EUROPEAN COMMISSION Brussels, 9.11.2016 SWD(2016) 362 final COMMISSION STAFF WORKING DOCUMENT The former Yugoslav Republic of Macedonia 2016 Report Accompanying the document Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions 2016 Communication on EU Enlargement Policy {COM(2016) 715 final}



Table of Contents 1. INTRODUCTION 1.1. Context 1.2. Summary of the report 2. POLITICAL CRITERIA 2.1. Democracy 2.2. Public administration reform 2.3. Rule of law 2.4. Human rights and the protection of minorities 2.5. Regional issues and international obligations 3. ECONOMIC CRITERIA 3.1. The existence of a functioning market economy 3.2. The capacity to cope with competitive pressure and market forces within the Union 4. ABILITY TO ASSUME THE OBLIGATIONS OF MEMBERSHIP 4.1.Chapter 1: Free movement of goods 4.2.Chapter 2: Freedom of movement for workers 4.3.Chapter 3: Right of establishment and freedom to provide services 4.4.Chapter 4: Free movement of capital 4.5.Chapter 5: Public procurement

4.6.Chapter 6: Company law 4.7.Chapter 7: Intellectual property law 4.8.Chapter 8: Competition policy 4.9.Chapter 9: Financial services 4.10.Chapter 10: Information society and media 4.11.Chapter 11: Agriculture and rural development 4.12.Chapter 12: Food safety, veterinary and phytosanitary policy 4.13.Chapter 13: Fisheries 4.14.Chapter 14: Transport policy 4.15.Chapter 15: Energy 4.16.Chapter 16: Taxation 4.17.Chapter 17: Economic and monetary policy 4.18.Chapter 18: Statistics 4.19.Chapter 19: Social policy and employment 4.20.Chapter 20: Enterprise and industrial policy 4.21.Chapter 21: Trans-European networks 4.22.Chapter 22: Regional policy and coordination of structural instruments 4.23.Chapter 23 Judiciary and fundamental rights 4.24.Chapter 24: Justice, freedom and security 4.25.Chapter 25: Science and research

4.26.Chapter 26: Education and culture 4.27.Chapter 27: Environment and climate change 4.28.Chapter 28: Consumer and health protection 4.29.Chapter 29: Customs union 4.30.Chapter 30: External relations 4.31.Chapter 31: Foreign, security and defence policy 4.32.Chapter 32: Financial control 4.33.Chapter 33: Financial and budgetary provisions Annex I — Relations between the EU and the former Yugoslav Republic of Macedonia Annex II – Statistical Annex

1. INTRODUCTION

1.1. Context The Stabilisation and Association Agreement between the former Yugoslav Republic of Macedonia and the EU entered into force in April 2004. The European Council granted the status of candidate country to the former Yugoslav Republic of Macedonia in December 2005. The Commission recommended for the first time to the Council to open accession negotiations with the country in 2009. In 2015, the Commission stated that it was prepared to extend its recommendation, conditional on the continued implementation of the Pržino Agreement, which was facilitated by Commissioner Hahn and three Members of the European Parliament in 2015, and substantial progress in the implementation of the 'Urgent Reform Priorities'. The deep political crisis continued in 2016, exacerbated by the attempt to pardon individuals charged or allegedly involved in the wiretaps. This decision was rescinded in the face of national and international protests. The Pržino agreement is partially implemented and limited progress was made in terms of concrete implementation of the ‘Urgent Reform Priorities’. The agreements and important decisions taken in summer 2016, which pave the way for early parliamentary elections, provide an opportunity for the country's leaders to finally overcome the long-lasting crisis. 1.2. Summary of the report Concerning the political criteria, the country was faced with the continuation of the most severe political crisis since 2001. Democracy and rule of law have been constantly challenged, in particular due to state capture affecting the functioning of democratic institutions and key areas of society. The country suffers from a divisive political culture and a lack of capacity for compromise. On 20 July and 31 August 2016, leaders of the four main political parties reached a deal on the implementation of the Pržino Agreement, including by setting 11 December 2016 as the date for early parliamentary elections and declaring their support to the work of the Special Prosecutor. They reiterated also their commitment to implement the ‘Urgent Reform Priorities'. The inter-ethnic situation remained fragile. The review of the Ohrid Framework Agreement, which ended the 2001 conflict and provides the framework for the inter-ethnic relations, still needs to be completed in a transparent and inclusive manner. Civil society played a constructive role in supporting democratic processes and ensuring greater checks and balances. At the same time, civil society organisations continue to express their concerns about the deterioration of the climate in which they operate and the limited government commitment to dialogue, as well as about public attacks by politicians and pro-government media. The country is moderately prepared with the reform of its public administration. There has been some progress, although limited, over the past year. The implementation of the new legal framework on human resources management started. However, there is insufficient progress in the implementation of the Commission's previous recommendations. Rather than being suspended, temporary contracts continued to be transformed into permanent ones without open competition. Ineffective accountability lines, the use of the public sector as a political instrument, allegations of pressure exerted on public employees and alleged politicisation of administration in an electoral year continue to be of concern. A comprehensive 2017-2022 public administration reform strategy is belatedly under preparation. Furthermore, the lack of political commitment to deliver on necessary reforms in public financial management led to a significant reduction of EU financial assistance in 2016. The country's judicial system has some level of preparation. However, the situation has been backsliding since 2014 and achievements of the previous decade’s reform process have been undermined by recurrent political interference in the work of the judiciary. The authorities failed to demonstrate necessary political will to address effectively the underlying issues as identified in the ‘Urgent Reform Priorities’. The obstructions faced by the newly established Special Prosecutor have shown the need to address effectively the lack of independence of the judiciary and to prevent selective justice. Concerning the fight against corruption, the country has some level of preparation. Corruption remains prevalent in many areas and continues to be a serious problem. The legislative and institutional framework has been developed. However, the structural shortcomings of the State Commission for Prevention of Corruption and political interference in its work have minimised the impact of past efforts. There is still a need to establish a convincing track record, especially on high level corruption cases. In the fight against organised crime, the country has reached some level of preparation. The legislative framework is broadly in line with European standards and strategies have been elaborated. However, the law enforcement capacity to investigate financial crimes and confiscate assets needs to be developed further. Concerning the protection of human rights, the legislative and institutional framework is largely in line with the European standards. More efforts are needed in practice to ensure the respect of human rights of vulnerable groups, including refugees and migrants. There is also a continuing lack of political will and adequate resources to enable the relevant supervisory and regulatory bodies to fulfil their mandate independently and effectively. The most marginalised categories of the population are still not being accorded full protection. In the area of freedom of expression, the country has some level of preparation. However, freedom of expression and the situation of the media remain a serious challenge in the current political climate. With regard to regional cooperation, the country generally continues to maintain good relations with other enlargement countries and participated actively in regional initiatives. Steps have been taken to improve good neighbourly relations, including through the recent progress in implementing the confidence-building measures with Greece. The 'name issue' needs to be resolved as a matter of urgency. As regards the economic criteria, the former Yugoslav Republic of Macedonia has a good level of preparation in developing a functioning market economy. Overall, no progress was made towards a functioning market economy during the reporting period. Macroeconomic stability was preserved and the macroeconomic environment strengthened further in 2015. This was supported by major public infrastructure spending and foreign direct investment, although signs of weaknesses were observed in the first quarter of 2016. Despite unemployment remaining high, particularly for youth, it has decreased during the reporting period. Certain vulnerabilities remain, however, such as the low competitiveness of the domestic private sector which is hampered by weak contract enforcement, the large informal economy, and difficult access to finance. The management of public finances did not improve and public debt increased further. The economy has a moderate level of preparation to cope with competitive pressures and market forces within the Union. Some progress was made to foster innovation and foreign investments and digitalisation is progressing fast. The economy is poorly diversified, however, and manufacturing industry produces mainly low value-added products. The economy continued to suffer from weaknesses in education curricula, low innovation rates and significant investment needs, including in public infrastructure, that make it less competitive. As regards its ability to assume the obligations of membership, the country is moderately prepared in most areas, including in the areas of competition, transport and energy. Further efforts are needed across the board, in particular in those few areas where the country is at an early stage of preparation, such as freedom of movement of workers. More focus is also needed on administrative capacity and effective implementation. The country continued to be affected by the migration crisis. This created a substantial burden on its asylum and migration system. The country continued to cooperate with neighbouring countries and Member States and made efforts to provide shelter and humanitarian supplies, with EU support as well as the support of others. The country should maintain its efforts to ensure effective screening of refugees and migrants and address relevant protection needs. The country should also maintain its efforts to decrease the number of unfounded asylum applications lodged by its nationals in EU Member States. 2. POLITICAL CRITERIA 2.1. Democracy The reporting period was marked by the continuing political crisis and the partial implementation of the 2015 Pržino Agreement. Although some deadlines were met, most were late and required constant involvement and support from the EU and the US. Some key commitments remained unfulfilled. Although work on these has started, limited progress was made on the concrete implementation of the 'Urgent Reform Priorities', primarily due to a lack of political will.

