On 17 December 2021 the IMF published a report on the economy of North Macedonia following discussions under Article IV of the IMF’s articles of agreement.

The economic impact of the pandemic has been mitigated by strong policy support which has prevented large job losses and protected the most vulnerable groups. While continuing to limit the economic damage from the crisis, North Macedonia must make progress on reforms to strengthen public financial management and revenue administration. Economic growth is forecast to rise from 4% percent in 2021 to 4.2% in 2022 as domestic demand remains strong.

Pandemic-related spending has been reduced in the 2022 budget but the government continues to support economic activity. Funding could be used for the reallocation of resources across business sectors by retraining workers, providing incentives for hiring and investment, and strengthening the social safety net.

Additional funds may be required to mitigate the impact of higher energy prices on vulnerable sections of the population, especially after the reduced VAT rate on electricity is removed from July onward. Providing further subsidies to energy companies, or continuing the reduced VAT rate, which assists households at all income levels, would be expensive for taxpayers compared to targeting assistance to lower income households.

The fiscal deficit should be brought close to 1% of GDP over the next five years, to ensure there is adequate fiscal space to respond to future economic shocks. The deficit can be reduced by tax policy reform. This would include streamlining the preferential treatment currently given to some sectors, reversing the tax cuts made during the pandemic, and making the tax system more progressive. Efforts should also be made to strengthen tax collection capacity and to combat tax evasion.

The government needs to halt the reduction in labour force participation which accelerated during the pandemic. Policies must support retraining and strengthen education, to reduce skill shortages. The minimum wage mechanism should be more closely aligned with productivity developments. The bankruptcy and insolvency framework should be strengthened through implementation of the new bankruptcy law, to help resource reallocation in future.