Macedonia Snapshot

8/11/2019 Macedonia Snapshot

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World Bank Group - FYR Macedonia Partnership

Country Program SnapshotApril 2014


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RECENT ECONOMIC ANDSECTORAL DEVELOPMENTS

Growth and External Performance

FYR Macedonia is a small, open economy inSouth East Europe.1 Landlocked, with apopulation of only 2 million, FYR Macedonia was

the third poorest among the South East Europeancountries in 2013. Trade plays an important partof the economy compared to regional peers, withtrade as a share of GDP of 112 percent over thepast decade. Since 1995, the countrys exchangerate has been pegged to the euro, which hassuccessfully supported price stability. Inflationhas averaged 2.5 percent over the past 10 years.

The National Bank of the Republic of Macedonia(NBRM) has responded quickly and decisively toany possible threats to the peg. Further, theGovernment has implemented important

structural reforms in recent years, which includereducing the regulatory burden and cutting redtape, improving the customs administration, andintroducing a flat tax on personal and corporateincome. In 2013, FYR Macedonia ranked amongthe top 10 Doing Businessreformers worldwide.2

FYR Macedonias real GDP growth has beenbelow the South East European averageduring the past decade, but has caught up inrecent years (figure 1a). Between 2002 and 2013,FYR Macedonia grew at 3.1 percent in real terms,compared to 3.5 percent in other South East

European countries. Until 2008, its growth wasamong the lowest in the region, but since thattime, it has outperformed most of its peers. In the

wake of the global financial crisis, FYRMacedonias economy contracted by 0.9 percentin 2009, as exports plummeted and private capitalinflows declined. Real GDP growth reached 2.9percent in 2010 and 2.8 percent in 2011. Theeconomy fell back into a mild recession in 2012(contracting by 0.4 percent) amid the re-intensification of the euro crisis and the associatedslump in import demand, but momentum began

to turn in the latter half of the year. Real GDPgrowth for 2013 reached 3.1 percent, primarily on

1South East Europe refers here to Albania, Bosnia andHerzegovina, Kosovo, FYR Macedonia, Montenegro, andSerbia.2According to the World Banks Doing Business report, FYRMacedonia has improved its Distance-to-Frontier from57.2 in 2005 to 74.12 in 2013 (with 100 being the bestpossible value). In 2013, it ranked 25 worldwide in terms ofthe overall Ease of Doing Business, which places it amongthe best economies for Doing Business in Europe, surpassedonly by the Nordic countries, Ireland, and Germany.

the back of a surge in construction activity largelydriven by public investments as the Governmentimplemented a substantial fiscal stimulus to powerthe economy. GDP growth for 2014 is projectedto reach 3.0 percent.

Figure 1. Growth Performance

a. Cross-Country Comparison of Real GDPGrowth

Source: Authors calculations, based on World Bank World

Development Indicators(WDI)..

b. Demand Composition (in % points)3

Source: FYR Macedonia, State Statistics Office.

Despite its strong domestic content, GDPgrowth over the past decade has not been job-rich. Employment contracted between 2002 and2004, despite improving real GDP growth, andonly began to grow in the middle of the decade.Despite recent modest gains, the overallunemployment level remained high at 29 percentin 2013. FYR Macedonia has one of the lowestemployment rates in the Europe and Central Asiaregion. Poor labor market outcomes are

concentrated among some groups, particularlywomen, youth, and elderly workers. However,relative to other South East European countries,FYR Macedonia has experienced a more buoyantemployment recovery since the crisis and hasmanaged to bring down its unemployment rate ata faster pace than its peers.

3Gross investments for 2013 include discrepancies in

changes in inventories due to balancing, as published by theSSO.

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Albania Bosnia and Herzegovina

Kosovo Macedonia, FYR

Montenegro Serbia

Projections

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2005 2006 2007 2008 2009 2010 2011 2012 2013

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Economic growth and improvements inemployment in recent years have nottranslated into significant poverty reduction inFYR Macedonia. Despite data challenges inmonitoring recent poverty in FYR Macedonia,evidence shows that consumption-based absolutepoverty between 2003 and 2008 (HouseholdBudget Survey) increased from 8 to 9 percentusing a regional poverty line of US$2.5 a day, andfrom 33 percent to 37 percent, using a regionalpoverty line of US$5 a day. During the sameperiod, official relative poverty statistics4remainedlargely unchanged at around 30 percent. Thenewly introduced Survey of Income and LivingConditions (SILC), available for 2010 and 2011,also show that poverty has remained largelyunchanged, at 27.3 percent? in 2010 and 27.1percent in 2011.5

The welfare of the poorest 40 percent of thepopulation has not improved either.

Consumption growth of the bottom 40 percentthe World Bank indicator for the new institutionalgoal of promoting shared prosperitydecreasedby 1.5 percent annually between 2003 and 2008, asaverage consumption grew by 1.1 percent.Growth incidence curves show that those at thetop of the distribution had significantly higher

welfare gains. Although not directly comparable,recent income-based data for 2010 and 2011 showa slight decline in overall income acrosspopulation groups, which is more pronounced forthe bottom 40 percent.

Trends in poverty reduction and sharedprosperity seem to be driven by the pattern ofeconomic growth in FYR Macedonia,combined with a lower ability of the poor andless well-off to benefit from opportunities.First, half of all new jobs created between 2007and 2011 went to people with tertiary education.

With the poor and bottom 40 percentoverrepresented among the unskilled workforce,income-generating opportunities for these groupsseem to have been limited. Second, the remainingjobs were mostly created in the informal sectorand associated with limited earning potential. Inaddition to having fewer of the kind of skills that

would allow them to benefit from jobopportunities, the bottom 40 percent of thepopulation in FYR Macedonia face added barriersand disincentives to work that are linked to labor

4Measured at 70 percent of median consumption.5This indicator, called population at risk of poverty, ismeasured at 60 percent of median equalized income,the same as in countries in the European Union.

taxation and social protection and especially affectlow-wage earners.

Export growth accelerated in 2013 as FYRMacedonia has diversified its exports inrecent years both in terms of products anddestinations.Export growth reached 6.6 percentin 2013, largely driven by an increase in foreigndirect investment (FDI)-related exports. Most

FDI-related exports are connected to theautomobile industry and include goods such ascatalysts and electronic dashboard components.

Tobacco products, fresh vegetables, and furniturehave also significantly contributed to exportgrowth. By contrast, iron, steel, and apparel, FYRMacedonias traditional export goods, have fallenin importance.6 In 2008, only six productscontributed to roughly 70 percent of total exports.By 2013, this number had increased to 12.Emerging markets such as China and Turkey havegained in importance. Exports to Germany have

more than doubled in terms of GDP over the pastsix years, rising from 14.2 percent in 2008 to 29.4percent in 2012. Exports to Germany had furtherincreased to 35.9 percent in 2013, driven by FDI-related exports (figure 2a). In parallel, in 2013export shares to Greece increased for the firsttime since 2008, and exports to Bulgaria continuedincreasing for a second year. On the other hand,exports to Kosovo and Serbia continued todecline for the third and fourth year, respectively.Exports to Italy also declined.

While the country has been successful inattracting high-profile FDIs, backwardlinkages to spurring the development of thelocal economy are lagging. Between 2006 and2013, net FDI on average amounted to 4.4percent of GDP, which is still significantly belowthe regional average of 6.4 percent of GDP overthe same period. While FDI has contributedsignificantly to export growth, backward linkages

with local companies are very limited, thusrestraining employment gains and other spilloversthrough the FDI.

The current account deficit declined in 2013.Notwithstanding the strong export growth, FYRMacedonia has been running persistent currentaccount deficits, mainly because of high oil andelectricity imports and a high import content of

6 The metal industry accounted for more than 25percent of all exports over the past decade.


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exports.7 The current account deficit widenedfrom 2.1 percent in 2010 to 3.1 percent in 2012

Figure 2. Export Performance

a. Exports (in % of GDP)

Note: Emerging economies include: China, Russia, Turkey,India, and Brazil.

b. Current Account Financing (in % of GDP)

Note: 2013 calculations are made using estimated GDPfigures.Source: NBRM, State Statistics Office of the Republic of

Macedonia, and World Bank staff calculations.

