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22nd September 2021, Skopje – Fiscal decentralization reform is aimed at increased funds and stable revenues of municipalities, thus leading to improved and more efficient services for the citizens, as well as enhanced local development. This reform was prepared by the Ministry of Finance, whereby the Government, at yesterday’s session accepted the proposed modifications and amendments to the Law on Financing Local Government Units.

The reform, which will, in systemic manner, provide for more efficient and financially stable municipalities, thus being able to perform their obligations and render their services to the citizens in uninterrupted and high-quality manner, was presented by Prime Minister Zaev and Minister of Finance, Fatmir Besimi at today’s press conference.

“As a central government, we are working, together with the municipalities, on implementing development projects, all to the end of rendering timely, efficient and high-quality services to the citizens. At the same time, we are obliged, both as central and local government, to improve the living conditions of all citizens in every city, municipality and settlement. Decentralization process has to be wrapped up systemically, thus making the municipalities efficient and financially stable on one hand, while performing their obligations and rendering their services to the citizens in interrupted and high-quality manner on the other”, Prime Minister Zaev pointed out.

He mentioned once again that the EUR 50 million transferred in 2018 helped the municipalities to settle 50% of their arrears, thus enabling the municipalities to exploit their development potential, which was hindered by their arrears and blocked accounts, adding thereby that permanent legal solutions are being introduced, geared towards systemic functionality and independent operations of the municipalities. The goal thereof is financial independence, capacity building, as well as conditions for attracting new investments, all to the end of attaining economic development as a whole.

During the press – conference, Minister of Finance Fatmir Besimi stressed that the reform rests on three pillars: enhanced fiscal capacity of municipalities and increased municipal revenues, strengthened financial discipline of municipalities, reduced arrears and cost-effective operations, as well as increased transparency and accountability. Measures and activities, as he went on, will provide for better democracy in the society, more efficient and cost-effective service rendering and delivery, as well as intensified local and regional development.

Under the new legal solution, the municipalities will be transferred increased revenues on the basis of both the collected PIT and the amount of VAT grants.

“For the purpose of enhancing the fiscal capacity of municipalities, this Law envisages gradual increase of the PIT revenues from 3% to 6% by 2024, i.e. 4% in 2022, 5% in 2023 and 6% in 2024. Municipalities are distributed such revenues on the basis of collected PIT on the wages of individuals with permanent or temporary place of residence in the respective municipality”, Minister Besimi said.

He went on that for the purpose of additional enhancement of the fiscal capacity and increase of municipal revenues, the Law also includes proposals for amendments to the gradual increase of the amount of VAT grants from 4.5% to 6%. Thus, VAT revenues are provided, accounting for 6% of the collected VAT generated in the previous fiscal year, starting 2024. In addition, this increase is envisaged to be gradual, which will account for 5% in 2022 and 5.5% in 2023.

Funds will be distributed in three Funds, as follows: 4.5% from the collected VAT generated in the previous fiscal year in the General Fund, and 0.75% of the collected VAT generated in the previous fiscal years in the Performance Fund and the Equalization Fund, each.

Minister pointed out that thus, municipalities will be transferred funds higher by Denar 1.7 billion.

“In line with the projections, given the projected 3% of PIT, municipal funds currently amount to Denar 600 million. Given the additional 3%, in line with the Fiscal Strategy and the projected revenues, municipal funds in 2024 will amount to Denar 1.562 billion, i.e. higher by Denar 781 million. On the basis of the amount of VAT grants, in 2024, , Denar 2.8 billion has been projected from the 4.5% of the collected VAT in the previous year, while Denar 3.7 billion are to be distributed from the 6% thereof. This is by Denar 1 billion more funds. In 2021, the municipalities will be distributed funds higher by Denar 1.7 billion on annual basis”, Besimi explained.

The reform also envisages activities aimed at increasing the financial discipline and efficiency, as well as reducing and rescheduling the arrears.

What is a novelty, as he pointed out, is that financial indiscipline will be declared by force of law, as per the criteria pertaining to financial indiscipline.

He added that the idea is not to block the municipalities, but for them to rather have at their disposal three instruments, i.e. the opportunity to use a standby credit from the Ministry of Finance, issue a municipal bond for a known purchaser – Ministry of Finance and issue a structural bond by Ministry of Finance.

For the purpose of using one of the instruments, covering a period of up to 10 years, the municipalities will submit a request to the Ministry of Finance based on the Plan of Measures aimed at Overcoming Financial Instability.

To the end of strengthening the financial discipline of municipalities, arrears repayment and cost-effective operations, under the reform, measures are envisaged for planning the actual revenues and expenditures of the municipalities, rationalizing the operations and reducing the unnecessary expenditures, regular servicing of arrears, strengthened financial discipline, procedures on declaring financial instability, issuing municipal bonds and analysis of the existing arrears of both the municipalities and the public enterprises.

Moreover, to the end of strengthening the fiscal responsibility of municipalities, the legal amendments are also expected to provide for increased transparency of their operations, by which the municipalities will be obliged, in a transparent manner, to publish financial data on their websites, as well as enhanced accountability in spending all funds transferred by the Government.

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