The effects of the global economic crisis on
Macedonian economy:
Some macroeconomic indicators and future policy
recommendations
Elizabeta Tosheva, PhD
University St. Clement of Ohrid, Bitola
Faculty of Law – Kichevo, Republic of Macedonia (FYROM)
Abstract
The recent economic and financial crisis caused a severe blow to the fragile Macedonian
economy, halting the positive development trends in the last decade. This, has in turn,
intensified the future challenges.
The paper intends to analyze the impact of global economic crisis on the Macedonian
economy focuses mainly on the macroeconomic level, identifying and analyzing
fluctuations of major macroeconomic indicators that reflect the development and
macroeconomic balances of the economy, such as GDP, the level of employment,
inflation, budget deficit, public debt, etc. Secondary analysis of previous quantitative
data and published studies, combined with an own qualitative study in the field, has
provided a reliable and convincing basis for analysis.
The experiences and lessons taken from the global economic crisis should serve as a
basis for changing the current economic model with a new one in order the economy of
the country to catch a connection with the intense changes that are expected to occur
in the coming period. It is expected that creating new economic model in Republic
of Macedonia will result in multiple positive effects that primarily manifested in the
increasing number of newly small and medium enterprises, domestic investments,
industrial production, GDP, number of new employees and total exports as well as in
reduction of the trade deficit in maintaining macroeconomic stability of the country.
Keywords: Republic of Macedonia; economic crisis; unemployment; inflation;
budgetary deficit; policy recommendations
Introduction
Republic of Macedonia is a small, land-locked country of about 2 million people with a
multi - ethnic population1 in the middle of the Western Balkans. R. Macedonia was the
third poorest among the South East European countries in 2012.2 It is also the most
According to the 2002 census, the population consists of ethnic Macedonians (64 percent), ethnic Albanians (25 percent), ethnic
Turks, (4 percent), ethnic Serbs (1.7 percent), Roma (2.7 percent), and some other small minority communities.
1
2
National Bank of Republic of Macedonia
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open economy among its regional peers3, with an Openness index4 of 112 percent
over the past decade. Since 2002, the country’s exchange rate has been pegged to the
euro, which has successfully supported price stability, and inflation has averaged 2.5
percent over the past 20 years. It was among the first Western Balkan countries to gain
EU candidate country status in 2005, but it has yet to start EU accession negotiations.
The recent economic crisis caused a severe blow to the fragile economy and labour
markets of the Macedonian economy halting the positive development trends in the
last decade. The decline of economic activity in most neighboring states, the postrecession situation in Europe, the crisis in the euro zone, the debt crisis, the decrease in
foreign investment and the increase in energy prices seriously affected the Macedonian
economy. The Western Balkan countries are especially vulnerable to the effects of the
euro zone crisis because of the high degree of „euroization‟ (Bartlett & Uvalic, 2013). Almost
60% of the region‟s exports go to the EU, while the banking sector relies heavily on
euro zone finance. The economic slowdown in EU countries - the main recipients of
Macedonian exports weakened demand for exports and led to a drop in investment
and remittances (Panagiotou, 2012). As a result, GDP growth was marginally negative.
Due to the extremely high interdependence of the economy with those of the euroarea, the euro-crisis (and particularly the meltdown of the Greek economy) have had
extremely detrimental repercussions on the economy in terms of macroeconomic
performance, growth, FDI, trade flows, remittances etc.
There are several points that define the weakcondition in of Macedonia economy:
- The Eurozone crisis which resulted in declining exports and foreign investment;
- The blocked process of EU accession;
- Failed privatization processes of four large state-owned enterprises, due to weak
company fundamentals and difficult economic environment;
- Reduction of the credit growth as a result of the conservative credit policy of the
banks;
- High unemployment rate, of around 30%, especially among youth, of above 54%
(EBRD, 2013).
