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5th November 2022, Skopje – Accountability is part of fiscal transparency, which is the highest degree of control over public finances. Hence, thorough and comprehensible elaboration of the Draft Budget, as the most significant fiscal document adopted each year, is of crucial importance for the sound public finance management.

Budget means much more than just a statement of revenues and expenditures. It is a comprehensive plan of all policies and measures the Government implements throughout the fiscal year. “A budget is more than just a series of numbers on a page, it is an embodiment of our values”, former US President, Obama said. It is often pointed out that “Budget arises from the citizens, being destined for the citizens themselves”. Therefore, it is important to implement the citizen’s budget concept, i.e. to present and get such extensive document closer to the citizens, in a comprehensible and simple manner. Thus, this column is precisely focused on brining the context and the solutions proposed under the next year’s Budget, closer to the public.

This week, the Government gave green light for the 2023 Draft Budget, submitted by the Ministry of Finance, which is to be further debated in the institution accountable for democracy – the Parliament. As a Minister of Finance, I had the honor to present this Draft Budget to the public upon its adoption, on behalf of the Government. Accountability surely does not end there. This Draft Budget will be further reviewed and debated in the Parliament, whereby in the meantime, we will certainly continue to provide information about the separate positions and solutions, so as to explain and bring them closer to the public.

As per the 2023 Draft Budget, some of the provisions referred to in the Organic Budget Law, also start to apply. This reform law will bring about major changes as regards the public finance management. Next year’s Draft Budget is officially the first medium-term budget, providing a bigger picture about the ongoing challenges for our economy, as well as the desired medium-term goals.

 

Macroeconomics in a Global Context

Over the past three years, the world has faced major economic issues. Government has proposed a Budget for a third year in a row in times of economic crisis. Inflation has been at a decade-long record high level, along with high uncertainty due to the Russian invasion of Ukraine, coupled by the long-term effects of the COVID-19 induced pandemic. Most of the economic are experiencing slowed down growth or contraction. In 2022, global economic growth is expected to slow down by twice compared to the previous year (3.2% growth). However, what is causing a concern are the expectations about protraction of the crisis, with even more intensified pace next year (as per IMF’s October projections, global growth will slow down to 2.7% in 2023, being more pronounced as regards the European economy, which growth is expected to slow down to 0.7% next year). As for next year, the economy in Germany, as our major trading partner, is forecasted to drop by 0.3%. Expectations about the global and the EU economic growth in 2023 have indicated the gloomiest outlook since 2001, excluding the Global Financial Crisis and the start of the COVID-19 induced pandemic.

In our country, the economic activity was affected by the challenges and the uncertainties triggered by the global factors, while still managing to keep the economic growth. During the first half of 2022, it reached 2.6%. Positive performance has been seen in the services, industrial and agriculture sectors, while as per the expenditure analysis, domestic demand increased, i.e. consumption was boosted, being coupled by scaled-up gross investments.

 

Medium-Term and 2023 Forecasts on the Domestic Economy

As a result of all afore-mentioned, unfavourable trends as regards foreign and domestic demand, as well as investments in fixed assets and consumption, are expected. However, the measures continuously undertaken by the Government are expected to cushion such impact on the living standard and the companies’ liquidity.

As per the baseline macroeconomic scenario, economic growth is projected at 2.9% in 2023. Economic activity growth will be further boosted by the domestic demand. Inflation will start to decrease as of next year, however, amid still high prices of energy products and food on the international markets, it is projected at 7.1%,

However, the medium-term projections are opposite thereto. Global trends, as well as global supply chains are expected to stabilize, which will be accompanied by high economic activity growth at our major trading partners. Economic policies and measures contained in the Fiscal Sustainability and Economic Growth Plan, Public Investment Plan and Growth Acceleration Plan, will be a solid basis for doubling our country’s economic growth compared to the 2.5% average over the last decade. As per the baseline scenario, in the period 2023-2027, average economic activity growth will reach 4.6%, whereby 5% growth rate is expected as of 2025.

Investments will play crucial role in the economic growth, which are expected to record average annual growth of approximately 8%, resulting from the anticipated scaled-up private investments, as well as the increased capital expenditures. Investment to GDP ratio is expected to exceed 40% in 2027. Accordingly, in the period 2024-2027, employment growth will be accelerated to 3.2% in average per year, thus contributing for the unemployment rate to be reduced to 9.4% in 2027. In this period, average net wage is expected to increase by 6.1% in nominal terms on annual basis.

Inflation rate will be gradually stabilized, projected at 7.1% in 2023 and 2.5% in 2024, to be reduced to 2% in the medium run.

 

Budget as an Adequate Response to the Challenges, which are to be Faced in 2023

2023 Budget has a specific purpose. On one hand, it should provide for cushioning the consequences of the energy crisis, while laying the foundations for economic recovery, and accelerated economic growth later on, on the other. At the same time, the 2023 Draft Budget is in line with our commitment to fiscal consolidation, all to the end of ensuring fiscal sustainability. In addition, thereunder, funds have been provided for smooth financing of the EU integration process.

