[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 8.11.2006

SEC(2006) 1387

COMMISSION STAFF WORKING DOCUMENT

The former Yugoslav Republic of Macedonia 2006 Progress Report

{COM (2006) 649 final}

TABLE OF CONTENTS

1. Introduction 4

1.1. Preface 4

1.2. Relations between the EU and the former Yugoslav Republic of Macedonia 5

2. Political criteria 5

2.1. Democracy and the rule of law 5

2.2. Human rights and the protection of minorities 12

2.3. Regional issues and international obligations 16

3. Economic criteria 17

3.1. Introduction 17

3.2. Assessment in terms of the Copenhagen criteria 18

3.2.1. The existence of a functioning market economy 18

3.2.2. The capacity to cope with competitive pressure and market forces within the Union 21

4. Ability to assume the obligations of membership 23

4.1. Chapter 1: Free movement of goods 24

4.2. Chapter 2: Freedom of movement for workers 25

4.3. Chapter 3: Right of establishment and freedom to provide services 25

4.4. Chapter 4: Free movement of capital 26

4.5. Chapter 5: Public procurement 27

4.6. Chapter 6: Company law 27

4.7. Chapter 7: Intellectual property law 28

4.8. Chapter 8: Competition Policy 29

4.9. Chapter 9: Financial Services 31

4.10. Chapter 10: Information society and media 31

4.11. Chapter 11: Agriculture 32

4.12. Chapter 12: Food safety, veterinary and phytosanitary policy 34

4.13. Chapter 13: Fisheries 35

4.14. Chapter 14: Transport policy 35

4.15. Chapter 15: Energy 36

4.16. Chapter 16: Taxation 37

4.17. Chapter 17: Economic and Monetary Union 38

4.18. Chapter 18: Statistics 39

4.19. Chapter 19: Employment and Social Policy 40

4.20. Chapter 20: Enterprise and Industrial Policy 41

4.21. Chapter 21: Trans European Networks 42

4.22. Chapter 22: Regional Policy and Coordination of Structural Instruments 43

4.23. Chapter 23: Judiciary and fundamental rights 44

4.24. Chapter 24: Justice, Freedom and Security 48

4.25. Chapter 25: Science & Research 50

4.26. Chapter 26: Education & Culture 51

4.27. Chapter 27: Environment 51

4.28. Chapter 28: Consumer and Health Protection 53

4.29. Chapter 29: Customs Union 53

4.30. Chapter 30: External Relations 55

4.31. Chapter 31: Foreign, Security and Defence Policy 56

4.32. Chapter 32: Financial control 57

4.33. Chapter 33: Financial and Budgetary Provisions 58

STATISTICAL ANNEX 59

COMMISSION STAFF WORKING DOCUMENT

The former Yugoslav Republic of Macedonia 2006 Progress Report

INTRODUCTION

Preface

The European Council of 17 December 2005 granted the status of candidate country to the former Yugoslav Republic of Macedonia. This is the first report on progress made by this country in preparing for EU membership.

The report:

- briefly describes the relations between the former Yugoslav Republic of Macedonia and the Union;

- analyses the situation in the former Yugoslav Republic of Macedonia in terms of the political criteria for membership;

- analyses the situation in the former Yugoslav Republic of Macedonia on the basis of the economic criteria for membership;

- reviews former Yugoslav Republic of Macedonia's capacity to assume the obligations of membership, that is, the acquis expressed in the Treaties, the secondary legislation, and the policies of the Union.

The period covered by this report is 1 October 2005 to 30 September 2006. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a rule, legislation or measures which are under preparation or await Parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and permits an objective assessment.

The report is based on information gathered and analysed by the Commission. In addition, many sources have been used, including contributions from the government of the former Yugoslav Republic of Macedonia, the Member States, European Parliament reports[1] and information from various international and non-governmental organisations.

The Commission draws conclusions regarding the former Yugoslav Republic of Macedonia in its separation communication on enlargement[2], based on the technical analysis contained in this report.

Relations between the EU and the former Yugoslav Republic of Macedonia

The former Yugoslav Republic of Macedonia is participating in the Stabilisation and Association Process.

The former Yugoslav Republic of Macedonia has made progress in the implementation of the Stabilisation and Association Agreement (SAA). But is not meeting all of its obligations under the SAA. Notable exceptions include telecom liberalisation and the protection of the intellectual property.

In July, the Commission submitted a proposal to the Council for negotiating directives to negotiate visa facilitation and readmission agreements with the former Yugoslav Republic of Macedonia.

The revised European Partnership was adopted in January and the government presented an action plan for its implementation in February. The government adopted a draft National Programme for the Adoption of the Acquis in March.

The EU Police mission, "EUPOL Proxima", ended in December. The implementation of the police reform at local level continued to be supported by an EU Police Advisory Team until June, then by a CARDS funded project.

The EC pre-accession financial assistance to the former Yugoslav Republic of Macedonia amounts to € 43.6 million for 2006.

POLITICAL CRITERIA

This section examines progress made by the former Yugoslav Republic of Macedonia towards meeting the Copenhagen political criteria which require stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities. It also monitors, regional cooperation, good neighbourly relations, and the respect for international obligations, such as cooperation with the UN International Criminal Tribunal for the former Yugoslavia.

Democracy and the rule of law

The Constitution was amended in December 2005, mainly to pave the way for the reform of the judiciary as recommended in the European Partnership. Eleven amendments were made to reform the court system, the immunity rules, the administrative sanction system, the selection and training system for judges and prosecutors, the Judicial Council and the Public Prosecutor's Office, and allow administrative bodies to impose sanctions.

Parliament

Parliamentary elections were held on 5 July.

There were significant efforts to improve the electoral system in the period leading up to the elections. Recommendations of OSCE’s Office for Democratic Institutions and Human Rights (OSCE-ODIHR) were taken into account in line with the European Partnership. The Democratic Party of Albanians (DPA) returned to Parliament in February, following a 9-month boycott. This was a welcome development which allowed DPA's participation in the debate on the electoral code and judicial reforms. The opposition was then able to fully assume its role in accordance with democratic standards. A comprehensive reform of the electoral code was enacted in March with a broad consensus, providing for a fully professional State Election Commission. The influence of political parties over electoral administration was significantly curtailed, by ensuring the participation of civil servants in electoral administration. New legal provisions have improved the position of women as regards both inclusion in lists of candidates and participation in the electoral administration. At the same time, the criminal code was changed to strengthen sanctions for election-related crimes. In June, the leaders of the main parties signed a code on fair elections.

The judiciary has acted against the perpetrators of irregularities committed during the local elections in 2005. Sentences were delivered in 14 of the 19 cases prosecuted and prison sentences delivered against 28 perpetrators.

The electoral process was conducted generally in a peaceful and orderly manner and largely in accordance with international standards, as observed by OSCE-ODIHR.

However, there were significant irregularities on the election day. Ballot stuffing, family voting, intimidation and other types of fraud continued to occur, albeit at lower levels than in previous elections. Additionally, the early days of the election campaign were tainted by a number of violent incidents, mainly involving the two principal ethnic Albanian parties.

The first round of voting took place on 5 July and voting was repeated on 19 July in 29 polling stations where it had been cancelled by the Supreme Court due to irregularities. However, there were still shortcomings in a substantial number of polling stations in applying OSCE principles and commitments as well as the commitments set out in the code of conduct signed by political leaders. The Public Prosecutor’s Office therefore initiated procedures for 11 criminal acts during the pre-election period and investigations of eight cases of electoral fraud as a result of police reports.

Voter participation was low, at 56%. Citizens’ trust of the electoral process should be further strengthened. All irregularities should be investigated and addressed so that they do not occur in the future. Strong political commitment will be needed to ensure higher standards at the next elections due in 2009.

Following the elections, the coalition "For a better Macedonia" won 45 of the 120 seats. This included the Socialist Party and the Liberal Party, led by the Internal Macedonian Revolutionary Organisation - Democratic Party for Macedonian National Unity (VMRO-DPMNE). It formed a government coalition with the Democratic Party of Albanians, the New Social-Democratic Party, VMRO-National Party, the Democratic Renewal of Macedonia and the Party of European Future.

The parliamentary seats were distributed as follows: VMRO-DPMNE (37), Social Democratic Union (24), Democratic Union for Integration (14), Democratic Party of Albanians (11), New Social-Democratic party (7), VMRO-National party (6), Liberal Democratic Party (5), Liberal Party (3), Party for Democratic Prosperity (3), Socialist Party (3), Democratic Party of Turks (2), Democratic Renewal of Macedonia (1), Party of European Future (1), Roma Union (1), Democratic Party of Serbs (1). 30% of the Members of Parliament are women.

The new Parliament held its constitutive session on 26 July. The DUI-PDP coalition has boycotted Parliament from its first meeting in protest at not having been invited to be part of the new government, as the main ethnic Albanian parliamentary group having won 60% of the ethnic Albanian community votes.

Until its recess in June, the Parliament generally functioned satisfactorily. Progress in the Stabilisation and Association Process was regularly discussed in the Committee on EU Affairs based on reports by the Deputy Prime Minister, who is in charge of EU integration. However, a persistant disagreement on the use of the Albanian language by the chairperson of the committee prevented the social affairs committee from meeting. The committee for security and intelligence issues could also not meet, after its chairperson was transferred for trial to the International Criminal Tribunal for the former Yugoslavia (ICTY) in 2005.

