One Crisis on Top of Another – the case of North Macedonia

By Zoran Jovanovski, Economist/Banker

Key challenges

As everywhere in the world, it all started to deteriorate with the COVID-19 pandemic. Pre-pandemic real GDP growth of 3.9 percent in 2019 turned into negative real GDP growth of 6.1 percent in 2020. Economic recovery started in 2021 but it did not offset fully the decline from the previous year as the real GDP growth in 2021 equaled 4 percent. In 2022, economic growth amounted to 2.4 percent and 2.8 percent in the first and second quarter, respectively. Given the fact that the impact from the energy prices spike started to materialize in the real sector operations, it is not very likely at this moment that the real GDP growth of 3.2 percent, as projected by the finance ministry, will be achieved in 2022.

There are several challenges that the companies currently face. The initial challenge, the COVID-19 pandemic, has been largely dealt with. The situation with the inflation is different. In July 2022, it reached 16 percent compared to July the previous year, while on average for the first seven months of 2022 compared to the same period of last year it amounted to 10.9 percent. The increase in inflation reflects mainly the increase in the energy prices, an unavoidable input in the cost structure of companies’ products or services, but is also due to the wage pressures arising from the increase in the minimum wage. The key challenge for the National Bank is how to slow down the inflation and prevent a buildup of longer-term inflationary expectations while at the same time not hurting excessively the recovery of the economy. Within this framework, the National Bank increased the key interest rate on several occasions, bringing it up from 1.25 percent in March 2022 to 2.5 percent in August and is keeping it unchanged in September 2022. The transmission mechanism of the monetary policy has not translated this increase into a sizeable increase of the commercial banks’ lending interest rates, indicating mostly their cautiousness not to burden too much and too fast their borrowers. The most harmful challenge, as is the case almost all over the place, is the energy crisis. The energy crisis has the potential to turn into an existential crisis for the companies, which is why a number of them are putting their operations into survival mode. The problem is of longer-term nature and finding very effective solutions promptly is rather difficult.

Looking for solutions, the companies anticipate that the energy prices will start to decline eventually, but not to the levels present before the war in Ukraine. Hence, there is a need for lasting adjustments to their business models. That is why the companies are increasingly focusing on installing photovoltaics as a source of electricity. The government has eased and simplified somewhat the relevant procedures but further actions are needed in that respect.

For the time being, the government also provides subsidies, but they are directed to the households and small companies. Room for fiscal maneuver to alleviate the impact on the economy is limited. Before the Covid-19 pandemic, at the end of 2019 public debt equaled 49.2 percent of GDP, and reached 55.4 percent at the end of June 2022. It may turn higher if the projected economic growth for the year is not achieved. For budget deficit financing in 2022 the government has announced that it is considering a combination of foreign borrowing, including borrowing from the IMF, new Eurobond issuance, etc.
The banking sector remains solvent, liquid and well capitalised to provide support to the companies and households in need.


Given the complex geopolitical context, the starting point when considering the future is the issue of security. NATO membership has provided the much needed security umbrella for the country. Another major development for the country is the process of EU accession negotiations. Throughout the unprecedented 17 year-long candidate country status, the country made a great effort to adopt the EU regulations in a number of areas. These efforts will accelerate in the period to come thus simplifying and easing the entrance of FDIs, while at the same time minimizing the costs for their regulatory adjustment. The local companies will also strengthen their resilience within their preparation for the competitiveness pressures arising from joining EU. The government’s goal is that the country joins EU by 2030.

Developments that will gain importance as time passes by are the initiatives for regional economic integration and development. There are several regional initiatives that are aiming at improving the economy of six Western Balkan countries. One of the most popular of them is the so-called Berlin Process. This is a structured effort, supported by EU, in which Chambers of Commerce play important role through the specially designed Chambers Investment Forum.

The most recent initiative, however, is the Open Balkan initiative. It is still of limited reach compared to other initiatives as it includes only North Macedonia, Serbia and Albania for the time being. The Open Balkan initiative has at least two very specific characteristics. Firstly, there is full compatibility between the views of the political leadership and business leaders. They are following a common sense approach trying to maximize the benefits for the three economies from their economic integration. Secondly, unlike some other initiatives in the past, Open Balkan is focused on delivering tangible results. The agreements signed by the three governments aim at facilitating a faster border crossing of goods, free flow of labour force, easing of administrative procedures, recognition of university diplomas, attracting FDIs as a region, etc.
It is envisaged that the citizens of the three countries may get an Open Balkan ID number that will allow for easy movement of people and an opportunity to work in any of the three countries without lengthy administrative approval procedures, while having all the rights as the local workers. Overall, the economy of North Macedonia faces a bumpy road ahead, primarily because of the energy prices. What gives a ray of hope in the period to come is the notion that the private sector in the country has faced quite a number of serious challenges in the last 31 years of the country’s independence and managed to find solutions and survive. It will be very difficult, but this is not the first time.

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