Macedonian investment guide: economic situation

Agency of the Republic of Macedonia for Transformation of Enterprises with Social Capital


The Republic of Macedonia is a landlocked, mountainous country located in the centre of the Balkans in south-central Europe. According to the 1994 census the population of approximately 21 million is 66.5 per cent Macedonian, 22.9 per cent Albanian, four per cent Turkish, 2.3 per cent Rhomas (Gypsies), two per cent Serbian and 2.3 per cent other. Although it is one of the least developed of the six republics of the former Yugoslavia, Macedonia has the potential to be largely self-sufficient in many foodstuffs and in electrical energy (hydro-power, coal and renewables). The principal agricultural products are wheat, corn, tomatoes, rice, peppers, livestock, livestock products and tobacco; fruits and other vegetables are also grown for export in significant quantities. Wine is also an important export. Industry primarily is low technology and includes oil refining, mining (coal, chromium, lead, zinc and ferro-nickel), basic textiles, construction, shoe production and tobacco processing. Raw materials and spare parts constitute the largest segment of imports.

Macedonia is suffering from many of the same ills as other Central/East European countries going through the transition from a centrally planned to a market economy and from a socialist/communist to an open democratic political system. Unique to Macedonia, however, was that the enterprise sector operated according to the Yugoslav system of 'market socialism' in which workers managed firms but equity capital was undefined and socially owned. All major decisions were made by councils of workers, which protected wages and employment at the cost of investment. Losses were financed by a banking system controlled by the largest enterprises, the 'loss makers'. In addition, the productive sector was dominated by large firms in heavy industries many of which were integrated with firms located in other Yugoslav republics. Enterprises which relied on them for material and power inputs were dimensioned to supply captive markets that have now been lost.

Macedonia has had to struggle with the transition in a particularly hostile environment, given the pressures to enforce tightly the now removed United Nation's trade sanctions against Serbia and Montenegro, without compensation from the international community. Serbia and Montenegro accounted for around 60 per cent of the Macedonian market prior to the disintegration of former Yugoslavia, and also served as a conduit between Macedonia and other Eastern and Western European markets. Difficulties in relations with Greece culminated in their imposition of a trade embargo in February 1994, which blocked access to Greek markets and to the port of Thessaloniki that had provided an important route for imports and exports to and from third country markets. Relations with Greece were re-established in October 1995. These events threatened the economic stability of the country and exacerbated the tensions associated with the economic and political changes generated in the move to independence.

Macedonia has faced the additional problem of having to create institutions to perform national functions previously undertaken by the federal government in Belgrade, such as foreign affairs, defence, treasury, customs, central banking, etc. Dealing with ethnic tensions in a region rife with ethnic conflicts has only served to complicate the situation further. Macedonia, unlike its sister republics in the former Yugoslavia, established its independence peacefully and to a large extent has succeeded in defusing much ethnic tension through its inclusion of minorities in all aspects of government, through its open communication with minority groups and through its willingness to accommodate minority concerns to the extent practicable. Ethnic tensions remain, however, a critical factor in the ability of the government to maintain its integrity and stability in the midst of what was until recently a deteriorating economy. The tenuousness of current levels of political stability leave government institutions particularly vulnerable to potential economic and social disruptions.

Within this context it appears that Macedonia has the natural and human resources necessary to transform its economy and its political system. Macedonians have demonstrated to a significant extent the political will to effect the changes needed to secure this transformation. New legislation in support of the stabilisation programme negotiated with the International Monetary Fund (IMF) was developed. Most has now been enacted into law, including laws on pension and insurance, labour relations, taxes (profit, income, sales, property and customs), banks, foreign trade, concessions, foreign credit relations, foreign investment, securities, central bank and privatisation. It should be noted, however, that some key laws are still pending action by the Parliament, including human rights, election procedures, state enterprises, broadcasting, customs regime and government administration.

Stabilisation programme

Initial attempts at stabilisation showed only meagre results, although, as mentioned above, many laws were passed restructuring the institutional framework. In early 1994, with the help of the IMF, a more determined effort was commenced. The main objectives of the stabilisation programme are:

  • to move the economy away from hyper inflation;
  • to achieve an environment for permanent growth;
  • to create conditions for integration into the international financial market.

