27th December 2020, Skopje – Below are the Minister of Finance, Fatmir Besimi’s throughts on the economic developments this year, next year’s expectations and expectations for the period up to 2025.
- 2020 – YEAR OF PANDEMIC AND CRISIS
We Faced Pandemic and the Most Severe Economic Crisis of the Century
Extremely challenging year – from both social and economic perspective – passed by. Greatest global economic and health crisis in the past century erupted. Its impact is far worse than the one of theGlobal Financial Crisis in 2009. For the sake of comparison, global GDP at that time dropped by 0.1%, affecting mainly the developed economies. Global economy is expected to contract by -4.4% this year, with almost no economy spared from the crisis.
The crisis engulfed all areas worldwide with a varying intensity, however, the vulnerable groups all around the globe, such as low-income households, migrants, workers in the informal economy and women, were the most affected. Crisis’ impact was the most severe in several sectors of the economy – tourism, most of the industrial branches, such as retail and wholesale, while, from a size aspect, the crisis weighted most heavily on micro, small – and medium-sized enterprises, employing high share of vulnerable groups. For the first time in 22 years, poverty rate worldwide is on the rise.
COVID-19 induced crisis is the worst health and economic crisis our country has ever faced. Because of the four sets of anti-crisis measures, deeper decline than the projected one of – 4.4% in 2020 was prevented. Even if the growth decline is deeper, it will be lower than the one at our major trading partners. As of the third quarter 2020 inclusive, GDP is -5.9%, with the highest quarterly decline of 14.9% registered in Q2. Significant deterioration of the global economy and drop in external demand caused by the health crisis affected the activities of domestic export companies and industrial production, inflow of private transfers from abroad, while containment measures on preventing the COVD-19 spread in the country affected part of the activities in the services sector, such as trade, transport, hospitality industry and tourism.
All this affected both the State Budget and the fiscal policy conducted throughout 2020. As a result of the significant slowdown of economic activity, revenue collection dropped, on one hand, with the expenditure side deepening by virtue of the needs and the measures to cope with COVID-19 induced crisis, on the other, as was the case with all the economies worldwide.
Swift, Efficient and Sizable Fiscal Response
In March 2020, administrative bans in support of undertaking measures to prevent the spreading of COVID-19, and putting the citizens’ health first, led to reduced economic activity, which expectedly started to reflect on the Budget revenues. Starting 20th March, when the effects from the measures undertaken to prevent the spreading of the Coronavirus started to be felt, sharp decline of tax revenues by around 25% per day was observed. This led to decline of both total tax revenues by 11% compared to 2019 and total revenues by 5.3% in March.
As months were passing by, the measures implemented affected the economy even more, thus the Budget execution, in particular the budget revenue collection. In April, revenue collection declined by 20% compared to April 2019, with tax revenues dropping by 31%, while in May, revenue collection decreased by 24% compared to 2019, with tax revenues declining by 28%.
As summer was approaching and epidemiological situation was moderately improving, revenue collection improved as well. In addition, three sets of anti-crisis measures were adopted and implemented, amounting to around half a billion euros, which contributed to cushioning the impact of the containment measures. Supplementary Budget was adopted in May so as to provide additional funds for the anti-crisis and the containment measures. Number of measures aimed at injecting liquidity into the economy were also implemented, such as financial support for wage payment, applied by around 20,000 companies employing more that 120,000 people, interest-free loans and affordable finance supporting over 1,500 companies, support for various vulnerable groups extended to more than 300,000 citizens, tax reliefs, etc.
It contributed to cushioning the economic decline, reflecting also on the revenue side, with the revenues dropping by 9.6% in June compared to 2019. Revenue collection in the first half of 2020 was by 9% lower in relation to last year.
In July, revenues increased for the first time by 1.2% on monthly basis compared to 2019, while in August, they declined by 14%.