However, the country has made strong efforts in recent years to improve the business
environment and defy global trends by attracting much-needed FDI. These efforts
should help growth to pick up this year and beyond. Strong investment growth, fuelled
by public infrastructure projects and FDI boosted domestic demand in 2014, which is
expected to remain the only growth driver in 2015 and 2016. The government relaxed
its fiscal consolidation path, with targeted budget deficits declining less rapidly than
3
South East Europe refers here to Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Montenegro, and Serbia.
4
The Openness index is calculated as exports plus imports as a share of GDP.
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originally planned. While the rise in government debt is moderate, financing needs of
state-owned enterprises weigh heavily on the public debt level (European Commission, 2015).
Macedonia has managed to improve many dimensions of its business environment,
showing that it can be done in other countries in the region, too (World Bank and International
Finance Corporation, 2013). The country maintained its high ranking (30th) in the latest 2015
Doing Business report (World Bank Group, 2015).
This is the case of R. Macedonia in the context of the current economic and financial
crises, identifying and analyzing fluctuations of major macroeconomic indicators that
reflect the development and macroeconomic balances of the economy, such as GDP,
the level of employment, inflation, budget deficit, public debt, etc. Secondary analysis
of previous quantitative data and published studies, combined with an own qualitative
study in the field, has provided a reliable and convincing basis for analysis. The paper
highlights the need for the country to use opportunity to improve its investment
climates and reduce public debt, while simultaneously eliminating payment arrears in
the public sector - which will help improve financial discipline in the overall economy.
Economic Overview of Recent Macroeconomic Trends
As was discussed above, the economic situation in R. Macedonia in 2014 was
characterised by post-recession trends and deterioration in exports to Macedonia’s
traditional trading partners. Obtaining economic growth and protecting the population,
through reduction of inflation and measures for limitation of the unemployment
phenomenon, are considered priorities. Budgetary deficit and public debt are the
instruments the state can use to achieve these major objectives. The Maastricht
criteria of nominal convergence for public finance are no longer considered in the
short run, only in the medium and long run. In the context of the decline of the private
consumption, decreasing the current account deficit is another issue of these crises.
The general policy mix in Macedonia is sound, as it remained stability oriented while
trying to support the recovery. The prospects for growth are still higher than in most
of the other countries of the region. Fiscal policy was oriented towards achieving
the fiscal target, despite lower than expected revenue performance. The quality of
public finances has not improved significantly and the issue of high unemployment, in
particular among the young, remains a major policy challenge.
In the following section, we present fluctuations of the major macroeconomic variables
during the period 2007-2015.
GDP. Gradual recovery of global economy had positive transferable effects on the
activity in the Macedonian economy as well. Following the moderate drop in 2009
and 2012, real GDP increased by 2.2% in 2013 and coninues increasing in the folowing
year. The economy has recovered gradually, so GDP growth reached 3.8% in 2014.
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The renewed growth of the economy remains narrowly based on investment, with
only gradual strengthening of the external sector and marginal support from private
consumption (European Commission, 2014).
2007
6,5
2008
5,5
2009
-0,4
2010
3,4
2011
2,3
2012
-0,5
2013
2.7
2014
3.8
Kv.1
Кv.2
Кv.3
Кv.4
Кv.1
2014
2014
2014
2014
2015
3.3
4.7
4.3
2.7
3,2
Table 2.1. GDP (real growth rates in %) RM (2007-2015)
Source: National Bank of Republic of Macedonia, April 2015
According to the European Commission, Macedonia’s government remains supportive,
with plans for further infrastructure projects, and increases in entitlement spending,
relaxing its mid-term fiscal consolidation strategy. Investment activity, driven by public
expenditure on transport and energy projects, as well as the construction of new foreign
investment facilities, is projected to post further solid gains, even though growth rates
are slowing down to their long-term average. Household spending, benefitting from
sound fundamentals, is likely to firm up further, and set to become the main source
of output growth in 2015 and 2016. Domestic investment consumption and increased
production of new industrial capacities, in conditions of gradual recovery of export
demand and favorable trends in prices of metals on the global markets, contributed
for continuation of the trend of economic recovery. Macedonia’s GDP is expected to
grow by 3.8% in 2015 and by 3.9% in 2016. Further gains in domestic demand are
likely to set GDP growth at an even higher pace in 2015 and 2016, while the negative
contribution from net exports is expected to diminish (World Bank Group, 2015).
