Former Yugoslav Republic of Macedonia: Recent Economic Developments

The economy of the Former Yugoslav Republic of Macedonia suffered a setback owing to the Kosovo crisis. The impact of the crisis, however, was less severe. Inflation remained low, the balance-of-payments position and the fiscal situation improved, and indicators of external vulnerability remained satisfactory. The National Bank of Macedonia faced contrasting challenges in the conduct of monetary policy. The pace of structural reforms picked up and a value-added tax was introduced. However, structural weaknesses in the financial system have prevented a more vigorous economic recovery.


The economy of the Former Yugoslav Republic of Macedonia suffered a setback owing to the Kosovo crisis. The impact of the crisis, however, was less severe. Inflation remained low, the balance-of-payments position and the fiscal situation improved, and indicators of external vulnerability remained satisfactory. The National Bank of Macedonia faced contrasting challenges in the conduct of monetary policy. The pace of structural reforms picked up and a value-added tax was introduced. However, structural weaknesses in the financial system have prevented a more vigorous economic recovery.

II. Real Sector Developments1

A. Demand and Supply

1. Following a long recession in the first half of the 1990s, real economic growth turned positive in 1996 and accelerated to 2.9 percent in 1998, the highest growth achieved since independence (Table 2). In 1999, despite the Kosovo crisis, growth is estimated to have slowed down only slightly. However, the pattern of sectoral growth dramatically changed in 1999: on the demand side, net foreign demand became a major driving force, while on the supply side, industry relinquished its growth-leading role to construction, communications, and trade sectors.

Table 2.

FYR Macedonia: Selected Real Sector Indicators, 1992–99

(Annual percentage change)

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Sources: Data provided by the FYRM authorities; and IMF staff estimates.

For 1992–95 based on administrative surveys, adjusted for poor coverage of the private sector; for 1996–99 Based on labor force survey.

Based on the labor force survey, conducted since 1996.

3/ Based on net average wages in industry.

2. Following two years of rapid growth, domestic demand was sluggish in 1999, reflecting a significantly lower inventory accumulation and continued weak fixed capital formation (Table 19 and Figure 1). The investment environment deteriorated with the onset of the Kosovo crisis in the first half of 1999. Trade disruptions adversely affected the import-intensive investment in equipment and machinery. This was partially offset, however, by a surge in investment in construction, which accounts for about one half of the fixed investment.

Figure 1.
Figure 1.

FYRM: Economic Activity Indicators and Consumer Prices

Citation: IMF Staff Country Reports 2000, 072; 10.5089/9781451825992.002.A002

Sources: FYRM authorities; and IMF staff estimates.

3. While the deteriorating situation in Federal Republic of Yugoslavia (FRY) adversely affected the investment behavior in the country, the low investment growth in the past decade reflects a number of structural factors. These are (i) weak domestic savings and limited access to foreign resources; (ii) lack of a developed domestic capital market that limited the availability of longer-term financing for investment; (iii) high level of real interest rates; (iv) inefficiencies in the banking system, which continues to channel scarce financing to unviable enterprises through connected lending or at the behest of the government; and (v) the slow pace of structural reforms, as private sector firms in Macedonia have tended to substantially outspend the state-owned enterprises in investment2.

4. Consumption growth accelerated in 1999, reflecting mainly the jump in the growth rate of government consumption (from about 4 percent in 1998 to an estimated 10 percent in 1999) due to increased expenditures on refugees. This more than offset the slowdown in private consumption, as uncertainties in the region encouraged precautionary savings.

5. The downward trend in net foreign demand was abruptly reversed in 1999, as Kosovo-related disruptions in trade resulted in a severe compression of imports. As a result, unlike in the previous years, net foreign demand was the driving force behind the overall growth in 1999.

