rankovce – Kriva Kriva Palanka) • Local Roads Connectivity Project [P170267] Palanka) Baseline [2024]: 43.8 tons • Regional Trade and Transport Facilitation Project [P162043] Baseline [2024]: 138.5 Target [2026]: 45 tons • Agriculture Modernization Project [P168014] Target [2028]: 265.6 Source: Customs database IFC Ongoing Financing: Source: P149955 Survey • Macedonia Telecom [#8972] SPI 2.1.2: Cost of export per • South Central Ventures (regional) [#46554] Indicator 2.1.2: Average freight shipment in North Macedonia • SEE Food Retail [Schwarz; # 46855] transport time on corridor Skopje (USD amount) MIGA Guarantees: Belgrade (Hours) Baseline [2024]: 148 • NLB Capital Optimization [Project ID:14537] Baseline [2024]: 7 Target [2026]: 130 • ProCredit Capital Optimization [Project ID: 14781] Target [2028]: 6 Source: P162043 Survey IBRD Financing Pipeline: Source: P162043 Survey • Private Sector Development and Access to Finance (FY25) SPI 2.1.3: Farmers adopting • Local Roads Connectivity Project AF [P170267; FY24] improved agricultural technology • Road Upgrading and Development Project AF [P149955; FY24] Indicator 2.1.3: Percentage of (Corporate Results Indicators, • Agriculture (FY27) agricultural produce marketed in Number); o/w female compliance with quality standards Baseline [2024]: 0 • Second phase of Regional Trade and Transport Facilitation [P168014; FY25] Baseline [2024]: 40 Target [2026]: 350; o/w female 50 IFC Financing Pipeline: Target [2028]: 75 Source: MAFWE • Modern commercial and industrial infrastructure (e.g., retail, logistics etc.) Source: Agriculture data base • Potential investment in export-oriented manufacturing (e.g. auto parts, electric SPI 2.1.4: Adoption of a modern vehicles) and services (e.g., food/nonfood retail) companies) Indicator 2.1.4: Additional private Insolvency Law with IFC advisory • WB Agri RSF (with the European Fund for Sustainable Development (EFSD+)) investments facilitated by IFC and technical support • Potential MSME credit lines with banks, NBFIs, and regional platforms advisory services (USD) Baseline [2024]: no • FIG Regional Climate Program (with the EU) Baseline [2024]: 0 Target [2026]: yes IBRD Ongoing ASA: Target [2028]: 15 million Source: Regional Insolvency and • Western Balkans Trade Facilitation Advisory Project Phase II [P179241] Source: Western Balkans Debt Resolution Project • Support to Western Balkans Common Regional Market Initiative [P178854] Manufacturing Value Chains AS • Regional Remittances and Payments Systems [P180514] • Regional Financial Stability [P179998] • Regional Private Sector Growth ASA [P500581] IFC Ongoing ASA: • Western Balkans Debt Resolution Project Phase II [#603482] • Western Balkans Manufacturing Value Chains project [604496] • Eco-Industrial Parks (WBIF) [#607033] 36 • National Single Window [#601677] IFC ASA Pipeline: • Asset-based financing and recovering debt in Western Balkans [#608243] • Roadmap for Sustainable E-mobility Ecosystem in the Western Balkans Region [#608123] • Strengthening Logistics and Warehousing Services in EUR [#608377] IBRD ASA Pipeline: • CEM • Private Sector Growth and Competitiveness CPF Objective 2.2: Strengthen foundational skills This objective is the continuation of the previous CPF Objective of improving the quality and relevance of education. It builds on the achievements supported under the CPF FY19-23 and continues engagement on implementation of the reforms with a focus on foundational skills. Intervention Logic Rationale: While North Macedonia has made improvements in education, average scores on the Program for International Student Assessment (PISA) remain below those of EU students as well as when compared to those in the Western Balkan countries. A child who starts school at age four can complete 11 years of education by age 18, but this falls to 7.3 years when adjusted for learning quality. Partly as a result, as the Human Capital Index shows, there is a significant loss in potential productivity. In addition, about 45 percent of the working-age population was economically inactive in 2022. Rates of inactivity are particularly high among workers over 55 and women. 18 percent of youth are not in employment, education, or training, and unemployment is especially acute among young people. Overall, the average worker in North Macedonia loses an estimated 23 years of productive employment throughout their lifetime. Improving labor productivity and increasing access to economic opportunities, particularly for those disadvantaged, requires significant investment in foundational skills to meet labor market demands and allow for life- long learning. Lessons learned and new knowledge at the program level: According to the Human Capital Strategy ASA, North Macedonia’ s human capital remains underdeveloped, and productivity is stubbornly low. The economy faces challenges such as hindered growth and limited employment opportunities. Furthermore, human capital formation has not contributed to growth in the last five years. This warrants urgent action by the government to take steps to strengthen the labor supply by providing inclusive, high-quality education, starting early in life. Early childhood education and care is one of the highest-return investments, offering lifelong and intergenerational benefits that can break the poverty cycle. Hence, the importance of increasing the supply of integrated, affordable, high-quality early childhood education and care, especially among disadvantaged groups. The current engagement in the education sector has further shown the importance of simultaneously tackling related constraints for bigger impact, including issues around the quality of teachers and the classroom environment, the importance of assessments, and issues of financing and governance. A similar approach is likely necessary at the secondary level of education as well. WBG ongoing and planned support to this CPF Objective: The WBG will continue supporting the government’s efforts in strengthening human capital through th e life cycle. The Bank will remain engaged in early childhood education, as a proven high-return investment to life-long skills development, in addition to the contribution it can make in freeing women’s time to allow them to join the work force. Also, t he Bank will continue working on improving the quality of primary education. The pipeline includes a Human Development IPF, which will address secondary technical and general education and additional supply-side constraints to employment with 37 particular focus on providing students with skills that will facilitate the transition to work while addressing additional constraints that hinder employment among the most vulnerable. Together these investments will support the development of foundational skills as well as tackle critical barriers to the productive use of those skills, particularly among women. Key risks and mitigation: Notwithstanding an existing strong consensus across the society of North Macedonia on the importance of strengthening th e country’s human capital, the implementation of deep-reaching reforms could be derailed or considerably slowed down, should commitments not be supported by adequate budget allocations. Public investments in education are often cut first in times of economic contraction. Continuous policy dialogue and citizens engagement in the context of existing portfolio and of the emerging pipeline of projects and analytical and advisory services could contribute to keeping the policy and budget focus to sustain reforms. Supplementary Progress CPF Objective Indicators WBG Program Indicators Indicator 2.2.1: National preschool SPI 2.2.1: Share of preschools IBRD Ongoing Financing: enrollment rates for children 3 to 6 with improved process quality as • Social Services Improvement Project [P162246] years old (percent) measured by the quality • Primary Education Improvement Project [P171973] Baseline [2023]: 43.77 assessment tool (Percentage) IBRD Financing Pipeline: Target [2028]: 50 Baseline [2023]: 2.71 • Social Services Improvement Project 2 [P180350; FY24] Source: ECEC Data base Target [2026]: 3 • Human Development IPF with DLIs (FY26) Source: P162246 IBRD Ongoing ASA: Indicator 2.2.2: Preschool • Promoting Jobs and the Care Economy in the Western Balkans [P180684] enrollment rates for children 3 to 6 SPI 2.2.2: Proportion of School • Second phase of Europe 2020 TF Supporting Effective Reintegration of Returnees years old who belong to families Improvement Plans that use [P172194] benefitting from the Social performance data and monitoring • Western Balkans Country Gender Assessment [P179260] Financial Assistance (percent). tools for improving student • North Macedonia Public Finance Review: Ensuring Stability and Boosting Resilience Baseline (2023): 8.3 learning (Percentage) [P179795] Target (2028): 20 Baseline [2023]: 0 IBRD ASA Pipeline: Source: ECEC Data base Target [2026]: 60 Source: P171973 and MOE • Advancing Education Systems in the Western Balkans Indicator 2.2.3: Proportion of • Migration classrooms with improved learning • Getting People to Work: Improving Incentives and Employment Services environment at the primary level resulting from project interventions (percent) Baseline [2023]: 13.2 Target [2028]: 30 Source: P171973 and MOE Indicator 2.2.4: Proportion of 38 classrooms with improved quality of teaching practices as measured by in-class teacher observation tool (text) Baseline: [2023]: Classroom observation conducted; the baseline value is 3.14 on the scale 1-5 Target [2028]: 40% of classrooms improved as measured by the follow up assessment of a representative sample of schools Source: P171973 and MOE High-Level Outcome 3 (HLO 3) – Increased climate resilience This HLO aligns with the Focus Area 3 of the previous CPF FY19-23 (Sustainable Growth: Enhance Sustainability and Build resilience to Shocks ). It is adjusted towards higher climate resilience, based on the SCD findings. High-level Outcome Indicators Data source Current value 1. CO2 intensity 1. FYR Macedonia - Countries & Regions - IEA 1. 56 kg/2015 US$ (2020) 2. https://www.iqair.com/world-most-polluted- 2. Air pollution index countries 2. 25.6 (2022) High-Level Outcome Description Rationale: North Macedonia is a small, landlocked country that relies heavily on external resources for energy and food production. It is one of the most vulnerable countries in ECA to the adverse effects of climate change and is heavily reliant on fossil fuels. Mismanagement of natural resources, especially water and land, hamper the sustainability of the economy, increase North Macedonia’s exposure to natural disasters, and affect the health of the population. Energy consumption heavily relies on fossil fuels, and consequently the country faces high air pollution levels which are gradually worsening the quality of life and reducing the potential of cities to serve as engines of economic growth and to retain talent. The lack of a comprehensive approach to natural resource management and climate change, inefficient institutional coordination and capacity, and low investment in green and resilient infrastructure limit progress in managing natural resources in an efficient, effective, and sustainable manner. There is also a need to reform environmental policy and strategy in key sectors with EU accession and EU policy directives focusing on chapters on climate mitigation, climate adaptation, circular economy and air pollution , in line with the country’s ambition to join the EU. Of relevance is the need to align to the provisions of the European Union’s 2030 Climate and Energy Framework, which is the European strategic long-term vision for achieving climate neutrality by 2050. 39 WBG engagement: The WBG program will support HLO 3 by accompanying the ongoing energy efficiency initiatives, municipal management and infrastructure resiliency measures as well as air quality management measures. Implementation of this HLO will require blending investment and TA through the full spectrum of instruments in the WBG toolbox. SDGs associated: SDG6 (Clean Water and Sanitation); SDG7 (Affordable and Clean Energy); SDG11 (Sustainable Cities and Communities); and SDG13 (Climate Action). CPF Objective 3.1: Sustain transition to greener energy sources This is the continuation of the previous CPF Objective to accelerate the transition to a more sustainable energy mix. Intervention Logic Rationale: North Macedonia has been decoupling its growth from emissions since 1990, but much more needs to be done to fully decarbonize the economy. The country’s heavy reliance on coal and petroleum products creates significant environmental and social externalities, including greenhouse-gas emissions and air pollution. North Macedonia is characterized by high energy intensity (almost three times higher than the EU average), inefficiencies in the ageing energy production system, persistently high dependence on highly polluting lignite coal and oil (accounting for more than 70 percent of the primary energy supply), and inefficient energy use. The energy supply is unreliable and needs to be further diversified to become more energy independent. The Transmission System Operator needs grid investments to be able to integrate the large renewable energy capacity that is planned to phase out coal. The country’s coal phase out needs repurposing of depleted coal mines and coal-fired power plant assets, and associated reskilling. Lessons learned and new knowledge at the program level: As a way of combating the effects of climate change, increasing energy security and affordability, reducing air pollution due to stationary sources, and decarbonizing the economy, North Macedonia needs to accelerate the transition to renewable energy sources, by using its natural resources, such as solar, wind, water, and its robust electricity infrastructure. According to the International Renewable Energy Agency (IRENA), the country has the technical potential to generate over 8GW of renewable electricity, of which roughly 2GW could be cost-competitive. Renewable resources in North Macedonia are poised to play a significant role in offsetting the potential losses from the decommissioning of existing power plants. The c ountry’s abundant hydroelectric resources, combined with increased natural gas access and the potential for battery storage, could facilitate the expansion of intermittent renewable power. Energy efficiency can significantly reduce the impact of energy costs on the economy’s competitiveness by reducing the overall need for energy. The energy transition is also an opportunity to create green jobs both in energy efficiency and in renewable energy (e.g., renovations, rooftop solar installation, etc.). The transition will also contribute to reducing air pollution from stationary sources which are responsible for a significant share of the particulate matter with the largest emitters being heating, the power plants and aging and growing vehicular fleets, with particular incidence in urban areas. The EU is a global leader in climate action, and North Macedonia’s access to the common market—and to financial assistance from the EU—will hinge on its decarbonization efforts. According to the CLR, deeper collaboration within the WBG would help to further support and mobilize private capital into climate finance activities. WBG ongoing and planned support to this CPF Objective: The WBG program will support North Macedonia with energy security and decarbonization, in line with the country’s ambitious NDC’s targets. It will continue supporting energy efficiency initiatives to reduce energy consumption in the public sector, both at the municipal and central government levels. The program will also support the creation and operationalization of an energy efficiency fund as a sustainable financing mechanism for this sector. IFC's involvement will be key, particularly in structuring PPPs, supporting the ramp-up of RE capacity, and working closely with SOEs to address grid and transmission issues. Through the policy dialogue under the IBRD’s DPO, the program will support efforts to adjust incentives to reduce c arbon emissions from vehicular fleets, enable the installation of larger rooftop solar panels by homes and small businesses, making them prosumers, and develop regulations that will lead to increased 40 awareness and management of the impact of climate change on credit risks by banks. The Bank will continue pursuing dialogue on two operations that will address the energy transition and reduction of negative externalities from the use of fossil fuels. The proposed Greener Environmental Growth Project would support a wider green environmental agenda and would aim to reduce particulate emissions from targeted sources in selected areas of North Macedonia and strengthen the air quality management capacity in the country. The Energy Transition would accompany the Accelerating Coal Transition initiative that may support the repurposing of mines and provide alternatives for livelihood to coal subsector workers. Key risks and mitigation: Persisting geopolitical tensions could further delay North Macedonia’s transition to cleaner energy sources. That has already resulted in the recent reopening of coal-fired plants scheduled for decommissioning in the near future, and in an unsatisfactory speed of allocation and implementation of renewable energy initiatives, with tangible implications on the country’s energy security, energy bill and overall competitiveness of t he economy. Mitigation measures include a continued policy dialogue with the authorities, as part of ongoing and future development policy operations to accelerate energy transition, as well as a coordinated engagement with other development partners in the context of specific programs, such as the EU Macro-Financial Assistance and the IMF Precautionary and Liquidity Line (PLL). The Bank will continue to also work on analytical and advisory support on just transition and air quality to deepen the dialogue. Supplementary Progress