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18th November 2021, Skopje – Amid big political crisis and bickering in the country, one thing is crystal clear – one must not fail in adopting the most important economic document, the Budget for next year, which the way of financing all needs of the state depends on. The opposition, as usual, has criticized it, claiming it is exorbitant, non-development and unrealistic, but Deputy Minister of Finance, Dimitar Kovachevski, has numerous arguments in support of such tailored state Budget. In his interview for Faktor.mk news portal, Kovachevski explained why 2022 Budget would bring about better infrastructure, as well as boosted competitiveness of our country, improved health and education sectors, higher living standard of the citizens. As Kovachevski assured, funds are projected for both payment of wages and pensions, thus guaranteeing safety and stability, and capital investments higher than the budget deficit, supporting the country’s development as well. He explained the basis of Government’s optimistic projections for high economic growth and gross investments, why it is expected for VAT revenues next year to amount more than EUR 1 billion and what is driving the economic flows. We also discussed whether it is realistic to expect capital investments higher than EUR 615 million and how the Government plans to actually use such amount, why more than EUR 2 billion is projected for social transfers, as well as whether next year’s Budget projects sufficient funds for amortizing the possible energy crisis and price shocks.

Debate about the most important economic document, 2022 Budget, commenced in the Parliament. Considering the specific political situation in the Parliament and the ruling majority and opposition structure, do you expect for it to be adopted on time, although opposition VMRO-DPMNE announced no obstacles?

Kovachevski: It is important for the Parliament to adopt the Budget on time, since it provides for uninterrupted financing of the state’s functions, strong financial support for economic recovery and accelerated, inclusive and sustainable economic growth.

The Budget is the country’s bloodstream, meaning by voting for its adoption, we vote for the country’s development, capital investments geared towards better infrastructure, boosting the competitiveness of our economy, better health, better education and higher living standard for the citizens. We vote for timely payment of pensions, social transfers and support to the farmers.

In times when we are still fighting against the pandemic, support to the business sector and the health sector is crucial.

As regards the deadlines to be adhered to, the whole procedure of Budget preparation and adoption is stipulated by law, envisaging the exact time frame. Accordingly, MPs are to adopt the Draft Budget at a plenary session by 31st December this year at the latest.

As a Government, you base all economic forecasts on expected economic growth of 4.6% and scaled-up gross investments of 8.5%. Are these forecasts realistic, considering that the pandemic has not abated and stabilized, for now at least, and the political situation in the country is not stable, hence it is very certain that parliamentary elections are to be held next year?

Kovachevski: Despite the protracted pandemic effects, in 2021, the domestic economy is recovering at accelerated pace, with growth of economic activity in the first half this year reaching 5.2% and being broad-based, meaning growth is driven by many sectors (trade, industry, service sector, etc.). In 2022, economic growth is expected to accelerate and reach 4.6% amid scaled-up investments, solid consumption growth and stabilized external demand. With the capital expenditures increased and geared towards improving the physical infrastructure, accompanied by measures and activities for their better execution, as well as more significant inflow of foreign investments, which will contribute to growth of private investments, gross investments are envisaged to grow by 8.5% in real terms, i.e. they are expected to be major factor to the economic growth in 2022 and in the medium term as well. Moreover, investments will be encouraged with state support aimed at strengthening the private sector and boosting the competitiveness, innovations and technological development of the companies, by providing alternative financing sources and instruments, one of the key aspects of the Growth Acceleration Plan.

Private consumption is projected to grow by 3.5% in real terms, amid further increase of wages and job creation, increased crediting and remittances from abroad. Export activity is envisaged to pick up by 8.3% in 2022, as a result of the further stabilization of the global value chains and growth of external demand amid increased economic activity at the major trading partners, above all Germany.

Projecting 4.6% economic growth is based on such expectations and policies. Baseline macroeconomic scenario is accompanied by risks, which are mainly related to the duration and consequences of the health crisis both in the country and globally.

What stands out when you take a look at the revenue side of the 2022 Draft Budget is that the Government projects to collect EUR 1.012 billion VAT revenues next year, meaning the psychological limit of EUR 1 billion expected VAT revenues will be overcome for the first time, being by even EUR 140 million higher in relation to the 2021 Supplementary Budget. What are these so high and ambitious expectations on VAT collection based on, which consumption will stimulate that much the increase of this tax collection?

Kovachevski: Such projections are based on projected increased private consumption, overperformance of VAT collection this year, as well as the activities and the policies implemented to the end of reducing the informal economy.