The increased tension between the majority and the opposition, especially with DUI-PDP, needs to be addressed. It will be essential for the government to seek consensus on a number of critical reforms, due to the specificities of the country's political model, and in the interest of political stability. The opposition will need to assume its role fully and constructively. This will be particularly important in areas linked to the reforms undertaken to implement the Ohrid Framework Agreement, where decisions require a double majority: a majority of MPs and a majority of the MPs belonging to non-majority communities. The necessary channels of communication have to be established without further delay.

Overall, there was some progress in strengthening the electoral process, despite irregularities and incidents which will have to be fully addressed. A constructive dialogue between all parties will be essential to adopting and implementing important political reforms and related legislation. The implementation of the Ohrid Framework Agreement remains essential to foster a positive environment for further reforms.

Government

Prime Minister Gruevski presented a new government which was approved by Parliament on 26 August. It includes representatives from the Democratic Party of Albanians, the New Social-Democratic Party, the Socialist Party, the Liberal Party and the Democratic Party of Turks. The government presented its priorities for 2006-2010 which were: improving the living standards of the citizens, increasing employment, strengthening the fight against corruption, developing democracy, improving interethnic relations, political stability and integration into the EU and NATO.

Public Administration

The 2000 Law on Civil Servants has been further implementedand the first performance appraisal of the civil servants completed in 2005. An Action Plan was adopted in January to set up a functional human resources management system. A new system of salaries for civil servants was introduced in April. Rules for defining disciplinary offences and conducting disciplinary procedures have been established. 31 disciplinary procedures have been initiated against civil servants in 2006.

Steps have been undertaken to increase transparency in public administration. A new Law on Free Access to Public Information, enacted in January, entered into force in September. An independent commission was set up in June to oversee its implementation. The government also promoted several web-portals to facilitate access to administrative bodies.

The number of complaints to the Ombudsman increased by 56% in 2005, mostly due to better public awareness. All ten deputy Ombudsmen have taken office, which should further improve the operation of the Ombudsman institution. Since January, all ministries have to report on a three-monthly basis to the General Secretariat of the government on the implementation of recommendations or requests made by the Ombudsman.

The government's rules of procedures were amended in April to further improve the planning and decision-making system. A new coordinating body for inspectorates has been set up to strengthen their role.

The Secretariat for European Affairs has assumed a central role in coordinating progress on EU integration objectives. An audit of the structures put in place to work on the European integration process has been launched in order to assess future needs. An Action Plan has been prepared to fulfil European Partnership priorities. In March, the government adopted a draft National Programme for the Adoption of the Acquis which was submitted for comments to the Commission. The new government announced in September its intention to revise the draft on the basis of its work programme and the Commission's comments and assessment of the progress achieved. Its successful implementation will also depend on the readiness of the new government to allocate sufficient financial and human resources for its implementation.

The situation regarding the training of civil servants has continued to improve. The Civil Servants Agency adopted a National System for the Coordination of Training of Civil Servants in October 2005 and organised a number of seminars and training courses on EU- and civil service-related issues.

The transfer of competences to municipalities has moved ahead. In March, the government adopted a five-year training strategy aimed at developing a professional and reliable local self-government public service. Close cooperation between the Ministry of Local Self-Government and the municipalities has helped to alleviate some problems. Public services have began to improve in most municipalities, particularly as regards urban planning. The Association of Municipalities has continued to play a crucial role in addressing all issues arising from the relations between the government and the municipalities.

The Law on Defence was amended in May, to allow for establishing a professional army, as part of the reforms needed to prepare for NATO membership. The entire process of transformation is due to be completed by the end of 2007. In September, the new government adopted a national programme for NATO membership.

The general level of security has steadily improved. This has been achieved both by the increased operational capacity of the police and the increasing trust of all communities towards the police.

However, the mechanisms to increase professionalism and accountability and guarantee independence and political neutrality need to be fully implemented. The single decision taken in September to replace officials in the ministries and public bodies on a massive scale illustrated that political changes still have a deep impact. Such decisions affect administration staff at top and middle management levels and challenge the promotion of a merit based career system. Implementation of the code of ethics for civil servants should be further strengthened. The Civil Servants Agency should be further strengthened to be able to play its full role in assessing performance of civil servants and in disciplinary procedures.

A process for citizens' consultation and participation in the initial stage of developing legislation is included in the 2000 Law on Organisation and Operation of State Administrative Bodies. However, it is little used. Training measures are needed to ensure the correct and consistent implementation of the 2005 Law on General Administrative Procedures across the public administration and to further strengthen citizen's rights.

There is still room to improve co-operation with the ombudsman, especially for the Ministry of Interior.

Ministries need to be more realistic in their planning and increase their capacity for strategy and policy development, given the lack of appropriate administrative structures for implementation. Additionally, the uneven quality of legislation leads to difficulties in its implementation. The practice of prior impact assessment should be extended.

There are still serious challenges to be addressed before passing to the next steps in the decentralisation process. The problem of debts remains an issue, and substantial debts could threaten the functioning of several municipalities. Smaller municipalities have had difficulties in delivering basic services. Possible under-financing of the educational sector is a matter of concern. Municipal tax collection remained a challenge in many municipalities. Further progress in fiscal decentralisation will require the development of financial and internal control mechanisms to allow appropriate planning and to minimise the risk of fraud and corruption. The municipalities' capacity to manage state-owned property should be developed, particularly considering the scarce resources available to foster local economic development.

The Ministry of Interior and the police have been restructured, though not altogether in line with the 2003 Police Reform Strategy. The adoption of a new Police Law met a key priority of the European Partnership. The late adoption of this framework law has impeded the decentralisation of the police and the creation of a new appointment system for police chiefs, delaying the implementation of the reform. Constructive cooperation between the government and the opposition to ensure the smooth implementation of the law is needed (see also Chapter 24 - Justice, freedom and security).

Overall, reforms in the organisation of the public administration are taking place progressively and aim to improve management and increase transparency. However, implementing reforms in the administration and the reform of the police remain serious challenges.

Judicial system

The amendments made to the Constitution in December allowed a breakthrough in the judiciary reform. The legal framework for strengthening the independence and the efficiency of the judiciary is largely in place. They were supported by a broad political consensus.

New laws on Courts and Administrative Disputes were enacted in May. These will substantially reform the structure of the judiciary as from 2007, once in force. Changes include the creation of a fourth court of appeal and special court departments in five basic courts to deal with cases of organised crime. A new administrative court will be established as the first instance for judicial review of administrative decisions so as to remove the burden of hearing administrative disputes from the Supreme Court. The composition and role of the Judicial Council was changed, to strengthen its independence and allow it to play a decisive role in appointing and dismissing judges. Out of its 15 members, 8 will be judges elected by the judges, 3 will be elected by the Parliament, 2 by the Parliament upon a proposal by the President of the Republic. The President of the Supreme Court and the Minister of Justice are ex-officio members. The principle of equitable representation should be respected in the election of its members.

The Parliament's role in selection and disciplinary procedures of the judges has been abolished. Changes were also introduced to promote a merit based career system for judges and prosecutor. A new Academy for the training of judges and prosecutors was set up. This should pave the way for the professional and non-political selection of judges.

Further legislative parts of the Judiciary Reform Strategy have been implemented to improve the functioning of the judiciary. The Laws on Misdemeanours and on Administrative Disputes were enacted in May. They should alleviate the burden on the courts and reduce the backlog of pending cases. Other steps taken conferring the administrative bodies the power to impose sanctions and introducing the concept of alternative dispute resolution for civil and commercial cases will also decrease the burden on the courts.

The entry into force of the Laws on Enforcement of Civil Judgements and on Litigation Procedure which changed court procedures and its implementation should improve the enforcement of civil law cases.

The budgetary resources allocated in 2006 to the judiciary have slightly increased compared to 2005. Overall, judicial reform has remained high on the agenda of the new government just as for the previous government.

However, the judicial system shows the same serious shortcomings as in previous years affecting both its independence and its efficiency. The financial situation of the courts remains a matter of concern. Delays occurred in setting up the new Academy for judges and prosecutors as well as in nominating the members of the Judicial Council. The law on the conditions for appointment and dismissal of public prosecutors and their deputies remains to be adopted. The real effects of judicial reform will only become apparent once the new laws take effect and new, fully operational structures are in place.

The effective implementation of the reforms and the improved operation of the judiciary will have to be demonstrated by a sustained track record. It will be important for the new government and Parliament to maintain the momentum of reform and provide appropriate budgetary allocations. Broad political consensus will be required to proceed with reform and its implementation. It will be even more important for those parts of the reforms where decisions have to be taken by a double majority. The sustained and full support of the members of the judiciary will also be needed, especially at senior level.

Overall, the constitutional and legal framework for an independent and efficient judiciary is now largely in place. However, most of the reforms in the judiciary have not yet entered into force. There are important challenges in this field, which require a sustained programme of reforms. (See also Chapter 23 – Judiciary and fundamental rights ).

