Global economic recovery is the keyword in 2021. With the immunization process and the gradual improvement of the epidemiological situation, the investors’ and consumers’ confidence will increase, resulting in recovery of both investments and private consumption. Recovery of economies and supply chains returning to normal will provide for increased trade and utilization of production capacities. Relaxing and lifting the COVID-19 containment measures will contribute to improving the services capacity utilization. All this will provide for boosting the economic activity and economic growth.
Speed of recovery will vary from region to region, from one country to another, depending on the Coronavirus crisis impact and the pace of the immunization process. As a result of timely policies to cope with the pandemic impact, the resulting crisis is expected to leave smaller scars than the 2008 global financial crisis, however, emerging market economies and the least developed economies, being hit harder, are expected to suffer more significant medium-term losses.
Expectations of the international financial institutions for the global economic result are improving. IMF is now projecting a stronger recovery for the global economy than in the October 2020 WEO, with growth projected to be 6% in 2021 and 4.4% in 2022. The upward revision reflects additional fiscal support in a few large economies, the anticipated vaccine-powered recovery in the second half of 2021, as well as the effectiveness of policy support to provide a bridge to vaccine-powered normalization.
Economic growth in the Eurozone is projected at 4.4% in 2021, implying a slight upward revision to January projections, but a downward revision to October 2020 projections. Economic growth in 2022 is projected at 3.8%, with significantly improved expectations compared to October 2020 projections.
Uncertainty about recovery still remains high, mainly due to the protracted health crisis, i.e. how many vaccines will be administered and whether they will be sufficiently efficient against new COVID-19 strains. The effectiveness of the policy actions to limit the economic damage caused by the pandemic, the evolution of financial conditions and commodity prices, as well as the adjustment capacity of the economy, are also sources of uncertainty.
Developments and Expectations for the Economy in the Republic of North Macedonia
IMF April forecast on economic growth in the Republic of North Macedonia of 3.8% in 2021 is much the same at the Ministry of Finance projections (4.1%). Positive developments in the economy have been observed since the beginning of the year. It can be best detected through the revenue side of the Budget. Since the beginning of 2021 by end-April inclusive, revenue performance was higher by 11% compared to last year, taking into account that the comparative base was high due to the absence of the pandemic during this period last year. Collection of taxes and contributions is higher by more than 12%, with tax revenues increasing by almost 18% and revenues on the basis of contributions picking up by 4.5%. Increased tax collection was due to the high collection at almost all taxes, with VAT collection increasing by almost 30%.
According to the State Statistical Office, export of goods in the first three months experienced 18% growth in nominal terms annually, with the positive trends in this segment continuing with stronger dynamics. Import of goods experienced nominal growth of 14.1%. Utilization of production capacities also picks up, with 71% utilization in February, being at the same level as before the crisis. Positive tendencies are also seen in the industrial production since March 2021, experiencing 7.6% increase in relation to the same period last year. Data on internal trade in the first two months show increased turnover by 0.5% in nominal terms, following a period of decline throughout 2020. Average wage continues to increase, experiencing 2.7% growth in February since the beginning of the year. In March, total credits grew by 5.2%, with credits to both households and corporate sector increased, while total deposits surged by 7.4%.
According to the latest macroeconomic and fiscal trends and expectations with respect to the international economic environment, domestic economy is envisaged to get back to the economic growth trajectory, overcoming the pandemic-induced shocks.
Strategy for Economic Recovery and Accelerated Growth (SmartER Growth)
One of the brilliant minds, Albert Einstein, considered that in the midst of every crisis, lies great opportunity for those who can anticipate it. Coronavirus crisis can be a chance for things to be put systemically in the right place, so as to function better afterwards and create higher added value. Hence, in addition to measures and activities geared towards economy recovery, mechanisms are needed to be created which will stimulate the economic activity towards higher and sustainable growth on the medium run. This is the objective of the Strategy for Economic Recovery and Accelerated Growth (SmartER Growth), which I have written about before.
The Strategy comprises four pillars: (i) economic recovery from COVID-19, (ii) intensified, inclusive and sustainable economic growth, (iii) boosted competitiveness of the private sector and (iv) development of human resources and equal opportunities.