CPF Objective Indicators WBG Program Indicators Indicator 3.1.1: Projected lifetime SPI 3.1.1: Establishment and IBRD Ongoing Financing: energy savings from Energy operationalization of an Energy • North Macedonia Public Sector Energy Efficiency Project [P149990] Efficiency investments in the public Efficiency Fund (EEF) IBRD Financing Pipeline: sector (Mega Joules; CC) Baseline [2023]: No EEF • Sustainability and Resilience DPO [P180587; FY24] Baseline [2023]: 0 Target [2026]: EEF is established • Energy Transition (FY25) Target [2028]: 2,454,434,000 and operationalized. • Greener Environmental Growth (FY25) Source: P149990 Energy audit Source: DBNM IFC Financing Pipeline: • RES investments (solar and wind; battery storage) Indicator 3.1.2: Combined wattage • Commercial Infrastructure (retail, logistics, etc) of solar rooftops (in MW) (CC) SPI 3.1.2: Banks’ report on • Green Finance Baseline [2022]: 11.9 exposure to climate risk IBRD Ongoing ASA: Target [2028]: 35 Baseline [2024]: No • Integrating Climate Change Perspectives into Fiscal Policy ASA [P179264] Source: Universal Supplier Target [2026]: Yes • Western Balkans Countries Climate and Development Report [P179205] Source: NBRNM • Western Balkans Six Energy Crisis Response [P197826] Indicator 3.1.3: Additional • Western Balkans Whole-of-Economy Climate Action Support [P180450] Renewable Energy capacity • Just in Time Sub-Component - Western Balkans Green Recovery Support Grant facilitated through investments, [P178440] PPP or advisory support (MW) • Western Balkans: Analyses for Air Quality Management for Selected Airsheds in the Baseline [2024]: 0 Western Balkans [P178090] Target [2028]: 50-150 MW IFC Ongoing ASA: Source: IFC RES investments (solar and wind; battery storage) • Gevgelija EIP PPP advisory [#507612] IFC ASA Pipeline: 41 • Eco-Industrial Parks (WBIF) (#607033) • Roadmap for Sustainable E-mobility Ecosystem in the Western Balkans region Indicator 3.1.4. Number of (#608123) commercial buildings with green MIGA Guarantees: certification in North Macedonia • NLB Capital Optimization [Project ID:14537] Baseline [2024]: 0 • ProCredit Capital Optimization [Project ID: 14781] Target [2029]: At least 1 Source: IFC Investment in Retail (Schwarz; #46855) and (future) commercial infrastructure CPF Objective 3.2: Scale up climate resilient infrastructure This is a new objective addressing the need for climate resilient infrastructure with a particular focus on connectivity and municipal level. Intervention Logic Rationale: North Macedonia is one of the most vulnerable countries in Europe and Central Asia to the adverse effects of climate change. The country is highly exposed to floods, landslides, droughts, wildfires, and extreme heat and cold temperatures, as its aging and poorly managed infrastructure and services struggle to cope with the intensifying effects of climate change. Due to climate change, the country is expected to experience more frequent and intense dry spells. The annual damage to critical infrastructure from climate-related hazards is expected to increase fivefold by 2080. While there is a strong national strategic objective for climate proofing the transport sector to ensure connectivity and access to services and opportunities, the transport sector is still very vulnerable to climate change both in the road and rail sectors which impacts asset durability, network management and transport operation costs and all-season access. The country’s water and wastewater-management infrastructure are outdated, with most systems installed more than 50 years ago and water losses estimated at 62% (2020). Agriculture, hydropower, industry, and municipal users compete for access to the country’s limited water supply. Rising temperatures and longer dry spells are likel y to significantly increase demand for irrigation, further intensifying competition between agriculture and other sectors. As droughts and floods become more severe, rainfall becomes more erratic, and crops become more vulnerable to pests and diseases, with impacts on yields and agriculture production unless adequate adaptation measures are put in place. Municipal infrastructure is also very vulnerable to climate change and there is a need for greater emphasis in climate-resilient infrastructure asset management. As both population and economic activities are geographically concentrated in municipalities, municipal preparedness and investments are critical to achieving climate targets and enhancing resilience to disaster and climate risks of the entire country. The results of the Climate Change Public Awareness Survey in North Macedonia from 2021 indicated that the respondents detected the lack of clean water as the biggest social problem, followed closely by climate change, nature degradation and extreme weather conditions. Lessons learned and new knowledge at the program level : Investing in climate-resilient infrastructure, with a focus on municipalities, is crucial to safeguard North Macedonia from the effects of drought and ensure long-term water security and sustainable delivery of quality municipal services. Due to climate change, the eastern part of the country is expected to experience more frequent and intense dry spells. Agriculture, hydropower, industry, and municipal users compete for access to the country’s limited water supply. Rising temperatures and longer dry spells are likely to significantly increase demand for irrigation, further intensifying competition between agriculture and other sectors. Under such conditions, the country needs to invest in the improvement of its water infrastructure and devise new financing 42 mechanisms for the water sector, which will lead to achieving water security. At the same time, capacities at local and central level need to be supported with clear policy and regulations. Enhancing the country’s climate resilience requires: a) improved c overage, quality and sustainability of municipal services, b) enhanced risk resilience and climate change mitigation in line with North Macedonia’s targets within the Paris Agreement; and c) enhanced r eadiness of the financial sector to support climate change adaptation and mitigation. The latter could be achieved through adopting a disaster-finance strategy based on predictable, rapid, and flexible financing instruments, such as “Green finance” instruments which promote climate-change mitigation and to crowd in local FI and institutional investors (pension funds, insurance companies) to finance climate-resilient infrastructure and adaptation projects with adequate risk identification and mitigation. Finally, the CLR suggests that the introduction of CERC components should be considered more frequently in new projects. WBG ongoing and planned support to this CPF Objective: The World Bank will scale up support to climate resilient infrastructure through continuous support to the upgrading of road and municipal infrastructure, including by introducing climate change resilience, adaptation and mitigation measures in design and construction. Under the Road Upgrading and Development Project, construction and operation will be carried out according to international standards which include disaster risk mitigation actions. At the local level, the Local Roads Connectivity project will support resilient access with roads designed with climate resilient guidelines. The Sustainable Municipal Development Project will advance municipal infrastructure and services incorporating state of the art resiliency considerations and introduction of climate change mitigation and sustainability of municipal infrastructure investments. All construction activities under the Public Sector Energy Efficiency Project will be carried out in compliance with the construction and building codes taking measures against disaster risks, such as floods, landslides, and earthquakes. For the water sector, the Bank will support the government in implementing and prioritizing actions to reduce non-revenue water losses initially with analytical support. The Western Balkans analytical program will contribute to improved understanding of climate change-related shocks and stressors on cities, including those in North Macedonia. Additionally, the Bank will deepen country dialogue to assess opportunities for support in disaster risk management. Key risks and mitigation: North Macedonia’s high exposure to climate change and limited preparedness to face the consequences of natural hazards may divert policy and budget attention away from the implementation of institutional strengthening program and of mitigation strategies. Technical designs of the investments in climate- smart manner, coupled with intensified project supervision to complete the works under the ongoing projects in a timely manner and in line with the envisaged technical specifications, as well as constant stakeholder engagement on the climate resilience agenda could help boost the count ry’s preparedness and adaptation to climate change and, with that, reduce the impact of natural hazards on the economy. Supplementary Progress CPF Objective Indicators WBG Program Indicators Indicator 3.2.1: Roads SPI 3.2.1: Development of climate IBRD Ongoing Financing: rehabilitated (kilometers) resilient design guidelines for • Road Upgrading and Development [P149955] Baseline [2023]: 57.64 local and low volume roads • Local Roads Connectivity Project [P170267] Target [2028]: 450 (Yes/No) • Public Sector Energy Efficiency Project [P149990] Source: MOTC Baseline [2023]: No IBRD Financing Pipeline: Target [2024]: Yes • Sustainable Municipal Development Project [P174897; FY24] Indicator 3.2.2. Municipalities Source: P170267 • Road Upgrading and Development AF [P149955; FY24] applying climate considerations • Local Roads Connectivity Project AF [P170267; FY24] for municipal services and SPI 3.2.2: Municipalities utilizing IBRD Ongoing ASA: associated facilities for climate simple asset management • Western Balkans Countries Climate and Development Report [P179205] 43 change mitigation and improved methods (Percentage) • Priorities for Climate Ready Cities in Selected Western Balkan Countries [P177921] resilience to extreme weather Baseline [2023]: 0 • Western Balkans Whole-of-Economy Climate Action Support [P180450] events in validated municipal Target [2024]: 65 • Greening Western Balkans Agriculture (P180312) planning/annual and multi-annual Source: P170267 IBRD ASA Pipeline: budget documents (percentage) • Investment Plan to Reduce Water Losses Baseline [2024]: 0 SPI 3.2.3: Development of project • Disaster Risk Management Target [2029]: 25 percent appraisal guidance/manual that • MEPSO digitalization and BESS preparation Source: P174897 enable green, climate-smart, and resilient municipal investments (Yes/No) Baseline [2024]: No Target [2026]: Yes Source: P174897 G Gender related indicators CC Climate change related indicators 44 Annex 2: Completion and Learning Review NORTH MACEDONIA FY19–FY23 COMPLETION AND LEARNING REVIEW I. INTRODUCTION 1. This Completion and Learning Review (CLR) assesses the design and implementation of the World Bank Group (WBG) Country Partnership Framework (CPF) for the Republic of North Macedonia for FY19–23 and evaluates lessons learned to inform the development of the next CPF. The strategic objective of the CPF was to support North Macedonia’s ability to achieve faster, inclusive, and sustainable growth and provide its citizens with greater opportunities for a better life. It was designed around three interconnected focus areas: (i) export-led growth to improve the environment for a competitive private sector; (ii) inclusive growth to expand skills and opportunities for the most vulnerable; and (iii) sustainable growth to enhance sustainability and build resilience to shocks. 2. The Performance and Learning Review (PLR), completed in April 2022, confirmed the strategic directions of the CPF and its duration. The PLR adjusted the program to align it with changes in the country context and shifting government priorities, triggered in large part by the COVID-19 pandemic. The PLR introduced a new objective to strengthen the program’s focus on supporting private sector competitiveness, innovation, and resilience, and allocated an additional US$80 million to strengthen the program’s adaptability for crisis response. 3. The overall development outcome of the CPF is rated moderately satisfactory, and the overall performance of the WBG in designing and implementing the CPF is rated good (CLR Annex 2). A robust portfolio of national and regional investments from the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), and Multilateral Investment Guarantee Agency (MIGA) supported meaningful progress in key areas of the country’s development program, including improvements in connectivity and competitiveness, expanded preschool and social protection services, and stronger public financial management. These results were underpinned by a strong program of advisory services and analytics in key areas such as connectivity, investment climate, access to finance, energy crisis response (with a focus on energy vulnerability), and post-COVID recovery. 4. This progress was achieved despite seismic shifts in the country context. Although IBRD was swift in preparing and approving projects, the volatile political environment—characterized by several executive reshufflings in the context of a heated political debate linked to the European Union (EU) accession process—slowed implementation in some areas. These operational challenges also constrained IFC’s ability to open up new opportunities for investment in North Macedonia, underscoring the need for upstream reforms, strong political will, a stable political mandate, and well-defined policy frameworks. 5. The outbreak of COVID-19 had a mixed impact on CPF implementation. The World Bank responded promptly to the government’s request for assistance in saving lives and preserving jobs during the pandemic, activating the Contingent Emergency Response Component (CERC) under the Local Roads Connectivity Project (LRCP) and launching an Emergency COVID-19 Response Project (ECRP). The activation of the CERC component helped the government provide wage and social contribution subsidies for 22,195 small and medium enterprises (SMEs) so that they could keep their employees on the job during the most difficult months of the pandemic. The World Bank also reallocated funds within the Primary Education Improvement Project (PEIP) to mitigate pandemic-induced disruptions to education. 46 While implementation of some projects slowed down, rapid utilization of the funds targeted for COVID- 19 response boosted disbursement rates to 29.7 percent and 31 percent in 2020 and 2021, respectively. 6. For nearly the entire CPF period, North Macedonia’s economy was buffeted by multiple, overlapping crises. Real output growth reached 3.9 percent in 2019, but the outbreak of COVID-19 caused output to contract by 4.7 percent in 2020, led by reduced investment, consumption, and external demand. Poverty (as measured by the upper-middle-income poverty line of US$6.85 per day in 2017 purchasing power parity) increased by one percentage point, after having been cut by more than half in the decade prior to the pandemic, to 19.1 percent in 2019. School closures and rising health care needs eroded the country’s human capital. Crisis support measures, including wage and direct firm subsidies, helped prevent a major labor market impact, and the unemployment rate dropped to a historical low of 14.4 percent in 2022. The country’s economic recovery after 2021 was supported by a consumption boost, while the contribution of net exports stayed negative. Output growth slowed again to 2.1 percent in 2022, as the country coped with energy and cost-of-living crises and the disruptions brought about by Russia’s invasion of Ukraine, despite the launch of a large highway construction program that would further stretch public finances. The government’s substantial energy subsidies to households offset a major consumption impact, and inflation slowed from a two-decade high of 14.2 percent in 2022 to single digits in 2023, following a tightening of monetary policy that could scar growth prospects in the future. II. PROGRESS TOWARD DEVELOPMENT OUTCOMES 7. Overall progress toward achieving the CPF development outcomes is rated moderately satisfactory. Of six CPF objectives, one was achieved, three mostly achieved, and two partially achieved. Of 16 indicator targets, 38 percent were fully achieved, 31 percent were mostly or partially achieved, and 31 percent not achieved (CLR Annex 1). Advancements toward a more competitive business environment included improved trade logistics, stronger connectivity through natural hazard risk assessments in the roads sector, and greater innovation and resilience in the private sector. Support to SMEs during the COVID-19 pandemic further contributed to this outcome. Strong progress was made in expanding preschool enrollment, providing on-the-job training, and strengthening access to social services. Good progress was made in strengthening fiscal management and public financial management (PFM), but the transition to a more sustainable energy mix showed modest results. Focus Area I: Export-Led Growth – Improve the Environment for a Competitive Private Sector Moderately Satisfactory 8. Progress toward outcomes in the first focus area was broadly positive, with five of seven targets achieved or mostly achieved during the CPF period. Under this focus area, the CPF aimed to support improved connectivity and access to markets. At the PLR stage, an additional objective was introduced to reflect the program’s focus on increasing private sector competitiveness, innovation, and resilience. Objective 1: Improve Connectivity and Access to Markets – mostly achieved 9. IBRD-financed regional and national operations envisaged significant investments in upgrading national and local road infrastructure for better connectivity. Rehabilitation of around 280 kilometers of roads under the National and Regional Roads Rehabilitation Project (NRRRP) reduced travel time and 47 vehicle operating costs,24 and around 1,094 markets and services were connected25 through local road network improvements under the ongoing LRCP. Despite these improvements, the market accessibility index along Corridor VIII did not improve as expected by the end of the CPF period, due to delays in construction works supported through the Road Upgrading and Development Project. The delays have been resolved, and the works are expected to be completed in 2025. 