Anti-corruption policy

Since the November 2005 opinion, the legal and institutional framework to address corruption has been further strengthened. Changes in the electoral code included the obligation for each party to account for its campaign expenses. Recommendations from the Council of Europe Group of States Against Corruption (GRECO) are steadily being implemented. There has been progress in the cooperation and coordination in the fight against corruption. An inter-ministerial body was set up in April to co-ordinate the activities of those involved. Relations between the State Anti-Corruption Commission and the Public Prosecutor are more constructive. Co-operation with the Public Prosecutor’s Office has progressed at the operational level, especially in the Specialised Unit for Fight Against organised Crime.

According to the State Anti-Corruption Commission, almost all officials have submitted asset declarations. The Commission has brought charges against those who have not submitted these.

Steps were taken to improve transparency in public decisions and in the management of state assets. In particular the Law on Free Access to Public Information was adopted in February and entered into force in September. The discretionary powers of ministers and other officials in the administration have been reviewed.

However, the results of legal and institutional measures remain far from satisfactory and have had a limited impact. Corruption remains widespread, holding back economic development and weakening social cohesion. The UN Convention against corruption still has to be ratified. The OECD Convention on combating bribery of foreign public officials in international business transactions has yet to be signed. Little progress was achieved in identifying the extent of corruption, which hampered preventive and detection measures.

Whereas there have been a few high profiles cases concluded, such as the case of the Director of Health sentenced to four years in prison, prosecutions of corruption cases remain at a low level. Several investigations are in procedure against judges and prosecutors for abuse of their functions. There have been two sentences against police officers for bribe or abuse of position, and one criminal procedure against a customs officer.

The implementation of the existing anti-corruption regulations requires additional capacity and political will. While, according to the State Anti-Corruption Commission, almost all officials have submitted asset declarations, sentences delivered to officials failing to fulfil this obligation have been lenient. A fully effective checking of the property declarations would require strengthening the bodies involved. The implementation of the regulations on political parties' finances and election campaign financing are serious challenges, including for the State Audit Office capacity to determine irregularities.

Tangible progress in reducing the discretionary rights of ministers and other officials has yet to be achieved. Incompatibility rules still lack clarity, and control and enforcement mechanisms are weak. Conflict of interest remains to be regulated and monitored. For instance, there is no clear policy as regards the employment of former members of the government.

More initiatives should be undertaken by the Public Prosecutor Office. More remains to be done to demonstrate a zero tolerance policy. The irregularities identified by the State Audit Office in its reports should be followed up. The potential of the Ombudsman Office should also be used more fully.

The new government has put a particular focus on the fight against corruption in its work programme. It remains to be seen if the political intention demonstrated will be strong enough to ensure effective progress in this area.

Overall, there was some progress in strengthening the legal and institutional framework for fighting corruption. However, corruption remains widespread. Many allegations of corruption have yet to be investigated. Strong political will is required to step up efforts to combat corruption effectively ( see also Chapter 23 – Judiciary and Fundamental Rights ).

Human rights and the protection of minorities

Observance of international human rights law

There are currently 638 applications pending against the former Yugoslav Republic of Macedonia before a decision making body of the European Court of Human Rights. The Court received 251 applications in 2006, compared with 248 in 2005. Out of five judgements in 2006, four established there was a violation. All violations were related to the length of judiciary proceedings. An inter-ministerial committee was set up in May to follow up the obligations deriving from the European Social Charter. Protocol 1 has still not been ratified.

Civil and political rights

In April, the government decided to set up an inter-ministerial body for human rights led by the Ministry of Justice. This body will strengthen and coordinate co-operation among state institutions dealing with human rights issues. It will present yearly reports.

As regards prevention of torture and ill-treatment , the Law on Criminal Procedure was amended to abolish mandatory pre-trial detention. Positive developments have taken place in the Ministry of Interior's sector for internal control and professional standards. These have contributed towards strengthening its ability to investigate charges of police abuse and corruption.

However, mechanisms for investigating degrading treatment need to be strengthened, including through the co-operation between the Ombudsman and the Ministry of Interior. Incidents of ill-treatment continue to occur, particularly during arrest and detention.

In absence of a new law on the police, there had until now been no legal basis for ensuring the adoption of a code of police ethics and of transparent and accountable appointments, promotion and disciplinary procedures. The use of "informative talks" by the Police remains unclear. Continuous efforts in training and raising awareness on human rights issues and police ethics are needed.

There has been limited progress in the situation in prisons. There are concerns about the number of deaths, including suicides, in prisons . The Council of Europe's Committee for the Prevention of Torture and Inhuman or Degrading Treatment or Punishment carried out inspections in May. Its recommendations should be fully implemented.

The European Parliament's Temporary Committee on the alleged use of European countries by the CIA for the transport and illegal detention of prisoners visited Skopje in April to investigate the case of Mr Khaled El Masri , a German citizen of Lebanese origin. The authorities are encouraged to conduct effective and rigorous investigations to ascertain the truth and to cooperate fully with the European Parliament's Temporary Committee on this issue.

Telecommunication tapping still takes place in absence of a proper legal framework. The Law on Interception of Communications has not yet been enacted. This must be addressed without further delay.

There were limited and local cases of violations of freedom of religion . However, in the village of Sekirnik, the communities involved reached an agreement on the construction of a church. In Lazec, a dialogue has been initiated on the construction of a mosque. The revision of the Law on Religion and Religious Groups is still under consideration. The draft revisions should provide more liberal procedures for the registration of religious institutions. These should also remove all remaining impediments to free practice of religious belief.

Legal guarantees for freedom of expression were further strengthened with the abolition of imprisonment as a possible punishment for defamation. The new Broadcasting Law, which was enacted in November, provided for greater independence of the regulatory body - the Broadcasting Council. The law allows for public funding of satellite broadcasting services in the languages of the non-majority communities through the Macedonian Radio Television . However, the issue of strengthening the mechanisms necessary to ensure the economic and financial independence of the media remains to be addressed. Rigorous implementation of the new legislative framework is needed, especially to secure the funding of the regulatory body and the public service broadcaster (see also chapter 10, information society and media) . Access to information will have to be effectively ensured, as foreseen by the new Law on Public Access to Information of Public Character.

Freedom of association and assembly have been guaranteed. The 2005 labour relations law entered into force, allowing legal entities to set up associations to exercise economic and social rights. Two trade unions and two employers’ associations were registered.

The active involvement of civil society organisations in public policy-making and reforms has developed further, for instance, through making proposals for new legislation. The government adopted a strategy for co-operation with civil society in June. A new law on sponsorship and donations was enacted in April, providing tax incentives for donations and sponsorship by a local or foreign legal or physical entity. However, the strengthening of civil society requires further coordination between non governmental organisations (NGO) and the public authorities. The development of the NGOs’ activities is still hampered by a lack of resources. Changes in the criteria for allocating grants from the state budget to NGOs are still needed, so as to better define objectives and avoid non-transparent selection procedures.

Overall, there has been no major violation of the civil and political rights. However, more needs to be done to improve the legal framework and enhance effective implementation of these rights.

Economic and Social Rights

In the field of women's rights, a Law on Equal Opportunities for men and women was enacted in May. Implementation of the UN Convention on Elimination of Discrimination against Women has generally been assessed positively by the UN in a number of areas. These include education, health care, political participation and the non-government sector. Additional activities are to be undertaken in the spheres of employment, the situation of women in rural areas and violence ( see also chapter 19 - Employment and social policy ). There was no particular progress in the definition of rape or in measures against domestic violence and sexual harassment, which remain at a high level and are rarely prosecuted. A strategy for combating illegal immigration and trafficking in human beings was adopted in March. This aims to better protect victims and witnesses and improve the investigation and the prosecution process of perpetrators. However, further action is needed to curb forced prostitution and trafficking in women and girls ( see also Chapter 24 – Justice, freedom and security ).

In February, the government adopted an action plan for the protection of children's rights and set up a national coordination body. This plan was complemented by a development programme to apply these.

A national strategy for the development of education in the period 2005-2015 was adopted in April. Progress has been made in relation to minority education ( see below ). However, challenges to the reform of the education system remain. The education budget is limited. The impact of the decentralisation process remains to be assessed.

There is limited progress in the implementation of the National Strategy for the Rights of Persons with Disabilities . The situation in institutions caring for persons with mental disabilities is still not satisfactory. The government needs to further develop social care policies, including community-based options as alternatives to institutions. Some of the existing community mental health centres operate well, but conditions in psychiatric hospitals vary greatly.

Regarding labour rights and trade union rights , there are no significant developments to report in the area of social dialogue , which requires strengthening.

The process of restitution of property that was confiscated during the Yugoslav regime has progressed slowly. According to the Ministry of Finance, decisions have been taken on 8,549 of 21,986 applications filed between 2000 and 2005. There has been no improvement in the restitution issue of the properties of the Orthodox church and the Muslim community.

Minority rights, protection of minorities and cultural rights

In general, inter-ethnic relations have continued to improve. The commitment of the government to make progress in the implementation of the Ohrid Framework Agreement remained essential for the country's stability. Inter-ethnic issues were not conflicting issues during the electoral campaign.

The Ombudsman’s annual report indicates that four complaints relating to minority rights were received in 2005. This constitutes a substantial decrease compared with the eleven complaints made in 2004.

