27th February 2021, Skopje – In line with the baseline scenario, 4.1% economic growth is expected this year. However, there are still risks ahead. They are mostly related to the health crisis, i.e. the protracted COVID-19 pandemic. This would result in having containment measures in place, repercussions on global supply chains and external demand, deteriorated expectations of businesses and households, reduced inflow of both investments and foreign pecuniary remittances. Amid occurrence of the risks related to the international environment, i.e. reducing the external demand growth by half, recovery of the national economy will be significantly slowed down, however, this year would end with a positive economic growth rate.
Mr. Besimi, domestic economy is still struggling with concerns over the uncertainty caused by the pandemic. Slow dynamics of the immunization process still does not leave room to talk about economic growth, and this year, the focus would be rather placed on anti-crisis measures such as protecting the jobs and helping the companies. What are your expectations, how long will the protracted economic recovery take?
– We should look at things realistically. The macroeconomic baseline scenario of the Ministry of Finance is a realistic scenario. According to this scenario, by starting the immunization process, investors and consumers’ confidence is expected to increase, which will result in a recovery as regards investments and private consumption. Recovery of our trading partners will undoubtedly lead to increase in the external demand as well. As the time goes by, the health crisis is expected to fade, to be also accompanied by gradual improvement of the epidemiological picture, improved utilization of production and services capacities and favorable effects from the economic measures. In line with the baseline scenario, 4.1% economic growth is expected this year.
However, there are still risks ahead. They are mostly related to health crisis, i.e. the prolonged COVID-19 pandemic. This would result in having containment measures in place, repercussions on global supply chains and external demand, deteriorated expectations of businesses and households, reduced inflow of both investments and foreign pecuniary remittances. Amid occurrence of the risks related to the international environment, i.e. reducing the external demand growth by half, recovery of the national economy will be significantly slowed down, however, this year would end with a positive economic growth rate.
Another signification factor is NATO membership, which may have strong impact on investment activity, being coupled by the implementation of structural reforms.
The fifth set of measures, in addition to the support for the business sector and the citizens, includes a development component, i.e. these measures are designed for the purpose of encouraging the revitalization and the economic growth. Under the previous sets, measures were aimed at increasing the companies’ liquidity and keeping the jobs, whereby the measures under the fifth set also provide for boosting the investment activity.
Is this year’s projected 4.1% economic growth rate achievable given that COVID-19 crisis will undoubtedly last until the first quarter at least?
– Ministry of Finance’ projected 4.1% economic growth is based upon assumptions that the effects of the health crisis will start to weaken in the first quarter, and accordingly investors’ confidence will begin to restore and the excessive precaution of consumers will start to reduce. Projections are in line with the projections of the other international financial institutions, ranging between 5.5% as projected by the IFM and 3.6% as expected by the World Bank.
According to the latest International Monetary Fund’ World Economic Outlook as of January 2021, 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 easing of the stringent social distancing measures. With growing vaccine availability, improved therapies and increased testing, local transmission of the virus is expected to be brought to low levels.
In addition, tendency of gradually restoring pre-crisis level of raw material prices on global stock markets speaks in favor of a boosted economy. Thus, trends of oil price, as well as prices of base metals, i.e. primary commodities reflects boosted industry worldwide, thus surely having positive effects on the domestic export as well. On the other hand, reduced price of gold on global stock markets reflects improved expectations of the economic entities about the global economy.
Process of improving the developments in the domestic economy begun last year. Gross investments in the third quarter of 2020 picked up by 4.2%, following the high decline of more than 30% in the second quarter of 2020, being a result of the growth 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 of 2020 from the point of view of foreign trade, as well as industry and utilization of capacities. Positive developments also continued in the first month this year, while the so-far undertaken anti-crisis measures under the four sets had also positively contributed thereto.
Last week, North Macedonia’s credit rating was again affirmed by the Credit Rating Agency “Standard & Poor’s”, being of particular significance in times of global economic crisis, particularly in the eyes of investors. This Credit Rating Agency expects for Macedonian economy to get back on the track of growth this year and overcome the shocks from caused by COVID-19 pandemic. Their forecasts are that the recovery of automotive industry, having strong effects on our export, as well as the growth of domestic consumption, will be driving forces of growth.
