Thewesternbalkans
The office the World bank made an assessment about the North Macedonia’s macroeconomic developments in 2023. The main conclusions are as follow:
- While the economy showed some resilience to crises, consumption is decelerating driven by the increased cost of living, while manufacturing struggles as external demand slows.
- Public finances are overstretched amidst a rise in borrowing costs. Fiscal consolidation needs to be prioritized to help accommodate new spending commitments on wages and public investments.
- Headline inflation is decelerating but is projected to remain high in 2023 and fall towards the long-term average by 2025. Yet, wage pressures may lead to protracted inflationary pressures.
- The medium-term outlook is positive, but downside risks prevail. Boosting growth and accelerating income convergence calls for much-needed reforms that are on halt due to a lasting parliamentary impasse.
The WB Report sad that the economic growth started decelerating in the second quarter of 2023. After growing by 2.1 percent in Q1 2023, output increased by only 1.1 percent on an annual basis in Q2 2023, led by private consumption while exports and gross capital investments fell as external demand slowed and stocks declined. Further, consumption eased to 1.6 percent (down by 1.1 pp from the quarter before) as continued high inflation and credit slowdown put a dent on household purchasing power. Overall, H1 growth turned at 1.6 percent compared to 3.1 in H1 2022. On the production side, output growth in H1 2023 was driven by services and industry, while construction and agriculture sectors continued to struggle. After a sharp increase in Q1, the construction output dropped by close to 22 percent in Q2.
High-frequency data point to a slowdown of growth in the third quarter of 2023. Industrial production declined by 1.8 percent in July as mining and manufacturing lost ground while energy production intensified. A reduction in the number and value of building permits issued by June can slow construction activity over the coming months, while real retail trade declined by 3.9 percent in July 2023. Tourism observed steady improvement over the summer season.
External sector imbalances eased. The current account deficit declined to 1.1 percent of GDP by Q2 2023, largely due to an improvement in the merchandise trade balance. With energy import pressures abating, the trade deficit shrunk by more than 6 percentage points (pp) to 20.5 percent of GDP. At the same time, the services surplus softened to 4.8 percent of GDP owing to outlays for public infrastructure works. The primary income deficit remained broadly unchanged despite a rise in interest payments, while the secondary account surplus stood high supported by solid remittances. FDI inflows decelerated to 4.7 ercent of GDP but financed the CAD and increased gross foreign exchange reserves. Gross external debt declined to an estimated 76.9 percent of GDP by March 2023.
Despite sizeable government support, structural labor market challenges persist. In Q2 2023,12 the participation rate slightly increased to 52.4 percent compared to a quarter earlier. However, the female participation rate, at 42.5 percent, remains 20 pp lower than that for men. Care for children and the elderly is cited as one of the primary reasons for inactivity of women but firms in North Macedonia are least prepared in the region to offer child-care benefits or flexible working arrangements.The employment rate increased by 0.4 pp to 45.5 percent, while the unemployment rate declined to 13.1 percent, on account of more jobs for the younger cohort and the exit to inactivity of the older cohorts. The youth unemployment rate declined to 25.6 percent, still significantly higher than the EU average.
Sustained wage growth has outpaced inflation since April 2023. Wage growth was registered in all economic sectors in the first half of the year, led by a mandatory rise of the minimum wage. For construction, administrative and education workers wage growth was above average. Wages are set to rise even further as the Government signed a new collective agreement for the public sector that includes: a 10 percent wage increase as of September 2023; a revision to the wage-setting methodology in 2024 linking the base wage to the national gross wage; an annual leave bonus at 30 percent of the average net wage; and loyalty bonuses.
Headline inflation decelerated to single digits in June 2023 after reaching 19.8 percent in October 2022. Global pressures abating, monetary policy tightening, The Q1-Q2 2023 data are not fully comparable to previous labor data due to methodological changes and the revision of the sample based on the 2021 census. All figures are on a quarter by quarter comparison.
The government support measures to control the prices of basic food products helped to contain the rise in prices responsible for half of the inflation increase in the first half of 2023. As food prices and energy prices eased, the inflation rate slowed to 8.3 percent in August 2023. However, second-round and spillover effects have kept core inflation high at around 8 percent. Inflation expectations measured in Q2 2023 stand at 9.3 percent for 2023, despite a mild improvement relative to the previous survey round from Q1 2023.
