## 1mkdea2022003 — VAT in North Macedonia; Revenue Administration; Public Investment Management

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### VAT in North Macedonia: statutory framework and recent measures
- Standard VAT rate: 18 percent.
- Reduced rates: 5 percent and 10 percent.
  - 5 percent rate applies to food, agricultural inputs, hotels, residential water supply, transport, and pharmaceuticals, among other goods and services.
  - 10 percent rate applies to restaurant services.
- Recent policy measures and estimated fiscal impacts:
  - MyVAT reimbursement scheme (introduced July 2019): refunds individuals who remit consumption invoices; cap per family of four at MKD 28,800 per year (MKD 7,200 or approximately €120 per person). Refunds amounted to about 0.2 percent of GDP in 2020. Authorities have announced intention to increase the cap.
  - Reduced VAT rate of 10 percent on restaurant services effective January 2021 (applies to on-site and delivery services, excluding alcoholic beverages). Estimated fiscal cost: about 0.2 percent of GDP.
  - Residential electricity included under the 5 percent rate as of mid-July 2021 (temporary: increase to 10 percent as of July 2022 and back to 18 percent as of July 2023). Fiscal cost: approximately 0.1 and 0.2 percent of GDP respectively in 2021 and 2022.
  - Proposal for a new ecotax on fuels with an estimated revenue impact of about 0.5 percent of GDP.

### VAT efficiency and potential revenue space (2019 data and comparative context)
- VAT performance indicators (2019):
  - VAT C-Efficiency ratio: 0.58.
  - VAT Productivity ratio: 0.42.
  - VAT rate: 18 percent.
- Comparative context (selected averages):
  - Average (excluding North Macedonia) VAT C-Efficiency: 0.72; VAT Productivity: 0.54; VAT Rate: 20.1 percent.
  - EU-27 VAT C-Efficiency: 0.58; VAT Productivity: 0.37; VAT Rate: 21.5 percent.
- Key findings and quantified potential:
  - Both the VAT C-Efficiency ratio (0.58) and Productivity ratio (0.42) are among the lowest in the region.
  - If North Macedonia raised its productivity ratio to a level similar to the region’s average, VAT receipts could potentially increase by over 2 percent of GDP (relative to 2019) with the existing statutory rate.
  - The combined VAT shortfall (from the C-Efficiency estimation) is 42 percent of potential tax revenue.
  - A World Bank study provides a similar estimate, with the respective shares of the “policy” and “compliance” gaps at 45 and 55 percent. Applying these proportions implies a VAT policy gap of 19 percent of potential tax revenue, representing close to 2.5 percent of GDP.

### Drivers of VAT shortfalls and policy exceptions
- Extensive use and expansion of reduced rates and exemptions over time have reduced the taxable base.
- Preferential treatments and exemptions are not comprehensively identified, measured, and reported.
- Tax expenditures are not systematically estimated; the new Organic Budget Law (to be adopted) provides for such assessment with a plan to release a full report by 2023.
- Distinction between components of the gap:
  - Policy component: exceptions to fully taxing the consumption base at the standard rate.
  - Administration component: difference between potential revenue under existing policy and actual revenues.

### Revenue administration: strengths and weaknesses of the Public Revenue Office (PRO)
- Strengths:
  - Many taxpayer services (pre-filling, electronic submission) yield high on-time filing rates.
  - Extensive use of electronic withholding and advance payments.
  - Annual reports and strategic and operational plans published in a timely manner.
- Weaknesses limiting effectiveness:
  - Fragmented IT processes: PRO has limited access to and control of the central taxpayer register held by a separate agency, preventing a real-time whole-of-taxpayer view.
  - Limited scope compliance risk management: compliance risk management not strategically executed across the PRO; processes not centralized; identification, assessment, ranking and quantification of compliance risks do not cover all tax types and major sectors.
  - Shortcomings in large taxpayer management: on-time VAT payment by large taxpayers is weak; audit programs not focused on large taxpayers; no documented compliance improvement plans for this segment.
  - Suboptimal dispute resolution: administrative review is not independent from audit; administrative court often acts as the first stage and procedures normally take more than a year.
  - Deficiencies in VAT refunds: limited automatic risk assessment of VAT returns; much manual work; only a third of refunds (by amount) are paid within 30 days.
  - Insufficient consultations with taxpayers: surveys and meetings conducted but not through an independent agency and mostly ad-hoc.