The deep political crisis, which arose from the 2015 revelations of wide-spread illegal interceptions of communications (wiretaps) and their serious content, continued in 2016. The President’s decision to pardon 56 individuals charged or allegedly involved in the wiretaps was subsequently rescinded in the face of strong domestic and international protests. Overall, democracy and the rule of law continue to be challenged, in particular due to the capture of institutions such as judicial bodies, regulatory agencies and media outlets. The country suffers from a divisive political culture and a lack of capacity for compromise. Narrow party interests continue to prevail over the interests of the country and its citizens on key issues. A welcome accord on the implementation of the Pržino Agreement was reached on 20 July 2016. On 31 August, the political leaders took a number of further important decisions, including setting the date of early parliamentary elections on 11 December 2016. These recent accords, including notably on the preparation and holding of credible elections, are an opportunity for the country's leaders to finally overcome the long-standing crisis, address systemic rule of law issues and put the country firmly back onto the EU path. Elections Ahead of the early parliamentary elections, work must continue to ensure conditions for a credible electoral process (such as preventing and investigating the intimidation of voters, ensuring separation of state and party activities, balanced media reporting and continuously updating the voters’ list) and to address the OSCE/ODIHR recommendations. Efforts should continue to enhance the capacities of the State Election Commission. Greater transparency is needed to increase citizens' trust in its work. Following letters sent by the EU and US to the Prime Minister, indicating that the conditions for credible elections were not in place at that point, the political leaders decided to postpone the early parliamentary elections from 24 April 2016 (as initially provided for in the Pržino agreement) to 5 June 2016. Those elections were postponed, too, when three signatories of the political agreement deemed that the conditions were not met and only one submitted a list of candidates. On 31 August 2016, the political leaders agreed to hold early parliamentary elections on 11 December 2016. The November 2015 amendments to the electoral code partially addressed previous OSCE/ODIHR recommendations. These amendments introduced a quota of 40 % for candidates of the less-represented gender on party lists. The code was also amended in July 2016 to reflect the provisions of the 20 July agreement. The code could benefit from a future review in order to ensure internal coherence and consistency with the relevant legislation. The composition of the State Election Commission was changed to include three independent members, in addition to the six nominees from the four main political parties. It operated in a tense political environment. Its work was impaired by political interference, lack of cooperation from various stakeholders, a limited timeframe and resources. Parliament The ongoing crisis underlined once again parliament’s weak legislative and oversight functions and the need to substantially improve its performance as a forum for constructive political dialogue and representation. The focus needs to be on active participation of all parliamentary parties, proper consultation and impact assessment prior to the enactment of legislation, credible functional oversight of the work of government and the intelligence services, establishing political accountability for the illegal wiretaps, and the capacity to monitor the protection of human rights and fundamental freedoms in the country. Parliament’s work continued to be seriously hampered by the political crisis, including by a lack of political dialogue, its dissolution and the non-participation of the main opposition party in parliamentary activities from 23 June to 22 July 2016. The parliament was dissolved again on 17 October 2016 ahead of the early parliamentary elections on 11 December 2016. During the reporting period, the parliament did not adequately fulfil its function of providing checks and balances. The practice of frequent legislative changes to laws and use of shortened procedures for adoption, without sufficient consultation or impact assessment, continued. The two committees responsible for oversight of the security services (one on security and counterintelligence, and one on the interception of communications) need to carry out their mandate. The inquiry committee failed to deliver on political accountability over the illegal wiretaps because members of the main ruling party either did not participate in hearings or would not answer questions. All three committees failed to submit their initial reports as agreed in the Pržino Agreement. The parliamentary committee established following the President’s decisions on pardons decided that there were no grounds for impeachment. There was no progress on implementing the earlier recommendations of the Committee of Inquiry into the events in parliament of 24 December 2012. Governance Serious challenges to the democratic governance of the country continued, raising concerns about state capture of institutions and key sectors of society. Independent regulatory, supervisory and advisory bodies were not able to carry out their functions proactively, effectively and free from political pressure, leading to limited oversight of the executive. The government needs to restore credibility by implementing robust reforms, preparing and holding credible elections, committing to and implementing all obligations under the Pržino Agreement. The Ohrid Framework Agreement needs to be reviewed in an inclusive and transparent manner and any resulting recommendations implemented. Following the Pržino Agreement, SDSM ministers joined the interim government in November 2015 and deputy ministers from VMRO-DPMNE and SDSM, with veto rights on election-related matters, were appointed to several ministries. However, obstructionism and lack of cooperation on all sides were reported in these cross-party ministries. As foreseen in the Pržino Agreement, ex-Prime Minister Gruevski resigned in January. In April, DUI replaced its Ministers following the release of illegal wiretaps of a private nature. Following the reconvening of parliament on 18 May, VMRO-DPMNE and DUI accepted the resignation of SDSM ministers and decided therefore to continue in their coalition. After the latest agreement of 20 July, a new interim government in charge of organising elections was appointed by the parliament on 2 September 2016, which includes again Ministers from SDSM. The Macedonian government made limited progress in implementing the 'Urgent Reform Priorities', accepted in June 2015. Backsliding continued in some critical areas of the rule of law. Inter-ethnic relations remained fragile. The Ohrid Framework Agreement (OFA), which ended the 2001 conflict, provides the framework for preserving the multi-ethnic character of society. In general, this process remained highly politicised. With international support, the State Secretariat for the Implementation of the OFA, prepared a report with recommendations and submitted it to the government in December 2015. There has been no follow-up to date. Overall, the situation remained mostly calm. Inter-ethnic tensions caused by public displays of religious and ethnic symbols were calmed by community and political leaders. Decentralisation of government is a key element of the OFA. Central budget underfunding and low capacity of local tax collection compromise the capacity of some municipalities to carry out their obligations. The legal framework for local self-government needs to be reviewed. Another essential part of the OFA is balanced regional development. On this point, a 2016-2019 action plan envisages a more transparent and balanced distribution of national funds. The 2016 budget for regional development has doubled and the 2017 budget envisages another increase, but this will still be insufficient.

Civil society No progress was made in addressing last year's recommendations. The environment in which civil society organisations (CSOs) operate worsened. The national authorities must consult and engage with civil society to find a way out of the crisis by better involving CSOs in policy-making, legislative process and in discussions resulting in concrete actions. Both government and non-governmental actors should cooperate more constructively. The state must ensure relevant legal, financial and policy frameworks to ensure the functioning of civil society. An empowered civil society is a crucial component of any democratic system and should be recognised and treated as such by state institutions. CSOs continued to express serious concerns about the difficult environment and the climate of fear in which they operate. In general, they continued to report being subject to harsh and disproportionate criticism by politicians and certain media. Following the presidential pardons, CSOs organised numerous protests across ethnic lines, made efforts to strengthen democratic processes and ensure greater checks and balances. A group of CSOs prepared a 'Blueprint for Urgent Democratic Reforms' in July 2016. At the same time, political polarisation and divisions can be observed between CSOs who support the governing party and those who oppose it. Some CSOs reported targeted investigations and infringement of privacy by law enforcement agencies when they disagreed with the government on sensitive political issues. Individual members were fined and taken to court following civil disobedience during the protests (also called the ‘colourful revolution’). There has been limited government commitment to dialogue with CSOs. Their involvement in policy-making and legislative drafting remains insufficient, although some further efforts were made by the Secretariat for European Affairs. Some 89 CSOs expressed serious concerns about the process for establishing the Council for Cooperation between the government and civil sector, in particular over the lack of a proper consultative process and the selection process of civil society representatives. Local government continued to lack the capacity to cooperate with CSOs. Inadequate administrative capacity and the lack of funds in the government unit for NGO Cooperation prevent the implementation of the 2012-2017 strategy for cooperation with civil society. The drafting of the 2015-2017 action plan is still pending. A binding framework for standardised rules for state financing of civil society has not yet been adopted and the allocations of state funds remain insufficient. A fully functional legal framework, based on the law on associations and foundations, is still not in place. Oversight of the intelligence services The two oversight committees chaired by the opposition (one on security and counter-intelligence and one on interception of communications) began their work in September 2015. They visited the Bureau for Security and Counterintelligence (UBK) and other services, but did not perform any effective oversight. The clear recommendations on both oversight and reform of the intelligence services in the ‘Urgent Reform Priorities’ were not implemented. The oversight system is still not fully functional, in particular as regards the intelligence services. Work on intelligence sector reform was finally launched in October 2016 with external support. 2.2. Public administration reform The country is moderately prepared with the reform of its public administration. There was some progress, although limited, over the past year. The implementation of the new legal framework on human resources management started. However, there has been insufficient commitment to implement the Commission’s 2015 recommendations. Ineffective accountability lines, the use of the public sector as a political instrument, allegations of pressure exerted on public employees and alleged politicisation of administration in an electoral year continue to be of concern. Furthermore, the lack of political commitment to deliver on necessary reforms in public financial management led to a significant reduction of EU financial assistance in 2016. Strong political commitment is necessary to guarantee the independence of the public administration and respect for the principles of transparency, merit and equitable representation. In the coming year, the country should in particular: → address serious concerns about politicisation of the public service; → ensure full implementation of the principles of accountability, transparency and merit (as provided for in the ‘Urgent Reform Priorities’ as well as the law); → suspend and review the implementation of the law on transformation of temporary positions into permanent contracts until the principle of merit is fully observed (as per the ‘Urgent Reform Priorities’); → adopt a public administration reform strategy and a public financial management reform programme, which will address the weaknesses identified, including budget transparency. Policy development and coordination The legal framework and institutional structures continued to ensure a coherent policy-making system. A medium-term policy planning system is in place and strategies now include more information on their financing. However, the quality of the European integration coordination system is decreasing due to lack of political will to implement EU-related reforms. Sectoral planning needs to be improved, also in view of receiving EU assistance. The capacity for inclusive and evidence-based policy and legislative development needs to be improved. Obligatory inter-ministerial and public consultations on policies and legislation remained a formality. The quality of obligatory regulatory impact assessments for legislative and policy proposals is weak. Financial impact assessments are very often not prepared, and procedures are applied only formally. Public scrutiny over government work is formally in place, but a decreasing number of selected government reports are made public. Those reports that are publicly available continue to focus more on quantitative outputs than on qualitative assessment of achieved policy objectives. Public financial management Preparations for the multiannual public financial management reform programme continued at technical level. However, a formal government-led dialogue on the programme is yet to be launched and a medium-term budgetary framework is yet to be adopted. The following areas have been identified among the main priorities for development of public finances in the country: the public availability and comprehensiveness of fiscal data; budget classification and the budget revenue planning process; a strengthened internal control system; alignment of public procurement legislation with the acquis and its efficient implementation; and increased audit coverage of total public spending in order to improve accountability and transparency of the public finances. Payment arrears were identified by the 2015 public expenditure and financial accountability assessment as a further important area to be tackled by the government. Budget transparency is not ensured, because clear, comprehensive, timely and reliable budgetary and statistical information is not publicly available. The 2016-2017 fiscal strategy and the 2016 budget did not undergo sufficient parliamentary debate. The lack of appropriate public and parliamentary scrutiny raises concern about the transparency of the budgetary process. Parliament has limited capacity to exercise control on use of public funds and there is no efficient mechanism to monitor the budgetary impact of government proposals. Public service and human resources management