(figure 2b), as the trade deficit worsened from20.5 percent of GDP in 2010 to 23.6 percent ofGDP in 2012. However, strong exportperformance in 2013 and weak import demandresulted in a decline in the current account andtrade deficits to 1.9 percent of GDP and 20.6percent, respectively, in that year. The persistentlarge trade deficits have been financed by privatetransfers, which increased from 18.9 percent ofGDP in 2010 to 20.7 percent of GDP in 2012,

before declining somewhat in 2013 to 19.5percent. This reliance on private transfers exposesFYR Macedonia to external risks that could bemitigated by increasing FDI, enhancing backwardlinkages between foreign firms and domestic

7Roughly 40 percent of the exported value of iron andsteel, FYR Macedonias most important export good, isimported.

suppliers, reducing energy imports, andstrengthening the countrys competitiveness.8

FYR Macedonias reserve coverage has beenstable, and inflation remained low and indecline during 2013. Reserves have beencomfortably above four months of imports since2009. Even though reserves declined slightly in2013, it was largely due to the decline in goldprices and thus the valorization of gold in thereserves. Despite this, the reserves at the end of2013 were sufficient to cover 4.4 months ofimports. The country has maintained pricestability throughout the decade, with inflationaveraging 2.5 percent between 2002 and 2012. In2013, inflation further declined to 2.8 percentcompared to 2012, when it reached 3.3, and to2011, when it was 3.9 percent. Declining food andhousing prices (especially in the second half of2013) were the main drivers of the declininginflation. Expectations for 2014 are that inflation

will average 2.5 percent.

Figure 3. Reserve Coverage and Inflation

a. Reserve Coverage

b. Inflation

8The Government of FYR Macedonia is pursuing anactive strategy to attract FDI. Net FDI reached 6.5percent in 2008 and declined somewhat over 200911.In 2012 and 2013, the country was able to attractimportant second-generation investments of alreadyestablished companies. Although FDI has contributedsignificantly to export growth, backward linkages havebeen weak. This is expected to change, as new foreign

operations were established in 2013 (and more areexpected in 2014) that should have stronger links withthe local economy.

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2008 2009 2010 2011 2012 2013Germany Kosovo

Serbia Bulgaria

Italy Greece

Other EU countries Emerging economies /1

Other Export of goods to GDP ratio

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2008 2009 2010 2011 2012 2013

FDI flows, net Prtfolio investment, netOther investment, net Loans, netChange in reserves Capital accountCurrent account Deficit

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500

1,000

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2,500

3,000

Foreign reserves (USD Mill.), left axes

Reserves coverage (months of imports), right axes


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Source: NBRM, State Statistics Office of the Republic ofMacedonia, and World Bank staff calculations.

Growth is expected to accelerate in themedium term, benefiting from the increase inpublic investments and sustained exportgrowth. Real GDP growth reached 3.1 percent in2013 and is expected to reach 3.0 and 3.5 percentin 2014 and 2015, respectively. Externally financedpublic investment is also projected to accelerate,

supporting growth but leading to a widening ofthe current account deficit and public debt overthe medium term. Going forward, it is particularlyimportant that public investments be channeled tosectors that have a high multiplier effect, includingthose providing the necessary infrastructure topromote private investments and job creation.

Fiscal Performance

Expansionary fiscal policy in the aftermath ofthe crisis led to a widening of the fiscal deficit

that continued during 2013. Revenues fell byover 3 percent of GDP between 2008 and 2011,reflecting not only weakening economic activitybut also a policy decision to reduce the tax burden(mainly the profit tax and the personal incometax) and social security contributions in order toboost competitiveness. The Government offsetthis to some extent by cutting expenditures (from34.1 percent of GDP in 2009 to 32.3 percent in2011), but the fiscal deficit still widened from 0.9percent of GDP in 2008 to 2.5 percent in 2011. Afurther deterioration of the deficit was contained

at the expense of an accumulation of budgetaryarrears on value added tax (VAT) refunds andpayments on goods and services. TheGovernment started to clear these arrears inSeptember 2012, and by the end of February 2013,it had cleared all outstanding payment obligations9

9There remain some central government arrears in thehealth sector, which are estimated to be around 0.5percent of GDP as of end 2013. The government hastaken several steps to reduce these arrears and preventtheir accumulation.

with the exception of payment obligations in thehealth sector. However, lower than expectedrevenues (as a result of the VAT refunds made inFebruary 2013 and the frontloading ofexpenditures for the April 2013 elections) andincreased pension and subsidies expendituresresulted in a supplementary budget and anincrease in the deficit from 3.5 to 4.1 percent ofGDP.

The Government has also taken steps tostrengthen public financial management inorder to prevent the recurrence of arrears.Measures taken in late 2012 and early 2013included amendments to the Organic Budget Lawand amendments to the Manual of TreasuryOperations. In addition, the Government updatedthe Treasury Information System to incorporatethe entry and monitoring of multiyear liabilities.

The new system was introduced in January 2014.In addition, a medium-term fiscal strategy was

presented together with the 2014 budget inDecember 2013, which foresees a gradual fiscalconsolidation.

At the same time, the Government has electedto shift some capital expenditure off-budget,complicating fiscal management andweakening transparency. In January 2013, theGovernment moved a large part of roadinfrastructure projects off-budget by transformingthe former Road Fund into the Public Enterprisefor State Roads (PESR), a nonprofit entity that

can borrow on its own behalf but is backed by asovereign guarantee. At its inception, the PESRcarried 82 million in debt (1.1 percent of GDP),but this is set to rise rapidly in the near term as thePESR executes what is fundamentally a centralGovernment investment agenda.

FYR Macedonias central Government debtremains moderate, but total public sector debtis set to rise rapidly as state-owned enterprises(SOEs) take over a significant share ofinvestment spending. Central Governmentgross debt as a share of GDP climbed from 20.7percent in 2008 to 35.8 percent by the end of2013. The steep increase in the past five years wasdriven by a widening of the fiscal deficit and thenegative economic growth in 2012, and waslargely financed through domestic borrowing.Public sector debt at end-2013 was 43.2 percent ofGDP. However, public enterprise debt isprojected to rise from 6.2 percent of GDP at end-2013 to 15.4 percent by 2018 on the back of

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Housing, utilities and

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planned borrowing by PESR and other SOEs tofinance an ambitious agenda of infrastructure andother investment projects. This will bring totalpublic sector debt in 2018 to 51 percent. The debtof municipalities is projected to remain stable at anegligible 0.1 percent of GDP.

Monetary and Financial Sector

The banking sector is stable, butnonperforming loans (NPLs) are increasingand credit growth remains weak. FYRMacedonias banking sector is dominated by threelarge banks, which control 61 percent of bankingassets. During 2013, medium and small banksgained market share at the expense of the threelarge banks and now control 39 percent of allassets, compared to 30 percent at end-2012. Twoof the three large banks are owned by parentbanks in Greece and Slovenia that are facingdifficulties at the parent bank level that may affect

operations of their local subsidiaries. However, allforeign-owned banks in FYR Macedonia operateas stand-alone subsidiaries under domesticregulation and supervision, and with their ownbalance sheets. Moreover, the Central Bankmaintains a prudent supervisory policy, includingsemi-annual stress tests.

Credit growth had been declining for thebetter part of 2013 and only started increasingin the last quarter of the year. NPLs remainhigh, but deposits have been growing.Credit

growth started declining in mid-2012 and wasdeclining until September 2013 because ofcorporate credit that was falling steeply, reaching ahistoric low of 0.4 percent in September 2013before increasing to 3.7 percent as of end-2013.Household credit, on the other hand, increased in2013, reaching 10.3 percent by the end of the year.Corporate NPLs were also increasing throughout2013 and reached a historic high of 16.0 percent inNovember, before subsiding to 14.8 percent at theend of the year. Overall, NPLs were 11.3 percentat end-2013. Deposits growth, on the other hand,

reached 6.1 percent in 2013, and the loan-to-deposit ratio was maintained significantly below100, at 89.8 percent, leaving the banks room toresume lending activities.

Monetary policy has remainedaccommodative. In response to weak creditgrowth, the NBRM lowered the interest rate onCentral Bank bills twice by one-quarter percentagepoint in 2013. To stimulate long-term creditgrowth, in June 2013, the NBRM also lowered thereserve requirements to zero on banks liabilities

to nonresident financial companies with maturityof over one year and on all liabilities tononresidents with maturity of over two years. Italso reduced the reserve requirement ratio forbanks liabilities in domestic currency from 10 to 8percent, and increased the reserve requirementratio for liabilities in foreign currency from 13 to15 percent. Taking into consideration the stabilityand liquidity in the system, in October 2013, theNBRM, , reduced the proportion of time depositsassumed to be withdrawn from banks from 80 to60 percent, thus reducing the provisioningrequirements and providing more room for banksto expand long-term lending to the private sector.