Government adopted the fifth set of anti-crisis measures. What makes it different from the so-far government measures and how will this set of measures help the economy?
– Fifth set of measures is aimed at catalyzing the revitalization process. It is focused on several goals: (1) providing direct financial support to companies so as to keep the jobs, (2) financial support for boosting the liquidity of the private sector, (3) supporting the purchasing power of vulnerable categories and (4) creating more favorable business environment.
Fifth set includes total of 29 measures, amounting to Denar 9.7 billion or around EUR 160 million, EUR 91.7 million out of which are budget funds.
Main measures under this set include a development component. Thus, the measure related to financial support for wage payment for the months of February and March 2021 stipulate a financial support in the form of subsidy for the companies, which will make investments. The same applies to the measure for interest-free credit lines – companies, which will make investments or create jobs, will be provided with grants.
This set of measures also includes a series of other measures aimed at boosting liquidity of the economy, enhancing competitiveness and encouraging investments. What has been also envisaged is a direct financial support for several sectors, additional funds for the state loan guarantee, increase of the fund for support for export-oriented companies, abolition of customs duties on certain raw materials, etc.
What is the so-far performance of the previous anti-crisis measures? What is the amount paid by the state as support to companies and citizens under the projected 10% of GDP and what are the effects therefrom?
– In the course of 2020, four sets of measures were adopted, being aimed at protecting the jobs and the vulnerable categories in the country, boosting the liquidity of the economy, as well as supporting the domestic economic activity. Measures mostly gravitated towards awarding grant funds and subsidies to tourism, transport and food and accommodation services, favorable 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.
Projected amount of all four sets is around EUR 1 billion or around 10% of GDP, whereby the first three sets are estimated at EUR 550 million, while the third set amounts to EUR 470 million. Each country undertook measures in line with the available fiscal space. 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, around 10% in our country, 11.3% in Serbia, to around 14% of GDP in Slovenia and Greece. Sovereign debt of Slovenia and Greece has significantly increased since the beginning of the crisis by 13 p.p., i.e. 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 the data of the Statistical Office of the EU “Eurostat”. 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.
In addition to the measures undertaken by fiscal authorities, actions taken by monetary authorities also contributed to mitigating the effects of the COVID-19 crisis. Reduction or preserving reference interest rate at low level and additional measures through other instruments of monetary policy, contributed to maintaining liquidity in economies. Thus for instance, European Central Bank pursued accommodative monetary policy aimed at supporting the economy, by leaving negative interest rates in place all the time. This affected the other interest rates, for example, EURIBOR remained negative throughout the crisis period, thus making the financing costs favorable. Such setup of monetary policy led to increased money supply on the financial markets, contributing to reducing the interest rates and the borrowing costs of the countries required for financing the economic measures. At the same time, low inflation provided for the monetary policy to be more active in combating the effects of the pandemic.
As of last year inclusive, under the P1 Program – Measures for Coping with COVID-19 Crisis for the Government, EUR 292 million or over 95% of the budgeted funds were paid on the basis of financial support for wage payment, financial support for vulnerable categories, measures aimed at supporting the companies, financial support for citizens having lost their jobs due to the crisis, etc. More than EUR 85 million on the basis of interest-free and cheap loans, has been approved through the Development Bank. It must be taken into account that total fiscal stimulus covers not only the direct budget costs, but also the tax relief and exemptions, available guarantees, etc. Thus for instance, the funds planned for the state loan guarantee have been multiplied by six times, i.e. the amount of guaranteed loans for the companies will be by six times higher.
As for the effects from the four sets of measures, the respective support intended for the citizens and the companies resulted in mitigating the adverse consequences of the pandemic on the household income and consumption, as well as the activity of the business entities. Hence, it is estimated that implementation of these measures has contributed to mitigating the drop of economic activity, i.e. without these measures, drop of economic activity would be higher by around 2 percentage points in 2020.
