Stagflation taking North Macedonia back to the 80s

Stagflation taking North Macedonia back to the 80s
Prices of milk and dairy products have soared, rising by over 26% in the last year. / Valentina Dimitrievska
By Valentina Dimitrievska in Skopje September 26, 2022

For older residents of North Macedonia’s capital Skopje the current energy crisis and rampant food price inflation feel like a return to the 1980s. Soaring prices have left citizens struggling to afford basic food and transport costs and worried about how they will manage to heat their homes during the winter ahead. 

Economists’ forecasts for the coming months are not promising. Stagflation, which was evident in the second quarter, will become more intense by the end of 2022, with a higher possibility of a recession from the beginning of next year, one analyst told bne IntelliNews.

For most citizens the rise of food and energy prices is the biggest problem. “Food is expensive. I’m not using my car any more,” Aleksandar from Skopje told bne IntelliNews

“What bothers me the most is the psychological matrix of going round in circles … The situation is like in the 80s of the last century, a period of uncertainty and lack of ideas,” he added, referring to the decade of economic crises and hyperinflation that followed Yugoslavia’s heavy borrowing from both East and West during the Cold War. During the 1980s, people faced food shortages, fuel and electricity restrictions, with the economic chaos helping to sow the seeds for the bloody breakup of Yugoslavia the following decade. 

Since early 2021, prices in North Macedonia have been rising sharply. In August this year, food and beverages prices posted the biggest annual growth of 25.1%, followed by hotel and restaurants (24.2%) and transport costs (17.4%). The price of bread and cereals jumped 44.1% y/y in August, oils and fats by 46.7% and prices of milk, cheese and eggs were 26.9% higher y/y.

Cold winter ahead 

North Macedonia has hot summers and but its winters are cold, with temperatures falling well below zero. Only about 55,000 households in Skopje use central heating in the country from heating utility BEG (which was recently stripped of its licences). Most citizens use electric heaters in winter, which will cost considerably more to run than they did in previous years. And the upcoming winter is already causing headaches for those who use firewood or pellets as their prices have more than doubled.

“The price of pellets increased enormously so I decided to switch to inventer air conditioner, even though the investment was significant. I think this will be cheaper even though the price of electricity went up as well. Otherwise I would need to spend MKD800 [€13] per day on heating with pellets,” 29-year-old Marko said.

For heating with pellets one family would need about MKD24,000 or about €400 per month, which is just below the average monthly wage. For the whole winter season from mid-October to mid-April this will be MKD144,000, which is about €2,300.

North Macedonia, like other countries in the region, wants to increase power generation from green sources. However, asked about investing in rooftop panels, Marko said it is too big an investment. “I can’t afford this at the moment,” he said.

 “Last year we bought 2.5 tonnes of pellets for a decent heating of the entire house for about MKD25,500, but this year the price more than doubled so I bought just one tonne and I plan to heat just one room and wear warm clothes,” beauty salon owner Dani said.

“I have to find a solution for this winter as firewood is expensive and there is a shortage,” Haris, who lives in the outskirts of Skopje, complained.

The price of one cubic metre of firewood is MKD4,800 and at least six cubic metres are needed to heat space of about 45 sqm depending on how cold the winter will be.

Stagflation to worsen 

The energy crisis is the biggest risk for the economy in North Macedonia at the moment and economic experts recommend the government to increase domestic power production and focus measures on vulnerable categories of the population.

North Macedonia’s economy posted a real annual growth of 2.8% in the second quarter, following 2.4% growth in 1Q22. Meanwhile, inflation jumped to 16.8% in August and reached 11.6% in the first eight months of the year. Industrial output fell by an annual 5% in July, reversing a 0.9% year-on-year increase in the previous month.

Stagflation could also increase the jobless rate that would result in a drop in consumer spending power.

“The expectations are that energy prices will remain high due to market uncertainty and the risks of further interruption of gas supply in the EU countries. The lower supply already generates energy shortages and causes upward pressure on energy prices, which will have a strong impact on the European economy,” chief economist and head of Finance Think economic research institute Blagica Petreski told bne IntelliNews.

She said that North Macedonia is dependent on the European economy, and such risks and trends will have a spillover effect on the country’s economy.

“First of all, because of the direct dependence on energy imports, and secondly, due to significant trade links with the EU countries, including the multinational companies that operate in the country and are directly dependent on their parent companies abroad,” Petreski said.

According to her, despite the reduction in food prices on global markets since June 2022, further increases in energy prices indicate that price pressures could last longer compared to previous expectations.

Growth forecasts downgraded

Consequently, there have already been downward revisions to GDP growth forecasts and upward revisions to the inflation rate, Petreski said.

Finance Think has revised downward the GDP projection growth for North Macedonia in 2022 to 2.1% from the previous 2.8%, while the projection for the annual inflation was revised upwards to 12.2% from the previous 9.7%.

According to the Macedonian central bank, due to persistent downward revisions in foreign demand caused by the military conflict in Ukraine and the deepening energy crisis, downside risks to growth in the third quarter are more likely.

“The dramatic increase in the price of energy puts pressure primarily on industry, which buys electricity on the free market,” Petreski said.

