North Macedonia

major macro economic indicators

(e): Estimate (f): Forecast  

RISK ASSESSMENT

Modest growth driven by investment

The economy is still expected to grow modestly in 2023, in line with domestic demand, its main driver (91% of GDP in 2021). Household consumption (77% of GDP in 2021) will contribute modestly to GDP, due to continued inflation. Although inflation is expected to fall below the double-digit mark in 2023, it will remain well above the 2021 and pre-pandemic level and will exceed the increase in net wages (despite a sharp increase in 2022). As a result, real wages will be negative and the loss of household purchasing power will drag on consumption. Prevailing uncertainty related to the global economic and political context will keep household confidence in negative territory, which will damp domestic demand. The central bank's monetary policy (NBRNM) tightened following the inflation that occurred in 2022: the key rate rose from 1.25% to 4.75% after several rate hikes. The central bank has not announced a possible rate cut for 2023: to continue the fight against inflation and maintain the peg to the euro, the NBRNM will have to tighten its policy given that than the European Central Bank (ECB) is likely to have to do the same. Private investment (35.9% of GDP in 2021, with FDI) should still be the main contributor to growth, despite weaker momentum than in 2022 due to a slowdown in flows from Western Europe, the country’s main investor. Last, net imports will drag on growth.

Improved current account deficit and budget balance

The current account deficit will decrease in line with a slowdown in household demand for imported goods, but also with lower imported energy costs. However, the recovery in exports will be affected by lower demand from trading partners, particularly Germany which accounted for 47% of exports in 2021. The slight increase in expatriate remittances will also reduce the current account deficit, but they will still not be able to match the considerable trade deficit. The services surplus is expected to increase thanks to the continued recovery of tourism.

The government intends to continue its fiscal consolidation policy. The 2023 budget plans to reduce the deficit to 4.6% of GDP, notably by increasing tax revenue, but also by cuts in public spending. The revenue increase should take place in particular through amendments to tax laws adopted at the end of 2022. While the law on private income abolished the progressiveness of the tax that was due to be levied from the beginning of 2023, legislation targeting company profits and VAT includes measures aimed at abolishing exemptions for certain categories of companies or reducing the products considered as basic necessities. With regard to expenditure, the government has indicated that it wants to better target household support measures, in particular those taken in 2022, to combat inflation. At the same time, a larger part of the budget (51.8% more than in 2022, 15% of the total budget) must be devoted to capital investments on infrastructure projects. Over the longer term, the government's priority is to boost growth by improving education and labour productivity. Investment in human capital has been cited as one of the government’s five main objectives.

One step closer towards the elusive EU

The government continues to demonstrate its resolve to join the European Union. In addition to becoming the 30th member state of NATO in March 2020, a political agreement was reached to start EU membership negotiations. In June 2022, Bulgaria lifted its veto on the candidacy of North Macedonia, in force since November 2020 prior to an agreement with the latter. In July 2022, after daily demonstrations, the “French proposal” was approved by the Parliament of North Macedonia, with 68 votes out of 120 seats after the opposition left the room and failed to vote). Under the agreement, North Macedonia must recognise the existence of a Bulgarian minority in its Constitution, while Bulgaria is not forced to recognize the Macedonian language which it considers a dialect of Bulgarian.

The inclusion of this measure in the Constitution implies a two-thirds majority in the Macedonian Parliament, which is not currently the case. Political tensions remain within the country, between the supporters of a rapprochement with the EU, and the opposition, for whom the acceptance of the French compromise means the destruction of the identity of the Macedonian people. In this context, the leader of the opposition party, VMRO DPMNE, Hristijan Mickoski called a snap election in early January  to be held in May 2023, instead of 2024. A month earlier, the country's President, Stevo Pendarovski, qualified the situation as critical as citizens were losing confidence in local institutions and in the EU. In his opinion, accepting the proposal would not harm the Macedonian identity. He also called state institutions "weak" and "full of corruption", and believes that protests are likely to soon reignite.

Last updated: April 2023