In the meantime, fourth set of anti-crisis measures, the most sizable as yet, was adopted in September, hence the estimated value of the adopted sets of anti-crises measures reached more than a billion euros. Second Supplementary Budget was adopted, to the end of allocating funds for some of the measures having budget implications. New set of measures also envisaged support to businesses for payment of wages to employees, supporting over 13,000 companies employing over 60,000 persons. Loan application process for the interest-free loan, including 30% grant component, in the amount of EUR 31 million is ongoing, as is the establishment of State Guarantee Fund providing the companies an easier access to liquidity. This set of measures will encourage private consumption as well by awarding Denar 6,000 to 250,000 citizens from the vulnerable groups.
Measures Mitigated the Crisis Impact
Measures were primarely focused on protecting the citizens’ health and lives and strengthening the health sector, supporting the businesses and preserving the jobs, as well as protecting the vulnerable groups being most affected by the crisis. The overall sets of anti-crisis measures in 2020 amounted to around one billion euros or approximately 10% of our GDP. Funds were allocated for free PCR tests, vacinnes, support for medical personnel, financial support for around 5,000 citizens being hit the hardest by the crisis by transferring funds directly to their transaction accounts, around 100,000 jobs were preserved by supporting around 15,000 companies affected by the crisis by financing part of the wages on two occasions for a period of three months each, providing favourable loans for the enteprisis and other measures aimed at mitigating the crisis impact.
Measures continued yielding results, evidenced by the GDP in Q3 2020, when following the high 14.9% decline of GDP in Q2, the drop was mitigated to -3.3%. If analyzed by components, following the high drop of 34.4% of gross investments in the second quarter, they surged by 4.2% in Q3, as a result of the investments growth in construction works, as well as machines and equipment. Moreover, consumption decline in the third quarter was mitigated to -1.2%, following the high -9.1% in the previous quarter. This was mainly a result of the fact that public consumption surged by high 13.5% in real terms, due to the increased spending to support the categories most affected by the pandemic.
As regards the revenue side, GDP deline was lower the following months – -2% in September, -5.6% in October and -4.6% in November. At the end of the year, although still not ended, we can say that the Budget is executed within the projections.
Fiscal intervention to mitigate the pandemic impact prevented an estimated contraction of economic activity of around 7% (or even higher) in 2020, considering that public consumption in the first three quarters contributed with 1.2 p.p. to GDP growth, i.e. it lowered its drop from 7.1% to 5.9%.
- 2021-2025 PERIOD OF RECOVERY AND GROWTH
The forthcoming 2021 will bear the hallmark of protection of health, economic recovery and accelerated growth reforms in medium and long run.
The following 2021 should be the year of economic recovery. Optimism prevails in the world regarding immunization which would prevent new waves of the virus and new lockdowns.
In 2021, EU economy is projected to grow by 5%, whereas global economic growth is projected at 5.2%, according to the October projections of the International Monetary Fund. Germany, as a country to which the domestic companies export the most, is expected to experience economic growth of 4.2% in 2021, following the projected decline of 6% in 2020.
In line with the baseline scenario, which implies weakening of the health crisis and gradual improvement of the epidemiological situation, 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, economic growth in our country is expected to shift to the positive zone in 2021. Investments, consumption and external demand are expected to recover, whereby growth of 4.1% is projected. Export is expected to experience growth of 14%, with gross-investments surging by 7.7%, private and public consumption experiencing growth of 3.5% in real terms and 4.3% respectively, while the number of employees is projected to increase by 1.9% and unemployment to decrease.
Still, we are taking into account the unpredictability of this crisis despite the positive developments of solving it. The pessimistic scenario is based on the assumption of new COVID-19 waves, increase of the number of newly infected in 2021, thus causing for the social distancing measures to continue applying until their possible gradual lifting in 2021 as the situation improves. Containment measures would have repercussions on global supply chains and external demand, deteriorated expectations of businesses and households, reduced inflow of both investments and foreign pecuniary remittances, leading to negative consequences for the overall domestic economic activity.
