A time to reset: North Macedonia’s struggle for fiscal stability and stronger growth

As growth sputters and debt mounts, North Macedonia faces a stark choice: fix its public finances fast or watch its economic promise wither away.

More than three decades after gaining independence from Yugoslavia, North Macedonia continues to pursue a stable and prosperous market economy.

The transition has brought an array of policy experiments and institutional reforms intended to modernise the business climate, harmonise with European Union standards, and improve opportunities for ordinary citizens.

Yet the pace of change has tested public patience. Growth remains modest, youth employment too scarce, and public finances less disciplined than the country’s aspirations demand.

A new assessment from the World Bank, published earlier this month, offers a timely reminder that the country’s economic management requires urgent improvements.

The report warns of rising public debt and a persistent shortfall in fiscal discipline. It calls for better tax administration, more efficient public spending, and a renewed commitment to structural reforms that could break the cycle of underachievement.

Policymakers in Skopje now have a choice: tighten fiscal management, encourage higher-value investment, and free resources for social and economic development—or continue along a path that risks prolonged mediocrity.

Moderate growth and a mixed economic structure

After some gains in recent years, North Macedonia’s growth trajectory remains underwhelming. According to the World Bank’s latest assessments, GDP growth, which reached 4.5 per cent in 2021, faced pressure in 2023 due to sluggish external demand and domestic constraints, and reached just one per cent—the lowest level of growth in the Western Balkans.

This year should be better, with most forecasts suggesting growth potentially edging closer to three per cent.

This incremental improvement provides some grounds for optimism, but will require sound policies to become self-sustaining.

In 2023, the country’s gross domestic product (GDP) amounted to around 14.7 billion US dollars, with a per capita figure of about 8,100 US dollars.

Services accounted for roughly 71 per cent of output in 2021, manufacturing about 13 per cent, other industry eight per cent, and agriculture also eight per cent. These ratios underscore a shift away from the older economic structures of the Yugoslav era, yet many service activities remain low in value added. Without investments in competitiveness, productivity, and innovation, the economy risks generating moderate growth but not the transformation needed to raise incomes faster.

Fiscal policy under the microscope

The World Bank’s report highlights fiscal discipline as the linchpin of any credible development strategy.

Over the decade leading up to 2022, North Macedonia’s fiscal deficits averaged about 3.9 per cent of GDP. Public debt stood at around 53.41 per cent of GDP in 2021, easing to 51.8 per cent in 2022.

Although these figures do not represent an immediate crisis, they leave little margin for error. A steady accumulation of debt drains resources from future generations, diverts funds from infrastructure and education, and limits the government’s capacity to respond to any sudden economic downturn.

The World Bank urges better tax administration, not simply as a technical exercise but as a way to ensure fairness and efficiency. Ensuring that all economic agents pay what they owe would yield more stable revenues and allow policymakers to invest in public goods.

By cutting unnecessary spending and directing public funds to high-impact areas, the authorities could reduce vulnerabilities and restore credibility in the eyes of both domestic stakeholders and external investors.

The labour market puzzle

Unemployment, though falling from 17.2 per cent in 2019 to 13.1 per cent in 2023, remains a major concern. Too many young people struggle to find decent work, limiting their long-term earning potential and discouraging those with talent and ambition from staying in the country.

This problem weighs heavily on future growth. Any strategy that aims to push the economy beyond a three per cent growth rate must also address employment quality and the skills mismatch.

More disciplined fiscal management can free up resources for schools and vocational programs. Shoring up the educational system is not a quick fix, but it would yield long-term benefits by equipping future workers with the abilities that local employers and foreign investors value.

An environment where firms can operate under transparent and predictable regulations, supported by reliable infrastructure, would also help absorb more workers into productive roles. Active labour-market measures—such as training subsidies, career counseling, and support for entrepreneurship—can bridge the gap between classroom learning and workplace demands.