10. Capacity building interventions accompanied infrastructure investments. The NRRRP supported the completion of a road risk assessment, development of prioritized preparedness and mitigation investment plans, enhancement of the Road Asset Management System (RAMS) to include data on flooding and landslide risks along national roads, and elaboration of climate resilience guidelines. The updated internal procedures of the Public Enterprise for State Roads (PESR) include requirements to consider climate resilience in planning, and all internal guidance documents were developed. Risk assessments under the RAMS were embedded in the PESR’s investment development plans and are applied continuously. The PESR’s RAMS team collects data for new roads regularly and road quality data annually using the Dynatest system. These data form the basis for preparing yearly maintenance plans for road sections produced with HDM-4, a computer software for Highway Development and Maintenance Management System. Capacity building activities benefited stakeholders beyond government officials, since training on guidelines and technical solutions to treat landslide- and flood-prone points was extended to private sector representatives and the Faculty of Civil Engineering, the latter of which will play a central role in civil works design and construction and in road maintenance. 11. IBRD and IFC provided extensive technical assistance (TA)26 on trade facilitation. This cooperation supported the introduction of a risk-based border control methodology and harmonization of trade procedures at the border by the State Agriculture Inspectorate. The standard operating procedures, applied since early 2022, have streamlined and standardized the inspections process. Application of the risk-based methodology is planned for 2024, following the rollout of a database to capture and process inspections data. A Time Release Study in 2022 showed that border processing times had been cut nearly in half compared to 2015. Average import processing times at the Corridor X Tabanovce border crossing decreased to 2 hours 31 minutes in 2021 from 4 hours 58 minutes in 2015. Joint TA also contributed to efficiency improvements in customs and border agencies, strengthening competencies and the quality of logistics services and operations; increasing transport efficiency; and identifying, fostering, and supporting export-competitive value chains. North Macedonia’s ranking on the Logistics Performance Index (LPI) improved from 81st of 160 countries in 2018 to 57th of 139 countries in 2023, placing it among the 11 highest-scoring upper-middle-income economies. Finally, the National Single Window, developed under IFC’s National Single Window Blueprint Project (#601677) and being operationalized with support from the World Bank’s Regional Trade and Transport Facilitation Project, is estimated to be fully operational in 2024–25, enabling companies to meet import, export, and transit-related regulatory requirements through electronic submission at a single-entry point. Objective 2: Increase Private Sector Competitiveness, Innovation, and Resilience – mostly achieved 24 Implementation Completion and Results Report for the NRRRP, March 26, 2020. 25 According to the LRCP, a connection established through a safe and resilient road would connectsocial facilities (such as health, education, government administration) and commercial facilities (such as agricultural markets, processing facilities, tourism sites and industrial parks. A road is considered safe and resilient if during construction recommendations are implemented from road safety audits and resilient designs. 26 Support was provided through the World Bank’s Western Balkans Trade Facilitation Advisory II ASA (P179241) and IFC’s Europe and Central Asia Trade Facilitation Support Project (#601446) and National Single Window Blueprint Project (#601677). 48 12. The CPF’s support on enhancing private sector competitiveness, innovation, and resilience intensified at the PLR stage through a mix of IBRD investment lending and TA, as well as IFC advisory services and MIGA guarantees. Interventions focused on improving the innovative capacity of SMEs and start-ups, boosting the competitiveness of agriculture subsectors, and strengthening services, manufacturing value chains, and the financial sector. World Bank advisory services and analytics (ASA), IFC regional initiatives, and MIGA interventions helped push this agenda forward and led to concrete results, including the approval of the Credit Guarantee Fund and the first Climate Framework Action Plan (CFAP) in the banking sector through MIGA’s support to Nova Ljubljanska Banka (NLB). 13. The Skills Development and Innovation Support Project (SDISP) contributed to the innovative capacity of enterprises by supporting the establishment of a Fund for Innovation and Technological Development (FITD). The FITD introduced four instruments to assist start-ups and SMEs: (i) start-up grants; (ii) commercialization of innovation; (iii) accelerators; and (iv) technological extension. In 2019– 21, the FITD approved support for over 236 innovative start-ups, with €20.4 million in grants,27 while enterprises provided an additional €10.5 million for innovation investments. The private funding mobilized as a share of the FITD and other government investments in innovation activities reached 51.5 percent in 2022, exceeding the CPF target of 40 percent. In addition, following World Bank advice, the FITD adjusted the technology development instrument to facilitate firms’ rapid response to the COVID-19 crisis, providing €1.7 million to 87 companies. While the SDISP did not evaluate generated exports as a measure of improved competitiveness, most of its beneficiaries were selected based on their growth potential, which assumes exports to foreign markets given the small size of the domestic market. North Macedonia’s innovation index score reached 47 percent of the overall EU score in 2021, up from 33 percent in 2014.28 Over the same time period, the country’s exports of medium- and high-tech goods improved from 78 percent relative to the EU amounts, to 119 percent, exports of knowledge-intensive services from 21 percent to 27 percent, and sales of innovative products from 18 percent to 21 percent. 14. Activation of the CERC under the LRCP, coupled with national budget funds, helped companies continue operations and maintain employees during the COVID-19 pandemic. Some 22,195 SMEs received wage subsidy support for at least one month, nearly meeting the CPF target of 24,000. Analyses conducted by the World Bank’s Poverty and Equity team indicate that, without these measures, it is likely that poverty would have increased to pre-2015 levels. However, the delayed effectiveness of the Agriculture Modernization Project29 hindered farmers’ adoption of improved agriculture technology, and progress has so far been limited to assessing training needs. 15. IFC financing through regional projects reached US$67.2 million in private investment during the CPF period, surpassing the PLR-adjusted target range of US$20 to US$50 million. Small market size and lack of sizeable bankable projects constrained IFC’s efforts to realize its envisaged program. In the real sector, IFC directly financed two projects: (i) a regional real estate platform (Hystead, #39423) that supported its retail-focused investment in North Macedonia, amounting to €26 million, and (ii) a leading retail group to support its expansion into the Western Balkans market (Schwarz, #46855), with €12.5 million earmarked for projects in North Macedonia. Through IFC financing, the expansion of modern retail in North Macedonia is anticipated to deliver impact in the next CPF cycle by creating jobs, strengthening supply chains, improving the agribusiness value chain, ensuring food security, raising the standards of modern retail services, and enhancing the green building program through EDGE certification. Besides direct financing, IFC facilitated US$23.7 million in private investment into North Macedonia through the 27 These are partially repayable grants if the start-up becomes successful. 28 European Innovation Scoreboard, 2021. 29 The project was launched in April 2022, two years after its approval by the WBG Board of Directors. 49 regional Western Balkans Investment Policy and Promotion Advisory Project (#601642), mostly achieving the US$30 million CPF target. IFC supported four companies in auto parts and electrical and plastic components production, helping to attract and retain higher value-added, long-term foreign investment. 16. IFC also contributed to this CPF objective by delivering a strong advisory program in key areas such as investment climate, manufacturing, public–private partnerships (PPPs), and trade. Under the Western Balkans Manufacturing Value Chain Advisory Project, IFC onboarded onto a digital matchmaking program 27 suppliers from the Western Balkans region that had passed the obligatory manufacturing audit. In the 11 months following the first company’s onboarding, eight matches have been registered between suppliers in North Macedonia and off-takers from the Eurozone and the United Kingdom. IFC launched business reviews of three manufacturing companies, jointly with multinational companies, to help build capacity and upgrade production to levels required for penetrating new value chains. 17. In the financial sector, while no direct investment was made during the CPF period, IFC supported a regional private equity fund, South Central Ventures Technology III (#46554), which invested €1 million in a technology company in North Macedonia. This investment followed FITD support to the same company through the early-stage innovation program. This sequenced work of IBRD and IFC demonstrated that public investments in innovative start-ups can increase value-added exports of services and leverage private investment, while generating highly paid jobs. Furthermore, IFC’s Regional Debt Resolution and Business Exit Program (Phase II) supported the development and drafting of a new Insolvency Law that, once ratified by parliament, is expected to speed up the resolution of insolvency cases, enabling business restructuring and recovery, job retention, and higher returns to creditors. 18. MIGA’s political risk insurance helped increase lending to SMEs and climate finance during the CPF period. MIGA’s partnership with IFC contributed to MIGA’s issuance of capital optimization guarantees, totaling US$205.7 million,30 to ProCredit (US$62.7 million) and Nova Ljubljanska Banka (NLB) (US$143 million). MIGA guarantees were issued to ProCredit in FY19, FY21 and FY23, while guarantees to NLB were issued in FY20 and FY23. MIGA’s guarantees helped reduce the regulatory risk weighting applied to ProCredit and NLB’s mandatory cash reserves at the financial intermediary group consolidated level, freeing up regulatory capital for North Macedonia subsidiaries to continue lending and contribute to domestic credit to corporates, SMEs and climate lending activities, focused on renewable energy, energy efficiency and green buildings. 19. MIGA further contributed to this CPF objective by supporting the launch of the first CFAP in FY23 in the banking sector and setting climate targets. NLB is the first bank to initiate a CFAP in the North Macedonian banking industry and set green loan targets as a milestone, helping the wider industry to set up a comprehensive climate financing standard. 20. Findings and recommendations delivered under the Innovation and Competitiveness Ecosystem TA31 helped the government initiate policy reforms to improve SME access to finance. In 2021, based on the model provided by the World Bank, the Ministry of Finance (MoF) established a €15 million Credit Guarantee Fund in the Development Bank that stimulated SME lending in 11 banks and savings houses, partially guaranteeing 129 SME loans for a total value of €11.5 million. Policy and institutional support to the economy and education ministries led to the development of the Smart Specialization Strategy, which 30Outstanding MIGA exposure stood at US$131.5 million as of October 31, 2023. 31This includes a Public Expenditure Review of private sector support programs, recommended policy measures for firms’ post - COVID recovery, a functional review of institutional governance, and technical notes on SME access to finance and supporting SMEs during energy crises. 50 aims to foster green and sustainable business growth through knowledge, innovation, and technology. This strategy, already included in the Economic Reform Program and the EU progress report, will be adopted by end-2023, as it is a condition for the EU Macro Financial Assistance. 21. World Bank support for state aid management and the financial sector legal framework contributed to this objective. A Trade Competitiveness Diagnostic and Assessment of State Aid Programs in Supporting Export Growth and Global Value Chain Linkages helped the Cabinet of the Deputy Prime Minister design a state aid management information system to be implemented through the recently approved Building Efficient, Transparent and Accountable PFM Institutions (BETA PFM) Project. To ensure banking system soundness and stability, the World Bank’s Financial Sector Advisory Center assisted in revamping the Bank Resolution Law and the Deposit Insurance Law. Both laws are to be adopted by end-2023. Focus Area II: Inclusive Growth – Expand Skills and Opportunities for the Most Vulnerable Moderately Satisfactory 22. Overall, good progress was made toward inclusive growth, with four out of five targets achieved or mostly achieved during the CPF period. Under this focus area, the CPF sought to strengthen inclusive growth by expanding skills and enhancing opportunities for the most vulnerable groups. Objective 3: Improve the Quality and Relevance of Education – achieved 23. The CPF contributed to the achievement of this objective through investment project financing (IPF) operations that aimed to improve the quality and relevance of, and access to, preschool, primary, and vocational secondary education. The improvements were achieved through a combination of activities focused on enhancing the learning environment, training teachers, and expanding and modernizing the curriculum. Although the CPF results framework captured only the access and relevance dimensions, a comprehensive approach that also focused on quality supported the achievement of this objective. 24. Targeted IBRD investments in the education sector increased preschool and primary education quality and access. The ongoing PEIP, approved in FY21, helped furnish and equip science laboratories, provide tablets for the digitalization of the fourth-grade curriculum, and upgrade basic infrastructure, with a particular focus on inclusion and access for students with special needs. Through these interventions, the project helped improve the learning environment in about 13 percent of primary classrooms. The project also supported in-service training of over 90 percent of primary school teachers, in accordance with the Law on Teachers. The Bureau for Development of Education started using the in-class teacher observation tool TEACH, to monitor the quality of teaching and learning in primary schools, and the project will support its adaptation and training. Investments under the ongoing Social Services Improvement Project (SSIP) helped expand access to preschool by constructing 12 new kindergartens, creating additional 1,508 preschool spaces and contributing to an increase in national preschool enrollment rates among children aged three to six (from 35.7 percent in 2018 to 43.77 percent in 2023). Enrollment improved particularly among children whose families receive the Guaranteed Minimum Assistance (GMA), from 0.4 percent in 2018 to 8.3 percent in 2023. The Government Standards and Norms for kindergartens were updated to include best-practice construction and energy efficiency standards. In line with these standards, an additional 2,790 spaces were opened in 49 newly built and adapted kindergartens, financed by the government. 25. The SDISP helped to enhance the relevance of secondary TVET through the successful implementation of a new curriculum that includes mandatory on-the-job training. The project financed 51 teacher training, equipping educators with the skills and knowledge needed to effectively deliver the revised curriculum. Significant efforts were made to improve the learning environment in schools, ensuring that vocational equipment and learning materials are up-to-date, relevant, and engaging for learners. The grant program established through the SDISP helped incentivize private companies to establish partnerships with TVET schools. As of 2021, enrollment announcements for TVET schools include information about the companies with which those schools have cooperation agreements. The number of such partnerships reached 2,907 in the 2021–22 academic year,32 an increase of 258 percent from the 2014 baseline. By April 2021, when the project closed, 51 percent of secondary TVET students had benefited from practical training experience, exceeding the CPF target of 45 percent. Together, these initiatives have helped to elevate the quality and relevance of TVET education. 