24th May 2022, Skopje – On Saturday, the 2022 Draft Supplementary Budget was presented to the public, upon being adopted by the Government. Given the new geopolitical developments and their effect on the global economy, the budget restructuring was geared towards adjusting the projections to the new macroeconomic background, providing funds in response to the crisis, optimizing the sources of financing and preserving the fiscal sustainability. Before I address the proposed modifications and amendments to the 2022 Budget, I would like to point out that this is a timely, moderate and proactive response to the global developments. That is the next logical step, which should be taken.
Earlier this month, Supplementary Budget was also adopted in Croatia. Croatia revised its GDP growth forecasts downwards by 1.4 percentage points, i.e. from 4.4% to 3% growth this year, while increasing the inflation rate forecast from 2.6% to 7.8%. Croatia’s budget revenues were increased, as well the expenditures, being higher than the revenues, with the budget deficit being widened. In principle, the amendments they made are similar to the amendments we proposed under the Supplementary Budget.
War in Ukraine, a trigger of global and domestic economic flows
What is the background thereof? This year’s Budget projections were made in the second half of 2021. Last year, global and European economies were recovering rapidly, which was the same case with the countries in the region. Coping with the pandemic, the immunization process, the more favorable international position, as well as the reopening of the economies, contributed to accelerated growth. Last year, our economy recorded a solid economic growth of 4%. In the course of last year, certain price pressures emerged, above all at energy products and some other commodities on the global markets. These pressures stemmed from the disrupted global supply chains during the pandemic, i.e. the supply did not recover quickly enough to match the demand, which was getting back to normal. However, the international institutions expected for such mismatch to be overcome and to stabilize in the first half of 2022 already.
However, what international financial organizations, as well as our country did not expects, was the onset of the war in Ukraine. Russia and Ukraine play significant role as regards the global chains, as one of the major exporters of energy products and wheat throughout the world. With the war being started in Ukraine, and the sanctions being imposed on Russia, price pressures were intensified and spilled over, while additional threats for the economies emerged through the trade, the tightening of the financial markets and the uncertainty on the part of investors and consumers. All this led to reducing the expectations for economic growth in 2022.
3.2% growth this year, to pick up to 4.5% in 2023, with over 5% growth rates in the period 2024-2027
International Monetary Fund expects for the global economy to pick up by 3.6% in 2022, being by 0.8 percentage points less compared to the January projection. Economic growth in the EU is projected at 2.9%. This year, GDP in Germany is expected to increase by 2.1%.
EU and Germany are our major trading partners. Our economy is small and remarkably open. Accordingly, our projections are in line with their projections. Recovery of the economy will pursue this year as well. The pace will be slower compared to last year, however, 3.2% growth is expected in 2022. This is by 1.4 percentage points lower compared to the projection upon which the 2022 Budget was based. This projection is also in line with the latest IMF projection for our country. Growth expectations are based upon the expectations pertaining to the demand, with the private consumption growth being projected at 3.3%. It is expected for the price pressures impact on the household income to be offset via the minimum wage increase, the increased pensions, as well as via other government measures aimed at cushioning the price shock effects. Real gross investment growth is projected at 5%. In addition to the capital budget expenditures, private investments are also expected to contribute thereto, mostly as a result of the support intended for developing the private sector, as well as boosting the competitiveness.
IMF expects for the inflation in the Eurozone to reach 5.3% annual rate, while in the upcoming period, it is expected to slow down, and to be again reduced to 2% annual inflation rate. In line with the domestic ongoing developments, as well as the expectations about the inflation in the Eurozone and the spillover effect in our country, annual 7.2% inflation rate was projected. International financial institutions expect for the prices in the second half of the year to start stabilizing moderately and gradually until their full stabilization next year. Accordingly, 3.5% inflation rate is projected in 2023, which is expected to stabilize and account for 2% in the medium term.
