FYR Macedonia strategy overview

Full strategy  (1Mb) Approved 11  Jul 2006

Cтратегија За Поранешна Југословенска Република Македонија  (0.9Mb)

Summary of public comments  (0.1Mb)

The Former Yugoslav Republic (FYR) of Macedonia continues to meet the conditions specified in Article 1 of the Agreement Establishing the Bank.  Implementation of the Ohrid Agreement and progress in EU accession continue to support political stability. In December 2005, the country received the status of official EU candidate. The signing of the Ohrid agreement in August 2001 marked the end of the uprising by ethnic-Albanian guerrillas. It provides, inter alia, for a territorial decentralisation programme aimed at giving the local authorities a greater role in local governance. Although the Ohrid Agreement is unpopular with some of the ethnic Macedonians, a referendum on the territorial re-organisation law, held on 7 November 2004, failed.  Parliamentary elections took place on 5 July 2006. 

Economic performance

A new three-year SDR 51.7 million Stand-By Arrangement, focusing on reforms in health care, the judiciary and the labour market, was approved by the IMF in August 2005. Real GDP growth reached 4 per cent in 2005 with strong performance of the steel, textile and chemical industries. In February 2006, the country joined the Central-European Free Trade Agreement (CEFTA) and this may have a positive impact on trade performance. The stable growth performance at around 4 per cent per year should be sustained in the medium term, supported by progress in EU accession process and further structural reforms. Unemployment remains high, at 36.5 per cent as of the end of 2005.  Monetary policy continues to be based on a de facto near-peg of the denar to the euro. Reforms to fiscal management and planning have improved the stability of public finances. 

Structual reforms

FYR Macedonia has recorded steady progress in structural reforms in recent years. Following a new pension law of September 2005, private pension funds emerged as a result of the pension reform. In January 2006, a one-stop shop system for registration of businesses was enforced, reducing the procedure of establishing a business. In March 2006, a new bankruptcy law was approved by the parliament. Fiscal decentralisation has begun to be implemented which has created opportunities for greater local government autonomy and control of local infrastructure investments. In January 2005, a new power transmission company, AD MEPSO, was unbundled from the previously integrated state power company. In August 2005, further power sector restructuring steps were approved by the government. The new power distribution company, AD ESM, was sold to EVN AG, an Austrian investor in March 2006. The Regulatory Energy Commission is meanwhile working on a new system of calculating electricity tariffs. In May 2005, the government completed talks with the World Bank on a EUR 15 million railways restructuring loan, following the adoption of the railways restructuring legislation by the parliament in April 2005. Recently acquired candidacy status for the EU accession is now providing a further impetus for continuation of structural reforms. 

The volume of the Bank’s support to FYR Macedonia increased modestly during the last Strategy period (mid-2004 through mid-2006) with 7 new commitments  for EUR 86 million , bringing total cumulative commitments to EUR 403.7 million, 55.7 per cent of which are in the private sector. It is encouraging that 2 projects were signed with foreign sponsors, despite a general perception about a difficult investment climate in the country.

Transition challenges

The main transition challenges are:

• Improving the business environment, particularly for SMEs - speeding up the ongoing judiciary reforms, stepping-up the fight against corruption, reducing bureaucracy (long administrative procedures with unpredictable outcomes, and unequal treatment of licence applications), and reducing ambiguities over property rights;
• Strengthening the banking sector to reduce the high cost of financing, improving access of SMEs to finance; and
• Implementing privatisation and commercialisation, and improving regulation of key utilities to attract strong investment flows to modernise relevant infrastructure in line with the country’s new decentralisation process.

Strategic priorities

In light of the transition challenges as well as the Government's intention to limit the use of new sovereign borrowings, the Bank’s focus will be, first, on the support to the private sector, including the strengthening of the financial sector, as a channel for SME financing. In the public infrastructure sector, the Bank, jointly with the relevant authorities and other IFIs, will support the rehabilitation of key infrastructure projects through its support to further privatisations in the power sector and possible concession/PPP projects (e.g. the Skopje Airport). The Bank’s continued support to the successful implementation of the existing operations is a key precondition in identifying follow-up projects in the energy, transport and municipal sectors. The Bank’s strategic priorities will be:

• Corporate Sector: The Bank will target its support towards smaller-scale local export-oriented companies showing good corporate governance, by providing loans, guarantees or making equity investments, including through the new EBRD-Italy Western Balkans Local Enterprise Facility. Assistance to local enterprises will be provided through the TAM/BAS programmes. The Bank will continue its support to strategic foreign investors.
  
  
• Financial Sector: The Bank will continue to focus on (i) providing banks with funding and institutional support to assist the banks develop new products (including TFP and co-financing), grow their business on a sustainable basis, and improve corporate governance; (ii) channelling more funding to SMEs through commercial banks and micro-lending institutions, including through the implementation of the EU/EBRD Western Balkans SME framework and the MSME Finance Framework for Western Balkans and Croatia; and (iii) supporting the banks in attracting strategic investors and promoting sector consolidation with its possible participation in mergers and acquisitions of smaller creditworthy banks.
  
  
• Infrastructure: The Bank will focus on (i) supporting privatisation and commercialisation of public utilities, also through the implementation of the pre-privatisation agreement for the newly un-bundled electricity distribution and generation companies, (ii) energy projects that fit the regional energy market development such as regional electricity and gas interconnections, (iii) promoting regional transport networks, including the support to Skopje Airport concession and the restructuring of the road maintenance sector, and (iv) supporting the new fiscal decentralisation process, including through possible municipal-guaranteed water sector investments.

All EBRD operations in FYR Macedonia are subject to the Bank's Environmental Policy and will incorporate, where appropriate, Environmental Action Plans, in line with the Bank's mandate to actively support environmentally sound and sustainable development through its investment projects.

Technical cooperation

TC and official co-financing will remain crucial for project preparation and institution building, particularly promoting smaller scale local enterprises and for public sector operations. The Bank will continue its close co-operation with the EU/EAR and bi-lateral donor institutions. A decision to create the new Western Balkans Multi-Donor Fund was made at the EBRD Annual General Meeting in London (21-22 May 2006). Eleven countries agreed to provide a total EUR 10 million in donor funds towards a new EBRD-driven initiative to boost private business investment and infrastructure development in the Western Balkan countries, including FYR Macedonia. The new multi-donor fund will strengthen EBRD – donor coordination in FYR Macedonia and expand the resources available to support economic growth and regional cooperation.