Unemployment rate, following the increase in the second quarter, registered certain decline in the third quarter, hence the average unemployment rate in the first nine months was 16.5%, being 1 percentage point decline compared to the same period in the previous year. This is undisputable evidence that many jobs were kept after all.
Average gross and net wage kept to increase continuously throughout the year. Annual growth rate of net wage in November 2020 accounted for 7%, being by around Denar 1,800 higher compared to the average net wage paid in the same month in 2019. Continued increase of the average wage despite the crisis, was also a result of the measures the Government undertook, pertaining to the financial support for wage payment and the contribution subsidizing.
What has been the budget revenue collection dynamics since the beginning of the year, how much do the revenues deviate from the projections given the protracted crisis?
– At the beginning of the year, collection of tax revenues was somewhat lower by 3% compared to January 2020, however, on the other hand, it should be taken into account that the comparative base dates back before the crisis started, when high annual growth of 7.3% was achieved.
Collection of taxes and contributions as of the end of last year inclusive, i.e. 19th February is by around 2% higher than the same month last year, however, the end of the month would give the full picture of the respective collection.
As regards the expenditures, all liabilities of the state have been settled on regular basis and in a timely manner. In addition to the regular liabilities, the measures under the fourth set will also be paid, being extended this year.
Last year, the crisis was felt in our country, as well as all around the globe. All global economies recorded income decline, while on the other hand, due to the needs of the healthcare sector, as well as the anti-crisis social and economic measures, the expenditures kept rising. The most critical months in our country were April and May 2020, when the most stringent healthcare measures were applied, such as the quarantine periods, which lasted for several days. It is then when the tax revenue collection declined by more than 20% compared to the same months in the previous year. Improvement was recorded during the summer months, except for August, being also noted in the last quarter of 2020, whereby revenues increased in December when compared to the same month last year. Crisis effects are still being felt, however, improvements and tendency towards revitalizing the economy, have been recorded. We are closely monitoring the developments on a daily basis.
Do you expect for the budget to be executed as planned without the need for a Supplementary Budget throughout the year, with particular focus on the realization of capital investments as a significant stimulus of the economic activity?
– Even when we presented the 2021 Budget, it was pointed out that during 2021, Supplementary Budget will be adopted in line with the actual developments. Supplementary Budget is not uncommon activity and if take a look at the past 15 years, not a single year has passed without adopting a Supplementary Budget. In 2009 and 2009 when there was a crisis, two Supplementary Budgets were adopted per year. This means adjusting the Budget to the actual developments and circumstances – if there are higher revenues, they should be allocated to the positions, which will generate higher value added, whereby if some funds are not used, they should be allocated to positions recording better execution, etc.
As regards capital expenditures, we have developed a strategy aimed at improving their execution and a 5-year annual plan on public investments, amounting to EUR 3.2 billion, comprising the strategic capital projects in the field of transport, health and educational infrastructure. Improved realization of capital projects may be achieved only if there is a sound long-term plan in place, mechanisms for monitoring the realization and clear rules for awarding and punishing budget users according to their respective performance. As I already mentioned, as regards the monitoring mechanisms, a plan has been put in place, whereby the established investment committee is responsible for monitoring the realization through the Methodology for Smart Key Performance Indicators.
As for awarding and punishing of budget users related to the realization, i.e. under-execution with respect to capital investments, innovative mechanism has been envisaged in the 2021 Law on Budget Execution. If budget users, as of the first quarter inclusive, fail to execute at least 15% of the projected capital expenditures, at least 40% by the second quarter, and at least 65% by the third quarter, they will have their funds withdrawn and reallocated to projects recording solid realization.
What does the new Public Financial Management Reform Program include?
– During the most severe crisis since the Great Depression by far, the crucial issues are the following: 1. How to recover the economy. 2. How to get the economy back to the growth trajectory, 3. How to intensify the economic growth and 4. How to attain sustainable and inclusive growth. Setting clear goals is key to creating a strategy, and an action plan afterwards. Well-designed strategy, as well as detailed and viable plan, are the basis for favorable outcome, should they be implemented properly.