According to this scenario, the European economy projections are cut in half to 2.5% and having in mind them being our major trading partner, our projections would follow along those lines.
SMART Finance with Medium-Term Budget Framework in Times of Unpredictability
In order to deal with the uncertainty, we are to define all possible outcomes and to give adequate response to each and every one. 2021 Budget is response to next year’s possible scenarios. Focusing on health, social welfare and public investment, as well as the envisaged so called “buffers” in case of new crisis wave, the Budget should give adequate response to the forthcoming events. “Health” is the key word for the 2021 Budget, since the health of the citizens, the health of the economy, the finances and the society as a whole is of most importance and highest priority.
2021 strategic priorities are providing for accelerated and sustainable economic growth, higher living standards and quality of life of the population, tackling the global pandemic crisis caused by the Coronavirus, rule of law, judiciary’s independence, consistent and non-selective fight against crime and corruption by exercising overreaching and biding transparency, quality education accessible to all according to the labor market demand, modern and efficient public administration based on digitalization providing quality and speedy services to citizens and businesses, and environment protection, “green” development, reduction of air pollution and climate changes’ impact.
To achieve better performance as well – from the planning aspect, we should look far ahead rather than “day-by-day”. Since my first day in the Ministry of Finance, I have been advocating the introduction of the SMART Finance concept. SMART is an acronym of S – strategic, M – maintainable, A – accountable, R – reform-oriented, T – transparent. Such working concept brings about clear measurable objectives, work plan, mechanisms to monitor the performance and outcome and measure the results and their impact on the economy, while maintaining high level of fiscal transparency throughout the whole process.
2021 Budget is one of the first steps of SMART Finance. Despite facing one of the greatest and unpredictable crises, we went a step further from annual fiscal planning and projections to a five-year growth, deficit and public investment projections.
By implementing policies, measures and reforms, which I will address further down the line, our medium-term expectations are for the economic growth to increase by twice from the average 2% – 2.5% of GDP in the past years to 4% – 5% in the coming period, i.e. twice as fast improvement of the citizens’ standard of living, and the country’s living conditions in general. Following 2021, growth is projected to accelerate and reach 4.6% in 2023, 5.6% in 2024 and 5.9% in 2025. Average economic growth rate is expected to stabilize to 5.75% annually in the period 2026-2030. Needless to say, we endeavor for most of the citizens to enjoy the benefits of this growth.
The ABC of the Medium-Term Economic Growth Budget Framework
Crisis carries huge risks and opens opportunities to come out of it as more functional society and more resilient economy. Each lesson learnt is a gain in itself, and we are to also see this crises as a starting point of making things better than before.
We have established three platforms as regards the implementation of the fiscal policy in the next medium-term period. These platforms are practically the ABC of the economic growth model: A. SmartER Growth 2021-2025 Strategy aimed at economic recovery and sustainable growth, B. 2021-2025 Fiscal Consolidation, and C. 2021-2025 Public Investment Plan.
The first challenge is stabilizing and creating new fiscal space by gradually reducting the budget deficit, i.e. the gap between revenues and expenditures, while not implicating the economic growth. 2021 deficit is projected at 4.9% in 2021, being lower by 3.6 percentage points compared to this year’s projected budget deficit. Our plan and expectations are for budget deficit to gradually narrow each year in accordance with the planned fiscal consolidation, thus reaching -3.8% in 2022, -3.2% in 2023, -2.9% in 2024, and -2% in 2025, which will be below the Maastricht criterion of -3% of GDP.
We are to implement the intended fiscal consolidation in way of improving budget revenue collection, reducing and restructuring budget expenditures and changing the sources of financing the budget deficit.
Improved budget revenue collection will mainly be performed with measures aimed at reducing the informal (grey) economy. One of the priorities of the Ministry of Finance in the following five-year period will be enhancing, and designing new mechanisms for, fight against grey economy.
