20th November 2020, Skopje – Budget structure is not something that can be changed in а fiscal year. However, 2021 Budget sets foundations for major changes. For the first time, we have a Budget that goes beyond a fiscal year, i.e. beyond 12 months. Under the 2021 Budget, economic growth, budget deficit, as well as strategic multi-year capital projects, are foreseen for the next 5 years. By longer-term and better planning we expect better performance of the projections. In fact, underperformance in implementing capital projects is to a great extend caused by year-by-year projections, since these projects are multi-year one.
Mr. Besimi, next year’s Budget envisages reduction of public expenditures by 2.1% compared to this year, amid increased revenues by 8.3% and significant narrowing of the deficit through lower net borrowing. How much is this Budget adequate for 2021, considering the big risk of economic crisis spillover is still present, especially in the first half of the year, creating the need for new stimulating measures on one hand, and how much can such Budget stimulate economic recovery in the second half of the year on the other?
“Health” is the key word in the 2021 Draft Budget. When creating it, our priority was the health of the citizens, followed by economic recovery and sound public finance system and a well-functioning social system as a whole, having in mind that all these matters are mutually connected.
Our citizens and their health is our top priority. Therefore, EUR 664 million has been allocated in the health sector, which will provide for covering the public and health services, the medical supplies and equipment, as well as the capital investments in the health sector. Moreover, EUR 1.47 billion has been allocated for the social protection as support to the vulnerable categories, active employment measures and other measures aimed at providing a decent life for all citizens.
Furthermore, EUR 1.141 billion has been allocated for the economy. We will thus provide for supporting the investments activities of domestic enterprises, attracting foreign direct investments, investing in the development zones, small- and medium-sized enterprises, boosting competitiveness, supporting domestic tourism, etc.
To the end of providing for stable public finances in the 2021 Budget, fiscal consolidation is envisaged, i.e. gradual reduction of the gap between revenues and expenditures. As for next year, budget deficit accounting for 4.9% of GDP has been projected, or by 3.6 percentage points less compared to the projected 2020 budget deficit. In the medium run, budget consolidation is planned to resume, to the end of achieving 2.1% budget deficit by 2025. Thus, in the medium run, public debt will be also stabilized at a level below the Maastricht criterion (58.8% of GDP in 2025).
Hence, the answer to your question whether this Budget is adequate for the coming year, which brings significant uncertainty, is yes. We undertake strategic activities in many areas, at the same time ensuring buffers in the Government’s P1 Program for new measures. We have prepared for different scenarios and, although the coming year brings challenges, we do not expect for the Budget to be revised by the end of the first half of 2021.
You have announced redesigning of the budget policy, but capital expenditures, although increased by 20% in relation to this year, still account for just ten and so percentage of the total Budget, while the remaining 90% of the funds are used for current spending. How will you redesign the fiscal policy?
Budget structure is not something that can be changed in a fiscal year. However, 2021 Budget sets foundations for major changes. Firstly, we have a Budget that goes beyond a fiscal year, i.e. beyond 12 months, for the first time. Under the 2021 Budget, economic growth, budget deficit, as well as strategic multi-year capital projects, are foreseen for the next 5 years. By longer-term and better planning we expect better performance of the projections. In fact, underperformance in implementing capital projects is to a great extend caused by year-by-year projections, since these projects are multi-year one.
Since I have been appointed Minister of Finance, I have been talking about the SMART Finances concept – a concept based on clear strategy, sustainability, maintainability, reform-orientation and transparency. This is the concept we applied when projecting the 2021 Budget.
2021 Budget includes three main priorities – health and wellbeing of the citizens, economic recovery and accelerated growth and structural reforms aimed at rule of law and Euro-Atlantic integrations. These priorities will be achieved through the Strategy for Economic Recovery and Accelerated Growth or SmartER Growth, 2021-2025 Budget Consolidation Policies and 2021 – 2025 Public Investment Plan. We have clear goals and comprehensive plans how to achieve them. As regards the Strategy, we build a basis for an accelerated, above all sustainable, growth between 4% – 5% in the medium term, instead of the average of around 2% – 2.5% growth in the past 10 years.
