MACEDONIAN FINANCIAL SECTOR OVERVIEW

taxes.

An important step toward rationalizing the tax system is the replacement of the sales taxes with VAT (Value Added Tax). The Law on VAT was enacted in 1999 and became effective on April 1, 2000.

Profit Tax Allowances for Foreign Investments

For joint ventures, the Profit Tax Law provides for a tax reduction at the proportionate level of profits, which belong to a foreign person for the first three years of operation. In order to receive this tax advantage, the foreign ownership in the company must be at least 20%. The law also provides for tax reductions for foreign persons performing registered activities that are non-residents of the Republic of Macedonia for the first three years of operation. Total tax reduction for the three years must not exceed the initially invested amount and the investor must continue to operate at least three additional years, otherwise, the investor is obligated to pay the tax liability.

Custom Duties

Custom rates are addressed in the Law on Custom Tariffs and have been in force since August 1996. Custom duties are levied on imported goods.

The rates vary from 0 to 35% for a majority of goods and up to 60% for some agricultural goods. Imports of crude oil and essential items are subject to rates of less than 5%, around 5% on raw materials and equipment, 10% on oil derivatives and about 12% to 15% on other products. Rates on luxury goods are higher. The simple average tariff rate declined from 28% to 15.04%

in 1997. The detailed schedule of custom rates can be found in the Tariff Book. Under certain conditions, the import of raw materials, reproduction materials, fuel and other auxiliary materials for production of goods for export is treated as a temporary import and are not subject to custom duties.

The temporary import and export of goods is a separate segment of the foreign trade operations and is regulated by the Law for Foreign Trade and Law on Custom Duties.

Accounting

All enterprises in Macedonia must keep financial records in accordance with the Accountancy Law and Financial Operations Law. Furthermore, the internal accounting standards of the company must also be included. Not all of these internal standards comply with international standards for accounting and auditing. International Accounting Standards (IAS) have been officially accepted in Macedonia since 1997, but the implementation is going very slowly. Most enterprises in Macedonia are making an effort to keep their books according to generally accepted accounting principles and procedures. Consequently, care should be taken in reviewing and comparing financial statements.

Auditing

The Audit Law was passed in December 1997. An audit may be performed by a domestic or foreign legal entity registered to provide such services in the Republic of Macedonia in accordance with the Audit Law and Law for

Trading Companies.

At the present time there are 11 registered auditing companies. Five large worldwide accounting companies have branch offices in Macedonia: Price Waterhouse-Coopers, Deloitte and Touche, Arthur Andersen, KPMG and Ernst & Young.

Joint stock companies, holding companies, stock market quoted companies, as well as, the limited liability companies (that are meeting the criteria) are required to audit their accounts.

The entire financial sector has undergone considerable change since the country issued the first independent currency in April 1992. Incorporation into the Federal Republic of Yugoslavia left Macedonia with a highly unbalanced banking sector. One bank had a market share of almost 65 percent of bank assets and a disproportionate share of bank branches and key business.

The Banks and Savings Houses Act of May 1993 established new rules for establishing banks including base capital requirements of USD 1.5 million for setting up a domestic bank and USD 4.5 million for setting up a bank authorized for external transactions. These amounts were increased with the April 1996 amendment to the Act to USD 3.5 million and USD 11 million respectively. The amendment is to be implemented by the end of 2001.

In 1996, the Deposit Insurance Fund was established and all banks and savings houses were required to be shareholders.

Currently there are 22 commercial banks, suggesting the country has a surplus of banks. Some consolidation has already begun, with Kreditna Banka-Bitola merging with Export-Import Banka. A Greek Credit Bank has purchased Kreditna Banka. However, these five banks: Komercijalna Banka- Skopje, Stopanska Banka-Skopje, Makedonska Banka-Skopje, Stopanska Banka-Bitola, Tutunska Banka, and Stopanska Banka in particular, continue to dominate the sector.

The largest commercial bank, with about 30 percent of total business and 38 percent of total assets is Stopanska Banka. Komercijalna Banka, Makedonska Banka (formerly Ljubljanska Banka), Stopanska Banka-Bitola and Tutunska Banka are the other four large banks. All have branches in some of the regional cities and towns. Komercijalna Banka was a part of Stopanska Banka until 1990, when it was privatized.