### Policy recommendations — revenue mobilization priorities (VAT and broader tax system)
- Increase progressivity of income taxation:
  - Reinstating the personal income tax reform would provide additional revenue and improve equity.
  - Consider exemption threshold, the top rate and the income level at which it applies, and the rate on capital income to balance equity and efficiency.
- Reduce preferential treatments where appropriate:
  - Conduct the planned comprehensive analysis of tax expenditures to increase transparency and evaluate cost-benefit of special regimes in direct and indirect taxation, comparing them with direct spending policies and ultimately reviewing their scope.
  - The sizeable VAT policy gap indicates substantial potential revenue space; recent introduction of a second reduced VAT rate and widespread preferential treatments illustrate the difficulty of containing pressures for expanding special treatments.
- Property taxation:
  - Raise recurrent tax on immovable property and reduce related exemptions gradually over several years to capture non-negligible revenue potential and support fiscal decentralization.
  - Property taxes are found to be among the least distortive for economic growth.
- Environmental taxation:
  - Carbon taxes are recommended to reflect the social cost of emissions and price the pollution currently externalized.
  - Carbon and other environmental taxes can raise collections while supporting a green post-pandemic recovery.

### Improved revenue administration is key to reaping the full benefits of such reform (chapter highlights)
- Several priorities remain which, if implemented, could lead to better collection capacity, a critical success factor for an overhaul of the country’s tax system.
- Needed actions:
  - Strong reform leadership and governance to drive the reform program as a coherent set of initiatives and ensure adequate oversight and project management.
  - IT modernization and subsequent transformation of the PRO’s organization and processes to enhance taxpayer services and increase reliance on data driven processes.
  - A more systematic approach to compliance risk management to improve coverage and targeting of risks.
  - Improve tax audit methods (including through reliance on indirect methods) and strengthen the Large Taxpayer Office.
  - Strengthen dispute resolution independence and reduce delays.

### Public Investment Management (PIM): diagnostic and implementation priorities
- Digital and adoption gaps:
  - Electronic interaction of individuals with public institutions is well below EU levels; purchase of goods/services via Internet and digital banking remains relatively underdeveloped.
  - Broadband widely available, but internet connections lag in speed; digital competences and skills of individuals are relatively low (data referenced for 2019 or latest available year).
- PIMA findings (January 2020):
  - Procurement for capital projects is open and transparent.
  - Financing for capital spending during implementation is made available in a timely manner.
  - Many policies and procedures governing public investment are either not aligned or only partially aligned with good practices; fragmentation affects all stages of the PIM cycle.
  - Framework performs differently “on paper” (institutional design) versus “in practice” (effectiveness).
- Planning-stage weaknesses and remedies:
  - Improve project prioritization and alignment of sectoral strategies with strategic plans of line ministries and procurement agencies.
  - Subject major capital projects to rigorous technical, economic, and financial analysis using a standard methodology for project appraisal.
  - Strengthen coordination between central and local governments; make capital transfers to municipalities more transparent; improve reporting of contingent liabilities from projects financed outside the central government budget.
  - Enhance monitoring of public corporations for more efficient investment.
- Allocation-stage weaknesses and remedies:
  - Project prioritization and selection and multiyear budgeting need improvement.
  - Create a single pipeline of appraised capital projects to facilitate prioritization and a level playing field.
  - Use standard and comparable methodologies across sectors for project selection.
  - Introduce multiyear ceilings on capital expenditure at the level of line ministries, sectors, or programs.
  - Present individual capital projects comprehensively in the budget; report all public investment spending regardless of funding source.
- Implementation-stage weaknesses and remedies:
  - Improve portfolio management and oversight to identify cost overruns and project delays and enable timely corrective action.
  - Transparent monitoring and reporting of public assets to inform planning of investment and maintenance needs.
- Role of the Ministry of Finance:
  - Laws and regulations could better support its role as gatekeeper during the public investment cycle.
  - Establish a dedicated team and an adequate information system to enhance PIM-related functions.
  - Ensure individual capital projects can be identified and presented in budget documentation.
- Authorities’ recent actions:
  - Introduced “CAPEF” incentive-based mechanism for reallocating capital spending appropriations in-year.
  - Adopted a PIM action plan and established working groups for implementation.
  - A new Organic Budget Law has been prepared and is being discussed in parliament; a new PPP law is planned.
  - Functional and technical requirements of an integrated financial management information system have been further developed, including detailed specifications for the PIM component.

