Small Enterprise Development in MACEDONIA

Small Enterprise Development
1. The Policy Framework
1.1 Macroeconomic situation
Following a decade of sluggish growth, due both to external shocks and internal
difficulties, the economic performance of the country is now improving. Economic
growth (in terms of real GDP) was 4% in 2005, driven primarily by strong exports
which in 2004 and 2005 increased by 20% each year; for 2006, the growth rate
is expected to be around 4.5 %. This represents the highest real growth rates in
the country since its independence in 1991.
Macroeconomic stabilisation continued in 2005, and a conservative fiscal policy
and a stable exchange rate have kept inflation largely under control. Since 2002,
annual inflation has averaged less than 1%, but it increased to 3.4 % in mid-
2006, largely due to external pressures. Putting this in context, the inflation in the
Euro zone was 2.2% in 2005, and remained largely constant during 2006.
In the past, persistent current account deficits created reserve shortages and led
to rising external debt. The external position has strengthened now, with gross
reserves rising from € 700 m at the end of 2004 to around € 1,200 m by mid-
2006. This has enabled the National Bank (NBRM) to cut interest rates (prime
lending) from 10% in October 2005 to below 6% in May 2006. Commercial banks
have matched these rate cuts to a certain degree, and the credit volume has
expanded, albeit from a low base. However, much of the increased lending goes
into consumer credit and is denominated in foreign currency.
Despite these recent improvements, the country still faces considerable challenges
in achieving sustained rapid growth and lowering unemployment. Unemployment
was 37% in 2005 (EU25 average: 8.6%), and employment figures have remained
more or less stagnant since 1995. With two-thirds of the unemployed being out
of work for more than four years, high youth unemployment and a low labour
force participation rate, much of the unemployment is structural in nature and
reducing it is proving rather difficult. Nevertheless, the unemployment rate is
starting to fall as the Agency for Employment has started to implement an active
labour market policy.
Foreign Direct Investment (FDI) has been recovering since 2002 and reached
US$151 million in 2004, after which it declined again somewhat to $113 million
in 2005. Total FDI in the country is about US$ 2.2 b or less than US$ 600 per
capita. This is lower than the regional average and substantially lower than in
neighbouring Bulgaria and Romania. In late 2006, the Government embarked
on an ambitious programme to attract more foreign investment into the country,
focusing on specific growth sectors.
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