Addendum 8a

Seminar on the Promotion of
Foreign Direct Investment toSoutheastern Europe

Macedonia

8 November 2002, Tokyo, JIIA
Ministry of Foreign Affairs of JapanThe Japan Institute of International Affairs

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An outline of the presentation“Business potentials of the Republic of Macedonia”
1. Geography & People
Total area: 25,713 sq. km
Land locked mountainous territory with deep valleys & basins,
3 large natural lakes, river Vardar bisects the country
Population: 2.1 million
2. Priority Economic Goals of the Republic of Macedonia
Economic growth and development, Alleviating poverty, Maintenance ofmacroeconomic stability, Reduction of unemployment, Accelerating reforms in all
segments of economy
3. GDP and Inflation 1992-2000, Stable Macroeconomic Framework
GDP - Continuous growth,
Inflation, Exchange rate - Stable foreign exchange rate, Gross reserves
4. Basic Macroeconomic Indicators Projection for 2001
Annual rate of inflation 2.2%
Annual rate of GDP growth 6.0%;Exchange rate of the Denar linked to the EURO
5. Customs Duties and Taxes
The customs duties generally range between 0% and 25%; (Average rate – 14,24%)
Categories of taxes, the most important being:
Corporate income tax, personal income tax
Property tax rate, VAT (5% for specific products);VAT is implemented from
April 2000
6. Foreign Trade Policy and Trade Regime
High level of liberalization
98% of goods are freely exchanged
The average custom duty 14,24%
Current account transactions are liberalized;- Biggest Trading Partners in 2000 (in mill. U.S. dollars) - Macedonia-Japan Export-Import 2002, I-VII
Free Trade Agreements:• Slovenia, Croatia, FR Yugoslavia, Turkey, Bulgaria, Ukraine, Countries Members of EFTA (not yet in force) Albania, Bosnia & Herzegovina
Under negotiation: Romania
7. Privatization, FDI Through Privatization, Top Ten Investors, Sectors With
Investment Potentials; Sectors with export potentials- Production of wine
- Food processing industry- Metallurgy- Textile Industry- Fur and Leader processing industry- Tobacco processing industry- Tourism

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Wine Growing Sector
15 modern wine cellars, Annual production of grapes, wine, brandy; Most
important export markets: Germany, UK, Sweden, Japan, Canada, USA, Franceetc.
Food Processing Industry
Capacities for annual production of:
25,000 tons of processed fruits
30,000 tons of processed vegetables
15,000 tons of confectionery products
Metallurgy
Ferrous metallurgy participates with 7% in the GDP of the countryNon-ferrous metallurgy participates with 3% in the GDP
Big capacities for production of flat rolled products of iron or non-alloy coldrolled steel, plated or coated products; aluminum bars, rods and profiles;
refined copper and copper alloys; unwrought refined lead; zinc dust, powders
and flakes, bars, rods, profiles and wire, plates, sheets, strip and foil, etc.
Textile Industry
Participates with approximately 20% within the country’s GDP
8.84% of the total number of companies in the economy
27% share in the employment
Capacities for production of cotton, yarns and threads, synthetic fibers, woolen
fabrics, clothing garments etc.
425 new smaller/bigger textile capacities in the last 3 years
Fur and Leather Processing Industry
Capacities for annual production of:
3,500,000 m2 of hide and leather
1,300,000 m2 of fur
5,000 tones of rubber products
year 2000 - annual production of 531,000 m2 of hide; 328,000 of fur;
1,600,000 pair of shoes
Tobacco Processing Industry
Three tobacco factories
Annual production of 30,000 tons tobacco
Capacities for annual production of 20,000 tons cigarettes
year 2000 - annual production of 28,635 tons of fermented tobacco and 8,882
tons of cigarettes
8. Agriculture, Transportation, Telecommunication