The implementation of the new merit-based recruitment and appraisal procedures enshrined in the 2015 law on administrative servants began in September 2016. However, rather than being suspended, temporary contracts continued to be transformed into permanent ones without open competition. This was contrary to the ‘Urgent Reform Priorities’, as it ran counter to the basic principle of merit in public administration and bypassed the new uniform rules for public-sector employees. No figures were made public on the number and type of such contracts. Concerns remained also over the transparency of staff mobility and possible misuse of dismissal procedures. Criteria for senior management positions should be made more detailed to limit political appointments and dismissals. Allegations of pressure on the public sector employees continued, reinforcing the perception of high levels of politicisation. The final report of the OSCE/ODIHR Election Observation Mission (July 2016) notes that there are credible allegations that public sector employees suffered intimidation, pressure and threats to their employment to attend counter-demonstrations. Allegations of intimidation to attend demonstrations were also reported. After long delays, the methodology on equitable representation was signed and published. However, figures on equitable representation remained almost unchanged, while smaller communities remained under-represented. Efforts to meet targets for equitable representation often did not take account of institutions’ real staffing needs and the principle of merit. The number of public employees not required to show up for work continued to increase. The Ministry of Information Society and Administration does not yet have enough leverage to coordinate and monitor human resources management. A first report on the number of employees in the public sector was published (one of the ‘Urgent Reform Priorities’). There is still lack of clarity on the issue of temporary employees. The remuneration system across the public sector remained non-uniform, leading to inconsistent levels of pay and hindering mobility. Professional development continued for public servants through training. The new human resource software in place provides cumulative data on training already provided but there is no centralised database of the training offered by various institutions. The impact of legislation promoting integrity in the public service remained relatively limited. Accountability of the administration As effective lines of accountability are not in place between or within institutions, a functional review is needed to assess the rationality of the organisation of the Macedonian public administration. Some institutions continued to report in parallel both to their line ministry and to the government. Clear separation of reporting and accountability requirements between party and state must be ensured. Managerial accountability is still not systematically implemented and there is little delegation of responsibility to middle management. (See chapter 32 — Financial control). Appropriate internal and external oversight mechanisms are in place to ensure citizens’ right to good administration. The quality and impact of parliamentary oversight needs to be improved. The Ombudsman continued to work efficiently but systemic follow-up of his repeated recommendations is required from a number of institutions (see the ‘Urgent Reform Priorities’). Concerns continued to be expressed about excessive classification of documents by the government as confidential (also an ‘Urgent Reform Priority’), thereby impeding citizens’ right to access public information. The volume and quality of information published by individual state bodies fell. The Commission that reviews appeals continued to have insufficient capacity to monitor compliance with the requirement for proactive disclosure of information. It needs more integrity and powers to impose penalties to encourage better enforcement of the relevant legislation. On the right to administrative justice, the current appeal procedure remained onerous, complex and lengthy, comprising several appeal layers. Administrative courts’ efficiency increased, but delays in enforcing court rulings remained. The right to seek compensation and the liability of public authorities in cases of wrongdoing is in place but data on compensation for damages is still not available. Service delivery to citizens and businesses Government activities on building user-oriented administration slowed during the reporting period. The interoperability framework is not operational due to a lack of funding and political will to implement it. The number of services provided to the public through the e-government portal remained modest and primarily focused on businesses. The relevant government portal does not qualify as one-stop-shop portal as it is merely an information site. Equal access to public services is partially in place. The legislative framework on general administrative procedures was amended, simplifying more than 180 special administrative procedures. A new approach and substantial training at central and local level are needed to ensure it is applied uniformly. Strategic framework for public administration reform A comprehensive 2017-2022 public administration reform strategy is belatedly under preparation, it should be finalised through as inclusive a process as possible and be linked to medium-term and annual budget planning. The capacity of the Ministry of Information Society and Administration and other involved institutions to efficiently coordinate and monitor implementation of the strategy needs to be strengthened. The lack of implementation of the recommendations in last year’s report and the delays in implementing the new legal framework have compromised the declared political support and the commitment to the principles of transparency, accountability and merit in public administration. This also limits the financial sustainability of a wider public administration reform agenda. A new approach and strong political commitment from the highest political leadership is needed to ensure full understanding and enforcement of these principles. 2.3. Rule of law Functioning of the judiciary The country’s judicial system has some level of preparation. However, backsliding continued and this constitutes a serious concern. The reforms of the last decade continued to be undermined by political interference in the work and appointment of the judiciary. There was no progress on last year’s recommendations or on the outstanding issues already identified in previous reports and the ‘Urgent Reform Priorities’. The work of the Special Prosecutor must not be obstructed. In the coming year, the country should in particular: → depoliticise the appointment and promotion systems in practice, not only in law; → provide full support and resources to the Special Prosecutor;

→ reform the discipline and dismissal system for judges, in line with EU and Venice Commission recommendations; → develop a serious justice sector reform strategy and action plan addressing remaining shortcomings in a sustainable manner; → improve strategic planning, needs assessment, resource management and allocation within the justice sector, including within the Ministry of Justice. Strategic documents The adoption and implementation of a new judicial reform strategy is key to securing the benefits of past reforms and preventing further setbacks. Such a strategy should address persistent shortcomings in a candid, systematic and integrated manner and should foresee an inclusive consultation process with relevant national and international stakeholders. There are concerns that preparatory work for such a strategy has not taken full account of those shortcomings. Management bodies The new president and deputy president of the Judicial Council were elected by its members. A new member was also appointed by the parliament, who retired one month later, calling into question the seriousness of the parliament's appointment policy. Public prosecutors elected four new members of the Council of Public Prosecutors from among their peers. Parliament also renewed the mandates of two serving members of the Council and appointed a further new member. Concerns persist about the merit and professional experience of some members of management bodies appointed by parliament, as well as the treatment of professional staff. Independence and impartiality There was no progress in ensuring the functional independence of the justice system. Reports of selective justice in certain high-profile or politically sensitive court cases continued. Public demonstrations illustrated the climate of political tension surrounding the work of the judiciary, especially in relation to the wiretapping scandal. Although the President of the Judicial Council and the President of the Supreme Court have pointed publicly to the need to respect the independence of the judiciary, there is no framework in place to protect judges against external pressure. Concerns about judges’ security of tenure, including in the light of 2015 Venice Commission recommendations, have not been addressed. The work of the Special Prosecutor's Office (SPO), established in 2015 to investigate cases linked to the wiretapping scandal, continued to be hampered in practice. Criminal courts regularly refused to grant pre-trial measures requested by the SPO as part of its investigations and the Council of Public Prosecutors and the ruling party publicly criticised its work. The international community continued to insist that the SPO must be allowed to fulfil all its functions independently. The automated court case management information system requires further upgrades to prevent any misuse. The system needs to ensure that cases cannot be allocated to a specific judge on political or personal grounds, and this needs to be monitored on a systematic basis. There were also allegations of direct interference in the assignment of judges to handle specific procedures initiated by the Special Prosecutor. Accountability The codes of ethics for judges (2006) and prosecutors (2004) are in place but there is little evidence of effective monitoring of compliance. Ethics is part of the curriculum of the Academy for Judges and Prosecutors. Judges and Prosecutors are under a legal obligation to declare their assets on an annual basis and report on possible conflicts of interest. The State Commission for the Prevention of Corruption (SCPC) checks these assets, but its powers of verification remain limited. Professionalism and competence While they have become more clearly merit-based, decisions on appointment and promotion of court presidents and higher court judges continue to be vulnerable to political bargaining. First-time entrants to the professions are required to have graduated from the Academy for Judges and Prosecutors. However, the law on the academy was amended in December 2015 to reduce the merit requirements for candidate prosecutors without good reason and concerns about political motivations persist. The professional evaluation system continues to be based on quantitative criteria. The 'Urgent Reform Priorities' in these areas have not been addressed. Quality of justice The Academy for Judges and Prosecutors is the institution responsible for initial and in-service training of all judges, prosecutors and court staff. This also covers relevant aspects of European Union law and European Court of Human Rights (ECtHR) jurisprudence. It is financed by the state budget and foreign donors. All courts produce quarterly and annual activity reports. Most of them publish press releases on ongoing high-level investigations and trials. ICT systems are in use in all courts, although sometimes with obsolete hard- and software as well as insufficient funding for renewal and maintenance. The situation is improving across public prosecutors’ offices. Online access to jurisprudence, and in particular "searchability", still needs to improve in line with 'Urgent Reform Priorities'. Permanent training is still required to improve the reasoning in court judgments. Encouraging secondments of national judges to the ECtHR is among the 'Urgent Reform Priorities'. As regards alternative dispute resolution, there has been little use of the option of mediation. The country is an observer in the European Judicial Training Network. Efficiency