By stabilizing the price pressures, normalizing the supply chains, as well as by implementing the Growth Acceleration Financing Plan, the economic growth in our country is projected to accelerate in the medium term. As for next year, 4.5% growth is projected, 5.7% in 2024, 5.9% in 2025, 5.7% in 2026 and 5.5% in 2027.
In the medium term, stronger growth of export is expected, with somewhat lower growth rate compared to import. As for this year, net wage is projected to increase by 11% resulting from the minimum wage increase, higher wages in the field of education, as well as in some of the high earning industries, such as the ICT sector. On the medium run, wage growth is projected to continue. Unemployment rate is expected to continue to reduce, being projected at 14.5% this year, expected to reduce, in the medium term, to 8.2% in 2027, while employment rate is forecasted to increase to 54.7% during the same year.
Under the initial 2022 Budget, total revenues were projected in the amount of Denar 238.9 billion (EUR 3.88 billion), being higher by 7.4% compared to the 2021 Supplementary Budget, with the expenditures being projected in the amount of Denar 272.4 billion (EUR 4.43 billion) or by 1.4% higher compared to 2021. With the budget revenues and expenditures being projected like this, gradual reduction of budget deficit was also forecasted, i.e. gradual consolidation, which will not reflect on the economic growth.
During the period January – April 2022, total budget revenue collection amounted to Denar 78.9 billion (EUR 1.28 billion) or around 33% of the projected funds. As for the same period, expenditure execution amounted to Denar 83.6 billion (EUR 1.34 billion) or around 30.7% of the 2022 Budget. All liabilities of the budget users, legal rights of the citizens and the due liabilities towards domestic and foreign creditors, were settled on time and on regular basis during this period.
As regards the 2022 State Budget, as of the start of the year, funds amounting to Denar 5.3 billion (EUR 86.2 million) were paid as a financial support for AD ESM Skopje, all to the end of coping with the ongoing energy crisis. In this respect, by timely providing support to the energy sector, the electricity supply issue was overcome, thus protecting the citizens against the price shocks and providing the most favourable electricity price for the companies. This was followed by the set of measures adopted by the Government, being aimed at protecting the vulnerable categories and the business sector, coupled by the measures for making savings at budget users.
During this period, state budget deficit amounted to Denar 4.6 billion (EUR 74.8 million) or 0.6% compared to the GDP projected in 2022.
Given the adjusted macroeconomic projections, the ongoing economic situation, as well as the developments on the international market, the need for its restructuring is evident, all to the end of responding appropriately to the newly occurred situation.
According to the amendments and modifications to the 2022 Budget of the Republic of North Macedonia, total revenues are projected in the amount of Denar 245.8 billion (EUR 4 billion), being higher by approximately Denar 6.9 billion (EUR 112.2 million) compared to the initial Budget projections.
Tax revenues are projected in the amount of Denar 143.2 billion (EUR 2.3 billion), i.e. by around Denar 6.7 billion (EUR 108.9 million) or by 5% more compared to the projected ones under the 2022 Budget. Projected growth of tax revenues is a result of the increased tax base at certain types of taxes stemming from the higher consumption, the average wage increase, the greater profitability of companies and similar, as well as on the basis of the expectations about improved tax revenue collection due to the grey economy reduction, the enhanced tax control, as well as the simplification and digitalization of the tax procedures, accompanied by the further realization of the goals and the priorities set under the 2021-2027 Tax System Reform Strategy.
Total expenditure revision amounts to Denar 288. 5 billion (EUR 4.7 billion) or higher by 5.9%, i.e. by around Denar 16.1 billion (EUR 261. 8 million) more compared to the initial 2022 projections. Anyway, under the Supplementary Budget, cuts were made for many items, totaling Denar 13.4 billion (EUR 217.9 million).
On the basis of such projected revenues and expenditures, deficit is projected in the amount of Denar 42.7 billion (EUR 694.3 million), i.e. 5.3% of GDP, being higher by Denar 9.1 billion (EIR 148 million) compared to the initial Budget.
Additional funds for anti-crisis measures, wages, pensions subsidies and guaranteed minimum assistance
I will thoroughly present the expenditures by items, in order for the public to get familiar with respective increases and the cuts being made thereof.