Inflation. The values of inflation rate in 2014 and estimated for 2015 and 2016 indicates
a stability of purchasing power of population in this difficult and very insecure period.
In 2013 and the inflation was relatively low and stable, ranging around 2,8% to -0,3%
in 2014. In a medium run, inflation will be under the influence of the changes in
global primary commodity prices, and the pace of economic activity in the domestic
economy. Global inflation factors in the medium term suggest moderate acceleration
of domestic inflation after its low level in 2014. In 2015, foreign inflation is expected
to reach 1.3% and in 2016, it is expected to increase moderately to 1.8% (NERP, 2015).
2007
2008
2009
2010
2011
2012
2013
Kv1
2014 2015
2,3
8,3
-0,8
1,6
3,9
3,3
2,8
-0,3
Table 2.2. Inflation rate (%) R. Macedonia 2007-2015
Source: National Bank of Republic of Macedonia, August 2015
-0,9
Kv2
2015
-0,3
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Figure 2.1. Inflation rate in Macedonia
Labour market. As for the labour market, certain positive dynamics was noticed,
which can be considered as a reflection of the recovery of the economy from the
global economic crisis. A prolonged economic downturn would add to the already
chronic problem of long-term unemployment (Bogetić, et al. 2012). Unemployment rate in
Macedonia, particularly youth and long-term unemployment, remained persistently
high, pointing to deep-rooted structural impediments in the labour market. There
was some gradual improvement in the official employment and unemployment rates.
Macedonia has made impressive progress in reducing unemployment (declining from
34 percent in 2008 to 28 percent in the third quarter of 2014), yet most jobs were
created in low-productivity sectors or in the public sector (World Bank Group, 2015). The
recorded employment creation derives, to a large part, from an increase in parttime and self-employed occupations and from a rise in public sector employment.
Overall, in spite of some incremental improvement in the official labour market
figures, labour market policy has had limited success in addressing the persistently
high unemployment. Structural challenges in the labour market remain to be tackled.
Kv1 Kv2 Kv3 Kv4
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2014 2014 2014 2014
37,3
36
34,9
33,8
32,2
32,1
31,4
31
29
28
28,4
28,2
27,9
27,6
Table 2.3. Unemployment rate (%) R. Macedonia (2005-2014)
Source: National Bank of Republic of Macedonia, April 2015
The sold of current account. The current account balance measuring the ratio between
imports and exports is very important for the future perspectives of the country, as
it indicates decreased confidence of foreign investors. Macedonia recorded a Current
Account deficit of 64.60 USD Million in April of 2015. Current Account in Macedonia
averaged -30.21 USD Million from 1998 until 2015, reaching an all time high of 107.80
USD Million in September of 2009 and a record low of -243.60 USD Million in November
of 2008.5 For Macedonia, the estimated value is 3.6 % over GDP, with 0.2 percentage
points higher than the average of the EU 27 (WIBF, 2013). The structural budget balance
5
State Statististical Office
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refers to the general government balance, cyclically adjusted for nonstructural
elements beyond the economic cycle. These include temporary financial sector and
asset price movements as well as one-off, or temporary, revenue or expenditure items.
2007
2008
2009
2010
2011
2012
2013
2014
-7,3
-12,5
-6,5
-2,1
-2,5
-3,1
-1,8
-1,4
Table 2.4. The sold of current account (% of BDP) (2007-2014)
Source: National Bank of Republic of Macedonia, April 2015
The main current account components register divergent movements. Trade deficit
is shrinks gradually, while the share of net inflows from private transfers in GDP
slowdown insignificantly. Trade deficit reduction is based on the expected faster growth
of exports compared to the growth of imports. Export performances of domestic
companies are largely conditioned upon the developments of external demand and
global prices, whose dynamics usually, and under current environment of disruption
of regular streams of global economy, is additionally clouded by uncertainty. Hence,
the developments of global economy are relevant risk factor to the developments of
the balance of payments of the Macedonian economy in a medium run. The stress
tests show that the expected external debt stabilization of the medium run, however,
is particularly sensitive to the shocks in the primary deficit of the current account and
in the economic growth (NERP, 2015).