### Macroeconomic effects of scaling up public investment — empirical evidence, model simulations, and applications to North Macedonia
- Empirical evidence cited:
  - IMF (2014): A 1 percent of GDP increase in investment spending sustained over a 10-year period raises the level of GDP by about 0.4 percent in the same year and by 1.5 percent four years after the shock for advanced economies; the effect close to doubles in countries with a high degree of public investment efficiency.
  - Ari et al. (2020): Public investment booms tend to be associated with larger increases in output in CESEE countries and the average Western Balkan country; effects increase with slack in the economy, a lower capital stock, and higher infrastructure quality.
- Model-based simulation (GIMF calibrated to average Western Balkan country, Ari et al. (2020)):
  - A sustained 1 percent of GDP increase in public investment over a 10-year period increases output by 0.7 percent above the baseline in the first year and to about 2.5 percent above the baseline after 10 years.
  - The effect increases by an additional 0.3 percentage points if accompanied by improved investment efficiency.
  - Regional coordination and improved connectivity can amplify effects.
- Stylized shock results — GDP level deviation from baseline of a shock that brings public infrastructure investment above its baseline by 1 percent of GDP for 10 years:
  - Financing — Tax: T+0 0.66; T+5 1.42; T+10 2.51; T+15 2.41
  - Financing — Expenditure: T+0 0.74; T+5 1.52; T+10 2.83; T+15 2.47
  - Financing — Debt: T+0 0.70; T+5 1.65; T+10 2.52; T+15 2.43
  - Investment Efficiency — Unchanged Efficiency: T+0 0.70; T+5 1.65; T+10 2.52; T+15 2.43
  - Investment Efficiency — Improved Efficiency: T+0 0.73; T+5 1.81; T+10 2.82; T+15 2.70
  - Regional Coordination — Coordinated Investment: T+0 0.73; T+5 1.81; T+10 2.82; T+15 2.70
  - Regional Coordination — Improved Connectivity: T+0 1.10; T+5 2.96; T+10 4.54; T+15 4.74
- Application to North Macedonia:
  - Government’s medium-term fiscal strategy (adopted December 2021) targets an increase in capital expenditure of 0.8 percent of GDP in 2022 and a further rise from 2024.
  - IMF staff calculations find public investment would contribute 0.5 percentage points to GDP growth in 2022 relative to a baseline where government capital spending is kept constant as a share of GDP at the level for 2021 projected in the medium-term fiscal strategy.
  - Growth effect continues in outer years as public investment is further scaled up from 2024, adding 0.4–0.5 percentage points to annual growth in the outer years.
  - Note: Government capital spending was already scaled up by 0.9 percent of GDP in 2021; the lagged effect of this increase is not included in the simulation.
  - Calculations do not assume under-execution of public investment, which has been substantial in the past.