As for next year, private consumption is projected to grow by 3.5% in real terms, amid further increase of wages and job creation, increased crediting and remittances from abroad. Expected improvement of the epidemiologic picture will have positive effect on private consumption by increased vaccination rates and increased utilization of the service capacities. With respect to the current Budget execution, VAT revenue collection overperformed in relation to 2021 projections. Hence, since the beginning of this year by 16th November inclusive, VAT revenues were collected in the amount of Denar 50.1 billion, being higher by 26.7% compared to the same period last year.

Decreased informal economy, i.e. decreased tax evasion through all mechanisms Ministry of Finance and its administrative authorities implement, is the key priority of the Ministry, and certainly one of the main reasons for the expected increase of VAT revenues.

The Government plans to spend even EUR 4.43 billion budget funds next year, making 2022 Budget the bulkiest one ever in the country’s history. What would you say in support thereof, why is it necessary to spend so much money, couldn’t we be a bit more prudent and cautious amid protracted pandemic and great indebtedness of the country?

Kovachevski: Upcoming 2022 will be a year of further economic recovery and accelerated growth via investments, projected in the Draft Budget at historic high, funds allocated therefore being higher than the budget deficit amount for the first time ever. Still, amid the risks related to the protracted COVID-19 pandemic, protecting the health and the lives of the citizens is crucial, with the regular payment of wages, pensions and social contributions and support to the economy as an integral part thereof.

Facing the new reality due to the pandemic challenges, to recover and to thrive in these changing times, we, as a Government, aim to implement the Growth Acceleration Plan as a general framework which consists of all the elements that could contribute to better utilization of resources and increased growth potential in the medium term. Besides the current activities that we have located, we suggest innovative ways to finance the investments, to consume all the available funds offered from official creditors and finally to reach all the possibilities to mobilize private investments.

The private sources of financing will be encouraged by public funding and a rich array of conventional and innovative financing mechanism and instruments. The assessed combined impact of the Growth Acceleration Plan (2022-2026) is EUR 12 billion invested in projects designed and implemented by both the public and private sector.

You plan a gradual fiscal consolidation, however, considering the Budget, the budget deficit next year should amount to EUR 545 million, with public debt expected to account for 65.5% of GDP. Such level of debt has already entered the “red” zone according to the experts, and is also above the Maastricht criteria. Should this worry us and is there any danger of public debt not being serviced?

Kovachevski: At European and regional level, moderately high budget deficit is needed in 2022 as well to support the economy and to achieve accelerated, sustainable and inclusive economic growth. Excessively speedy fiscal consolidation would aggravate the economic recovery. If we look at IMF projections, budget deficit in Turkey is projected at 5.6%, in Spain at 5%, in Italy at 4.7% as percentage of GDP, etc.

Next year’s budget deficit is projected at 4.3% of GDP or Denar 33.5 billion in absolute terms. Forecasted deficit is in line with the projections set in 2022-2026 Fiscal Strategy and the commitment to fiscal consolidation. Such budget deficit substantiates the sustainability of the projections, the commitment to budget discipline, the redesign of the budget spending, by increased share of capital and infrastructure-related expenditures in the total expenditures.

Budget deficit for the coming year is projected at the respective level solely due to the execution of capital expenditures, being projected at a higher level than the budget deficit amount, thus adhering to the golden rule of government spending. In order to achieve fiscal sustainability by reducing the budget deficit in 2022, a need has arisen to rationalize the public expenditures, to measure the results from the expenditure execution and to increase the spending efficiency. 2022 Budget projects recovery of the economy hit by COVID-19 pandemic, accelerated growth with scaled-up capital investments, as well as maintaining fiscal stability by reducing the budget deficit in relation to the previous year. According to the medium-term strategy, budget deficit will be gradually reduced. It is envisaged for it to decline to below 3% by 2026. Hence, the deficit is projected at 3.5% and 2.9% in 2023 and 2024 respectively, at 2.5% in 2025, before reaching 2.2% of GDP by 2026. As regards public debt, revised Public Debt Management Strategy will be submitted along with the second reading of the Budget at the Government.
According to unofficial projections, public debt in 2022 will account for 63.5% of GDP, being lower that 65.9% of GDP as projected in the Public Debt Management Strategy.
Among the sources of deficit financing, Ministry of Finance introduces, for the first time in history since its economic independence, new types of financing instruments, those being the following: development bonds, inflation-indexed bonds, green and project bonds, included in the Growth Acceleration Plan.

According to the data which, as I have mentioned before, are being updated at the moment, public debt in 2026 is expected to be below the Maastricht criteria, i.e. below 60%.

When will a eurobond be issued and what will its size be, are any other types of eurobonds envisaged?

Kovachevski: Issuing a eurobond is a regular instrument the countries worldwide use both to raise financial resources to cover the budget deficit and to finance capital projects. Its issuance also brings benefits for the BOP position of the country.

