IMF Wraps 2025 Article IV Talks with North Macedonia

• Growth in North Macedonia is anticipated to reach 3.3% in 2025, driven by domestic demand and public investment projects, although heightened external risks and uncertainties may weigh on this outlook.
• The National Bank has effectively managed recent challenges including bringing down inflation after the energy cost shock and is cautiously easing monetary policy. However, risks remain particularly linked to persistent core inflation driven by strong wage growth.
• The fiscal budget recorded a deficit of 4.4% of GDP, while public debt rose to 63% of GDP in 2024. Fiscal consolidation is essential to abide by fiscal rules and build policy buffers in an uncertain environment.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation for North Macedonia [1] and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis [2] . The authorities have consented to the publication of the Staff Report prepared for this consultation.

Economic growth in North Macedonia is gaining momentum in an environment of increased uncertainty. Growth is expected to reach at 3.3 percent in 2025, driven by stronger domestic demand as public investment projects (including the Corridor 8/10d road project) intensify and consumption is supported by government transfers and real wage growth. However, weak external demand, influenced by structural shifts in the European automotive sector and global uncertainties, is expected to weigh on growth.

Inflation has been volatile, increasing towards the end of 2024, but has fallen recently, in line with energy and food prices. Core inflation has become the main driver and remains persistent, fueled by strong wage growth. The National Bank of the Republic of North Macedonia (NBRNM), which has effectively managed recent challenges including the energy cost shock, has begun easing monetary policy more cautiously and with a lag following the European Central Bank.

The pace of fiscal consolidation in 2024 was slower than anticipated, in the context of an election year. Spending increases, including on wages and a new pension law replaced indexation with an ad-hoc 20 percent increase of the monthly average pension, resulting in a budget deficit of 4.4 percent of GDP. Public debt continues its upward trend, reaching 63 percent of GDP by end-2024. Fiscal rules include a limit on the budget deficit of 3 percent of GDP and a limit on general government debt of 60 percent of GDP, requiring the government to commit to a 5-year corrective plan when these limits are breached.

Domestic risks are elevated and the external outlook more uncertain. Weak public investment, stalled productivity reforms, emigration, and slowing activity of key trade partners threaten growth in the medium-term. Meanwhile, high real wage growth without productivity gains and increased fiscal transfers could further fuel inflation and erode competitiveness. Trade policy shifts and shocks to FDI may suppress exports and tighten financial conditions.

Following the Executive Board discussion, Mr. Bo Li, Deputy Managing Director and Chair, issued the following statement:

Executive Board Assessment

In concluding the 2025 Article IV consultation with North Macedonia, Executive Directors endorsed staff's appraisal, as follows:

The economy is expected to gain momentum, though risks are tilted to the downside. Growth is projected to reach 3.3 percent in 2025, driven by stronger domestic demand as public investment projects, including the Corridor 8/10d road project, intensify and consumption is supported by government transfers and real wage growth. However, inflation has accelerated with high food inflation despite administrative price controls and other interventions. Core inflation remains persistent fueled by strong wage growth. Domestic risks from weak public investment, emigration and stalled productivity reforms are elevated, while the external outlook has become more uncertain due to shocks to external demand from structural shifts in key partners and trade policy tensions. The external position in 2024 was assessed as stronger than the level implied by medium-term fundamentals and desirable policies.

A credible fiscal strategy is essential to rebuilding buffers, reducing debt and ensuring compliance with fiscal rules. This is key to maintaining market confidence, ensuring access to international capital, creating room for investment, and enhancing resilience against future shocks. The focus should be on:

• Controlling current spending: Further pension increases in September 2025 should be omitted and the authorities should return to a rule-based pension system in 2026—indexing only to inflation—to support consolidation while protecting pensioners' purchasing power. Public wage increases should be limited to inflation in the near term. The authorities should strengthen oversight to ensure public wage increases are consistent with achieving the fiscal rules. Over time, unifying the fragmented wage negotiating system will help prevent unexpected budget pressures.
• Mobilizing revenues. Tax reforms should focus on reducing tax expenditures, limiting reduced rates and exemptions, improving tax compliance, and revamping property tax.