As for wages and allowances item, Denar 32.3 billion (EUR 526.1 million) are projected or Denar 554.7 more compared to the initial budget for harmonizing the wages of employees at budget users with the minimum wage and the planned wage growth in the judiciary and police sectors. It is worth mentioning that this amount also includes the effects from curbing new jobs, as well as optimizing the public administration, i.e. the state administration at the budget users has been reduced by 500 employees compared to December 2021 when the administration had 87,000 employees.
As regards the reaction by the Federation of Trade Unions with respect to the increase of public sector wages, I would like to point out that comprehensive methodology should be agreed, by which the wages in the whole public sector will be harmonized. This methodology will provide for valuating the productivity, as well as preserving the living standard (increase in the real wage and the inflation). As soon as such methodology is put in place, the respective funds will be earmarked appropriately.
Expenditures related to goods and services are projected in the amount of around Denar 22.3 billion (EUR 362.6 million), being higher by Denar 2.2 billion (EUR 35 million) compared to the initial Budget. While cuts are being made as regards the temporary employments and other sundries, the upward revision in this item is a result of the utility fees, the heating, the communication and the transport, stemming from the increased prices of energy products, aimed at smooth performance of the ongoing activities in the public sector, as well as the expenditures for NATO obligations within the Ministry of Defence, and the envisaged costs for refugees and displaced persons.
Current transfers are projected in the amount of Denar 189.7 billion or by around Denar 19 billion higher compared to the 2021 projections, pertaining to the funds necessary for implementing the economic measures aimed at coping supporting the citizens and the economy.
Buffers are projected to amount to Denar 4.7 billion (EUR 76.4 million), to be used as targeted support for protection of the living standard of the citizens, as well as the companies’ liquidity amid protracted crisis on the global energy products and commodities market.
At the same time, additional subsidies and transfers are projected for direct financial support in the agriculture sector by providing additional Denar 3.2 billion (EUR 52 million) intended for supporting vegetable and animal production, all to the end of stimulating the generation of yields, increased production, boosted competitiveness as well as cushioning of the price pressure of commodities.
Growth is also seen at the item current transfers to local government, being a result of the increase in block grants, pertaining to the increased wage by 15% for the staff in the kindergartens, the primary and the secondary schools, as of September this year.
Pensions are additionally increased, as per the new Pension Calculation Methodology, according to which the pension indexation is carried out as per the trends of the Consumer Price Index, accounting for 50% and the increase in the average wage paid to all employees, accounting for 50%. As for the Wage Increase Subsidy Program, higher amount is projected, being intended for encouraging employers to pay higher wages for the purpose of increasing the economic standard of living of the private sector staff, i.e. the additional projected amount includes the effect as regards the subsidized difference between the contributions for the so-far and the new minimum wage.
As for the beneficiaries of the right to guaranteed minimum assistance, additional financial support is provided, amounting to Denar 2.4 billion (EUR 39 million).
Transfers to the Health Insurance Fund will be geared towards reducing the liabilities of the public health institutions, as well as higher wages for the medical staff and the physicians.
Capital expenditures remain to be at all-time record high level compared to the previous years
Capital expenditures are projected in the amount of Denar 32.2 billion (EUR 523.6 million) or by around Denar 6 billion lower compared to the 2022 projections. I would like to hereby point out that this year’s capital investments remain at all-time record high level, i.e. higher by Denar 8.8 billion or 37.8% compared to last year, as well as higher by twice, i.e. Denar 16.1 billion compared to 2020. CAPEF mechanism is efficient, with the execution being closely monitored and with those showing underperformance, having their funds withdrawn.