We plan to re-open some of the existing eurobonds next year and, depending on the capital market developments, we will issue it. Projected amount therefore is EUR 250 million. There are always other options to provide these funds, one of them being borrowing a loan from some of the foreign commercial banks.

Issuing a green bond is also one of the options being considered. Green bonds will be offered to encourage projects that support the “Green Agenda” and the “Green Transition”, aiming to improve energy efficiency; prevent or limit pollution; facilitate waste management; support sustainable agriculture, fishing and forestry; protect aquatic and terrestrial ecosystems; provide clean transport and sustainable management of waters; cultivate environment-friendly technologies, etc. Unlike the existing bonds, green bonds will be used solely for environmentally eligible investment projects or green development, with the proceeds used for covering the capital expenditures. Introducing this instrument will facilitate the development of the financial market on the medium term. In order to continuously strengthen the government securities financial market and pursue the worldwide practice, Ministry of Finance undertakes activities aimed at diversifying the sources of financing and introducing new types of financing instruments.

The citizens have not yet been given a strongly substantiated explanation on why capital expenditures for next year are projected in such high amount of up to EUR 615 million, being by even EUR 130 million higher than the amount projected in the 20221 Supplementary Budget. We are aware that, throughout the years, projected capital expenditures have been under-utilized and, this year as well, expenditure execution accounted for only 47% in the first nine months. Could you explain the so high projected expenditures for capital investments and how can you guarantee they would be actually spent as projected?

Kovachevski: In the period 1st January – 12th November 2021, capital expenditures were executed in the total amount of Denar 16.5 billion, accounting for 59% of the total capital expenditures projected in 2021. During the same period, share of executed capital expenditures in the total executed expenditures reached 7.4%. Compared to the same period in 2020, execution of capital expenditures was higher by Denar 6.6 billion or by 66.2%. The CAPEF mechanism, already put in place, yields results, and it will be applied next year as well. The mechanism envisages to control and reallocate the funds each quarter throughout the year to the end of ensuring their better execution. In addition, performance-based budgeting will be introduced next year. It is aimed at improving the efficiency and effectiveness of public expenditures by linking the funding of the public sector to the results they deliver. Therefore, five-year performance indicators, so called input and output indicators, will be put in place with the 2022 Budget already, to be designed with technical assistance from the international financial institutions, such as IMF. Next year’s capital expenditures are projected at around Denar 37.8 billion. According to all of its features, the 2022 Draft Budget includes a development component. Budget’s development component is reflected in the increased funds for capital expenditures by approximately 27% compared to 2021. Funds will be intended for intensifying the implementation of infrastructure projects, i.e. investments in road and railway infrastructure, energy and utilities infrastructure, as well as capital investments aimed at improving the conditions in the health, education and social systems, agriculture, culture, sports, environmental protection and judiciary. It is of great importance that this Draft Budget adheres to the golden rule of government spending. In 2022, capital investments will be higher that the budget deficit for the first in the last decade, meaning borrowing will be targeted solely for investment projects. Capital expenditures in 2022 are projected at all-time record high level, accounting for 14% of the total expenditures. When executing the Budget, we will adhere to the value for money principle, with citizens’ money being geared towards generating greater benefits in attaining the goals for higher quality of life.

With the performance-based budgeting put in place, efficiency and effectiveness of public expenditures will be improved by linking the funding of the public sector to the results they deliver. Budgeting must not be viewed as an isolated initiative, but rather as a part of broader institutional reforms, the goal of which is better quality of life for the present and the future generations. 2022 Draft Budget, including a development component, will ensure uninterrupted financing of the state’s functions, as well as strong financial support for economic recovery and accelerated, inclusive and sustainable economic growth.

The Government has talked big about reducing the current expenditures next year, as well as the goods and services related expenditures. However, expenditures related to wages will increase, amounting to even EUR 531 million due to increased wages of health workers, judiciary and prosecution staff, inspectors, …. Will such expenditures increase solely on the basis of increased wages or will there be new employments in the public administration, since as the Government has promised “new employments will be strictly controlled” within the Budget?

Kovachevski: Wage increase in 2022 is intended for health workers who, amid pandemic, put superhuman efforts to care about and protect the health of all citizens, judiciary staff, inspection services which are to contribute to reducing the informal economy.
All in all, we remain committed to optimizing the administration by controlling new employments, as well as improving the standard of living of the employees and increasing the motivation for professional, high-quality and complete fulfillment of the working tasks.

This is evident if wage-related expenditures are analyzed as a percentage of the total expenditures, showing decrease in the past years. In 2016, they accounted for 14% of the total expenditures, 13.3% and 13.2% in 2017 and 2018 respectively, dropping to 12.8% in 2019 and 12.2% in 2020, accounting for 11.8% of the total expenditures in 2021.