Some progress has been achieved in participation of non majority communities in the public administration and public enterprises. The general level of participation grew from 20.5 % in July 2005 to 21.7 % in August (Albanians 16.5%; Serbs 1.6%; Turks 1.4%; Roma 0.6%; Vlachs 0.5%; Bosniaks 0.3%; other communities 0.9%). In the judiciary, the principle of equitable representation in the selection of judges and prosecutors as well as in the composition of the Judicial Council has been enshrined in the new laws.

As regards education, progress has continued. The total level of enrolment of students from non-majority groups in the three State Universities is progressively increasing, and reached 24% in 2005/2006 compared to 20,6% in 2004/2005. Additional quotas have been decided in accordance with the 2005-2015 education action plan. In the South East Europe University, 72% of the 4800 students are from minorities.

Provisions on the use of non-majority languages in official documents have been implemented (ID cards, passports, excerpts from the central registry, driving licences and registration certificates). Progress has continued regarding their use as an official language.

However, dialogue and trust-building between communities should be further developed to achieve sustainable progress. Localised incidents have attracted the attention of the media. Non majority communities remain significantly under-represented in the public administration. Furthermore, progress has been uneven across the various communities. Ethnic Albanians have made significant gains, although they are still under-represented in public life. Other groups have seen little or no gains.

Significant discrepancies continue to exist among individual ministries. In the police sector, progress has come to a standstill. In the absence of a common strategy to ensure equitable representation, solutions have so far been specific to individual institutions or sectors. There is a need for additional efforts to ensure that equitable representation policies and mechanisms fully reflect the ethnic diversity of the population.

As regards the use of minority languages, smooth implementation of the legal provisions will require sustained commitment and further investment, for example to implement the provisions on traffic signs.

There are still insufficient opportunities for interaction between the different communities, particularly in the sphere of education. While some initiatives in this area exist, they are mainly led by civil society. There appears to be no comprehensive policy to bridge the gap between the different communities through the education system.

All political parties must continue to work on building consensus on ethnic-related issues, in full compliance with the letter and spirit of the Ohrid Framework Agreement.

The situation of the Roma community continues to cause concern. There has been some progress in the implementation of the four action plans under the 2005-2015 Decade of Roma Inclusion. These were set up for the development of education, housing, employment and health care, but still have limited impact. Special funds have been established in the relevant ministries to support the implementation of the action plans. The Ministry of Labour and Social policy has also been working on Roma employment by supporting the establishment of family businesses for young Roma. However, tangible progress in the conditions of the Roma will require sustained commitment to the implementation of the objectives of the National Strategy for Roma. Discrimination against Romani people continues. They are still disproportionately the subject of ill-treatment by the police. Others are denied citizenship. Romani children are frequently denied the right to education and comprise the majority of the country's street children.

The number of internally displaced persons (IDPs) decreased from 1420 to about 720.

There are 2,096 refugees in the country, the vast majority Roma, Ashkalia and Egyptians from Kosovo. Since the Law on Asylum entered into force, only 28 refugees have received recognised refugee status. Most applicants have been granted "humanitarian protection", which is a status with a duration of up to 12 months. There are still concerns over the transparency and independence of the government commission competent to deal with appeals against first instance decisions on refugee status.

Overall, there were no major problems in the area of fundamental rights. The level of minority rights’ protection has remained high. However, there are still a number of areas where implementation of the fundamental rights should be fostered. The implementation of the Ohrid Framework Agreement is essential to foster a positive environment for further reforms.

Regional issues and international obligations

The former Yugoslav Republic of Macedonia has maintained full cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY).

The trial of the only case (“Ljuboten”) for which the ICTY indicted citizens of the former Yugoslav Republic of Macedonia has not yet started in The Hague. The four cases for which the Tribunal decided not to pursue its investigations due to its "exit strategy" (UNSCR 1534/04), have not yet been referred back to the national authorities for possible further investigation. The government has agreed with the ICTY to start the process of return of cases progressively, starting at the beginning of 2007. A number of judicial reforms are required before these cases can be dealt with. The handling of the returned cases will be a major test of the maturity of the institutions and the capacity of the judicial system.

As regards the International Criminal Court , the government stated that the scope of the non-surrender agreement concluded with the USA does not include citizens of the former Yugoslav Republic of Macedonia. However, it still does not comply with "the EU Guiding Principles Concerning Arrangements between a State Party to the Rome Statute of the International Criminal Court and the United States Regarding the Conditions for Surrender of Persons to the Court" adopted by the Council in September 2002. In particular it does not contain practical provisions ensuring investigation and prosecution by national jurisdictions.

Regional cooperation and good neighbourly relations form an essential part of the process of moving towards the European Union.

The former Yugoslav Republic of Macedonia has continued its active participation in regional initiatives, such as the Stability Pact, the South-East European Cooperation Process (SEECP), the Central European Initiative and the Adriatic Ionian Initiative. The former Yugoslav Republic of Macedonia is committed to the establishment of the Regional Cooperation Council. It is party to the Energy Community Treaty that entered into force in July 2006 and a signatory of the agreement on the European Common Aviation Area of June 2006.

The former Yugoslav Republic of Macedonia ratified the agreement on CEFTA membership in May. It is participating in the negotiations for establishing a single regional Free Trade Agreement, based on an enlarged and amended CEFTA. A Free Trade Agreement with Kosovo (UNHCR 1244) entered into force in February. The former Yugoslav Republic of Macedonia has concluded bilateral free trade agreements with all South East European countries.

Bilateral relations with Albania have been developing. Reciprocal high level visits have been accompanied by signing of cooperation agreements concerning police cooperation, transport, energy, defence, tourism, culture, information, science, and the opening of an additional border crossing point. The former Yugoslav Republic of Macedonia offered assistance during the electricity crisis in Albania in 2005. A joint committee for the Lake Ohrid basin was created.

Relations with Serbia have remained good. However, the religious dispute between the Macedonian Orthodox Church and the Serbian Orthodox Church continues to require caution from the governments of both countries.

The position of the former Yugoslav Republic of Macedonia towards the Kosovo issue continued to be constructive throughout the initial phase of the status talks. High level visits have contributed to foster cooperation. The border demarcation remains to be resolved in the context of the talks. This issue, of a technical nature, should continue to be approached in a constructive manner. Co-operation with UNMIK and the Kosovo authorities also resulted in the reopening of a regular passenger rail service between Skopje and Pristina, which had been interrupted since 1999.

The former Yugoslav Republic of Macedonia recognised Montenegro ’s independence in June. A consulate was opened in Podgorica in January.

Relations with Bosnia and Herzegovina have remained good. A number of bilateral agreements have been signed, including on mutual legal assistance, property rights issues and mutual execution of court rulings in criminal matters.

Relations with Croatia have continued to develop. Co-operation is particularly strong as regards the EU integration processes, with a regular exchange of information both at a technical and political level.

Relations with Bulgaria have been developing. Meetings at senior political level have been accompanied by intensified technical co-operation and cross-border activities. In June, an agreement on transnational police cooperation was signed.

Relations with Greece have been developing. In December 2005 the two countries opened an Office for Consular, Economic and Trade Relations in Bitola and a Consulate in Thessaloniki respectively. Cooperation has developed in many areas, including transport, health, security, culture and customs. However, there has been no progress on the name issue which remains an open problem. Renewed efforts are needed, with a constructive approach, to find a negotiated and mutually acceptable solution on the name issue with Greece, under the auspices of the UN, within the framework of UN Security Council Resolutions (EEC) No 817/93 and (EEC) No 845/93, thereby contributing to regional cooperation and good neighbourly relations.

ECONOMIC CRITERIA

Introduction

In examining the economic developments in the former Yugoslav Republic of Macedonia, the Commission's approach was guided by the conclusions of the European Council in Copenhagen in June 1993, which stated that membership of the Union requires the existence of a functioning market economy, and the capacity to cope with competitive pressure and market forces within the Union.

Assessment in terms of the Copenhagen criteria

The existence of a functioning market economy

Economic policy essentials

All relevant political parties agree on establishing a market based economy. The government adopted the 2006 Macroeconomic Policy Document in December 2005, emphasising the objective of maintaining economic stability and promoting growth and employment. Since 2006, the country has participated in the EU's Pre-accession Fiscal Surveillance procedure. In April, the authorities submitted the first fiscal notification. They are currently preparing the first Pre-accession Economic Programme (PEP), which is due by December. Programme cooperation with the International Monetary Fund (IMF) and World Bank is on track, with positive assessments on the country's progress by both institutions concerning its programme commitments. A broad political consensus on the fundamentals of economic policy has been maintained.

Macroeconomic stability

In the second half of 2005, real GDP grew by around 4% year-on-year, driven by exports and investment. In the first half of 2006, output growth slowed to 2.6% due to weak industrial production and decelerating construction. Industrial production only increased by 2.8% year-on-year during the first eight months of 2006, compared to 8.2% during the same period in 2005. Average per-capita GDP in purchasing power standards was 26% of the EU-25 average, compared to 25% the year before. Overall, economic performance has stayed on track, although below potential.