Structural fiscal reforms are needed to strengthen fiscal governance and improve spending efficiency. Key steps include implementing the Public Investment Management decree and manual, adopting the PPP law, and conducting spending reviews to optimize budget spending. Managing fiscal risks, especially from SOEs and major projects like the Corridor 8/10d road, is crucial. The state-owned electricity generator, ESM, requires investments in technology and efficiency improvements to lower production costs and expand production, while gradually reducing its role in the subsidized, regulated market. Risks to the budget remain if production expansion falls short of the ambitious goal. The operationalization of the Fiscal Council is a positive step and it is encouraged to strengthen its independent assessments.

Administrative price controls will not stem long-term food inflation and may create distortions and hinder competition in the sector. Food inflation remained elevated in 2025, despite frequent use of administrative price controls. Future use may delay price increases, quelling short-term inflation, but does not solve underlying structural factors and can lead to large price increases once measures are removed. Additionally, continued reactionary interventions create uncertainty that may deter potential entrants hurting competition. To counter inflation, the authorities should instead focus on tightening fiscal policy and maintaining a tight monetary stance.

Policy rates should remain on hold and liquidity measures should be tightened until inflation steadily declines. Given the recent acceleration in both headline and core inflation, the NBRNM should remain on hold until there is clear evidence of sustained disinflation, including in core. At the same time, liquidity conditions should be tightened using tools such as reserve requirements to absorb excess liquidity. The NBRNM must stay alert to inflationary risks from domestic factors, including wage and pension increases, as well as heightened external risks from trade uncertainties. If these risks materialize, the NBRNM should be prepared to tighten rates to prevent inflation from becoming entrenched.

Macro prudential settings may need to be tightened to slow credit growth. The implemented loan-to-value and debt service-to-income ratios help safeguard financial stability by reducing pressures in the real estate market and preventing higher levels of indebtedness. Staff support the NBRNM's gradual tightening of the countercyclical capital buffer and additional capital requirements to ensure banks maintain adequate loss-absorbing and recapitalization capacity, in line with EU regulations. Should lending and real estate prices continue growing briskly, further tightening of macroprudential instruments may be warranted.

Preserving central bank autonomy is crucial for maintaining price stability, exchange rate stability, and financial stability. The recent amendments to the National Bank law, adopted without prior consultation with the NBRNM, reallocate a larger share of NBRNM profits to the budget and revert the profit retention mechanism to a static core capital number instead of being dynamic, based on monetary liabilities. These changes undermine the previously established risk-based profit retention, which was designed with IMF advice to strengthen the bank's reserves, and risk weakening the financial and policy autonomy, and credibility of the NBRNM.

Structural reforms are needed to boost productivity, offset the drag from emigration, and advance in the EU accession process. Reducing informality through streamlined business registrations and expanded digital public services is a priority to improving the business environment and supporting productivity growth. Capital expenditures should be safeguarded in the budget and public investment management should be strengthened to prioritize high-impact projects. The ongoing road projects should be completed. Investing in education, incentivizing higher participation, particularly among women, better matching of skills, and simplifying work permit procedures for foreign workers would help address labor shortages. Expanding affordable childcare and gradually raising the retirement age of women would help to offset workforce losses from high emigration. Ad hoc adjustments to minimum wages should be avoided to contain inflation and preserve competitiveness. Public resource efficiency, accountability, and transparency could be improved through increasing digitalization, reassessing state aid schemes, and strengthening procurement systems and management of SOEs.

Governance reforms to improve predictability of legal and regulatory environment, functioning of the rule of law, and anti-corruption efforts are crucial. Improving judicial independence and impartiality would strengthen contract enforcement and help reduce informality. The Criminal Code should be aligned with international standards and resource adequacy in key anti-corruption institutions further enhanced. The predictability of the legal and regulatory environment could be improved by limiting the use of expedited procedures in Parliament, increasing stakeholder consultation, and consistently applying regulatory requirements. The upcoming new national anti-corruption strategy is an opportunity to accelerate reforms through stronger accountability and coordination.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.