The anti-inflation measures are targeted at reducing the public sector budget deficit, at ending the passive rediscounting of commercial bank credits by the central bank and at wage discipline. Combined with other aspects of monetary policy, the programme produced a number of positive effects. The budget deficit was reduced from 11 per cent of GSP in 1993 to three per cent in 1994. Inflation has been brought under control: the annual year-end rate was 1,780 per cent in 1992, 248 per cent in 1993, 55 per cent in 1994 (versus a target of 70 per cent) and beat the target of 18 per cent for 1995 by ten points. The target for 1996 was six per cent, with growth of 1.5 per cent in GDP.

In agriculture, where Macedonia has the advantage of having been already largely private, subsidies have been substantially reduced or eliminated. Controls have been imposed on wage increases. The Government is moving ahead to privatise most 'socially-owned' enterprises and has initiated actions to reform and rehabilitate the banking system. With the repayment of arrears to the World Bank, Macedonia can now be considered for access to the resources of the international financial institutions (IBRD, EBRD, IMF and IDA) and is renegotiating terms with other creditors (foreign governments and banks, and domestic creditors).

Assistance framework

The immediate negative impacts of the needed economic transformation require commitment among the general populace as well as the leadership. As has been demonstrated in other Central and Eastern European countries, privatisation almost always results in a period of dislocation as the work force adjusts to the shift from social or state-owned to private enterprise. Surplus employees of the larger enterprises are thrown out of work by the new profit and productivity oriented private owners and will need time and retraining to find new employment opportunities, and patience for them to develop.

This shift, which can last for an extended period of time, increases the burden on social insurance programmes. Unfortunately, this increased demand for government support occurs at a time when government revenues are down due to reductions in economic activities, dislocations from the transition to an open economy and inadequate tax collection capabilities. In Macedonia the problems have been exacerbated by the loss of historic markets to the north and south and by the high costs of using alternative transport routes. Preventing destabilisation is the primary focus of humanitarian and development assistance programmes among bilateral and multilateral donors.

Macedonia is a member of the more important international financial institutions. Both the World Bank (IBRD - International Bank for Reconstruction and Development) and the International Monetary Fund (IMF) have established representative offices in Skopje. The country has been accepted for membership by the European Bank for Reconstruction and Development (EBRD) and by the International Fund for Agricultural Development (IFAD). The European Union provides assistance through the European Community/Polish and Hungarian Aid to Reconstruction of the Economy (EC/PHARE) and the European Community Humanitarian Office (ECHO).

The country is the target of several major multilateral and bilateral assistance and aid programmes. These include, among others, the United Nations Children's Fund (UNICEF), the World Health Organisation (WHO), the United Nations High Commission for Refugees (UNHCR), the United States Agency for International Development (USAID), the British Overseas Development Administration (ODA), the International Federation of the Red Cross and Red Crescent Societies (IFRC) and the International Committee of the Red Cross (ICRC).

Bilateral non-government organisations (NGOs) operating assistance programmes include Catholic Relief Services (CRS), Medicins sans Frontieres (MSF - France), Equilibre (French NGO), Dutch/Danish/British/German inter-church aid groups, CARITAS (Catholic NGO), CRIC (Italian NGO), Hemisphere (French NGO), Project Hope, and several Islamic NGOs. Other NGOs include Spikes of Goodness, El Hilaal, and the Open Society Institute (Soros Foundation).


Macedonian Posts & Telecommunications (MPT, formerly PTT) is organised as an independent state-owned company encompassing postal and telecommunication services. The headquarter's office in Skopje is housed in a modern structure which has a national and international telephone exchange open to the public 24 hours a day and seven days a week. The postal network includes 267 offices. Most postal activities are located at the number two office next to the Skopje railroad station. The present installed capacity is around 400,000 telephone lines (20.8/100 inhabitants). Several exchanges in Skopje are digital, though most of the equipment and cables are fairly antiquated. MPT intends to extend capacity using fibre optic technology, enabling all new lines to be digital.

Since the Belgrade telecommunications centre was cut off upon independence, a mobile terrestrial satellite unit was leased to connect Macedonia via EUTELSAT to Switzerland. Subsequently an earth satellite station was put into service connecting Macedonia via INTELSAT AOR to the United States and Canada. To supplement the existing East-West analogue transmission system, a new corridor is under construction, with the laying of optical cables linking Macedonia with Italy, Albania, Bulgaria and Turkey. Direct international circuits connect to 16 countries.