In 2005, the current account deficit declined to 1.4% of GDP, compared to 7.7% in 2004. About half of the decline was due to higher exports. These increased from 31% of GDP in 2004 to 36% of GDP in 2005. Net private transfers increased from 13.3% of GDP in 2004 to 17.6%, which also contributed to the improvement in the current account. Foreign direct investment (FDI) declined slightly, from 2.8% of GDP in 2004 to 1.7% in 2005, but rose sharply during the first half of 2006 and reached some 6% of the GDP, projected for 2006. Exports were slightly below the pre-year level (-0.5%), whereas imports rose by 4%. Overall, external deficits have markedly narrowed, with an annualised current account deficit of around 3% of the GDP during the first half of 2006.

At the end of August 2006, official reserve assets of the country's central bank (NBRM) stood at Є 1.3 billion, equivalent to more than 4 months of imports of goods and services. The main reasons for the rapid increase in reserves were the inflow of proceeds from the privatisation of the electricity distributor ESM, which amounted to about 5% GDP, and other foreign exchange inflows through the cash exchange offices. In August 2006 gross external debt stood at some 39 % of GDP, after the sale of a Є 150 million 10-year government Eurobond had led to a temporary increase in the debt ratio. The revenues of the bond sale were used to finance the repayment of the London Club debt, which helped to lower the costs of the debt service.

The unemployment rate declined to 36.1% in the second quarter of 2006, whereas the employment rate increased to 35%. Besides seasonal effects, the impact of the recent liberalisation of labour legislation has contributed to this favourable development. Unemployment among the young is very high and the duration of unemployment in this age group is long. The existence of a substantial informal sector most may lead to a significant over-estimation of real unemployment. ( See also Chapter 19 – Social Policy and Employment .) Overall, unemployment has started to decline, although from a very high level.

The recent strengthening of foreign currency reserves and the improved confidence in the stability of the financial system has allowed a marked reduction in policy interest rates. For example, Central Bank bill rates dropped to 5.5% in August 2006, compared to 10.0% a year before. In October 2005, the NBRM switched from auctioning fixed-rate Central Bank bills to flexible-rate auctions, which resulted in a marked decrease of these rates. Short-term lending rates of commercial banks have declined from 12.1% at the end of 2005 to 11.1% in August 2006. In March 2006, the NBRM started to replace its main instrument for monetary policy (28-day Central Bank bills) with 3-month treasury bills. Credit growth to the private sector continued to be high, at some 24.5% during the first half of 2006. However, the credit provision to the private sector is relatively low, around 25% of GDP. The volume of broad money (M4) rose by 15% year-on-year during the first half of 2006. Overall, monetary policy has remained sound, responding to the improved confidence in the stability of the financial system.

Consumer price inflation has increased to 3.3% during the first nine months of 2006, compared to 0.4% during the same period in 2005. The main factors were supply driven elements, such as increases in excise taxes and higher energy costs. The country's statistical office is currently preparing an indicator of core inflation. Overall, inflation has remained under control.

The NBRM has managed to maintain the exchange rate of the Denar against the euro on a level of 61.3 Denar/euro and intends to continue this de-facto peg. In order to improve the efficiency of the foreign exchange market, the NBRM has established an electronic system of exchange rate monitoring and introduced a system of market-makers. Overall, the exchange rate has remained stable towards the euro.

Fiscal balances turned out better than expected in 2005, with a general government surplus of 0.3% of GDP (cash basis), compared to a targeted deficit of 0.8% of GDP[3]. As in previous years, revenue collection was better than expected, whereas expenditures remained lower than planned. A new Law on Tax Procedure entered into force in April 2006, which assists tax collection, simplifies procedures and improves the equal treatment of tax payers. In addition, the strengthening of the public debt management institutions and the adoption of the 2006-2008 Public Debt Management Strategy should result in an improved debt structure and lower expenditures for debt servicing. Fiscal decentralisation appears to be on track. The introduction of a second-pillar pension system by January 2006 puts the pension system on a sounder footing, although the decrease of social security contribution will increase fiscal pressures in the short-term. Due to a financing transaction, public debt temporarily increased from 36.6% of GDP at the end of 2004, to 40.1% of GDP at the end of 2005. However, by mid-2006 it had declined again to below 35% of GDP. Overall, public sector accounts have remained close to balance and public administration has been strengthened.

Economic stability was maintained, with balanced public finances, low inflation and improving external accounts. The improved reserve position has strengthened confidence in the stability of the foreign exchange regime and has allowed for a lowering of interest rates. Overall, the macroeconomic policy mix has succeeded in maintaining economy stability, although key challenges such as high unemployment and low investment persist.

Free interplay of market forces

Privatisation of the last state enterprises continued. In October 2005, most of the remaining state property was transferred to four institutions for further liquidation: the Pension Fund, the Ministry of Economy, the Ministry of Finance and a public real estate agency. Most of the companies transferred to the Ministry of Economy are subject to bankruptcy procedures. The book value of minority shares owned by the pension fund was 2.8% of GDP at the end of 2005. By June 2006, the pension fund had sold minority shares in 14 local companies, amounting to some 24% of the fund's total privatisation portfolio and accruing revenues of Є 16 million (0.3% of GDP). The state maintained ownership of around 30 enterprises, with an estimated value of 16% of GDP and minority shares in privatised companies. The state electricity company was divided into three sections - for generation, transmission and distribution. The distribution company was sold in March 2006 to a strategic foreign investor for the equivalent of 5% of GDP. In June 2006, the state offered most of its shares in the landline telecom company for sale on the stock exchange. This meant 45.1% of the company's shares, leaving only 2% in state hands. So far, a 9.9% stake in the company has been sold for Є 60.3 million (1.4% of GDP).

Free market entry and exit

The government significantly reduced entry barriers and accelerated exit procedures. For example, a one-stop-shop system for company registration has been established. This resulted in a marked simplification of procedures and reduced the average time for registration to seven days. The one-stop-shop system started to operate in January 2006 and handled about 18,600 applications during the first nine months[4]. Around 8% of the new companies were owned by foreign investors, who invested some Є 3 million (0.1% of GDP) in the country. Furthermore, the competence of the Credit Guarantee Fund was extended to cover long-term loans for SME investments. Bankruptcy legislation was amended in March 2006 to accelerate market exit procedures. This should lead to a shortening of procedures and reduce costs. However, the necessary implementing legislation is not yet fully in place. Overall, barriers to market entry and exit have been reduced.

Adequate legal system

The necessary legal system is largely in place. However, slow legal procedures are an important impediment to the functioning of the system, for example, delaying the clarification of ownership disputes. The time required to register a real estate transaction was –reduced; for example from several weeks to one day in the case of an accelerated procedure. However, the real estate cadastre covers only about 47% of the country so far. The authorities plan to finalise the full registration by 2009. Several measures to simplify and accelerate legal procedures have been adopted, such as the law on international trade arbitration in March 2006 and the Law on Mediation in May 2006, which introduced alternative dispute settlement procedures. Progress has been made in accelerating market entry and in clarifying property rights. However, the judiciary has continued to be a bottleneck.

Sufficiently developed financial sector

In 2005, credits to the private sector increased from 21.5% of GDP (end 2004) to 24.4% of GDP (end 2005) The recent decline in interest rates, the establishment of a guarantee fund and the acceleration of registration of property rights contribute to increasing financial intermediation. The operational efficiency of local banks has still been relatively low. The banking sector has remained comparatively small, with banking assets amounting to about 49% of GDP, although the number of banks is still relatively high. A recent merger of two smaller banks reduced the number of banks to 19. There are also 15 savings houses. Overall, financial intermediation has deepened.

The five largest banks account for 76% of total assets and 75% of total credits. Spreads between lending and deposit rates shrank from about 7.2% in early 2005 to around 6.7% in July 2006. The high spreads partly reflect an unfavourable asset structure. The share of assets deposited abroad declined from 35% in 2004 to 25% in 2005, indicating a marked improvement of confidence in the financial system. All banks are controlled by private owners, with the exception of the small 100% state-owned development bank. Foreign banks are majority owners of two of the three largest banks. The state has continued to withdraw from the banking sector, by selling a number of minority shares. However, concentration in the banking sector has remained high.

Banking sector capitalisation has remained high, with a capital adequacy ratio of some 20% in mid-2006 compared to 23% in 2004. Small banks have a high capital adequacy ratio of some 27% on average, while large banks register a ratio of some 13%. The share of non-performing loans declined from 13% in 2004, to 11% of total loans in 2005. The share of worst performing credits has declined from 7.6% to 4.6%. The profitability of the sector rose in 2005. Returns on assets and equity reached 1.3% and 8.1%, respectively. Overall, the stability of the financial sector has strengthened further.

Market capitalisation of the 57 companies listed on the Macedonian Stock Exchange rose from 16% of GDP in 2004 to 18% in 2005. By mid-2006, the stock market capitalisation had reached some 20% of GDP. Securities trading rose by 7% in 2005. Foreign-owned brokerage houses have entered the market. However, so far no foreign investment fund has been established. ( See also Chapter 9 – Financial Services. ) Overall, the size of the non-banking financial sector has increased, but the level still remains very low.