Policies to be used to achieve this are systematized in four pillars. The first one includes managing the COVID-19 effect – the health aspect, saving the economy and keeping the jobs. The second one is aimed at accelerating the economic development by encouraging investments, investments in infrastructure, digitalization and reduction of the informal economy. The third pillar builds on boosting the competitiveness of the economy, encompassing all policies supporting investments, various innovations, boosted competitiveness, supporting the export, conquering new markets, new technologies. The fourth pillar rests on making investments in the human capital, meaning high-quality education, which will be in line with the demand on the market, as well as sustainable health system.
Under-implementation of capital investments is a long-standing problem. What is this due to and how much will the new mechanisms to monitor performance of public investments improve the realization of the next year’s plan?
Major capital projects are multi-year projects. Year-by-year projections were one of the problems resolved with this Budget. We have also envisaged measures to “push” the institutions to perform better. We have foreseen establishment of a mechanism aimed at “punishing and rewarding” the budget users by reallocating budget funds in the course of the budget year from those with poor execution of capital expenditures to those with better execution thereof. In addition, execution of capital expenditures will be evaluated through the SMART Finance concept, insisting on completion of and accelerated implementation of major infrastructure projects.
The idea is not to put figures of capital expenditures on paper, but rather to see their quality, i.e. their effect on both the economy and the growth. Therefore, we have envisaged adoption of a methodology to evaluate the effects of the investment projects on the economic growth, as well as significant reduction and limitation of the capital expenditures for purchasing furniture and vehicles.
Establishment of both a unit for monitoring capital investments within the Ministry of Finance is therefore foreseen, and a National Council for Monitoring Public Investments, to be chaired by the Prime Minister, with the Line Ministries as its members.
Which are the most important capital investments to be financed by the Government next year, considered as driving force of economic recovery?
Starting next year, 5-year cycle of public investments amounting to EUR 3.1 billion commences. It includes projects 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, environmental protection. All these strategic projects are multi-year projects, and most of them are budgeted in 2021 Budget, with their financing starting next year. In 2021, EUR 374 million is allocated in the Budget alone for capital expenditures, being by 20% more compared to 2020.
I will turn to the projects that are part of the five-year public investment plan for the period 2021 – 2025, so as to get the big picture of the key projects we will dedicate to in the coming period.
As regards road infrastructure, the following is envisaged: construction of Skopje-Blace and Kicevo-Gostivar highway sections, improvement of the road infrastructure in the municipalities through the Local Roads Connectivity Project, financing of Road Corridor VIII – Kumanovo – Rankovce section, Rankovce – Kriva Palanka section, Kriva Palanka – Bulgarian border, financing of Kicevo – Ohrid and Stip-Radovis sections, Tetovo – Gostivar highway extension, as well as implementation of the National Roads Program, the Western Balkans Trade and Transport Facilitation Project and the Skopje Rapid Bus Transit Project on the territory of the City of Skopje. In the period 2020 – 2025, the following is envisaged: construction of road section Gradsko – Drenovo intersection as part of Road Corridor X-d, rehabilitation of Kumanovo – Stracin section, construction of a new expressway from Prilep – bridge over Lenishka River and construction of a third lane on the road section from the village Belovodica – Mavrovo quarry.
With respect to rail infrastructure, Project for Construction of New Railway on Corridor VIII, Kichevo – border with Albania section, is envisaged to commence, as well as rehabilitation of Kumanovo – Deljadrovce rail section, and financing the three phases of the construction and rehabilitation of east part of the rail – Corridor 8 towards Bulgaria.
Regarding gasification, construction of national gas pipelines Skopje–Tetovo section, Gostivar-Kicevo section and Sveti Nikole-Veles section is envisaged, as well as construction of interconnection gas pipelines between the Republic of North Macedonia and the Republic of Kosovo and between the Republic of North Macedonia and the Republic of Greece. As regards energy infrastructure, projects envisaged to be financed are those implemented by AD ESM and AD MEPSO, such as: Wind Park Bogdanci – phase 2, District Heating System for Bitola, 400kV Interconnection Transmission Line Macedonia (Bitola) – Albania (Elbasan), Photovoltaic Power Plant Oslomej, Wind Park Miravci, Lindane Cleaning Project (OHIS), Photovoltaic Power Plant Oslomej 2 Project and Photovoltaic Power Plant Bitola Project.
Among the major projects envisaged to be implemented during this period in the field of utilities infrastructure are the first and the second phase of the Water Supply and Wastewater Collection Project. Irrigation Program North Macedonia and Agriculture Modernization Project are the major capital projects in the field of agriculture.