The clearance rate maintained by most courts is 100 % or higher, meaning that they are able to process at least as many cases as they receive in one year. Court backlogs have not been an issue of concern for several years. The overall length of court proceedings from initiation to final judgment remains a concern in a number of old cases. The Bureau for Representation before the ECtHR made significant efforts to ensure the speedy execution of all ECtHR judgments (an 'Urgent Reform Priority'), achieving good results. Fight against corruption The country has some level of preparation. The legislative and institutional framework has been developed over a decade, as well as a track record on both prevention and prosecution. No progress was achieved in the past year on the outstanding issues or on last year’s recommendations. Corruption remains prevalent in many areas and continues to be a serious problem. A significant slowdown was noted in both prevention and repression activities. The capacity to effectively tackle corruption continued to be undermined by political interference in the work of relevant bodies, hampering their ability to act proactively and non-selectively, especially in highlevel cases (‘Urgent Reform Priorities’). In addressing the shortcomings outlined below, the country should pay particular attention in the coming year to: → demonstrating real political will by providing law enforcement with necessary autonomy, specialised staff and equipment and by defining clearly specific objectives and indicators to measures achievements or failures; → reviewing the status and composition of the State Commission for Prevention of Corruption (SCPC) to make it more transparent, meritbased and independent from political parties; → improving public awareness and trust in the fight against corruption by increasing the visibility of anti-corruption measures and the results achieved; → developing a credible track record on fighting high-level corruption, including asset recovery (as per the ‘Urgent Reform Priorities’); → implementing an effective legal framework for the protection of whistle-blowers, in line with European standards (as per the ‘Urgent Reform Priorities’) and Venice Commission recommendations. Track record While the track record of investigations, prosecutions and convictions is strong on corruption offences committed by lower-level officials, it remains very weak on high-level corruption. There has still not been a proper follow-up on the 2015 interception of communications scandal that raised serious allegations of high-level political corruption and unlawful interference in various sectors of society. This selective passivity raised concerns over the independence of the police, the Public Prosecutor’s Office and the SCPC. Financial investigations and asset confiscation are still used very rarely and the respective capacities of law enforcement and judicial institutions remained weak. The track record on control of party and campaign financing indicates that the existing penalties under the law on the prevention of corruption and the electoral code need to be applied in practice in a more systematic and visible manner. The SCPC regularly initiates misdemeanour proceedings for failure to declare assets or submit statements of interest. It also investigates potential conflicts of interest and refers asset discrepancies to the Public Revenue Office for further investigation. However, since 2015, the SCPC has significantly slowed down its corruption prevention activities. Institutional framework The SCPC is the main institution responsible for prevention of corruption. However, it lacks functional independence: the selection and appointment process of its members is not transparent and seems to favour political loyalty over professionalism and integrity. The SCPC suffers from certain structural shortcomings which the national authorities are not willing to address effectively. This deprives the SCPC of effective means to fulfil its duties. The SCPC is also deprived of investigative powers. Instead it has to rely either on the Public Revenue Office or on the courts. Court decisions are often issued after cumbersome and lengthy procedure. Often these decisions exonerate officials from their responsibility or reduce penalties, on unclear or disputable grounds. For failures to submit statements of conflict of interest, the SCPC is only empowered to issue public reprimands which have a very low deterrent effect. It shares its role in monitoring election campaign financing in an unclear manner with the State Audit Office, the State Election Commission, the Public Revenue Office and law enforcement bodies. Journalists complain of difficulties in obtaining information from the SCPC, whose decisions are not public, which further reduces public trust in it. On law enforcement, the Unit for the Fight Against Corruption within the Ministry of the Interior Department for Serious and Organised Crimes still has substantial specialised staffing and equipment needs. It also lacks safeguards against politicisation and interference. The Agency for Management of Confiscated Property continues to have insufficient powers and resources. The capacity of the prosecution service to lead criminal investigations and direct law enforcement agencies still has to be strengthened, as well as its ability to fulfil its functions notwithstanding political circumstances. The Special Prosecutor’s Office is the sole body that has been proactive in investigating high-level cases, in compliance with its mandate, but continues to face a lack of cooperation from state bodies. Legal framework

The criminal code penalises a broad range of corruption-related offences. However, following a Constitutional Court decision in April parts of the 2009 law on pardons were repealed, re-introducing the possibility for the President to grant pardons for offences including election and voting fraud, drug trafficking, paedophilia and crimes against humanity at any stage of criminal procedure. This clearly opens up the risk of interference with the course of justice. The President's subsequent attempt to pardon 56 individuals charged or allegedly involved in the wiretaps reinforced the public perception of impunity and selective justice. It also showed a serious lack political will to engage effectively against corruption. Financing of political parties and campaigns is regulated mainly by the 2004 law on the financing of political parties and the electoral code of 2006. The 2015 amendments to the electoral code were not sufficient to address all legal shortcomings. There is still no indication of political will to create an effective mechanism to monitor the financing of political parties and election campaigns. The respective control and investigative powers and responsibilities of the State Audit Office, the SCPC, the State Election Commission and law enforcement agencies are still unclear, leading to a mutual abdication of responsibility. Since 2014, a suspension of party financing from the state budget was imposed in a handful of cases which did not have the expected deterrent effect. There is no effective prevention and punishment of conflicts of interest. The penalties for failing to submit statements or for established conflicts of interest are weak. Likewise, procedures to verify assets declarations and impose penalties are fragmented and inefficient. The implementation of the law on free access to public information remained ineffective. Political parties are still excluded from the list of holders of information. A new law on protection of whistle-blowers was adopted in November 2015 but substantial legal, institutional and practical preparations are still needed for effective implementation of the law. The Venice Commission recommendations and earlier European Commission recommendations still need to be followed up in order to complete the legislative framework. The country is party to all the relevant international Conventions but there is still no indication that their provisions are used in practice. Strategic framework The relevant strategies and action plans continued to be implemented. However, they are not based on comprehensive assessments and inclusive consultation processes. Also, the current action plan of the State Programme for Repression of Corruption and Prevention and reduction of Conflict of Interest lacks ambition and credibility. Fight against organised crime The country has achieved some level of preparation in the fight against organised crime. The legislative framework is broadly in line with European standards. No progress was made specifically on last year’s recommendations. A separate Unit for Economic Crime and Corruption was established at the Ministry of the Interior. However, more still needs to be done to improve the effectiveness of law enforcement in this area. In addressing the shortcomings outlined below, the country should pay particular attention in the coming year to: → establishing an improved track record on combating money laundering and improving capacity and expertise to carry out financial investigations and asset confiscations on a more systematic basis; → establishing an independent, external and transparent oversight mechanism for the police; → stepping up efforts to improve cooperation between the various law enforcement agencies by bringing the National Coordination Centre for the Fight against Organised Crime into full operation; → revising the legal and technical framework on intercepting communications and increasing the effectiveness of special investigative measures for genuine law enforcement purposes (as per the ‘Urgent Reform Priorities’). Track record A comprehensive track record on investigations, prosecutions and convictions in the fight against organised crime has already been in place for some time. In recent years a number of criminal networks and routes have been dismantled, in particular relating to people smuggling, human trafficking and drug trafficking, reflecting the country’s location on the Western Balkans trafficking routes. Proper implementation of anti-money laundering legislation is still needed by all relevant institutions, including banks. There are relatively few cases, and the necessary data collection to track them effectively should be stepped up. Coordination among the relevant anti-money laundering institutions slightly improved, but more needs to be done. The use of special investigative measures is quite common in organised crime cases, but criminal investigations need to be separated from interception for security purposes. The law enforcement and prosecution bodies need more expertise and greater capacity and authority to conduct serious financial investigations. The precautionary freezing of assets is rarely applied, which leads to poor confiscation rates. More systematic cooperation is needed between the Agency for Management of Confiscated Assets and law enforcement agencies, prosecutors and the judiciary. The level of sentencing by courts appears on the whole to be appropriately strict, although efforts are still needed to ensure greater consistency.