Figure 4. Policy and Credit Interest Rates

Source: NBRM and World Bank staff calculations.

Figure 5. Credit Growth (y-o-y)


Figure 6. Nonperforming Loans (as % of total)


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LC credit intrest rate FX-indexed credit interest rate

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Corporate NPLs

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Source: National Bank and authors calculations


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Competitiveness

FYR Macedonia seekes to improve sharedprosperity by moving to a higher growtheconomy based on advanced manufacturingcapabilities and more competitive, export-orientedenterprises. Under the Governments growthagenda, exports have grown rapidly and in 2012

accounted for 53.4 percent of GDP. Furtherimprovement, however, depends on structuralchanges, given that: (a) exports are still tooconcentrated in commodities (metals andminerals) where value added is low and prices are

volatile; (b) medium and large firms do not investsufficiently in quality or innovation; and (c) mostexporting firms are small (fewer than 10employees) and have difficulty competing inexport markets because of inefficiencies and highcosts related to customs, logistics, and tradeinfrastructure. Further, (d) the agribusiness sector,

which employed 20 percent of the workforce in

2012, is constrained by several factors, includingthe large share of state-owned land, which needsto be better managed to unleash its productiveand export potential.

Programmatic CompetitivenessDevelopment Policy Loan (DPL) Series

Supporting the Government agenda oncompetitiveness, the ProgrammaticCompetitiveness Development Policy Loan(DPL) series, consisting of two US$50 million

equivalent operations?, is an important elementof the World Banks Country Partnership Strategy(CPS) for the period 20102014. The CPSsupports the key goals within each pillar: (i) theCompetitiveness pillar goals of (a) increasingfinancing and investment in sectors where FYRMacedonia could become competitive, (b)establishing the legal framework for landprivatization, and (c) lowering transport andfreight costs by improving customs proceduresand border crossing facilities; (ii) the InclusiveGrowth pillar goal of improving employability byreducing impediments to hiring; and, (iii) the

Green Growth pillar goal of aligning theagriculture sector and agricultural exports withEuropean Union (EU) requirements.

The Competitiveness DPL series aims atstrengthening the competitiveness of FYRMacedonias economy by incentivizingproductive investment and technologicalupgrading in the manufacturing, agribusiness, andtrade logistics sectors, and by establishingfavorable conditions to progressively increase

labor market flexibility, skills development, andthe innovation capacity of the private sector.

Building on the results of the FirstCompetitiveness DPL in fiscal year (FY) 2013,the Second DPL in FY14 is further deepeningthe competitiveness agenda by supportingreforms that incentivize investment andtechnology upgrading in the manufacturing,agribusiness, and trade logistics sectors.ForFYR Macedonia, developing advancedmanufacturing capabilities and upgrading thedomestic enterprise sector are critical to ensuringsustainable growth and the creation of high-skilledjobs. The reforms will increase the effectiveness ofincentives aimed at attracting foreign investors,promoting exports, supporting agriculturalproducers, and advancing technologicalmodernization and technology transfer from FDIto the domestic economy.

Cross-cutting policy actions under DPL2 lay thegroundwork for increased labor market flexibilityand innovation capacity in the key productivesectors. Improving the efficiency of the labormarket is essential to the competitiveness of FYRMacedonias economy and necessary to resolvingthe problem of long-term unemployment. Further,comprehensive reforms in the innovation supportframework will stimulate research anddevelopment (R&D) andtechnology transfer inthe private sector.

Energy

The Government is concerned about thecountrys growing reliance on imported fossilfuels and energy inefficiency. Fossil fuelsaccount for more than 80 percent of energyconsumption in FYR Macedonia, and anincreasing amount of this is imported, including allliquid fuel and natural gas. In the absence ofinvestment in new energy sources, this trend willcontinue as demand grows while domesticproduction erodes. The Government is

committed to reversing this trend andstrengthening energy security. Greater energyefficiency is the first step in this direction, as FYRMacedonia consumes very little energy per capitabut a high amount per unit of GDP. Its energyintensity is 3.5 times higher and its carbonintensity four times higher than the average of theOrganisation for Economic Co-operation andDevelopment (OECD) countries.

The Government recognizes this and isdetermined to increase its share of energy


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from renewable resources. The potential isthere, but has yet to be realized. An immediatearea of opportunity is to improve the efficiency ofresidential, commercial, and public buildings,

which account for up to 50 percent of energyconsumption. The authorities also want to exploitrenewable energy sources, starting withhydropower (of some 5,500 gigawatt hours [GWh]of clean hydropower ready to be exploited, only27 percent has been tapped), but also wind, solar,and biomass. Other goals include increasing theuse of natural gas and reducing the use ofelectricity in heating buildings. Investing in theenergy sector is particularly important, as morethan half of Macedonian firms indicate in surveysthat electricity supply is a problem.

The World Bank supports FYR Macedoniasenergy sector.The Energy Community of SouthEast Europe (ECSEE) Adaptable ProgramLending (APL) 3 is updating the energy

transmission infrastructure and promoting soundenergy planning and regulation. The ECSEE

APL3 is also supporting the green agenda byreducing power losses and increasing the stabilityof the power system, mainly by strengthening thetransmission network. Additional financing forECSEE APL 3 enables the extension of anelectricity transmission interconnection fromMacedonia to Serbia. The Government has alsoasked for Bank support in building the LukovoPole Water Storage and Renewable Energy facility,

which will serve the needs of the existing

hydropower plants. This project will help meetenergy demand, which is expected to grow by 2.6percent annually over the next decade. Therecently closed Global Environment Facility(GEF) Sustainable Energy Project supported theGovernment in setting up a large-scale nationalprogram to retrofit public buildings with the aimof improving energy efficiency. The projectprovided capacity building for this nationalprogram, and at the same time financed energy-efficiency measures in schools, kindergartens, andhospitals.

Social Policy

FYR Macedonia is building an innovative andwell-targeted social safety net. The country hasa social protection system that provides support toa substantial part of the population. More than 20percent of the population receives some sort ofsocial transfers. The largest transfer is the SocialFinancial Assistance (SFA), an income-tested, last-resort source of income support providingassistance to around 35,000 households. The

existing system performs reasonably well byregional standards, but exclusion and leakage exist.In addition, the coverage of social assistance couldbe strengthened further, as it reaches only 32percent of individuals in the poorest quintile. Inaddition, the system is one of the least generous inthe region; it helps in moderating poverty but notin moving people out of it. Removing nonpensionsocial transfers would increase poverty by a fewpercentage points only. Pensions, on the otherhand, provide an important buffer against poverty,helping around 11 percent of the population stayabove the absolute poverty line.

The Government launched a broad reformagenda to improve the effectiveness of thesystem. Information systems have been upgradedto allow for better administration, monitoring,payment, and service delivery. The Governmenthas also improved its definition and calculation ofbenefits, and revised the terms of eligibility. Most

recent improvements in the efficiency of theoverall social safety net administration and servicedelivery were directed toward improvements inthe institutional infrastructure by linking theMinistry of Labor and Social Policy informationsystem with the administrative registries of severalGovernment agencies. This exchange ofinformation between agencies simplifies theregistration procedures and reduces theadministrative costs for benefit claimants as wellas for the administration of the cash benefits. Atthe same time, it has taken advantage of a

relatively well-targeted means-tested last-resortprogramSFAto introduce a conditional cashtransfer (CCT) program, supported by the Bank.

The CCT program helps to reduce theintergenerational transmission of poverty bylinking benefits to the fulfillment of standards forsecondary school enrollment and attendance. TheGovernment has also launched a new CCTprogram for activating youth in families benefitingfrom the SFA in order to help them make thetransition into the labor market.

Figure 7. Targeting the Accuracy of Social

Assistance

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Targeting Accuracy of Social Assistance:

% of Total Benefits Received by Poorest Quintile(All Non-Contributory Transfers)

Source: World Bank Analysis of Household Surveys, V arious Years


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Source: Europe and Central Asia Social Protection Database,World Bank.