### Policy considerations for PIM and investment scaling
- Strengthen public investment management:
  - Implement rigorous and transparent arrangements for appraisal, selection, and implementation of investment projects.
  - Better integrate PPPs within the overall PIM framework and increase consistency between national strategic planning and capital budgeting.
  - Complete ongoing work to address the PIMA recommendations without delay.
- Assess and manage fiscal risks:
  - Develop a risk-management function to minimize probability that risks materialize, assess fiscal impact, and cope with realized risks.
  - Recognize sources of risks: unrealistic costings, underestimated scope, appraisal and coordination failures, funding shortfalls, poor project management, and insufficient demand.
- Diversify financing sources:
  - Increase private sector involvement where appropriate to capture technical expertise, bundling economies, and improved cost recovery.
  - Use risk mitigation instruments such as minimum revenue guarantees, guarantees and insurance contracts, export credit guarantees, grants, and tax incentives to attract private financing.
- Consider regional coordination:
  - Regional coordination and cross-border projects can amplify benefits via improved connectivity and integration with the EU single market.
  - Be mindful of coordination, legal and regulatory compatibility, asymmetric information and shocks, and risk sharing; supranational initiatives and international donors can help mitigate risks.
- Include climate transition in recovery planning:
  - Reduce carbon footprint and mitigate/adapt to climate change as an important element of public investment planning given potential fiscal costs of future natural disasters and the increasing financial cost of CO2 emissions.
- Apply credible assumptions on growth impacts and spillovers:
  - Expect the largest growth effect during the initial scaling-up phase; long-term growth dividends are more modest and may be temporarily negative as public investment is normalized.
  - Ensure scaling-up is accompanied by sound PIM to maximize medium- and long-term dividends.

*Source: 1mkdea2022003 - 1. VAT in North Macedonia: Recent Measures, Tax Efficiency, and Potential Revenue; 11. Improved revenue administration is key to reaping the full benefits of such reform.; 15. Information and communications technologies have become increasingly available to*

### 1. VAT in North Macedonia: Recent Measures, Tax Efficiency, and Potential  Revenue

### 1. VAT in North Macedonia: Recent Measures, Tax Efficiency, and Potential  Revenue

### Introduction and context
- North Macedonia’s tax burden was among the lowest in the Western Balkans and well below EU levels prior to the pandemic. Boosting revenue is a top priority to build fiscal space and scale up investment in human and physical capital.
- The government adopted a comprehensive strategy in December 2020 to improve tax fairness, strengthen revenue collection, increase tax transparency and quality of taxpayer services, and introduce environmental taxation. Annual Action Plans will determine specific measures and sequencing.
- In 2019, taxes on energy, transport, pollution, and resources accounted for 1.9 percent of GDP.

### VAT statutory framework and recent measures
- Standard VAT rate: 18 percent.
- Reduced rates: 5 percent and 10 percent.
  - The 5 percent rate applies to food, agricultural inputs, hotels, residential water supply, transport, and pharmaceuticals, among other goods and services.
  - The 10 percent rate applies to restaurant services.
- Recent policy measures:
  - MyVAT reimbursement scheme (introduced July 2019): refunds individuals who remit consumption invoices; cap per family of four at MKD 28,800 per year (MKD 7,200 or approximately €120 per person). Refunds amounted to about 0.2 percent of GDP in 2020. Authorities have announced intention to increase the cap.
  - Reduced VAT rate of 10 percent on restaurant services effective January 2021 (applies to on-site and delivery services, excluding alcoholic beverages). Estimated fiscal cost: about 0.2 percent of GDP.
  - Residential electricity included under the 5 percent rate as of mid-July 2021 (temporary: increase to 10 percent as of July 2022 and back to 18 percent as of July 2023). Fiscal cost: approximately 0.1 and 0.2 percent of GDP respectively in 2021 and 2022.
  - Proposal for a new ecotax on fuels with an estimated revenue impact of about 0.5 percent of GDP.

### VAT efficiency and potential revenue space
- VAT efficiency measures (2019):
  - VAT C-Efficiency ratio: 0.58.
  - VAT Productivity ratio: 0.42.
  - VAT rate: 18 percent.
- Comparative context (selected):
  - Average (excluding North Macedonia) VAT C-Efficiency: 0.72; VAT Productivity: 0.54; VAT Rate: 20.1 percent.
  - EU-27 VAT C-Efficiency: 0.58; VAT Productivity: 0.37; VAT Rate: 21.5 percent.
- Key findings:
  - Both the VAT C-Efficiency ratio (0.58) and Productivity ratio (0.42) are among the lowest in the region.
  - If North Macedonia raised its productivity ratio to a level similar to the region’s average, VAT receipts could potentially increase by over 2 percent of GDP (relative to 2019) with the existing statutory rate.
  - The combined VAT shortfall (from the C-Efficiency estimation) is 42 percent of potential tax revenue.
  - A World Bank study provides a similar estimate, with the respective shares of the “policy” and “compliance” gaps at 45 and 55 percent. Applying these proportions implies a VAT policy gap of 19 percent of potential tax revenue, representing close to 2.5 percent of GDP.

