Economy in focus: North Macedonia

A pivotal 12 months could be in store for North Macedonia. Parliamentary and presidential elections await, while economically—after a period of moderate growth—the landlocked Balkan nation is gearing up for a year that could potentially mark a significant upturn in its fortunes. 

In 2022, North Macedonia’s GDP growth was modest, at 2.1 per cent, reflecting the global economic challenges and the lingering effects of the Covid-19 pandemic. The country’s economy is expected to have expanded by a similar amount in 2023, with a favourable net export position partly offset by a drop in investment.

Notably, however, growth slowed in the second half of 2023, with decelerating consumption and exports. 

Looking ahead to 2024, the European Bank for Reconstruction and Development forecasts a brighter picture, projecting an acceleration of real GDP growth to three per cent. This optimistic outlook is underpinned by expectations of strengthened regional integration, support for the green economy transition, and efforts to enhance competitiveness through value chain improvements and workforce upskilling. 

Inflation, which hit almost 10 per cent in 2023, is anticipated to average well below the previous year’s level in 2024, thanks to the lagged effects of interest rate hikes. This, along with the government’s intent to reduce the fiscal deficit from 2023’s projection of 4.7 per cent to 3.4 per cent in 2024, signals a concerted effort to stabilise the economy and enhance fiscal discipline. 

Unemployment—15.2 per cent in 2022—remains high. Despite the recovery and continued government support to employers, employment growth is expected to pick up only marginally, with the annual unemployment rate declining to 15 per cent in 2023 and 14.8 per cent in 2024. 

IT is the economy’s fastest growing sector

Key sectors of the Macedonian economy include manufacturing, particularly automotive components and textiles. Manufacturing accounts for almost a quarter of GDP, and has long since overtaken agriculture, traditionally the most important sector of the economy, but which now accounts for less than eight per cent of GDP. 

The fastest growing sector of the economy however—with an annual growth rate of up to 15 per cent in recent years—is IT, both hardware and software as well as services. The US International Trade Association says that the IT sector in North Macedonia benefits from a skilled and cost-effective workforce with excellent English language skills, solid telecommunications infrastructure, and low corporate tax (10 per cent).  

In Emerging Europe’s latest IT Competitiveness Index, North Macedonia ranked 15th among the 23 countries of the region, up from 16th the previous year. It ranked second however in the number of IT students per capita. 

A national ICT strategy for 2023-2027 is aligned with the EU’s Digital Economy and Society Index (DESI) goals and sets clear objectives for government infrastructure, centralisation of ICT and e-government services, and the establishment of a digital transformation agency.  

Additionally, the government has created a 27 million euros hybrid investment fund that will focus on start-ups and innovative companies. 

German exposure 

Partially owing to its large automotive sector, the Macedonian economy has long been reliant on Germany—the destination for almost half of all exports.  

Fortunately, despite the country’s significant exposure to the German economy, there has been no significant indication of a German recession adversely affecting the North Macedonian economy, says the Vienna Institute for International Economic Studies (wiiw) in its latest forecast.  

Exports to Germany during the first five months of 2023 increased by approximately eight per cent year on year in nominal US dollars terms, while German investment in the country for the first half year surged by 62 per cent in nominal euro terms.  

Even the automotive industry, dominated as it is by German-owned companies, witnessed a substantial 10 per cent expansion in production during the initial seven months, when assessed in real terms.  

“While adverse effects may yet materialise after a time lag, there remains the possibility that German companies could expand their operations in North Macedonia in order to minimise production costs. That would have a positive impact on the local economy,” wiiw says. 

Political landscape: Towards the EU 

The political landscape of North Macedonia has been a significant factor in shaping its economic trajectory. The government, led by Prime Minister Dimitar Kovačevski, a social democrat in office since the beginning of 2022, has had to navigate through the aftermath of the pandemic, an economic and energy crisis, and the intricate process of EU accession negotiations.  

However, while the prospect of EU accession talks have been a beacon of hope for the country’s European integration aspirations, the constitutional amendments on which they depend, including the recognition of the country’s Bulgarian minority, are still pending in parliament, creating a sense of political uncertainty that could impact the pace of economic reforms and growth, the World Bank has warned. 

The country’s main opposition party, the nationalist VMRO DPMNE, is blocking the constitutional changes, citing a lack of clear guarantees from Sofia that Bulgaria will not block North Macedonia in its EU accession process in the future. 

On December 13, at the EU’s latest Western Balkans summit, Kovačevski nevertheless said that it was “inevitable” North Macedonia would become an EU member, and that his government remained “committed” to implement the constitutional changes required. 

Indeed, despite the challenges, North Macedonia’s commitment to reform and EU accession remains steadfast. The country’s strategic focus on managing the economic and energy crisis, coupled with the pursuit of EU-aligned reforms, is expected to foster a conducive environment for investment and economic expansion. 

However, perhaps a sign of growing frustration with the lack of movement towards membership, support for the EU in North Macedonia is falling, according to a recent opinion poll, which claimed that just 60 per cent of Macedonians currently support EU membership—the lowest level ever and 20 per cent lower than the figure for a decade ago. 

Furthermore, a separate poll suggests that fewer than a quarter of Macedonians support the constitutional amendments required to kick start the accession process. The litmus test will come at parliamentary and presidential elections, likely to take place in April or May.

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