North Macedonia: Staff Concluding Statement of the 2026 Article IV Mission

1. North Macedonia recorded robust growth and a decline in inflation. Growth accelerated to 3.5 percent in 2025, above its potential, driven mainly by construction-related investment and strong private consumption amid buoyant wage and credit growth. Headline inflation declined from the peak of 4.8 percent in July 2025 to 2.9 percent in February 2026, largely thanks to slowing core inflation, while food and beverage price inflation remained elevated at 3.8 percent. The 2025 budget met its deficit target of 4 percent of GDP with shortfalls in tax revenue offset by cuts in capital expenditure and goods and services spending. Public debt, including state guaranteed, stayed around 60 percent of GDP. The current account deficit increased to 4.4 percent of GDP, largely due to a decline in private transfers and the services balance. Continued real wage growth and limited productivity gains have weakened competitiveness, highlighting the need for a stronger policy framework, some tightening in macroeconomic policies, and structural reforms.
2. The energy price shock stemming from the ongoing war in the Middle East is expected to weigh on growth and reignite inflationary pressures. Real GDP growth is projected to slow to 3.1 percent in 2026 and converge to its estimated potential of 3 percent over the medium term. At the same time, higher global oil prices are expected to push inflation up to about 4.5 percent in 2026, also raising concerns about energy affordability. To cushion the impact, the authorities temporarily reduced the VAT on fuel from 18 to 10 percent and released heavy fuel from state reserves to help contain electricity generation costs. Due to higher energy imports, the current account deficit is projected to widen to around 5 percent of GDP in 2026, before narrowing gradually to about 3 percent of GDP in the medium term as global commodity markets normalize.
3. Risks to the outlook are tilted to the downside. A prolonged conflict in the Middle East and higher energy prices coupled with weaker growth in the EU could further slow economic activity, keep inflation higher for longer, weaken the external position, and delay the ongoing fiscal consolidation. Domestically, fiscal slippages, particularly from continued ad-hoc wage and pension increases, and cost overruns in large infrastructure projects, could derail fiscal consolidation and erode market confidence. On the upside, stronger reform implementation could significantly improve North Macedonia’s growth prospects.

Fiscal Policy

4. The mission welcomes the authorities’ commitment to reduce the fiscal deficit to 3.5 percent of GDP in 2026. This would help build fiscal buffers for shocks and support disinflation under the peg. However, without concrete tax policy and administration measures, the envisaged revenue gains may not materialize. As a result, the deficit could reach 4.2 percent of GDP. Achieving the budget target will require firm control of current spending, particularly on pensions, wages, and goods and services, and efforts to reduce VAT tax expenditures. Support to households in response to the current energy price shock should be well targeted, as across-the-board subsidies, including generalized tax cuts, are inefficient and regressive. Therefore, the temporary VAT reduction should be phased out promptly. Vulnerable households should be supported through the existing social assistance schemes, which are relatively well-targeted in North Macedonia, though their coverage and adequacy may need to be strengthened. The VAT windfall from higher fuel prices could be used to cover part of the related costs.
5. Fiscal consolidation should continue in the medium term. The debt sustainability analysis suggests a moderate overall risk, which in combination with significant financing requirements of the budget and the expected rise in the pension fund financing needs (the latter adding 5.3 percent of GDP to public debt by 2041), points to the need for larger deficit reduction. Staff recommend targeting public debt (excluding guarantees) to below 45 percent of GDP by 2035, requiring a deficit of 2 percent of GDP by 2030 compared to 3 percent in the baseline projections. This would provide the needed buffer under the fiscal rule for future shocks and demographic pressures. The largest gains can be achieved by reducing VAT tax expenditures, where foregone revenue is estimated at about 3.5 percent of GDP, alongside strengthening tax administration through e‑invoicing, an Integrated Tax Information System, improved compliance risk management, and reduced tax evasion. On the expenditure side, priorities include containing the public wage bill by moving toward a unified, rules‑based compensation framework and reforming pensions to restore the link between contributions and benefits. Both of these reforms can take time, during which wage and pension increases should be limited to inflation. Strengthening public finance and investment management would improve efficiency of spending and generate additional savings.
6. Strengthening budget integrity and fiscal transparency remain critical. The institutional arrangement that delegates the management of road construction to PESR (Public Enterprise for State Roads) places significant public investment spending and PESR’s borrowing with government guarantees outside the government budget perimeter. Similarly, the losses of ESM, which reflect a policy decision to maintain subsidized tariffs, amount to implicit subsidies but are not recorded in the budget. Bringing PESR and electricity subsidies within the general government budget framework would improve fiscal transparency and provide a more accurate assessment of fiscal risks.