Institutional and operational capacity A major police reform started 15 years ago and reforms continued in specific areas. To align with the law on internal affairs, a new rulebook on the structure of the unit and job description was adopted. The Ministry of the Interior has specialised units dealing with different types of crime. The level of police equipment is generally good. The Sector for Internal Control and Professional Standards is not sufficiently effective, especially when it comes to ill-treatment. Penalties imposed against police officers are not sufficiently dissuasive. An independent and efficient oversight mechanism for the police still needs to be established and the existing complaints mechanism needs to be implemented in a consistent manner. Although clear criteria for recruiting and evaluating police officers exist, there are persistent allegations of politicisation. Relations between prosecutors and police still need to be improved so that the prosecution service can fully play its leading role in investigations. Only one of the planned multi-disciplinary investigative centres under the direction of the Public Prosecutor has been set up so far and is still not properly staffed and equipped. There is still no electronic interconnection between the police and the Public Prosecutor’s Office, which would allow information to be shared efficiently. The National Coordination Centre for the Fight against Organised Crime is established by law, but is still not operational. Following enhanced border controls along the Western Balkan route and the subsequent increase of smuggling of migrants, law enforcement authorities face challenges in identifying and arresting smugglers. Sustained efforts by the institutions in charge of this area need to continue. The Special Prosecutor has requested amendments to the existing law on witness protection in order to widen its scope to cover cases under the SPO's jurisdiction, but the parliament has rejected the proposed amendments. The powers and resources of the police, the Public Prosecutor’s Office, the courts and the Agency for Management of Confiscated Property still need to be strengthened so they can seize and confiscate assets more effectively and frequently. The financial police and the Financial Intelligence Unit have weak resources and capacities. An operational agreement with Europol has been in place since 2011 and the country has a cooperation agreement with Eurojust in force since 2010. Close cooperation continued with international and regional bodies in the fight against organised crime. Legal framework The country’s criminal code is largely in line with European standards. The law on criminal procedure was modernised in 2010. The 2006 law on interception of communications was amended in 2012 but the ‘Urgent Reform Priorities’ recommend separating the mandate, regulations and technical facilities for interception in criminal investigations from those for security and intelligence purposes. Working groups were set up to begin to address the issue with external support. Broad consensus will be needed to take this forward. The police, customs administration and financial police need to be given the technical means to carry out interceptions without having to rely on the intelligence services. Legislation on the seizure and confiscation of criminal assets needs to be improved and its implementation stepped up. Strategic framework The national organised crime threat assessment, inspired by the EU SOCTA methodology, was adopted in March 2016 and the regional threat assessment was adopted in June 2016. National strategies are in place to combat human trafficking and illegal migration (2013-2016), drugs (2014-2020), terrorism (2016-2020) and police development (2016-2020). Nevertheless, strategic planning capacities within the Ministry of the Interior and the Public Prosecutor’s Office should be strengthened. 2.4. Human rights and the protection of minorities Overall situation The legal framework for protecting human rights is broadly in line with European standards, but laws are sometimes not fully or correctly applied. The bodies involved in protecting and promoting human rights lack sufficient staff and financial resources, they coordinate poorly and, in some cases, are not considered independent. Weaknesses in the implementation of human rights standards continue to affect primarily the most vulnerable and marginalised groups in society, including children and young people, people with disabilities, Roma and LGBTI people. Shortcomings particularly affect the following areas: Serious practical problems persist over freedom of expression due to uneven implementation of the law and political interference. The prison system continues to be heavily understaffed and mismanaged, resulting in systemic breaches of international human rights standards.

The establishment of an independent oversight mechanism is a recurrent demand, which has still not been addressed, necessary ensure that complaints of police ill-treatment are investigated seriously and thoroughly. For a detailed analysis of developments on human rights and the protection of minorities, see chapter 23 —Judiciary and fundamental rights. For developments in trade union rights, anti-discrimination and equal opportunities, see also chapter 19 — Social policy and employment. Freedom of expression The country has some level of preparation. The legislative framework is broadly aligned with both the acquis and international standards, although further reforms have been called for within the country. Freedom of expression and the situation of the media remain a serious challenge in the current political climate. There was no progress in this area over most of the past year. Relevant figures on government advertising, which can constitute a tool to exercise influence over broadcasters, have still not been made public by the authorities. Balanced and diversified reporting by the mainstream media is still lacking, although there were some encouraging signs over the summer in terms of reporting by the public broadcaster and some private channels. In the coming year the country should in particular: → show tangible results of ongoing reforms within the Public Broadcaster, aiming at addressing lack of political independence and lack of balanced reporting ('Urgent Reform Priorities'); → ensure full transparency on government advertising, not only on the spending of public finances but also on its recipients and contents ('Urgent Reform Priorities'); → ensure that the public has access to objective and accurate reporting and a variety of viewpoints through the mainstream media, particularly the public service broadcaster; → all media stakeholders should assume their respective responsibility for professional conduct. Intimidation of journalists The media reflects the strong polarisation of society along political lines. There were a number of reports of intimidation of journalists and judicial proceedings against journalists. On 12 April, several journalists were injured by the police during the protests against the President’s pardoning of 56 individuals and the premises of two pro-government media outlets were damaged. Legislative environment The laws are broadly in line with the acquis although there are continuing calls for further reforms coming from within the country. Amendments to the electoral code set out rules for the portrayal of political parties by the public service broadcaster, strengthened the monitoring of the media by the Agency for Audio and Audio-visual Media Services (including through an ad-hoc body established within the Agency) and prohibited financing of political parties’ campaigns by the media. Implementation of legislation/institutions Implementation of legislation remained deficient and freedom of the media continued to decline throughout the year. Practical measures in the 'Urgent Reform Priorities' to improve the media situation have still not been addressed. Journalists' organisations and civil society offered their recommendations for media reforms. There has been little political commitment to promote media pluralism and independence. With the 31 August political agreement, some improvements in news reporting have been noted in particular as regards MRT and some private channels; these need to be confirmed with time. Political interference in the editorial policies of the media, in particular nationwide broadcasters, remained a serious concern. There are indications that most private broadcasters appear to have coordinated their editorial policy in favour of the main ruling party. Many media do not meet their obligations on balanced and professional reporting. In some mainstream media, members of the opposition and their activities are negatively portrayed, as are civil society protests. There was insufficient coverage in televised debates of politicians from across the political spectrum, even though debates would allow the expression of diverse ideas and opinions. Low professional standards and ethics persisted at some media outlets, to the detriment of the public’s right to receive objective and balanced reporting. Investigative reporting remained limited. There have also been rare instances of self-criticism. Throughout the reporting period, some 20 new defamation lawsuits against journalists were registered. The large-scale illegal wiretapping of journalists revealed last year, uncertain working conditions and an increase in threats and attacks on media further contributed to self-censorship. The Agency for audio and audio-visual services made efforts to complement the self-regulatory functions of the profession, playing a more proactive role on issues of professionalism and journalistic standards and ethics. There are concerns about pressures on the agency members. Public service broadcaster Serious concerns remain over the public service broadcaster (MRT)’s balance in reporting. According to OSCE/ODIHR Election Observation mission, media monitoring noted that newscasts provided limited information about political events and failed to provide comprehensive analysis on a daily basis. In several cases, journalists mixed facts with their own political opinions when covering the news. The sustainability and autonomy of MRT financing must be ensured and implemented. The code of ethics of MRT still needs to be adopted. The Ombudsman Office’s recommendation concerning unlawfully collection of licence fees from vulnerable groups in society remained unresolved. The new chief editor of MRT was appointed in September 2016 following the 20 July agreement. Economic factors