Transport

As a landlocked country, FYR Macedonia isparticularly dependent on a well-developedtransport network for its economic and socialdevelopment.Key elements of this network arealso part of the Trans-European transportnetwork (Corridor 10, which goes from Austria to

Turkey, and Corridor 8, which connects Albaniato the Black Sea ports in Bulgaria). Since itsindependence, the main challenges facing thecountry have been to reduce the economicdistance to export markets and lower the costs oftransportation arising from the poor condition ofCorridor 10 and major delays at key bordercrossing points. The road transport network has aparticularly critical role in the development of theeconomy, as it carries the bulk of the countrysexports/goods (in the first two quarters of 2013,93 percent of freight was carried on roads). A

Government priority is thus to upgrade andrehabilitate road infrastructure to improve futuregrowth prospects. These challenges have also beenaddressed through the World Banks programs,

which have focused on (i) the improvement ofroad and rail facilities along Corridor 10; and (ii)trade and transport facilitation actions to ease themovement of traffic through key border crossings.

In addition to the financial support to regionaland local road network investments, theWorld Bank is working together with the

Government to improve the sustainability ofroad financing. These efforts center on PESRand include the introduction of a road assetmanagement system (RAMS), which is aimed atcreating a comprehensive road database for thecountrys road network. This would allow PESRto manage its capital investment budgets in asustainable manner, ensuring that these capitalexpenditures target network sections that are inpriority investment need and also expand sectionsthat have strong economic justification. A US$70million project currently in preparation will

specifically focus on these improvements inPESRs road management capacity.

Figure 8. Road Network in FYR Macedonia

Road category Length (km)

Highways 236

National Roads 911

Regional Roads 3772

Local Roads 9240Total length of roads 14159

Notwithstanding the ongoing roadinvestments, more remains to be done, as thecondition of the road network is still worsethan that of neighboring countries and EUaverages.This particularly refers to the nationalroads that provide a critical link between urbanareas and the international corridors. In addition,many of the countrys roads are vulnerable toecological and climate change factors, andinterventions are required to protect them from

damage. Consequently, the currently preparedoperation will specifically target the rehabilitationof road links to the two European corridors,Corridors 10 and 8. A particular focus of theinvestments will be to integrate road safetyconsiderations in design and rehabilitationpractices and also to insure that design standardsare considerate of measures necessary to ensureclimate resilience.

The implementation experience of the pastBank-financed projects suggests that Bank

operations present a unique opportunity fortechnical capacity enhancement in PESR andcontribute toward increased capacity for EUgrant financing absorption. In the case of thecurrent Roads project, PESR successfullyimplemented an ambitious rehabilitation programthat resulted in the rehabilitation of 284 kilometers(km) of regional roads and 380 km of local roadsin four years. The implementation modalities andcapacity within PESR are a strong foundation forthe absorption of the EUs Instrument for Pre-

Accession Assistance (IPA) 2 in the road transport

sector. This is, however, dependent on PESRscapacity to adequately plan road sectorinvestments and timely prepare mature projects.Consequently, the proposed project activities aredeveloped to contribute directly to such capacityenhancement, since the technical assistance onroad safety and road asset management will enablePESR to prepare investment pipelines andprojects that will satisfy the economic, technical,and road safety standards necessary for EUfinancing, and could also support the preparationof a pipeline investment plan for IPA2.


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Municipal Services

Improving the living standards of thepopulation requires more effective andefficient public service delivery.Given the newinstitutional realities brought by the unfoldingdecentralization process, better performing

municipalities are crucial to delivering thisambitious agenda. Municipalities provide keypublic services and infrastructure for citizens andlocal businesses. Municipal governments controlover 7 percent of public spending (a figure that islikely to increase), and local authorities influence,shape, and maintain stable interethnic relations atthe level closest to citizens.

Against this backdrop, FYR Macedonia facesthe dual challenge of increasing investmentsin municipal services while tacklingweaknesses in municipal performance and

local capacity. To respond to these challenges,municipalities will have to make considerableinvestments in strengthening their ability tomanage the services and funds at their disposal.

To take full advantage of the opportunities athand, including resources that accompany EUpre-accession, municipal governments will have tofulfill a greater role for which they are currentlyinsufficiently prepared. In doing so, municipalitiesface the challenge of weak institutional capacity tomanage their investment responsibilities andcommunal enterprises, many of which lack

market-based strategies and are not financiallysustainable. The need for reform in the communalservices sector is widely recognized in the country.

The World Bank-financedM unic ipal Services

Improvement Project

focuses on improvingthe transparency, financial sustainability, anddelivery of targeted services under theresponsibility of competitively selectedmunicipalities and their communal serviceenterprises, such as water supply, sanitation, andsolid waste management, as well as energyefficiency, urban transport, and other servicesunder municipal provision. It provides subloans tomunicipalities for investments in revenue-generating public services and other high-priorityinvestment projects, as well as technical assistancegrants for subproject preparation, local capacitybuilding for municipalities and Communal ServiceEnterprises, and national-level institutionalstrengthening.

Real Estate Cadastre

FYR Macedonia has a model cadastre systemin the region. With the help of the World Bank,the Government has made great strides inreforming the real estate cadastre and propertyregistration system. The Agency for Real EstateCadastre has transformed itself from a technical

organization focused on surveying to a serviceorganization focused on customers. The RealEstate Cadastre has been established on 99.8percent of the countrys territory, and theincreased efficiency and confidence in theregistration system has led to an increase in theuse of property as a financial asset.

The Government is now focused on furtherenhancing the registration and cadastreservices by upgrading the national data sets interms of accuracy, completeness, andaccessibility.The World Bankfinanced project

is helping the Agency for Real Estate Cadastrewith: a) digitizing the existing cadastre maps andplans; b) providing this graphical information in a

web-based geographic information system tofacilitate access to information by citizens, theprivate sector, and the public sector; c) upgradingthe geodetic reference infrastructure to improvethe accuracy and efficiency of surveying; and d)supporting the Government in preparing astrategy and then implementing the NationalSpatial Data Infrastructure. World Bankinvestment also supports the Authority for Legal

and Property Affairs in its efforts to complete theprivatization of urban land and the legalization ofillegally constructed buildings, and works toimprove this agencys capacity to deal with theassets in state property.

THE WORLD BANK PROGRAM INFYR MACEDONIA

FYR Macedonia joined the World Bank in

1994 and graduated from InternationalDevelopment Assistance (IDA) in 2003. Sincethen, the World Bank has provided more thanUS$1.2 billion in loans and grants to support thecountrys transition to a market economy and itsefforts to build effective institutions; enhance thebusiness environment; improve education, socialprotection, and pensions; build and rehabilitatethe basic transport and energy infrastructure; andpreserve the natural and cultural heritage.


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The current World Bank Country PartnershipStrategy (CPS) with FYR Macedonia forFY1114 is coming to an end, and a newcountry strategy is under preparation. Theobjective of the current CPS was to provideselective and targeted financial support andknowledge and advisory services in support offaster, more inclusive, and greener economicgrowth. Because FYR Macedonias future growthand development depend fundamentally on thepace of EU accession, virtually every interventionin the CPS is designed to help the country preparefor EU membership. The current programconsists of six loans, totaling US$299 million.

To help the Government cope with theconsequences of the European crisis and tosupport the countrys economic transition, theGovernment and the Bank approved three budgetsupport operations (including two Policy BasedGuarantees) with objectives to: (i) strengthen the

sustainability of public finances; (ii) improve theperformance of social protection; (iii) improve thecompetitiveness of the economy; and (iv)strengthen the resilience of the financial sector. Asecond Competitiveness DPL has beennegotiated, pending Board presentation in March2014.

The portfolio also includes aReal Estate

Cadastre and Registrat ion Project (US$26million) for the digitalization of cadastral maps,the establishment of the National Spatial Data

Infrastructure Portal to enable greater inter-government agency operability (access andexchange of data), and the securing of land andreal estate titles.

In infrastructure, theRegional and Local

Roads Program Support Project

(US$105million) helps with the rehabilitation of regionaland local roads and provides institutional supportto improve the management of roads. Anotherinfrastructure investment operation, underpreparation within the current CPS, is theNationaland Regional Roads Rehabilitation Project (US$70million), which aims to enhance the connectivityof selected national and regional roads, primarilyto Corridors 10 and 8, and to improve the capacityof PESR for road safety and climate resilience.

The World Bank finances the energy sectorthrough the ECSEE APL3 Project (US$44million) to improve the transmission grid,including an interconnection with Serbia.

Local development is assisted through theMunicipal Services Improvement Project(US$75 million), which is helping to improve thetransparency, financial sustainability, and deliveryof targeted municipal services in selectedmunicipalities. The Bank is negotiating with theEuropean Commission a cofinancing for thisproject of US$21.2 million in order to use IPAfunds for rural infrastructure investments throughthe existing project mechanisms.