26. Achievement of this objective was supplemented through targeted ASA. The PFR underpinned the design of a new formula for primary education financing, which is now reviewed by the MoF. The Read@Home TA helped improve learning outcomes among children from vulnerable families receiving the GMA, by providing preschool and school children with books and parents with instructions on how to read and discuss the books at home during the COVID-19 pandemic. The Finding Solutions to Youth Unemployment in North Macedonia ASA informed the SDISP on how to engage the private sector in developing and improving TVET schools’ curriculum, strengthening private sector collaboration. Objective 4: Improve the Access to and Quality of Social Services – mostly achieved 27. IBRD delivered two IPF projects in support of this objective during the CPF period. The ongoing Social Insurance Administration Project is helping to implement legislative and administrative reforms, strengthen the disability assessment process and its application, address data shortcomings in individual work records, and improve the employment system for persons with disabilities. A set of draft laws and bylaws developed under the project and pending government endorsement will pave the way for strengthening the regulatory framework for people with disabilities and in hazardous occupations. Earlier, the SSIP contributed to upgrading the regulatory framework for social protection and financed a grant program for municipalities that led to an expansion in the number of beneficiaries receiving alternative non-institutional social services (such as day care, foster care, assisted living, and soup kitchens) from licensed providers to 2,602 beneficiaries (57.6 percent of whom are women). Surveys show high levels of satisfaction with the quality of social services. With the second round of the program being rolled out to an additional 17 municipalities, it is expected that the target of 3,000 beneficiaries will be achieved by end-2023. Progress in implementing a new information system has been limited, due to delays in analyzing the functional requirements. Consequently, the indicator on the share of cash benefit and social services recipients recertified and recorded in the new system will not be achieved before the end of the CPF period, but a recent Social Protection Situational Analysis confirms that the quality of cash benefits— as measured by their adequacy in covering needed expenditures—has improved. 28. Social assistance coverage of the bottom quintile of female-headed households has improved substantially. Building on the World Bank’s previous policy engagement, the Public Finance and Competitiveness Development Policy Operation (PFC DPO) supported the consolidation of social assistance programs and adoption of common poverty-based criteria through the enactment of the Social Protection Law. This modernized approach enabled the government to respond swiftly to the COVID-19 pandemic by expanding the GMA program through relaxed eligibility criteria and simplified application procedures. Per the 2020 Statistics of Income and Living Conditions (SILC) survey, which analyzes 2019 income, 61.6 percent of female-headed households in the bottom income quintile received social 32 Data for the 2022–23 academic year are expected by the fall of 2023. 52 assistance, exceeding the CPF target of 40 percent. Findings based on the recently conducted 2021 SILC are still pending analysis. 29. Situational analyses in the areas of social protection, education, and health contributed to improving the country’s social protection system and supported the government in preparing its Human Capital Strategy. These analyses helped the government improve the legal framework and governance of the new social services system. A trust fund on Supporting the Effective Reintegration of Roma Returnees in the Western Balkans helped understand the barriers faced by vulnerable citizens, including Roma and Roma returnees, in accessing social protection services. Focus Area III: Sustainable Growth – Enhance Sustainability and Build Resilience to Shocks Moderately Unsatisfactory 30. Progress in enhancing sustainable growth has been limited, with one of four targets achieved and one partially achieved. Several factors undermined initiatives to enhance sustainability and build resilience to shocks, including pandemic-related fiscal pressures, limited private investment in the energy sector due to interconnection bottlenecks, and project effectiveness delays during a time of political flux. Objective 5: Strengthen Fiscal and Public Financial Management – partially achieved 31. The CPF employed both lending and analytical instruments to support fiscal management and PFM. The policy dialogue under the PFC DPO focused on reforms to reduce general government arrears and increase general government tax revenues. Enactment of the Law on Reporting and Monitoring of Liabilities, supported by the DPO, helped identify and monitor general government arrears, while quarterly publication of reported arrears contributed to data transparency and public scrutiny. However, a strong initial reduction in arrears (from 2.8 percent of gross domestic product [GDP) in 2018 to 2.42 percent in 2019) was reversed by pandemic-related emergency spending. Arrears increased to 3.3 percent in 2021, then dropped again to 3.1 percent in 2022. World Bank TA helped the government prepare the new Organic Budget Law, which aims to address systemic weaknesses by better regulating the budget process and introducing medium-term budgeting, a fiscal rule, and a Fiscal Council as an independent fiscal watchdog. While a positive development, this law was only enacted in late 2022, leading to delays in developing the Integrated Financial Management Information System (IFMIS), whose commitment control module is expected to tighten fiscal discipline and prevent further accumulation of arrears. 32. ASA on spending controls and quality and on revenue mobilization contributed to strengthening fiscal management and PFM. The Structural Reform Support TA, together with trust fund financing on health tax reform, provided the government with just-in-time policy advice on crisis response support to deepen the revenue base and provided TA to strengthen modeling and policy impact assessment capacity. Continuous engagement with the MoF on personal income tax (PIT) reform led to parliamentary passage of PIT law amendments in December 2022, bringing capital income under the tax base and contributing to an increase in tax revenues (from 27.1 percent of GDP in 2018 to 29.1 percent in December 2022).33 Objective 6: Accelerate the Transition to a More Sustainable Energy Mix – partially achieved 33. Interventions to boost renewable energy capacity fell short of intended results. The Municipal Services Improvement Project (MSIP), through the trust fund provided by the EU Instrument for Pre- 33 Tax revenue data: https://finance.gov.mk/%d0%b8%d0%b7%d0%b2%d0%b5%d1%88%d1%82%d0%b0%d0%b8/?lang=en GDP data: https://www.stat.gov.mk/PrethodniSoopstenijaOblast_en.aspx?id=31&rbrObl=7 53 Accession, financed the installation of photovoltaic systems in public buildings across 36 municipalities, mostly in the poorest regions of North Macedonia. The systems were installed in 108 facilities and produced a total of 1,484 MWh of electricity just in one year, from April 2019 to April 2020, or 92 percent of installed capacity, thus contributing to lifetime energy savings of about 30,000 MWh and CO2 emissions reductions of about 25,530 tons. However, the CPF target of 100 MW of renewable energy capacity has not been achieved. Although IFC envisaged support for the development of large-scale renewable energy projects by leveraging PPPs, the Čebren hydropower plant project, supported under an IFC PPP Advisory mandate, was not pursued due to the need for further environmental, social, and corporate governance studies. Proposed projects on transaction advisory in waste-to-energy and through the Cities Initiative also did not materialize. North Macedonia has adopted a new renewable energy auction system, under which IFC has attempted to support viable private renewable energy investments, but none of the sizable projects that have been considered in line with IFC’s investment criteria and minimum resource threshold have moved forward. Several factors have caused delays in implementing renewable energy projects, including bottlenecks on the development and interconnection side, a long permission process, and slow progress on investment approvals within the government. MIGA’s capital optimization guarantees supported and enabled the local operations of international banks to lend to climate finance projects focused on energy efficiency, green building, and renewable energy.34 34. Targeted World Bank TA on managing air quality and disaster risks helped make progress toward this CPF objective. Findings from the Regional Air Quality Management ASA on ambient air quality, key sources of air pollution, and its health and economic impacts informed preliminary policy recommendations for improving air quality management in North Macedonia. Through the Western Balkans Disaster Risk Management Program, the World Bank supported tools for mainstreaming seismic risk considerations into the identification, prioritization, and implementation of energy efficiency investments. It provided capacity building on identifying and prioritizing investments to improve emergency response facilities, and an investment plan was prepared with a focus on infrastructure. III. WORLD BANK GROUP PERFORMANCE 35. The WBG’s overall performance in designing and implementing the CPF program is rated good. This assessment is based on: (i) the CPF’s alignment with the government’s reform program for 2017–20; (ii) the use of a balanced mix of investment lending, ASA, and TA, underpinned by intensive policy dialogue; (iii) the WBG program’s proactive and timely responses to changing global circumstances and domestic political volatility; and (iv) proactive management and oversight of the portfolio. Design and Relevance 36. Design of the CPF was well aligned with the government’s key development priorities and remained relevant throughout the CPF period. The program took advantage of a window of opportunity afforded by the new government’s reform momentum by frontloading lending operations in the transport, social policy, agriculture, and energy sectors—key areas of the government’s program for 2017–20. These areas also reflected the priorities set out in the 2018 Systematic Country Diagnostic (SCD) and the WBG’s green, resilient, and inclusive development agenda. The CPF was aligned with the Growth Acceleration Plan for 2022–26 and was appropriately rooted in North Macedonia’s EU and NATO accession agendas, underpinned by close collaboration with key development partners, especially the EU. 34 This encompassed 100 percent of the MIGA guarantee in the case of ProCredit. 54 37. The flexibility embedded in the CPF design, and deepened through the PLR, allowed the program to adjust nimbly to changes in context during the CPF period, but some program areas remained overly ambitious in light of the challenging political environment. The program’s design took on board lessons learned in implementing the previous Country Partnership Strategy for FY14–18, with a focus on ensuring flexibility to allow adjustments based on emerging priorities and needs and maintaining close engagement with both government and nongovernment stakeholders. These approaches proved essential given substantial shifts in the country’s political and economic context. Nevertheless, the IPFs aimed at market accessibility, agricultural modernization, social services information systems, and sustainable energy — despite adjustments at the PLR stage—failed to move forward quickly enough to achieve targets during the CPF period. The project timelines did not sufficiently account for delays in project processing and approvals as a result of the political stalemate in parliament and a decline in ownership among implementing agencies, whose management changed frequently. These risks affected the achievement of CPF objectives, although they were mitigated somewhat through hands-on project preparation support and continuous client engagement, including virtually during pandemic-related travel restrictions. 38. The CPF program was supported by country-focused and regional lending and knowledge instruments that helped guide policy dialogue, provided just-in-time support during overlapping crises, and informed future lending. Two projects approved during the CPF period used a multiphase programmatic approach (MPA)35 that emphasized learning, adaptability, and flexibility. The inclusion of the CERC component in the LRCP provided the flexibility needed to respond swiftly to the COVID-19 crisis. 39. TA on the Organic Budget Law helped to inform activities under the new BETA PFM project as a key pillar of the ambitious and comprehensive PFM Reform Program 2018–21. A PFR provided analytical support to the MoF and line ministries in designing a sustainable medium-term fiscal strategy to restore fiscal sustainability, boost tax revenues, and improve spending efficiency in the social protection, health, pension, education, and agriculture sectors. The World Bank prepared an action plan with policy recommendations to support post-COVID recovery of growth and jobs, and ASA on assessing primary health care capacity helped build consensus and ensure the swift preparation of the ECRP. 40. The country program benefited from one regional MPA, the Regional Trade and Transport Facilitation Project (RTTFP, P162043), which aims to facilitate the movement of goods and services across the Western Balkans, improve transport efficiency and predictability, and increase market access for trade and investment. The project’s benefits revolve primarily around ensuring the deployment of similar systems across Western Balkans countries (for example, the National Single Window for Trade) with inherent interoperability for future integration into the EU, together with support for national transport strategies and physical and procedural improvements at border crossing points. The latter provided an opportunity to start a one-stop-shop for integrated control at border crossing points in Albania and North Macedonia and provided a framework for technical-level cooperation between key border agencies. The relevance of the RTTFP became especially clear after COVID-related travel restrictions were lifted and the World Bank was able to engage more closely and in person. As discussed above, IFC’s impact in North Macedonia benefited from regional investments in the commercial real estate, retail, and private equity sectors, and from advisory programs, including the Western Balkans Manufacturing Value Chain project (#604496), Regional Trade Facilitation Support Program for ECA (#601446), National Single Window (#601677), and Western Balkans Regional Investment Policy and Promotion Program (#601642), and Western Balkans Debt Resolution Project Phase II (#603482). 35 Western Balkans Trade and Transport Facilitation Project (P162043) and Emergency Covid-19 Response Project (P173916). 55 41. The overall risk to achieving CPF objectives was assessed as substantial, based on substantial ratings for all but two of the risks (technical design of project or program and fiduciary). The PLR adjusted the overall risk to moderate, as COVID-related restrictions were rolled back, vaccines became available, and economic growth started to pick up. Political prospects looked stable at the time of PLR preparation, as 2021 local elections had ushered in a change in prime minister and a few cabinet ministers. Still, some risks materialized as the political and governance environment was negatively affected by Russia’s invasion of Ukraine in February 2022 and remained unstable through the end of the CPF period. Mitigation tools were appropriate, and residual risks were managed through flexible adjustments in program design and in the selection of instruments, underpinned by policy dialogue and consultations with diverse counterparts, including international partners, the political opposition, the private sector, nongovernmental organizations, and academia. ASA guided policy dialogue and helped the government spearhead reform efforts and tackle vested interests. The risk of policy reversal in social assistance reforms, for example, was mitigated through IPFs and follow-up by development partners. The considerable economic and social risks that emerged in the wake of lockdowns imposed to contain the spread of COVID-19 were mitigated through new IPFs and activation of the LRCP’s CERC component. Risks to the sustainability of program outcomes have been mitigated partially by the government’s continued reform efforts and by incentives embedded in EU accession negotiations, which opened in March 2020. Program Implementation 42. IBRD supported the government’s ambitious reform agenda by frontloading CPF resources, delivering in FY20 six operations that totaled US$408.9 million in commitments. The CPF financing envelope was increased through the replenishment of US$143.3 million to help the government address the impact of COVID-19. Nine operations were approved during the CPF period, including eight IPF operations and one DPO, with total commitments of US$528.37 million. Seven projects closed during the same period. The World Bank implemented two recipient-executed trust funds, totaling US$34.94 million, on tourism and municipal services. Two additional EU-financed recipient-executed trust funds (US$9.54 million) were approved in FY23 to provide cofinancing for the Agriculture Modernization and BETA PFM projects, but these have yet to be implemented. 43. IFC financing reached US$67.2 million during the CPF period. IFC directly financed two projects in the real sector, supported a regional private equity fund that invested in a company in North Macedonia, and facilitated private investment through the regional Western Balkans Regional Investment Policy and Promotion advisory project. IFC’s portfolio did not grow, however, given a lack of government commitment to implementing reforms that would unlock large-scale investments, and lower FDI inflows amid the volatile political environment, and political sensitivities affecting regional integration. 