### Drivers of VAT shortfalls and policy exceptions
- Extensive use and expansion of reduced rates and exemptions over time have reduced the taxable base.
- Preferential treatments and exemptions are not comprehensively identified, measured, and reported. Tax expenditures are not systematically estimated; the new Organic Budget Law (to be adopted) provides for such assessment with a plan to release a full report by 2023.
- Policy vs. administration components:
  - The policy component reflects exceptions to fully taxing the consumption base at the standard rate.
  - The administration component represents the difference between potential revenue under existing policy and actual revenues.

### Revenue administration: strengths and weaknesses
- Strengths of the Public Revenue Office (PRO):
  - Many taxpayer services (pre-filling, electronic submission) yield high on-time filing rates.
  - Extensive use of electronic withholding and advance payments.
  - Annual reports and strategic and operational plans published in a timely manner.
- Weaknesses that limit effectiveness:
  - Fragmented IT processes (PRO has limited access to and control of the central taxpayer register held by a separate agency), preventing a real-time whole-of-taxpayer view.
  - Limited scope compliance risk management: compliance risk management not strategically executed across the PRO; processes not centralized; identification, assessment, ranking and quantification of compliance risks do not cover all tax types and major sectors.
  - Shortcomings in large taxpayer management: on-time VAT payment by large taxpayers is weak; audit programs not focused on large taxpayers; no documented compliance improvement plans for this segment.
  - Suboptimal dispute resolution: administrative review is not independent from audit; administrative court often acts as the first stage and procedures normally take more than a year.
  - Deficiencies in VAT refunds: limited automatic risk assessment of VAT returns; much manual work; only a third of refunds (by amount) are paid within 30 days.
  - Insufficient consultations with taxpayers: surveys and meetings conducted but not through an independent agency and mostly ad-hoc.

### Policy recommendations (priorities for revenue mobilization)
- Increase progressivity of income taxation:
  - Reinstating the personal income tax reform would provide additional revenue and improve equity.
  - Consideration of the exemption threshold, the top rate and the income level at which it applies, and the rate on capital income to balance equity and efficiency.
- Reduce preferential treatments where appropriate:
  - Conduct the planned comprehensive analysis of tax expenditures to increase transparency and evaluate cost-benefit of special regimes in direct and indirect taxation, comparing them with direct spending policies and ultimately reviewing their scope.
  - The sizeable VAT policy gap indicates substantial potential revenue space; recent introduction of a second reduced VAT rate and widespread preferential treatments illustrate the difficulty of containing pressures for expanding special treatments.
- Property taxation:
  - Raise recurrent tax on immovable property and reduce related exemptions gradually over several years to capture non-negligible revenue potential and support fiscal decentralization.
  - Property taxes are found to be among the least distortive for economic growth.
- Environmental taxation:
  - Carbon taxes are recommended to reflect the social cost of emissions and price the pollution currently externalized.
  - Carbon and other environmental taxes can raise collections while supporting a green post-pandemic recovery.

*Source: 1mkdea2022003 - 1. VAT in North Macedonia: Recent Measures, Tax Efficiency, and Potential  Revenue*

### 11.      Improved revenue administration is key to reaping the full benefits of such reform.

### 11.      Improved revenue administration is key to reaping the full benefits of such reform.

### Key findings on revenue administration and tax system reform
- Despite progress in some areas, several priorities remain which, if implemented, could lead to better collection capacity, a critical success factor for an overhaul of the country’s tax system.
- Strong reform leadership and governance are needed to drive the reform program as a coherent set of initiatives and ensure adequate oversight and project management.
- IT modernization and subsequent transformation of the PRO’s organization and processes would help:
  - enhance taxpayer services, and
  - increase reliance on data driven processes.
- A more systematic approach to compliance risk management is important to improve coverage and targeting of risks.
- Improving tax audit methods (including through reliance on indirect methods) and strengthening the Large Taxpayer Office should also be a priority.
- See WB (2020).

