GENERAL OVERVIEW OF THE MACEDONIAN SME SECTOR

OVERVIEW OF THE SME FINANCE

and the political establishment in general, for the need of a continuous improvement of the existing institutional infrastructure. Consequently, SME sector development support has been on the increase since 1998.

Meanwhile, an array of foreign donor entities committed some DEM 200 million, over the past two years only, for SME development and promotion (first ever foreign financial support for the sector): from soft loans to various forms of technical assistance (TA).

Still, a number of limiting factors to SME development persist and will have to be addressed accordingly. The lack of an efficient and durable network of information collection and distribution, relevant to SME sector, is cited as one of the leading constraints to private entrepreneurship and SME development in general (see Annex I - Most Important constraints to SME Development).

1) The overall legal, monetary, fiscal and administrative environment is not fully adjusted to the growing needs conducive to private sector development and particularly not with regard to enhanced SME promotion.

2) There are no decisive policies for SME promotion; consequently there are no incentives, exemptions, etc.

3) The only existing definition or classification of enterprises in the Republic of Macedonia is based on Article 4 of the Accounting Law. This classification refers to the number of employees, annual income and average value of assets. Handicraft activities are per definition specific trades and can have up to 10 employees, including family members. In addition there exists the status of self-employment.

4) The mandate and role of different government bodies (ministries, branch offices, agencies and municipalities) at various levels - national, regional, municipal - are not clear.

5) Procedures for registering an enterprise are still rather cumbersome and there is no bankruptcy and foreclosure legislation. The Government of Macedonia (GoM) is currently planning to introduce a one-stop-shop where all necessary documents can be obtained in order to facilitate registration.

6) Regulations concerning taxation and accounting are complicated and apply to all companies regardless of their size and/or turnover. However, the fiscal system reform drive is gaining momentum: (i) corporate income tax is introduced (ii) personal income tax has been reduced to 18% and 15%

respectively and (iii) the retail sales tax was replaced by a uniform 19%VAT (effective April 1, 2000).

7) Basically, the same laws apply to both foreign investors and domestic enterprises.

8) The legislation concerning real estate (land property law) is still incomplete.

A land reform and establishment of codification scheme are envisaged in addition to the Denationalization Act (already past in Parliament)

9) Inflation is low and the Macedonian denar (a local currency unit, pegged to the German mark) is rather stable as result of stringent monetary policy mechanisms.

National Policy

10) Organizations of civil society are scarce and not sufficiently developed.

As a result, there is very little entrepreneurial participation in policy dialogue or decision-making.

1) Lack of access to credits, banking and financial services are considered one of the major constraints of the SME and handicraft sectors. The existing banking and financial system does not really cater adequately (yet) for the needs of the SMEs. Therefore a profound reform of the banking and financial sector is strongly required.

2) Despite the existence of private banks, the banking sector is still state- governed. All local inter-bank payments, including payments within the National Bank, and all commercial financial transactions are settled through the Central Payments Operation Service.

3) Banks offer limited range of services, have rarely regional branches and do not offer specialized services to small enterprises.

4) There is an increase in foreign funding for SME development, but access to information is still difficult and procedures for obtaining credits are not always transparent.

1) The general institutional infrastructure for SME promotion is in its early stage of development. There are but a few independent organizations for business promotion such as economic chambers, industry associations and business clubs. An additional constraint is the lack of tradition in policy dialogue among major stakeholders.

2) The Macedonian Chamber of Economy is a reminiscence of the past era. It seems to represent the interest of the large companies only, although membership is compulsory for all registered companies.

3) With the exception of the City of Skopje Regional Chamber, the rest of the (most exist on paper only) regional chambers in the country are hardly operational.

4) The few existing Associations of Handicrafts are organized at either national or regional levels, but in practice have limited impact on promoting policy dialogue

5) The collapse of the former system and the restructuring or liquidation of the leading domestic international trading companies resulted in disruption of the traditional distribution channels. Hence, the performance of most import and export oriented SMEs was severely affected.

6) The system of vocational education and training is still inadequate. In addition to the lack of training in diverse technical skills, there is a growing demand for specialized training in marketing, management, IT, accounting and finance.

Financial Services

The Institutional Setting

for SME

Development

1.2. MACEDONIAN SMALL BUSINESS ENVIRONMENT HIGHLIGHTS

The current political environment in the region, despite the satisfactory political climate in Macedonia, is still a limiting factor to increased (direct) foreign participation in SME development.

Financial services are still undeveloped, while domestic banks fail to adequately respond to the increasing needs for financial assistance and advice of private entrepreneurs and the SME sector in general.

There is little transparency and limited access yet to both domestic and foreign funding intended for SME development.

Despite the establishment of a network of SME assistance facilities, a long- term strategy with a comprehensive and decisive support is needed to fostering the Sector’s development.

Access to business related information (particularly with regard to financial issues) is still limited while the existing legislature pertaining to SME sector will have to be upgraded.

A number of specialized institutions for the promotion of SMEs have been established since 1998 with the assistance of foreign donors or are in the making. The ultimate objective is the setting up of a network of Regional Enterprise Support Centers (RESC), which will be placed under the auspices of the PHARE funded National Enterprise Promotion Agency (NEPA), perceived as the umbrella organization for SME Development Promotion.

Despite a universe of available printed and electronic media, the dissemination of SME related information is still very limited. The preferred communication of most SME promotion and development institutions and assistance facilities is by mail rather than by open communication. Printed or electronic media are used, to a certain extent, for communication with the general public. In contrast, contact with target audiences is predominantly maintained by mail, fax or phone. Although Macedonia has at least three major INTERNET providers, this communication instrument is still not in wide use by both SME assistance facilities and private entrepreneurs alike.

There is practically no tradition in private – public dialogue, networking or regular exchange of information among groups or individuals working within the SME sector. However, several informal groups of senior independent business consultants specializing in SME sector development meet on a regular basis and currently act as an interface between the client base and the relevant institutions involved in SME promotion, assistance and development.

Financial Services Credit Policy

General Institutional Support

Special Institutions for the Promotion of SMEs

Communication Instruments

SMEs Forums Political

Environment