Budget expenditures will be reduced and restructured primarily by cutting non-priority and non-essential costs, as well as travel and per diem expenses, entertainment expenses and contractual services. Cutting current expenditures will be attained by introducing standards for operating costs per budget user and streamlining and revising transfers and subsidies programs. Moreover, measures will also be implemented aimed at optimizing and increasing public administration efficiency, optimizing and reorganizing the public sector, digitalizing most of the public services, setting criteria for use of official premises by budget users, value limits when purchasing furniture, official vehicles and official airfare travel tickets on economy class only.
To the end of optimizing the expenditures, share of capital expenditures in the total expenditures will be increased, and their execution will be improved as well. In the period 2017-2019, average share of capital expenditures in the total expenditures, accounted for 8.1%, while accounting for 9.4% in 2021, i.e. out of each Denar 1.000 intended for budget spending, Denar 94 will be geared towards investments, with a tendency for this percentage to increase further on. Moreover, during the past 10 years, capital expenditure execution accounted, in average, for around 70% of the funds projected in the adopted Budget. In addition to projecting higher capital expenditures, measures aimed at improving their execution are and will be undertaken. CAPEF (capital expenditure efficiency) mechanism has been put in place, aimed at “punishing and rewarding” 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. also coupled by the introduction of the Public Investment Management Assessment (PIMA) methodology, as well as the methodology for assessing the performance of capital investments via Smart Key Performance Indicators, Unit for Monitoring the Capital Expenditure Execution was established within the Ministry of Finance and Support Unit at Government level, as well as the National Investment Committee at Government level, chaired by the Prime Minister.
In fact, sources of financing are exceptionally important for reducing both the debt and the deficit. For the purpose of their greater diversification, public debt will be rescheduled by issuing development bonds, as well as privatizing state-owned capital such as the loss-making enterprises or part of the state-owned land. In addition, solutions will be reached for mobilizing the private capital in development projects via PPP or development funds following the example of the Juncker Plan during the Great Financial Crisis and the European Sovereign Debt Crisis.
In addition to the recovery, it is necessary to boost economic activity in support of higher and sustainable growth. Second platform, i.e. the Strategy for Economic Recovery and Accelerated Growth is focused thereon, resting upon five pillars: (1) economic recovery, (2) accelerated and sustainable economic growth, (3) boosted competitiveness of the private sector, (4) development of human resources and equal opportunities, and (5) digital (smart) economy.
Economic recovery from COVID-19 will be accomplished via measures aimed at safeguarding the health of citizens, as well as ensuring social protection for the most vulnerable categories, by also providing support to the economy, the private sector and keeping the jobs.
Following the economic recovery, measures and policies for accelerated, inclusive and sustainable economic growth are foreseen. They will be aimed at good governance – rule of law, public administration reforms, corruption eradication and capacity building of the institutions. Ensuring fiscal sustainability and macroeconomic and financial stability will be of crucial importance, also coupled by the measures in support of local and balanced regional development, sustainable and healthy environment.
At the same time, actions will be taken so as to boost the competitiveness of the private sector, strengthen the trade relations and integrate in the global chains. Activities will also be undertaken in support of business environment improvement, informal economy eradication, improved access to finance and technology adaptation, as well as agriculture modernization.
Investments in human capital remain to be among the top priorities in the Strategy for Economic Recovery and Accelerated Growth. Activities will be undertaken, aimed at creating equal opportunities, developing human resources by making investments in the field of education, science and health, promoting higher participation of the working able population, social protection and social insurance.
Digitalized both economy and public services will be significant for enterprises in view of their adaptation to the new normal, while also providing for their boosted competitiveness and increased quality of the services and products thereof.