Arrangements with AT&T; permit the use of their USA Direct and World Connect services. Commercial pager systems (PIKON) and radio telephones cover the whole country. There are several dial-up electronic mail service providers (ITL, INFORMA) and three direct full service Internet connections utilising satellite dishes: one commercial (ULTRA), one quasi-commercial (MPT) and one non-commercial (MARNET: C&M; University and the Soros Open Society Institute).

MPT intends to split its activities into two independent market oriented entities by 1997. Meanwhile it has embarked on an ambitious five-year development plan costing US$239 million, which includes adding nearly 300,000 telephone lines for a target density of 33 per cent, an earth satellite centre consisting of three dishes with diameters of eight to 15 metres, expanding switching facilities from 10,228 to 26,118 trunks, and the construction of a cellular network on the GSM standard supporting up to 50,000 subscribers.

Elektrostopanstvo na Makedonija, an independent public utility, integrates the production, transmission and distribution of electricity. They have three thermoelectric stations with an installed capacity of 1,010 MW powered by lignite and oil, six hydroelectric stations with an installed capacity of 390 MW, nine hydroelectric distribution stations with an installed power of 34 MW, and two lignite coal mines. A new hydroelectric station at Kozjak and unused capacity at the Negotino thermal station could satisfy six per cent of electric power needs.

Macedonia forms part of the European electric energy system (UCPTE) and imports about 80 per cent of its power. Linkages exist with the Federal Republic of Yugoslavia (110/220/400 kV), Greece (150/400 kV) and Bulgaria (110 kV), while the transmission network in Macedonia is at three levels: 380, 220 and 110 kV. The distribution network is at 35, 20, 10 and 0.4 kV. Residential use is 380/220 Volt at 50 Hz. Ambitious programmes envision significant investments to maintain and upgrade systems financed in part by international institutions.

There are two international airports: Petrovec at Skopje and Ohrid. Skopje is serviced by six airlines which have direct flights to and from various Western European cities and connections through Ljubljana, Slovenia, and Zagreb, Croatia. The airports are operated by a public company, which was rated the third most successful in the country in 1994 among all types of companies.

Makedonski Zeleznici operates the railways and maintains over 900km of lines, 315km of which are electrified. The main north-south line from Belgrade, Serbia, to the port of Thessaloniki, Greece, on the Aegean Sea, passes through Skopje. In the planning stage is a project to construct a new east-west line which would connect Varna, Bulgaria, on the Black Sea with Durres, Albania, on the Adriatic Sea. The first phase will be construction of a line from Gjuesevo, Bulgaria, to Kumanovo, Macedonia, to link up the existing lines. The second more difficult phase will be construction of a line to connect with Albania.

Macedonia has a good network of roads totalling over 9,400km, of which half are well-maintained paved highways. A major highway, E75, parallels the railroad in the north-south corridor and plans are underway to upgrade the secondary roads connecting Macedonia with Albania in the west and Bulgaria in the east. The European Union has designated this as Corridor Number Eight.


Macedonia is committed to the development of an open market economy and the principles of that orientation are reflected in its institutional system. The pillars of the new economic system are the guarantees of the freedom of the market and entrepreneurship and the rights of ownership and inheritance. These can be restricted by law only for reasons of the defence of the Republic, the protection of the natural and living environment or for public health reasons.

At the end of the Second World War Macedonia was a typical agrarian and underdeveloped country; only small-scale handicrafts were continued in the towns. Over the next 40 years under the aegis of the Socialist Federal Republic of Yugoslavia, investment poured in and growth averaged 5.3 per cent annually, causing the gross domestic product (GDP) to be magnified by eight times. Industrial production grew at over eight per cent annually and doubled its share of GDP, while the service sector's share grew by 50 per cent.

Since then the economy has experienced declines in almost all parameters. The break-up of Yugoslavia, the loss of markets, the transition to a free market and an open society, the sanctions on Serbia/Montenegro, the Greek embargo, droughts, etc, have all contributed to this predicament. Many of the industries were dimensioned to serve all of former Yugoslavia or export markets, which were lost and only now just reopened. It is thought that the bottom in the economy has been reached and that positive growth should commence in 1996.

Ferrous and non-ferrous metallurgical industries were developed based mainly on serving export customers. The Skopje Steel Works has an annual capacity of 1.2 million tons of hot and cold rolled sheet metal. Other plants can produce ferrous alloys, seamed tubing and ferro-nickel products. Other installations produce lead, zinc, copper, gold and silver. Their share of the social product resulting from mining and industry was about 11 per cent.