9. SME Development

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10. Free Economic Zone - “Bunardzik”
During July 1999, an Urban plan for “Bunardzic” was adopted
The zone is 10 km east of Skopje, on the left side of the highway SkopjeKumanovo (E75) and 3km distanced from the “Petrovec” Airport
The location covers total 158.93 ha (139.28 ha - free zone and 19.65 ha dwelling zone)
For one part of this free zone (30 ha) an Agreement between the Republic ofMacedonia and the Republic of China has already been signed and the legal
procedure for its establishing is on its way
Law On Free Economic Zones
Complete tax exemption if:
51% of the production is exported in the first year
62% in the second year of the operating process
70% in the following years of operating
Profit tax and property tax for a period of 10 years from the day ofcommencement of activities in the free zone
11. Hospitable FDI Environment
Main advantages:
Maintained good and stabile political and economic climate, Business friendly
legal environment, being subject to further adjustments.
Possible competitive advantages in several sectors, especially natural resources andhuman resources based; Relatively good and improving infrastructure.
Educated and comparatively inexpensive labor force; Competitive and technicallyskilled human resources; Entrepreneurial spirit of population; An existing
diversified industrial base; Possible hub for some businesses in the Balkan area;
Strategic position in the Balkans.
Attractive environment:
Sustainable development; Open for cooperation with all countries; Abundantinvestment opportunities; National treatment for domestic and foreign investors,
Computer literacy, well-trained and dedicated workforce; Education as a steppingstone for development; Continuity in structural reforms; Stimulating tax and otherlegal relieves and exemption; Ongoing Stabilization and Association process with
the EU
12. Investment Promotion Unit
Operates since 1996 in the field of FDIONE STOP SHOP-Provides you with a full range of free services
Image building of the country
Investment generation
Information on existing legislation
Proposals for changes in legislation and submitting reports to the Government
Assistance in identifying companies seeking investment and arranging contacts
with potential partners
Advise on specific investment opportunity, including companies profiles
Conduct direct negotiations with strategic Investors
Assisting and servicing Investors in the process of registration

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The Reforms of the Macedonian Economy“Seminar about Foreign Direct Investment into Southeastern Europe”
Tokyo, November 2002
The economy of the Republic of Macedonia is probably one of the rare examples of economies,
which during past years, owing to objective economic conditions imposed by the crises in the region, has
shown losses that are bigger than the gross annual domestic product. This indicates that the Republic ofMacedonia has large economic and human potentials at its disposal, which under different conditions andwith the appropriate material suppositions would show incomparably larger profitability.
During the entire period of transition, the Republic of Macedonia was dedicated to radical
measures, whose purpose was to apply practical solutions for the implementation of necessary reforms at
all levels in the country, with priority placed on the economic system. The reforms in the Republic ofMacedonia were conducted simultaneously through transformation of state bodies, institutions, the system,with priority given to legal solutions for transformation of capital organization of companies, the financial
sector, foreign-trade regime and customs operation. They were carried out in collaboration withinternational financial organizations, especially with the World Bank and the IMF.
Radical changes have been also made in the legal sphere in the areas of taxes i.e. the enactment of
the value added tax, regulations related to the foreign investments, not just guaranteeing the security ofinvestments, but also building up promotional solutions for their stimulation.
It is of special importance to point out the results that have been achieved in privatization andrestructuring.
Changes of ownership have increased the dynamics of development of private initiative andentrepreneurship. Formally and from legal point of view, the process of privatization of socially owned
capital is finished. A confirmation of such conclusion is provided through the number of privatizedcompanies, their capital and the number of employees in these companies.
The post-privatization phase is undergoing right now. It is characterized by the internal
restructuring with regards to capital ownership, as well as technical-technological restructuring according
to market needs in order to increase efficiency. Small and medium sized enterprises from the private sector
have taken active part in the reforms of the Macedonian economy. They successfully realize the qualitativeand quantitative changes in the economic structures. Institutions that are indispensable to the process ofprivatization and for the purpose of introduction of market economy in general, have also started to operate.
Those are the currency market and the securities market. Private company’s stocks are listed on the Stock
Exchange through stockbroker companies and their buying and selling is free. A large number of foreigncompanies are present on the domestic market.
With the assistance of USAID, the Ministry of Finance of the Republic of Macedonia, theMacedonian Business Center are establishing several projects for private sector support and strengthening.
The EBRD in partnership with IFC and KfW from Germany are on the way to establish the Bank for micro
crediting that will grant credits to small business without mortgage but with other types of guarantees.
The major changes resulting from the reforms in the economic system, executed during thetransitional period, are directed towards the building of a favorable environment of an open market
economy. It ensures free transfer of goods and capital and opportunities for attracting foreign investments.
There are several progressive measures built in the legislation.
- The Law on Tax on Profit, defining the tax rate at a level of 15% contains many provisions
according to which legal entities are exempt from payment of this tax;
- The Law on Personal Income Tax, provides for two rates: general of 19% and Favorable of 5%which applies to one part of foodstuffs as an instrument for protection of the living standard, as well as toelectricity, medicines etc.
- Legislation related to concessions (the Law on Concessions, the Law on Construction Land andthe Law on Mineral wealth) provides an opportunity through guaranteed right of ownership of construction
land and legal protection of ownership.