As for 2023, overcoming the upcoming challenges, will be a top priority. Therefore, funds amounting to EUR 250 million was allocated as support to surmount the crisis. However, high amount of funds for capital expenditures was also projected, all to the end of underpinning the economic activity despite the global economy slowdown.

In the medium run, the structural reforms and measures, i.e. redesigned public finance structure with higher share of capital expenditures, competitiveness-related investments, digitalization, support to the private sector and improvement of the investment climate, will provide for boosting the economic activity and accelerating the economic growth. Establishment of development funds, innovation support funds, guarantee funds, equity funds, venture capital funds and similar instruments for support of export-oriented companies, small- and medium-sized enterprises, as well as social enterprises are also part of this agenda. Thereby, public-private partnerships, concessions and other instruments for financing public capital projects are also planned to be put into place, to be coupled by financing private sector projects.

Ensuring fiscal sustainability is a must. Therefore, we remain firmly committed to gradual fiscal consolidation, which will not undermine the economic growth. Since the onset of the crisis onwards, budget deficit has been gradually reduced, which we aim to reduce to less than 3%, i.e. below the Maastricht Criteria, in the medium-term. Planned fiscal consolidation covers improved budget revenue collection via measures aimed at reducing the informal economy, as well as preventing and eradicating corruption, reducing and restructuring budget expenditures, by cutting non-priority and non-essential expenditures and revising methodologies for transfers and subsidies, as well as changes in the sources of financing the budget deficit, i.e. their greater diversification.

 

Detailed Presentation of the Statement of Revenues and Expenditures

Total revenues of the 2023 Budget of the Republic of North Macedonia are projected in the amount of Denar 282 billion, being higher by 14.8% in relation to 2022, while expenditures are projected in the amount of Denar 324.8 billion, being higher by 12.6% in relation to 2022, thus speaking in favor of our further commitment to gradual fiscal consolidation. Such projected revenues and expenditures result in a budget deficit of 4.6% of the projected GDP, i.e. by 0.7 percentage points lower compared to this year’s projection.

2023 Budget revenue projections are based upon revenue performance throughout 2022, expectations for economic growth and improved efficiency and effectiveness of the public revenue collection system. For the purpose of attaining the revenue projections, measures and activities have been planned, geared towards: enhancing the existing tax regulations, reducing the tax evasion, introducing advanced technologies, modernization and automation of the working processes, strengthening the revenue collection capacities of the institutions, increased and more efficient collection of tax revenues, as well as strengthening the institutional coordination.

As regards the expenditure side, 2023 current expenditures are projected in the amount of Denar 275.9 billion, intended for regular payment of wages to the public sector employees, timely and regular payment of pensions, guaranteed minimum income and other social allowances, payment of agricultural subsidies, support to small- and medium-sized enterprises, support and subsidizing of innovation activities, as well as support to the energy sector.

Expenditures related to wage payment are projected in line with the existing legal solutions and they amount to Denar 34.9 billion. In relation to the current year, the amount is higher by Denar 1.6 billion, to the end of harmonizing public sector wages with the minimum wage in the course of the next year in line with the new methodology. We remain committed to optimizing the employees’ capacities in the public sector.

Current transfers and subsidies are projected in the amount of Denar 204.5 billion, being higher by 7.8% or by around Denar 14.7 billion more compared to 2022.

As regards social transfers, Denar 75 billion is projected for payment of pensions, i.e. by around 10% more compared to this year, all to the end of providing funds for pension indexation as per the CPI trends, accounting for 50%, and the increase in the average wage, accounting for 50%. Denar 12.5 billion is projected for payment of social protection benefits for the most vulnerable categories. Denar 1.5 billion is also projected for payment of unemployment benefit and active employment measures each.

Additional Denar 3.9 billion is projected for healthcare compared to 2022, totaling Denar 42.1 billion, for the purpose of financing healthcare services, as well as utilities fees of the public health institutions.

Subsidies are also projected for managing crisis situations as regards supply of necessary energy products and stimulating the national electricity generation. Moreover, funds are also allocated for agriculture subsidies, intended for increasing the national vegetable and animal production and stimulating the generation of yields. Subsidies to the private sector are also envisaged, intended for supporting small- and medium-sized enterprises, boosting the competitiveness, innovation activity, technological development and research, new investments, supporting the export and conquering new markets, supporting job creation and similar.

Under the new Budget, transfers to local government units are increased in line with our commitment to the fiscal decentralization. In fact, percentage of VAT revenues distributed to the municipalities is increased from 4.5% to 5.5%. Funds on the basis of the additional increase of VAT percentage for the municipalities will be distributed in two new funds – Performance Fund and Equalization Fund. Additional funds are also projected for block and earmarked grants to the municipalities intended for financing the increased wages by 15% in primary and secondary education at local level and by 15% for day-care teachers and nursery nurses in the nursery schools.