Following years of restructuring, the government recently privatized the remaining shares in Stopanska Banka (some 85%). The Hellenic Bank from Greece purchased 65%, 10% was purchased by EBRD and 10% by IFC for a total of 87 million USD. The National Bank expects the deal to bring new stability to the banking system, as well as Western expertise and business practices. A money market began operations in November 1997 and trades primarily in treasury bills.

Banking Sector

The Macedonian Stock Exchange (MSE) was founded in late 1995 as the first organized bourse in the history of the Republic, which trades stocks and bonds. The trade volume continues to be low, but several large transactions such as the acquisition of Balkan Steel for 20 million USD, were made on the Stock Exchange. The MSE has 17 members, of which 13 are banks, two are savings houses and two are insurance companies.

There are three markets on the MSE: the first lists blue-chip companies with a market capitalization of at least USD 8 million, the second lists companies that have at least a USD 550,000 market capitalization, while the third operates, in effect, as an OTC (over-the-counter) market.

There are five insurance companies with total assets, which amount up to 3 percent of GDP. The largest of the lot holds 80% of the total assets of the insurance sector.

Multilateral and Other Sources of Financing

Macedonia has received multilateral funding from several sources, most notably the International Monetary Fund (IMF), the World Bank and the European Bank for Reconstruction and Development (EBRD). The financial arrangements with these institutions are designed for stabilization of the economy and building the basis for attracting foreign direct investments.

The first equity investment fund has begun to operate in Macedonia.

International Monetary Fund (IMF)

The country has enjoyed excellent relations with the IMF since paying its arrears with the IMF in 1994. Early in 2000, the Government opted for an Enhanced Financial Facility (EEF) Loan for 80 million USD to support the economic program from 2000-2002. This is a continuation of the previously implemented Enhanced Adjustment Facility (ESAF).

With IMF support, the Government is planning to introduce a private pension system and to eventually increase the retirement age.

The World Bank

The country joined the World Bank and the International Development Association (IDA) in February 1993. The World Bank has been working with the Macedonian Government to assist the production sector development, support stabilization and structural reform with analytical input and adjustment lending with the aim to strengthen the social safety net through investment lending and technical assistance.

Since Macedonia joined the World Bank and IDA, commitments total approximately USD 500 million for 17 projects.

The International Finance Corporation (IFC), a member of the World Bank Group, has been very supportive in the transitional process of the economy in Macedonia and in building a quality business climate for foreign investments. The IFC launched an extensive program (IFC’s Reach) to foster private investments and promote private sector development in a total of 16 countries. In early 2001 IFC established a regional SME promotion program (SEED) worth ca. USD 32 million of which Macedonia is one of the beneficiary states.

Non-bank Financial Institutions

European Union - PHARE

In March 1996, the country became a full member of the PHARE program.

The Cooperation Agreement with the EU was signed in July 1997, while implementation started in January 1998. Funds are allocated to support the enterprise and financial sectors, public investment and infrastructure, agriculture and natural resources, social sectors and human resources, and reform sustainability.

European Bank for Reconstruction and Development - EBRD As of November 1999, the European Bank for Reconstruction and Development has approved 11 projects totaling 200 million USD. Of these, six are in the public sector and five are in the private sector. Among the private sector projects, a total of 65 million USD has been loaned to the private banking sector.

The EBRD strategy focuses on new projects, which will have a high impact on private sector development. The Bank is also making loans and direct investments in private projects in the industrial and agribusiness sectors and will actively support foreign direct investments.

The EBRD is proceeding with specific infrastructure projects, mostly those that have a direct impact on the facilitation of private sector development and on the regional integration of the country.

Investment Funds

Financial intermediaries like investment funds and private pension funds previously did not exist in the country. There was a state pension fund and several insurance companies.

An investment fund called Small Enterprise Assistance Fund (SEAF) has begun to operate and already 5 equity investments have been concluded.

SEAF provides financial support using equity funding from the United States Agency for International Development (USAID), European Bank for Reconstruction and Development (EBRD), IFC and the German Investment Fund (DEG).

Bilateral Funding

There is a large network of countries assisting Macedonia in attracting foreign investments. A program of loans, equity investments and direct financial aid is in place. Among the most active supporters are the USA, the Netherlands, Canada, Denmark, Italy, Japan, Norway, Germany, United Kingdom, Austria and Switzerland. Several of these countries, most notably the USA, have provided technical support for the transformation of the enterprises in order to achieve economic restructuring and sustainable growth.

2.2. INVESTMENT CLIMATE AND