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Macedonia year in review part 2: the economy

While 2003 was not the banner year hoped for by the government, it still offered some signs for cautious optimism, especially in terms of foreign investment and a burnished international image owing to the general lack of violence. Painful privatization processes reached their final stages, amidst worker protests. Communications shortcomings, and to a lesser extent transport and infrastructure ones, remained the worst impediment to foreign investment. High-level disagreements impeded progress and led to ministerial re-shuffles. However, a number of important international deals were reached in 2003, and despite frequent criticism the government did take strides towards improving the investment climate. The year ended on a high note with news of major investments from Turkish companies.

Cleaning House: OKTA, EXIM Bank, the Health Fund and more

The first order of business for the government was to clean up old problems such as OKTA. The contentious OKTA privatization deal with Hellenic Petroleum concluded under the previous government had left the latter virtually in control of Macedonia’s oil, and obliged to pay only 1 percent in import duties (compared to a previous 23 percent). Buoyed by a European Court ruling, the government was able to re-negotiate the contract.

Another troublesome vestige of the past came in March, when Macedonia’s Export-Import (EXIM) Bank crashed. It had done well enough during the previous government; owner Methodi Smilenski allegedly had close ties with those in power. Yet the essential reason the bank folded was that Smilenski gave credits to companies owned by himself- companies located in Macedonia (Stip) as well as in Austria, Poland (Krakow) and other European countries. The biggest shareholder of all was FZC- 11^th October, Macedonia’s largest and German-owned pipe factory. In accordance with national banking regulations, the Macedonian National Bank took over EXIM.

The government continued to turn its attention to VMRO-DPA indiscretions, with SDSM Health Fund chief Rubin Zarevski charging his predecessor, Vojo Mihailovski, with causing a deficit of approximately 5.5 billion MKD by dramatically increasing purchase totals. Zarevski had won his position after his economic formula for fixing the Health Fund was selected as the best- though there were gripes that a superior plan from another candidate was overlooked, because he was not part of the “Skopje clique.” (Zarevski in turn was eventually sacked after employing his wife at the Army hospital. He was controversially replaced by Dr. Nikola Panovski from LDP, whose wife owns a drug trading company.

Fund austerity made its presence known when at least on two occasions, State Clinic doctors received their pay a month late. September’s mandated loss of jobs for Macedonians (to benefit Albanians) at the Clinic contributed to Macedonian resentment of government policy.

While the illegality of party-owned corporations was presented as scandalous in the early part of the year, its solution amounted to basically the same thing. While SDSM criticized VMRO for surreptitiously “owning” companies through their top officials’ private holdings, the SDSM merely returned the corrupted companies to the rule of the people who had originally corrupted them in the first place. Thus the appointment to the ECM directorate of Pande Lazarov, who replaced the compromised Lambe Arnaudov of VMRO. Another example was that of the privately owned, dubiously privatized Makedonija Tabak cigarette factory, whose leadership was awarded a top SDSM man, Straso Nelkovski, reprising his role from the first corrupt SDSM administration, where he had worked under the late cigarette smuggling king Danco Suturkov. Under the VMRO government, the “tobacco mafia” had allegedly been in the control of the now-vanished Dragan Daravelski. Regardless of what party is in power, it seems, the practice lives on and this has to do with its primarily internationalized and lucrative character.

Loss-making companies and social security

In March, the government made plans to settle details of social security in light of the projected final privatization of state-owned companies. The unions had been very concerned that the government act, threatening massive strikes. The government’s decision to transfer MKD 9.03 million from the privatization of a Skopje mill to the Fund for Pension and Disability Insurance represented a new approach to providing for labor from privatization profits, one conceivably to be used when dealing with the other large deficit-ridden companies.

Plans were also announced for similarly afflicted companies that remain within the public sector. The Ministry of Economy suggested that instead of depositing funds from the accounts of the public enterprises into the commercial banks on a selective basis, a practice present in the past period, depositing should be done on the basis of public tenders, where the funds would be deposited in banks meeting “high criteria for financial solvency,” while offering lower interest rates and speedier service.

However, in 2003 social security remained hampered by massive abuses. As before, citizens working abroad for lucrative salaries were listed as unemployed, and they (and/or their spouses) collected welfare- draining the system and public funds.