Strong investment-related, and, gradually, also consumption-related import growth
is likely to lead to a slight deterioration in the current account, even though private
transfers are expected to remain stable (EC, 2015). On the other hand, it is a fact that the
number of exporting companies in the economy grows steadily, which should result
in export diversification and improvement of export performances in a medium run.
This would simultaneously contribute to higher resilience of the economy to external
shocks.
The public debt. Levels of public debt in R. Macedonia combined with the pressures
on public finance due to increased demand for social assistance and sluggish revenue
growth, further limit the fiscal space on the budget for further expanding infrastructure
investments. At the same time, country is still lagging behind in terms of its capital
stock, both private and public, so further investment is needed. The share of external
debt in total general government debt increased by some 6pp to 69,8% of GDP in
2014. Other indicators of indebtedness, such as debt servicing to exports, and interest
repayment to exports, continued to suggest low external indebtedness of the country.
However, projections point towards a further increase in external debt levels over the
next years, given the elevated financing needs of state-owned enterprises managing
public infrastructure projects, which are likely to be met by foreign commercial loans
(EC, 2015a).
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Kv1 Kv2 Kv3 Kv4
2007 2008 2009 2010 2011 2012 2013 2014 2014 2014 2014 2014
46,6
48,8
55,9
57,8
64,2
68,2
64,3
69,8
66
67,3
74,3
69,8
Table 2.5. External debt RM in % (2007-2014)
Source: National Bank of Republic of Macedonia, April 2015
Central government debt. Even though government debt in R. Macedonia is still at
a moderate level, but the increases over the last years give rise to concern. Central
government debt stood at 33.6% of GDP by the end of July 2013, compared to 27.8% at
end of 2011 (WIBF, 2013). Moreover, as the budget of the newly created public enterprise
for state roads was excluded from the central budget as of 2013, its debt is no longer
included in central government debt. Overall, fiscal governance and fiscal discipline
deteriorated and would benefit from the implementation of a medium-term strategy.
Between 2008 and 2014, R Macedonia’s public debt almost doubled, increasing from
23 % of GDP in 2008 to an estimated 45.8 % of GDP in gross terms by 2014 (or 40.8
% in net terms). By comparison, public debt in the SEE region averaged 52.7% in
2014. This increase in public debt was driven by sustained fiscal deficits at the central
government level and state-owned enterprise (SOE)-led investments (WBG, 2015).
Figure 2.2. Central government debt Republic of Macedonia as % of GDP
Source: http://www.tradingeconomics.com/macedonia/government-debt-to-gdp
FDI. The recent economic crisis has underscored the importance of a competitivenesssupporting economic environment for better enabling national economies to absorb
shocks and ensure solid economic performance (Penev, 2012).
So, the new set of measures was designed to facilitate the procedures for doing
business in the country, improve access to credit of micro enterprises and SMEs,
increase their liquidity, stimulate construction, increase privatisation of land, promote
employment in agriculture, improve tourism, promote export and reduce unfair
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competition. Inflows of foreign direct investment (FDI) averaged 2.8 percent of GDP
per year between 2009 and 2014 but are still low by regional standards (World Bank
Group, 2015). Between 2006 and 2013, net FDI on average amounted to 4.3 percent of
GDP, which is significantly below the regional average of 8.1 percent of GDP over the
same period. Backward linkages with local companies are limited, thus restraining
employment gains, net export growth, know-how sharing, and other spillovers from
the FDI. However, new FDI projects (especially in the automotive industry, mining,
and textiles and apparel) offer good opportunities for increasing linkages with local
companies (World Bank Group, 2015).