 

Golden Rule: Investments Higher than the Budget Deficit

What is particularly important and rightfully gives this Budget the epithet “developing” is that 2023 Budget is based upon the “golden rule” of public finances. The golden rule means capital expenditures to be higher than the budget deficit, i.e. to borrow only for projects that will add value to the economy, accelerate growth and contribute to improving the living standard of our citizens.

Under this Budget, capital expenditures are projected at Denar 48.9 billion (EUR 791 million), being by around 52.3% higher compared to 2022 projection. They are intended for speeding up the implementation of infrastructure projects, i.e. investments in road and railway infrastructure, energy and utilities infrastructure, as well as capital investments aimed at improving the conditions in the health, education and social systems, agriculture, culture, sports, environment protection and judiciary. Given the limited space allotment for writing and for the sake of ease of reading, I will mention just some of the projects.

Substantial investments are projected in the road infrastructure, including Tetovo – Gostivar highway extension, construction of new Trebenishta- Struga- Kjafasan highway, construction of Gostivar-Bukojcani and Prilep-Bitola sections. Furthermore, the Public Enterprise for State Roads will finance the preparation of the Feasibility Study for construction of Tetovo – Prizren road. Construction of both the Eastern part of Road Corridor 8 via the sections Rankovce – Kriva Palanka and Kriva Palanka – Bulgarian border and the Western part of Road Corridor 8 via construction of Kichevo – Bukojchani highway section and Kichevo – Ohrid highway section will continue. Construction of Skopje – Blace highway section will be financed with EBRD loan.

Reconstruction of Railway Corridor 10 is envisaged to be completed in 2023, and funds are projected for continuation of the first and the second phase of the project for construction and reconstruction of Eastern part of Railway Corridor 8 – Kumanovo-Beljakovce-Kriva Palanka section. In the medium term, EBRD and EIB have confirmed the financing of Kichevo – Lin (Albania) railway section.

Number of capital projects in the field of environment are also envisaged. Implementation of the Municipal Services Improvement Project, intended for financing capital projects in the municipalities, will continue, as will the implementation of the Public Sector Energy Efficiency Project intended for financing energy efficient projects in the municipalities.

As regards the health sector, investments are projected for construction and reconstruction of public health institutions, procurement of medical equipment.

In the field of education, childcare and sports, capital investments are projected, being intended for construction and reconstruction of primary and secondary schools, nurseries, construction of schools and sports halls, reconstruction of pupils’ and students’ dormitories, equipping and reconstruction of universities and investments in sports infrastructure. Implementation of both the Energy Efficient Rehabilitation of Student Dormitories in North Macedonia Project and the Project for Construction of Physical Education Facilities in Primary Schools and Rehabilitation of Primary and Secondary Schools will continue.

To the end of improving the access to social rights and services, as well as expanding the capacities for preschool care and upbringing through construction of new facilities and repurposing/upgrading the existing infrastructure of preschool institutions, implementation of the Social Services Improvement Project will continue in 2023.

Substantial capital investments are also envisaged, intended for rural development, construction of hydro systems and investments aimed at boosting the competitiveness and modernizing the agricultural holdings.

 

Financing the Deficit and the Prior Debts Falling Due with Most Favourable Sources and Liability Management Activities

With respect to financing the Budget, i.e. the projected deficit and debt repayment amounting to Denar 52.1 billion, on the basis of prior debts falling due, with the Eurobond issued in 2016 accounting for almost half thereof, will be financed from domestic and foreign sources.

Government securities or domestic loan will be used for the domestic borrowing, while foreign borrowing will be carried out by issuing debt securities on the international capital market, tranche disbursement under the IMF Precautionary and Liquidity Line, as well as funds under favourable terms and conditions from foreign financial institutions and credit lines intended for financing certain projects and budget deficit. Choice of a financing source will be based on the favorable ongoing developments on the international capital market. For the purpose of prudent public finance management, Ministry of Finance will consider the possibility for active debt portfolio management through liability management activities.

In order to continuously strengthen the government securities financial market and pursue the worldwide practice, Ministry of Finance undertakes activities aimed at diversifying the sources of financing and introducing new types of financing instruments, which will be differently applied, as follows: development bonds – encouraging the financing of development projects in the country, green bonds – stimulating and supporting environment improvement and protection projects, designed specifically to support eco projects, project bonds – an alternative funding to source financing of infrastructure-related projects and development bonds for the citizens – mobilizing capital, in the form of cash savings for the citizens and a possibility for the diaspora to invest in these securities.

 

Expected Outcomes

At the very end, I will briefly mention the expected outcomes to be yielded by these policies. Redefined budget framework will provide for a timely and proper fiscal response to the deteriorated global macroeconomic context and sustainable public finances amid increased uncertainty. Budget support to cushion the price shocks and subsidizing the energy and electricity system are aimed at preserving both the living standard of the citizens and the companies’ liquidity. Execution of capital expenditures and implementation of infrastructure projects in the priority areas, in line with the government policies, will generate positive multiplier effects on medium-term economic growth and accelerate the real economic convergence towards the economy of the European Union.

 

Fatmir Besimi, Minister of Finance

Also available in: Macedonian Albanian

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