The capacity to cope with competitive pressure and market forces within the Union

Existence of a functioning market economy

The former Yugoslav Republic of Macedonia has achieved a sufficient degree of macroeconomic stability. It has made important progress in reducing barriers to market entry and exit, in strengthening the legal and institutional framework and in improving the transparency and accountability of public procedures. However, the full functioning of the market economy is still impeded by weaknesses in the judiciary, administrative bottlenecks, a low degree of legal certainty, a high number of unsettled property disputes, and considerable labour market imbalances. Preparations for the general elections slowed down the finalisation of important structural reforms, such as the implementing regulations of the bankruptcy law, delays in implementing a supervisory development plan, amendments to the law on banking supervision and the central bank law.

Sufficient human and physical capital

The authorities adopted a series of reform measures in 2005 to modernise curricula, to improve the training of teaching staff, to promote vocational education and training and to support life long learning. However, as a result of decades of underspending on education the infrastructure is inadequate and outdated. High unemployment rates among school leavers are an indication of the deficits in this area. Furthermore, in certain rural areas access to education remains limited. The education system does not sufficiently reflect the country's needs ( see also Chapter 26 – Education and Culture and Chapter 19 – Social Policy and Employment ). Overall, some measures have been taken to improve education and human capital.

Labour contracts have become more flexible. This is the result of the new labour code, which allows part-time employment and simplifies procedures in the case of redundancies, overtime, shift work etc.. Active labour market measures have also been strengthened. These developments have helped to reduce unemployment and increase employment. The existence of a substantial informal sector probably leads to an overestimation of the true dimension of unemployment. Overall, labour markets have become more flexible, but the supply and demand mismatch is still high.

Gross fixed capital formation rose marginally from 17% of GDP in 2004 to about 18% in 2005. This low ratio can be seen as an indication for a weak business environment. Public investment was particularly low at 3.6% of GDP in 2005. The share of investment in GDP has remained relatively low, given the country's need to catch up with international standards.

Foreign direct investment increased sharply in the first half of 2006 to around 6% of projected GDP. The main factors were payments related to the privatisation of the electricity distributor, amounting to about 5% of GDP. Apart from these privatisation-related cases, greenfield FDI inflows remained limited. Unclear property rights and fragmented responsibilities between the central and local governments have contributed to delays in FDI projects. The agency for Investment Promotion became operative in 2005, but suffers from resource constraints. Overall, FDI inflows have continued to increase; however, they were mainly driven by privatisations.

Adequate sectoral and enterprise structure

The last two decades of insufficient investment have eroded the quality of transport networks. An upgrading of the overall system of infrastructure has started for projects related to the European transport corridor X. The railway company has been separated into two operative companies, so as to privatise them. In the telecommunications sector, the state has embarked upon offering its remaining shares (except a 2% "golden share") on the Stock Exchange. Public research and development expenditures were raised to 0.7% of GDP in 2005. ( See also Chapter 14 – Transport Policy, Chapter 21 – Trans-European Networks, and Chapter 25 – Science and Research. ) Overall, infrastructure has continued to require repair and modernisation.

Only minor changes have been recorded in the production structure of the economy. There has been a significant increase in the value added of wholesale and retail trade, whose share in total value added rose from 12.9% of GDP in 2004 to 13.4% in 2005. The value added of industry has remained around 29% of GDP. This pattern is confirmed by labour market data, which indicates broadly unchanged employment figures for industry at around 22% of the labour force. Overall, changes to the structure of the economy have remained limited.

The number of enterprises has increased significantly during the last year. However, the number of employed in these enterprises has only risen by 2.6%, indicating that the main increase has occurred in small enterprises. There are many 'single employee enterprises' due to the absence of the legal category "self-employed". The authorities have tried to ease the financing constraint for SMEs by improving the functioning of the Guarantee Funds. However, the low degree of real estate registration hampers the provision of collateral for credit provision. ( See Chapter 20 – Enterprise and Industrial Policy. ) Overall, the number of small firms has increased considerably, but their share in total employment remains relatively low.

State influence on competitiveness

The authorities have shown an increasing reluctance to intervene in market processes, for example by moving towards rule based decisions for public tenders. No precise data on the actual volume of direct state aid are available at present. However, there are indications that indirect state aid leads to significant distortions in the competitive position of enterprises in the market. These are in the form of accumulated payment arrears of taxes and social security contributions. Providing electricity below cost price or allowing the accumulation of payment arrears are examples of these indirect state interventions. ( See Chapter 8 – Competition Policy. ) Overall, direct state intervention has continued to decline, but indirect state aid still leads to distortions in relative prices.

Trade integration with the EU

The country is a small open economy with total trade of goods and services accounting for around 100% of GDP in 2005. During the first eight months of 2006, about 55% of all exports went to the EU-25, while about 45% of imports came from the EU-5. In 2006, the country joined CEFTA and concluded a number of free trade agreements, including with neighbouring Kosovo. Trade integration with the Western Balkan region increased, reaching 33% of the country's exports and 10% of its imports. The Eu remain by far the country's main trading partner. In the region, Serbia is also an important trade partner. The export structure is still highly concentrated on a few items, with textile and clothing products amounting to about 24% of total exports, and manufactured iron and zinc products to some 26%. ( See Chapter 30 – External Relations ). Overall, trade integration is well advanced, but the commodity composition is concentrated on a few price-sensitive products.

International price competitiveness improved slightly during the last year, benefiting from low inflation and a nominally stable exchange rate. The real effective exchange rate depreciated by 3% in 2005, whilst labour productivity increased by 2.7%. At the same time, real wage increases remained in line with productivity growth and unit labour costs decreased by 4% in 2005. Overall, price competitiveness and labour productivity has improved.

ABILITY TO ASSUME THE OBLIGATIONS OF MEMBERSHIP

This section examines the former Yugoslav Republic of Macedonia's ability to assume the obligations of membership – that is, the acquis as expressed in the Treaties, the secondary legislation, and the policies of the Union. It also analyses the former Yugoslav Republic of Macedonia's administrative capacity to implement the acquis . The analysis is structured in accordance with the list of the 33 acquis chapters.

Chapter 1: Free movement of goods

Some progress has been made as regards the general principles, with the introduction of the principle of mutual recognition in the Law on Product Safety, which came into force in March 2006. The former Yugoslav Republic of Macedonia still needs to make sure that its legislation, including distinctly as well as indistinctly applicable measures, is compatible with Articles 28 – 30 of the EC Treaty and related jurisprudence of the European Court of Justice.

As regards horizontal measures, the new Law on Product Safety replaced the 2002 Law on Prescribing Technical Requirements for Products and Conformity Assessment as well as some articles of the Law on Consumer Protection. It covers the whole area of technical harmonisation and establishes the basis for transposition of the principles of the "new approach" and the "old approach".

In the area of standardisation, 855 harmonised European standards (ENs), mainly related to the directives on low voltage equipment, safety of machinery and construction products, were adopted as national standards.

Progress has also been made on the strengthening of administrative capacity in some key institutions. A Sector for Internal Market has been established within the Ministry of Economy, dealing with free movement of goods, harmonisation of technical regulations, and consumer protection. The Institute for Standardisation of the Republic of Macedonia has established 15 new technical committees. Its administrative capacity has been strengthened by new staff and information technology equipment. The Institute for Accreditation of the Republic of Macedonia performs accreditation functions and is financed from the state budget. It has been provided with sufficient office space to perform its duties, but lacks staff. The institute became a full member of the European Co-operation for Accreditation when the country was granted candidate status.

A Council for Metrology , consisting of domestic experts, was established within the Bureau of Metrology. Existing capacity is insufficient to perform laboratory testing and calibration tasks.

The Government established a co-ordination body for co-operation in the area of market surveillance . The Ministry of Economy has been designated as responsible for market surveillance relating to the implementation of the technical norms under the Law on Product Safety.

Some progress can be noted on New and Global Approach directives for the construction sector. The Law on Construction Products came into force in April 2006, regulating essential requirements and attestation of conformity of construction products. In addition, rulebooks on construction products and on machines have been adopted.

In areas covered by the Old Approach directives , rulebooks on the quantitative analysis of textile fibres, on the composition and names of textiles, and on labelling of materials used in the main components of footwear have been adopted.

No progress can be reported in the area of procedural measures .

Conclusion

There has been some progress in this chapter, but it remains uneven. Some progress in alignment can be reported in the area of horizontal measures but most of the sectoral acquis on free movement of goods remains to be transposed and implemented. Alignment with the acquis in this area has been initiated but is still at an early stage.

Chapter 2: Freedom of movement for workers

There are no developments on access to the labour market . The employment service agency and its network of employment offices still lack the technical and human capacities required for participation in the European Employment Services (EURES). Preparations in this area are moderately advanced.

There has been some progress in the area of co-ordination of social security systems . The former Yugoslav Republic of Macedonia has signed further bilateral social security agreements with Romania, the Czech Republic and the Netherlands. Administrative capacity to implement Community rules on the co-ordination of social security systems remains insufficient. Further steps have to be taken in this respect. Preparations in this area are moderately advanced.

Conclusion

Limited progress has been achieved in this chapter. Alignment with Community rules is at early stage. Administrative capacity needs to be strengthened.

Chapter 3: Right of establishment and freedom to provide services

No progress has been made towards removing barriers to the right of establishment for EU natural and legal persons. The provision of certain services to foreigners may not be allowed or allowed only under conditions of reciprocity. The regulatory framework needs to be adapted so as to remove remaining legal barriers for EU natural and legal persons.