44. MIGA’s outstanding portfolio, at end- October 2023, stood at US$131.5 million (CLR Annex 8). MIGA was active in the financial sector, which contributed to the fourfold portfolio increase during the CPF, from US$28.1 million outstanding exposure at the beginning of the CPF period. Given relatively shallow credit conditions, with private sector credit in the country at 55.7 percent of GDP in 2022, MIGA guarantees helped to de-risk banks’ balance sheets, achieve regulatory capital relief, and thereby allowing for extra capacity to support increased lending, including during the worst of the COVID-19 pandemic. 45. The first half of the CPF program was marked by strong government commitment to reforms and ownership of the WBG program, which together with strong collaboration and fast-paced preparation, supported the commitment of the largest part of the CPF envelope. The pace of adoption, effectiveness, and implementation slowed significantly in the wake of COVID-19, the consequent declaration of an emergency situation, the implementation of prevention measures to mitigate the spread of infection, and 56 the political turmoil caused by the different political parties’ opinions on the handling of the pandemic crisis. This imposed unprecedented delays in the effectiveness of several projects, including the Public Sector Energy Efficiency Project, Agriculture Modernization Project, ECRP, and additional financing for the LCRP, as well as the enactment of the Organic Budget Law. Flagging government ownership and reform fatigue were exacerbated by opposition by some EU members to North Macedonia’s efforts to start accession negotiations. 46. The World Bank responded flexibly by adjusting the program and providing just-in-time policy advice to help the government battle emerging crises. The PLR adjusted the CPF portfolio (CLR Annex 3), mobilizing and redirecting around US$143.43 million in FY20 by delivering the ECRP, activating the LRCP CERC, and realigning the remaining country program with the WBG’s COVID-19 Crisis Response Approach Paper.36 The PLR adapted the CPF objectives to reflect new government priorities on building an effective, transparent, and accountable PFM system; improving municipal-level service delivery; and promoting private sector growth. A new objective was introduced to capture additional support for the private sector, and a new indicator was added on helping SMEs maintain operations and jobs at the height of the pandemic. The PLR adjusted other targets to ensure feasibility in a changed environment. 47. Knowledge gaps identified in the 2018 SCD were filled, and others were identified based on crisis- fueled changes in political and economic circumstances. The Growth and Jobs Action Plan helped understand and identify policy actions to address labor and demand-side obstacles to employment. The Trade Competitiveness Diagnostic and State Aid Effectiveness Report provided policy options for boosting competitiveness and restructuring state aid policy. On this basis, the BETA PFM project will support the introduction and operationalization of a state aid management information system. 48. Throughout the CPF period, the World Bank consulted closely with development partners on policy advice and financing support in the areas of PFM, education, health, and agriculture. The World Bank collaborated with the United Nations Children’s Fund (UNICEF) on the SSIP and the PEIP. UNICEF has been working to optimize the country’s primary education school network, providing information on facilities that could be repurposed into preschool playrooms. UNICEF has also contributed to the new formula for primary education financing. The World Health Organization provided training on life and fire safety for hospital staff, as part of related actions under the ECRP. As mentioned above, collaboration with the EU resulted in two trust funds to co-finance the agriculture and PFM projects. Finally, the Organic Budget Law TA benefited from close coordination and support from the EU and the International Monetary Fund. 49. Portfolio performance was mixed, owing to the regional and global impacts of the COVID-19 pandemic and Russia’s invasion of Ukraine. The disbursement ratio ranged between 12.6 percent and 31 percent, the latter owing largely to fast disbursements of the LRCP CERC and the ECRP. The World Bank’s Independent Evaluation Group evaluated six closed projects, five of which received outcome ratings of moderately satisfactory or higher. On average, there were two problem projects per year, not necessarily in the same sector. These projects exited problem status by the end of the CPF period, thanks to the implementation of proactivity actions (CLR Annex 5). 50. Procurement performance was generally good, supported by relatively experienced project implementation units (PIUs) and a focus on regular capacity building, keeping most procurement risks moderate. The World Bank procurement team conducted regular capacity building and training sessions, both at a regional level and individually for newly hired fiduciary staff in specific PIUs. New PIU staff were 36 World Bank. 2020. “Saving Lives, Scaling-up Impact and Getting Back on Track,” World Bank COVID-19 Crisis Response Approach Paper. Washington, DC: World Bank. 57 also encouraged to attend other relevant training offered by the World Bank or external institutions. Overall, procurement was conducted in accordance with agreed project-specific procurement arrangements. The quality of procurement documents improved over the course of the CPF period, reducing the need for reviews on the part of the World Bank. There were rarely fewer than three competitors in procurement procedures for goods, works, and services, and procurement-related complaints were rare. Procurement management was therefore rated satisfactory in all projects, except for a moderately satisfactory rating for the Road Upgrading and Development Project. 51. Financial management capacity in World Bank-financed projects was satisfactory overall, with qualified staff available on the market if needed. No financial management training sessions were held or planned during the CPF period, owing to a lack of demand or need from the projects. Some elements of country systems are utilized within World Bank projects, including budgeting and planning, internal controls, and funds flow arrangements. Independent audit firms provide external reporting, and there were no overdue audits or audits with modified opinions during the CPF period. 52. Overall compliance with safeguards was satisfactory. All new projects under the CPF were governed by the Environmental and Social Framework (ESF), introduced in 2018, which expanded the scope beyond involuntary resettlement and land acquisition and allowed for better integration of climate resilience and energy efficiency into the design of investment operations. During the CPF period, there were no delays in project preparation as a result of the new framework. The institutions implementing World Bank projects were well acquainted with project preparation requirements. All projects were responsive to community needs and grievances, and grievance redress mechanisms and practices have been strengthened, although in some cases, the capacity to implement the new ESF requirements was uneven, particularly at the municipal level. Environmental instruments were prepared and consulted on in a satisfactory, timely manner. The insufficient waste management infrastructure in the country set limits for handling and disposing of waste, prompting the focus on supporting improvements in this area. IV. ALIGNMENT WITH CORPORATE GOALS 53. One of the criteria for selectively defining CPF objectives was to align with the WBG ’s twin goals and SCD development priorities of eliminating poverty and boosting shared prosperity. To this end, the World Bank provided support to the government’s social assistance reforms and, following the emergence of COVID-19, acted quickly to help companies maintain employees. Social assistance reforms consolidated a variety of fragmented, non-means-tested social benefit programs, allowing for more accurate poverty targeting and expanding social assistance coverage among those in the bottom income quintile. These reforms are expected to help continue the historical reduction of inequality, as measured by the Gini index, which fell from approximately 42.8 percent in 2009 to 33.6 percent in 2019 (the most recent year for which data are available). At the government’s request, the World Bank prepared and delivered a policy note as part of its regular macroeconomic monitoring, recommending crisis response measures to help protect the country’s most vulnerable from the impact of rising food and energy prices. 54. The 2018 SCD identified gender gaps in North Macedonia’s economic and social spheres. The latest Western Balkans Country Gender Assessments note that these challenges remain—especially regarding unpaid labor in households, which affects women’s economic opportunities and well‐being. Gender inequalities in health and education endowments have decreased in recent years. Six of the nine projects approved during the CPF period were gender-tagged. For example, the PFC DPO and related operations supporting social protection reforms led to changes in the social benefit system, which were highly effective in reducing poverty through better-targeted GMA with a higher threshold. As a result, social benefit coverage of female-headed households in the bottom quintile expanded significantly from 22.6 58 percent to 61.6 percent. The concerted effort made in this area drew on an impact evaluation of prior WBG operations in the social sector, which showed that female family members tended to spend social benefits more productively than males. In addition, the SSIP is facilitating female labor market participation by increasing access to kindergarten and establishing municipal-level services for elder care. Two-thirds of women surveyed about road improvements supported by the NRRRP reported being more satisfied with public transport and road safety improvements that expanded access to educational, health, and social institutions, as well as markets, banks, employment facilities, and arable land. 55. Citizen engagement (CE) remained strong over the CPF period. Between FY19 and FY23, the portfolio consistently reached 100 percent compliance in incorporating beneficiary feedback in all IPFs with clearly identifiable beneficiaries and on ensuring citizen-oriented design in projects. The integration of a CE roadmap since 2017 and increased support to task teams has contributed to this strengthened focus throughout the portfolio, with seven of nine projects receiving in-depth support between FY19 and FY23. As a result, North Macedonia ranks first in the region for the quality of CE included in project design. An updated review of CE quality in IPFs against the Europe and Central Asia CE Quality Index indicates that all nine projects approved since FY19 developed citizen-oriented designs that met the criteria for depth, frequency, openness to a range of feedback, and provision of multiple channels. 56. The CPF boosted the share of climate co-benefits through lending and ASA to help mitigate and prevent adverse effects from climate change. The Regional Air Quality Management in the Western Balkans ASA built a knowledge base on local-level air pollution concentrations and identified institutional and functional deficiencies in air quality management and governance that would inform further policy reforms and investment programs addressing air pollution at national and local levels. For example, one of the prior actions of the PFC DPO was the adoption of the Energy Law, which brought climate co-benefits through new competitive schemes for renewable energy investments and addressed energy poverty with measures that envisage direct financing of energy efficiency upgrades in the houses of energy-vulnerable customers. The overall climate co-benefits of operations approved during FY19–23 amounted to US$63.4 million, or 25 percent of overall commitments, distributed equally among mitigation and adaptation. Recent operations on public sector energy efficiency and local roads connectivity contributed significantly to climate co-benefits by reducing greenhouse gas emissions and increasing climate resilience. V. LESSONS LEARNED 57. The experience of CPF implementation during a volatile period in North Macedonia’s political environment demonstrated the importance of integrating political economy considerations into program design, drawing on high-level government commitment and multiannual engagements. The WBG can help build ownership and commitment through consistent dialogue, simple project designs that include clear lines of responsibility and accountability, TA on collecting and analyzing data to support evidence-based decision making, and hands-on support for change management processes. This dialogue would benefit from a wider consultation process on the benefits of the program, including with opposition parties, to mitigate effectiveness delays. The high political turnover experienced in North Macedonia over the CPF period—and its impact in delaying implementation of some parts of the program—demonstrated the importance of accounting for the country’s political climate and election cycles when selecting interventions and defining the timing of project preparation. Finally, as pointed out in the PLR, multiannual engagements in selected sectors have allowed for a building block approach to supporting critical reforms through sequenced dialogue and reform implementation. The WBG’s long-term engagement in areas such as social assistance and transport has helped achieve transformational change through policy adjustments, evidence-based decision making, and comprehensive approaches to reform. 59 58. A building block approach also underpins IFC’s efforts to open up new investment opportunities. As described in the PLR, persistent challenges in the operational environment have underscored the need for further upstream reforms to set the stage for new investments. In small markets like North Macedonia, for IFC to play a meaningful role and deliver sizable impact in infrastructure, there is a need for political will and capacity to undertake strategic projects where private participation is beneficial and envisioned for construction and long-term operations. Mitigation strategies are also needed in a politically unstable environment such as that in North Macedonia. For example, relying on “champions” within the client institution can help ensure continuity, provide a bridge between officials who are leaving and those coming into key positions, and forge connections between the client institution and other institutional stakeholders. Deeper collaboration within the WBG would help to further mobilize foreign private capital into key sectors in North Macedonia. MIGA’s capital optimization guarantees in the financial sector are supporting much-needed bank lending to strategic sectors, including climate finance activities, and political risk insurance instruments could continue to de-risk cross-border investments to support other key areas, such as infrastructure, renewable energy, and gender. Finally, engaging selectively in smaller projects, while leveraging World Bank support in line with the principles of the Cascade Approach, will help build investment expertise and develop a market, for example in the renewable energy sector, which can then enable IFC to provide financial support and attract private capital. 59. Anchoring structural reforms with the EU accession process and coordinating with other development partners can help mitigate the risk of policy reversal and enhance the sustainability of reforms. Regular coordination with the EU across sectors has helped the country optimize its use of EU accession funds through various modalities, including trust funds and cofinancing of World Bank- supported operations. Although reforms under the PFC DPO enjoyed strong support by the MoF and the Ministry of Labor and Social Policy, political volatility and pressure from vested interests led to a reversal of policy actions on pensions and PIT after vetoes from some EU members stalled North Macedonia’s EU accession efforts. A programmatic series of DPOs anchored to the EU accession process and International Monetary Fund programs may be a better instrument for supporting complex, politically sensitive reforms that require a medium-term time horizon. 60. Project readiness, flexibility, and proactivity in implementation are critical in North Macedonia’s political economy and institutional capacity context. In several areas, the CPF results framework’s level of ambition did not fully reflect the time needed to build ownership through stakeholder consultations, ensure project readiness, facilitate interagency coordination, complete project processing requirements, and build institutional capacity for implementation. However, drawing on lessons learned under the previous country strategy, the CPF program’s focus on flexibility and proactivity proved critical in achieving results. This flexibility was underpinned by strong client engagement and the tailored use of ASA to inform lending operations and support institutional capacity strengthening. Building on long-standing policy dialogue and available analytics in health and social assistance, the World Bank was able to move in swiftly with an emergency support project in response to COVID-19, and to work effectively through issues despite prevailing uncertainty. Moreover, the existence of a CERC component in the LRCP provided crucial, timely support for the government’s COVID-19 response, suggesting that the introduction of CERC components should be considered more frequently in new projects and a standard country-level manual developed to promote a uniform approach to CERC activation in future projects. At the project level, the MSIP embraced flexibility by allowing municipalities to apply for sub-loans on a rolling basis, giving local governments more freedom to time their applications for when they had sufficient borrowing capacity, thereby ensuring more balanced and equitable disbursement over the life of the project. 