Skopje, Former Yugoslav Republic of Macedonia. After a period of political turmoil, the country now needs to reignite growth (photo: iStockphoto/rozah13)

Spotlight on the Former Yugoslav Republic of Macedonia: Five Ways to Reform

November 22, 2017

The new Macedonian government, in office since June after two years of deepening political crisis, now has the opportunity to rekindle growth. After a prolonged period of uncertainty, the country needs to move forward with tax and labor market reforms, cut untargeted subsidies, and better manage its public finances, the report states.

With growth at 2.4 percent in 2016, the lowest in four years, the country needs to focus on these five key issues to help turn around the slowdown in growth:

  • Public debt is on the rise: create budgetary roomPublic debt has almost doubled since 2008, reaching 45 percent in 2016, and could hit 53 percent by 2022. To be able to reduce the public debt and make room for maneuver for the longer term, the IMF proposes a series of measures, including more efficient collection of value added taxes, higher taxes on property and energy, and scaled-down untargeted subsidies. In addition, the government should protect those who are most vulnerable through more efficient social spending: excluding pensions, only a quarter of social spending currently goes to the bottom fifth of the population.
  • The quality of public institutions and of the judiciary has been on the decline: pursue planned reforms steadfastlyThe government’s ambitious agenda is appropriately focusing on improving public institutions, the judiciary, and public finance management. Inefficient and opaque state bureaucracies and courts have stymied investment and hindered deeper integration with the European Union. For reforms to work and match implementation capacity, they must be well-prioritized and gradual.
  • Unemployment is high: invest in skills and lower the tax burden—The unemployment rate, at 23 percent, is among the highest in Europe and is concentrated mostly among the young and those with few skills. Curing this long-standing problem requires on-the-job training and the improvement of skills. The labor tax burden on low-earners can be eased through lower social security contributions. Overall and for the long term, investment in education and skills remains imperative.
  • Minimum wages are high: further increases should reflect improving productivity—The minimum wage, currently around 60 percent of GDP per person, is high when compared with peers in emerging Europe. Planned further large increases could jeopardize the country's competitiveness. Additional harm could result if mandatory higher wages force people into informal employment, and the young would suffer the most. The welfare impact on the poor of a higher minimum wage is also somewhat questionable given that 70 percent of the poor in FYR Macedonia are either unemployed or outside the labor force.
  • The population is aging: bring more women to work and reform pensions—FYR Macedonia has one of the lowest female labor force participation rates in Europe. At the same time, the mandatory retirement age is lower than the average for the continent. The country must make most of its labor force to counter the negative demographic trend. More affordable and accessible child care, leave policies that help working mothers, a higher retirement age, and removal of loopholes for early retirement are the formula for success.