Third platform – 2021 -2025 Public Investment Plan is also destined for accelerated growth and increased living standard, as well as improved living conditions in the country. It is focused on implementing 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. In particular, in the period 2021-2025, total amount of EUR 3.2 billion is projected as capital projects, EUR 1.28 billion out of which as budget funds, EUR 112.8 million as donations (through IPA Funds), as well as funds in the amount of EUR 1.84 billion for capital investments made by international financial institutions/bilateral creditors.
Reform Laws and Strategies
Strategies and reform laws have already been prepared for the purpose of implementing the policies, the activities and the measures set in the three platforms.
New Organic Budget Law is exceptionally important, foreseeing introduction of fiscal rules and establishment of the Fiscal Council – aimed at greater control, medium-term budgeting and putting an Integrated Financial Management Information System in place – for the aim of better planning, establishment of Registry of Public Entities and increased transparency. This Law corresponds to the new SMART finance concept, being aimed at setting a framework for conducting sound, predictable and sustainable fiscal policy, as well as increasing the budget discipline and accountability. The Law goes a step further as regards public finance digitilization, i.e. introduction of Integrated Financial Management Information System – IFMIS, aimed at improving the control over revenue performance and expenditure execution, from their planning and projections to their final performance and execution. Five-year Public Debt Management Strategy was also prepared, defining the limits for the three levels of debt – general government, guaranteed and total public debt in the coming five years, as well as the debt structure, all to the end of prudent debt management. In line with this Strategy and in support of the fiscal consolidation polices, being pursued, as of 2025 inclusive, public debt should be reduced below the Maastricht Criterion, i.e. to 58.8%. General government debt, as per the Strategy, will account for up to 53.7% of GDP, following its stabilization and reduction to 51% in 2025. The Strategy is aimed at maintaining sustainable debt level via prudent public debt management. It envisages financing the needs of the state with the lowest possible cost, identifying, monitoring and managing the risks public debt portfolio is susceptible to, as well as developing and maintaining an efficient domestic financial market.
Implementation of the five-year Tax System Reform Strategy should provide for greater fairness and efficiency in the tax system, which will stimulate investments and innovations, thus boosting the economic growth, increasing the tax accountability – raising the awareness for the need to pay taxes, increased tax transparency, better quality of services, digitalization and green taxation. This Strategy is an integral part of a broader medium-term policy on accelerated growth. It sets the general guidelines for improvement of public revenue performance and prudent designing of the tax burden, in particular, how to attain some of the crucial goals such as: reducing the informal economy, reducing the economic inequality, overcoming the difficulties in collecting public revenues, addressing the sophisticated techniques for tax avoidance and evasion, as well as response to the challenges for environmental protection and the new technologies, and creating a tax system supportive of investments and innovations, thus contributing to boosted economic activity and accelerated growth. Goal of the Strategy, together with the other strategies and policies, is to offer sustainable solutions to these issues. To the end of ensuring increased transparency, activities are envisaged for exchange of information between tax authorities and other entities, primarily on the basis of e-services. At the same time, quality of services will also be improved by streamlining and speeding up the procedures and reducing the administrative burden. To that end, one of the priorities to be achieved is the process digitalization. This Strategy will also imply defining the optimal tax policies in future, to be accomplished via extensive expert analysis and broad consulting process, as well as involvement of all stakeholders in the economy and society, i.e. the chambers of commerce, trade unions, experts, and civil society.
Other reform attempts will cover reducing the informal economy, optimizing the public debt as regards maturity and costs, as well as financial consolidation process and improved public finance management by the municipalities.
- DEVOTION TO THE CAUSE
Realization of all these planned activities will contribute to attaining economic growth at EU-alike level as our ultimate goal in the long run, thus resulting in higher living standard than the one in half of the EU Member States. Only by remaining committed thereto, as well as by having a sound strategy and plan for its implementation in place, all this can be accomplished. As the brilliant mind of the last century, Albert Einstein, would say: “In the midst of difficulty lies opportunity”.
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