The law on audio and audio-visual media services regulates media ownership by laying down restrictions and prohibitions on conflicts of interest. However, most of the TV stations with a national concession and newspapers of wide circulation belong to individuals known to have close links with the government ruling coalition. Government advertising was suspended, but the data and criteria for granting such contracts (which should be transparent, objective and non-discriminatory) have still not been made publicly available. The use of unpaid public service announcements of a truly public interest nature should also be further explored (as per the ‘Urgent Reform Priorities’). Legislation prohibits operators from controlling internet traffic, except to protect network connections against becoming overloaded. In practice, operators do not block, slow down, alter, degrade or discriminate against any internet content. Investigative reporting is primarily carried out by internet media. Professional organisations/professional conditions In July 2016, a new Independent Syndicate of Journalists in Macedonia was established, representing several media portals. Journalists from MRT are organised in a self-governing union. Weak union protection and poor labour conditions contributed to the continuing problem of self-censorship. None of the country’s media outlets have signed a collective agreement with the Independent Union of Journalists and Media Workers. Most often journalists work under temporary contracts. 2.5. Regional issues and international obligations The country continued to cooperate fully with the International Criminal Tribunal for the former Yugoslavia. There are no remaining cases or appeals pending in The Hague. The country still maintains a bilateral immunity agreement with the United States, granting US citizens exemptions from the jurisdiction of the International Criminal Court. In doing so, it does not comply with the EU common positions on the integrity of the Rome Statute or with the related EU guiding principles on bilateral immunity agreements. The country needs to align with the EU position. In September 2016, there were 664 Roma refugees from Kosovo* registered in the country, of whom 18 were recognised refugees, 173 whose asylum applications were rejected and 473 were under subsidiary protection. There were 183 internally displaced persons (47 families). In 2015, 152 people were voluntarily repatriated to Kosovo and Serbia. The Ministry of Labour and Social Policy continued to provide support to 80 families for rented housing and utilities, under the integration strategy. Regional cooperation and good neighbourly relations form an essential part of the country’s process of moving towards the EU. They contribute to stability, reconciliation and a climate conducive to addressing open bilateral issues and the legacies of the past. The country has continued to participate actively in regional initiatives such as the South East Europe Cooperation Process (SEECP), the Regional Cooperation Council, CEFTA, the Western Balkans Six, the Energy Community Treaty, the European Common Aviation Area Agreement, the Central European Initiative (CEI), the Regional Initiative for Migration and Asylum (MARRI) and RECOM. The impetus given through the ‘Berlin process’ and the Western Balkan Six initiative, particularly on the connectivity agenda, continued to foster increased regional cooperation. Building on the results of previous summits, the 4 July 2016 Paris summit saw further advances on the connectivity agenda but also opened cooperation in new areas, notably through the establishment of the Regional Youth Cooperation Office to be established in Tirana. The country has participated actively. The country remained constructively committed to bilateral relations with other enlargement countries and neighbouring EU Member States. It signed a bilateral convention on regional cooperation with Kosovo under Article 12 of the SAA and needs to do the same with Bosnia and Herzegovina. Bilateral relations with Albania remained generally good. An agreement was ratified on collocation of diplomatic mission and consular posts with Bosnia and Herzegovina in March and the country continued its contribution to the EUFOR Althea operation. Relations with Kosovo continued to develop, with the signature and ratification of an agreement to facilitate travel between the two countries using personal identification documents. Some tensions resulted from politicians’ statements alleging participation of people from Kosovo in the Kumanovo incident in 2015. Agreements with Montenegro were ratified in March 2016 on legal assistance in civil and criminal cases, and on mutual enforcement of judgments in criminal cases. Relations with Serbia remained good and continued to deepen. Some tensions arose following the vote to support Kosovo’s membership of UNESCO. Relations with Turkey developed, including a visit by the Deputy Prime Minister in charge of European Affairs to Turkey in February 2016. In August 2016, President Ivanov met with his Turkish counterpart in Istanbul. Relations with Bulgaria continued to be affected by differences, primarily about the interpretation of history. A number of high-level visits took place. During their visit for the SEECP Summit meeting in Sofia, President Ivanov and Foreign Minister Poposki met with their counterparts. The respective Academies of Science and Art held their third meeting in Skopje. Negotiations on a bilateral agreement on good neighbourly relations continued. However, ongoing issues remained. The countries continued to cooperate on defence issues and good cooperation continued on cross-border matters and on sectoral and trade relations, including infrastructure priorities. People-to-people contacts continued normally. Relations with Greece continued to be affected by the name issue. There were no formal talks on this issue under the auspices of the UN during the reporting period. The foreign ministers met in bilateral and multilateral formats. The visit by Foreign Minister Poposki to Athens in December 2015, during which he paid a courtesy call on the President and the Deputy Speaker, was the first in more than 15 years. The latest visit by Greek Minister of Foreign Affairs, Nikos Kotzias, took place during the ambassadorial conference in August 2016. The speakers of the parliament met for the first time in September 2016. Constructive discussions continued in assessing positively progress in the implementation of the confidence building measures, which were launched after the visit of the Greek Foreign Minister in 2015. The confidence building measures have started to produce tangible results. Direct contacts were established between the two foreign ministries and political consultations were held at the level of political directors and legal experts. A Memorandum of Understanding on exchanges of students was signed between the University of Cyril and Methodius of Skopje and University of Piraeus. The two chiefs of police also met officially for the first time and direct contacts were established between the respective ministries. Although the migration crisis challenged bilateral relations, it also had a positive spill-over effect on overall bilateral cooperation. Economic and trade relations continued normally. The Presidents of Croatia and Slovenia jointly visited the country in the context of the migration crisis.

3. ECONOMIC CRITERIA Key economic figures 2014 2015 Gross domestic product per capita (% of EU28 in PPS) 37 n/a GDP growth (%) 3.5 3.7 Unemployment rate (female; male) (%) 27.7; 28.6 26.7; 25.1 Economic activity rate for persons aged 20–64: proportion of the population aged 20–64 that is economically active (female; male) (%) 70.8 70.2 Current account balance (% of GDP) -0.8 -1.3 Foreign direct investment (FDI) (% of GDP) 2.4 1.7 Source: Eurostat In line with the conclusions of the European Council in Copenhagen in June 1993, EU accession requires the existence of a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union. The monitoring of these economic criteria should be seen in the context of the central importance of economic governance in the enlargement process. Each enlargement country prepares an Economic Reform Programme (ERP) annually, which sets out a medium-term macro-fiscal policy framework and a structural reform agenda aimed at ensuring competitiveness and inclusive growth. The ERPs are the basis for country-specific policy guidance jointly adopted by the EU and the Western Balkans and Turkey at ministerial level in May each year. 3.1. The existence of a functioning market economy The former Yugoslav Republic of Macedonia has a good level of preparation in developing a functioning market economy. However, no progress was made during the reporting period. Macroeconomic stability was preserved and the macroeconomic environment strengthened further in 2015, supported by major public infrastructure spending and foreign direct investment, although with signs of weaknesses in the first quarter of 2016. Unemployment is decreasing, but remains high, particularly for youth. Certain vulnerabilities remain, such as the low competitiveness of the domestic private sector which is hampered by weak contract enforcement, the large informal economy, and difficult access to finance. The management of public finances did not improve. In addition to the sustained large fiscal deficits over the past years, the rising financing needs of state-owned enterprises managing the government's investment agenda are driving up public debt levels. In line with the ERP recommendations and in order to support long-term growth, the former Yugoslav Republic of Macedonia should pay particular attention to: → underpinning fiscal consolidation by identifying concrete revenue and expenditure measures; → moving towards a better targeting of transfer spending and improving the growth-friendliness of public finance; → improving fiscal transparency and budget planning capacity. Economic governance The government remains committed to promoting growth and employment by market-based economic policies. Support to private sector competitiveness, public infrastructure developments, and export promotion remained the pillars of the government's economic policy. However, employment is boosted by large-scale government programmes as well as active labour market measures, rather than by job creation in private local enterprises. Commitment to fiscal consolidation is lacking, as the government failed to point out concrete measures, while repeatedly revising annual deficit targets upwards in mid-year. The ERP policy guidance from 12 May 2015 regarding macro-fiscal issues has not been addressed, while the guidance on labour market policies and on structural reform has been only partially addressed. Macroeconomic stability Figure 1 GDP growth Economic expansion accelerated in 2015, but has slowed down in 2016 in the context of a political crisis. After a real output decline in 2012, the economy posted stable growth rates averaging 3.4 % between 2013 and 2015. Since 2012, household consumption has become an increasingly important contributor to growth, while investment and the foreign balance proved volatile. The construction sector was the fastest growing industry in this period. In 2015, real GDP increased by 3.7 %, driven by domestic consumption and net exports. Overall investment remained flat, in spite of strong public infrastructure spending. Growth lost momentum in the first half of 2016, averaging 2.1 % year-on-year. The average per-capita income (purchasing power standards) amounted to 37 % of the EU-28 average in 2015, an increase of 3 percentage points (pp) since 2012. Short-term external vulnerabilities remained contained. The current account deficit has remained moderate in recent years. In the four quarters to June 2016, it stood at 2.5 % of GDP, albeit higher than its average of 1.5 % of GDP over the past five years. The rise in 2016 came largely on account of a widening merchandise trade deficit, which remains large, at 19.9 % of GDP, yet lower than on average between 2011 and 2015 (23.2 %). The trade deficit has been covered historically by robust private transfer inflows, significantly alleviating external imbalances. While still more than compensating for the current account deficit, foreign direct investment inflows dropped to 1.9 % of GDP in 2015, compared to an average of 2.7 % in the preceding five years, as companies adjusted to new tax legislation, and the political crisis lingered on. The composition of new FDI, shifting from equity to debt financing, has become more volatile and less conducive to structural change in the economy in recent years. Public sector borrowing abroad impacts on external debt. The external debt of the country has been rising rapidly since 2009 (+14pp), as the public sector increasingly resorted to foreign financing. Private sector indebtedness abroad increased, too. At the end of 2015, external debt amounted to 70 % of GDP. Foreign exchange reserves declined in 2015, even though the government issued a Eurobond in November 2015 (EUR 270 million). Some of the loss was made up in the first quarter of 2016, and reserves were further boosted by a EUR 450 million Eurobond issued in July 2016. Reserves coverage remains satisfactory at about 4 months of prospective imports. ERP policy guidance: "Underpin fiscal consolidation by identifying concrete revenue and expenditure measures; move towards a better targeting of transfer spending and improve the growth-friendliness of public finance, in particular by fully executing planned priority public investment spending. Protect against fiscal risks by using any excess revenue to create fiscal buffers." Figure 2 Fiscal developments The central bank successfully defended price stability and the currency peg. After several years of easing, monetary policy has become more restrictive since mid-2015, motivated by broader-based economic growth, ample liquidity in the financial sector, and strong household credit growth. In May 2016, the central bank raised the key interest rate from 3.25 % to 4 %, in response to speculation-driven pressure on banks' deposits, and amid continuing subdued price pressures. In 2015, consumer prices dropped by 0.3 %, as in 2014, driven by declining fuel and transport prices, supported by lower food prices. Annual average inflation has been decreasing since 2011, when it stood at 3.9 %. The bank also effectively stimulated the "denarisation" of loans and deposits, reducing foreign exchange risks. The country's exchange rate is anchored through a de facto peg to the euro.