The World Bank is also active in the humandevelopment sector through two operations: theConditional Cash Transfer Project (US$25 million),

which provides subsistence to poor familieswhose children attend school regularly; and theSkills Development and Innovation Support Project(US$24 million), whose objective is to improvehigher education resource allocation transparency,as well as promote accountability, enhance therelevance of secondary technical vocational

education, and support innovation capacity inFYR Macedonia.

Analytical and Advisory Activities (AAA). Overthe last two years, the Banks AAA program hasshifted to just-in-time advisory work while stilldelivering core analytical reports. The programincludes applying the framework from the WorldDevelopment Report 2013: Jobs, with an accent ondefining the jobs agenda in FYR Macedonia, andalso includes a Green Growth assessment with theaim of helping the Government mainstream

sustainable development and climate change issuesinto the macroeconomic planning and decision-making framework. The program additionallycontains a competitiveness assessment, a review ofpublic expenditures in agriculture, and a labormarket review, as well as support for the OpenGovernment initiative.

The new CPS for FYR Macedonia is underpreparation, and will focus on two pillars: growthand competitiveness, and human capital andinclusion. A tentative list of planned new lendingoperations includes the Energy Efficiency Fundproject, a second Roads Rehabilitation Project, theICT-Based Jobs project, a project with theMinistry of Environment, and anotherCompetitiveness DPL.

The International Finance Corporation

FYR Macedonia became a shareholder andmember of the International FinanceCorporation (IFC) in 1993. Since then, IFCsinvestment in FYR Macedonia has totaled US$245


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million, including US$37.5 million in syndicatedloans in 38 projects across a variety of sectors, andits committed investment portfolio in FYRMacedonia as of September 30, 2013 was US$207million. In FY13, IFC invested US$6.8 million inthe country. IFCs advisory services aim toimprove the investment climate and theperformance of private sector companies, and toattract private sector participation in thedevelopment of infrastructure projects.

Through a combination of investment andadvisory services, IFC will continue to partner

with clients in strategic sectors crucial to thecountrys long-term sustainable development, witha particular focus on: The financial sector, with a special emphasis

on small and medium-sized enterprises(SMEs) and energy-efficiency lending

Climate change, including investments in theinfrastructure and energy sectors

Agribusiness, with an emphasis on food retail Value-added manufacturing Business infrastructure, with a focus on

logistics and distribution Health and education

Recent investment projects include:

US$10 million trade finance line to OhridskaBanka Societe General, signed in August 2013

US$13.4 million long-term loan to OhridskaBanka Societe General, a mid-sized bank, to

support the SME sector US$4.6 million long-term loan to support

EVN Macedonia, the sole electricity supplyand distribution company in the country

Under its Global Trade Finance Program, IFCprovided a trade finance line to:

NBG Stopanska Banka, a bank with growingpresence across retail, corporate banking, andSME lending

NLB Tutunska Banka, part of the SlovenianNLB Group

Unibanka, a tier-two local bank with a specialfocus on the SME sector

Ohridska Banka, part of Socit Gnrale

IFC has also invested in two regional projects(Titan Cement and Vino-Zupa) that havesignificant operations in the country.

In addition to investments, IFC has an activeadvisory program in FYR Macedonia. Thefollowing regional advisory services projects havebeen recently implemented in the country:

TheBalkans R enewable Energy Project

worksto develop the renewable energy market, with aspecial emphasis on small hydropower plants(SHPPs), in Western Balkan countries with thehighest impact potential: Albania, Bosnia andHerzegovina, FYR Macedonia, Kosovo,Montenegro and Serbia. (Supported by the FederalMinistry of Finance of Austria)

The Europe and Central Asia CorporateGovernance Programsupports the strengtheningof corporate governance practices in thecompanies and banks in the region, leading toimproved performance (reduced capital cost,higher valuations, improved loan terms) and/orefficiency (improved operations, clearer structures,

better defined roles). The program also has acapacity-building component, supporting localinstitutions to provide corporate governanceservices jointly with IFC.

The Western Balkans Trade Logistics Projectis active in Albania, Bosnia and Herzegovina,Kosovo, FYR Macedonia, Montenegro, and Serbia.

The projects goal is the reduction of regulatoryand administrative bottlenecks to regional cross-border trade by streamlining export and importprocedures, harmonizing inter-agency cooperation

within and between countries, and championingrisk-based controls, including wider use ofelectronic systems for data exchange and tradelogistics-related payments. The project aims toimprove the competitiveness of the private sectorby improving access to regional and global markets.

The activities implemented by the project areexpected to generate US$10 million in privatesector savings.

Public-Private Partnerships: IFC providesadvice on designing and implementing public-private partnership (PPP) transactions to nationaland municipal governments to improveinfrastructure and access to basic services such as

water, power, health, and education. The programis supported by donor partners Austria, Norway,and Switzerland.

In FYR Macedonia, IFC currently has twoactive PPP advisory mandates, helping theGovernment to attract private sector participationin (i) the power sector: the Crna River HPPproject, which aims to improve energy sector


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efficiency and environmental sustainability, whereIFC has been assisting with the design andimplementation of a PPP transaction; and (ii) roadtransportation: the Corridor 8 toll roadconcession.


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FYR MACEDONIA: CONDITIONAL CASH TRANSFER PROJECT

Key Dates:Approved:June 16, 2009Effective: October 28, 2009Closing: December 31, 2015Financing in million US Dollars:

Financier Financing Disbursed Undisbursed

IBRD loanGovernment

25.001.30

9.2 16.2

Total Project Cost 26.30

*World Bank Disbursements as of March 2014.Note : Disbursements m ay d i ffer f rom f inanc ing due to excha nge rate f luc tuat ions

at the t ime of d i sbursement .

The impact of the global financial crisis and economic downturn in 2009 reduced prospects for growth, exports, foreigndirect investment (FDI), and private transfers. In addition, poverty has remained high and is likely to increase due to theimpact of the crisis. In this context, the need for effective and efficient social safety nets takes on increasing importance.Safety nets are part of a broader poverty reduction strategy interacting with social insurance, health, education, financial

services, and other policies aimed at reducing poverty and managing risk. Safety nets have both short-run roles in alleviatingimmediate poverty and inequality, and long-term impacts by enabling households to make better investments for theirfuture. The Government has recognized that the impacts on human capital and the reduction in the intergenerationaltransmission of poverty can be particularly powerful when safety net programs are directly linked to incentives for investingin education and health through conditional cash transfers (CCTs).

The Project Development Objective is to strengthen the effectiveness and efficiency of FYR Macedonias social safetynet through (a) the introduction of CCTs; and (b) improvements in the administration, oversight, monitoring, andevaluation of social assistance transfers.

The Project is addressing the objective by supporting the implementation of a CCT program for poor families conditionedon secondary school enrollment and the attendance of their children, and helping identify and develop possible extensions

of the CCT model in health, labor, and/or other levels of education. In addition, the project is supporting improvements insafety net administration, service delivery, oversight, and monitoring and evaluation.

Results achieved:

In the school year 201314, approximately 7,500 children from poor families regularly attended secondary schoolsdue to the CCT benefit.

The coverage of the CCT secondary education program increased from about 67 percent of eligible children in thefirst year of implementation to about 86 percent in 2013. The impact evaluation of the CCT secondary educationprogram also shows impressive results in enrollment, especially among older youth who are disproportionatelylikely to drop out of school. The CCT program likely explains the increase of 10 percentage points in secondaryschool enrollment in Macedonia, and also the lower dropout rates among older youth.

Management and information systems for cash benefits have been upgraded to allow for better administration,monitoring, payment, and service delivery.

Key Partners: The Bank team works closely with (i) the Ministry of Labor and Social Policy, which is responsible foroverall policy setting as well as for project management; and (ii) the Ministry of Education and Science.

Key Development Partnersinclude the Government of Japan (which supports the development of this project throughPolicy and Human Resources Development [PHRD] grants) and the United Nations Childrens Fund (UNICEF), whichprovides support in the CCT program identification process.


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FYR MACEDONIA: ENERGY COMMUNITY OF SOUTH EAST EUROPE APL 3

Key Dates:Approved:January 10, 2006Effective: May 25, 2006Closing: March 31, 2014Financing in million US Dollars:


IBRD loanGovernment

44.126.9

27.4 20.1




Improving the performance of the energy sector is crucial to sustaining economic development and improvingcompetitiveness in South East Europe (SEE). Power supply in the region is projected to tighten significantly during the nextfew years, which will constrain economic activity and affect the quality of life of the citizens if not addressed in a timelyfashion.

