Crisis of Global Proportions
8th February 2021, Skopje – Previous year undoubtedly posed the biggest challenge the world has faced in the last decade. Health crisis has spread throughout the globe in just two months and, by disrupting the global supply chain and the containment health measures, the health crisis turned into economic, even humanitarian crisis.
Immediately, the most heavily affected were the activities in the tourism sector. For instance, if we take the countries in the region, the highest GDP decline of -14.9% and -8.8% was observed in Montenegro and Croatia respectively in the first three quarters in 2020, plummeting by -20.3% and -15.4% respectively in the second quarter, i.e. from the beginning of the containment health measures. In the first three quarters in 2020, decline of -5.9% was observed in the Republic of North Macedonia, placing it in the middle compared to the Western Balkans countries according to the economic performance or slightly better than the average decline of GDP in EU-27, which accounted for -6.9%.
Disruption of the global supply chain adversely reflected on the foreign trade, industrial production, trade, …. Most of the countries in the region experienced negative result in the industry in the first quarter of 2020 already, while all of them registered a sharp decline of the industrial production in the second quarter.
As regards the other economic foundations, impact of the crisis depended on the structure of the economy and the state of the economy prior to crisis escalation. Thus, for instance, unemployment rate at most of the countries increased in the course of 2020, varying from quarter to quarter as per the state’s interventions through the anti-crisis measures. In our country, unemployment in the first quarter of 2020 dropped, followed by a slight increase in the second quarter, amortized in the third quarter already when unemployment rate declined again. This was a result, above all, of the undertaken anti-crisis measures aimed at keeping the jobs through employees’ wage subsidizing and social contributions subsidizing, as well as various financial incentives offered to the companies so as to preserve their operations in times of crisis.
Response to COVID-19 through Economic and Social Measures
Measures the economies undertook last year were similar and aimed at protecting the economic branches most exposed to the blow of the crisis, injecting liquidity in the economy, protecting the jobs, stimulating both public and private consumption – all to the end of boosting the economic activity. Mainly, measures gravitated towards awarding grant funds and subsidies to tourism, transport and food and accommodation services, favourable loans and interest-free credits for SMEs and companies showing visible impact from the crisis on their operations’ results, keeping the employees through financial support for wage payment, financial support for those having lost their jobs, financial support for the vulnerable groups, stimulating the implementation of public investments, growth of public consumption and various incentives for boosting the private consumption.
Anti-crisis packages varied from country to country depending on the available fiscal space in the economies. For the purpose of getting a clearer picture, according to IMF data, fiscal stimulus in the countries in the region ranged from 2.4% of GDP in Bulgaria, 2.8% in Albania, 3% in Bosnia and Herzegovina, 3.7% in Montenegro, 4.1% in Kosovo, 7% in Croatia, to around 10% with the four sets of measures in Republic of North Macedonia, 11.3% in Serbia, with Slovenia and Greece having allocated the most, around 14% of GDP. Total fiscal stimulus includes not only the direct budget costs, but also the tax relief and exemptions, available guarantees, etc.
Sovereign debt of Slovenia and Greece has significantly increased since the beginning of the crisis by 13 p.p. and by 19.4 p.p. respectively, with sovereign debt of Slovenia accounting for 78.5% of GDP and the one of Greece accounting for 199.9% of GDP at the end of the third quarter. As regards the other countries in the region, it ranged from 90.8% in Montenegro, 56.8% in Serbia, 51% in Republic of North Macedonia, to 38.9% in Bosnia and Herzegovina and 22.1% in Kosovo, according to Eurostat data. According to these data, it can be seen that our country has balanced well the stimulus packages and keeping the debt at a certain level which, in the medium term, will stabilize and will not pose any threat or be an obstacle to further economic development and macroeconomic stability.
Beginning of Economic Revival
If the main task for the policy makers last year was to save and maintain liquidity and solvency of the economy, with as less consequences from the crisis shocks as possible, this year’s task is somewhat more complex. Policies and measures being undertaken and to be undertaken this year will not be aimed at survival, but rather at recovery of the economy.