Concerning the freedom to provide cross border services no progress has been made towards removing barriers to the provision of cross-border services by EU natural and legal persons. The legislation does not make a distinction between foreign operators providing services on a temporary basis and those providing services through a permanent establishment. Such an establishment requirement is incompatible with the acquis . National legislation does not distinguish between permanent and temporary provision of services. In order to ensure compatibility with the acquis, the licensing/authorisation system needs to be assessed in detail as regards its aims, scope and practical application. All incompatible measures will have to be amended or repealed.

As regards the mutual recognition of professional qualifications , the legislation and approach followed by the former Yugoslav Republic of Macedonia (also concerning administrative structures for recognition of foreign qualifications) are currently based on academic recognition. Full implementation of EU law on professional recognition is foreseen for 2008.

No further approximation of the country's legislation to the acquis on postal services has taken place. The restructuring of the Public Enterprise for Postal Traffic Macedonian Post-office into a shareholding company in state ownership is underway. The statute of the new company was adopted and the Government appointed the members of the supervisory board. An independent national postal services regulatory authority has yet to be established and a policy based on the postal directives needs to be adopted.

Conclusion

There has been no progress in this chapter. Further efforts to align the legislation with the acquis and to effectively implement and enforce it are needed.

Chapter 4: Free movement of capital

In the field of capital movements and payments , progress is on schedule. The country fulfils all the commitments undertaken under stage I of the SAA and has undertaken to gradually liberalise its capital account. Nonetheless, alignment remains limited and will require considerable further efforts. Significant restrictions exist in particular on the acquisition of real estate by EU persons and companies as well as on short-tem capital movements. Portfolio investment remains only partially liberalised.

With regard to payment systems , some progress can be reported. A new Bankruptcy Law was passed in March which transposes the basic principles of the EC directive on settlement finality. In order to improve the rules for cross-border payment operations, three decisions of the central bank have been amended. Additional six are being revised to achieve harmonisation with EU legislation in this area. Nonetheless, a strategic document for the development of payment systems still has to be prepared. The national legislation is not yet fully in line with the acquis . Overall, in the area of capital movements and payment systems, preparations for alignment with the acquis are underway.

As concerns the fight against money laundering , limited progress has been made in the implementation of the National Strategy against Money Laundering and Funding Terrorism. Four memoranda of understanding were signed, three thereof with the financial intelligence departments of the USA, Luxembourg and Moldova and one with the national bank. However, the legislation does not yet fully comply with EU standards. The directorate for money laundering prevention is at the core of a nascent system for combating money laundering and financing of terrorism. It is not yet capable of ensuring adequate volume and quality of reports submitted to the investigating and prosecuting authorities. The directorate is not adequately staffed in terms of both quantity and quality. Improved quality would help improve co-operation with other bodies involved in prevention of money laundering. The division of labour with respect to financial crimes between the investigative authorities of the Ministry of Finance and the Ministry of the Interior remains unclear. Amendments to the Law on Financial Police remain to be enacted. Preparations in this area are moderately advanced, but further legislative alignment is necessary and the enforcement capacity needs to be strengthened, in particular by raising awareness among reporting institutions and by further establishing a credible enforcement record on the part of the relevant institutions.

Conclusion

Some progress has been made in the area of free movement of capital, in particular as regards payment systems As regards money-laundering, the legislative and institutional framework still needs to be reinforced. Overall, further efforts are needed to align the legislation with the acquis and to effectively implement and enforce it.

Chapter 5: Public procurement

Substantial progress has taken place regarding alignment in the area of public procurement. As regards general principles , the Law on Public Procurement was amended in December, providing for an online system accessible to the public via the internet. An implementing regulation for electronic public procurement was adopted by the Ministry of Finance in May.

Progress can be reported regarding the award of public contracts . The Public Procurement Bureau has made substantial efforts to increase the public sector’s awareness, including a web site which gives access to public procurement legislation, announcements of public procurement tenders, procedures and registers and findings of the second-instance Public Procurement Commission, a daily update of the register of public procurement and seminars on public procurement rules.

The Public Procurement Bureau cooperates actively with the Commission for Protection of Competition, the State Commission for the Fight against Corruption, and the State Audit Office. However, effective remedies still have to be put in place.

Conclusion

Significant progress can be reported in alignment with the acquis in the area of public procurement and in strengthening implementation capacity. The basis for developing an effective public procurement system has been established. However, effective remedies still have to be put in place. Considerable efforts are still needed to effectively implement and enforce the legislation.

Chapter 6: Company law

Significant progress in the area of company registration can be reported. Procedures have been simplified and time needed for company registration reduced significantly. The Law on the One-Stop Shop System and the Keeping of the Company Register and the Register of Other Legal Entities entered into force in October 2005. To facilitate its implementation, the Company Law was amended, along with 16 other laws. Manuals on the registration forms for entries in the company register and the register of other legal entities, and on the opening and closing of an account for the participants in payment transactions have been adopted to ensure the effective functioning of the one-stop shop ( see also Economic criteria ). In addition, the central registry tariff was amended. The possibility of electronic registration and data management of other registries still has to be addressed.

As regards administrative capacity , the administrative structure for the new system of company registration was set up and started to operate in January. The Central Registry was reinforced by seven regional company registration offices. The responsibilities of the courts (i.e. company registration and registration of other legal entities) and the State Statistical Office (i.e. issuing of registration numbers to the companies and other legal entities) were transferred to the Central Registry, which communicates electronically with the Internal Revenue Service and commercial banks.

Additional staff were recruited at the Central Registry for the purposes of the one-stop shop system. As a result of the new arrangements, registering a firm now takes an average of 6 days instead of 48 days. In less than six months of operation, the number of companies registered was equal to the total number registered in 2005.

In December, the Ministry of Finance amended the rulebooks on accounting standards for financial reporting, and those on the use of international accounting standards. However, it should be clarified whether the presentation of the accounts is required to be in line with the "Full International Financial Reporting Standards (IFRS)" and whether the standards are systematically updated following updates of IFRS. In addition, it is important to indicate that an extension of IFRS to all limited liability companies should not be used as a substitute for transposition of the acquis (4th and 7th company law directives). Furthermore, applying IFRS to SMEs could create undue complications, since those standards are not designed for small companies.

A strategy and action plan to enhance the quality of corporate financial reporting was published in April. It includes plans for a review of the Trade Company Law and related secondary legislation to achieve compliance with the Directives on Annual Accounts and on Consolidated Accounts and IAS regulation.

As regards auditing , international standards of audit were updated and published. A code of ethics determined by the International Federation of Accountants (IFAC) was adopted by the Ministry of Finance in October.

The Institute of Certified Auditors was established in May as a professional association. Its charter, establishing the rules, scope and independence of the audit profession, has yet to be approved. The Accounting Standards Committee was set up in May as a body of the Institute. It is not yet operational.

Efforts have been made to improve the supervision of audit. The Ministry of Finance established a Council for Promotion and Supervision of the Audit of the Professional Association of Auditors in December.

Conclusion

There has been notable progress in this area, in particular the introduction of the one-stop-shop system for company registration, as requested in the European Partnership. Standards for accounting and auditing have been amended. Further efforts will be needed to ensure the effective implementation and enforcement of these rules.

Chapter 7: Intellectual property law

Some progress has taken place concerning copyright and related rights. In accordance with the provisions of the new law, enacted in December, the Ministry of Culture has approved implementing legislation on the issuing of licences for new collecting associations. As regards administrative capacity, a sector for copyright and related rights was formed within the Ministry of Culture and is operational. The Government also appointed a president and members of the commission dealing with copyright and related rights. Following a public competition, two licences were issued for the new collecting associations which, in addition to the existing one – ZAMP, will assist the implementation of the law.

In the field of industrial property rights some progress has been recorded. The agreement on co-operation in the field of patents with the European Patent Organisation (EPO) has been extended and will be valid until accession to EPO. Further amendments to the Industrial Property Law were enacted in March. The State Market Inspectorate may now temporarily close a business; seize products, equipment, funds and documents used in violating industrial property rights and launch a misdemeanour procedure. These changes were introduced after the Constitution was amended in December to empower administrative organs to impose sanctions.

In an effort to enhance administrative capacity, a coordinating body for industrial property was formed. It brings together the institutions involved in protection of industrial property, with the aim of enhancing enforcement of industrial property law, strengthening the system for protection of industrial property rights, co-ordinating the activities of the various institutions, and raising public awareness of industrial property rights. Additional, although limited, recruitment has taken place in the State Office for Industrial Property, bringing the total to 25 employees, and in the sector for inspection supervision and control of the Ministry of Culture. The inspectors and prosecutors still lack the necessary equipment and expertise to detect and prosecute infringements.

