30th May 2021, Skopje – First joint scientific conference of the Ministry of Finance and the Macedonian Academy of Sciences and Arts (MASA) was held last week. It focused on the challenges for the fiscal policy posed by COVID-19 pandemic and the post-crisis expectations. More than 30 eminent economists took part in the Conference – academicians Fiti, Bexheti, Petreski and Zeqiri, Governor Anita Angelovska-Bezoska, Vice Governor Mitreska and Manager of Monetary Policy and Research Department Davidovska-Stojanova, professors and former Ministers of Finance Popovski, Slaveski and Tevdovski, as well as other colleagues I deeply appreciate as exceptional scholars and experts, such as Bishev, Stojkov, Uzunov, Trpeski, Mazlami, Abazi-Alili, Filipovski, Mojsovska-Blazhevski, Nakjeva-Ruzhin, Trenovski, and colleagues from the Ministry of Finance Kovachevski, Tast and Elezi, along with many other young professors who presented very interesting and useful analyses. Representatives of the European Commission, the World Bank and the IMF also addressed the Conference.
The Conference is of exceptional importance due to two reasons – the first one is the readiness of the Government to include the scientific community in creating future strategies and policies, and the second one is the synergy of proper solutions, which will inevitably spring from the cooperation with the academic community.
To my utmost satisfaction, this cooperation with MASA went exceptionally well. We have enticed successful authors, with very thorough analyses, to be soon published in a conference proceeding. I dedicate this Article to the conclusions drawn from the Conference. Some of my views on the future steps in the fiscal area will be also presented.
General conclusions from the Conference are the following:
- Fiscal policy has to continue being supportive of the business sector on its path to recovery.
- Funds for financing the fiscal stimulus are to be (for the most part) “imported”.
- Fiscal consolidation is crucial in the medium term.
I will touch upon each of the conclusions below in the Article.
Anti-crisis measures – until the economy gets back on sound footing
It is certain that the economy has started recovering from COVID-19 induced crisis. Since the beginning of this year, positive economic results have been registered globally, as well as in our country.
IMF Staff has recently concluded visit to our country, noting that rebound in economic activity is underway. Statistical data from the beginning of 2021 speak in favour of this. Export in the first quarter experienced 18% increase, while import grew by 14.1%. External trade in March, compared to last year, registered high increase of 35.5%, while export grew by 36.7%. In March, industrial production experienced higher increase of 7.6% for the first time since the pandemic outbreak, with manufacturing picking up by 6.2%. Business entities’ expectations in terms of increased production volume, volume of production orders and reduced stock of finished goods also improved. Utilization of production capacities picks up as well, with 71.7% utilization in April, being at the same level as before the crisis. In April, credits to both households and corporate sector grew by 5.7% annually, with deposits increasing by 6.9%.
Economic recovery is a result of the gradual lifting of containment measures globally and in our country, as well as the accelerated immunization, which contribute for supply chains returning back to normal and utilization of business capacities increasing. Moreover, it is a result of the measures the Government adopted to support the business sector and the citizens and to mitigate the crisis impact. Ministry of Finance’s estimations show that, as a result of the measures undertaken, 2020 decline was mitigated by 4.2 p.p., i.e. it would have reached even 8.7% should no measures be undertaken. At the same time, the undertaken support measures have contributed to preserving large portion of the jobs (unemployment rate in 2020 dropped by almost one percentage point compared to 2019). Furthermore, average wage continued to increase despite the crisis (annual increase of 7.8% in 2020 compared to 2019).
Six sets of anti-crisis measures, amounting to around one billion two hundred million euros, have been adopted since the outbreak of the pandemic. This amount accounts for around 11% of GDP. Total fiscal stimulus covers not only the direct budget costs, but also the tax relief and exemptions, available guarantees, etc. For comparison purposes, according to IMF data, fiscal stimulus in the countries in the region ranged from 2.4% of GDP in Bulgaria, to 3% in Bosnia and Herzegovina, 3.3% in Albania, 4% in Montenegro, 5% in Kosovo, 7% in Croatia, 13.6% in Serbia, to around 14% of GDP in Slovenia and Greece respectively.