In addition, the entrenched bureaucrats at the Social Security Administration continued the Yugoslav-era practice of laziness, unaccountability and inability to achieve results. Some pensioners have been waiting up to 5 years, perhaps longer, to receive back payments and the administration has showed very little interest in assisting them.

Tax changes

In March, the “war tax” of 2001 was finally ended. The revenue it generated to fill budget gaps was to be compensated for by the increased coverage of the VAT.

On 4 March, the Macedonian government adopted the changes and supplements to the law on Value-Added Tax (VAT), citing that the necessary financial effect would be achieved without increasing companies’ expenditures. Instead, the general population would be hit by the VAT increase, While VAT would be reduced from 19 to 18 percent, its purview was altered completely. Previously, it applied only to goods purchased but not to food, electricity and water. Popular outcries forced the beleaguered Gosev to continue to “water down” the tax in a futile struggle to please both the IMF and the hard-hit Macedonian public.

Cosmofon arrives; communications remain partially monopolized

On 14 June, OTE subsidiary Cosmofon set up shop as Macedonia’s 2nd mobile operator. The dark days of MobiMak monopoly finally came to an end. However, despite an initial massive switch of customers to Cosmofon, many were disappointed by the new company’s low starting coverage (65 percent of the country) and only marginally lower prices. As always, the introduction of competition had a salutary effect on the market, forcing Mobimak to offer its own “sweet deals.” Nevertheless, mobile rates in Macedonia remained among the highest in Europe. Cosmofon pledged to dramatically increase its coverage by the end of the year; now the company covers all the major towns, and has only a few of the least populated mountain areas to cover. The Greek-owned company also promised to pump tens of millions of dollars in additional investments into its operations here.

Ever-popular Macedonian Telecommunications enraged the public again by raising rates 15 percent across the board. While an initial increase of 25 percent had been announced, popular outcry led the company to trim the rise to 15 percent. However, the remainder will probably be made up in the new year, when MT says another rate hike will occur. The company retains a landline monopoly until 2005.

On 6 March, MT Executive Director Attila Szendrei announced that 2002 was another “successful” year, with total income of MKD 14.15 billion, and a profit of MKD 1.2 billion. Further, Telekom’s 2002 investments came to Euro 78.3 million. However, Szendrei stated, realized revenues were three times lower than in 2001. However, this statement was deceiving, as there was not so much a loss of profit as a division of assets. In the second half of 2001, MobiMak was separated from Telekom. Thus the goliath, for all intents and purposes the same thing, seemed less formidable (on paper) than it actually is. According to a television report in March, MobiMak made a profit of Euro 60 million last year- from a total population of 2 million.

Szendrei also blamed the “lower” revenues since 2001 on differences between domestic and international accounting standards. According to the Macedonian standards, debts amounting to MKD 1.4 billion were also included in the total income column. In other words, there were no “lower” revenues since 2001. In any case, international experts continue to express unease over accounting in Macedonia- in many cases, still done in the “single entry” fashion.

Despite its promises to increase investment and modernize service to rural areas, MT has also made some amazing blunders that one would not expect from a foreign-managed company. When all of the phone prefixes in Skopje were changed overnight, and apparently at random, the company provided very little advance warning. Locals and foreigners alike were baffled by the chaotic and largely unannounced scheme.

Even more endearing to the Macedonian public was MT’s year-end decision to cut 70.000 phone number for unpaid bills. One enraged victim showed his bill- merely .5 denars- on television.

Despite MT’s avaricious price increases and extremely expensive by-minute internet billing, its charges for ISDN connections remained very affordable compared to dial-up, and (usually) worked almost as well as Western cable connections. However, rates for .com.mk web extensions remain the most expensive in Europe, and Macedonian businesses remain largely ignorant of the marketing, advertising and communications potential of the internet.

The government strikes a deal with Microsoft

Macedonia became the latest “strategic partner” of Microsoft in August, part of the American company’s general plan to help “upgrade” European national high-tech capacities in preparation for the EU’s requirement to be net-friendly by 2005. Although Macedonia is not a member of the club, Microsoft is treating it like a contender- and jumping in the ring with it too.

