10th July 2022, Skopje – The Parliament will debate 2022 Budget modifications and amendments on its plenary session on Monday. As I was going through the exposé and the materials, I got inspired to write this column, covering several topics which are extensive and distinct, yet strongly linked, such as the global economic developments, the Budget and its financing and the EU perspectives. Through my columns, I always try to anticipate and show the bigger picture, since the economy always requires strategy and planning. Hence, I will again write about, through facts, the aspects of public finances in the prevalent context and how to easier reach what we strive for – accelerated and sustainable economic growth.
According to the latest June projections of the World Bank, global growth is expected to slow down from 5.7% in 2021 to 2.9% in 2022, as a result of the deep recession to hit both Russia’s and Ukraine’s economies, spillover from the crisis in the other economies, demand slowdown, as well as withdrawal of fiscal support and the high inflation. As regards 2023, economic activity is forecast to accelerate only slightly to 3%, in particular as a result of the high commodity prices and continued monetary tightening, expected to persist. In 2024, global growth is projected at 3%, as activity converges to its long-run potential pace.
Avoiding Stagflation
For the time being, all relevant international institutions forecast a positive economic performance this year. Still, most of them envisage danger of stagflation. In its June 2022 “Global Economic Prospects”, World Bank red-flagged inflation rates running at multidecade highs, surging borrowing cost of the countries following the pandemic, tightening of the monetary policy to rein in the inflation, as well as tightening of the financial conditions and longstanding slowed down investment activity.
In order to reduce the risk of stagflation, global policy makers are to strive for boosting the supply of food and energy commodities, with announcements of future supply helping reduce prices and inflation expectations. It is necessary to speed the transition to low-carbon energy source, extend help to those affected by the war in Ukraine, consider the options for debt write-off or relief for the low-income countries, as well as strengthen health preparedness and efforts to contain COVID-19.
Amid protracted inflationary pressures, developing economies, which faced significantly narrowed fiscal space to respond, are to focus primarily on protecting the vulnerable groups affected by the crisis. At the same time, prudent public debt management is required in order to provide for both its sustainable financing and macroeconomic stability.
Supplementary Budget – Measures Envisaged for both the Citizens and the Business Sector
At the onset of the energy and price crisis, Government of the Republic of North Macedonia reacted with a strong fiscal response, in order to slow down the spillover effect of the imported inflation on the domestic products. Next set of anti-crisis measures, to be presented following the adoption of the Supplementary Budget, includes targeted measures aimed at those most in need, yielding optimal results. Pace of implementing the measures will conform to the economic trends, whereby it is expected for most of them to be in effect in the fourth quarter of 2022. Measures will be put in place for the citizens and the businesses, as well as for support for food price stabilization. At the same time, a prudent policy will provide for both preserving the fiscal space and, most importantly, ensuring maintenance of macroeconomic stability.
Under the Supplementary Budget, additional Denar 19 billion is allocated to many categories and objectives so as to absorb part of the crisis effects. Around one third of these funds are projected as a buffer, which will be used for a new set of measures. Further on, additional funds are also allocated as subsidies for the farmers to the end of stimulating the domestic production, with a positive effect on the food prices. As regards the most vulnerable groups, additional funds are allocated as support to cope with the price shocks, and funds are also envisaged for pension increase – systematically, in line with the wage increase and CPI increase. Funds are also projected under the Supplementary Budget for companies’ wage increase subsidies, as well as investment support programs. Moreover, in addition to the Budget, support to the citizens and the business sector affected by the energy crisis and the inflation is also provided in the form of favourable loans from the European Bank for Reconstruction and Development in the amount of EUR 100 million to preserve ESM’s (Power Plants of Macedonia) liquidity (which sells below the production costs so as to absorb the price shock on the regulated market, i.e. “subsidizing” the electricity bills, above all those of the households) and the European Investment Bank in the amount of EUR 100 million to support the business sector through favourable and/or interest-free credits, with the commercial banks also participating through the Growth Acceleration Plan model with additional EUR 100-200 million. I have not listed here the existing measures already included in the Supplementary Budget, such as the reduced VAT on electricity for households, VAT refunds in the amount of Denar 2.2 billion to the citizens under the “MyVAT” Project and other measures being systemically set, helping the vulnerable categories in times of crisis, such as guaranteed minimum income and other active labour market measures, as well as the new methodology that provides for constant indexation (increase) of pensions and minimum wage to inflation and price increase, all to the end of protecting the living standard and the integrity.
Even with the crisis, we have kept the expanded development component of the Budget with Denar 32.1 billion as capital investments which, despite the downward revision under the Supplementary Budget, they are at historic high as yet.
Debt and Deficit Limits Set
As regards the economy, maintaining stability and prudent public debt management are equally important for it to get back to the accelerated growth trajectory. Hence, under the draft Supplementary Budget, the budget deficit is widened so as to provide funds for the anti-crisis measures, but it is still low compared to last year.