Monetary and financial sector policies

7. The combination of the energy price shock and still strong domestic demand warrant further tightening of monetary policy. The National Bank’s modernized policy framework is an important achievement that strengthens its operational efficiency and flexibility. To absorb more liquidity and improve transmission, the National Bank should switch its CB-bill auctions to full-allotment and raise its policy rate. Staff recommend calibrating the policy stance so that forward‑looking real policy rates gradually converge toward neutrality –currently estimated by Fund staff at about 2 percent – over the medium term, as inflation declines. If needed, reserve requirements could also be increased. Finally, restoring a dynamic capital structure of the central bank, linked to its monetary liabilities, and reinstating a robust profit-retention framework in the law are essential to safeguard the central bank’s financial autonomy and policy credibility.
8. The financial system remains robust, but emerging vulnerabilities call for supervisory vigilance. The banking sector is well-capitalized, liquid, and profitable, and non-performing loans remain low. Credit growth accelerated in 2025, driven by ample liquidity and strong deposit growth, with particularly rapid expansion in real estate–related lending supported by sharp rise in housing prices Macroprudential policy has been appropriately tightened, and stress tests suggest that systemic risks remain contained. However, elevated exposures to real estate warrant continued close monitoring. If credit and housing market pressures persist in the coming months, additional macroprudential measures will be needed to further strengthen capital buffers and mitigate risks. The mission welcomes the planned alignment of the Law on the Deposit Insurance Fund and the Banking Law with the Resolution Law, to be enacted by end-June 2026. The critical and urgent next step is to fully align banking legislation with European legislation, which would integrate supervision, recovery and resolution, and licensing frameworks, and modernize supervisory architecture with a complete financial stability toolkit including systemic sectoral buffers for real estate-related lending. The non-bank financial institutions and crypto‑asset service providers are growing fast but remain small, and should be subject to close supervision, with potential linkages to banks closely monitored and related risks proactively mitigated.

Structural reforms

9. Structural reforms can lift productivity, strengthen competitiveness, and support faster income convergence with the European Union. Staff analysis suggests that well-targeted and credibly implemented reforms could substantially raise North Macedonia’s GDP over the medium term. Priorities are governance, labor market reforms, SOE management, and the energy sector.
10. Good governance is essential for public sector efficiency and investor confidence. Strengthening judicial efficiency, regulatory predictability, and enforcement of contracts would considerably improve the business environment and encourage investment. This can be achieved through transparent and merit-based judicial appointments; enhanced resources, capacity and autonomy of the State Commission for the Prevention of Corruption; the strengthened criminal code and improved effectiveness of the asset declaration for public officials; and accelerated implementation of the anti-corruption strategy. At the same time, simplifying business regulations and reducing administrative burdens would foster a more predictable and competitive business environment.
11. Targeted labor market reforms can strengthen labor force participation, reduce skills mismatches, and increase labor productivity. Formal employment and inclusiveness can be strengthened by supporting job search and employability, reducing barriers to work, and expanding participation incentives for women through affordable childcare, flexible work arrangements and a higher retirement age. Skills mismatches should be addressed through vocational training and reskilling, in line with the EU Reform Agenda, to better align workforce with labor market needs. To preserve competitiveness, real wage growth should reflect productivity gains.
12. Improving SOE performance is essential to ensure efficiency of public resource allocation and to contain fiscal risks. The mission recommends establishing a clear state ownership policy that separates regulatory and commercial functions, improves corporate governance, oversight, reporting and disclosure frameworks, ensures professional board and management appointments, and establishes financial and operational performance targets. The forthcoming SOE law should give the Ministry of Finance authority to oversee major financial decisions by SOEs.
13. Energy sector reforms are critical to ensure energy security and affordability. Electricity tariffs remain below cost-recovery, while continued losses of the state electricity company ESM underscores the need for stronger governance, transparency, and operational efficiency. ESM has made considerable strides to improve its operational efficiency and optimize costs, but more action is needed to place the company on a sustainable financial footing, including gradual implementation of cost-recovery electricity pricing. The vulnerable should be shielded through targeted social assistance. To strengthen energy security and support the green transition, the sector needs deeper integration with the European energy networks, and investment in energy infrastructure and renewables.

READ MORE: https://www.imf.org/en/news/articles/2026/03/31/mcs-04012026-north-macedonia-staff-concluding-statement-of-the-2026-article-iv-mission