11th October 2022, Skopje – Different crises require different solutions. The best response is always the one delivering the best results in the long term, while policies adopted “today” should always take account of “tomorrow”. This is the right course to take in overcoming a crisis.
With this opening wording, I dedicate the column to tackling the current crisis and the ongoing measures undertaken to lessen its impact. The new set of measures is just one part of the whole set of economic policies conducted to the end of maintaining social and economic stability. I will try to give an overview in this column of what has been done and what follows.
In the past three years, the world faced multiple overlapping crises. As a result of non-economic factors – the pandemic, the climate changes and the war in Ukraine, the world is facing the most severe economic crisis witnessed since World War II. First, the pandemic caused for the economic activity to plunge sharply. Recovery of the economic activity has created supply bottlenecks, in particular as regards energy products, causing price pressures globally. War in Ukraine has additionally worsened the energy crisis and the inflation. Price of energy products, impact of imported price on domestic one and inflation expectations will be the key challenges to address in the coming period.
We Have Overcome the Pandemic, but New Crises Emerged Demanding a Rapid Response
Response by the fiscal policy to the consequences of the pandemic for the economy was energetic. Slowed down economic activity was stimulated by encouraging both public and private consumption. Activities were undertaken, in coordination with the monetary policy, aimed at increasing the liquidity in the economy. The Government has supported the vulnerable categories, the companies affected by the crisis and the job retention through six sets of anti-crisis measures worth EUR 1.2 billion. Foreign capital was therefore provided, the cost of which amid the pandemic was at record low, due to the relaxed monetary policy of the central banks. However, as a result thereof, public debt surged by ten and so percentage points, as was actually the case in all developing countries. Still, the overall strategy gave results and the decline was significantly mitigated. The economy continued recovering the next year, experiencing 4% growth.
We are now facing different kind of challenges. Initial consequences of the pandemic were overcome, however, uneven recovery of both the supply and the demand has created bottlenecks in the global supply chains. As a result thereof, price pressures have been more pronounced, above all as regards energy products and other primary commodities. With the outset of the war in Ukraine in February this year and the sanctions against and from Russia, the price pressures have become even more pronounced, taking into account the role of Russia and Ukraine in the global supply chains (above all energy products and grain crops).
Record High Prices of Energy Products and Food, Inflation and Trade Deficit
Prices of oil, gas and electricity have reached record high levels. Price of natural gas experienced a huge jump in the second half of 2021, continuing its surge in 2022. Hence, in 2021, average price of gas in Europe picked up by 370% compared to 2020. In the period January – August 2022, average price of natural gas in Europe reached 1,389.5 $/1000m3, increasing by 143.7% compared to 2021 average. In August, gas price amounted to 2,478.2 $/1000m3. Subsequently, price of electricity also picked up. Average price of electricity in the period January – August 2022 was 272.7 EUR/MWh, being higher by 139.4% compared to the average price in 2021. In the course of September, average price of electricity amounted to around 390 EUR/MWh, slightly dropping compared to August 2022, when average price reached 495 EUR/MWh.
Furthermore, food prices, in particular price of cereals, hit record high globally in the last 22 years, as per the data of the Food and Agriculture Organization of the United Nations and the IMF. Price of maize in 2021 was higher by 56.9% in relation to 2020, while as of August 2022 inclusive, average price picked up by 22.6% compared to 2021. Price of wheat in 2021 grew by 23.7% in relation to 2020, with average price being higher by 35.6% in the period January – July 2022 compared to 2021 average. Following the record high levels in the period March – May, price of wheat dropped in June and July 2022. Price of sunflower oil was higher by 59.4% in 2021 in relation to 2020, with average price of US$ 1,820.6 per ton in the period January – August 2022, additionally increasing by 29.7% in relation to 2021. Its price reached US$ 2,361.1 in March, being all-time high, dropping to US$ 1,496.2 in August. Prices of beef and chicken meat also picked up on the global stock markets.
As a small and open economy, we are exceptionally susceptible to these global trends, above all, the spillover of import prices on the domestic prices of goods and services, resulting in accelerated inflation since the beginning of this year by August inclusive by 11.6% annually. Rising prices of food products, oil derivatives and electricity accounted for 73% in the inflation increase in the respective period. Core inflation, excluding the volatile components – food and energy products – grew by 5.9% in the first eight months of 2022.
Moreover, global trends affected the trade deficit and the current account, above all as a result of the increase of prices on the stock markets. Almost 70% of the electricity demand is covered from domestic production capacities, with around 30% being imported. According to the data of the State Statistical Office, value of net import of electricity in 2021 was higher by EUR 126.5 million, i.e. by 114.4% in relation to 2020. Rising value of net import was mostly due to the increased electricity price on the international market, taking into account that quantity of imported electricity in this period surged by only 6.5%. This is also witnessed by 2022 data, when as of July inclusive, import reached EUR 351 million, being an increase of 220% compared to the same period in 2021, when the quantity of net imported energy declined by around 22%. The case is similar with the import of oil and oil products, with the value of import increasing by 62.5% in 2021 in relation to 2020, when the quantity of net import surged by 5.5%. During the first seven months of 2022, value of net import of oil grew by 119% in relation to 2021, when the quantity of net import surged by only 9.4%. As a result, trade deficit significantly widened in the course of 2021 and 2022.