According to the latest data, government debt dropped to 46.8% of GDP at the end of Q1 2022, with public debt decreasing to 54.9% of GDP. As per IMF assessments, level of public debt for the developing countries of up to 70% of GDP is considered as stable. Our commitment to prudent public debt management to the end of its stability and sustainability is also reflected in the medium-term limits set in the Public Debt Management Strategy, compiling the public debt framework for the period 2023-2027. Such medium-term limits define the maximum sustainable level of total public debt in relation to GDP and the level of guaranteed public debt in relation to GDP. In order to keep sustainable level of public debt, limit on the total public debt in the medium and the long run should not exceed 60% of GDP. However, as a result of the economic crisis induced by COVID-19, most of the European Union countries, as well as the countries in the region, have been forced to widen their budget deficits all to the end of ensuring funds for managing the pandemic, which has resulted in increased level of public debt by more than 10 percentage points. Due to the severity of the crisis, European Union suspended the fiscal rules by the end of 2022. Our medium-term projections show that public debt will exceed the 60% threshold in the period 2022-2025, but as a result of the fiscal consolidation measures, getting back to 60% of GDP is envisaged in 2026 and 2027, with government debt reducing to around 50%. New Budget Law is expected to be voted at the Parliament by the end of July. It also envisages fiscal rules on public debt and budget deficit, as well as establishment of a Fiscal Council, as exceptionally important for the fiscal sustainability, coupled with many other reforms which will lead to more efficient and more transparent public finance management.
Maintaining public debt stability requires our strong commitment to gradual fiscal consolidation. Latest Fiscal Strategy with prospects until 2027 envisages gradual fiscal consolidation, with a reduced budget deficit as a percentage of GDP: 4.2% in 2023, 3.6% in 2024, 3.2% in 2025, 3.0% in 2026 and 2.8% in 2027. In order to strengthen the fiscal discipline, medium-term fiscal strategy includes limits on budget expenditures, limits by budget user, as well as medium-term projections for the local government and the public enterprises and the state-owned joint stock companies. Envisaged fiscal consolidation encompasses three main aspects: improving budget revenue collection via measures aimed at reducing grey economy and preventing and eradicating corruption; reducing and restructuring budget expenditures, by cutting non-priority and non-essential expenditures, greater support for the private sector and the innovations, support to the vulnerable categories and revision of methodologies for transfers and subsidies; and changes in the sources of financing the budget deficit, greater diversification of the source of financing the deficit, financing and implementing certain projects through public private partnerships and establishing a Development Fund. This is all envisaged in the Growth Acceleration Plan which, by including various sources of financing, will underpin the investment activity, thus accelerating the growth and reducing the deficit at the same time. Here, I would also like mention the financial support for maintaining macroeconomic stability, i.e. IMF 2022-2023 Precautionary and Liquidity Line, as well as other IMF and World Bank development programs.
EU in the Context of the Economy, the Growth and the Investments
What is crucial is the access to the EU funds, as well as foreign investments growth, as one of the many benefits for the economy from the EU integration. Taking into account that Growth Acceleration Plan envisages for country’s economic growth to double by mobilizing capital from various sources and reaching historic high rates of above 5% sustainable growth, EU integration, from an economic point of view, plays an important role in implementing the respective Plan.
If one takes into account the experience of the other countries in the process of EU integration, it shows an intensified economic activity, boosted competitiveness and foreign trade, increased foreign investments and job creation. Economic growth in the Czech Republic, for instance, accelerated from 2.7% to 6.1% following its accession to the EU. The integration also has positive impact on the infrastructure development, as well as the other sectors such as the ICT industry, tourism, agriculture and education.
General advantages of EU accession are stability, democracy, security and prosperity, stimulus and support to GDP growth, more jobs, higher wages and pensions, growing national market and domestic demand, free movement of labour, goods, services and capital, as well as access to a market with more than 450 million consumers. And the macroeconomic impacts are growing inflow of foreign direct investments as a result of increased business confidence, reduced risks, more mobile workforce, efficient transport, stronger competition and a drive for innovation, state subsidy system harmonized with EU regulations, easier access to financial institutions and funds, additional increase in GDP and industrial output growth due to higher export sales dynamics.
Businesses will also have benefits – increased access to EU funds and support for SMEs, no customs or quantitative restrictions within the EU and simplified administrative procedure when trading with other EU member states. With respect to reduction of non-tariff trade barriers, it is worthwhile to also mention the mutual certification of goods, single standard certification process for the entire region and enforcement of competition policy and intellectual property rights.
In a nutshell, benefits are undeniable from an economic aspect. It is clear that our economy, after a long period of economic growth rates of around 2.5% on average, and economic shocks of the pandemic, the energy and the price crisis, needs a booster, a catalyst, to accelerate the growth. Sound and viable strategy with the Growth Acceleration Plan is in place and we have opportunities we are to use. At the close, the full picture is always crucial for making the right decisions.
Fatmir Besimi, Minister of Finance
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