NATO Economic Colloquium 1997

Economic Reforms in the Republic of Macedonia (1) Olgica Vasilevska Ministry of Foreign Affairs, Republic of Macedonia Macedonia is at the heart of the Balkans. Political and economic stability in Macedonia helps to promote stability in the wide Balkan area. Macedonia has developed a civic society, respects human rights, has built democratic institutions and created a free market economy. European orientation is an integral part of Macedonian political, economic and social development. Although Macedonia is close to regions of instability, it is overcoming such difficulties by building good neighbourly relations and cooperation in the region. Our strategic goal is full membership in the European Union and full membership of NATO. We have signed the Agreement for Cooperation with the EU and we are preparing our application for association status. Our participation and work in regional organisations and integration is evident. The Republic of Macedonia is an active member of CEI which has steadily increased its international credibility. Macedonia was among the first countries to give unconditional support to the South-Eastern Europe Cooperation Initiative. The ultimate goal of this and other initiatives is development of mutual cooperation in the region; a goal that Macedonia fully supports. Macedonia is a member of all international financial institutions: the World Bank, International Monetary Fund, European Bank for Reconstruction and Development (EBRD), International Fund for Agricultural Development (IFAD). The Republic of Macedonia establishes its position in international economic relations through observance of international principles and standards. This endeavour can be seen in the commitment of the Republic of Macedonia to become a member of the World Trade Organisation. Recently, the Republic of Macedonia has succeeded in attaining long-term macroeconomic stability; inflation has been reduced to the level of developed industrial countries, the exchange rate of the denar is stable, the budget deficit has been reduced, while 1996 will be remembered as a year when the long recessionary trend stopped and the growth of industrial production commenced. Since 1993 until the present day, in cooperation with the IMF and the World Bank, the government has made important changes in monetary and fiscal policy. New types of taxes have been imposed such as the corporate profit tax, personal income tax, income tax and property tax. A value added tax will be introduced in 1998. Budget expenses have been drastically reduced and adjusted to the level of budgetary revenues; at the same time the budget deficit has been reduced to the level of the liabilities the state has towards foreign countries. All types of former social spending which represented non-market or state financing of enterprises have been eliminated from the budget, which has been reduced to the minimum functions of the state. The participation of fiscal inflow in overall state revenues decreased from 43.6% in 1996 to 41% in 1997. The Republic of Macedonia regularly services its debt owed to foreign creditors: the IMF, the World Bank, the Paris Club of Creditors and the London Club. The overall foreign debt of the Republic of Macedonia at 31 June 1996 was US$1,105m. This sum includes outstanding liabilities to the European Investment Bank of US$35m which will be paid during 1997. In order to completely transform the socio-economic system, the Assembly has adopted 186 new laws and has amended a further 305. Many old laws have been removed. The government has the firm intention to further harmonise the legal system and to adopt European standards. The general aim is to safeguard consistency, to harmonise the legal system and to either adjust or eliminate provisions from the former socialist-based system to clear the path for the operation of an open economy. In short, the legal system and institutional framework consistent with a market economy has been almost completed. According to the Privatisation Agency of the Republic of Macedonia, a total of 1,216 enterprises have been privatised, 113 of which are large enterprises, 273 are medium-sized and 830 are small enterprises. By the end of December 1996, 930 enterprises (77% of the total number) with a total capital value of DM2.19m had been privatised, while 290 are currently undergoing the process of privatisation which is expected to be completed by the end of 1997. It is important to note that privatisation in the Republic of Macedonia has also occurred through the creation of new private businesses. By 31 July 1996, there were 90,000 registered enterprises in Macedonia, 86,000 of which were privately owned. The private sector is becoming an important driving force in the Macedonian economy, responsible for 65% of gross income, 47% of employment, and 70% of total profits. By the end of 1997, enterprises and cooperatives in the field of agriculture will begin the process of privatisation. Macedonia has rapidly liberalised its economy. The World Bank has recognised this fact by ranking the country at a relatively high level. There is a positive correlation between GDP and liberalisation, but despite these achievements, other transition countries have proved to be much more attractive for FDI. One of the priorities in establishing overall economic policy is the creation of incentives for a larger inflow of foreign capital. There has been practically no inflow of foreign capital due the high political risk in the Balkans. According to the World Development Report of the World Bank, only US$36m was invested in our country from 1989 until 1995. By comparison, Albania received US$186m, Bulgaria US$397m, and Romania over US$1bn. Macedonia should no longer be considered as a risk area, on the contrary, the internal situation is stable. Macedonia has developed infrastructure, educated human resources and a solid industrial base - much more than can be claimed by some of its neighbours. In the present period we attach great attention to attracting foreign investments. What is it that Macedonia could offer to the world? Macedonia has much to offer foreign investors in agriculture, food processing, metallurgy, chemicals, and in the leather goods industry. More specifically, the agro-processing industry could be improved by both modernising existing and building new packaging and processing facilities. The capacity to produce automotive parts, electrical appliances and packaging already exists, but needs to be modernised by the implementation of new technologies. Information and communication technology is considered to be the most promising growth sector followed by the chemical industry. To sum up, Macedonia offers an FDI friendly atmosphere, an acceptable legal framework, a well trained technical workforce, a tradition in private entrepreneurship in cooperation with foreigners and a solid industrial base. Macedonia has liberalised its import and export regime and has signed Free Trade Agreements with Slovenia, Croatia and FR Yugoslavia and has proposed respective agreements with Bosnia, Albania and Bulgaria. The agreements set customs tariffs at the very low level of 1-2% for a "natural regional" market of some 26 million inhabitants. This means that Macedonia does not represent a small limited market, but a centrally located market which can serve the whole Balkan region. In a previous era, Macedonia used to be one of the poorest regions within former Yugoslavia, comprising 10% of the territory, 8.5% of the population but just 5% of Yugoslavian GDP. As an independent country, our future is now in our hands. Macedonia sees its future in improving its macroeconomy, further liberalisating its trade policy, and introducing better trade finance practices. These processes will result in deeper integration with the European Union and the rest of the World. Footnotes Turkey recognises the Republic of Macedonia with its constitutional name