With respect to environment, major capital project is the construction of wastewater treatment plant in Skopje, as well as solid waste stations in the Southwest, Vardar, Pelagonija, Southeast and Skopje regions.
As regards building infrastructure for waste water collection and treatment, as well as for the purpose of establishing an integrated and financially self-sustaining waste management system fulfilling the EU requirements, significant capital projects to be financed through IPA 2 Programs in the 2020-2025 period are: rehabilitation and extension of the sewerage network in the City of Skopje, construction of a wastewater treatment plant and rehabilitation and extension of the sewerage network in the Municipality of Tetovo and the Municipality of Kicevo, construction of wastewater treatment plant and rehabilitation and expansion of the sewerage network in Bitola, Project for Closure of Non-Compliance Landfills in East and Northeast Regions, construction of a central waste management facility, construction of a sorting plant, MBT plant, landfill, composting plant, green point for the Eastern and Northeastern region in Sveti Nikole, construction of six local waste management facilities – transfer stations, composting plants and green spots for the Eastern and Northeastern region, support in establishing a regional waste management system – procurement of equipment for the Eastern region, support and preparation of the documentation required for procurement of water equipment for the Municipalities of Radovish, Kicevo, Strumica, Bitola, Tetovo, Berovo, Kumanovo and Prilep, preparation of project documentation for improving the infrastructure for waste water collection and treatment and water supply network in the Municipality of Aracinovo.
Capital projects in the health sector include Construction of University Clinical Centre in Skopje, Reconstruction and Extension of Regional Clinical Hospital in Stip, as well as Emergency COVID-19 Response Project.
Regarding education, social protection and judiciary, following projects are envisaged to be financed: construction and reconstruction of primary and secondary schools, construction of physical education facilities in secondary schools, reconstruction of student dormitories, Skills Development and Innovation Support Project, reconstruction of public pre-school institutions and other projects.
Bulgaria has made remarks about the construction of Corridor 8 as yet another alibi to impede the start of the EU integration of our country. What is the pace of construction of the railway on this Corridor, how much money have you projected therefore in the new Budget?
Rehabilitation of the eastern part of railway line of Corridor 8 – first and second phase will be financed with EBRD loan, with funds being envisaged for the next three years. In addition, construction of new and rehabilitation of the existing Beljakovce – Kriva Palanka section will be financed through the WBIF and EBRD, with funds also being envisaged for the next five years. As regards the on-site works, Minister of Transport and Communications is the relevant interlocutor.
You forecast 4.1% economic growth next year. What is this forecast based on? How much the low comparison basis this year on one hand, i.e. the recession which according to IMF will reach up to 5.4%, gives positive outlook for 2021 on the other?
Growth is projected at 4.1% in 2021, 4.6% in 2022, 5.2% in 2023, 5.6% in 2024 and 5.9% in 2025.
Economic recovery projected in 2021 is under strong impact of the uncertainty as regards the duration of the pandemic and it can be seriously hit by the recent increasing in the number of newly infected people. Social distancing restrictions are expected to continue to apply, however, possible improvement of the situation can bring about gradual lifting of the restrictions in the course of 2021. Economic growth in the country is expected to shift to the positive zone next year, when investments are expected to recover, as well as the consumption and the external demand. This is in line with the baseline scenario – considered by all global economies when projecting the growth. Baseline scenario assumes weakening of the health crisis and gradual improvement of the epidemiological picture, improved utilization of the production and the services capacities, favourable effects from the economic measures, as well as boosted confidence of both the consumers and the investors.
Planned fiscal consolidation, redesigned fiscal policy, and the Strategy for Economic Recovery and Accelerated Growth (SmartER Growth) are a solid basis for intensifying the economic growth in the period to come, getting the economy back to the pre-crisis growth trajectory in the second half of 2022, as well as ensuring accelerated growth dynamics thereafter. In line with the projections, economic growth is expected to reach an average rate of 5% in the coming five-year period, with the average economic growth rate expected to stabilize at 5.75% annually in the period 2026 – 2030.
Pessimistic scenario is that the crisis will protract throughout 2021, while the recovery will commence in 2022. In line with this scenario, growth would be lower in 2021, i.e. it would be similar to the growth of our major European trading partners which, according to the pessimistic scenario, expect for the growth to drop by half, or to experience growth rates of around 2.5%, instead of growth rates of around 5%.
