ECONOMY
Macedonia is a small economy with a gross domestic product (GDP) of about $8 billion, representing about 0.01% of the total world output. It is an open economy, highly integrated into international trade, with a total trade-to-GDP ratio of 106.8% at the end of 2007. Agriculture and industry have been the two most important sectors of the economy in the past, but the services sector has gained prominence in recent years. Economic problems persist, even as Macedonia undertakes structural reforms to finish the transition to a market-oriented economy. A largely obsolete industrial infrastructure has not seen much investment during the transition period. Labor force education and skills are competitive in some technical areas and industries but significantly lacking in others. Without adequate job opportunities, many with the best skills seek employment abroad. A low standard of living, high unemployment rate, and relatively modest economic growth rate are the central economic problems.
Five years of continuous economic expansion in Macedonia was interrupted by the 2001 conflict, which led to a contraction of 4.5% in 2001. Growth started to pick up in 2003 (2.8%) and continued in 2004 (4.1%), 2005 (4.1%), 2006 (4.0%), and 2007 (5.0%). Living standards still lag behind those enjoyed before independence. Real growth is projected to reach a rather optimistic 6% annually in 2008, with inflation of up to 5%. The United States is supporting Macedonia's transition to a democratic, secure, market-oriented society with substantial amounts of assistance.
Background
After the breakup of Yugoslavia in 1991, Macedonia, the former Yugoslavia's poorest republic, faced formidable economic challenges posed by both the transition to a market economy and a difficult regional situation. The breakup deprived Macedonia of key protected markets and large transfer payments from the central Yugoslav government. The war in Bosnia, international sanctions on Serbia, and the 1999 crisis in neighboring Kosovo delivered successive shocks to Macedonia's trade-dependent economy. The government's painful but necessary structural reforms and macroeconomic stabilization program generated additional economic dislocation. Macedonia's economy was hurt especially by a trade embargo imposed by Greece in February 1994 in a dispute over the country's name, flag, and constitution, and by international trade sanctions against Serbia that were not suspended until a month after conclusion of the Dayton Accords. The impact of the 2001 ethnic Albanian insurgency in Macedonia, decreased international demand for Macedonian products, canceled contracts in the textile and iron and steel industry, and poor restructuring of the private sector affected Macedonia's growth and foreign trade prospects through 2004.
Macedonia's political and security situation is stable. This has allowed the government to refocus energies on domestic reforms, boosting economic growth, and attracting increased levels of foreign investment. In 2004, the government passed a progressive Trade Companies Law aimed at easing impediments to foreign investment, providing tax and investment incentives, and guaranteeing shareholder rights. In 2007, the government finished implementing a one-stop procedure for business registration that considerably shortened the time required to register a new business. The government's fiscal policy, aligned with International Monetary Fund (IMF) and World Bank policies, helped maintain a stable macroeconomic environment. Legislation that would further liberalize the telecommunications market, and completion of the first phase of privatization of the electricity sector, sent promising signals to investors. However, economic growth remained sub-par in 2005 and 2006, due in part to poor government results in combating corruption, weak judiciary, poor contract enforcement, and high domestic finance costs. The new Government of Macedonia that took office in August 2006 put the fight against corruption and attracting foreign investors at the very top of its priority list. In 2007, it launched an expensive marketing campaign promoting the country as a good investment destination. It provided business incentives by cutting rates on profit tax and personal income tax, while implementing a "regulatory guillotine"--an activity which aims to significantly reduce procedures and legislative requirements for doing business.
Macroeconomy
Real GDP growth continued in 2008 at approximately the same tempo as in 2007.
After growing by 4.1%, 4%, and 5% respectively in 2005, 2006, and 2007, it
reached 5.2% in the first quarter of 2008. The growth was broad-based as value
added increased in all sectors. Wholesale and retail trade sectors led the
growth with a 10.2% annual increase, and construction followed with 9.7%.