Guarding macroeconomic stability

Inflation has generally remained tame, averaging about 2.5 per cent in the decade leading up to 2022. The National Bank of North Macedonia, by pegging the denar to the euro and maintaining prudent monetary policies, has provided a measure of stability.

This hard-won record helps shield households from the erosion of purchasing power and lowers uncertainty for investors. But stable prices and a predictable currency arrangement hinge on other parts of the policy framework. Weak fiscal controls or a significant rise in public debt would complicate the job of keeping inflation low.

Aligning fiscal and monetary policy is critical. Sound public finances allow monetary authorities to focus on maintaining low and stable inflation without having to bail out fiscal profligacy. A credible commitment to prudent spending and fair taxation ensures that shocks to the system—whether global or local—are less likely to send inflation surging or force abrupt policy shifts.

Integrating into the global economy

With trade-to-GDP ratios above 171 per cent, North Macedonia’s economy is open to international markets.

Specialisation in products like catalysts containing precious metals points to the potential for niche advantages. Major trading partners include Germany, Serbia, and Bulgaria, underscoring the importance of stable regional relations and alignment with EU regulations.

Foreign direct investment (FDI) remains a valuable source of capital and know-how. In 2022, FDI net inflows reached about 6.3 per cent of GDP, buoyed by free economic zones and various tax incentives. While these policies have their uses, the ultimate goal should be developing a broader set of advantages that make North Macedonia a trusted production hub and a credible supplier.

Improved fiscal discipline, better governance, and infrastructure upgrades would help integrate foreign investors more fully into local supply chains. Encouraging foreign firms to share technology and train local workers can create a virtuous cycle, elevating domestic capabilities and boosting exports.

Toward a more credible reform agenda

Accelerating progress toward EU membership and achieving higher growth targets require a deeper structural overhaul. (Although the European Council approved the start of accession talks in 2020, no negotiation chapters have yet been opened).

This means reforming institutions, ensuring that contracts are honoured, and allowing entrepreneurs to operate within a predictable legal environment. Courts must be efficient, impartial, and accessible. Regulation should be clear and coherent, and public procurement should be free from corruption or favouritism.

Infrastructure development deserves particular attention. Better roads and railways would lower transport costs and facilitate trade. Reliable energy supplies, including renewables, would reduce dependence on imports and align the economy more closely with EU climate and environmental goals.

Investing in digital connectivity can expand e-commerce, enhance communication, and enable remote work, making the labour market more flexible and resilient.

The EU accession process is, after all, not only about ticking boxes. It offers a framework for implementing difficult but necessary changes that would improve the business environment, reduce uncertainty, and encourage long-term thinking.

If North Macedonia uses this framework to guide reforms, the country can achieve something closer to the stable and dynamic economy its leaders and citizens seek.

A chance to break the pattern

The World Bank’s recent message is clear, and echoes that of businesses operating in North Macedonia: serious policy adjustments are overdue. Without a concerted effort to improve tax systems, control spending, and invest intelligently, North Macedonia risks floating along at growth rates that never truly transform its economy.

Real progress means facing up to these challenges and committing to a more disciplined, strategic approach.

Better-managed public finances open the door to more effective social services, stronger support for business, and new opportunities for the young and ambitious. By strengthening institutions and investing in long-term competitiveness, the country can aim for more than modest gains. It can begin to lift living standards, retain talent, and position itself as a credible player in European markets.

This is a time to reset policy priorities and confront longstanding inefficiencies. A coherent fiscal plan, backed by structural reforms, could set the stage for more robust and inclusive growth.

Ultimately, this is a moment for North Macedonia to reset its economic priorities. The country has spent decades taking incremental steps toward a more open and modern economy. Now, a more thorough reinvention is needed.

Photo by Lex Melony on Unsplash.

At Emerging Europe, we use an integrated approach centred around market intelligence to help organisations understand trends and strategically position themselves for success.

Learn how our solutions can help you thrive in the region:

Company and Services Overview | Strategic Advantage.