Microsoft seemed to be most interested in cracking down on unlicensed software, and making sure none was being used in the government. Indeed, none was. Critics feared that Microsoft “partnership” with the government would in effect stifle the market opportunity for any competitive operating systems, such as Linux.

Agriculture

Although agriculture remains one of Macedonia’s most important industries, it suffered several blows in 2003. The government’s generally poor responses to crises, inability to offer effective subsidies, and rather bizarre stimulus plans meant that the sector itself suffered.

To some extent, this drop could have been expected after the removal of former agriculture minister Marjan Gjorcev, a leading figure in VMRO-DPMNE from the agricultural heartland of Strumica. Gjorcev was more than ready to attack the government’s policy, stating that the overall agricultural production by the end of April 2003 was 12.6% smaller than in the same period last year, and the purchase of crops is 20.3 smaller compared with last year. Further, the agricultural exports deficit was $31.4 million, according to Gjorcev who also claimed that the purchase price of tobacco this year was 50 percent lower than in 2001 and 2002- which will probably result in the sowing of 15% less tobacco than planned.

Strumica’s many watermelon farmers were irked by the government’s failure to provide an export strategy. Most of this year’s crop was left to rot in the fields, or trucked to Skopje and sold on the streets. The reason for this was inexplicably low prices- as low as 0.8 denars for a kilogram of watermelons. Melon producers from the Strumica region held a peaceful protest on 11th July in front of the Government building in Skopje, requesting state remedies for their calamity. Gjorcev tried to make political capital out of the melon misfortune, suggesting the government undertake interventional purchases, export refunds, guaranteed prices and direct payments to farmers. Noting that these measures are applied in all developed European countries, Gorcev also stated that Macedonia is “obliged to take them under the Stabilisation and Association Agreement and as a member of WTO.”

Impoverished egg producers were also angered by price restructuring plans by the government. Producers were afflicted by unbelievably low prices- from 1.8 and 3.2 denars per egg (0.3-0.5 euro cents), and complained that state-sponsored trade inspections aimed at regulating the legal imports of eggs decreased their imports. A major problem for them was the government’s requirement that agricultural entities open export firms, whereas small individual producers would prefer free border transit for exporters. The grain industry, also in trouble, lobbied the government to guarantee mill prices, impose duties on 50 percent of the planned 150,000 ton-grain imports for this year and invest the money from the duties in the agricultural development through purchasing quality seeds, new mechanization and technological improvements.

The Macedonian dairy sector offered a rare glimmer of hope when a USAID competitiveness team for Macedonian dairy farmers, dairies, abattoirs and dairy producers visited New York over the summer. The results of the trip’s research pointed out a large interest in Macedonian sheep cheese among the wholesalers in New York, Chicago, Boston and San Francisco. There is a growing American interest for Macedonian lamb meat also, according to the USAID team, which was to start negotiations with the US Department of Agriculture and FDA for import permits for Macedonian cheese and lamb.

A month after the criticism, the government reacted by offering a “back to the earth” plan for Macedonians eager to return to their agricultural roots. Rather than help existing farmers, the project envisioned giving laid-off factory workers free leasing of up to 5 hectares of land for 3-5 years. The government would also provide free seed, fertilizer and equipment for the first year, as well as a relatively uninspiring 400 euro reward to get the unemployed off of the dole. The second part of the project was to “educate” farmers on the WTO agreement. “The future of Macedonia is in agriculture,” claimed Slavko Petrov, the Minister of Agriculture and, of all things, a former lawyer. He stated that over 57,000 hectares of arable land is now leased to defunct state-owned agricultural combinates. While some of this land remains idle, the rest has been re-leased by the combinates to private farmers. However, this plan gives no assurances to the farmers about better conditions with the commercial banks, and the amount of subsidies- less than 400 euros each- is just pathetic compared to the millions lavished by the EU upon its farmers.

The year 2003 came to an end with another sad, silent protest by farmers from all over Macedonia’s heartland, assembled in front of Parliament. Angry at not having received promised payment for their goods, the farmers unanimous response to journalists’ questions was “(we have) no money.”

