Macedonia Economy Facts

Economical overview

Northern Macedonia is one of Europe’s poorest countries with high unemployment and a large proportion of the population who are outside the formal economy. A domestic political crisis caused growth to fall below zero in 2017, but the curve has subsequently turned upwards again.

Although progress has been made since independence in 1991, poverty is still widespread (see Social conditions). Many residents depend on money from relatives working abroad or on income from the extensive informal sector, which is estimated to account for between 20 and 45 percent of GDP. While the official unemployment rate has steadily declined, it is still among the highest in Europe at over 20 percent – and for young people nearly 50 percent.

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The industry’s share of GDP fell sharply in connection with the disintegration of Yugoslavia. More recently, it has increased and is approaching a third of GDP. Agriculture accounts for just over a tenth and the service sector for the rest.

During Yugoslavia, Macedonia was the poorest of the six sub-republics and completely dependent on the support of richer regions. When the subsidy system collapsed in the disintegration of Yugoslavia in the early 1990s, the Macedonian economy was hit hard. The loss of production for the industry was particularly large, especially for the food, textile and tobacco industries.

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The 1991–1995 war, the international sanctions against ex-Yugoslavia, and the 1994–1995 trade boycott of Greece due to the name conflict (see Modern History) further undermined the Macedonian economy. Foreign trade shrank sharply when traditional trade routes were cut. After a slight upturn in the late 1990s, the 1998–1999 Kosovo War, with subsequent large refugee flows to Macedonia, razed the economy. Subsequently, the economic development of the internal conflict between Macedonians and Albanians was hampered in 2001, as defense costs increased, tax revenues decreased and the budget deficit rose rapidly.

After independence in 1991, the country turned to international lending institutions for help. The IMF lent money towards promises of agricultural reform and privatization in industry as a step towards market economy. A austerity program to reduce government spending was launched and measures were put in place against galloping inflation. A central bank was formed to control the new currency, the denar. It introduced VAT in 2000, made cuts to the state administration and promised the IMF to sell out state-owned large companies. Together with the World Bank, the EU and individual member states were also important donors.

The reform program came to an end during the crisis years, but after 2003 some clearing could be discerned. In 2008, GDP growth was noted at 5 percent and the budget deficit had decreased. The denier was now stable and tied to the euro. Tax collection had improved, which gave the state increased income. But at the same time, so far low inflation rose alarmingly fast and the current account deficit was large (imports were larger than exports). Despite the relief for companies in the form of reduced bureaucracy and reduced taxes (a so-called flat income tax for both businesses and private individuals of 12 percent was introduced in 2007 and was reduced to 10 percent the following year), foreign investment and the number of new jobs did not increase rapidly enough. The reason was, among other things, problems with widespread corruption and a defective judicial system. The uncertainty about a future Macedonian EU membership also affected investors. Similarly, the infrastructure, such as roads and electricity supply, and others, had major shortcomings.

After a downturn due to the 2008 international financial crisis, the economy recovered and growth accelerated. Among other things, the government allowed a number of so-called economic free zones to be erected, with special relief for the companies. It invested heavily in attracting more foreign direct investment, which was partially successful, and also made large state investments in a number of agricultural and construction projects, including Skopje in 2014. This helped to reduce the high unemployment rate somewhat.

But the good results were partially eaten up by the euro crisis in 2012, although Northern Macedonia was one of the countries that performed best. However, the large government investments have largely been made with borrowed money. A large part of the large foreign investment promised by the government (especially in connection with elections) has been absent, as have the job opportunities that would follow. Turkey is the country that has invested most in Northern Macedonia, followed by Germany, the United States, the United Kingdom and Italy.

A few years after the euro crisis, the political contradictions within the country (see Modern history) grew, resulting in repercussions, not least when foreign investors pulled their ears. This led to negative growth in 2017, but after the new election that year, the situation has stabilized.

FACTS – FINANCE

External debt

US $ 8,566 million (2017)

Currency

Macedonian denar

Main export goods

catalysts, electronics, vehicle parts, iron and steel, textile products

Largest trading partner

Germany, Serbia, UK, Greece, Bulgaria

Macedonia Economy Facts

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