EBRD activities in Macedonia

As at 31 December 2002, the European Bank for Reconstruction and Development (EBRD) had signed 16 projects in Republic of Macedonia, with commitments totalling €258 million in support of projects with a total cost of €621 million. Of these, ten are in the private sector and six in the public sector.

The EBRD focus will be on increased support to the private sector and small and medium-sized enterprises (SMEs) in particular, through direct equity investments, a new microfinance bank and the expansion of the Trade Facilitation Programme. Having worked with various foreign investors in the country, the Bank is now taking a lead in establishing a focused dialogue between the international investors' community and the government to improve investment conditions. There is a strong emphasis on the energy sector with new projects, as well as on road and air navigation projects with regional dimensions. Building on its considerable presence in Macedonian banking sector, the EBRD is working towards supporting bank consolidation through further potential equity investments.

Strategy for Republic of Macedonia

Since the last Country Strategy was approved, the economy has undergone a period of considerable fluctuations. In 2000, notable progress was made in transition and in laying the foundations for sustainable economic growth. Real GDP grew by nearly 5 per cent, the highest rate of growth since independence, and significant reforms were introduced, including the acceleration of large-scale privatisation and better banking supervisory standards. In April 2001, Macedonia was the first country in south-eastern Europe to sign a Stabilisation and Association Agreement with the European Union. These achievements have been, however, seriously jeopardised by the recent conflict. Economic activity declined sharply during 2001, with an estimated real GDP contraction of more than 4 per cent and key reforms put on hold. The economic costs of the conflict have included trade disruption, the collapse of business confidence, both foreign and domestic, and the heavy fiscal burden of security expenditures.

Foreign Direct Investment

Macedonia has benefited over the last decade from access to loans on favourable terms from the international community, and the external debt burden, at around 40 per cent of GDP, is relatively moderate. However, the scope for incurring new sovereign loans is limited and should be carefully targeted at high-priority projects.

The success of this strategy depends on the country's ability to build political stability and a broad consensus on reform targets and to demonstrate a sustained commitment to the acceleration of structural reforms, in line with the country's aspiration for European integration.

Transition challenges

Significant transition challenges lie ahead for Macedonia, in particular:

(i)                   improving the business environment for investors,

(ii)                  privatising or liquidating large loss-making companies and promoting post-privatisation enterprise restructuring and the development of institutional and financial support for SMEs;

(iii)                 commercialising and privatising utilities, building upon the earlier success of the telecom privatisation, and developing critical regional infrastructure

(iv)                strengthening and consolidating the banking sector and developing non-bank financial institutions.

At this critical moment of post-conflict recovery, the Bank is fully committed to provide direct support to address these challenges and is well positioned to mobilise new private investment. The Bank's activities will focus both on advancing the implementation of existing projects and on developing new projects, along with institution-building initiatives, according to the following operational priorities:

Enterprise sector

The Bank will increase its efforts to support local export-oriented, private businesses through direct finance, including under the DIF framework. The Bank will also give a high priority to support SMEs and micro-businesses by setting-up a micro-enterprise bank and by working with financial institutions to enhance the availability of credit (from medium to micro) and trade facilities to enterprises.

Infrastructure

Energy
Support to the power utility is one of the Bank's key priorities. The Bank is offering to assist the privatisation of the electricity company through pre-privatisation financing, providing both investment and institutional support, and is considering financing the interconnection of the country's power transmission grid with Bulgaria, thereby allowing the emergence of a regional electricity market.

Transport
The Bank's priorities are to finalise and implement the Macedonian Regional Roads project under the Stability Pact, and to support the modernisation of the air navigation system of the country, both projects having wider regional impact.

Municipal infrastructure
The Bank will focus on the implementation of its environmental programme in six cities and will seek to expand it to other regions.

Financial sector
Particular attention will be paid to active management of the portfolio of existing projects, especially the equity investments in local banks. The Bank will assist with banking sector strengthening and consolidation through possible new equity investments and explore the scope for projects in the light of the recently started pension reform and the new leasing legislation.

The next two years

Over the next two years, the Bank will continue its active policy dialogue with the Government on the much-needed improvement of the investment climate and will take the lead in promoting the establishment of an international investors' association. The Bank will also place a strong focus on minimising environmental impacts and optimising environmental benefits associated with the Bank's prioritised areas of investment, particularly in the infrastructure sector, and on setting high standards for public consultation.

While implementing this strategy, the Bank will closely co-ordinate its actions with other IFIs and bi-lateral donors to ensure a complementary approach when providing financing, promote where possible co-financing and blending of loans with grant funding and mobilise technical assistance as needed.

Showcase projects

Municipal and Environmental Action Programme

Six municipalities in Macedonia will have significantly improved water supply and waste-water treatment as a result of this €53.5 million project to be implemented in 2002-04. The project consists of a series of investments for the rehabilitation of water supply and waste-water infrastructure together with a corporate development programme for Kumanovo, Ohrid/Struga, Stip, Strumica and Veles.

In addition to the EBRD loan of €20.8 million, the project is also co-financed by €32.7 million of investment grants and concessional loans and €3.9 million of grants for technical assistance, generously committed and provided by Switzerland, Portugal, Germany, Greece, Japan, Canada, Denmark and the USA. The Government of Macedonia has also committed €5.1 million to the project.

The project scope was designed to address urgent investment needs in the aging water and waste-water facilities of the municipalities and to meet EU environmental standards. It will also contribute to improving the financial and operational performance and efficiency of the water utilities, introducing cost recovery through user charges, and to enhancing the self-financing capacity of the water utilities. The Bank aims to expand this project to other municipalities in the country.

Trade Facilitation Programme

The EBRD Regional Trade Facilitation Programme was launched in Macedonia in 1999. It has proved to be an excellent financial product for the country, particularly in support of the development of small and medium-sized companies. Macedonia was ranked first by number of transactions and third by the volume of utilisation among the countries participating in the programme.

As of end January 2003, EBRD guarantees totalling € 43 million have supported 322 trade instruments issued by Macedonian banks. Current participating banks include Komercijalna Banka, Stopanska Banka, Tutunska Banka and Export & Credit Bank. In 2003 - 04 the EBRD will extend this programme to other creditworthy banks in the country and introduce new products, such as pre-export financing.

Signed Projects as of 31 December 2002

Source: EBRD

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