60 61. To effectively monitor implementation and evaluate whether and which program adjustments may be needed, the CPF results framework needs to accurately capture the WBG’s contributions to reform progress. Choosing broad indicators, such as the LPI, can make it difficult to attribute progress toward CPF targets to any specific reform measure or to the WBG’s specific contribution. This is a factor to keep in mind in designing the results framework for the next CPF. Indicators and units of measurement should be defined carefully to allow for accurate tracking of progress and clear links to meaningful progress on CPF objectives. At the same time, it will be important to allow for greater flexibility in indicators related to IFC’s private investments, as the probability of deal flows in smaller markets is not linear. Finally, the results framework needs to include indicators that measure outcomes, rather than outputs, as was in the case in several areas of this CPF. 61 CLR ANNEX 1: STATUS OF NORTH MACEDONIA FYY19–FY23 CPF RESULTS MATRIX Outcome Indicator Ratings CPF Outcome Status at CLR Mostly Partially Not Achieved Achieved Achieved Achieved FOCUS AREA I: EXPORT-LED GROWTH: IMPROVE THE ENVIRONMENT FOR A COMPETITIVE PRIVATE SECTOR Moderately Satisfactory Objective 1: Improve Connectivity and Access to Markets Mostly 2 1 Achieved Indicator 1: Improve market accessibility index along Corridor Not achieved VIII Indicator 2: Reduce trade costs, streamline trade procedures, and increase transport efficiency. Identify, foster, and support Achieved export-competitive value chains. Indicator 3: Improve the capacity of authorities to assess the risks of natural hazards impacting road assets and identify Achieved national gaps in preparedness and mitigation Objective 2: Increase Private Sector Competitiveness, Mostly 1 2 1 Innovation, and Resilience Achieved Indicator 4: Increase private investments facilitated by IFC Mostly advisory services achieved Indicator 5: Farmers who adopted improved agriculture Not achieved technology through training and advisory services Indicator 6: Improve innovative capacity of enterprises Achieved Indicator 7: Number of companies continuing operations and Mostly maintaining employees during COVID-19 with government achieved support designed and implemented with WB assistance FOCUS AREA II. INCLUSIVE GROWTH: EXPAND SKILLS AND OPPORTUNITIES FOR THE MOST VULNERABLE Moderately Satisfactory Objective 3: Improve the Quality and Relevance of Education Achieved 1 1 Indicator 8: Percentage of secondary TVET students benefiting Achieved from practical training in SMEs and large-sized firms Indicator 9: Percentage increase in national preschool Mostly enrollment rates for children 3–6 years old achieved Objective 4: Improve the Access to/ and Quality of Social Mostly 1 1 1 Services Achieved Indicator 10: Share of cash benefit and social services recipients Not achieved recertified and recorded in the new information system Indicator 11: Number of beneficiaries receiving non-institutional Mostly social services from licensed providers, of which female achieved Indicator 12: Improve coverage of social assistance for the Achieved bottom quintile female-headed households FOCUS AREA III. SUSTAINABLE GROWTH: ENHANCE SUSTAINABILITY AND BUILD RESILIENCE TO SHOCKS Moderately Unsatisfactory Objective 5: Strengthen Fiscal and Public Financial Management Partially 1 1 Achieved Indicator 13: Reduce general government arrears Not achieved Indicator 14: Strengthen tax revenues Achieved Objective 6: Accelerate the Transition to a More Sustainable Partially 1 1 Energy Mix Achieved Indicator 15: Additional renewable energy capacity facilitated Not achieved (MW) through investments, PPP, or advisory support Indicator 16: Achieve lifetime energy savings (20 years) and Partially reduce CO2 emissions through energy efficiency retrofitting of achieved public buildings 6 4 1 5 Total (38%) (25%) (6%) (31%) 62 CLR ANNEX 2: NORTH MACEDONIA FY19–FY23 CPR RESULTS MATRIX EVALUATION Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF FOCUS AREA I. EXPORT-LED GROWTH: IMPROVE THE ENVIRONMENT FOR A COMPETITIVE PRIVATE SECTOR Objective 1: Improve Connectivity and Access to Markets Overall Rating: Mostly achieved Indicator 1: Improve Baseline: 138.50 (2018) Not achieved • It is important to be realistic Completed lending: market accessibility about the duration of the road • National and Regional Roads index along Corridor Target: 265.60 (2023) Actual (June 2023): 138.50 (same infrastructure projects because Rehabilitation Project VIII as baseline) of associated ESF risks and (P148023, FY14, closed FY20) capacity constraints on the side Status: Improvements in the of the implementing agencies. Ongoing lending: market accessibility index are • Proper quality control at the • Road Upgrading and pending the completion of design stage is critical for Development Project construction of two sections on preventing construction delays (P149955, FY15) the eastern part of Corridor VIII by ensuring the designs • Western Balkans Trade and (between Rankovce and Kriva consider the specifics of the Transport Facilitation Project Palanka). The Road Upgrading and landscape and terrain. (P162043, FY19) Development project suffered • Due attention needs to be • Local Roads Connectivity substantial delays, due to paid to the implementation Project (LRCP, P170267, FY20; combination of technical, capacity of the respective AF FY21) contractual and performance institutions (such as the Public issues, which have been resolved Enterprise for State Roads) and Completed and ongoing ASA: during the first half of 2023. The allocation of adequate • North Macedonia – Support project has been extended until resources to allow for proper to Government's Growth and September 2025, when it is and timely management of land Jobs Action Plan (P168726, expected the road to be expropriations. completed FY20) completed. • Western Balkans - Intermodal Indicator 2: Reduce Baseline: Logistics Achieved • Targeted analytical work is Connectivity (P165641, trade costs, Performance Index Score useful, especially if it includes completed FY20) streamline trade 2.62 (2018) Actual (February 2023): 3.1 and supports data generation • Balkans Digital Highway procedures, and and plays a role in informing (P171797) increase transport Target: Logistics Status: The WBG’s Logistics the lending and reform • Logistics Performance Index efficiency. Identify, Performance Index Score Performance Index (LPI) Report for program. It also helps maintain 2.0 (P171468, FY23) foster, and support 3.00 (2023) 2023 shows significant 63 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF export-competitive improvement for North policy dialogue and reform • IFC Regional Trade Facilitation value chains. Macedonia, with an increase in the momentum in key sectors. Support Program for ECA country’s LPI score to 3.1 and an (Regional Advisory Platform, improvement in its rank from 81st #601446) of 160 countries in 2018 to 57th of • Western Balkans Roadmap for 139 countries in 2023.37 The 2023 National Single Window for LPI Report places North Macedonia Trade Phase 1 (North among the countries with Macedonia, Serbia, Albania, substantial improvement. #601677) Indicator 3: Improve Baseline: Limited risk Achieved • Adequate resource allocation • Western Balkans Regional the capacity of assessments or prioritized and high-level government Investment Policy and authorities to assess preparedness and Actual (June 2023): Road risk commitment are key to Promotion Program the risks of natural mitigation investment assessment completed, and mainstreaming the RAMS into (#601642) hazards impacting plans (2018) prioritized preparedness and strategic decision making for • Trade Policy Strategy 2.0 for road assets and mitigation investment plans road safety and resilience North Macedonia: Trade identify national Target: Road risk developed. within a road agency’s Competitiveness Diagnostic gaps in assessment completed, operations. and State Aid Effectiveness preparedness and and prioritized Status: The Road Asset • A realistic understanding of Report (P175734) mitigation preparedness and Management System (RAMS) implementing agency mitigation investment covers all national roads and capabilities through close plans developed (2023) incorporates climate resilience supervision and open considerations. The system communication is critical to the includes data on flooding and successful adoption of new landslide risks and climate data concepts in relatively along national roads. Climate traditional projects, such as resilience guidelines include road rehabilitation. instructions on conducting field • The use of RAMS and output- surveys, supervision checklists, based contracting, enabled the identification of engineering and National and Regional Roads non-engineering measures to Rehabilitation Project to push improve network resilience, also a the envelope on traditional methodology for the assessment road rehabilitation projects by 37 Connecting to Compete: Trade Logistics in the Global Economy—The Logistics Performance Index and Its Indicators. Washington DC, World Bank, 2023. 64 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF of hazards, vulnerability, and risks introducing climate and road from landslides and floods. The safety concepts. updated internal procedures of the Public Enterprise for State Roads (PESR) include requirements to consider climate resilience in planning, and all internal guidance documents were developed. Extensive capacity building, including specialized on-the-job training for four staff at the RAMS unit, was carried out on resilience, including through site-specific investigation work. 65 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF Additional evidence: IFC’s Western Balkans Manufacturing Value Chain project, whose objective was to improve the integration of light manufacturing firms into intraregional and European value chains, supported the registration of 27 suppliers from North Macedonia in a digital matchmaking platform, Achilles, thus increasing connectedness to off-takers/FDIs. Eleven requests for collaboration were received through this platform. The project also facilitated the first business review cascading into Improvement Action Plan where three companies were participating in a supplier development initiative by nomination of multinationals present in North Macedonia. These companies receive advisory services from IFC for strengthening their manufacturing capabilities with the main scope to be IATF accredited to penetrate new regional and global automotive value chains. The results of this activity will be reported as of January 2024. Rehabilitation of 280 kilometers of roads under the NRRRP resulted in a 12.5% reduction in travel time for passenger cars in 2019, while investments under the LRCP improved connections to 1,094 markets and services nationwide. Capacity enhancements at the PESR spilled over into the private sector, as training on guidelines and technical solutions to treat landslide and flood-prone points included the private sector and the School of Civil Engineering, which play a central role in the design and construction of civil works and will be relevant in the maintenance of these roads going forward. Objective 2: Increase Private Sector Competitiveness, Innovation, and Resilience Overall Rating: Mostly achieved Indicator 4: Increase Baseline: 0 (2018) Mostly achieved • Facilitation through the Completed lending: private investments advisory services does not • Skills Development and facilitated by IFC Target: US$30 million Actual (March 2023): US$23.7 produce immediate and Innovation Support (P128378, advisory services (2023) million tangible results in terms of closed FY21) private investments. • Local and Regional Status: Through the Strengthening • There is a need to allow for Competitiveness Project the Technological, Industrial, and more time between the (P154263, closed FY22) Development Zones and Investing advisory programs and the in Macedonia investment aftercare anticipated private Ongoing lending: and expansion programs executed investments. • Agriculture Modernization under the Western Balkans • It is recommended to create Project (P168014, FY20) Regional Investment Policy and more flexible indicators when it • Public Finance and Promotion Program, IFC helped relates to private investments, Competitiveness DPO facilitate US$23.7 million in since the probability of deal (P171851, FY20) reinvestments and expansion flows happening in smaller • LRCP AF (P170267, CERC investments with four companies markets are not linear. component) in the automotive, pharmaceutical, • MIGA guarantees: manufacturing, and services - NLB Project (14537) industries. - ProCredit Project (14781) 66 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF While the Western Balkans Investment Policy and Promotion Proposed Lending: Program has been completed, the • IFC investment in export investments envisaged to be oriented FDI in manufacturing facilitated through the Western • IFC financing through Balkans Manufacturing Value Regional Distressed Asset Chains Advisory Services have not Recovery Program yet materialized. The project is • EC Agri Risk Sharing program ongoing, however, and the target is expected to be achieved beyond Completed and ongoing ASA: the end of the CPF period. • Balkans Digital Highway Indicator 5: Farmers Baseline: 0 (2018) Not achieved • A wider consultation process (P162776, completed FY19) who adopted on the benefits of the project • Modernization of the improved Target: 500 (2023) Actual (February 2023): 0 (same as with the opposition parties Agriculture Administration in agriculture baseline) could speed up the North Macedonia (P166955, technology through parliamentary approval process completed FY20) training and Status: The project was launched, and mitigate effectiveness • Western Balkans advisory services following considerable delays, in delays. Competitiveness TA Program April 2022. An assessment of (P165531, completed FY20) training needs was completed, and • Unleashing the Potential of terms of reference prepared for Innovative Start-ups and SMEs priority technical training to be in the Western Balkans: provided to farmers in the coming Investment Readiness year. The activity is about to be Program 2.0 (P163168, FY21) launched in July 2023, and the TA • North Macedonia – Support will be recruited thereafter. to Government's Growth and Indicator 6: Improve Baseline: Share of private Achieved • Continued engagement on Jobs Action Plan (P168726, innovative capacity funding mobilized as a ideas, combined with resources completed FY20) of enterprises percentage of Fund for Actual (February 2022): 51.5 for policy dialogue and • IFC – Western Balkans Debt Innovation and percent significant investment in Resolution Project Phase II Technological analytical underpinnings, is (#603482) Development (FITD) and Status: In 2019–21, the FITD crucial for successful project other government approved support for over 236 implementation. institutions investments in innovative start-ups with €20.4 67 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF innovation activities and million from the government • The stability of senior • IFC – Western Balkans green growth – 35 (including own resources and the management and continuity Manufacturing Value Chains percent (2018) WB loan), while the enterprises during transitions are essential (#604496) provided an additional €10.5 factors in the sustainability and • IFC – Western Balkans Target: 40 percent (2023) million for their investments in long-term impact of programs. Regional Investment Policy innovation. and Promotion Program Indicator 7: Number Baseline: 0 (2020) Mostly achieved • Flexibility on the part of the (#601642) of companies World Bank in using • North Macedonia Innovation continuing Target: 24,000 (2023) Actual (February 2023): 22,195 instruments to support the and Competitiveness operations and authorities’ crisis response has Improvement Activity TA maintaining Status: The World Bank supported been critical. For example, the (P169882, FY21) employees during the government’s wage and social inclusion of a CERC component • North Macedonia: PPP COVID-19 pandemic subsidies support program through in the LRCP proved useful Capacity Building and Legal with government activation of the LRCP’s CERC for during the COVID-19 crisis. Reform (P169110, FY21) support designed the months of April, May, and June • DG NEAR financial sector and implemented 2020, thus enabling 22,195 deepening in Western Balkans with WB assistance companies to continue operations (P169885, FY22) and maintain employees. • IFC Western Balkans Manufacturing Value Chain Advisory Program • Public Finance Review (FY22) • Trade Competitiveness and State Aid (P175734, FY21) • Western Balkans Green Transformation (P177777, FY22) • Strengthening Financial Sector Diversification and Deepening in the Western Balkans (P179998, FY23) Additional evidence: The FITD’s funding instruments and technical support for the companies improved the innovative capacity of enterprises. According to the SDISP ICR, more than twice the targeted number of beneficiary firms introduced new processes (11 against a target of 4), which contributed to improvements in the innovative capacity of enterprises. FITD activities also helped companies mature and create a