### Context within the government’s Growth Acceleration Plan and financing implications
- The Growth Acceleration Plan intends to scale up public investment substantially over the next five years and should be accompanied by a strengthening of the public investment management framework to maximize benefits.
- The plan aims to make more efficient use, including by improving systematic under-execution, of publicly funded investment in the amount of 4 billion euros (32 percent of GDP) over 2022-26.
- The government aims to mobilize an additional 8 billion euros in private investment, reaching a total of 12 billion euros over the five-year period.
- The plan would be financed through a multitude of financing sources and instruments and has a complex governance structure (public and private means; support from international development partners; possible instruments include development bonds, project bonds, green bonds, PPPs, privatization of non-essential public assets, state funds, fund of funds, venture capital, crowdfunding).
- Transparency and independent assessments are required to avoid political interference in the plan’s governance.

### Projected macroeconomic impacts tied to investment scaling and revenue performance
- The government expects to more than double public investment in 2022-26 compared to the previous decade (in nominal terms).
- Together with the assumed increase in private investment, total investment is projected to rise from an average of 30.2 percent of GDP in the previous decade to 38.2 percent of GDP by 2026.
- On this basis, the government expects the annual real GDP growth rate to rise to 5.7 percent by 2026, from an average of 2.6 percent in the previous decade.
- These expectations are based on favorable macroeconomic assumptions, including regarding productivity, employment and wage growth, private consumption, and external trade.

### Implementation priorities for revenue administration to support the investment plan
- Provide strong reform leadership and governance to ensure reforms are implemented as a coherent program with adequate oversight and project management.
- Modernize IT systems in the tax administration and transform the PRO’s organization and processes to enable data-driven taxpayer services and compliance work.
- Adopt a systematic compliance risk management framework to improve risk coverage and targeting.
- Strengthen tax audit capabilities, including greater use of indirect audit methods.
- Strengthen the Large Taxpayer Office to improve oversight and collection from major taxpayers.

*Italic: Source — Excerpt from IMF chapter: “11. Improved revenue administration is key to reaping the full benefits of such reform.”*

### 15. Information and communications technologies have become  increasingly available to

### 1mkdea2022003 - 15. Information and communications technologies have become  increasingly available to

### Digital adoption and gaps
- Electronic interaction of individuals with public institutions (e.g., obtaining information, downloading forms, returning filled-in forms) is well below EU levels.
- Purchase of goods and services via the Internet and digital banking remains relatively underdeveloped.
- Use of electronic communications by firms to run, integrate, and improve business processes, share information internally, or communicate with business partners and customers is also below EU levels.
- Broadband is widely available, but internet connections appear to lag in speed.
- Digital competences and skills of individuals are relatively low; data referenced for digital skills are for 2019 or latest available year.

### Public Investment Management (PIM) assessment and findings
- The IMF’s Public Investment Management Assessment (PIMA) framework examines 15 key practices (“institutions”) and 3 cross-cutting enabling factors across the public investment cycle: planning, allocation, implementation.
- An IMF PIMA assessment was undertaken in January 2020 and found:
  - Procurement for capital projects is open and transparent.
  - Financing for capital spending during implementation is made available in a timely manner.
  - Many policies and procedures governing public investment are either not aligned or only partially aligned with good practices, with fragmentation affecting all stages of the PIM cycle.
  - The framework performs differently “on paper” (institutional design) versus “in practice” (effectiveness).
- Planning-stage weaknesses:
  - Need to improve project prioritization and alignment of sectoral strategies with strategic plans of line ministries and procurement agencies.
  - Major capital projects should be systematically subject to rigorous technical, economic, and financial analysis using a standard methodology for project appraisal.
  - Strengthen coordination between central and local governments; make capital transfers to municipalities more transparent; improve reporting of contingent liabilities from projects financed outside the central government budget.
  - Enhance monitoring of public corporations for more efficient investment.
- Allocation-stage weaknesses:
  - Project prioritization and selection and multiyear budgeting need improvement.
  - A single pipeline of appraised capital projects is recommended to facilitate prioritization and a level playing field for budgetary resources.
  - Use standard and comparable methodologies across sectors for project selection.
  - Introduce multiyear ceilings on capital expenditure at the level of line ministries, sectors, or programs.
  - Present individual capital projects comprehensively in the budget; report all public investment spending regardless of funding source to increase budget comprehensiveness.
- Implementation-stage weaknesses:
  - Portfolio management and oversight could be improved; absence of sectoral or national oversight prevents clear identification of cost overruns and project delays and timely corrective action.
  - Transparent monitoring and reporting of public assets would inform planning of investment and maintenance needs.
- Role of the Ministry of Finance:
  - Laws and regulations could better support its role as gatekeeper during the public investment cycle.
  - Establishing a dedicated team and an adequate information system would enhance PIM-related functions.
  - Important that individual capital projects can be identified and presented in budget documentation.
- Authorities’ recent actions:
  - Introduced a new, incentive-based mechanism (“CAPEF”) for reallocating capital spending appropriations in-year.
  - Adopted a PIM action plan and established working groups for implementation.
  - A new Organic Budget Law has been prepared and is being discussed in parliament; a new PPP law is planned.
  - Functional and technical requirements of an integrated financial management information system have been further developed, including detailed specifications for the PIM component.