6. On the supply side, growth during 1996-98 was spurred by a strong pickup in industry and a gradual recovery in transport and communications (Table 18). Following a sustained decline (averaging over 12 percent a year during the period 1991-95), industrial output recovered in 1996 and grew at an average rate of 4 percent over the period 1996-98. Industrial growth was helped by a number of favorable developments, including (i) the reactivation of idle capacities, especially in the iron and steel and metal processing industries, following their divestiture to foreign strategic investors in 1998; and (ii) increased access to foreign markets, particularly after the trade cooperation agreement was signed with the European Union in November 1997.

7. There were signs already in 1998, however, that structural weaknesses in the enterprise sector, as well as developments in the neighboring FRY, an important export market for industrial output in Macedonia3, stood in the way of sustained economic growth in the industrial sector. The outbreak of the crisis in Kosovo in mid-1999 delivered a major blow to industrial production in 1999, which is estimated to have declined by 2.5 percent for the year as a whole (Figure 1). The decline occurred despite the pickup in the production of a number of industrial products (construction materials, food, beverages and tobacco) following the surge in Kosovo-related demand.

8. Several sectors benefited in the aftermath of the Kosovo crisis, and they took up the growth-leading role played in the previous years by industry. These were trade, transport and communications4, and construction, which together contributed 2.2 percentage points to GDP growth in 1999, with the remainder distributed relatively evenly across the remaining sectors (excluding industry).

B. Prices

9. After hovering around 2 percent during 1996-97, average annual consumer price inflation turned slightly negative, falling by an average of 0.1 percent in 1998 and further by 0.7 percent in 1999 (Tables 2 and 20). Prices began to decline in September 1997, notwithstanding the 16 percent devaluation of the denar in July that year. There are a number of reasons why the devaluation did not lead, as expected, to upward pressure on prices. These include: (i) a six-month wage freeze following the devaluation; (ii) the anemic economic growth in early-1997 that prevented producers from passing higher costs to consumers and induced them instead to absorb these costs in lower profit margins; and (iii) the fall in the prices of food and raw materials in the domestic and international markets. Food prices, which account for about 40 percent of the consumer price index, fell sharply in 1998, reflecting the good agricultural crop in that year and increased domestic supply due to difficulties in exporting to the FRY and the EU’s imposition of a ban on lamb exports to European countries. The declining trend in consumer prices was further reinforced in early 1999 by a weakening of the price of clothing and footwear and by the reduction of the domestic retail price of oil derivatives in the first half of 1999 (see Annex II).

10. The deflationary trend bottomed out in May 1999 (on a seasonally-adjusted basis). The prices of food, tobacco and beverages picked up due to a surge in demand for these products from Kosovo, and as the increases in oil prices in international markets were passed through to domestic prices. During the period May-December 1999 prices increased by 3 percent on a seasonally-adjusted basis, bringing end-period inflation in 1999 to 2.4 percent.

C. Labor Market

11. The decline in employment that accompanied the recession in the first half of the 1990s bottomed out by end-1997.5 Employment increased by 5.4 percent in 1998 and a further 1 percent in 1999,6, 7 reflecting, albeit with a one-year delay, the pickup in overall economic activity in 1996 and the growth experienced by the country in 1998 (Tables 2 and 21). Despite some recent decline, the unemployment rate remained very high, at 32.4 percent in 1999 (see Annex I).

12. Employment growth in the economic sector8 (6.2 percent in 1998 and 1.2 percent in 1999) was more buoyant than in the noneconomic sector, as it benefited from relatively higher rates of growth during this period. Unlike in the past, small private firms (i.e. firms founded with private capital) were the main source of the increase in employment, with their share in total employment increasing from 43 percent in 1996 to 49 percent in 1999. Employment in the noneconomic sector has increased gradually and steadily since 1996, spurred by an expansion in public administration (of 8.3 percent in 1998 and a further 6 percent in 1999). This increase occurred despite the hiring restriction implicit in the freeze on the budgeted wage bill in both 1998 and 1999, and it more than offset the shedding of labor in education and health sectors.