The Development Objectiveof the Energy Community of South East Europe Project is to support the integration ofFYR Macedonia into the regional power market by financing investments in power transmission and institutionaldevelopment that would support market participation.

Specifically, the project has provided investment support and technical assistance to MEPSO (the public electric powertransmission company) to strengthen transmission and dispatch and improve the companys efficiency, and to bolster itsfunctioning in the regional power market through (a) financing the investments necessary to rehabilitate and upgrade thepower transmission network, (b) financing investments to increase the level of interconnection with neighboring powersystems, and (c) strengthening the institutional capacity of MEPSO.

Results achieved:

With the completion of a 19-kilometer transmission line to Greece, regional power trade has been facilitated.

In FYR Macedonia, power transit has increased by almost 200 percent since the finalization of the line.

38 transformation substations throughout the country have been rehabilitated, including the main substation

for the capital of Skopje, the capacity of which has been increased by 78 megavolt amperes (MVA). This has

improved system stability and has resulted in a reduction of technical losses of 2.2 megawatts (MW) during

peak hours.

Key Partners:The Bank team works closely with (i) the Ministry of Economy, which is responsible for the overall policysetting; (ii) MEPSO (the public electric power transmission company), the ultimate recipient of loan resources andimplementer of the project; and (iii) the Energy Regulatory Commission.

Key Development Partnersinclude the European Commission, the European Energy community, and the U.S. Agencyfor International Development (USAID).


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FYR MACEDONIA: REGIONAL AND LOCAL ROADS PROGRAM SUPPORT PROJECT

Key Dates:Approved: May 13, 2008Effective: October 17, 2008Closing:July 31, 2015Financing in million US Dollars:


IBRD loan 105.20 70.64 27.45


*World Bank Disbursements March 2014.Note : Disbursements m ay d i ffer f rom f inanc ing due to excha nge rate f luc tuat ions


While the road network of FYR Macedonia, consisting of of 3,781 kilometers of regional roads and 8,496 kilometers of localroads, is considered mostly adequate in coverage, its condition falls far below the standards of similar networks in otherEuropean and most neighboring countries. A technical assessment undertaken in 2007 classified the condition of theregional and local roads as having significant defects and weakened structural resistance requiring resurfacing or re-gravelling but not needing the pavement demolished or the road base rebuilt. This unsatisfactory condition of the roads is

principally the result of inadequate attention to the management and financing of the network over the last 15 years.

The Project Development Objective is to reduce the cost of safe access to markets and services for communities servedby regional and local roads in the Guarantors territory and improve the institutional capacity for investment planning androad safety.

The projects implementation period is 200815. It is financing the rehabilitation of roughly 284 kilometers of pavedregional roads (about 9 percent of the countrys regional roads) and roughly 420 kilometers of paved and unpaved localroads (about 5 percent of the countrys local roads). Following the Board-approved restructuring in 2013, the project alsoprovides heightened assistance to the Public Enterprise for State Roads (PESR) to improve its institutional capacity,modernize its approach to the management of the road network, and help it adequately consider road safety.Results achieved:

Regional roads: completed rehabilitation of 284 kilometers; local roads: completed rehabilitation of 384 kilometers in

73 municipalities; Technical audits of completed road works carried out and their recommendations being followed up; Additional work on drainage, replacement, and installation of road signs and lane markings and road side equipment,

such as guardrails, has increased the sustainability of rehabilitated roads and improved road safety; Started landslide remediation works on four critical road sections to ensure undisturbed road access and improved

safety; Strengthened the capacity of municipalities to plan, maintain, and invest in local roads (through the recommendations

of technical audits and the production of Guidelines for the Identification and Design of Improvements to LocalRoads);

PESR has embarked on the introduction of a Road Asset Management system for the road network; PESR is demonstrating strong commitment to road safety improvement:

(i) implementing the road safety elements to create a Model Road Safety Road on a section of a regional road;

(ii) replacing all road signs and road markings on regional roads in line with the newly enacted laws andregulations, which are consistent with European best practice.

Key Partners: The Bank team works closely with (i) the Public Enterprise for State Roads (PESR), the Borrower andimplementer of the project; (ii) the Ministry of Transport, which is responsible for the overall policy setting; and (iii) theNational Road Safety Council.Key Development Partnersinclude the European Bank for Reconstruction and Development (EBRD), which is inparallel financing a comparable program. European Union (EU) IPA funds may be accessed for subsequent phases ofthe program.


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FYR MACEDONIA: MUNICIPAL SERVICES IMPROVEMENT PROJECT

Key Dates:Approved: March 26, 2009Effective:August 4, 2009Closing: November 30, 2017Financing in million US Dollars:


IBRD loan 75.00 20 55.2




FYR Macedonia embarked on a decentralization reform process a decade ago. In many areas of their responsibility,municipalities are still unfamiliar with market-based approaches, and they are hampered by outmoded practices andregulations and the incomplete modernization of land registration. The need for reform in the communal services sector is

widely recognized in the country. Almost all local public services (water, sewerage and solid waste, public lighting, streetcleaning and parks, marketplaces, cemeteries) are provided through municipal-owned communal service enterprises. Most ofthese services have suffered pervasively from rigid tariff controls, neglected maintenance, over-employment, and poor

financial management, leading to a vicious cycle of further deterioration and lack of funding for new investments. Theprevailing institutional and policy framework, which keeps communal service enterprises overly dependent on theirmunicipal owners and weakens commercial incentives, does not support the sustainability of services, let alone generatefunding for improvements to meet the demands of the EU acquis.

The Project Development Objective is to improve the transparency, financial sustainability, and delivery of targetedmunicipal services in the participating municipalities. The project aims to focus on infrastructure and services under theresponsibility of participating municipalities and their communal service enterprises, such as water supply, sanitation, andsolid waste management, but may also include support for other functions such as energy efficiency, urban transport, andother services under municipal provision. It provides subloans to municipalities for investments in revenue-generatingpublic services and other high-priority investment projects, as well as technical assistance grants for subproject preparation,local capacity building for municipalities and communal service enterprises, and national-level institutional strengthening.Results achieved:

Subloans have been signed with 34 municipalities, while 18 projects have been successfully completed.

People in participating municipalities have been provided with access to regular solid waste collection, better andcheaper public lighting, rehabilitated local streets, better storm drainage, improved heating in public schools throughenergy savings, and improved water supply through the rehabilitation of water supply networks.

In Bogdanci, and Novaci, the population benefits from better and more energy-efficient street lightning, cutting energyconsumption by more than 50 percent; the project entailed the replacement of old mercury bulbs with new compactflorescent light bulbs. The project encompassed all inhabited areas. A total of 12,200 inhabitants benefited from theproject.

The city of Skopje procured equipment for street cleaning and new waste containers; 17 solid waste trucks and 60,000waste bins have been purchased, serving about 250,000 inhabitants.

The municipality of Ilinden purchased and installed a heating pump for an elementary school, resulting in more efficient

heating. The municipalities of Pehcevo, Vevchani, Krushevo, Kichevo, Vinica, and Gradsko bought new solid waste trucks to

serve their inhabitants.

The municipalities of Kochani and Kisela Voda reconstructed part of their water supply network, which is nowproviding a more reliable water supply to many of their citizens.

Key Partners:The Bank team is working closely with the (i) Ministry of Finance, which is responsible for the overall policysetting as well as for project management; (ii) Association of Municipalities (ZELS); and (iii) participating municipalities, asthe ultimate recipients of loan resources through on-lending arrangements.

AKey Development Partner is USAID, which provided technical assistance to municipalities on economic and financialanalyses as part of an ongoing USAID-funded program.