long-term impact on the innovation 68 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF economy, as evidenced by North Macedonia’s Global Innovation Index (2020) 38 ranking of 57th out of 131 countries, a significant jump from 84th in 2018. According to this, relative to gross domestic product, North Macedonia’s performance in innovation is above expectations for its level of development. The FITD continues to support the growth of innovative companies following the closure of the World Bank-financed project. Publicly available data show that, since its establishment, it has supported 839 co-financed projects, with total (public and private) investment of €101 million. According to studies conducted by local nongovernmental organizations,39 support provided to the government through the activation of the CERC cushioned the effects of the slowdown on the Macedonian labor market, preserving 80% of the most vulnerable jobs. The private sector let go of only 3% of employees during the first four months of the crisis, despite a significant loss of revenue. Following this intervention, the World Bank's Poverty and Equity Team conducted simulations to assess the project’s impact on poverty (defined as the proportion of individual s living with less than US$5.5/day) vis-a -vis other government programs adopted in response to COVID-19. The simulations showed that, in the absence of a government response to the pandemic, poverty would likely have increased to pre-2015 levels and more than 130,000 Macedonians would have fallen into poverty. Wage subsidies are estimated to have increased incomes along the entire income distribution and substantially contributed to the reduction in poverty, while other government programs have likely had the greatest impact among those at the bottom of the income distribution. When the second wave of COVID-19 hit, the government, influenced by this analysis and positive feedback from both the private sector and the unions, decided to continue providing income support to adversely affected companies during October–December 2020 without further World Bank support. FOCUS AREA II. INCLUSIVE GROWTH: EXPAND SKILLS AND OPPORTUNITIES FOR THE MOST VULNERABLE Objective 3: Improve the Quality and Relevance of Education Overall Rating: Achieved Indicator 8: Baseline: 37.5 percent Achieved • The grant program was Completed lending: Percentage of (2018) instrumental in incentivizing • Skills Development and secondary TVET Actual (February 2022): 51.03 private sector firms to establish Innovation Support (P128378, students benefiting Target: 45 percent (2023) percent partnerships with TVET schools. closed FY21) from practical • The impact evaluation of the training in SMEs and Status: The new curriculum pilot grant program was vital in Ongoing lending: large-sized firms framework for TVET embeds selecting the most impactful • Social Services Improvement practical training in firms as measures for cooperation Project (SSIP, P162246, FY18) mandatory. Starting from 2021, between TVET schools and • Primary Education announcements for enrollment in businesses. Improvement Project TVET schools include information (P171973, FY21) about the companies with which 38 https://www.wipo.int/global_innovation_index/en/2020/ 39 https://www.financethink.mk/wp-content/uploads/2020/10/PB41.pdf 69 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF those schools have signed contracts for cooperation. Completed and ongoing ASA: Indicator 9: Baseline: 35.7 percent Mostly achieved • Demand-side interventions, • Finding Solutions to Youth Percentage increase (2018) such as education campaigns Unemployment in North in national Actual (April 2023): 43.77 percent on the importance of early Macedonia (P168966, preschool Target: 46.5 percent learning, are necessary to boost completed FY19) enrollment rates for (2023) Status: Progress in improving demand for enrolling children • North Macedonia – Support children 3–6 years national preschool enrollment in preschool education; to Government's Growth and old rates remains slow. It should be monetary incentives for Jobs Action Plan (P168726, noted that the phrasing of the CPFfamilies could also be completed FY20) indicator is somewhat awkward, in considered. • North Macedonia Roma • Indicators and units of that the CPF did not in fact intend Education Pilot Phase 2 to track a 46.5 percent increase in measurement should be (P169862, completed, FY21) enrollment but rather an increase carefully defined to allow for • Read@Home TA (P174173) in the enrollment percentage to proper tracking of objectives. • Public Finance Review (FY23) 46.5 percent. This interpretation For example, an increase in reflects the specification of the preschool enrollment does not corresponding indicator in the SSIP necessarily imply improvement project, which aimed to achieve of quality and relevance of 46.5 percent national preschool education. enrollment in its fifth year (corresponding with the final year of the CPF period). Moreover, a 46.5 percent increase over the baseline enrollment share would not have been possible with the amount of investment foreseen. Additional Evidence: The SDISP has been instrumental in facilitating the successful implementation of the new TVET curriculum. Educators have been equipped with skills and knowledge to effectively deliver the revised curriculum, while adequate vocational equipment and learning materials ensured improved learning environment, thus elevating the overall quality of TVET education. The new TVET curriculum contributed to the improvement in the performance of TVET students, as reflected in significantly narrowing the performance gap between TVET students and their equals in general secondary education. Compared to the previous year’s national leaving exam results, the difference in mean scores of the first -generation students who followed the new TVET curriculum and those in General Secondary Education was only -0.04 for mother tongue and 0.43 for mathematics. In addition, the groundwork laid thus far already demonstrates a promising path toward a more effective and sustainable TVET education system, as evidenced by students’ increased interest in TVET 70 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF education. The SSIP strengthened the quality of the preschool education framework by establishing a national system to monitor early childhood education quality. The Measuring Early Learning Quality and Outcomes (MELQO) instrument was introduced, and baseline measurements were recently established. Follow-up measurements will provide data on potential quality improvements. MELQO shows that 99 percent of parents are satisfied with the services provided by kindergartens (55.5% very satisfied and 43.7% mostly satisfied). Two teacher training modules, aligned with required competencies, have been delivered to 90% of preschool teachers. Objective 4: Improve the Access to and Quality of Social Services Overall Rating: Mostly achieved Indicator 10: Share Baseline: 0 percent, of Not achieved • Project timetables need to be Ongoing lending: of cash benefit which 0 percent female realistic. The three-year • Public Finance and recipients and social (2018) Actual (June 2023): 0 percent, of duration of the Social Insurance Competitiveness DPO services recipients which 0 percent female Administration project proved (P171851, FY20) recertified and Target: 60 percent, of to be insufficient to complete • SSIP (P162246, FY19) recorded in the new which 50 percent female Status: Development of the all of the needed reforms, as • Social Insurance information system (2023) integrated information system was well as procurement of the Administration Project delayed. As of the CLR date, the information system, which took (P170343, FY20, in lieu of analysis of functional requirements longer than anticipated due to Pension Modernization (technical and business processes) the need for a detailed Project anticipated in the CPF) for cash benefits and social assessment of the functions services has been completed while and workflows that the Completed and ongoing ASA: detailed system design is expected information system would • North Macedonia Health ASA by end-June 2023. support. (P168755, completed FY19) Indicator 11: Baseline: 0 new Mostly achieved • There is a need to explore • Finding Solutions to Youth Number of beneficiaries, 0 percent delivery models that tap into Unemployment in North beneficiaries female (2018) Actual (March 2023): 2,602, of the significant potential for Macedonia (P168966, receiving non- which 57.61 percent female public and private provision and completed FY19) institutional social Target: 3,000 new financing of care services. • Western Balkans Pension services from beneficiaries, 50 percent Status: Results reflect the outcome • National rollout of care Technical Assistance FY2019 licensed providers, female (2023) of the first round of the grant services provision, coupled with (P168178, completed FY20) of which female program for establishment of policies that help address social • North Macedonia – Support social services provision. The norms that may prevent to Government's Growth and second round was launched in 17 women’s participation in the Jobs Action Plan (P168726, municipalities in July 2022, and labor market would generate completed FY20) contracts were signed with 11 new jobs for both skilled and less- 71 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF service providers. Once the skilled people and could • North Macedonia Health licensing and training is completed, contribute to the activation of ASA–Assessment of Primary the number of beneficiaries is Guaranteed Minimum Health Care Capacity expected to further increase and Assistance (GMA) beneficiaries. (P172264, completed FY20) achieve the target by the end of • Western Balkans Pension 2023. Advisory Services and Indicator 12: Baseline: 30.7 (2018) Achieved • Social assistance reform in Analytics FY2021 (P175000, Improve coverage of 2019, which consolidated social completed FY21) social assistance for Target: 40 percent (2023) Actual (February 2022): 61.6 assistance programs and • Western Balkans Regional the bottom quintile percent (as per last SILC survey, adopted common poverty- Health Program (P169008, female-headed 2019) based criteria, enabled North FY21) households Macedonia to act fast during • Public Finance Review (FY22) Status: Follow up SILC survey was the COVID-19 pandemic. The • North Macedonia Human conducted in 2021. Respective government rapidly expanded Capital Strategy (P176005, data is being analyzed. the GMA program by relaxing FY22) eligibility criteria and • Access Accelerated NCD simplifying application work–Supporting procedures. Improvements in Continuity of Care for Hypertension and Diabetes in North Macedonia: Findings from a Cascade Analysis (P170638, completed FY23) • TF Supporting the Effective Reintegration of Roma Returnees in the Western Balkans (P172194) 72 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF Additional evidence: The quality of cash benefits, as measured by their adequacy, improved following CPF-supported reforms, as outlined in the Social Protection Situational Analysis and the draft chapter prepared for the Public Finance Review in July 2022. The Ministry of Labor and Social Policy, as part of the SSIP’s outreach and citizen engagement activities, recently conducted a comprehensive survey of the beneficiaries of social services, the results of which were overwhelmingly positive, as almost all respondents expressed high levels of satisfaction with the quality of services provided. Moreover, communication with caregivers was praised by the majority of users, fostering a sense of trust and support. Nearly all beneficiaries reported a significant improvement in their quality of life across various aspects. Notably, more than two-thirds of respondents highlighted the positive impact on their regular grocery shopping and the maintenance of home hygiene and orderliness. FOCUS AREA III. SUSTAINABLE GROWTH: ENHANCE SUSTAINABILITY AND BUILD RESILIENCE TO SHOCKS Objective 5: Strengthen Fiscal and Public Financial Management Overall Rating: Partially achieved Indicator 13: Reduce Baseline: 2.8 percent of Not achieved • Enactment of the Law on Completed Lending: general government GDP (2018) Reporting and Monitoring of • Public Finance and arrears Actual (December 2022): 3.1 Liabilities to effectively identify Competitiveness DPO Target: Below 2 percent percent of GDP and monitor general (P171851, FY20) of GDP (2023) government arrears and launch Status: Arrears dropped to 2.42 of the quarterly publication of Ongoing Lending: percent of GDP in 2019. However, reported arrears from • Social Insurance due to the impact of the COVID-19 September 2018, supported by Administration Project crisis, arrears increased to 2.65 the Public Finance and (P170343, FY20) percent in 2020 and to 3.3 percent Competitiveness DPO, helped • Building Effective, in 2021. By end-2022, they with data reporting and public Transparent, and Accountable declined slightly to 3.1 percent of scrutiny of institutions that are PFM Institutions Project GDP. The health sector, public not paying their liabilities (P176366, FY22) enterprises, and local governments regularly. account for 93 percent of arrears, • The success of the Completed and ongoing ASA: while those of the central Government Debt and Risk • North Macedonia FSAP government declined to less than Management Program was due Update (P165920, completed 0.1 percent of GDP. to strong ownership on the part FY19) of the government and • EU-REPARIS (Road to Europe - technical team, inclusion of its Program of Accounting activities in related strategy Reform and Institutional reform programs, tailoring of the program to meet 73 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF immediate needs, and close Strengthening) (P147928, coordination with local offices completed FY19) of the World Bank and Swiss • North Macedonia: State Secretariat for Economic Sustainability of Delivery, Affairs. Financing of Municipal • Insufficient human resources Infrastructure and Services and engagement with routine (P168138, completed FY19) activities on the part of the • Strengthening Legislative technical team hampered the Scrutiny in the Western pace of reforms. Balkans (SAFE TF) (P160487, Indicator 14: Baseline: 27.1 percent of Achieved • Continuous engagement with completed FY20) Strengthen tax GDP (2018) technical teams to strengthen • Korea TF: Western Balkans - revenues Actual (December 2022): 29.1 the MOF capacity on all taxes Strengthening Fiscal Target: 28 percent of GDP percent of GDP and understanding of policy Institutions to Build Resilience (2023) impacts may help build (P165530, completed FY20) Status: The PIT Law was amended alliances for tax reforms once • Structural Reform Support TA in 2022 to bring capital income political ownership arises. (P172398, completed FY20) under tax base. The VAT Law and • Crisis Response TA (P175415, the Corporate Income Law completed FY21) proposing to reduce exemptions • North Macedonia are pending the parliamentary Government Debt and Risk enactment. Management Program (P162741, completed FY21) • Agricultural Insurance Market Development TA Project (P168971, completed FY21) • TA on Organic Budget Law (P168027, FY21) • Public Finance Review (P179795, FY23) • EU Regional TF on Strengthening Fiscal Governance (FY23–26) 74 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF • Trade Policy Strategy 2.0 for North Macedonia: Trade Competitiveness Diagnostic and State Aid Effectiveness Report (P175734) • Global Tax Program – health taxes workstream (FY23) Additional evidence: The recent PEFA (2022) report, prepared jointly by the staff of World Bank and International Monetary Fund, found that the country’s PFM performance registered an overall improvement compared to 2015. The Bank provided TA on the Organic Budget Law (OBL) that included technical input to the draft law and to part of the secondary legislation. The enactment of the OBL in September 2022 provided the legal basis for the establishment of a fiscal council, introduction of quantitative fiscal rules and fiscal responsibility statements, and paved the way for improved regulation of the entire budget process. Moreover, the draft bylaw (rulebook) that regulates the way of work and decision-making for the fiscal council was prepared as part of the Bank-executed EU Regional TF on Strengthening Fiscal Governance. The North Macedonia Public Finance and Competitiveness DPL within Pillar 1: Strengthening Public Finances also aimed to improve the country’s PFM performance. The enactment of the Law on Reporting and Monitoring the Liabilities (PA3) helped increase transparency through regular publication of data on arrears, while the enactment of the Law on Social Protection and the amendments to the Law on Child Protection (PA2) helped increase efficiency of PFM through the consolidation of social assistance benefits and the introduction of GMI program. The enactment of the Public Procurement Law (PA7) also supported more transparent and efficient PFM through the reduced burden on bidders, publication of procurement plans, notification of signed contracts, and upgrades of the e-procurement system. Following the launch of the tax reform and the request for technical assistance by the Ministry of Finance as of August 2022, the World Bank team delivered modeling tools for simulation of reform scenarios in the area of PIT, CIT, VAT and trained staff at the Ministry of Finance by organizing a series of hands-on technical workshops. 