D. Wages

13. Nominal net wages9 continued to grow during 1998-99, averaging over 3 percent a year (Table 2). As a result, real wages grew by close to 7 percent during the two-year period ending 1999. Wage growth in the economic sector substantially outpaced that in the noneconomic sector, owing mostly to the restrained wage stance followed by the authorities in the latter over the past several years.10 As a result, the wage differential between the two sectors was virtually eliminated by end-1999 (Figure 2). Within the economic sector, financial services, catering and tourism, and trade led the wage growth, averaging over 7 percent in 1999, twice the growth rates registered in other economic sectors (Table 22). Wage growth in the noneconomic sector remained about half that of the economic sector, with wages in public administration leading growth, averaging an estimated 2 percent a year during 1998-99.11

Figure 2.
Figure 2.

FYRM: Employment and Wages 1/

Citation: IMF Staff Country Reports 2000, 072; 10.5089/9781451825992.002.A002

Source: FYRM authorities.1/ Employment and unemployment data are based on labor force surveys.

Prepared by Aliona Cebotari.


For example, investment of public enterprises declined by 1.5 percent in 1998, whereas private sector investment grew by 13.3 percent and its share in total investment increased from 49.5 percent in 1996 to 57.1 percent in 1998. (These figures are based on enterprise level data and are not fully consistent with the national accounts concepts).


The sectors that traditionally export to the region have suffered most in 1998. For example, production of construction materials in 1998 fell by 12.1 percent, beverages by 7.8 percent and electrical equipment by 9 percent.


In the transport and communication sector, the buoyant telecommunications activity (due to the fast expansion of the mobile telephone network) was partially offset by the fall in transport activities during and following the military conflict, as roads, bridges and river routes through the neighboring FRY were destroyed during the conflict and took time to restore.


According to the results of the labor force survey (LFS). There are three sources of employment data in Macedonia: (i) the business surveys conducted by the Statistical Office on a monthly and semiannual basis. These do not cover the Ministries of Interior and Defense, nor agriculture, and cover poorly the predominantly private sectors; (ii) financial statements of enterprises submitted, annually and semiannually, to the Payments Bureau. These underestimate true employment because of massive underreporting of employees by firms, which tend not to register hired workers to avoid payroll taxes; (iii) the Labor Force Survey (LFS), conducted annually since 1996. This is considered to be the most reliable source of employment data in the country, as it captures unregistered employment, employment in the private sectors, as well as in the Ministries of Interior and Defense; however, it cannot be used to infer employment dynamics within the year.


Administrative sources, i.e. data collected by the Statistical Office through a monthly and semiannual surveys, show a continued decline in employment throughout 1998 and 1999 (Table 21).


Keeping in mind that the LFS was conducted in April, at the height of the Kosovo crisis, and that many sectors recovered significantly in the post-crisis period, it is possible that employment growth in 1999 has been underestimated by the LFS.


All sectors excluding public administration, education and health, which make up the noneconomic (budgetary) sector.


Macedonian wage statistics reports mainly net, rather than gross, wages. These are wages paid by employers net of payroll taxes and non wage benefits.


Wages in the noneconomic sector used to be substantially higher than in the rest of the economy. As a result, the wage legislation adopted in 1994, which aimed to restrain wage growth in the public sector (i.e. institutions and firms that were less than 70 percent private) by indexing nominal wages to expected consumer price inflation, provided for a lower indexing coefficient in the three noneconomic sectors to allow wages in the rest of the economy to catch up. Also, during 1998-99 the government faced a limit on its budgeted wage bill.


The actual growth in public administration may be substantially higher. This is because (i) official statistics do not cover the Ministries of Defense and Interior, and, in the case of the latter, large wage increases were given to employees at the time of the Kosovo crisis in 1999; and (ii) it is likely that the official statistics do not capture wage payments made by government ministries from their own special revenue accounts.