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FYR MACEDONIA: REAL ESTATE CADASTRE AND REGISTRATION PROJECT

Key Dates:Approved:March 15, 2005Effective:July 8, 2005Closing:June 30, 2015Financing in million USD:


IBRD loanGovernment

26.102.00

18.9 6.5


*World Bank Disbursements as of March2014.Note : Disbursements m ay d i ffer f rom f inanc ing due to excha nge rate fluc tuat ions


In 2005, the real estate cadastre covered less than 43 percent of the country, and uncertain property rights and weak landregistration services created significant constraints to foreign investment. Confidence in the registration and cadastre records

was low, as the records were significantly out-of-date and 6070 percent of apartments were not registered at all. The lack ofconfidence and the difficulty caused by incomplete records had negative effects on private sector investment and the

development of the economy overall; many land transactions were not registered, and cadastre and other records (courts,notaries) were incomplete and outdated, leading to uncertainty and a lack of trust in the property markets. Propertyownership was not registered consistently in any central place and the lack of secure title made mortgage financing difficultor impossible for most citizens.The Project Development Objective is to build an efficient and effective real estate cadastre and registration system,contributing to the development of efficient land and real estate markets.The Project has helped the Agency for Real Estate Cadastre (AREC) to transform itself from a technical organizationfocused on surveying to a service organization focused on customers. One of the main objectives of the project wasimproving the agencys management and monitoring, which consequently led to a more efficient and client-oriented way of

working. At the same time, the policy work under the project has contributed to the new Law on Land Survey, Cadastre, andRegistration of Real Estate Rights, which allowed for the development of private sector surveyors. The Government and theBank agreed on an Additional Financing loan of 9.0 million in 2010, and the project was extended for three years to

complete the additional activities, including the digital cadastre map and a national spatial data infrastructure that willcontribute to more and better services to citizens and other government partners.Results achieved:

Since the projects start in 2005:

A Real Estate Cadastre has been established on 99.8 percent of the countrys territory.

The annual number of registered transactions nationwide tripled from 42,000 in 2005 to 148,000 in 2013.

The number of mortgages registered in the land administration system each year increased from 3,000 in 2005 to13,000 in 2013, demonstrating a substantial increase in using ownership rights as collateral. Since the project began,over 70,000 mortgages have been registered.

The average time to register a purchase and sale transaction has been reduced to less than a daydown from 60days in 2004.

At the end of 2012, there were 288 accredited private surveyors and 149 registered companies providing services

directly to citizensup from 14 private surveyors and zero registered companies at project commencement. The Authority for Legal and Property Affairs (ALPA) operates with a new management information system that

enables greater efficiency in its work, and 24 out of 35 local offices operate in improved premises. A vision andstrategy for ALPAs future role were developed and are currently under implementation.

Key Partners: The Bank team has worked closely with the Agency for Real Estate Cadastre (AREC), the mainimplementing agency. Other key Government partners include the Ministry of Finance and the Ministry of Transport, bothof which are members of the Land Policy Advisory Committee and have been involved in land policy activities.Key Development Partners include the Swedish International Development Cooperation Agency (SIDA), the JapaneseInternational Cooperation Agency (JICA), and the Governments of the Netherlands and Norway. All have provided grantfunds in parallel with the World Bank-financed project to support AREC for capacity building and training, strategy,mapping, national spatial data infrastructure, and IT.


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FYR MACEDONIA: SOUTH EAST EUROPE AND CAUCASUS CATASTROPHE RISK INSURANCEFACILITY (SEEC CRIF)

Key Dates:Approved: March 3, 2011

Effective: n/aClosing: December 31, 2015Financing in million US Dollars*:


IBRD loan 5 5 0Total Project Cost 5

FYR Macedonia is particularly vulnerable to natural disasters. Between 1989 and 2006, floods constituted 44 percent ofnatural and technological disasters. Data from the last 20 years reveal a steadily rising trend of natural disaster incidence,flood severity, and flood intensity. The country is doubly impacted because not only has flooding shown a rising trend, butthe effects of climate change have also increased the incidence of droughts. In addition, FYR Macedonia is located in theMediterranean seismic belt. The 1963 earthquake killed more than 1,000 people and damaged 80 percent of the buildingstock in Skopje.

The Project Development Objective is to help increase the access of homeowners, farmers, the enterprise sector, andgovernment agencies to financial protection from losses caused by climate change and geological hazards.

The program will support the South East Europe and Caucasus (SEEC) countries efforts to joinEuropa Reby financingtheir membership contributions to the facility. Europa Re, in turn, will facilitate the growth of catastrophe risk insurancemarkets in the member countries. For the programs first phase, this component will be financed by International Bank forReconstruction and Development (IBRD) loans (for Serbia and FYR Macedonia) and International Development

Association (IDA) credits (for Bosnia and Herzegovina and Georgia). The SEEC CRIF will also work on building technicalcapacities through a grant, financed by donor funds and a Global Environment Facility (GEF) grant and implemented by

Europa Re that includes: (i) risk mapping and modeling for participating countries; (ii) design and pricing of appropriatecatastrophe risk insurance products; (iii) small weather monitoring stations to support parametric weather insurance; and (iv)technical assistance for regulatory and policy reforms to create an enabling market environment.Results achieved:

The most important expected result of the program is the increased access to affordable weather risk coverage andcatastrophe insurance for millions of people and thousands of small and medium-sized enterprises (SMEs) in theregion. The aim is to raise catastrophe insurance penetration among beneficiaries from the current 15 percent to 15percent of homeowners, farmers, enterprises, and Government entities over the next five years.

The key beneficiaries of SEEC CRIF are homeowners, farmers, the enterprise sector, and Governmentorganizations/agencies that will be able to buy dependable catastrophe insurance coverage and/or index-based

parametric weather risk insurance contracts at competitive prices. Direct beneficiaries also include local insurancecompanies in the participating countries that will be able to expand and deepen their insurance business.

Key Partners: The Bank team works closely with (i) the Ministry of Finance, which is responsible for the overall policysetting as well as for project implementation; (ii) the Insurance Supervision Agency; and (iii) private insurance companies.

Key Development Partnersinclude the Swiss State Secretariat for Economic Affairs, which is providing a US$4.5 milliongrant to finance the establishment of the Europa Re company. The Bank team is closely coordinating with the EUDelegation in FYR Macedonia.


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FYR MACEDONIA:STOPANSKA BANKA

Key Dates:

Approved:August 2011Signed: May 2012IFC financing (million US Dollars):

Financier Financing Fisca l Year

GTFP 2.00 2012


The proposed project is partnering with Stopanska Banka, a leading bank in FYR Macedonia, to support its trade finanactivities. The International Finance Corporation (IFC) was a holder of 10.8 percent of equity stakes until its exit in July 2010.

The project is part of IFCs regional business partnerships with subsidiaries of the National Bank of Greece (NBG). It is alsoline with the Joint IFI Action Plan, which is supporting the banking sectors of Central and Eastern Europe throughcoordinated international financial institutions (IFIs) intervention. The project established a US$4 million Global Trade FinanProgram (GTFP) trade nominal limit to Stopanska Banka with a risk weighted limit of US$2 million for up to one year.

The Project Development Objective. The objective of the project is to support the banks trade finance operations as wellto expand IFCs GTFP partner bank network in FYR Macedonia, which consisted of only one partner bank (NLB Tutunska)the time of investment. In this regard, the project contributes to the expansion of the trade finance business of the bank, makiit less reliant on parent support.

The development impact of the project is expected to include:

Contributing to economic growth through the increase of financing available for international trade Enhancing the banks ability to provide export finance and contribute to export growth

Helping a major Greek bank sustain its franchise and maintain its operations in South East Europe (SEE) countries


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FYR MACEDONIA:UNIBANK

Key Dates:

Approved:July 2013Signed:July 2013

IFC financing (million US Dollars):


GTFP 2.00 2013


Universal Investment Bank, established as Balkanska Banka with mixed capital from Macedonian and Bulgarian legal entities aindividuals, was bought in 2003 by the owners of FIBank, Sofia, Republic of Bulgaria, which is a current IFC client. Followi

the acquisition, the name of the bank was changed to its current name, Universal Investment Bank, in 2004. The bank servicthe small and medium-sized enterprise (SME) segment in the country with a stronghold in the retail market and has a limitexposure to the corporations of FYR Macedonia.

The banks main shareholders are Ivaylo Mutafchiev and Tzeko Minev, who are also the main shareholders of FIBankBulgaria, which is a current client of IFC through the GTFP, currently under discussion for an Energy-Efficiency line of up US$30 million. A trade line with UniBank was considered at the time when a trade line was proposed for FIBank in Bulgariathe end of 2009; however, due to a breach of certain important covenants, mainly the open loan exposure ratio, the Team fel

would be better to hold the investment until the bank had increased its provisioning levels.