Poor institutional and physical infrastructure, relatively low market and labour
efficiency, as well as limited innovation and sophistication potential of the region are
serious limitations to the competitiveness (WEF, 2013). Skills, technology absorption,
capacity, institution building and the overall business environment will become more
important (Snoy, 2011). A closer look at the key aspects affecting the investment climate,
in particular the frail institutional and administrative framework, clearly indicates
that there is substantial room for improving the overall business climate to boost
investments and other economic activities, notably for involving the private sector in
infrastructure developments.
In the Table 2.6., we present SWOT analysis of the current economic situation on R.
Macedonia and its future threats and opportunities.
STRENGTHS
Moderate decline of GDP during the period of
crisis
Contracting current account deficit
General government debt the lowest in the
region
Low and contracting fiscal deficit
Level of competitiveness
Quality of regulations
Macroeconomic stability
Significant progress in the elimination of
barriers to market entry and exit
THREATS
Political crisis in the country
EU accession negotiations not yet opened
Underdeveloped non-banking sector
Legal system weaknesses: Judicial independence
Brain drain
WEAKNESSES
High exposure to the Eurozone crisis
Growing external debt
Capability for innovation
High unemployment rate
Rule of law
Market size
OPPORTUNITIES
EU candidate status
Level of trade liberalization
Level of price liberalization
Private sector share in GDP
Competition policy
Table 2.6. SWOT analyses - R. Macedonia
Source: Author calculations
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Chalenges to Economic Growth
Despite the fact the Republic of Macedonia has accomplished a lot in terms of
attaining economic growth, there are still number of challenges remaining in future.
The Government of the Republic of Macedonia has identified all challenges to the
economic policy in the coming medium-term period:
- reducing unemployment rate, as the most burning issue to the Macedonian
economy, and
- realizing economic growth rates by increasing production with higher added
value and diversifying and expanding the export to the end of strengthening
competitive position of the country and the Macedonian companies globally
(Ministry of Finance of the Republic of Macedonia, 2015).
Current macroeconomic climate and external macroeconomic risks for the Republic
of Macedonia as a result of the turmoil on the global markets and the debt crisis in
Euro zone impose the need to accelerate the process of implementation of accession
criteria (Copenhagen Criteria), so as to increase economic growth and both domestic
and FDIs, as a condition for job creation. That is why increase of economic growth and
unemployment reduction, as precondition for increased living standard and better
and quality life of the citizens in the Republic of Macedonia, is considered as a top
strategic priority of the Government of the Republic of Macedonia.6
In order to respond to the challenges to realise the top strategic priorities, the country
remains committed, in the coming medium-term as well, to implement the structural
reform agenda in all aspects of the economic life. Realisation of these reforms will
mean success in implementing the model of economic development based on
competitive and integrated economy, providing equal opportunities for all by realizing
the following economic objectives: macroeconomic stability, higher economic growth
and job creation.
Such model, taking into account the particularities and the priorities of the Republic
of Macedonia for full integration and real convergence with the EU, is based on the EU
Strategy for fast, sustainable and inclusive economic development, known as “Europe
2020” Strategy.
Key reform areas: Taking into account the identified priorities and challenges to the
economic policy, following are key areas in the structural reform agenda: continuous
improvement of the business environment, support to entrepreneurship and SMEs,
as main promoters of dynamic economic growth and unemployment reduction,
promoting human capital and ensuring stronger link between supply and demand
on the labour market and increased export support and promotion. In addition,
The Parliament of the Republic of Macedonia adopted the Operating Programme of the Government of the Republic of
Macedonia (2011-2015) on 29th July 2011.
6
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economic policy focuses on implementing reforms to create efficient, effective and
professional public administration, strengthen legal safety and supervisory capacities
of the regulatory bodies, as well as increase productivity in agriculture.
Future Policy Recommendations
Tackling structural problems in the economy will require a significant improvement in
institutional capacity in the field of economic policy formulation and implementation.