Economic recovery from COVID-19 induced crisis will be realized via measures aimed at protecting the health of citizens and the social protection of the most vulnerable categories, as well as by providing support to the economy, the private sector and keeping the jobs.
Following the economic recovery, measures and policies focused on intensified, inclusive and sustainable economic growth have been envisaged, geared towards good governance – rule of law, eradicating corruption and capacity building of institutions. In the light of this context, ensuring fiscal sustainability and macroeconomic and financial stability will be of crucial importance, including the measures intended for supporting the fiscal decentralization, ensuring local and equal regional development, sustainable and healthy environment and digitalization of the economy and the public services.
At the same time, actions will be taken so as to boost the competitiveness of the private sector, strengthen the trade links and integrate in the global value chains. Activities will be also undertaken aimed at improving the business environment and reducing the shadow economy, improving the access to finance and adapting the technologies, as well as modernizing the agriculture. We have already presented part of the measures and had public discussion with the academicians and the business community on eradicating informal economy and tax evasion, as well as strengthening the fiscal decentralization. More discussions will follow covering other topics and solutions.
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 the health sector, through measures aimed at intensifying the activity of the working able population, and social protection and social insurance.
2021-2025 Public Investment Plan is aimed at accelerated growth and improved living standard and conditions in the country, focusing on implementation of capital infrastructure projects in the road and the rail infrastructure, the energy and the utilities infrastructure, as well as capital investments oriented towards improving the health, the education and the social systems, the agriculture sector and the environment protection. In the period 2021-2025, total amount of EUR 3.2 billion is envisaged for capital projects, out of which EUR 1.3 billion as budget funds, EUR 112.8 billion as grants (through IPA funds), and funds in the amount of EUR 1.8 billion for capital investments from international financial institutions/bilateral creditors.
Moreover, there were the novelties introduced in the 2021 Budget, aimed at giving a clear perspective of the growth and the development, i.e. these are the three components within the medium-term Budget framework: a) Strategy for Economic Recovery and Accelerated Growth, b) fiscal consolidation and c) Public Investment Plan.
The Crisis, the Public Debt and the Fiscal Room for Economic Growth Financing
Coronavirus crisis impacted almost all economies worldwide, leading to widening of the budget deficit and increased government debt. In fact, contraction of economic activity had an adverse effect on the revenue side, i.e. collection of duties, while the surge on the expenditure side was a result of the increased healthcare costs and the stimulating economic measures.
All European states, except Norway (recording a decline in the government debt by 1.3 percentage points in 2020 compared to the previous year), experienced increase of the government debt. In line with the IMF data, the highest increase in the government debt in Europe in 2020, compared to 2019, was observed in Spain, 27.5 percentage points surge or an actual government debt accounting for 123% of GDP, followed by Italy, recording a government debt increase by 27 percentage points or a government debt accounting for 161.8% of GDP, as well as Greece with the government debt increasing by 24.2 percentage points, the government debt of which accounted for 205.2% of GDP. As for the region, in addition to Greece, Albania recorded the highest government debt increase by 15.6 percentage points, accounting for 83.3% of GDP, followed by Slovenia, which government debt increased by 14.9 percentage points, accounting for 81% of GDP, and Croatia recording increase in the government debt by 14.5 percentage points, accounting for 87.7% of GDP. Out of 38 countries, Republic of North Macedonia has lower government debt than 24 countries, as well as lower increase in its government debt in 2020 than 22 countries. What is particularly important is for the debt to be sustainable which, according to IMF estimations in its Report on Macedonian economy, as of April 2020, should not exceed 70% of GDP. Moreover, it is also especially significant for the debt to be cost-effective, i.e. the added value, the growth, it will produce to be higher than the interest rate.
We are now placed between the hammer and the anvil, i.e. how to finance the economic development, at the same time maintaining moderate and stable level of public and government debt. Still, it is not an impossible mission, which I will elaborate below in this article.
