The economy was severely affected for several months by the crisis in Kosovo, but signs of significant recovery are apparent despite the disruption to production and trade. The recovery has been more rapid than expected. Largely because of a big increase in exports to Kosovo as returning refugees bought building materials and food. This demand is likely to subside, and economic recovery is expected to strenghten more gradually in 2000 and 2001. The government has made a firm effort to keep stabilisation on track, and the Central bank has successfully maintained its exchange policy.

The estimates for 1999 indicate that the economy grew by around 2%, with government figures indicating nearly 3% growth. Industrial production rose by 12.5% year on year in the third quarter. The budget for 2000 forecasts GDP growth of 6%. GDP per capita measured in US dollars is projected at 1,813 in 2000.

Stabilization is holding firm. End­year inflation was slightly negative in 1998. Prices remained stable even during the Kosovo crisis, and end­year inflation was 0.7% in 1999. An inflation rate of about 4% is forecast for 2000 in the budget.

The current account was in deficit for most of 1999 despite moving into temporary surplus in the second quarter due to a combination of severe import compression and a major increase of exports to Kosovo after the end of the war. Financial assistance from the IMF and World bank to help overcome the costs of the war has contributed to the quick recovery of foreign trade. However, the current account deficit is likely to widen again in 2000, reflecting pent­up demand on the part of consumers and producers, which will increase imports.

FDI has increased sharply, rising from US$ 15.8 million in 1997 to US$ 120.3 million in 1998, but dropped to an estimated US$ 30.8 million in 1999. The privatization of Stopanska banka (the largest bank in the country), that actually took place in December 1999, and the forthcoming privatization of public telecoms operator Makedonski Telekomunikacii, will bring in valuable revenue.

The fiscal deficit worsened significantly in 1999 because of the costs associated with the Kosovo crisis. The budget deficit was US$52 million in 1999. But in 2000 it was recorded a miracle: a suficit of around US$ 200 million (mainly as a consequence of the introduction of VAT).

The strongly independent central bank is maintaining a tight monetary policy, based on a de facto peg of the exchange rate of the Denar to the Deutschemark (MKD 31.0 = DEM 1).

In November this year, during the Summit in Zagreb, Republic of Macedonia signed a stabilization and Association Agreement with the European Union. This is meant to result in mutual free trade for a wide range of goods in 10 years, and free trade in industrial products in the short term. The Agreement is an important step in strengthening the country’s relationship with the EU.

VAT (introduced from April1, 2000):

General rates applies to everything except the following at reduced rate:

• Food products (except alcohol and soft drinks)
• Basic agricultural products and animal food (except pet food)
• Water/electricity/gas/coal/firewood
• Medical supplies/detergent/soaps
• Books/brochures and printed material (unless for advertising)

• Transport of passengers
• Maintenance of public cleanliness
• Lega/accounting/auditing services

• Resale/rental of building/flats (except first sale within 5 years of construction)
• Postal services
• Banking/financial/insurance services
• Cultural services by public institutions
• Health/educational services
• International transportation of passengers