Monetary policy tightening continued as inflationary pressures persist. By August 2023, the central bank had raised the key policy rate to 6.15 percent up from a historical low of 1.25 percent before the beginning of the tightening cycle in spring 2022. The NBRM also aimed to bolster the denarization process in banks’ balance sheets through raising the rate of mandatory reserves for foreign exchange liabilities from 19 to 20 percent. The pegged exchange rate has remained stable and FX reserves have recovered from losses incurred largely at the outbreak of the war in Ukraine, standing at more than 4 months of imports in June 2023. The stability of the banking sector was preserved with an increase in the capital adequacy ratio to 18 percent in Q1 2023 despite a drop in the liquidity rate to 19.1 percent that remains adequate. At the same time, the nonperforming loans ratio declined to 2.8 percent.
Credit growth slowed to 5.8 percent in July 2023 largely due to reduced borrowing by firms as financial conditions worsened.
Fiscal pressures continued. The public deficit in 2023 is likely to remain as high as in 2022. The general government deficit (with the Public Enterprise for State Roads finances included) is projected at 4.8 percent of GDP in 2023 after the budget technical reallocation that is needed to accommodate new wage spending commitments. The fiscal implications of the public sector collective agreement are estimated in the order of 0.7–0.8 percent of GDP on average per year and add to the earlier minimum wage adjustment and an upward correction of public officials’ wages.
By June 2023, the general government deficit reached an estimated 2.6 percent of GDP as VAT revenues declined while investment and social spending went up. At the same time, the collection of profit tax revenues increased as some of the TIDZ firms graduated from the tax exemption scheme. The recent adoption of the solidarity tax as well as CIT and VAT reforms will slightly ease the pressure for Q4 2023.
Public and publicly guaranteed and nonguaranteed debt stood well above the precrisis level. At 59.1 percent of GDP in June 2023, public debt is 10 pp above the level in 2019. Inflation helped reduce somewhat the debt-to-GDP ratio, but nominal public debt continues to rise. Expenditure arrears remain consistently above 3 percent of GDP, largely due to state-owned enterprise, health sector, and local government nonpayment. As part of the PLL arrangement with the IMF, the Government has committed to reduce payment arrears to the private sector.
The WB Report outlined following risks:
The medium-term outlook is positive, but downside risks prevail. Growth in 2023 is expected to increase modestly by 1.8 percent, reflecting a slowdown in the country’s main trading partners as second-round effects from the war in Ukraine took force. Growth is expected to moderately accelerate in the medium term led by the rise in public investments and recovered consumption before slowing towards the potential growth trend thereafter. Public debt is expected to increase over the medium term owing to the Corridor VIII and Xd highway sections and wage spending commitments. Fiscal deficit is projected to drop below 3 percent of GDP only from 2027.
As commodity prices ease, the inflation rate is projected to decelerate to the long-term average by 2025. Assuming that the impact of crises subsides over the forecast horizon, inflation is estimated to decline to 9.1 percent in 2023 and to fall to the long-term average of2 percent by 2025. Tightening monetary policy is expected to continue over the near term but to gradually ease as underlying price pressures subside.
While underlying risks remain largely skewed to the downside and reflect the outlook for the country’s main trading artners, moving ahead with EU accession negotiations may accelerate critical reforms and unlock growth. However, heightened political uncertainty and a prolonged parliamentary impasse due to lack of consensus for constitutional changes and upcoming parliamentary and presidential elections in the first half of 2024 may delay reform implementation. Finally, policy slippages may weaken fiscal sustainability and strengthen inflation persistence in turn requiring additional monetary tightening that can further restrict financing options and decelerate economic activity going forward.
Overlapping crises have scarred the growth potential and further slowed convergence with the EU. Moving from middle- to highincome status requires following up on pending reforms and addressing critical impediments for future growth. Policy actions need to be geared to rebuild buffers and reduce vulnerabilities to future shocks. Boosting productivity, advancing on inclusion, and enhancing fiscal and environmental sustainability are critical for long-term steady growth in the context of pronounced and widespread uncertainty. Decarbonizing the economy and building resilience to climate change shocks is needed to maintain international competitiveness ahead of the EU Cross-Border Adjustment Mechanism implementation. Increasing productive capital expenditures as a share of the medium-term budget while maintaining fiscal sustainability would be crucial for boosting growth.
Comments: In 2023, the economy of the Republic of North Macedonia continued to develop in the conditions of recovery from COVID-19 and in the new geopolitical situation in Europe provoked by Russia’s war in Ukraine. However, it should be noted that the Macedonian economy maintains its stability and the forecast is for moderate growth. The expectation is that with the progress of the integration processes in the EU, external investments will increase, mainly from EU member states, which in turn will lead to stability and predictability of the country’s economy, regardless of political turbulence.