Infrastructure developments

The major and continuing infrastructure project is Corridor 8, a route connecting Bulgaria’s port of Burgas with the southern Albanian port of Vlore, via Albania. It is likely to be funded by a mixture of the host governments, private investors and European aid, both institutionally and from single governments. In July, Italian Foreign Minister Franko Fratini, speaking on behalf of then-EU president Italy, declared Corridor 8 “a primary goal” of the Italian Government. The Italians are promising financing for about 960 km of railway and over 270 km of roads. On 15 July, EBRD representatives visited Skopje to announce the lending of $40 million to Macedonia, for the construction of two highway bypasses, one near Skopje, and another near Gevgelija, on the north-south corridor linking Greece and Serbia (Corridor 10).

Another major infrastructure project begun in 2003 was the Kosjak Dam. ESM started filling the dam in May, and announced that in 11 months the first power generator at Kozjak will start producing electricity, while the second generator is hoped to start working in September 2004. Kozjak is expected to provide 156 million kilowatt hours annually. The Chinese government, which was instrumental in assisting construction, is expected by ESM to provide further help; the Chinese Central Water & Electric Company will give the finishing touches to the huge dam. By July, Kozjak had already cost $146 million, and will likely cost some $25 million more. However, it is unlikely that the plant will pay off this entire investment from electricity alone. Plant production will only supply a small portion of Macedonia’s daily needs. But ESM sources are confident, stating that, “Kosjak is part of a much larger project, the Vardar Valley Scheme, which will include 13 more dams on our biggest river and will mean that Macedonia will have enough industrial and irrigational water for decades.” In other words, the investment totals will be “spread out” between the different projects, so that adducing profits may be hard to determine.

Electricity bosses believe that the total expected series of dams will eventually have an impact on Macedonian power production, which currently relies on the REK Bitola coal-fired plant for over 70% of the production. ESM also claims that Kozjak will stop any potential flooding of Skopje, and will improve the climate in the polluted city.

These last are somewhat debatable. What is interesting, however, is another way ESM plans to profit from the dam: by selling attractive real estate. Having a lakeside house half an hour’s drive from Skopje is an appealing prospect for the capital’s nouveau riche. One square meter near the expected shores of the future “Lake Kozjak” is now being sold for 20 euros.

Finally, Macedonia’s leading construction company (Granit) announced in July the start of a new “golden age” for the industry, claiming to have business worth 190 million euro abroad, making the company “Macedonia’s largest construction exporter,” according to company president Straso Milkovski. Among the company’s big projects are: long stretches of the Kiev-Odessa highway in the Ukraine (worth 80 million euro); Albania, on a highway which is part of the east-west Corridor 8 (worth 10 million euro) and on a number of highways in Bulgaria, totalling 2.45 million euro. In the summer, Granit also won a contract to build three stretches of a highway connecting Croatia to Slovenia and Serbia (worth 42 million euro). This was an especially positive development considering that the Macedonian company was competing against companies from Germany, Italy and Croatia for the bid- proving that, in some sectors at least, Macedonian companies can compete for international tenders with the rest of Europe.

Transport

Bulgarian Foreign Minister Solomon Pasi, in deploring the slow travel times between Balkan capitals, complained in July that, “Sofia has no railway connection with Skopje and Skopje has none with Tirana. This situation cannot be tolerated any longer.” US businessmen in the region have complained in the past about the lack of an air route to Thessaloniki. Such a route, while desirable, is out of the price range of most Macedonians, who generally take the dilapidated railroad system. Railroad strikes proved debilitating in 2003, as did occasional acts of sabotage in Albanian areas. Both affected international service between Serbia and Greece. Meanwhile, basic alternative services like buses to Greece and railroads to Bulgaria and Albania remained a distant dream. In November, new EU-sanctioned rules made train travel even more unattractive, when an “international tariff” applied to some tickets purchased on board resulted in a mind-boggling 200% increase in fare. How the EU can justify forcing Macedonia to comply with its standards, while the same low quality of service is still offered, is beyond comprehension.

Meanwhile, low-level corruption from Macedonia’s toll booth workers drained government coffers of much-needed funds for road repair and maintenance. In outlying villages, the OSCE and other bodies noted occasional “toll booths” still being set up by armed criminals in Albanian paramilitary uniforms.

