Macedonia Economy

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MACEDONIA
GDP: $16.91 billion.
note: Macedonia has a large informal sector (2006 est.)
Per capita GDP: $8,200 (2006 est.).
Real GDP growth: 3.2%.
Inflation rate: 3%.
Unemployment rate: 36%.
Official exchange rate (2006 avg.): 48.978 Macedonian denars =U.S.$1.

Budget: Income .............. $2.234 billion
Expenditure ... $2.284 billion

Main Crops:
Wheat, corn, sorghum, soybean, sugar beets.

Natural Resources: Lead, Zinc, Tin, Copper, Iron, Petroleum.

Major Industries: Food Processing, Motor Vehicles, Consumer Durables.

Macedonia is a small economy with a gross domestic product (GDP) of $4.6 billion, representing about 0.01% of the total world output. It also is an open economy, highly integrated into international trade, with a total trade-to-GDP ratio of 79.5%. Agriculture and industry have been the two most important sectors of the economy, but the services sector came on strong in the past few years. All three sectors provide a limited number of high-quality finished products. Like most transition economies, problems persist, even as Macedonia takes steps toward reform. A largely obsolete industrial infrastructure has not seen much investment during the transition period. Work force education and skills are competitive, but without adequate jobs, many with the best skills seek employment abroad. A low standard of living and high unemployment rates prompt occasional social unrest.

Five years of continuous economic expansion in Macedonia was interrupted by the 2001 conflict, which led to a contraction of 4.5% in 2001, despite the government being able to hold inflation at a stable average 5.3%. In 2002, the economy struggled to recover, posting only 0.7% growth. Growth started to pick up in 2003, with real GDP reaching 3.1%. The external debt-to-GDP ratio in 2003 was 38.4%. The economy still has not been able to fully recover to its pre-2001 crisis level. In 2004, real growth is projected to reach 4% with inflation of up to 2.8%. 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 nearby Bosnia, international sanctions on Serbia, and the neighboring Kosovo crisis in 1999 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 was especially hurt by the Greek trade embargo, imposed 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. As a result of these two border closures, 1995 GDP declined to 41% of its 1989 level.

Coincident to these problems, the country pursued an ambitious stabilization and reform program after independence. Despite external factors, the program yielded positive results through 1998 and won praise from the International Monetary Fund (IMF) and the World Bank. A robust financial austerity program stabilized the Macedonian denar and reduced the fiscal deficit. Inflation remained low for several years and was on average slightly negative in 1998 and 1999. Though economic growth suffered in the country's first 5 years of independence, a modest recovery was in progress--with 3.4% growth for 1998--until the Kosovo crisis.

Macedonia proved the most economically vulnerable of regional neighbors to the 1999 Kosovo conflict's spillovers. At the height of the crisis, Macedonia sheltered more than 350,000 Kosovar refugees, straining fiscal accounts and increasing social pressures. Per capita foreign direct investment (FDI), already the lowest in the region, worsened as investors lost confidence. With unemployment around 33%, the crisis exacerbated economic privation. Before the Kosovo crisis, up to 70% of the country's economy had been dependent on inputs from, exports to, or transport through the then-Federal Republic of Yugoslavia (FRY). At the height of the crisis, total exports had fallen to about 75% of the 1998 level. Exports to the FRY were down by about 80%. Exports that had previously transited the FRY (one-half of total exports) were hurt, as alternative transit routes through Bulgaria, Romania, and Greece increased transportation costs and delivery times, making Macedonian products less competitive. Export-processing contracts with other countries suffered cancellations over concerns about delivery risks.

Despite the impact of the Kosovo crisis on Macedonia's economy, marketing efforts were reoriented, new markets were identified and exploited, and the Kosovo market reopened in mid-summer 1999. A May 1999 international donors conference projected contraction of Macedonia's economy of around 5%--a swing of 10 percentage points from pre-conflict projections of 5% growth. However, these projections assumed the Kosovo conflict would continue through the end of the year. Early termination of the conflict in June led to an economic rebound and growth of around 2.7% in real terms for 1999.

Macedonia rescheduled its Paris Club debt in 1995, and again in early 1999, including $93 million of debt, interest, and arrears to the United States. The Kosovo crisis led to an appeal to have debt forgiven or deferred. A Paris Club agreement to defer Macedonian debt service ran out April 2000. Paris Club creditors agreed that repayment terms for amounts deferred during the Kosovo crisis would be set at 5 years, with 1 year as grace.

