Form CH@WORLD: A754 Embassy of Switzerland in Skopje Country: Republic of North Macedonia Last Updated: June 2021 North Macedonia – Economic Report 2020 0. Executive Summary North Macedonia as a market is generally of limited interest for Swiss exporters given its relatively small size. For Swiss investors and importers, however, the country offers opportunities in sectors such as textile, adventure tourism, automotive industry, light manufacturing and ICT. Overall, the conditions for Swiss firms to do business in North Macedonia are favourable. Still shortcomings in the rule of law and political uncertainties are challenges that Swiss firm’s encounter. In 2020, North Macedonia faced an economic recession as a result of the impact of the COVID-19 crisis, leading to job losses in certain sectors and a decrease in imports, exports, as well as the inflow of foreign direct investments (FDI). However, the measures of the government helped to reduce the impact of COVID-19 and certain sectors are expected to recover quickly while in others such as textile and tourism it may take longer. 1. Economic Problems and Issues1 In 2020, the Republic of North Macedonia was experiencing the deepest recession year since its independence. The year started with indicators for moderate growth but took a sharp downturn as the COVID-19 crisis emerged and imposed restrictions that affected almost all sectors of the economy, the services sector in particular. The first 3 quarters of 2020 mark a real decrease of 5.9% of the GDP, which is in accordance to the projected expectations and predictions of the National Bank of the Republic of North Macedonia. The economic activity in the last quarter, however, showed signs of an overall moderate influence of the health crisis on economic outputs of the country. With the starting of the vaccination process, the optimism and expectations amongst the economic operators started to return, particularly for the global growth in the medium term. Still, there is a high level of uncertainty, in particular with the development of the pandemic. In order to mitigate the effects of the pandemic, the Government intervened, which helped to prevent job losses but also increased the fiscal pressure as the public debt increased rapidly, reaching 65.2% of the GDP. Nevertheless, there were job losses in transport and storage, agriculture, energy, real estate, tourism and construction. Workers in the textile industry, being an important sector in the manufacturing sector with more than 37'000 employees, were also affected by the pandemic crisis. However, they managed to partially soften the affects by quickly shifting to production of protection masks and other protection equipment. The exports in this sector were also reduced to almost 11%, industrial production was reduced to almost 14%, which is identical to the job losses percentage. At the same time, employment in several other sectors, like ICT, health education, trade, professional services, mining and manufacturing, in fact rose. In general, according to the International Labour Organization (ILO) amongst the sectors most affected by COVID-19 in North Macedonia are: tourism, hospitality, transportation, warehousing and construction. According to a study by “Finance think” most sectors in 2021 might not return to the same economic performance as before COVID-19. However, certain sectors, especially export-oriented ones for example the automotive industry, might recover quickly, although there are exceptions in this respect, such as the textile industry and tourism, sectors that may take longer to recover. Because of a drop in external demand and consequently a drop in economic activity, exports and imports declined. Furthermore, as a result of travel restrictions, there were fewer exports of services and less expenditures due to limited visits of the diaspora. This was partially compensated by bank and cash transfers from individuals in the diaspora to their relatives and personal network. External funding needs 1 Data: National Bank of the Republic of North Macedonia 1 were met through the successful issuance of a 700m EUR Eurobond but, the decline in FDIs inflows also left a financial gap that forced the Government to request a EUR 550m assistance from the IMF, the World Bank and the EU. A recovery in transfers and export of services should contribute to narrowing of the current account deficit in 2022-23 to more sustainable levels. Particularly having in mind that the rollout of vaccines is not going at the desired speed for many countries and is not expected to take place on a significant scale even towards the end of the year and, consequently, a return to normality not before late 2021. However, there are encouraging signals from private consumption and investment. Consumption - on the basis of retail activity -, shows symptoms of recovery faster than expected, thus underscoring the resilience of the services sector. Investments were also made, propelled by the German auto industry, which takes almost half of the country's