At year’s end, US ambassador Lawrence Butler took Macedonia to task for not providing the right atmosphere for competition in the air carrier market. Meanwhile, airport development projects featured strong interest from Turkish companies at year’s end. Yet ethnic prejudice hampered potential; allegedly, the Albanian DUI’s Transportation Minister, Agron Buxhaku, vetoed an offer from Siemens to build an airport in Strumica, because no Albanians happen to live there. The ministry favored air projects in Struga and Tetovo, where a majority of Albanians live and where business could be done with air carriers from Albania and Kosovo.

Tourism

Despite the appearance of yet another man-made lake (Kosjak), and American interest in developing a water park near Kondovo, Macedonian tourism again failed to achieve its potential. Government figures remained notably unreliable and distorted, due to the ill-reasoned practice of defining a tourist as “any foreigner who spends at least one night in Macedonia.” Of course, since the vast majority of foreigners in Macedonia are businessmen, soldiers, or other international community types, this definition seems rather too generous.

A lack of marketing and inability to readily supply statistics and information continued to hamper the industry. A poor standard of written English was attested across both the private and public sectors. Despite millions spent in refurbishing infrastructures, the production of vital promotional material and brochures was neglected. The general lack of marketing was acknowledged on A-1 TV at the very end of the year, when

Nevertheless, several major domestic investments in prime spots such as Ohrid, Mavrovo and Berovo attest to a new spirit of hopefulness. Initiatives by the US Government are in place to help the country’s touristic development. We understand that serious American investors want to come into the market in the next few years.

WAZ acquires newspapers

Perhaps even greater than Cosmofon’s arrival was the news that Germany’s WAZ was purchasing the country’s 3 largest newspapers, amalgamating them into an entity called “MediaPrint Makedonija.” The German publishing group acquired Dnevnik, with a circulation of 55,000 copies, Utrinski Vesnik, with a circulation of 28,000 copies, and Vest, a tabloid with a circulation of over 30,000 copies. While final figures were not specified, the Germans were said to have spent between 1-5 million euros for the papers.

While initial fears of an editorial monopoly were circulated, WAZ and Dnevnik staff were quick to assert that no such editorial forcefulness would be exerted. Put in charge of the operation was Srdjan Kerim, an ethnic Turk and longtime ambassador to Germany.

The media sector had been afflicted by continuing bad news from Nova Makedonija, the state-run house whose privatization collapsed in September 2002 when the government claimed that the intended Slovenian purchaser was just a front company for the VMRO-DPMNE party. Considerable labor unrest and confusion followed, and Nova Makedonija was put under government forced management. It is now being liquidated, with the brand names of the two main newspapers, “Nova Makedonija” and “Vecer” and more than 15 other much smaller publications being sold.

The long-time CEO of Nova Makedonija, Pande Kolemisevski, bough the “Nova Makedonija” brand for a mere 5,000 euros. The new has historic value, as NM was the first newspaper in post-war Macedonia, established in 1944.

The “Vecer” name was purchased by a Skopje marketing agency, Idea-Plus, for 25,000 euros invested by its mother company, the Greek-owned Skopje Brewery. The rest of the Nova Makedonija company- its huge downtown office building, the printing press, 180 newspaper booths, etc. will be sold on separate tenders.

Unfortunately for the workers, they are not guaranteed retention by the new owners. Kolemisevski and Idea-Plus are merely obliged to keep the two papers in circulation.

Banking

Before being ousted from his position, Finance Minister Gosev was able to take some credit for a disciplined fiscal policy that by July had saved 55.6 million euros in the budget. Projected expenses for the first six months in 2003 were also slashed by 46 million euros, while profits came to 9.6 million euros higher then expected. Gosev and Central Bank president Ljube Trpevski also managed to keep inflation low, at 0.3 percent, while the denar has remained strong against foreign currencies, especially the sinking dollar, which has now lost over 20 percent of its value against the denar since 2002.

Gosev also presided over the opening of the long-awaited “Pro-Business Bank.” This bank, which will specialize in financing small and medium-size enterprises, is armed mostly with EBRD money. It will offer micro-credits for companies in Macedonia, with annual rates from 8-12 percent. The biggest credits- those of over 100,000 euro- will be offered at only 8 percent annual interest. This bank has already enjoyed great success in the region, operating in Serbia, Bulgaria, Croatia, Bosnia and Romania. It is the No.1 bank in Kosovo. The Bank aims to fill a hole in the Macedonian SME sector by specializing in low interest rate loans. High interest rates have been perhaps the major problem in stimulating Macedonian domestic investments (though corruption has also played a deleterious role). Historically, commercial banks have been reluctant to give low-interest loans, and periodically scuffle with the central bank in a static vicious circle.