75 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF Objective 6: Accelerate the Transition to a More Sustainable Energy Mix Overall Rating: Partially achieved Indicator 15: Baseline: 0 (2021) Not achieved • To build renewable energy Completed lending: Additional investment expertise in the • MSIP I (P096481, closed FY21) renewable energy Target: 100 MW, no. of Actual (September 2020): 1.6 MW; country and develop the • MSIP II (P154464, FY16) capacity facilitated projects 1 (2023) 1 subproject market, IFC may need to (MW) through consider engaging selectively in Ongoing lending investments, PPP, or Status: Under the MSIP I 108 a smaller project while • Public Sector Energy advisory support photovoltaic systems were leveraging World Bank support Efficiency Project (P149990, installed in the public buildings in line with the principles of the FY21) across 36 municipalities. Cascade Approach. The systems produced a total of Proposed: 1,484 MWh of electricity over one- • IFC investment in renewable year period and benefited 25,564 energy (solar, wind) students in 63 schools, 595 children in 5 kindergartens, and Completed and ongoing ASA: 6,095 citizens through installations • Regional Air Quality in 20 municipal buildings, 9 sport Management – Western halls, 2 training centers, and a Balkans (P166430, completed hospital. Systems installed on FY20) wastewater treatment plants and • Western Balkans Urban on a pump station and filter station Partnership Program benefited 191,850 people. (P165780) 76 Lessons Learned and Indicator Baseline/Target at PLR Status at CLR WBG Program instruments Suggestions for the New CPF Indicator 16: Baseline: No savings Partially achieved Parliamentary elections delayed • Western Balkans DRM Achieve lifetime (2018) due to the COVID-19 pandemic, Program (P165377) energy savings (20 Actual (January 2023): 30,000 and local regulations that • Western Balkans Energy years) and reduce Target: Energy savings - MWh energy savings, 25,530-ton prevented procurement Transition Program (P169389) CO2 emissions 329,414 MWh, reduction reduction in CO2 emissions preparation led to delays in • IFC transaction advisory in through energy in CO2 emissions - project approval and initiation waste-to-energy efficiency 142,074 tons of CO2 Status: Under the MSIP, rooftop of project activities, • IFC PPP advisory services in retrofitting of public equivalent (2023) solar photovoltaics installed on respectively. Therefore, it is infrastructure buildings selected municipal buildings, with important to take into account • IFC Cities Initiative: municipal a total installed capacity of 1.62 election cycles that may impact energy efficiency in waste-to- MWp, will contribute to lifetime project approval, effectiveness, power, and urban mobility energy savings of about 30,000 and procurement when MWh, and reductions in CO2 planning project preparation emissions of about 25,530 tons. and implementation timelines. These results translated into 9% achievement of energy savings target, and 18% achievement of carbon dioxide emissions reduction. Under the Public Sector Energy Efficiency Project, energy audits were completed for 18 health buildings. The procurement of installation works expected by late 2023. 77 CLR ANNEX 3: WBG RESPONSES TO THE EMERGENCE OF COVID-19 IN NORTH MACEDONIA The WBG supported the government’s request for assistance in saving lives and preserving jobs in the wake of the COVID-19 pandemic. This flexible response was aligned with the WBG’s COVID-19 Crisis Response Approach Paper: • Under Pillar 1, “Saving Lives,” and Pillar 2, “Protecting Poor and Vulnerable People,” in April 2020, the WBG approved the €90 million North Macedonia Emergency COVID‐19 Response Project to: (a) increase the health system’s readiness, and (b) provide social assistance support to the poorest and most vulnerable. • Under Pillar 3, which seeks to save livelihoods and preserve jobs through “Ensuring Sustainable Business Growth and Job Creation,” at the request of the government on May 14, 2020, the WBG activated the CERC of the €37 million LRCP to support over 24,000 SMEs through the government’s wage and social subsidies support program during the months of April, May, and June 2020. • Under Pillar 4, “Strengthening Policies, Institutions and Investments for Rebuilding Better”:  In December 2020, the WBG approved the Primary Education Improvement Project (US$25 million), whose objective is to improve learning conditions in primary education and build the foundation of a modern and efficient primary education system. Under this project, around 10,000 tablet computers were provided to students from socially vulnerable families to facilitate their access to education during the pandemic.  The Read@Home initiative (US$174,000), funded by the Early Learning Partnership Trust Fund, was launched as a joint effort between the Government of North Macedonia and the World Bank to distribute books to all children from low-income families in their mother tongue during the COVID- 19 school closures. In October 2020, 15,000 young children (aged 3-7) from all over the country received a small package of illustrated storybooks in their mother tongue. The package included ideas and questions for parents to try out during story time, as well as games they could play together with their children. In addition, about 25,000 school-aged children (aged 8-11) received storybooks in their mother tongue that, while part of their required school curriculum, would be difficult for vulnerable families to afford.  The Early Childhood Development Emergency COVID-19 Trust Fund provided US$37,000 to purchase the television rights and broadcast 100 episodes of Sesame Street via the Macedonian national television broadcaster in early 2020, translated into Macedonian and Albanian languages, providing high-quality educational content for children at home during the early days of the pandemic.  The proposed North Macedonia ASA program for FY21 was aligned with Pillar 4 through recovery- focused technical assistance in key areas: (i) a value-added tax gap analysis; (ii) microsimulation tax modeling on improving personal income tax performance; (iii) environmental taxation; (iv) a tax administration efficiency assessment using the Tax DIAMOND toolkit; (v) drafting of a new Organic Budget Law; (vii) a new public debt law and debt strategy; and (viii) work on making the ecosystem for firm-level innovation and competitiveness more effective. 78 CLR ANNEX 4: PLANNED VS. DELIVERED IBRD LENDING US$ FY CPF Lending Program – PLANNED CPF Lending Program – DELIVERED million FY19 Focus Area 1: (Proposed Western Balkans Trade and Transport Facilitation Western Balkans Trade and Transport 30 lending Facilitation (FY19) US$ 100 Focus Area 2: million) Fiscal Efficiency and Competitiveness (DPO/PBG) Public Finance and Competitiveness DPO (FY20) 139,3 FY20-FY21 Focus Area 1: (Proposed Local Roads Connectivity Project and/or National Local Roads Connectivity Project (FY20) 78 Lending and Regional Roads Rehabilitation Project Local Roads Connectivity Project AF (FY21) 44.8 about Additional Financing (IPF) US$120 Digital Macedonia – High-speed Broadband (IPF) Digital Macedonia/ NODE -dropped million Agriculture Modernization (IPF) Agriculture Modernization Project (FY20) 50.5 Focus Area 2: Pension Modernization Project (IPF) Social Insurance Administration Project (FY20) 15.17 Primary Education Improvement Project (FY21) 25.0 Focus Area 3: Energy Efficiency (IPF) Public Sector Energy Efficiency Project (FY20) 27.4 Emergency COVID-19 Response Project (FY20) 98.5 FY22-FY23 Focus Area 1: (Proposed Innovation and/or Competitiveness Project (IPF) lending of Focus Area 2: around US$ Primary Education and/or Health Care Project (IPF) 200 million Focus Area 3: Fiscal and Growth (DPO/PBG) Building Efficient, Transparent and Accountable 19.7 Sustainable Municipal Development (IPF/PforR) PFM Institutions Project (FY23) and/or Wastewater Project (IPF) US$420 Total: 528.3 million 79 CLR ANNEX 5: IBRD PORTFOLIO INDICATORS OVER THE CPF PERIOD Portfolio and Disbursements Data as of FY17 FY18 FY19 FY20 FY21 FY22 FY23 Active Projects # 8 8 7 11 9 9 8 Net Commitments Amt $m 348.90 346.83 339.58 534.95 498.02 480.80 374.03 Total Disbursements $m 105.58 148.98 140.17 147.57 183.38 233.40 162.42 Total Undisbursed Balance $m 229.97 185.59 185.29 380.02 325.53 258.15 213.07 Disbursements in FY $m 31.16 43.40 21.90 48.94 116.05 61.86 36.98 Disbursement Ratio for IPF only % 11.9 18.8 12.6 29.7 31.0 19.4 15.9 IBRD/IDA Disbursement Ratio 12.2 17.0 13.0 30.1 30.8 19.4 15.9 Slow Disbursements % 0.0 12.5 0.0 0.0 0.0 0.0 12.5 * Disbursement ratio including closed projects in FY23 is 20.5 percent Portfolio Risk Data as of FY17 FY18 FY19 FY20 FY21 FY22 FY23 Actual Problem Project # 1 0 2 2 2 2 1 Problem Project % 12.5 0.0 28.6 18.2 11.1 22.2 12.5 Potential Problem Project # 0 0 0 0 0 0 0 Projects At Risk # 1 0 2 2 2 2 1 Projects At Risk % 12.5 0.0 28.6 18.2 11.1 22.2 12.5 Commitments At Risk $m 90.95 .00 108.16 108.16 97.21 95.16 79.99 Commitments at Risk % 26.1 0.0 31.9 20.2 19.5 19.8 21.4 Proactivity % 100.0 50.0 50.0 50.0 50 Independent Evaluation Group Ratings Data as of FY17 FY18 FY19 FY20 FY21 FY22 FY23 # of Exits 1 1 2 2 1 No. of Projects Evaluated by IEG 1 1 2 2 1 IEG MS+ Outcome Sat % 100.0 100.0 100.0 100.0 0.0 ICR Quality Sat % 100.0 100.0 100.0 100.0 100.0 Net Disconnect % 0.0 0.0 0.0 0.0 0.0 Bank Perf. MS+ @ Entry (%) 0.0 100.0 100.0 100.0 100.0 Bank Perf. MS+ @ SPN (%) 100.0 100.0 100.0 100.0 100.00 M&E Quality % 0.0 100.0 100.0 100.0 0.0 Borrower Overall Performance % Sat 100.0 0.0 0 .0 0.0 0.0 80 CLR ANNEX 6: IBRD OPERATIONS PORTFOLIO Latest Project Ratings Project Approval Closing Cancellation Cofinancing Undisbursed Project Name Development Implementation IBRD Number Date Date Amount Amount Amount Objective Progress P149955 Road Upgrading and MU MU 30-Sep-2015 30-Sep- $79.99M $10.96M $0.00M $27.03M Development Project 2025 P162246 Social Services S S 13-Sep-2018 30-Jun-2024 $33.40M $0.00M $0.00M $10.72M Improvement Project P170267 North Macedonia: S MS 18-Dec- 31-Dec- $122.80M $0.00M $0.00M $59.01M Local Roads 2019 2024 Connectivity Project P170343 Social Insurance MS MU 06-Feb-2020 31-Dec- $15.17M $0.00M $0.00M $13.13M Administration Project 2024 P168014 Agriculture S MS 30-Jan-2020 30-Jun-2025 $50.50M $0.00M $3.89M 45.32M Modernization Project P149990 North Macedonia S MS 30-Jan-2020 30-Sep- $27.40M $0.00M $0.00M $25.19M Public Sector Energy 2025 Efficiency Project P171973 Primary Education S S 11-Dec- 27-Feb- $25.00M $0.00M $0.00M $13.93M Improvement Project 2020 2026 P176366 Building Effective, S S 14-Dec- 30-Sep- $19.77M $0.00M $4.78M $18.73M Transparent and 2022 2027 Accountable PFM Institutions Project P162043 Western Balkans Trade S S 18-Apr-2019 15-Dec- $30.00M $00.00M $00.00M $23.4 and Transport 2025 Facilitation * TOTAL $404.03M $10.96M $8.67M $236.5M * Regional project 81 CLR Annex 7. IFC’s Committed Portfolio* As of October 2, 2023 * Direct investments only, excluding indirect investments through regional projects 82 CLR ANNEX 8: MIGA GUARANTEE PORTFOLIO, FY19 to FY23 (Outstanding portfolio in million US dollars) Capital Project Optimization Effective Expiry Date Sector FY19 FY20 FY21 FY22 FY23 ID Projects, Local Date Bank ProCredit Group Central Bank 9195 12/22/2010 12/21/2020 Financial 28.1 27.7 - - - Mandatory Reserve Coverage NLB Banka AD 14537 06/30/2020 06/29/2027 Financial - 101.8 107.9 49.2 92.6 Skopje ProCredit 14781 Mandatory Reserve 12/22/2020 03/20/2028 Financial - - 29.4 14.8 41.2 Coverage Outstanding Exposure 28.1 129.5 137.3 64.0 133.8 Number of Projects 1 2 2 2 2 83 Annex 3: Active and Proposed ASA [Italics = Regional] HLO Active ASA Proposed ASA Program HLO 1: • North Macedonia Public Finance Review: Ensuring • CEM Improved Stability and Boosting Resilience [P179795] • Public Financial Quality of • North Macedonia Government Debt and Risk Management Public Service Management Program [P162741] • GovTech and Digital Delivery • North Macedonia Integrating Climate Perspective into Development PFM Agenda – Western Balkans Green Recovery Support • Gender Report Grant [P179264] • Advancing Education • Western Balkans Road to Europe Program of Accounting Systems in the Reform and Institutional Strengthening for Small and Western Balkans Medium Enterprises [P172296] • Migration • Enhancing Infrastructure Governance in Western Balkan • Health Finance Countries [P180720] • IFC Strengthening • Strengthening Fiscal Governance in the Western Balkans Public Private [P180191] Partnerships in • Western Balkans Whole-of-Economy Climate Action Western Balkans Support [P180450] [#608312] • Western Balkans Pension Advisory Services and Analytics FY2023-24 [P179828] • Western Balkans Poverty & Equity Program FY22-FY23 [P177035] • Promoting Jobs and the Care Economy in the Western Balkans [P180684] • Western Balkans SPJ Situational Analyses [P176230] • Gevgelija EIP PPP advisory [#50761] HLO 2: • Promoting Jobs and the Care Economy in the Western • Advancing Education More Balkans [P180684] Systems in the Productive • Second phase of Europe 2020 TF Supporting Effective Western Balkans Private Sector Reintegration of Returnees [P172194] • Migration Jobs • Western Balkans Country Gender Assessment [P179260] • Getting People to • Western Balkans Trade Facilitation Advisory Project Work: Improving Phase II [P179241] Incentives and • Support to Western Balkans Common Regional Market Employment Services Initiative [P178854] • Digitalization of • Regional Private Sector Growth ASA [P500581] banks’ agriculture • Regional Remittances and Payments Systems departments • Regional Financial Stability • CEM • Smart Specialization Advisory • Private Sector • Western Balkans Debt Resolution Project Phase II Competitiveness [#603482] • Asset-based financing • Western Balkans Manufacturing Value Chains project and recovering debt (#604496) in Western Balkans • Eco-Industrial Parks (WBIF) [#607033] [#608243] • National Single Window [#601677] • Roadmap for • NLB Banka AD Skopje [Project ID 14537] Sustainable E- mobility Ecosystem in 84 • ProCredit Mandatory Reserves [Project ID 14781] the Western Balkans region [#608123] • Strengthening Logistics and Warehousing Service in EUR [#608377] HLO 3: • Integrating Climate Change Perspectives into Fiscal • Eco-Industrial Parks Increased Policy ASA [P179264] (WBIF) (#607033) Climate • Western Balkans Countries Climate and Development • Roadmap for Resilience Report [P179205] Sustainable E- • Western Balkans Six Energy Crisis Response [P197826] mobility Ecosystem in • Western Balkans Whole-of-Economy Climate Action the Western Balkans Support [P180450] region (#608123) • Just in Time Sub-Component - Western Balkans Green • Investment Plan to Recovery Support Grant [P178440] Reduce Water Losses • Western Balkans: Analyses for Air Quality Management • Disaster Risk for Selected Airsheds in the Western Balkans [P178090] Management • Gevgelija EIP PPP advisory [#507612] Western Balkans • MEPSO digitalization Country Climate and Development Report (P179205) and BESS preparation • Priorities for Climate Ready Cities in Selected Western • CEM Balkan Countries [P177921] • NLB Banka AD Skopje [Project ID 14537] • ProCredit Mandatory Reserves [Project ID 14781] 85 Annex 4: Selected Indicators* of Bank Portfolio Performance and Management As of September 19, 2023 Indicator FY21 FY22 FY23 FY24 Portfolio Assessment Number of Projects Under Implementation ᵃ 9.0 9.0 8.0 8.0 Average Implementation Period (years) ᵇ 2.4 3.4 3.7 3.9 Percent of Problem Projects by Number ᵃ˒ ͨ 11.1 22.2 12.5 0.0 Percent of Problem Projects by Amount ᵃ˒ ͨ 16.6 19.8 21.4 0.0 Percent of Projects at Risk by Number ᵃ˒ ͩ 11.1 22.2 12.5 0.0 Percent of Projects at Risk by Amount ᵃ˒ ͩ 16.6 19.8 21.4 0.0 Disbursement Ratio (%) ͤ 31.6 19.4 22.8 3.2 Portfolio Management CPPR during the year (yes/no) Supervision Resources (total US$) Average Supervision (US$/project) Memorandum Item Since FY80 Last Five FYs Proj Eval by IEG by Number 55 5 Proj Eval by IEG by Amt (US$ millions) 1,414.0 281.0 % of IEG Projects Rated U or HU by Number 14.8 20.0 % of IEG Projects Rated U or HU by Amt 4.1 0.0 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 86 Annex 5: IBRD Operations Portfolio Active Projects as of 09/20/2023 Supervision Rating Approval Closing IBRD Project ID Project Name Fiscal Fiscal (US$ Canceled Undisbursed Development Implementation Year Year million) Objectives Progress P168014 Agriculture Modernization Project MS MS 2020 2025 50.5 0.0 45.3 P170267 Local Roads Connectivity Project S MS 2019 2024 122.8 0.0 59.0 Building Efficient, Transparent and P176366 Accountable, PFM Institutions Project S S 2022 2027 19.7 0.0 18.7 P171973 Primary Education Improvement Project S S 2020 2026 25.0 0.0 13.9 P149990 Public Sector Energy Efficiency Project S MS 2020 2025 27.4 0.0 25.2 P149955 Road Upgrading and Development Project MS MS 2015 2025 79.9 11.0 27.0 P170343 Social Insurance Administration Project MS MS 2020 2024 15.2 0.0 13.1 P162246 Social Services Improvement Project S S 2018 2024 33.4 0.0 10.7 Western Balkans Trade and Transport P162043 Facilitation * S S 2019 2026 30.0 0.0 23.4 Overall Result 404 11.0 236.5 * Regional Project 87 Annex 6. IFC’s Committed Portfolio* As of October 2, 2023 * Direct investments only, excluding indirect investments through regional projects 88 Annex 7. MIGA’s Guarantee Portfolio (As of September 30, 2023) Gross Exposure (US$ Project Name Effective Date Expiry Date Investor Sector million) Nova Ljubljanska Banka NLB Banka AD Skopje 6/30/2020 6/29/2027 Financial 90.50 d.d., Ljubljana (NLB) ProCredit Mandatory ProCredit Holding AG & 12/22/2020 40.31 Reserves 03/20/2028 Co. KGaA Financial Total 130.83 89 Annex 8: Priority Areas of Development Partners’ Engagement Priorities Development Partners Agriculture EBRD, FAO, GIZ, KfW, UNDP Business Environment AU, EBRD, EIB, GIZ, KfW, IMF, SDC, UNDP, USAID, US Digital Agenda EBRD, EIB, FAO, GIZ, SDC, UNDP, UNICEF, USAID Education SDC, UNDP, UNICEF Energy AU40, EBRD, EIB, GIZ, KfW, IMF, UNDP, USAID, US Environment EBRD, EIB, FAO, GIZ, KfW, SDC, UNDP, UNICEF, Health UNDP, UNICEF Public Sector Reform EBRD, IMF, NL, SDC, UNDP, UNICEF, USAID, US, OPEC Fund Social protection EBRD, GIZ, IMF, UNDP, UNICEF Land administration EBRD, FAO Transport EBRD, EIB, US 40 Also active in mineral resources (mining). 90