Could you please explain what precisely over than EUR 2 billion, i.e. EUR 2.024 billion, as social transfers will be used for next year, and how can it be expected for a budget to be a development one if almost half of the budget funds are allocated in the social sphere?

Kovachevski: Social transfers, projected in the amount of Denar 124.49 billion, include all projected amounts for ensuring uninterrupted financing and payments related to the following: expenditures related to pensions in the amount of Denar 64.35 billion, being increased in relation to 2021 on the basis of larger number of expected retirees and regular indexation of pensions pursuant to the Law on PDI; transitional costs, related to transfer to the second pension pillar, on the basis of fully-funded pension insurance contributions in the amount of Denar 9.87 billion; unemployment benefits, pertaining to cash allowance and other unemployment rights in the amount of Denar 1.4 billion; active employment measures, related to the measures envisaged in the Operational Plan on Active Employment Programs and Measures, defining the target groups of unemployed persons, in the amount of Denar 1.81 billion; social allowances, related to social protection rights, allowances for civilian invalids of war, soldiers and war invalids and social allowances for child protection, in the amount of Denar 11.09 billion; as well as health care, which basically comprises the HIF Budget, most of which is used to finance healthcare services through the public health institutions and sick leave, in the amount of Denar 36.05 billion. As you can see, it is an item of great significance for most of the citizens, with the Budget providing for uninterrupted payment of pensions, financing of health services and social assistance, as well as active employment measures.

On the first day of the parliamentary debate at the Financing and Budget Committee, the opposition was interested, among other things, in why EUR 1.05 billion is going to be paid for pensions next year? Your answer please?

Kovachevski: Denar 64.3 billion is projected therefore in the 2022 Draft Budget, by 2.8% more compared to 2021 projections. As a Government, our goal is to provide for a dignified standard of living for the elderly. Since this Government has taken office, with respect to pensions, pursuant to law, they are indexed to the costs of living twice a year. As stipulated in the Law on Pension and Disability Insurance, pensions are indexed on regular basis on 1st January and 1st July according to the percentage of increase of the consumer price index in the previous half-year period in relation to the half-year period preceding it. Hence, next year, like in the years before, pension will be indexed in January and in June according to the increased costs of living registered by the State Statistical Office, to be reflected in the pensions. Moreover, starting 2019, apart from the regular indexation, additional indexation is also envisaged in case GDP in the previous year grows by more than 4% in real terms, as well as additional indexation when minimal wage in the current year increases by more than 15% and average wage in the previous year increases by more than 5%.

30-day energy crisis has been declared due to the high prices of energy sources and the necessity to help the energy companies, projecting EUR 65 million this year even in the first phase of the crisis. Are sufficient funds projected in the 2022 Budget to amortize the possible energy shocks which could protract next year as well?

Kovachevski: Funds for the energy crisis are also projected in the 2022 Draft Budget, in particular Denar 5.4 billion is allocated to a special program so as for the country to be able to respond to crisis situations, such as the energy crisis and the COVID-19 induced crisis.

To the end of mitigating the consequences of this large-scale energy crisis which goes global, affecting not only the Republic of North Macedonia, adequate steps have already been undertaken. Electricity supply crisis has been declared and adequate measures and activities are being undertaken to supply additional quantities of electricity, including the balancing energy and the active power reserve in line with the declared crisis situation pursuant to the Energy Law. Denar 4 billion has already been allocated in the 2021 Budget and transferred to AD ESM to supply additional quantities of electricity. Moreover, to the end of protecting the most vulnerable categories, Ministry of Labour and Social Policy, in coordination with the Ministry of Economy, are to prepare measures to support the socially vulnerable categories to use additional funds for protection against energy poverty. Such measure has already been implemented, with 45,622 socially vulnerable consumers being allocated Denar 1,000 support allowance to cover the heating costs. Measure we have adopted and is already being applied, aimed at protecting the living standard of the citizens, is the reduction of VAT on electricity from 18% to 5% for the households. All activities undertaken are geared towards ensuring sufficient quantities of electricity and mitigating the price effect.

Inflation rate next year is projected at 2.4%, to stabilize in the second half of the year. Isn’t it to too low considering the price surge and does the Government actually have any method and plan on how to protect the citizens from any possible significant rise in price increases?

Kovachevski: Inflation rate in the first nine months this year accounted for 2.8%, driven mainly by the increase in food and energy prices due to the price pressures stemming from external factors. Rise in prices of both commodities and energy is expected to stabilize by mid-2022 at the latest, with the inflation rate being projected at 2.4%. Projections are being considered globally, according to the projections of the IFIs. As so far, the Government will undertake active measures in line with the projections and the ongoing market developments, coordinating with the monetary policy.

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