According to the Budget projections, it is planned for borrowing to amount to almost EUR 1.3 billion next year, half of which for repayment of due debt, and the other half for financing the budget deficit. How do you plan to provide these funds?
2021 projected deficit amounts to Denar 34.9 billion. Repayment of foreign debt amounts to Denar 37.2 billion and domestic debt repayment amounts to Denar 6.1 billion. We are talking about Denar 78.2 billion or around EUR 1.3 billion to be funded by external borrowing and borrowing on the domestic government securities market.
Domestic borrowing is projected in the amount of Denar 23 billion, which will be provided by borrowing with GS. Borrowing on the domestic market will provide for financing under favorable conditions, using the favorable interest rates. For the purpose of optimizing the payments, reducing the refinancing risk, as well as using the low interest rates, the crucial commitment of the Ministry of Finance will be portfolio optimization and lengthening the maturity of the issued securities.
External borrowing may be realized through issuance of Eurobond on the international capital market and via disbursement of funds under favorable loans from foreign financial institutions and credit lines intended for financing certain projects. Thereby, the 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.
According to Ministry of Finance projections, at the end of 2020, general government debt will slightly decline, accounting for 51.2% of GDP, while public debt will account for 60.8% of GDP.
How realistic are these optimistic forecasts for reduction of the budget deficit and the public debt, as well as the growth acceleration, in the coming five years, and how will you materialize them?
Fiscal consolidation, i.e. reducing the difference between budget revenues and expenditures, is necessary to set sound basis for a stable economy and growth. We have a clear strategy and plan and policies on how to implement the fiscal decentralization. By implementing them, we expect the budget deficit to drop to 4.9% of GDP next year, being by 3.6 p.p. lower in relation to this year’s projection. It is projected at 3.8% in 2022, 3.2% in 2023, 2.8% in 2024 to 2.1% of GDP in 2025.
How will fiscal consolidation be attained? Through three sets of measures – improving budget revenue collection, reducing and restructuring the budget expenditures and changing the sources of financing the budget deficit.
Budget revenue collection will be improved via measures aimed at reducing informal economy and measures aimed at preventing and combatting corruption, coupled by strengthened inspection controls by the Public Revenue Office, measures related to collection of individuals’ and companies’ tax debt and tax policy strategy, which will provide for increasing the efficiency and the effectiveness of the tax system.
Budget expenditures will be reduced and restructured by cutting non-priority and non-essential costs, greater support to the private sector, innovations and boosted competitiveness, by establishment of a Guarantee Fund and a Private Capital Mobilization Fund, streamlining and revising the transfers and subsidies (social transfers, transfers for different sectors and local government transfers), increasing the efficiency of capital expenditure execution and analyzing the budget structure.
Non-priority costs to be reduced include, above all, travel and per diem expenses, representation costs and contractual services. In the coming medium-term period, we will focus on reducing the current expenditures by streamlining them through stagnation or limitation of total budget expenditures intended for wages, introducing a limit on the highest wage to be paid in the public sector, optimizing and increasing the efficiency of the public administration, optimizing and reorganizing the public sector, digitalizing considerable portion of public services, introducing criteria for the use of office space by budget users, value limits when purchasing furniture, value limits for procurement of official vehicles, including maximum price for procurement of an official vehicle and official air travel only in economy class. These funds will be used for supporting the private sector, strengthening the innovations and boosting the competitiveness.
Changing the manner of financing the budget deficit will also contribute to the fiscal consolidation, by reducing the borrowings and through greater diversification of the sources of financing the budget deficit, while managing the public debt by rescheduling to lower interest costs. Part of the state-owned capital is envisaged to be privatized, i.e. part of the joint stock companies predominantly or partially owned by the state, as are the largest loss-makers and part of state-owned land. In addition, private capital will be mobilized in development policies – certain projects will be financed through public-private partnerships (PPP), as well as Development Fund for Strategic Investments and Competitiveness Support Fund (FITD and DBRNM).
Second wave of COVID-19 pandemic leaves severe consequences on the economy, although the country has not introduced a lockdown yet. What are your expectations for the coming period, how much can this crisis deepen and continue its impact in 2021?
As I have said, we consider the baseline scenario, also considered by the other global economies in their projections. According to the baseline scenario, the situation will stabilize in the second quarter of 2021. According to the pessimistic scenario, the health crisis will continue throughout 2022, requiring adequate health measures on one hand, which would have effects on the economic activity on the other. We are prepared for every outcome, we have provided buffers and will act as the situation requires. New measures will be prepared if needed, which would cushion the possible new blows.