### Macroeconomic effects of scaling up public investment
- Short-term and medium-term impacts depend on: type of investment, state of business cycle, marginal return on additional capital, level of public debt, financing sources, absorptive capacity constraints, and complementarity to private investment.
- Empirical evidence:
  - IMF (2014): A 1 percent of GDP increase in investment spending sustained over a 10-year period raises the level of GDP by about 0.4 percent in the same year and by 1.5 percent four years after the shock for advanced economies; the effect close to doubles in countries with a high degree of public investment efficiency.
  - Ari et al. (2020): Public investment booms tend to be associated with larger increases in output in CESEE countries and the average Western Balkan country; effects increase with slack in the economy, a lower capital stock, and higher infrastructure quality.
- Model-based simulation (GIMF calibrated to average Western Balkan country, Ari et al. (2020)):
  - A sustained 1 percent of GDP increase in public investment over a 10-year period increases output by 0.7 percent above the baseline in the first year and to about 2.5 percent above the baseline after 10 years.
  - The effect increases by an additional 0.3 percentage points if accompanied by improved investment efficiency.
  - Regional coordination and improved connectivity can amplify effects.
- Stylized shock results (Table: GDP level deviation from baseline of a shock that brings public infrastructure investment above its baseline by 1 percent of GDP for 10 years):
  - Financing — Tax: T+0 0.66; T+5 1.42; T+10 2.51; T+15 2.41
  - Financing — Expenditure: T+0 0.74; T+5 1.52; T+10 2.83; T+15 2.47
  - Financing — Debt: T+0 0.70; T+5 1.65; T+10 2.52; T+15 2.43
  - Investment Efficiency — Unchanged Efficiency: T+0 0.70; T+5 1.65; T+10 2.52; T+15 2.43
  - Investment Efficiency — Improved Efficiency: T+0 0.73; T+5 1.81; T+10 2.82; T+15 2.70
  - Regional Coordination — Coordinated Investment: T+0 0.73; T+5 1.81; T+10 2.82; T+15 2.70
  - Regional Coordination — Improved Connectivity: T+0 1.10; T+5 2.96; T+10 4.54; T+15 4.74
- Application to North Macedonia:
  - Government’s medium-term fiscal strategy (adopted December 2021) targets an increase in capital expenditure of 0.8 percent of GDP in 2022 and a further rise from 2024.
  - IMF staff calculations find public investment would contribute 0.5 percentage points to GDP growth in 2022 relative to a baseline where government capital spending is kept constant as a share of GDP at the level for 2021 projected in the medium-term fiscal strategy.
  - Growth effect continues in outer years as public investment is further scaled up from 2024, adding 0.4–0.5 percentage points to annual growth in the outer years.
  - Note: Government capital spending was already scaled up by 0.9 percent of GDP in 2021; the lagged effect of this increase is not included in the simulation.
  - Calculations do not assume under-execution of public investment, which has been substantial in the past.