Juncker’s Plan – one euro goes in, 15 come out
Former President of the European Commission, Jean-Claude Juncker, in 2014, presented the Investment Plan for Europe, also known as Juncker Plan, aimed at boosting the economic activity in the EU following the recession caused by the global financial crisis, as well as improving the infrastructure in the EU Member States. Total initial value of the Plan was EUR 315 billion, and it resulted in EUR 335 billion infrastructure investments. I am referring to this Plan because of the way this amount was mobilized, i.e. creating a fund for mobilizing more funds from private and public sector funding to finance projects in sectors of key economic importance, such as transport and energy infrastructure, energy efficiency, broadband connection, innovations and long-term investment funds.
European Fund for Strategic Investment – EFSI, the driver of the Investment Plan for Europe, generated 15x multiplier effect on investments, with EFSI guaranteeing and thus mobilizing 15 times higher investments than the EFSI contribution. Multiplier effect occurs when EFSI contribution guarantees credits for new activities to be carried through by the European Investment Bank (EIB) generating threefold increase, while EIB offers instruments multiplying the capital by 5.
Moreover, the World Bank also recommends finding new instruments and manners of financing major capital projects, i.e. Maximizing Finance for Development – MFD. This concept envisages different solutions for project financing, including private and public capital geared towards optimal results. Thus, the economies, in particular the emerging economies and the low- and medium-income economies, are helped to improve their access to capital, as well as expand the scope of different sources of financing, which is in favour of the commitments to sustainable economic development.
Biden’s Build Back Better Plan
Biden’s Build Back Better Plan guarantees that, once the profound public-health and economic crisis is over, at the same time facing the existing climate crisis, investment cycle will commence, aimed at job creation needed to build a modern, sustainable infrastructure and provide fully clean energy future. In addition to the American Rescue Plan, worth around US$ 2 trillion, or accounting for around 10% of US GDP, Build Back Better Plan is expected to create millions of additional good-paying jobs, as well as built a more resilient and sustainable economy – getting the USA on the pathway to reaching net zero emissions economy-wide by no later than 2025.
Growth Acceleration Financing Plan
As for our commitments to fiscal decentralization, as well as the commitments to double the economic growth and achieve around 5% GDP annual growth rates, Ministry of Finance is in the final stage of preparing the Growth Acceleration Financing Plan, to be soon presented to, and discussed with, the public. The Plan addresses the new ways of access to capital to finance the recovery and the acceleration of the economic growth through projects in both the public and the private sector. The purpose of the Plan is to scale up the total investments in the economy, thereby staying on the set path to gradually reduce the fiscal deficit and to maintain stable debt level.
The essence of the Plan is to produce a multiplying effect by creating and using new mechanisms, instruments, funds and sources of financing, i.e. in addition to the planned public investments amounting to around EUR 4 billion for the period 2021-2025 financed from the Budget, IPA funds and by international financial institutions, much more funds and investments from the private sector to be mobilized. Thus, total investments will be increased, growth of GDP and job creation will be both accelerated.
The Plan involves 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. Public-private partnerships, concessions and other instruments for financing public capital projects are also planned to be put into places, to be coupled by financing private sector projects. These are the projects indicated within the National Investment Committee (NIC), also including new projects arising upon initiatives of the public or the private sector.
Growth Acceleration Financing Plan will support public and private sector projects aimed at improving the competitiveness of the economy and the quality of life, i.e. covering areas such as environment, digitalization, innovations, human capital and social inclusion.
Technical assistance for preliminary design, concepts, institutional and legal framework will be provided in cooperation with the international financial institutions, such as the World Bank and the European Investment Bank (EIB). Moreover, in the coming period, it is expected for the World Bank to deliver a Pre-Feasibility Study, which will give full picture and outline the design and the implementation of the respective activities. Development Bank, Innovation and Technological Development Fund, Directorate for Technological Industrial Development Zones and other institutions, as well as commercial banks and investment funds, will be implementing agents.
MoF undertakes activities on regulations on new financial instruments
To the end of implementing the new financial instruments, it is necessary to create an adequate institutional framework to provide for their application and their upgrading as well. Several legal solutions to support the establishment of these Funds are in the process of preparation and adoption.
Law on Investment Funds is one of these legal solutions, pending parliamentary procedure. The Law envisages introduction of feeder funds and master funds, and it regulates the requirements for opening a subsidiary of a foreign management company on the territory of the Republic of North Macedonia, also creating a possibility for a management company from our country to manage investment funds by acquiring qualified holding in a foreign company or by opening a subsidiary abroad.