Ministry of Finance’ operations are based on SMART finance concept, which rests on five principles – strategic operations, maintainability, accountability, reform – orientation and transparency. The crucial goal is to act by making plans and forecasts for a long time period ahead, anticipating all outcomes, measuring the results from the point of view of performance, as well as their impact on the other processes, all this being accompanied by continuous efforts to increase the transparency.
The seven objectives and priorities being set, are the following: 1. Economic growth and development; 2. SMART finance concept (i.e. accountable public finance management: public debt, liquidity, capital expenditures, medium-term budgeting, fair and efficient taxation, transparency and accountability); 3. Fiscal decentralization; 4. Development and liberalization of the financial market; 5. Eliminating the informal economy; 6. Public finance digitalization, and 7. Enhanced institutional and human capacities of the Ministry.
As for the SMART finance concept, large number of activities have already been undertaken and will be undertaken, such as Public Financial Management Reform Program (the new Budget Law and IFMIS – Integrated Financial Management Information System being incorporated therein), five-year Fiscal Strategy and five-year Public Debt Management Strategy, Tax Reform Strategy, introduction of a methodology for assessing the effects of investment projects on economic growth, so-called PIMA (Public Investment Management Assessment), as well as a methodology for assessing the realization of capital investments via Smart Key Performance Indicators.
Finally, I would like to underline that Ministry of Finance’s vision is to contribute to strengthening the functional market economy based upon knowledge, innovations and sustainable development, by implementing progressive ideas under its scope of work. We transform this vision into medium-term strategies and annual action plans, which have been designed through an inclusive process, whereby all stakeholders take part therein. Inclusive process in the process of designing the main strategic guidelines, pursuing evidence-based policies, as well as achieved fiscal transparency are democratic benefits, which will set the standards for all future creators of the reforms as regards the public financial system.
Ministry of Finance is also preparing a new Tax Strategy. What will this mean for taxpayers?
– Main objective of the tax policy is to ensure sustainable economic growth and development, thereby providing for legal safety of taxpayers and collection of public revenues on a regular basis.
The 2021-2025 Tax System Reform Strategy, being adopted by the Government, for which a public debate was previously held, includes five priorities for the tax policy makers and the respective authorities, administering the public revenues in the 2021-2025 period, together with their activities of crucial importance, results, responsible entities and key performance indicators.
First priority is greater fairness of taxation, in order to ensure that everyone meets its social obligation and pays its fair share of tax. Expected results are re-assessment of the fair taxation model, implementation of the standards aimed at preventing tax base erosion and profit shifting (BEPS), harmonization of the national legislation with the EU acquis and similar.
The second priority is increased efficiency and productivity of the tax system for the purpose of improved revenue collection, more efficient fight against illicit activities and tax evasion, and a strengthened institutional capacity, analysis and finalization of the tax base, reduction of the tax arrears and implementation of registry of beneficial owners. Some of the measures aimed at improving the efficiency and productivity of tax collection system are: review of existing tax regulation, introduction of advanced technologies, capacity building of institutions, modernization and automation of working processes, enhanced institutional coordination, as well as better cooperation on international level.
Third priority under the Tax Strategy is increased tax transparency, including improved exchange of information among tax authorities and other entities, to be primarily based upon electronic services and digitalized processes. This priority is expected to lead to greater fiscal literacy, as well as voluntary tax compliance.
The fourth priority pertains to better quality of services, which provides for simplifying and speeding up the procedures, as well as reducing the administrative burden. The ultimate goals is a higher level of digitalized services, better management as regards the issuance of export-import licenses, elimination of the unnecessary non-tariff barriers and better internal and tax control.
The last or the fifth priority is introduction of an environmental (“green”) taxation, aimed at encouraging taxpayers to reduce the activities that cause environmental pollution. Main objective is coping with the pollution and protecting the natural resources. In addition, increase in the budget revenues can be expected as a result therefrom.