Little progress has been made concerning enforcement and there are still no reliable statistics. An operation led by the state market inspectorate between February and June led to almost 400 charges being brought under the Laws on Copyright and Related Rights and on Trade, and eleven criminal charges under the Law on Copyright and Related Rights. The State Market Inspectorate has urged the public to report any illegal sale or renting of pirated materials and has provided a toll-free number for this purpose. There are no developments concerning the seizure and destruction of equipment used to make pirated goods. Enforcement is lagging behind the legal framework. Enforcement of intellectual property should be enhanced by the extension of the competence of 13 basic courts ( see also Chapter 23 – Judiciary and Fundamental Rights ). The necessary measures to guarantee no later than June 2006 a level of protection of intellectual, industrial and commercial property rights similar to that existing in the Community, including effective means of enforcing such rights, have not yet been taken. Therefore, the former Yugoslav Republic of Macedonia does not comply with the Stabilisation and Association Agreement.

Conclusion

There has been some progress regarding the alignment of the legislation with the acquis in this chapter, in particular in the area of industrial property rights. However, the former Yugoslav Republic of Macedonia must step up its efforts as regards enforcement, administrative structures and political will to crack down on piracy and counterfeiting, in order to comply with the Stabilisation and Association Agreement in this area. Preparations to align with the acquis are at an early stage.

Chapter 8: Competition Policy

Some progress can be reported in the area of antitrust . A new Law on Protection of Competition is in force since January. It is in line with the acquis and covers all sectors. Implementing legislation taking over the Community’s regulations on block exemptions, de minimis and mergers as well as other implementing legislation related to professional secrecy has been adopted. Previous problems related to the period for the prosecution of cartels have been resolved by extending the relevant time period from two to five years. Following the changes made to the Constitution, the Commission for Protection of Competition (CPC) could now be empowered to impose fines or other sanctions directly, without having to pass through the courts. However, this requires the adoption of specific legislation.

However, further amendments to the adopted legislation are still needed. The merger notification conditions need further alignment. Furthermore, the definition of professional secrecy should be revised, in order to avoid any problems related to its definition. Furthermore, there is an overlapping of competences between the public prosecution service and the CPC in cases of violations of competition rules. According to the new Law on Misdemeanours, a criminal procedure conducted for an infringement of competition rules leads to the suspension of the infringement procedure before the CPC. This leads to the de facto non-application of competition rules and should be clearly avoided.

As regards administrative capacity, the CPC’s lack of administrative staff and appropriate premises limits its capacity to properly fulfil its tasks and should be addressed. Out of the five members of the CPC, only two are full-time working members. Only six experts are employed at the commission.

The institutional capacity of the CPC needs to be urgently reinforced through support for education and training, as well as through the development of procedures and mechanisms for institutional communication between the CPC, sectoral regulators, government entities and consumer associations. In addition, investigation procedures need to be strengthened, clear guidelines and interpretations of competition law developed, and transparency and accountability promoted through information dissemination, public awareness campaigns and publication of cases solved and decisions made.

The enforcement record of the CPC is still unsatisfactory.

As regards state aid , the amendment of the Law on State Aid, by which competence for the monitoring and control of State aid was transferred from the State Aid Commission to the Commission for Protection of Competition, has been an important step forward to ensure an operationally independent state aid authority. In future, rules for horizontal aid measures will have to be adopted. Substantial work will have to be undertaken to ensure that the country’s industrial policies are made compatible with the State aid rules.

As regards administrative capacity, additional employees were recruited. Considerable efforts will be needed to strengthen the institutional capacity of the new state aid authority. Its staff need training. Transparent procedures for communication between the state aid authority, the industrial policy unit of the Ministry of Economy and other relevant government entities need to be established, procedures for handling cases and carrying out investigations need to be improved, a system to monitor and evaluate the current structure of state aid needs to be developed, and awareness-raising campaigns need to be organised and implemented.

There is still little awareness among government institutions and the general public, including the business sector, of the notification process and of the functioning of the state aid control system in general. It is necessary to foster state aid culture at all levels of government. The widespread and systematic non-payment of social security contributions and taxes by many industrial companies leads to unfair competition and impinges on the establishment of a level playing field for companies. Furthermore, the state aid authority will have to concentrate on the building up of a credible enforcement record. Preparation is lagging behind.

Conclusion

There was some progress in this area, mostly limited to the legal framework. However, further legislative alignment is needed. The former Yugoslav Republic of Macedonia needs to make considerable efforts to implement existing legislation much more effectively, in particular as regards the functioning of the Commission for Protection of Competition and its recently established competences on State aid.

Chapter 9: Financial Services

Concerning the banking sector and financial conglomerates, some progress has been made. The National Bank adopted a Supervisory Development Plan in January. This plan aims to enhance prudential supervision and to move gradually towards risk-oriented supervision. However, the country has made less effort to align its legislation with the acquis than in the previous year. It is necessary to continue to develop and strengthen banking supervision practice, including in the light of Basel II implementation and further amendment of the banking law in line with the acquis , especially with the Capital Requirements Directive. Preparations in the banking sector are advanced.

There has also been some progress as regards the insurance sector . The country continued its efforts to align its national legislation with the acquis . The Law on Compulsory Insurance in Traffic was adopted in October 2005. The implementing legislation regarding a new motor third party liability premium tariff structure was adopted in May. As far as pension insurance is concerned, the amendments to the Law on Mandatory Fully Funded Pension Insurance were enacted in December, by which certain areas related to the Agency for Supervision of Fully Funded Pension Insurance and the functions of the National Bank as a custodian of the pension funds were regulated in more detail. However, further amendments will be needed to meet the requirements of the 4th Motor Insurance Directive.

The insurance sector remains little-developed and is mostly focused on non-life insurance. Supervision of the insurance sector continues to be weak, and an independent body has not been set up. Nonetheless, the country has made an effort as regards the insurance sector and is well on track.

Some progress can be reported as regards the securities market and investment services . A new Law on Securities, which aims at transposing several EU directives in this area, came into force in November. The Law regulates investor compensation schemes, admissions of securities to an official stock exchange listing, information to be published on those securities, the prospectus and on markets in financial instruments. The administrative capacity of the Securities and Exchange Commission has also been strengthened. In order to promote inter-institutional cooperation a bilateral Memorandum has been signed between the Securities and Exchange Commission and the Agency for Supervision of Fully Funded Pension Insurance in January 2006. Preparations in this area are well on track.

Conclusion

There has been progress in the area of financial services, as the country has continued its efforts to align its national legislation with EU standards in the various sectors. Nonetheless, some deficiencies remain, in particular as regards the standard of supervision in the banking and the insurance sectors.

Chapter 10: Information society and media

Some progress has been made in parts of the area of electronic communications and information technologies . A substantial amount of secondary legislation was adopted to implement the Law on Electronic Communications. It enabled the regulatory authority to approve the first reference interconnection offer in January, and the reference unbundling offer in April, of the significant market power operator in the fixed voice telephone networks and services market. This has proved insufficient to ensure a level playing field to alternative operators and competition has remained symbolic up to now

The former Yugoslav Republic of Macedonia is still in breach of its obligations under the Stabilisation and Association Agreement in this field. Several important issues remain to be addressed to fulfil the starting conditions for market liberalisation, such as retail tariff regulation, cost accounting and accounting separation, number portability and regulation of leased lines provision. The Government is also running late in negotiating the revision of the concession agreements, in particular with the incumbent operator, and with the two mobile operators. The regulatory authority still needs to improve its organisation and capacity, including the allocation of adequate human resources, in order to be able to properly undertake its regulatory functions. Preparations in this area are lagging behind.

In the field of information society services , considerable efforts have been made to implement the national strategy for information society development by strengthening the administrative capacity of a number of bodies and by improving provision of public services to citizens and businesses through information and communication technologies. Significant progress was made in the field of e-government. However, legislation concerning electronic commerce and conditional access services remains to be adopted. Preparations are moderately advanced in this area.

The main piece of legislation in the audiovisual sector is the new Law on Broadcasting which entered into force in November 2005. The Law is largely in line with European standards on the media and the audiovisual acquis, including the Television Without Frontiers Directive. Other positive developments include the adoption of the law on public access to information of public character and the elimination of custodial sentencing for defamation. Rigorous implementation of the new Law on Broadcasting is needed to secure the funding of the regulatory body (Council of Electronic Media) and of the public service broadcaster, to de-politicise the procedure for selecting the members of the regulatory body, to establish the legal procedure that will ensure the political independence of the public broadcasting system and to introduce a more competitive licensing system which will diminish any political. The regulatory body adopted a code of ethics in June. However, a national broadcasting strategy remains to be adopted. Preparations in this area are at a reasonable level.

Conclusion

There has been notable, but uneven progress with respect to information society and media. Several important outstanding issues remain to be addressed in order to end the breach of the Stabilisation and Association Agreement, and to secure harmonisation of concession agreements with the provisions of the primary law. Preparations to align with the acquis are moderately advanced in this area. In the audiovisual sector, considerable efforts are needed to ensure the independence (especially financial) of the public broadcaster as well as to strengthen the media regulatory body.

Chapter 11: Agriculture

Regarding horizontal issues , pending the foreseen adoption of a General Law on Agriculture and Rural Development, there is still no general act covering the agriculture sector. No major progress has been made with respect to the paying agency , the Integrated Administration and Control System (IACS) and the Land Parcel Identification System (LPIS). The registration of agricultural land in the real estate cadastre is still being discussed by the Ministry of Agriculture and the State Geodetic Authority, including the creation of a database that can be used for the agriculture information system and the integrated administration and control system.

The Law on the Agricultura