Financial crime was the subject of a new group, the Finance Police, which suffered an immediate setback when it turned out that Petar Gosev’s appointed head (Ljupco Stojcev, a former police inspector who worked on exactly these types of crimes) had in 1992 been found guilty of white-collar crime himself. An interestingly “modern” development for financial crime in Macedonia was the summer arrest of the first-known group of identity thieves in the country. Three young men from Skopje robbed 793,000 MKD (over 12,000 euros) from ATM machines owned by Komercijalna Banka, using fake credit cards with only a magnetic reader strip on it. According to Borce Deljanovski, Chief of Analysis in the Interior Ministry, the men were collaborating with a foreigner who mailed them some 100 credit cards with a blank magnetic tape, to be inscribed by a special encoder machine purchased on the internet. The suspects used Western Union wire services to send the foreigner’s share of the cash to him in June. (Western Union indiscretions are also being investigated by police with regard to terrorist financing). Employees at a leading hotel in Skopje were also said to be involved in credit card fraud. The US Embassy reportedly was cautioning “its people” from staying at the hotel in question.

Governmental initiatives

As befitting its EU aspirations, the government continued to outdo itself with bureaucratic initiatives. Thus with the Ministry of Economy’s grand idea for an “Entrepreneurship Support Coordinative Council,” to consist of representatives from five ministries as well as various associations, chambers of commerce, SMEs, financial institutions and even the trade unions. Ironically the stated purpose of this “Council” was to reduce bureaucracy: “(to facilitate) SME development through legal and regulation reform with the purpose of reducing the barriers for starting up and performing businesses.” Unfortunately, it was expected that the international community would want to pay for this, as well as an “Agency for Entrepreneurship Promotion.” The combined cost for the two projects would be 1,500,000 euros for the period 2003-2006. The costs were optimistically expected to come from “budget and donors’ funds.” However, a country being weaned quickly from its international-beggar status cannot expect to have ill-conceived and redundant bureaucratic projects be funded by EU countries which already have their own bloated and vestigial bodies to float.

Turkish investment and customs on imports reduced

At year’s end, Turkish State Minister Kursat Tuzmen came to Skopje to lobby Prime Minister Branko Crvenkovski and Economy Minister Stevco Jakimovski to reduce the 30 percent customs duties put on Turkish products (compared to 1 percent on EU products). This resulted in a “very successful” agreement to decrease the customs duties on Turkish industrial products. Tuzman indicated that decreasing of the customs duties would “increase significantly” Turkish trade volume with Macedonia.

This came almost simultaneously with the announcement that Turkish holding giant Koc would, through its subsidiary Migros, open a $30 million, 25,000 square meter shopping mall. The three-floor center will contain 80 shops, 4 cinemas, a supermarket, restaurants and convention center, and eventually employ “hundreds of local people.

Conclusions

In 2003, Macedonia continued to struggle to make itself an attractive destination for foreign investment as domestic unhappiness with a poor economy continued to be heard. Nevertheless, a policy of fiscal austerity and a hard-nosed approach to finalizing privatization appear to be paying off, despite the frequently turbulent reactions from organized labor and the political opposition. The England-Macedonian football match went off without any feared violence, and the generally peaceful atmosphere contributed to an improved image for Macedonia.

While agriculture suffered and the closure of loss-making factories and discriminatory ethnic firings increased unemployment, there were signs of optimism in the foreign investment sector. European governments and the ERBRD pledged support for infrastructure improvements and the new Pro-Business Bank, expected to help growth in the SME sector. Construction firms won contracts abroad, while a sporting entrepreneur purchased an Italian football team. A German media empire invested heavily in Macedonia’s print media, while the Greeks introduced competition to the mobile sector. A major shopping mall venture from the Turks at year’s end, and promises of increased Turkish investment, rounded out the successes. And, for better or for worse, Microsoft became an “official partner” of the Macedonian government.