The government fails to indicate concrete measures underpinning fiscal consolidation. The authorities are planning an expenditure-based reduction in the general government deficit from 3.6 % of GDP in 2015 to 2.6 % in 2018, relying on optimistic assumptions of economic growth rather than specific savings. Yet, further ad-hoc increases in pensions, social transfers, and public wages are likely this year, as in previous years, while the pace of GDP growth is slowing down. Revenue shortfalls due to over-optimistic growth assumptions and underperforming collection, as well as spending pressures, have repeatedly required the adoption of a supplementary budget and a higher deficit target in recent years. ERP policy guidance: "Improve fiscal transparency and budget planning capacity by the swift introduction of a medium-term expenditure framework; by providing multi-annual projections of detailed revenue and expenditure components in the medium-term strategy as well as by comprehensive reporting of extra-budgetary expenditure in the consolidated fiscal reports. Inform systematically about payments arrears." Revenues have been overestimated by an average of 6 % in the last five years. In June 2016, the government resorted again to a supplementary budget, with a further revision in August. On average between 2009 and 2015, 62 % of total expenditure was devoted to transfers, especially pensions. In the same period, only about 84 % of budgeted capital expenditure was implemented. Public debt levels have been rising fast. An increasing amount of public capital expenditure has been shifted off-budget in recent years to state-owned enterprises (SOE), financed almost entirely by government-guaranteed credit. This, in addition to the rising primary fiscal deficits, has led to accelerating increases in public debt, by 23.5pp, to 46.5 % of GDP between 2008 and 2015. There is little transparency about the fiscal risks linked to the execution of sizeable public infrastructure works through state enterprises. Meanwhile, the government has successfully lengthened its debt maturities, and only a small share remains (domestic) short-term debt. The policy mix does not fully address the economic challenges. To promote sustainable growth and employment and contain risks to external balances, economic policy needs to focus on supporting the domestic private sector; targeting labour market weaknesses, and, diversifying the economy's structure. This would be aided by better targeted public expenditure and strengthened efforts at fiscal consolidation and debt stabilisation. The external borrowing of public sector bodies needs close monitoring so as to avoid challenges to monetary policy through its impact on domestic liquidity. Functioning of product markets Business environment ERP policy guidance: "Ensure a reliable and predictable regulatory environment for businesses by reducing the use of the urgency procedure for legislation, ensuring proper consultation of the stakeholders and reinforcing the independence of commercial courts." Business development suffers from weak and uneven law enforcement. Low corporate taxation and simplification of regulatory requirements are cornerstones of the government's policies to facilitate business operations. Yet, obtaining licences and permits for operation is perceived to be easier for foreign investors than domestic companies, which is one of the key issues for domestic businesses. Moreover, opaque interpretation of business regulations, notably by local administrations, uneven enforcement of rules and contracts, as well as corruption and the large informal economy hamper private sector development. In 2015, the number of new businesses, as well as the amount of registered founding capital, declined, compared to the preceding year and to the five-year average, possibly reflecting in part the lingering political uncertainty. Institutional capacities to enforce the law are weak. Resolving a commercial dispute through a court remains time-consuming and costly. Moreover, the efficiency of the judiciary system appears to be increasingly impacted by political interests. There were no new measures adopted on facilitating business exit, which remains challenging. Liquidation procedures after bankruptcy have been shortened in recent years, but still take about 1.8 years on average. The sizeable shadow economy is an important obstacle to business. The informal share of the economy is large, impacting on the competitiveness of the formal private sector. Estimates range from some 20 % of total output (State Statistical Office) to about 40 %, depending on the method applied. This creates problems of competition for registered companies and obstacles to investment. Policy measures in recent years were aimed at reinforcing the capacities of public bodies, involved in tackling the informal economy, as well as changes to tax and labour legislation intended to reduce labour cost and enhance the incentives for formal employment. State influence on the product market The public sector's share of the economy remains contained, yet discretionary policy enforcement by the government creates concerns. The value of state assets in GDP amounted to 13 % of GDP in 2015, having declined marginally, but steadily over the past five years. Yet, while the state's stake in the economy remains moderate, the involvement of the government in the private sector is growing in other ways, such as through uneven application of rules and regulations, inspections, and public procurement procedures. There is limited information on amounts and beneficiaries of state aid. The large share of state-owned land remains an obstacle to the development of the agricultural sector and prevents this land from being used as collateral by private owners seeking a bank loan. Energy prices are still largely set by the Energy Regulatory Commission (ERC). After the government postponed the liberalisation of the electricity market in 2014 by 5 years, contrary to the agreement of the EU Energy Community, electricity prices for households and small companies remain regulated by the ERC, with a schedule to allow gradual adjustment between 2016 and 2020. Prices paid by households do not cover cost and are cross-subsidised by prices charged to small companies. Natural gas prices, too, remain in the ERC's remit, even though legislation was adopted in 2015 to open the market. Oil and oil derivatives prices are also regulated, but follow global market prices. Administered and regulated prices accounted for 15 % of the CPI basket in 2015, largely unchanged from previous years. Privatisation and Restructuring The privatisation process is at an advanced stage. In 2015, there were no further privatisations, and the number of enterprises in full or partial state ownership remained unchanged from a year earlier. The value of state assets in GDP amounted to 13 % of GDP in 2015, having declined marginally, but steadily over the past five years. The implementation of a joint-venture between a state-owned company and a multinational tobacco enterprise is ongoing. Functioning of the financial market Financial stability The banking sector shows resilience in the face of lingering credit risk. The financial sector remains dominated by banks which account for about 90 % of the system's assets. Concentration remains high and unchanged compared to previous years, with about 60 % of assets held by the three biggest banks, out of a total of 15 banks operating in the country. The solvency ratio amounted to about double of the domestic supervisor's required minimum level of 8 %. Banks' profitability rose markedly in 2015. The quality of banks' assets, however, did not improve. The ratio of NPL to total loans to the private sector amounted to 11.4 % on average in 2015, only slightly below the average in 2014, and has declined only marginally