IMF data show that most of the countries continue the fiscal stimulus in 2021 as well. Should one review the cases of the above-mentioned countries from the region: in February 2021, Slovenia adopted the eighth set of measures worth EUR 320 million; in April, Serbia adopted new measures on wage subsidizing, financial support to citizens above the age of 18 and pensioners, financial support to unemployed, support to transport companies and hospitality industry accounting for 2.3% of GDP; Kosovo allocated new 1.7% of GDP for transfers to companies and citizens; in January and in April, Montenegro passed the fourth and the fifth sets of anti-crisis measures respectively; Republic of North Macedonia adopted the fifth and the sixth sets of measures in February and April respectively.
The large developed economies have also pursued adopting sets of economic measures in 2021. Since the beginning of the crisis, G20 countries have allocated significant amounts of funds for fiscal stimulus. As a percentage of GDP, Japan allocated 56%, Germany – 39.3%, Italy – 37.7%, France – 23.8%, the USA – 22.5%, Australia – 19.5%, Canada – 18.6%, etc.
IMF recommend for the support to the business sector and the citizens to continue until the recovery lasts. One of the aspects is that the corporate sector needs support due to liquidity and solvency issues in times of crises, especially the contact-intensive industries, as well as micro and small-sized enterprises. The second aspect is additional protection of the financial system, i.e. without any intervention by the fiscal policy, non-performing loans of companies may increase, which will make them borrow so as to cope with the crisis consequences, thereby not being able to service them.
The standpoint we came to is that it is necessary to continue supporting the companies, as well as the citizens (from a social point of view) so as to be able to continue the economic recovery. Commitments will certainly be geared towards a development feature of the new measures to be adopted, i.e. in addition to the support they provide, to also contribute to boosting new investments, expanding the capacities and creating jobs.
Importing capital to stimulate economic growth and ease monetary policy
Once we have determined that financial support has to continue, the question now is how it will be financed. In fact, since the outbreak of the crisis, due to decline in revenue collection, with simultaneously high increase of expenditures by reason of financing the health and the anti-crisis measures, budget deficits at almost all countries grew, which led to surge in government debt. If one takes into account the countries in the region, it can be noted that those which provided the highest fiscal stimulus experienced the highest debt surge. For instance, in 2020, according to IMF data, government debt in Slovenia and Greece increased significantly by 15 percentage points and by 24.3 p.p. respectively.
The new measures will require new financing. Investors are to approach the new financing through different mechanisms. Multiple positive effects on the economy will be thus achieved. First, drop of remittances from abroad and declined foreign investments (until recovery takes ground) will be cushioned. Second, the “crowding out” effect of the real sector, i.e. capital availability for the business sector from domestic sources of financing, will be avoided. Following the issuance of the Eurobonds in 2020 and 2021, monetary policy was relaxed, i.e. growth of money supply accelerated from 8% before the crisis to 10.1%, and interest rates on the money market dropped to historic low of 1.25% in March 2021. It can be concluded that financing the budget deficit through external sources boosts the economic growth on one hand and creates conditions for relaxation of the monetary policy on the other.
Other central banks worldwide also loosen the monetary policy, including the European Central Bank. It makes foreign capital cheaper and more accessible. Hence, we issued the eighth Eurobond in March, at historic low interest rate of 1.625%, with demand of international investors by 2.3 times higher than the offer. When making a comparison, average as regards the interests on all previously issued Eurobonds accounts for 5.05%, being by 3.1 times higher than the interest on the newly issued Eurobond.
When borrowing, it should be always taken into account that the cost of debt should be lower than the benefit generated therefrom, i.e. future growth rates of the Gross Domestic Product should be sufficient for financing the debt (g>k). In particular, the 2021 Eurobond we have issued is economically justified, if one takes into account the interest rate of 1.625%, with the projected GDP growth being at least 4.1% or 5.6% growth in nominal terms, i.e. 3.5-fold higher in relation to the interest rate on the Eurobond.