Metal fabrication and electrical equipment industries manufacture various structures including buses, castings, batteries, cables, and pumps, while others produce household appliances. Machinery for the metal, wood and plastic processing industries is available. This segment's share of social product's industrial activity was about ten per cent.

Basic and process chemical industries have accounted for about nine per cent of industrial social product. Capacities exist for basic chemicals, polyacrylonitrile fibre, and polyvinyl chloride, as well as for detergents, fertilisers, polyurethane foams and fibres. Pharmaceutical and cosmetics firms are well established.

The textile industry, including fibres, fabrics and finished products, is a major employer and contributor to industrial social product (over 15 per cent). The principal products are cotton thread and fabric, denim cloth, wool yarn, fabric and knitted fabric. Ready-made clothing production has increased in response to demands from European and North American markets for quality merchandise at reasonable costs.

A significant leather and leather-processing industry exists. Pig, calf, cow, bull, lamb and sheep skins are all processed for the local manufacture of furniture, clothing and shoes. With capacities for annual production of seven million pairs of shoes, this industry has been a major export earner.

The construction and building materials industries rely on domestic raw materials: feldspar, calcium carbonate, bentonite, crumbled and micronised quartz, perlite, etc. Outputs include china, tile, sanitary ware, asbestos, cement and cement products, as well as gypsum and gypsum products.

Food and beverage processing are highly developed: flour milling and baking; canned and bottled fruits and vegetables; bulk and bottled wines; beer malt and beer. Skopje Brewery was ranked as the most successful enterprise in Macedonia in 1994. Besides brewing beer they also are a licensee of Coca-Cola.

Agriculture and livestock

After World War Two 75 per cent of the population was engaged in agriculture; today it is about a sixth though it still accounts for about 20-25 per cent of social product. There is a total of 1.3 million hectares of agricultural land, of which 43 per cent is arable, four per cent is in vineyards and orchards, and the rest is meadows and pasture. Five percent is irrigated. Over three-quarters of agricultural production is in private hands.

Macedonia's agricultural development has been based on its favourable weather conditions, fertile soil, skilled technological resources, irrigation systems, mechanisation and qualified personnel. The figures below for 1992 are presented as being rather typical.

Principal crop production in 1992 (in thousand tons) included wheat (300), maize (130), sugar beet (61), rice (43), sunflower (38), tobacco (27) and grapes (264). Over 500,000 tons of early-market garden vegetables are produced annually: tomatoes, cucumbers, peppers cabbage, beans, melons, etc. Over 1.1 million litres of beer, wine and brandy are produced. Health foods are increasing in importance: honey, mushrooms, cereals, etc.

The figures for livestock in 1992 (in thousands) are cattle (285), pigs (173), sheep (2,351), horses (65), poultry (4,300). Some milk and cheese are imported but there is export potential for goat products.

Construction, trade and services

Construction has a long tradition in Macedonia; craftsmen, workers and companies have been active throughout the Balkans and indeed the world. The industry is very capable and highly developed, but has experienced a recession in recent years for reasons mentioned elsewhere. Projects undertaken have included hydroelectric power plants, irrigation systems, airports, hotels, hospitals, roads and bridges.

Trade and services are the segments of activity which have shown the most immediate impact of a reorientation to a market economy. The phenomenal growth in number of organisational units (from 5,000 five years ago to over 73,000 today) is largely attributable to the formation of new private (domestic, foreign and mixed) enterprises in these segments. Unfortunately, the influx of foreign tourists has fallen off. Still, the trade and services segments represent nearly a quarter of social product.

What is hard to measure is the extent of unregistered businesses and the size of the so-called 'grey economy', which has flourished in recent years and is becoming a serious problem. The Government has announced its intention to bring it under control.

Sectors with export potential

According to a December 1993 study done for the Commission of the European Communities (PHARE) on the improvement of export capabilities, a number of sub-sectors were identified as having particular export potential:

  • finished textile goods;
  • vehicle and bus assembly;
  • finished leather goods;
  • electronic equipment;
  • shoes;
  • telecommunications equipment;
  • packaging;
  • electric Motors;
  • lamb meat;
  • metal fabrications, steel pipe;
  • fruits and vegetables;
  • furniture;
  • processed foods, wines;
  • construction;
  • automotive accessories;
  • tobacco, cigarettes.

Investors and traders should investigate the situation in these industries and others, in order to evaluate their current potential, since it may have changed.

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