At the beginning of 2001, Macedonia's economic situation appeared to be improving, with visible signs of increased activity and dynamism, but with the start of the ethnic Albanian insurgency in Macedonia, the country's solid macroeconomic performance in 2000 and the beginning of 2001 began to slide and remained substantially depressed in 2001. Real GDP declined by 4.5% in 2001, as output deteriorated in most sectors. Inflation averaged 5.5% instead of the initially projected 2.2%. Current account deficit in the balance of payments was around 10.1% of GDP, down from an expected surplus of 1%, while the central government budget deficit reached 5.8%. From January through September 2001 the country lost around $200 million of its foreign currency reserves defending the targeted level of the denar against the German mark. Foreign direct investments, credits, grants, and donations declined when the insurgency began, and Macedonia's IMF program went off-track. The IMF and the Government of Macedonia agreed to a 6-month staff-monitored program, beginning January 1, 2002, but government decisions to reimburse depositors of a 1997 failed pyramid scheme and a general wage bill increase in public administration were seen as a threat to a viable budget expenditures policy, posing an obstacle to continuation of the staff-monitoring program and negotiations on a stand-by arrangement. Discussions between the IMF and the new government on a new agreement resumed in November 2002, and a new stand-by arrangement was signed in February 2003 and approved April 30, 2003.

The impact of the 2001 crisis, lower international demand for Macedonian products, canceled contracts in the textile and iron and steel industry, as well as the drought in 2001 affected Macedonia's growth prospects and foreign trade in 2002. Although Macedonia had been scheduled to graduate from International Development Association (IDA) financing in 2001, the World Bank provided $15 million in emergency economic assistance to finance critical imports for the private sector. Real GDP in 2002 grew by 0.3% on annual basis in spite of subdued inflation. The Consumer Price Index-based inflation in 2002 was 1.8%. Declining industrial output adversely affected foreign trade, with exports dropping by 3.7% and imports rising by 16.3%, resulting in a trade deficit of 23% of GDP. The current account deficit in 2002 was 8.8% of GDP. An international donors conference, organized by the World Bank and the European Commission, was held March 12, 2002, in Brussels, at which donors pledged $275 million to assist in covering the projected budget gap, implementing Framework Agreement reforms, and re-energizing the Macedonian economy. Donors also pledged an additional $244 million for general economic development in 2002, outside of the pledge categories defined by the World Bank and European Commission.

Most donor money came in 2003, rewarding the disciplined fiscal policy and stable monetary policy. The IMF signed a Stand-By Arrangement (SBA) with the Macedonian Government worth $27 million. In 2003, real GDP grew by 3.1%, mainly driven by the re-opening of a few loss-makers and strong exports given favorable prices on world markets. The consumer price index (CPI)-based inflation remained very low at 1.2%. The official unemployment rate climbed to 36.7% in 2003. A restrictive fiscal policy under the IMF program brought the budget deficit down to 1.1% of GDP, providing room for a relaxation of monetary policy, which resulted in lower interest rates. Although exports grew faster than imports compared to 2002, the trade deficit in 2003 remained large at 20.3% of GDP, while the current account deficit stabilized at 6% of GDP. External debt stood at 38.4% of GDP.

Macedonia is committed to pursuing membership in European and global economic structures. It was officially accepted as a member of the World Trade Organization (WTO) on October 15, 2002. Parliament ratified the agreement in January 2003, clearing the way for Macedonia to become a full member in March 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. After ratification in parliaments of all EU member countries, the agreement went into force on April 2, 2004.

Currently, Macedonia is undertaking substantial reforms in its economic and political systems, with the goal of boosting economic growth and attracting increased levels of foreign investment. Macedonia recently passed a progressive trade companies law, which should ease impediments to foreign investment, along with tax and investment incentives. Though concerns stemming from the 2001 conflict linger, the internationally mediated Framework Agreement is being implemented, and Macedonia's political and security situation has stabilized, allowing the government to refocus energies on domestic reforms. A rise in industrial output, fiscal consolidation, low inflation, and a fall in interest rates indicate a gradual recovery of the economy. Political and security normalization, macroeconomic stability and fiscal discipline are providing a foundation for higher growth rates. Real GDP growth is projected at 4% in 2004. The Macedonian Government's main economic policy goals remain to attract foreign investments, to increase employment and to reduce poverty. It has pledged to undertake measures to maintain fiscal discipline and to reduce interest rates even further. Developing the Small and Medium-Size Enterprise (SME) sector and intensifying structural reforms also are high on the government's list of priorities.

Trade
Macedonia's foreign trade balance has been in deficit since 1994, reaching $936.7 million in 2003. Total 2003 trade was $3.66 billion, or 79.5% of GDP--imports plus exports of goods and services. Macedonia's major trading partners are Serbia and Montenegro, Germany, and Greece. The United States is Macedonia's seventh-largest trading partner. In 2003, U.S.-Macedonia trade in goods totaled $129.1 million. According to Macedonian trade data, U.S. exports accounted for 2.4% 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 signed Free Trade Agreements with Albania, Bosnia and Herzegovina, Serbia and Montenegro, Bulgaria, Croatia, Ukraine, Slovenia, Turkey, and the European Free Trade Association countries.