With the World Bank support, Ministry of Finance works on the Law on Alternative Investment Funds, which is to be adopted in the course of 2022, regulating the operations of venture capital funds.
Another law governing the new instruments for capital mobilization is the Law on Modifications and Amendments to the Law on Macedonian Bank for Development Promotion, which regulates the credit-guarantee scheme (Guarantee Fund). Under the guarantee scheme, the government offers additional possibility for easier access to financial resources by credit risk sharing with the commercial banks. Micro, small- and medium-sized enterprises are thus provided easier access to funding.
Under the amendments to the Law, establishment of Funds is envisaged, to be managed by the Development Bank on behalf of the Government, pertaining to crediting in the country, issuance of payment guarantees, avals and other forms of security, purchase, sale and collection of claims, factoring and forfaiting on behalf of clients, trading in securities in his/her name and on his/her own behalf, collecting, processing and analyzing information of creditworthiness of the legal entities and their sale, economic-financial consulting, credit insurance against commercial and political risks and investment insurance. As regards the financial support for these Funds, funding will be pledged from the state Budget, loans and credit lines from IFIs, donations from the country and abroad and revenues generated from the operating activities.
New Development Funds and New Competences for the Existing Funds
Possibility to establish various development funds is being considered, which will target projects in the public sector and the private sector, applying different mechanism for capital mobilizing.
One of them is the Fund for Export Companies Support which is intended for supporting the production of export-oriented companies through favourable credits.
Another possibility is establishment of Investment Fund, which will support major projects, above all capital projects in the area of education, such as construction of kindergartens, schools, sports halls, etc., whereby when selecting the companies that would participate in the process, priority will be given to small- and medium-sized enterprises. Thus, in addition to investments in capital goods, small- and medium-sized enterprises would be also supported.
One more fund, Fund of Funds, is envisaged in the Growth Acceleration Financing Plan. It focuses on crowd in investments for and by growth-oriented businesses. Target group includes both the small- and the medium-sized enterprises developing and expanding their business activities, headquartered in the Republic of North Macedonia.
Law on Alternative Investment Funds, being in preparatory stage, will regulate the establishment and the operations of the venture capital funds, geared towards mobilizing resources from institutional investors and private entrepreneurs which will invest larger amounts.
Green Strategic Investment Fund is also envisaged to be established, intended for financing infrastructure and green investments. It will provide the necessary financial support to cover the robust infrastructure and investment agenda in the free economic and industrial zones in the Republic of North Macedonia. Following the trial period, the model can be expanded so as to include all such activities in the country, without any limitations, however, with the support from international private and institutional investors.
As regards establishment of some of the Funds, it is possible to use the already established institutional capacities, such as the Innovation and Technological Development Fund, the Development Bank and the Directorate for Technological Industrial Development Zones.
Apart from the Funds, crowdfunding is planned as additional financing instrument. Introduction of this instrument requires technical assistance so as to assess whether the existing regulations are in support of the crowdfunding concept, as well as preparation of any legal framework necessary and organizational requirements to introduce this concept. Timeframe for its introduction is by second half of 2022.
Designing and issuing a development bond is also considered. It is a new instrument on the securities market, aimed at mobilizing funds for new development projects.
Objective and Expected Results from the Growth Acceleration Plan
The Plan is geared towards financing the recovery of the economy hit by COVID-19 induced crisis and supporting an accelerated and sustainable growth, thereby maintaining fiscal stability by mobilizing private sector capital, in addition to the allocated budget funds.
On the medium term, expected results are the following: doubled growth from the average growth rate of 2.5% in the past 10 years to 5% growth rates; scaled-up investments in public infrastructure and private sector through mechanism for multiplying funds with private, in addition to public, sources of financing, and maintaining fiscal stability within the Maastricht Criteria on government debt and government budget deficit. Subsequently, investments and intensified growth will contribute to increased job creation and improved living standard and better quality of life of the citizens.
Lot of hard work, public debates, discussions and exchange of ideas are ahead of us in finding the best solutions to lead to economic development on the medium and the long run and provide for better living conditions for our citizens.
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