### Policy considerations and recommendations
- Strengthen public investment management:
  - Implement more rigorous and transparent arrangements for appraisal, selection, and implementation of investment projects.
  - Better integrate PPPs within the overall PIM framework and increase consistency between national strategic planning and capital budgeting.
  - Complete ongoing work to address the PIMA recommendations without delay.
- Assess and manage fiscal risks:
  - Develop a risk-management function to minimize probability that risks materialize, assess fiscal impact, and cope with realized risks.
  - Recognize sources of risks: unrealistic costings, underestimated scope, appraisal and coordination failures, funding shortfalls, poor project management, and insufficient demand.
- Diversify financing sources:
  - Increase private sector involvement where appropriate to capture technical expertise, bundling economies, and improved cost recovery.
  - Use risk mitigation instruments such as minimum revenue guarantees, guarantees and insurance contracts, export credit guarantees, grants, and tax incentives to attract private financing.
- Consider regional coordination:
  - Regional coordination and cross-border projects can amplify benefits via improved connectivity and integration with the EU single market.
  - Be mindful of coordination, legal and regulatory compatibility, asymmetric information and shocks, and risk sharing; supranational initiatives and international donors can help mitigate risks.
- Include climate transition in recovery planning:
  - Reduce carbon footprint and mitigate/adapt to climate change as an important element of public investment planning given potential fiscal costs of future natural disasters and the increasing financial cost of CO2 emissions.
- Apply credible assumptions on growth impacts and spillovers:
  - Expect the largest growth effect during the initial scaling-up phase; long-term growth dividends are more modest and may be temporarily negative as public investment is normalized.
  - Ensure scaling-up is accompanied by sound PIM to maximize medium- and long-term dividends.

*Sources: Eurostat; Worldwide Broadband Speed League 2021; IMF staff calculations; IMF (2020); Ari et al. (2020); IMF (2014).*

### References

### References

### Cited works
- Ari, Anil, David Bartolini, Vizhdan Boranova, Gabriel Di Bella, Kamil Dybczak, Keiko Honjo, Raju Huidrom, Andreas Jobst, Nemanja Jovanovic, Ezgi Ozturk, Laura Papi, Sergio Sola, Michelle Stone, and Petia  Topalova. 2020. “Infrastructure in Central, Eastern, and Southeastern Europe: Benchmarking, Macroeconomic Impact, and Policy  Issues.” Departmental Paper 20/11, International Monetary Fund,  Washington, DC.
- Atoyan,  Ruben V., Dora Benedek, Ezequiel Cabezon, Giuseppe Cipollone, Jacques A. Miniane, Nhu Nguyen, Martin Petri, Jens Reinke, and James Roaf. 2018. “Public Infrastructure in the Western Balkans: Opportunities and Challenges.” Departmental Paper 18/02, International  Monetary Fund, Washington, DC.
- Government of the Republic of North Macedonia. 2021. “Growth Acceleration Plan 2022–2026.” Ministry of Finance and Prime Minister’s Office.
- International  Monetary Fund  (IMF). 2014. “Is it  Time for an Infrastructure Push?  The Macroeconomic Effects of Public Investment.”  Chapter 3, World Economic Outlook, IMF, Washington, DC.
- International Monetary Fund (IMF). 2015. “Making Public Investment  More Efficient.” Staff Report, IMF, Washington, DC.
- International Monetary Fund (IMF). 2019. “Public Investment  Management Assessment (PIMA): Strengthening Infrastructure Governance.” Fiscal Affairs Department, IMF,  Washington, DC.
- International  Monetary  Fund  (IMF).  2020. “Republic of North Macedonia: Public Investment Management Assessment.” Technical Report, Fiscal Affairs Department, IMF, Washington, DC.
- Monteiro, Rui, Isabel Rial, and Eivind Tandberg. 2020. “Chapter 11: Fiscal Risks in Infrastructure.” In Schwartz, Gerd, Manal Fouad, Torben Hansen, and Geneviève Verdier, eds. 2020. “Well Spent: How Strong Infrastructure Governance Can End Waste in Public Investment.”  International Monetary Fund, Washington, DC.

*Source: 1mkdea2022003 - References*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mkdea2022003.pdf_