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According to Law on Agricultural Land, the Government can provide concessions of state owned
agricultural land and domestic and foreign legal entities and individuals. The long-term lease can range
from 5-to 40 years and the short-term up to 5 years.
According to Law on Free Trade Areas the land can be leased out to foreign investors for a periodof 50 years with a possible extension of that period for additional 25 years.
The Law on commercial companies to a great extend corresponds with the existing legislation in
the countries of EU, and it precisely stipulates all business relations between different types of companies.
The Customs Law provides for exemptions from paying customs duties by foreign investors inseveral instances, when importing equipment or spare parts that represent founding investment and are used
for basic business purposes.
One also has to note the changes and transformations in the financial and insurance sector. The
share of the foreign capital in a major part of the banking organizations and in the larger insurancecompany is expected to encourage the foreign companies to enlarge their presence in the Macedonian
economy through well-established long-term cooperation and higher forms of interrelationship.
There are 21 banks operating in the Republic of Macedonia, with majority having an authorizationby the National bank of the Republic of Macedonia for payment transactions, loans and guarantees, andstarting from last year, they are successfully completing these activities.
In accordance with the Law on Banks, when a bank establish another bank, the share in the capitalcan reach up to 100% subject to prior approval by the National Bank of the Republic of Macedonia and theminimum limit for the capital of a bank with major authorization is 9 million Euro.
The concentration of capital is mainly located with two major banks, and the dominant portion of
the banking industry is located in the capital city Skopje. The level of privatization of the banks is 87,4%
and the share of foreign capital in the total banking capital of the Republic of Macedonia is 37,4%.
The Insurance Law does not provide for limitations in overtaking control packages of stocks byforeign strategic investors. The share in the capital can reach up to 100% subject to prior approval by the
Minister of Finance in case an insurance company establishes another insurance company. There are four
private insurance companies on the domestic financial market, whereas the large one is dominantly owned
by QBE Inter. Insurance LTD-London.
The economic stability of the Republic of Macedonia depends directly on the results of foreign
trade. As a result, the Republic of Macedonia has chosen the path of liberal foreign-trade system andmembership in wider economic integration. Free Trade Agreements signed with large number of countries
have surpassed one of the drawbacks of the country’s economy, the small size of the market. The
Stabilization and Association Agreement signed with the EU, the official joining to WTO and theorientation towards membership in other associations, create a suitable climate for commencement ofinvestment activities in the Republic of Macedonia by domestic, and also by foreign investors. We hopethat the long-standing monetary and macroeconomic stability contributed towards stable economic
conditions, the existing infrastructure and stabilization of the region will contribute to further increase of
the foreign investments.
The liberalization of the trade and introducing the policy of its facilitation was promoted among
the countries in the Region within the Stability Pact. The Pact aims to increase the regional trade throughlowering and canceling the tariff and non-tariff barriers in the trade and through implementation of
measures for facilitating the trade in the Region and wider.
A regional approach was established for the infrastructure projects, strategic studies weredeveloped for the main areas of infrastructure and transparent procedure for promoting the regional projects
was created. Republic of Macedonia has signed FTE with Slovenia, Croatia, FRY, Turkey, Bulgaria,
Albania, Bosnia and Hertzegovina, Ukraine and EFTA member states. Macedonian integration in the WTO
creates opportunity for initiating the negotiations on country’s admission in CEFTA.
The economic and natural potentials of the Republic of Macedonia and the well-established stable
and stimulating regime within, represent an important foundation for attracting the interest of foreign
partners for investment in the Macedonian economy. The developed structure of industrial production andthe established system of regulations of incentive measures enables investments in the establishment of
mixed ownership companies, joint exports, through concessions, and other forms of business collaboration.
In the field of industry and mining, as a dominant activity with a share of over one fifth of thecreation of gross domestic product, there are important potential opportunities for investment. The field ofprocessing industry, electrical industry, production and processing of chemical products, non-metalindustry and production of construction materials, the exploitation of mineral raw materials, power supply

