North Macedonia

major macro economic indicators

(e): Estimate (f): Forecast  

RISK ASSESSMENT

Growth still highly vulnerable to the pandemic

The economy began to recover in the second half of 2021 and is expected to continue to do so in 2022. Domestic demand (89% of GDP in 2019) should contribute the most to GDP growth. Vaccination campaigns in 2021 rekindled optimism among households, whose consumption is expected to continue to grow in 2022, albeit at a slower pace. Unemployment is falling slowly but steadily (16.4% in 2020, 15.8% in 2021), and fiscal responses have prevented it from increasing, although weak labour market participation (56%) remains a major structural problem. Private investment (34.5% of GDP with FDI in 2019) plummeted in 2020 due to the crisis and is not expected to return to pre-COVID-19 levels by 2022. The economy remains extremely vulnerable to new variants, as the vaccination rate was only at 35% in October 2021. The tourism sector (6.8% of employment and 6.6% of GDP in 2019) is suffering as a result, and its return to a normal level of activity will be slow. Public spending (36.7% of GDP in 2020) is expected to remain high, exceeding pre-crisis levels, due to the continued fiscal response to the pandemic and infrastructure projects (continuation of the Corridor 8 rail and road project, gas pipeline with Greece). The trade deficit will make a negative contribution to growth in 2022.

  
The central bank (NBRNM) continues to pursue an accommodative monetary policy, with a rate of 1.25% in September 2021, supporting access to liquidity and credit. Inflation accelerated in 2021, largely owing to higher energy, food and transportation costs. It is expected to decline in 2022.

Twin deficits deteriorate

Continued support measures in response to the pandemic contributed significantly to the government deficit in 2021. In 2022, the deficit will be reduced as these measures are gradually phased out. Fiscal consolidation should further cut the deficit in the medium-term, although these efforts are hampered by tax evasion linked to the informal economy (estimated at between 30% and 40% of income and 18% of employment), and shortcomings in tax administration and the labour inspectorate. Budget deficits in recent years have increased the public debt, which is expected to rise in 2022. Most of the public debt is external (75%) and denominated in euros, but the credibility of the NBRNM, which guarantees the peg to the euro, lessens the exchange rate risk. The NBRNM has additionally signed financing agreements with the ECB and could access EUR 400 million if necessary. Private external debt is also substantial, representing 40.5% of GDP, although a portion of this corresponds to FDI-related intra-group loans.

 
Regarding the external accounts, the current account deficit narrowed in 2021 as official remittances from expatriates increased due to travel restrictions and the recovery in host countries, which offset the traditional trade deficit (17% in 2021) to a larger degree. This trend is expected to continue in 2022, with the upturn in tourism and continued brisk growth in road transport counteracting the trade deficit, which reflects the country's productive structure, in which capital and consumer goods must be imported. The deficit should be largely financed by FDI (about 3% of GDP), which are recovering. Foreign exchange reserves have increased marginally and, in June 2021, represented the equivalent of more than one-quarter of GDP, or four months of import coverage.

EU membership is a long way off

Early parliamentary elections in July 2020 saw a narrow victory for the coalition of the Social Democratic Alliance of Macedonia (SDSM) and the Albanian party BESA. In the October 2021 local elections, the nationalist opposition party VMRO-DPMNE, the second-largest party in the country, won more mayorships than the SDSM. This could weaken the ruling coalition, which holds only 62 out of 120 seats in parliament, before the next elections in 2024. Prime Minister Zoran Zaev resigned following the defeat.

 
The government continues to indicate the country's willingness to join the European Union. In addition to becoming the 30th member state of NATO in March 2020, North Macedonia reached a political agreement to begin accession negotiations. In November 2020, Bulgaria blocked the start of talks because of cultural and historical disputes between the two countries.

 
Pending the start of negotiations, Serbia, Albania and North Macedonia have created an Open Balkan zone, which builds on the Mini-Schengen initiative backed by the European Union and the United States. The zone, which is to be implemented by 2023, provides for greater freedom of movement for goods and people, including in the labour market, and the lifting of border controls.

Last updated: February 2022