What are the expectations from the fourth set of anti-crisis measures, which are to be yet implemented? How much can they cushion the impact of the pandemic on the economy? What is the guarantee that all measures, estimated in the amount of around EUR 470 million, will be implemented, considering that the implementation of the three previous sets accounts only for a third of the estimates?
As regards the fourth set of measures, 22 out of the total 31 measures are measures of the Ministry of Finance, so I can elaborate each of the measures within MoF competence in details. It gives me pleasure to say that legal solutions have already been prepared or information has been sent to the Government for each of them. Some of them are already being implemented, some are pending parliamentary procedure, and some undergo public consultations.
Fourth set of measures, which are within the competence of the Ministry of Finance and have been provided for under the Supplementary Budget, can be divided into four categories, as follows: measures for direct financial support to companies, measures for financial support to citizens, tax relief measures and measures pertaining to systemic solutions. These funds will be provided as support to the private sector and the citizens during the second wave of COVID–19, and they will further contribute to the economic recovery. The measures are designed so they can have positive effects on both the supply and the consumption side, thus cushioning the consequences of the crisis.
As regards the measures for financial support to companies, I would single out the financial support for employers and persons performing independent activity intended for wage payment for the months of October, November and December 2020, with more than 20,000 employers and persons performing independent activity having applied therefore. Then there are new interest-free credit lines with 30% grant component, information therefore being submitted to the Government. The measure is designed and the funds are expected to be made available to the companies in the course of this month or at the beginning of the next one. With respect to the state loan guarantee, the Law has been already prepared, it is published on the Single National Electronic Register for public comments, while as regards the additional EUR 100 million as loans under favourable terms and conditions from the Development Bank, information therefore has been already adopted by the Government and negotiations with EIB have been already commenced, with the funds expected to be made available to the Macedonian companies at the beginning of next year.
With respect to the measures aimed at financial support to the citizens, a law enabling the financial support in the amount of Denar 6,000 for the vulnerable categories is pending parliamentary procedure, and it is expected for the citizens to be able to use these funds the next month already. As regards the VAT-free weekend measure, most of the refunds have already been made, with few refunds remaining to be made by the PRO.
Measures related to tax exemptions and exemptions from duties, implemented by the Ministry of Finance, include reduction of VAT from 18% to 5%, reduction of VAT on restaurant services and serving food and beverages, the possibility to pay upon VAT application following its submission within 5 days at the latest, rather than on the same day. All these measures are governed under the Draft Law on Amendments to the VAT Law, which are to come into force starting 1st January 2021, while extension of the deadline for payment of VAT came into force upon the adoption of the Law by the Parliament.
Moreover, the tax relief also covers the measure for deferred payment of profit tax and personal income tax advance payments for persons performing independent activity. Amendments to these laws are pending parliamentary procedure and are expected to be adopted in the course of this month. Other measures are also governed under these laws, such as: raising the threshold under which the entities would not be subject to PT taxation regime, profit tax and personal income tax exemption for employee-related costs pertaining to additional qualifications, recognizing private health insurance costs of the employees for profit tax purposes, not being subject to personal income taxation, recognizing the costs for COVID-19 testing as an eligible cost and extension of the period for covering losses to be set off against future profits. Default interest on public duties has been reduced by half, to be applied until March 2021.
Regarding MoF’s measures pertaining to systemic solutions for fiscal sustainability and digitalization, they include introduction of e-invoice platform, a systemic solution which will be implemented throughout 2021, and which is important from the aspect of supporting the digital payments. Yet another of these measures is changing the calculation for the base for financing local government units, under which, when allocating funds to the local government units, the calculation of the average VAT collection in the previous three years will be taken into account, instead of the previous year alone as so far. Under the second 2020 Supplementary Budget, EUR 160 million has been provided for the measures with direct budget implications, such as: financial support for paying wages, financial support for vulnerable categories, support for producers, manufacturers and exporters of grape and wine, support for tourist guides, tourist tax refund for 2019 for realized overnight stays, VAT refund from the VAT-free weekend with “MyVAT”, state loan guarantee and customs bank guarantee through the Development Bank and grants for travel agencies, kids’ play areas and restaurants for weddings.