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sector are most suitable for foreign investments. In addition, the production of wine, textile industry,
tobacco processing industry, fur and leather processing industry, food processing industry, agriculture,transportation, telecommunication, tourism are the sectors with high investments potentials.
Foreign Direct Investment were almost entirely absent in the Republic of Macedonia until 1998
which was the first year when movement of investment activity with total FDI inflow of US$ 117 million
was recorded, mostly through post-privatization transactions of sale of privatized companies to strategic
investors.
The 1999 Kosovo crisis had a direct reflection on the investment climate in the Republic ofMacedonia and only US$ 32 million in FDI were recorded that year. The year 2000 was the mostsuccessful year for the Republic of Macedonia regarding the FDI inflows reaching US$ 175 million. This
trend would have certainly increased in 2001, if the security situation in the country was not deteriorated.
Despite that, the FDI inflows in 2001 reached a high amount of even US$ 443 million, US$ 340 million outof which around came from the sale of Makedonski telekomunikacii to the Hungarian company MATAV.
A process of rationalization of the Program for Investment in the Public Sector of the Republic ofMacedonia is being carried out on the basis of Government priority. Investment opportunities exist throughconcessions under BOT schemes in the public infrastructure system (mainly energy sector and road
construction).
The Republic of Macedonia is a party to the New York Convention on Recognition and
Enforcement of Foreign Arbitral Awards as well as the Geneva Convention on Execution of Foreign
Arbitral Awards. Macedonia is also a party to the Washington Convention on the Settlement of Investment
Disputes between States and Nationals of other States and the European Convention on International
Commercial Arbitration.
Domestic sources of Macedonian arbitrary law include the Constitution of the Republic ofMacedonia, the Litigation Procedure Law, the Law on Settlement of Disputes concerning the Laws andRegulations of other countries in certain relations and the Macedonian Law on Trading Companies.
Macedonia has a satisfactory network of paved highways. A major highway parallels the railroadin the North-South corridor and plans are underway to upgrade the secondary roads connecting Macedonia
with Albania in the West and Bulgaria to the East (Corridor No. 8).
The railway network consists of over 900 km of lines. The main North-South line from Belgrade
to the port of Thessaloniki (Mediterranean sea) passes through Skopje. Macedonia has two international
airports in the capital city Skopje and main tourist resort in the South-West of the country, Ohrid.
The country has a well-developed communications network. Additional investments are needed to
upgrade the technology and to increase the capacity of the lines.
About 80% of the energy needs in the Republic of Macedonia are met by domestic production ofthermal and hydroelectric power.
The installed capacity of the TPP are 1,010 MW and 390 MW of HPP. The total annual
production amounts 6,400 GW/h. An oil pipeline between Skopje and Thessaloniki is currently underconstruction, as well as a natural gas pipeline to carry Russian gas from the Bulgarian border to Skopje.
The relatively good and critical mass of educated and comparatively inexpensive labor force,competitive and technically skilled human resources combined with the traditionally entrepreneurial spiritof the population create hospitable environment for attracting foreign investments in the Republic ofMacedonia.
Vera Modanu

State Counselor
Ministry of Foreign Affairs
Republic of Macedonia