The transparency and quality of public financial management remain a concern.
Unemployment is still high despite a marginal decrease in the second quarter of
2014. Some specific measures have been adopted to tackle youth unemployment as
part of the country’s Unemployment policy, but their effect is yet to be seen. The
public sector remains the main employer. Labour market participation remains very
low, especially among women and young people. The national budget for active
employment programmes and measures has somewhat decreased in 2014 however,
and is not sufficient to meet the needs of the labour market. Little progress was made
on the long-term process of modernising the Employment Service Agency. Some steps
were made by the Ministry of Labour and Social Policy responsible for fighting informal
economy in order to reduce the level of undeclared work. Recent educational reforms
in Macedonia were mainly based on the premise that the country has a comparatively
low level of human capital, and that improving the educational attainment of the
population would bring greater productivity and growth (Arandarenko & Bartlet 2012).
Small and medium-size enterprises (SMEs) participate with 99% in the total number of
enterprises and absorb the largest part of the working force (79% of the total number of
employees are in SMEs) implying that SMEs are significant participants in the economy.
Taking into account their significance in the increase of the economic growth and the
reduction of the unemployment as a structural problem of the Macedonian economy,
one of the basic priorities in the following period presents the increased support to
the entrepreneurship and to SMEs through improvement of the business climate,
facilitation of the access to capital and other activities. Financial sector vulnerabilities
are a particular concern, given that the vast majority of the banking system is foreignowned and that most countries rely on funding from abroad (Penev, 2012).
The new economic model of the R. Macedonia should be based on: recovering the
labour market and reducing the number of unemployed, in particular by better
matching skills with demand (EC, 2015a); improving the management of public finances;
developing public spending schemes and further enhancing structural reforms;
further attracting exports and foreign investment, further reducing the public debt
and decelerating levels of FDI. Fiscal policy needs to be aligned with the country’s
structural reform priorities. A medium-term fiscal framework, multi-annual budgeting
and strategic planning, as well as effective public financial management are required.
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In the coming medium-term period, macroeconomic policy should be focused on:
- Further business climate improvement and creation of equal opportunities for
economic growth and development of all participants in the economic processes,
tax and customs policy aimed at supporting development of economic entities,
encouraging investment activity and attracting FDIs, developing human capital
and economic infrastructure of the country.
- Encouraging the as-yet-fragile economic recovery and supporting economic
growth; consolidating fiscal policy; balancing national budgets, solving liquidity
problems and problems connected with national currency fluctuations. Special
attention must be paid to reducing unemployment and increasing the number of
new jobs (Jeleva, 2012);
- Supporting the modernisation efforts of the country, including structural reforms
in all the respective areas, but also strengthening the main domains of democratic
development such as the rule of law, good governance, political consolidation
and ethnic tolerance;
- Removing obstacles to regional cooperation and stability and supporting the
multilateral dialogue on pressing issues;
- Improving communication with the business community in the country in order to
improve the business environment, entrepreneurial climate and competitiveness;
Conclusions
Objectives of the macroeconomic policy of the R. Macedonia in the coming period
should remain focused on maintaining macroeconomic stability and supporting
Macedonian economy by conducting prudent fiscal policy with reasonable and nondistortive rates of budget deficit and government debt under the Maastricht criterion,
improving the quality of public finance, mainly by intensifying capital investments
aimed at improving infrastructure and physical capital, hereby supporting the policy
of stable Denar exchange rate and maintaining low government debt.
Economic recovery continued in 2015 and financial stability was preserved, but
unemployment, especially among youth, remained very high. Fiscal discipline as well
as transparency and quality of government spending deteriorated. The Macedonian
economy remains well advanced and made some further progress towards the
establishment of a functioning market economy. To cope with competitive pressures
and market forces within the EU, in the medium-term, the country needs to implement
structural reforms. These include public finance management, multi-annual budgeting
and strategic planning. Prospects for growth and employment depend largely on the
development of the domestic private sector. To support this, there is a need for further
improvement of the business environment, including access to finance.
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