The Project Development Objective. The objectives are to support the trade finance operations of UniBank, one of tsecond-tier banks in FYR Macedonia, servicing SME clients in the market. UniBank, which is the sister bank of an existing IFclient in Bulgaria, has been adversely affected, as the crisis has increased the costs of trade substantially. The project is expectto establish a relationship with UniBank, the seventh-largest bank in FYR Macedonia servicing SME clients in the country, whhas been constrained by the global financial crisis. The project fits well with IFCs strategy for FYR Macedonia, as it contribudirectly to one of the main strategic objectives of expanding access to short-term finance to SMEs in the country, which is keyeconomic growth and job generation.

IFCs expected additionality includes:

Support for the trade finance operations of UniBank, since with no support from a strong multinational parent,UniBank is faced with limited access to lines by international banks;

Support for real sector clients in FYR Macedonia, which rely on trade finance for their operations and have beennegatively impacted by increased costs and the non-availability of lines.


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FYR MACEDONIA:EVN II

Key Dates:

Approved:January 2012Signed: February 2012

IFC financing (million US Dollars):


Loan 3.50 2012


EVN Macedonia AD (the Company) is FYR Macedonias sole electricity distribution company serving more than 812,0customers and a population of 2 million people. After the unbundling of the state-owned utility into separate generatiotransmission, and distribution companies, the Company was subsequently privatized in March 2006, with 90 percent of its shasold to EVN AG for 225 million. Ten percent of the Companys shares remain with the Government. Unfavorab

macroeconomic conditions in the country continue to have a negative impact on the Companys financial performance throuincreases in the impairment of receivables and high grid losses. Consequently, the Company continues to record losses. EVAG (the Sponsor) is Austrias second-largest integrated utility company, providing electricity, gas, heating, water, and waincineration services in Austria and 20 other Central Eastern European countries. EVN AG was partially privatized in 1990 ais currently owned 51 percent by the Province of Lower Austria and 49 percent by other utilities and shareholders. EVN AGlisted on stock exchanges in Vienna, Munich, and Frankfurt with a market capitalization of approximately 2 billion as February 26, 2013.

The Project Development Objective. The projects expected development impacts are: (a) supporting the Company duripower sector deregulation by providing long-term financing, (b) continue supporting EVN with its turnaround strategy thessentially focuses on increasing bill collection rates and reducing energy losses, which will lead to significant electricity savinfor FYR Macedonia, and (c) promoting proper sector reform and the development of a competitive power market in tcountry.


Providing debt financing with adequate maturity as long-term financing is unavailable in the Macedonian market;

Helping the Sponsor with its turnaround of the Company;

Bringing IFCs global experience in financing electricity distribution projects in markets where deregulation is takinplace;

Mitigating regulatory risk given the limited track record of the Regulator (ERC) and the new regulatory frameworkthat is being introduced;

Continuing to offer a stamp of approval regarding the Companys environmental and social action plan, in linewith World Bank Group (WBG) requirements.


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FYR MACEDONIA:OHRIDSKA BANK

Key Dates:

Approved: March 2012Signed:July 2012

IFC financing (million US Dollars):Financier Financing Fisca l Year

GTFP 20.00 2012


The Projectis integral to the Societe Generale IFI Action Plan for Central and East Europe (CEE) (IFC/R2010-0137), whiwould help expand the lending programs of Societe Generales (SocGen) subsidiaries in CEE countries, primarily to penetrvarious economic sectors such as agribusiness, climate change, and small and medium-sized enterprises (SMEs). Moreover, tplan is consistent with the strategy of the World Bank Group (WBG) to reinforce the financial sector in this region. Strontransparent, and coordinated action by parent banks and international financial institutions (IFIs) is much needed to minimieconomic vulnerabilities in the CEE banking sector. This action would counter the negative outcomes provoked by economcontraction, reduced investment and foreign direct investment (FDI) flows, and scaled-back credit to the private sector, all

which are now hindering SME growth and leading to job losses. Moreover, IFCs strategy is to balance the allocation financing requested from Western European banks for their subsidiaries in the region among the different countries, given thsignificant increase in demand for such financing.

The Project Development Objective.The project would further expand SME lending in FYR Macedonia through a fundipackage of up to 20 million in the form of senior and subordinated loans to Ohridska Banka A.D. Ohrid (Ohridska Banka)SocGen subsidiary and one of the countrys most stable banks, whose market share is 7.6 percent in terms of total assets. Thfirst portion of the project was committed and disbursed as a senior loan at 10 million. The bank has requested IFC to convthe uncommitted portion of the facility, which was approved as either a subordinated loan or senior loan to be used for SME(10 million), into a senior loan to be on-lent for renewable energy/energy-efficiency (RE/EE) products; the negotiations astill ongoing. The project would allow Ohridska Banka to tap into new funding sources, as international financing is scarce am

the European economic downturn. Strongly linked to IFCs regional objectives, this investment would directly boost access finance for SMEs, a key to economic growth and job creation.


IFC would provide long-term funding to Ohridska Banka, as longer-term financial resources are now in short supply,especially in frontier markets like FYR Macedonia. IFCs engagement is critical to augment SocGen, the parent company,now facing challenging market conditions, which could impede continual support to its subsidiaries. IFCs additionality,therefore, would assist Ohridska Banka in diversifying funding sources and in supporting real sector clients in FYRMacedonia, which rely on trade finance for their operations and have been negatively impacted by increased costs and thenon-availability of lines.

IFC would boost Ohridska Bankas lending to SMEs, which play a crucial role in both economic growth and job creation.

Increased access to finance: The project would contribute to economic growth in FYR Macedonia by increasing access tofinance for SMEsa vital economic segmentthrough a well-managed local bank supported by an international strategicinvestor.

Long-term maturities and improved capitalization: The project would assist Ohridska Banka to more effectively manage thbanks asset and liability positions with longer-term maturities otherwise in short supply; the subordinated debt, qualifyingfor Tier II capital, would subsequently strengthen the banks capital to underscore anticipated future growth.

Demonstration effect: As a SocGen subsidiary, Ohridska Banka is expected to demonstrate market best practices in pivotaareas, i.e., credit policies, risk management, and environmental and social systems.


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FYR MACEDONIA:TUTUNSKA BANK NLB

Key Dates:

Approved: December 2009Signed:January 2010

IFC financing (million US Dollars):Financier Financing Fisca l Year

Loan 33.00 2010


The Project is one element of an umbrella credit facility to NLB Group, a regional financial services group owned ancontrolled by its parent company, Nova Ljubljanska Banka dd. (NLB), based in Ljubljana, Slovenia. The facility is designed provide longer-term funding to NLB Group subsidiaries to support small and medium-sized enterprises (SMEs). The projeconsists of an SME financing credit line of up to 25 million to NLB Tutunska Banka A.D. Skopje (Tutunska), the thlargest bank with a growing presence across retail, corporate banking, and SME lending. The project would allow Tutunska tap a new source of financing at a time when international funding sources for Macedonian banks are drying up due to th

impact of the global financial crisis, and it also assists the Macedonian SME sector, which contributes around 90 percent of thcountrys economic output, in a time of economic hardship.

The Project Development Objective. By supporting SME lending activities of the b ank and the leasing company in a markwhere private sector credit/GDP is at significantly lower levels compared to the EU, IFC will contribute to expanding access term finance and support SMEs capital investment plans. The successful implementation of the project will help an experiencstrong local sponsor to grow further as a regional player, and facilitate the transfer of capital and modern banking practices froSlovenia into the lesser-developed markets in the region. It will also support a system bank in lending to the SME sector, whiis crucial for the creation of new job opportunities.


Support during Crisis: By providing funding to the Bank, IFC helps to maintain Tutunskas lending activities and acts as

counterbalancing force in the absence of private sector funding. Without the project, the bank might need to curtail itslending activities and reduce its balance sheet as existing funding becomes due.

Longer-Term Funding: IFC provides longer-term funding that Tutunska would find difficult to source from the privatesector market, particularly for frontier markets such as FYR Macedonia. This is relevant in the context of the global crisisthat has affected the ability of European banks and their subsidiaries to raise long-term funding.

Long-term Partnership: Through the project, IFC is building a long-term strategic partnership with NLB and the bank,which would provide a platform for IFC to undertake other initiatives across the region. NLB is one of the key regionalplayers, and such a partnership would give IFC further reach into many of the smaller markets in the region, as in the case the project.

Access to Finance: The investment supports SME lending activities of the NLB Group and the Bank in a ratherunderdeveloped market such as FYR Macedonia. IFC contributes to expanding access to term finance and support for

SMEs capital investment plans. The SME sector is an important driver of the Macedonian economy, still offering attractivgrowth opportunities.

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