Substantial investments are planed as regards the road infrastructure – Corridors 8 and 10. I will hereby mention some of the sections, for which funds are provided, being aimed at planning, project design and construction thereof, these being: Tetovo – Gostivar section/highway extension, construction of new Highway Trebenishta- Struga- Kjafasan, construction of Gostivar-Bukojcani, as well as Prilep-Bitola sections. Feasibility Study for construction of Tetovo – Prizren road will be prepared. What is also envisaged is construction of the eastern part of road Corridor 8 via the sections Rankovce – Kriva Palanka and Kriva Palanka – Bulgarian border, as well as the western part of road Corridor 8 via construction of the highway section Kichevo – Bukojchani and Kichevo – Ohrid section. In addition, credit funds are used for construction of the highway section Skopje – Blace (border with Kosovo), road section Shtip – Radovish, etc.
As regards railway infrastructure, it is planned to finance the three phases of the construction and rehabilitation of the eastern part of the railway line – Corridor VIII towards Bulgaria, as well as the Railway Corridor VIII Project – Kichevo – Border with Albania.
Regarding gasification, construction of national gas pipelines, Skopje-Tetovo section, Gostivar-Kichevo section and Sveti Nikole-Veles section is envisaged, as well as construction of gas interconnection pipelines between the Republic of North Macedonia and the Republic of Kosovo, between the Republic of North Macedonia and the Republic of Serbia, as well as between the Republic of North Macedonia and the Republic of Greece.
A number of other capital projects are also planned, in the field of education and child care, health, environmental protection and waste management… actually, the list is quite long, the agenda is ambitious, as evidenced by the high projected amount of over half a billion euros as capital investments.
Repayment of debts and covering the deficit in 2022, coupled by providing buffers in 2023
2022 projected deficit in the amount of Denar 42.7 billion (EUR 694.3 million), repayment of foreign debt principal in the amount of Denar 6.2 billion (EUR 101.3 million) and domestic debt repayment in the amount of Denar 5.5 billion (EUR 90 million), will be financed via borrowing on the international and the domestic market.
Given the ongoing economic and foreign and political developments, this year, greater focus will be placed on financing via the international markets, thus providing for more funds from the domestic banking sector to be intended for Macedonian economy, whereby, the country’s foreign currency reserves will be additionally increased through the foreign financing sources.
Domestic borrowing to be realized via government securities on the domestic market, i.e. by issuing treasury bills and government bonds, aimed at financing the budget, will be accompanied by the repayment of the government bonds at the same time. Foreign borrowing may be realized through disbursement of funds from loans extended by foreign financial institutions under favorable terms and conditions, being intended for financing certain projects, as well as borrowing for the purpose of financing the budget deficit. In fact, to the end of financing the budget deficit, IMF funds are planned, as well as funds from the international capital market by issuing debt securities.
Thereby, amid energy crisis, health pandemic and war in Ukraine, the terms and conditions on the international capital market are variable and hard to predict. Therefore, for the purpose of ensuring smooth financing of the budget needs, as well as reducing the refinancing risks, this year’s Budget includes cash buffer, which is not to be used during the year but it will rather provide funds for pre-financing during the next year. Funds to be provided on the financial markets, will be used for financing the budget needs in 2022, as well as for partial financing thereof in 2023.
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, which will be used for different purposes, such as development bonds, green bond and project bonds. These bonds are unlikely to be used in the current fiscal year, however, they will rather contribute to portfolio diversification in the medium term, while reducing the risks and the financing costs at the same time.
This Supplementary Budget is an appropriate response to the global developments, to which we, as a small and open economy, are not immune to. More funds are projected for supporting the living standard of the citizens. They provide for supporting the consumption, hence the economy activity as well. Economic activity is also supported through capital expenditures, recording all-time record high level so far. In case a need arises therefor, funds are projected as a buffer, which will be used for a new set of measures.
Although the global background is very uncertain, primarily since the roots of the crisis are political, i.e. being conditioned by the developments in Ukraine and the new sanctions against and from Russia, still, stabilization is expected the next year already. Stabilization of global chains and prices on the global stock markets will provide for reducing the pressures on our economy as well. It is important to overcome these times, by preserving macroeconomic stability, without thereby exerting domestic pressures by boosting inflation expectations.
Fatmir Besimi, Minister of Finance