Inflation started to increase rapidly since April 2021. The biggest contribution to the growth of inflation is the increase in import prices of food and energy, including the domestic price of electricity and heat energy, which are influenced by developments in the global energy market.

Petreski added that micro and small enterprises will be affected the most as well as industries where electricity is a significant input in their production. Vulnerable families will feel this price pressure strongly as well.

Crisis after crisis 

People in North Macedonia have got used to crises, some saying that this one is agonising, others that is an artificially-created crisis. The general opinion is that the world is falling apart. There is also general disappointment in politicians. 

“One crisis after another... I don’t remember when the country was not in some crisis ever, whether political or economic. We will overcome this as well by buying less food and wearing warm clothes at home in winter,” 48-year-old Skopje citizen Sonja told bne IntelliNews.

Since it declared independence in 1991, the country now known as North Macedonia has travelled a bumpy road with many crises, an oil embargo, a painful transition, which left many people without jobs, the two decades-long Greek veto on its EU and Nato integration processes, followed by the two-year Bulgarian veto that blocked the start of EU accession talks, and the COVID-19 pandemic.

The country made painful decisions, such as changing its name from Macedonia to North Macedonia to met Greece’s demands, and further concessions to Bulgaria to enable the start of EU accession negotiations

On top of that the country now faces the global energy crisis resulting from Russia’s invasion of Ukraine in February and Western sanctions imposed on Moscow. 

While the government in Skopje condemned the invasion and joined Western sanctions, and a majority of Macedonians see their country’s relations with Russia as poor, opinion is split and not everyone sees Russia as the guilty party; some accuse the US of being behind the war in Ukraine.

“Who fights in Ukraine?  Everyone knows that it’s mercenaries. The war was provoked by the US and now we are bearing the consequences. The entire crisis with high prices is artificial,” said a citizen of Skopje who preferred not to be named.

Government measures 

The country is looking for ways to deal with high prices of gas and electricity ahead of the winter season, and the government recently announced that is preparing a new set of anti-crisis measures worth €76mn.

Electricity prices for most households increased by an average 7.4% starting from July 1. In the meantime, electricity tariff system was changed so that bigger consumers will pay higher electricity bills. For companies, which buy electricity on the free market the prices are enormously higher.

Unusually high electricity bills also seriously affect the profitable operation of public enterprises. Some complain they received five to seven times higher electricity bills.

The wholesale and retail trade margin on electricity is capped at 10% to protect the domestic market from disruptions.

Recently, the government also extended the decision to cap the margin to up to 10% in wholesale and retail trade for basic foodstuffs. However, the measure did not prevent the enormous increase in retail prices.

In the last few days, prices of dairy products increased even more so the price of 1 kg of yellow cheese, the cheapest one, reached MKD700. Prices of milk are increasing almost on a weekly basis and reached MKD80 per litre, twice as high as before the crisis. More and more products are becoming less affordable for citizens in North Macedonia, where the average net wage is about €520.

Meanwhile, North Macedonia’s officials are frantically trying to secure deals from countries in the region for energy supply in the upcoming winter.

PM Dimitar Kovacevski visited Greece recently, where it was agreed to supply coal and fuel oil for thermal power plants without restrictions.

In Bulgaria, officials engaged in negotiations for the supply of 200 MW of baseload electricity, but failed to agree on the price.

Serbian President Aleksandar Vucic said Serbia will share gas with North Macedonia in exchange for electricity from Skopje-based combined gas-fuelled cogeneration plant TE-TO.

Representatives from North Macedonia’s energy companies also visited Istanbul for negotiations with the Turkish authorities to secure certain quantities of electricity at a favourable price.

The Open Balkan initiative of North Macedonia, Serbia and Albania is also a good instrument for the three countries to cooperate in the area of energy and food supply amid the crisis. On September 2, they decided to set up a working group and draft a plan to deal with the consequences of the energy crisis.

The plan will look for possibilities for gas storage and electricity supply, as well as the creation of a joint fund for financing future projects that are of great importance for the three countries.

Kovacevski recently presented his government's plan for dealing with the energy crisis, which envisages the state-owned power producer ESM to increase electricity production by 25% this year. The government also made available €50mn to ESM to increase production and provide additional amounts of electricity. As ESM is taking over the heating business in Skopje from BEG it will be responsible for producing or importing more energy for supplying households with heating.

The government rescue plan is estimated to cost €300mn this winter alone, but no electricity restrictions are envisaged, even though sector representatives think that restrictions are still possible.

According to the plan, ESM should also put into operation the third unit of the REK Bitola thermal power plant, the second boiler of the Negotino supporting thermal plant and the TE-TO cogeneration plant, while all hydropower plants will work at full potential.

"This autumn, winter, and the next spring will be the most difficult in the post-war Macedonian state, and we will endure it and overcome it together," Kovacevski said earlier.

In the longer term there are hopes that the current crisis will help accelerate the shift to green energy. The government of North Macedonia decided to simplify the procedures for installing solar rooftop panels on houses and commercial buildings, but this measure does not attract a lot of interest as it needs significant investments, thus is not appropriate to ease the crisis.

According to the Macedonian Association of Energy Engineers, the energy crisis will not end soon and could take several years, prompting a need for long-term measures to mitigate its consequences.