Following the election of the new government in June 2024, the World Bank Group prepared 16 sector-specific Policy Notes suggesting three focus areas to support faster, more resilient, and sustainable economic growth in North Macedonia.
The analysis in the policy notes points to three key reform actions:
1. Restore Macro-Fiscal Stability
The support provided during recent crises (2020-2023) has strained public finances, increasing the fiscal deficit to 6.1% and pushing public debt to 62% of GDP by end-2023, exceeding the fiscal rule. The Revised Fiscal Strategy 2024-28 outlines a path to gradual consolidation adhering to deficit rules, with optimistic growth projections of 5%. Stabilizing public finances will require spending consolidation and revenue mobilization. Restoring fiscal sustainability and creating conditions for stronger growth are essential for maintaining a positive outlook in the medium-to-long term.
Risks include low productivity growth, inefficient capital deployment, falling export demand, and inflation-dampened consumption, compounded by limited fiscal space amid high interest rates. Addressing export demand risks requires structural reforms in human capital development, connectivity, competition, and the energy sector to boost productivity, inclusivity, and fiscal sustainability, with EU accession negotiations potentially aiding growth prospects.
2. Implement Key Structural Reforms
Long-term growth and convergence with EU standards depend on enhancing productivity through structural reforms in human capital development, connectivity, competition, and the energy sector, along with intensified and continued EU accession efforts. North Macedonia¡¯s Human Capital Index score of 0.56 highlights the urgency for investments in education and boosting human capital to increase productivity. North Macedonia initiated a comprehensive social protection reform in 2019, aimed at consolidating and better targeting social assistance programs to shield vulnerable households.
Finalizing this ongoing reform process, monitoring its outcomes, and address in gaps in social benefits and services provision remains critical to fully realize the benefits of the reform. The agriculture sector, though averaging only 1.2% growth over the past decade, is vital for North Macedonia's economy, impacting poverty reduction, growth, job creation, and resilience to climate change and crises. The sector faces challenges of low productivity and competitiveness; diversification, innovation, and supporting smallholder farmers and agribusinesses could drive its transformation.
Promoting the development of a more dynamic private sector is crucial to accelerate GDP growth and hasten convergence toward the average EU income levels. In addition to a favorable enabling environment, private sector growth requires deeper financial intermediation supported by a resilient and stable financial system. Reducing cross-border payment costs is critical to enhancing integration. By modernizing payment systems and joining the Single Euro Payments Area (SEPA), North Macedonia can increase financial inclusion, bring more competition and innovation in payments, and reduce costs for domestic and cross-border digital payments.
3. Advance the Green and Digital Transitions
Decarbonizing North Macedonia will require significant investments in energy efficiency and renewable energy. Decarbonization offers various benefits, including helping the economy deal with the upcoming EU Cross-Border Adjustment Mechanism (CBAM) and potential carbon taxes, which may affect firms' financial performance. North Macedonia¡¯s energy transition is underway but progresses slowly. The country¡¯s economy is among the EU¡¯s most coal and oil-intensive, while legal, regulatory, financial, and technical barriers hinder progress. Investment in energy transition should be complemented by efforts to decrease energy consumption through improved energy efficiency of both public and residential buildings. The operationalization of the Energy Efficiency Fund is a key step toward scaling up energy efficiency.
Decarbonizing the economy will require complementary efforts, starting with modernizing the country¡¯s transport infrastructure. Considering its strategic position on the Pan-European Corridors VIII and X, North Macedonia has developed a robust highway and railway infrastructure but faces challenges due to limited institutional and technical capacity and insufficient maintenance. Transport infrastructure requires significant upgrades to enhance connectivity and facilitate smoother trade flows.
Decarbonization will also improve air quality, where the economic cost associated with health damage from air pollution was equivalent to 6.9% of GDP in 2016. Reducing air pollution, focusing on residential heating, could lower mortality due to air pollution by 23% by 2050. Investments in digital development, aligned with the EU Digital Agenda 2030, present an opportunity for achieving sustainable growth and resilience. Enhancing digital public infrastructure is central to this endeavor, laying the groundwork for comprehensive digital transformation and fostering public¨Cprivate partnerships (PPPs). Strengthening digital development governance is key to defining and implementing a cohesive digital development strategy.
The EU Growth Plan for the Western Balkans offers an opportunity for North Macedonia to implement key reforms and accelerate progress. The country could receive up to €750 million until 2027 upon implementing an ambitious reform and investment agenda focused on macro-fiscal stability, human capital development, private sector development and competitiveness, governance, anticorruption and justice, decarbonization, and air quality management.