exports. However, investment growth is expected to be constrained in 2021 as well, despite the rock-bottom interest rates and favorable lending conditions. Since the business confidence took a major hit in 2020 and until the global economic gathers pace, industrial capacities will continue to run on existing capacity and this will deter large scale investments. On top of everything, there are other factors that impede recovery and development. These are: 1) political instability; and 2) the delay of the EU accession negotiations. The first is due to the tiny majority of the government coalition in the Parliament, which often results in blockades of the Parliament work by opposition parties. This at times impedes a normal functioning of the Parliament and slows down the reforms aimed at strengthening institutions, boosting competitiveness and improving the business environment. This may cause that the Government might not last a full term. The second factor is Bulgaria delaying the start of the EU accession negotiations of North Macedonia due to diverging interpretations over the linguistic and historic heritage of North Macedonia. In conclusion, there are several risks that will directly influence the economic prospects and the speed of recovery in 2021. These are: Further waves of COVID-19 due to slow rollout speed of the vaccines – might have an irreversible effects in many sectors of the fragile economy; Political tensions and/or nationalist disputes – might further deepen the political instability; Corruption and lack of accountability of public officials – major impediment for doing business; and Debt servicing / balance of payment crisis – might trigger an inflation cycle. In January 2021, the Government adopted a multi-year structural reform Programme agreed with the European Commission. The measures include improving the business environment, combating tax evasion, reforming the energy and transport markets, developing agriculture, and supporting education and the digital transformation of the country. Vaccination will remain in the focus of the Government of the forthcoming period. Being a low income economy, it can’t compete with advanced economies in the vaccines bidding orders. It therefore relies on international support and the COVAX mechanism to ensure equitable access to vaccines. Delays in mass vaccination may lead to reappearance of infections and further obstacles and delays in recovery of normal economic activities. 2 Government response to the pandemic crisis2 Since the outbreak of the pandemic, the Government of the Republic of North Macedonia has adopted in total five sets of measures, aimed at reducing the negative effects of the crisis on the economy. Four sets were brought in 2020 whilst the fifth set was adopted in April 2021. Within the four sets in 2020, 70 different measures were implemented. These measures include direct support for families and individuals, the distribution of vouchers in the tourism sector, rent payment delay as well as restructuring of and prolonged payments of credit installments for companies and citizens. Furthermore, there were measures to support of the informal sector as well as financial support for companies. As a result, North Macedonia dedicated financial resources worth more than 9% of its GDP as economic measures for the reduction of the impact of COVID-19. Thereby, the total value of the four first sets of measures is circa 1 billion EUR and, until February 2021, almost 70% of these funds have been exhausted. Provided that there are credit lines within these sets that are still ongoing, the percentage of implementation will rise to 92%. Moreover, there are a number of measures within the third and the fourth set that will be implemented during 2021 and beyond. The effects of the four economic sets on the economic activity and unemployment is limited but important. While the total unemployment rate on annual basis decreased by 0.9% from 2019 to 2020, there were still 16'700 officially registered job losses in North Macedonia from March 2020 to March 2021. Therefore, the decrease in the unemployment rate might also be due to a decrease in the number of active job seekers or emigration. However, it is estimated that the total assistance of EUR 704m reduced the decrease of the economic activity significantly – the decrease is expected to have been -8.4% as opposed to the recorded -4.5%. As the challenges with the effects of the pandemic are still ongoing, some of the measures have a spillover through 2021 and in the meantime a fifth set of measures has been adopted in April 2021, and the sixth set is already in the pipeline, the overall effectiveness and impact of the measures cannot yet be assessed at this stage. 2. International and Regional Economic Agreements 2.1. Country’s Policy and Priorities3 Central to North Macedonia's foreign policy agenda remains the integration into European and Euro- Atlantic institutions. Therefore, when it comes to economic policymaking, achieving full participation in the EU's single market is the key priority.