EBRD: FYR Macedonia needs to press on with reform

Efforts to improve the business environment and attract foreign investment have been stepped up. FYR Macedonia's latest ranking on the 2012 World Banks Doing Business scores is impressive, and some major investors are showing interest, but important business climate issues such...

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EBRD: FYR Macedonia needs to press on with reform



EBRD - 08.11.2012

Efforts to improve the business environment and attract foreign investment have been stepped up. FYR Macedonia's latest ranking on the 2012 World Banks Doing Business scores is impressive, and some major investors are showing interest, but important business climate issues such as judicial reform and corruption remain to be fully addressed. " Macroeconomic stability has been preserved. Growth in 2011 was close to 3 per cent and inflation and the government deficit were kept at low levels, but a clear slow-down is evident so far in 2012. " Privatisation of some of the remaining state-owned assets is proving difficult. The failure over the past year of the states efforts to sell some major companies highlights both the stringent tender conditions in some cases and the difficulties of offloading state-owned shares in the present climate. 
KEY PRIORITIES FOR 2013 ? Reforms should be pushed forward in the context of the new high-level dialogue with the European Commission. This dialogue offers an opportunity for the country to advance on an EU-oriented reform path even while formal accession talks cannot proceed because of the name dispute. " Regulatory authorities in some infrastructure sectors need to be strengthened. In the energy sector, the regulatory authority is still subject to some intervention, and cross-subsidies are significant with household prices being kept artificially low. " The provision of financial services should be enhanced. Competition in the banking sector is less vigorous than in some regional peers, and there is scope to develop a greater range of financial services than presently available. 
MACROECONOMIC PERFORMANCE The economy was less affected by the global economic and financial crisis than many regional peers but the impact of the eurozone crisis has been felt strongly in 2012. With a GDP growth rate of 2.9 per cent, FYR Macedonia was among the strongest performing SEE economies in 2011. However, the impact from the eurozone crisis began to be felt in the second half of the year and a significant slow-down has followed since. In the first half of 2012, the economy contracted on a year-on-year basis on account of the weaker export demand as well as the impact of lower foreign direct investment and reduced remittance inflows on domestic demand. Inflation stayed relatively low in 2011 and in the first half of 2012, but it accelerated recently, reaching 5.3 per cent year-on-year in September 2012. This is a temporary spike caused by rising food prices as well as increases in pensions and the introduction of a minimum wage. The currency remains pegged to the euro and international reserves are at relatively comfortable levels of 114 per cent of short-term debt and about four months of imports. Fiscal targets have been met, but arrears are present. Given the currency peg to the euro and the limited sources of external funding, the government has implemented relatively tight fiscal policy. Over the past two years the government maintained the budget deficit within the targeted 2.5 per cent of GDP on a cash basis; this year, it is likely to reach 3.5 per cent of GDP. The government is taking measures to clear part of the accumulated budgetary arrears and delayed VAT refunds. In 2011 the government drew on the precautionary credit line (PCL) from the IMF to finance expenditures. The second review of the PCL was not completed, mainly because of IMF concerns about the arrears problem. The PCL is now dormant and will formally expire in January 2013. The eurozones difficulties will continue to dampen growth prospects in 2012 and 2013. Following the contraction in the first half of the year and in light of continuing weakness in the eurozone, growth in 2012 will be minimal at best. A modest recovery is likely to occur in 2013 to around 2 per cent. A pick-up in growth is expected in the medium term, as the regional economy recovers and as FYR Macedonia reaps the benefit of sustained macroeconomic stability and investor-friendly reforms introduced in recent years. 
Source: bne


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