In its World Economic Outlook, January 2021, International Monetary Fund indicates that the crisis will start fading in the first half of 2021, with the growth potential strengthening in the second half, especially with increased availability of vaccines and therapies and easing of the containment measures. As stated, “With growing vaccine availability, improved therapies, testing, and tracing, local transmission of the virus is expected to be brought to low levels everywhere by the end of 2022, with some regions and countries getting to low local transmission sooner than others”. As per IMF expectations on global economy, in January 2021, the forecast is revised up by 0.9 percentage points, i.e. global GDP is projected to grow by 5.5% in 2021.
Process of improvement of the developments has started in our country as well. Thanks to the undertaken sets of anti-crisis measures, GDP decline in Q3 2020 was mitigated, being almost five times lower. In addition, following the high decline of gross investments of more than 30% in the second quarter, 4.2% growth was registered in the third quarter, as a result of investments in construction works, as well as machinery and equipment. Decline of consumption was also mitigated, mainly as a result of the public consumption which registered high 13.5% increase. According to the high-frequency (monthly) data, further improvement of the developments was observed in the fourth quarter from the point of view of both foreign trade and industry and utilization of capacities.
With the start of the immunization process in Europe, the countries in the region and in our country, economies will start opening even more, and the economic activity will thus grow. The task for the policy makers in this case will be to use the recovery process as much as possible so as to achieve better economic results.
Road to Economic Recovery and Growth
Road to economic recovery necessities shift from general support policies to targeted support policies. With the improvement of the epidemiological picture and the economic recovery, IMF and World Bank recommend for the direct support to be replaced with productive public investments to boost the economic growth in the long run.
To that end, economic agents proven to be of vital importance, as well as economic agents that can continue generating value added and contribute to the economic growth, should be supported and encouraged to deliver better results. Fifth set of anti-crisis measures is intended to boost business performance, support export activity, support the access to capital for the companies, enhance investment activity, boost competitiveness, investments in human capital, digitalization and investments in innovations and development, i.e. to provide support to revival and development. The new measures envisage grants for achieved positive economic results, financial support to export, further improvement of access to loans and liquidity through Funds – series of measures which will support the development component and generate growth.
In the period to come, we will focus on three main goals – preserving the health of the citizens, social safety and support to both the economy and the business sector. Hence, the fiscal policy is aimed at this areas. More than EUR 640 million are allocated in the Budget for the health sector (more funds were allocated only in the 2020 crisis), around EUR 1.5 billion for social support and more than EUR 1.4 billion for support to economic development.
2021 can be our “year for a standing start”, i.e. year in which we will start a long-distance race, a race for higher and sustainable growth, which will contribute to better standard for the citizens and better living conditions in the country in the medium term. Setting the right strategy is of crucial importance for the success of the race. It is important to have a clear picture of the goal (finish line), to be aware that this is not a race of this generation alone and to direct all our efforts and capacities to as better result as possible.
SMART Finance is a concept to yield results in this case. What is needed is to create a comprehensive strategy and implementation plan, to vigilantly monitor the results and measure their impact, to undertake certain corrective actions, if needed, in the course of implementation. New times call for new way of thinking and acting. With each new crisis, we learn the systemic errors and act towards creating a better system that will respond to the new contemporary requirements. Practice without theory is certainly like boarding a ship without compass. Policy makers become ever more pragmatic and innovative, combining the traditional policies from the Neo-Keynesian or neoclassical economics with new knowledge of behavioral economic theory, neo-institutional theory, business cycles theory, etc. They strive for meeting the rational expectations of the citizens and, when possible, to overperform with additional positive achievements.
We have to be cautious – to vigilantly monitor, we have to be efficient – to react swiftly and finally, we have to act strategically – have focus in the long run.
No one says it is going to be simple, easy and with no obstacles … however, they say “a journey of a thousand miles begins with a single step” … and it is on us alone how fast we attain the goal – “reach the finish line”. I believe that, all together, with a clear goal, idea and commitment, we can get there very quickly!