“Golden Rule” of economic growth and public finance
According to the growth theories, “Golden Rule” of economic growth is considered to be the level at which the ratio of consumption and savings, i.e. investments, provides the same amount of capital per effective worker, taking into account the depreciation, the population growth and the technological development, thus ensuring constant returns to scale (economic growth). However, endogenous growth models in this equation also include the role of economic policies in generating growth by boosting growth generators – support to human capital, innovations and knowledge in order to increase the productivity of the economy. This also adds to the issue of financing growth, i.e. public finance, budget deficit and public debt. As regards these issues, economics debate has been opened as well, which also goes on with respect to the so-called “Golden Rule of public finance“, i.e. borrowing only to finance public investments (productive goals). However, it can be said that there is a consensus as regards public finance in the evidence of fiscal consolidation being an important factor in ensuring sustainable growth in the medium term. Simply put, if we want to financially support growth, in case there are no sufficient own savings in place, we can attain such growth by borrowing, however, it should be economically justified so as to provide for sustainable growth. From an intertemporal and intergenerational aspect, if we borrow today, it means that the borrowed funds should be repaid tomorrow, which, on the other hand, means that if we make an investment today, we should reap the benefits therefrom tomorrow, or if a generation borrows and the next one should repay this debt, it is understandable that the later should reap the fruits of such decision.
Consolidation and economic growth
As of the outbreak of the COVID-19 crisis, widening of the budget deficit and increased government debt over the past year featured almost all economies throughout the world. In Europe, only Norway recorded a decline in the government debt by 1.3 percentage points in 2020 compared to the previous year. In line with the IMF data, 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 24.3 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 surge 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.
Thus, it is crucial to have, as of now, a well-devised fiscal consolidation plan, i.e. gradual reduction of the budget deficit, without thereby hindering the economic growth.
Fiscal consolidation is planned to be accomplished by: i. Improving the budget revenue collection (by enhancing the capacities and improving the services of PRO and the Customs Administration, via measures aimed at reducing the grey economy, preventing and combatting corruption, etc.), II. Reducing and restructuring budget expenditures (by cutting the non-priority and non-essential costs, reducing the current expenditures, greater support to the private sector, innovations and boosted competitiveness, high allocations for social protection and revision of methodologies for transfers and subsidies, etc.) and III. Changes in the sources of financing the budget deficit (Growth Acceleration Financing Plan).
Such budget structure has been set up throughout the years, hence percentage of discretionary budget expenditures is small and fiscal policy room is limited.
What is planned is reducing the current expenditures by streamlining the public administration expenditures, optimizing and increasing the efficiency of the public administration, optimizing and reorganizing the public sector, and digitalizing considerable portion of public services. For the purpose of streamlining the expenditures, the emphasis is also placed on improving the execution of capital expenditures through the established CAPEF (capital expenditure efficiency) mechanism aimed at “punishing and rewarding” budget users by reallocating budget funds throughout the budget year from those with poor execution of capital expenditures to those with better execution thereof, coupled by Public Investment Management Assessment – PIMA and methodology for assessing the performance of capital investments via Smart Key Performance Indicators, as well as establishing bodies in charge of monitoring the performance of capital investments.
The purpose of the Plan is to scale up the total investments in the economy, thereby staying on the set path to reduce the fiscal deficit in the medium term 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. 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.
Intensification of economic growth in the medium term will also provide for stabilizing the debt due to the expanded fiscal room required for its servicing. Redesigned fiscal policy and the Strategy for Economic Recovery and Accelerated Growth (SmartER Growth) will provide 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 indicative forecasts, economic growth in 2025 is expected to reach 5.9%, while in the 2026 – 2030 period, average economic growth rate is expected to stabilize to 5.75% annually. This is planned to be attained by creating more competitive business climate, being export-oriented with firm support for entrepreneurship and innovations, via better access to finance and technology adaptation, modernization of the sectors with comparative advantage, tax reform, as well as by combatting the grey economy, digitalizing the economy, developing human resources by making investments in the field of education and science and the health sector, through measures aimed at intensifying the activity of the working able population, orientation towards “green economy”, etc.
At the end I would like to point out that this form of consultations with the academicians will become a practice, because we want for the science, as well as all stakeholders, to be part of the decision-making process to yield the needed results. I would also like to thank all participants in the Conference for their contribution with their papers, analyses and ideas.
Fatmir Besimi, Minister of Finance
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