Agriculture turned from a 3% dip in 2007 to a 4.2% rise in the first quarter of
2008. Industrial output in the first five months of 2008 was 8.3% higher than in
same period of 2007. Inflation unexpectedly surpassed projections, with the
year-on-year consumer price index (CPI) rising by 6.1%. Growing food and energy
prices pushed inflation up to 10.1% in the first half of 2008. The official
unemployment rate came down a bit to 34.9% in 2007. Strong collection of
revenues throughout 2007 resulted in a budget surplus of 0.3% of GDP, despite
the projected deficit of 1% of GDP. Tax collection continued the upward trend in
the first half of 2008, surpassing last year's first half performance by more
than 20%. Expansionary monetary policy continued in 2008 as well, providing for
total credit to the private sector at the end of May to grow by 43.4%. This
alerted the Central Bank to raise interest rates on Central Bank bills, and put
a ceiling on credit to households, but interest rates spreads continued to
narrow. Import growth doubled while export-led growth remained stagnant, thus
presenting a large trade deficit. At the end of May 2008, it amounted to 13.3%
of GDP. As a result, the current account deficit widened to over 5% of GDP,
already breaching the end-year target. Private transfers are stagnant compared
to last year, and foreign direct investment (FDI), although higher than the same
period of last year, is not enough to cover it. Foreign currency reserves
dropped down to levels that barely cover three months of imports; further loss
would seriously undermine the stability of the domestic currency. Public debt
remained low at 29.3% of GDP at the end of April 2008, due to pre-paying debts to international financial institutions in 2007.
In late 2005, Macedonian authorities concluded a three-year Stand-By Arrangement (SBA) with the IMF and a Programmatic Development Policy Loan (PDPL) with the World Bank. In 2007 both financial institutions positively assessed the enforcement of the programs, allowing the Government of Macedonia to withdraw a tranche of the PDPL 2 agreement worth $30 million. Since the first withdrawal of $15.4 million in 2006, the SBA has been only precautionary as balance-of-payment support was no longer needed. In April 2008, the IMF Board approved the third positive review of the SBA, and the fourth and final review will take place in September. So far, the Government of Macedonia has not initiated negotiations for a new arrangement with the IMF as the current one expires in August. In March 2007, the World Bank Board adopted a new four-year Country Partnership Strategy for Macedonia, which could potentially bring to the country total lending of up to $280 million.
Trade
Macedonia remains committed to pursuing membership in the European Union and
global economic structures. It became a full World Trade Organization (WTO)
member in April 2003. Following a 1997 cooperation agreement with the European
Union (EU), Macedonia signed a Stabilization and Association Agreement with the
EU in April 2001, giving Macedonia duty-free access to European markets. In
December 2005, it moved a step forward, obtaining candidate country status for
EU accession. Macedonia has had a foreign trade deficit since 1994, which
reached a record high of $1.871 billion in 2007, or 23.3% of GDP. Total trade at
the end of May 2008 (imports plus exports of goods and services) was $4.515
billion, and the trade deficit already amounted to $1.150 billion, or 13.3% of
GDP. A significant 51.5% of Macedonia's total trade was with EU 27 countries. By
separate countries, Macedonia's major trading partners are Serbia, Russia,
Germany, and Greece. In the first five months of 2008, total trade between
Macedonia and the United States was $37.6 million. U.S. exports accounted for
1.2% of Macedonia's total imports. U.S. meat, mainly poultry, and electrical
machinery have been particularly attractive to Macedonian importers. Principal
Macedonian exports to the United States are tobacco, apparel, footwear, and iron
and steel.
Macedonia has Free Trade Agreements with Ukraine, Turkey, and the European Free Trade Association countries. Bilateral agreements with Albania, Bosnia and Herzegovina, Croatia, Serbia, Montenegro, UN Mission in Kosovo (UNMIK), and Moldova were replaced with the membership in the Central European Free Trade Agreement (CEFTA), which the other countries joined in December 2006.
Economy
GDP (2007 est.): $8.036 billion.
Per capita GDP (2007 est.): $3,720.
Real GDP growth (first quarter 2008 est.): 5.2%.
Annualized inflation rate (first half 2008): 10.1%.
Unemployment rate (2007): 34.9%.
Trade: Significant exports--steel, textile products, chromium, lead, zinc, nickel, tobacco, lamb, and wine.
Official exchange rate (2007 avg.): 44.7 Macedonian denars = U.S.$1; (2006 avg.): 48.8 Macedonian denars = U.S.$1.