ERP policy guidance: "Develop comprehensive strategies involving all relevant stakeholders in order to both further foster the resolution of non-performing loans by banks and further promote the use of the local currency with a view to reducing risks to financial stability and the real economy. There would be a case for a gradual removal of the central bank’s accommodative monetary policy stance to the extent that authorities’ sanguine macroeconomic scenario is realised (including through its impact on inflation expectations and on the output gap)." since then. There was some progress in reducing the amount of non-performing loans as the central bank imposed an obligation on banks to write-off fully-provisioned loans that have been on their books for more than 2 years, with effect in June 2016. Access to finance Credit growth to companies slows amidst political uncertainty. Access to finance still remains difficult for SMEs, given impediments to both credit supply and demand, despite abundant liquidity of banks. Financial intermediation strengthened in 2015 compared to the preceding two years, with assets, credit and deposits rising as a share of GDP. Commercial bank loans remain by far the dominant source of financing, as SMEs are reluctant to tap equity and bond markets, and venture capital markets remain in their early stage of development. Loan growth to private households (12.4 % yoy on average in 2015) was almost double the growth rate of credit to non-financial companies, which has slowed down markedly since summer 2015. In order to curb the growth of long-term consumer loans, the central bank increased capital requirements on these assets in December 2015. Given the uncertain political situation, credit demand from SMEs and corporates has been subdued since mid-2015. To facilitate credit extension to SMEs, the government, in 2015, withdrew the last tranche of a credit line for SME development extended by the European Investment Bank. However, no other significant policy measures were adopted in 2015 to facilitate access to finance for SMEs. Functioning of the labour market ERP policy guidance: "Strengthen the provision of activation measures especially for vulnerable youth, women and long-term unemployed and further improve the capacity of the Employment Service Agency for profiling and personalised counselling of job seekers." Structural weaknesses hinder the functioning of the labour market. The country's overall unemployment rate remains persistently high, in particular for long-term unemployed and young workers, albeit declining steadily in recent years. In the second quarter of 2016, it dropped to 24 %, down by 2.8pp on the year. Between 2011 and 2015, the economy has created a large number of jobs. Annual employment growth amounted to 2.5 % on average, carried by job creation in the public sector, in construction and manufacturing, and through active labour market measures. Yet, the employment build-up was not in line with output growth, as significant structural weaknesses of the economy impede the functioning of the labour market. Labour force participation remained modest. The activity rate has been stagnant over recent years, at about 70 % of the working age population (20-64 years). The employment rate has increased only marginally – only 52 % of the working age population held a job in 2015. Given low female participation rates, the gender gap remains important, with women less likely to be in employment (42 %) than men (62 %). Figure 3 Unemployment in the former Yugoslav Republic of Macedonia (% of Active population) Figure 4 Participation rates in the former Yugoslav Republic of Macedonia (% of Labour Force) The informal economy accounts for a large, but shrinking share of employment. About 20 % of employment took place in the informal economy in 2015, down from 28.6 % in 2008. Informal work concerns especially young workers and long-term unemployed. To tackle the problem, the government introduced a programme waiving or reducing social contributions for newly hired registered unemployed workers for a period of up to five years. The programme has been extended for another year. 3.2. The capacity to cope with competitive pressure and market forces within the Union The economy has a moderate level of preparation to cope with competitive pressures and market forces within the Union. Some progress was made to foster innovation and foreign investments and digitalisation is progressing fast. There was a limited shift towards higher value added in manufacturing, but the structural transformation towards a more diversified economy is progressing slowly. The economy continued to suffer from weaknesses in education curricula, low innovation rates and significant investment needs including in public infrastructure. In order to support long-term growth, in the coming year the former Yugoslav Republic of Macedonia should pay particular attention to: → upgrade higher education and vocational curricula, so as to better align skills with labour market needs; → improve the innovation infrastructure in order to promote the competitiveness of the domestic private sector. Education and innovation Higher education needs reforms to address the skills gap. The country has suffered from a marked drain of skilled workers since the 1990s, the rebuilding of which proves difficult given low enrolment rates and deficiencies in the education system. Shortcomings in tertiary and vocational education often impede applicants from gaining skills required to work in technology-intensive sectors. This restrains output potential and impedes the reallocation of resources towards sectors with higher productivity and the spread of imported technology to the domestic economy. Public expenditure on education, at 4 % of GDP, is only slightly lower than the EU average, yet enrolment rates (18 % for pre-school, 91 % for primary school and 73 % for secondary school education) and attainments have improved only marginally over the past five years, pointing to certain weaknesses in the education and training programmes. The employment rate of higher education graduates is above the average of the economy, yet completion rates are low. The share of early school leavers remained constant at 12 % of total students. Modernisation of the VET programmes is currently underway, yet the implementation of the 2013-2020 Strategy is lagging. The country participated in the PISA assessment for the first time in 2015, but results are not yet available. Innovation rates for the private sector remain low. Public and private expenditure on research and innovation, as a share of GDP remained modest, compared to the EU average, at 0.52 % in 2014, and only slightly higher than in 2010. The government has tackled this problem mainly by the creation of the Innovation Fund which started disbursements in 2015 to stimulate R&D in SMEs. However, the absorption capacities of SMEs for the Fund's instruments are limited, calling for measures to strengthen their skills and technologies. Physical capital and quality of infrastructure

ERP policy guidance: "Adopt a credible public finance management reform programme. Prioritise public investments against clear policy objectives and identify the needs to which they respond. Increase the transparency on the selection criteria for the investments and on their impact on economic growth and on the fiscal path. " The economy's capital stock is in need of modernisation. The country's capital base is in need of renewal, even though modern production plants by foreign investors and public infrastructure investments have led to some upgrading in recent years. The investment ratio has remained constant, at 23-24 % of GDP, between 2011 and 2014. Some 70 % of investment was carried out by private enterprises (domestic and foreign), while the remainder is public investment financed through the government budget, international financial institutions, and public enterprises. The National Investment Committee, charged with the preparation and implementation of infrastructure investments, was created in June 2015, but there are concerns as to its efficiency. Regional connectivity in transport and energy is limited. Transport infrastructure linkages to regional neighbours and connection to the Trans-European Transport Networks remain a challenge. The country made, some progress, although limited, in implementing the connectivity reform measures agreed in the context of the Western Balkans Investment Framework. The focus should be on the establishment of functioning maintenance system along with the improvement of the capacities of the public enterprise in change. The strategically important Corridor X motorway part is expected by the government to be completed by May 2017, turning the focus on road maintenance and the weak capacities of the public enterprise in charge. While the electricity transmission connection with Serbia has been completed, interconnection with Albania, which would link the country to the wider Corridor VIII network, is still in the planning phase. The digitalisation of the economy is advanced. Both fixed and mobile broadband use has expanded in recent years, covering some 94 % of companies in 2015, compared to 87 % five years earlier. During this period, the share of households with internet access at home increased by 14pp to 69 %. The number of mobile phone subscriptions relative to population size stands at 100 %. Sectoral and enterprise structures The structural transformation of the economy is progressing slowly. The sectoral structure of the economy has remained largely stagnant in the past five years. At over half of gross value added, services account for the largest share, with agriculture providing 10 %, and industry and construction another 22 % (of which manufacturing around 12-13 %). Yet, the structure of the manufacturing sector shifted somewhat from basic manufactured goods towards products of higher value (chemicals, machinery) in this period. Half of the economy's jobs are in services, followed by industry and construction (27 %) and agriculture (24 %), again without significant changes since 2011. The structure of the corporate sector and its contribution to output has also remained stable, with SME accounting for over 99 % of all companies, and providing over 76 % of value added in the economy. Economic integration with the EU and price competitiveness The EU is an increasingly important export market and the major investment partner for the country. Trade openness of the economy is high. The country's total value of exports and imports of goods and services amounted to 108 % of GDP in 2015, about the same as five years earlier. Merchandise trade with the EU has increased steadily in the past 10 years and amounted to 68 % of the country's total trade in 2015. Exports rose particularly towards Germany and Belgium, on account of the operations of foreign direct investors, at the expense of exports to CEFTA countries. Imports sourced in the EU increased by 3 % compared to the previous year. While the share of EU direct investment inflows varies considerably (90 % of total in 2013; 7 % in 2014), the share of the stock of EU in total foreign investment has been high, but stagnant, at about 81 % over the past 5 years. Total Foreign Direct Investment (FDI) stock per capita and as percentage of GDP is, however, low. Figure 5 Trade integration with the EU Improved external competitiveness hinges on further export diversification. Change in the composition of exports remains slow, with limited progress towards higher value added products over the past five years, The shares of iron and steel products, as well as of clothing in total exports have fallen somewhat, while chemicals, and machinery and transport equipment became more important, mainly on account of foreign investment. After having declined for two years, labour productivity has been rising since early 2014, yet by less than real net wages, which have been supported by subdued price pressures as well as by steady increases in nominal pay. Gross wages are broadly aligned with the average output per employed person. The real effective exchange rate (CPI-based) has remained largely stable in the past five years. 4. ABILITY TO ASSUME THE OBLIGATIONS OF MEMBERSHIP 4.1.Chapter 1: Free movement of goods The free movement of goods ensures that many products can be traded freely across the EU based on common rules and procedures. Where products are governed by national rules, the principle of the free movement of goods prevents these from creating unjustified barriers to trade. The country is moderately prepared on the free movement of goods. Some progress was made, in particular on further eliminating non-tariff barriers to trade and strengthening the administrative capacity of the Bureau of Metrology. Further alignment is ongoing and necessary. In the coming year, the country should: → complete the adoption of measures to remove non-tariff barriers to trade; → complete alignment on the General Products Safety Directive and ensure adequate administrative capacity to enforce the legal framework. General principles A well-established and functional institutional framework provides proper conditions for production, distribution and marketing of industrial products. Full alignment with some of the key acquis, in particular for general product safety and the 2014 directives on product harmonisation is still pending. Legislative alignment is yet insufficient to negotiate an Agreement on Conformity Assessment and Acceptance and no progress was made in this area. Plans for further alignment of the legislation with the acquis are set out in the national plan for adoption of the acquis and individual strategic documents for standardisation, metrology and accreditation. Non-harmonised area

The action plan aimed at removing non-tariff barriers to trade to comply with Articles 34-36 of the Treaty on the Functioning of the European Union (TFEU), adopted in 2009 is being implemented. However, nine legal acts constituting obstacles to trade still need to be removed. No progress was made on removing them. The Ministry of Economy and the Institute of Standardisation continued to fulfil their obligation to notify on regulations related to technical and non-harmonised legislation and standards and technical specifications. The procedure for notifying the European Commission in accordance with the relevant directive is in place. Harmonised area: quality infrastructure There is a legal basis and administrative structure in place for technical regulations, standards, conformity assessment, accreditation, metrology and market surveillance. However, further alignment in these areas is required, in particular for general product safety and market surveillance. The Institute of Standardisation adopted 23,446 European standards and standardisation technical documents as national standards, mostly by the use of the "cover page" method. It is a full member of CEN and CENELEC. The Institute also developed a strategy for its development 2016-2020 and started the procedure t