Since the beginning of this year, our economy has continued recovering, registering 2.6% growth in the first half. Still, additional threats, apart from the abovementioned, are the expected greater prudence of both the consumers and the investors, impact of the price of energy products on the production capacities and the effects on the export.
Hence, an equation is to be laid down for the policies which the Government is to implement in this particular crisis. Economic activity, as well as social stability, are to be kept in the positive zone on one hand, with the macroeconomic stability, in terms of debt and inflation, being maintained on the other, or simply put “not to fan the flames”.
Targeted Measures are the Best Way to Respond
Just several months ago, in one of my previous columns, I wrote about the designing of measures under specific circumstances. By analyzing the ongoing situation worldwide (which did not escalate that much in the respective period), the International Monetary Fund recommended to allow the effectuation of the market forces of supply and demand, thereby undertaking measures to support the most vulnerable categories. Price signals are crucial for both adequate demand response and beginning of the stabilization. A good example thereof is the demand for energy, which is not flexible in the short run, but becomes flexible in the medium run, i.e. price increase may lead to lower demand. Over time, prices will stabilize as a result of the reduced demand.
IMF recommends targeted measures to be put in place to protect the most vulnerable categories, all to the end of preserving the social stability in times of crisis. EU Council gives similar recommendations about the fiscal policy, indicating in its recent October statement that fiscal policy shoud respond to both the energy crisis and the inflationary pressures. The Council emphasizes that the response should be aimed at supporting the vulnerable categories of citizens and businesses, in particular income measures that are exceptional, temporary and targeted to the vulnerable. Moreover, the Council, as the IMF, points out that activities are to be undertaken to work towards reducing the energy consumption, aimed at energy efficiency, renewable sources of energy and other policies which will not distort the single market in the long term. They also emphasize that fiscal policy should refrain from measures and activities that would add to inflationary pressures, as well as that growth potential should be raised in a sustainable manner, facilitating thereby the task of monetary policy to stabilize the inflation in the medium term. They also recall that that broad-based support to aggregate demand (as was the case during the pandemic) through fiscal policies is now not warranted.
In addition, recommendations given by international financial organization, such as IMF and World Bank are geared towards fiscal sustainability. Given that the general government debt rose sharply in most developing economies during the pandemic, gradual fiscal consolidation is still advisable.
Economic policies pursued by this Government are prudent and analytical. Every step we take in the fight against this global economic crisis is well-conceived – its ongoing effects, but also the mid-term and long-term consequences therefrom. In times of crisis, affecting so many stakeholders, encountering resistance and resentment about certain taken actions is expected, in terms of them being untimely or inadequate. However, it should also be taken into account that it is a matter of an extremely complex situation and that the most optimal solution, which is to contribute to resolving the crisis as a whole, is always being sought.
Three components of the fight against the ongoing crisis
Our fight against the ongoing crisis contains three components. The first one pertains to the ongoing dealing with the crisis and the protection of the most vulnerable groups of citizens and companies, followed by ensuring fiscal sustainability, thus preserving the macroeconomic stability as well, while the third component is related to the simultaneous implementation of reforms, while putting a new and improved public finance system in place, which will contribute to accelerated economic growth upon the economic recovery.
Since the onset of the energy and the price crisis, compared to the other Western Balkan countries, our Government responded most vigorously thereto, whereby as per the World Bank Group assessments, the funds intended therefor account for around 5% of GDP. It is a matter of a support in the form of subsidies, social protection, tax exemptions, all this being coupled by the support extended to domestic energy companies. For comparison purposes, such support accounts for 2.5% of GDP in Serbia, around 2.1% in Kosovo, 1.4% in Albania, 0.5% in Bosnia and Herzegovina and 0.1% in Montenegro.
Thereby, at the onset of the war in Ukraine, we responded more vigorously thereto given the risk of excessively rapid inflation. Set of measures aimed at coping with the energy and price crisis, adopted in March, amounted to around EUR 400 million, in the form of a direct support to the citizens, all to the end of improving the living standard and extending support to the business sector. Measures aimed at reducing VAT on electricity (from 18% to 5%), as well as commodities (from 5% to 0%) led to reducing the inflation by around 3 percentage points, whereby in the period January – June 2022, inflation rate accounted for 10% rather than 13% (if it were not for these measures). Thereby, some of the measures, pertaining to tax exemptions and cheap loans for the companies covered under this set, have been further extended, i.e. by the end of the year.
Government also provided transfers to ESM in order to cushion the effects of the rising market price of electricity, i.e. only 20% of the real market price is now paid on the regulated market.
In addition, under the 2022 Supplementary Budget, new measures have also been adopted, being more targeted than those under the set adopted in March. In fact, under the Supplementary Budget, 36,000 households are to be extended increased social guaranteed minimum assistance with respect to the social protection rights. Furthermore, additional EUR 73 million has been provided, aimed at increasing the pensions for more than 330,000 retirees. Additional EUR 17.5 million has been provided for wage increase subsidies for the employees in the private sector. Additional EUR 52 million has been allocated as subsidies and transfers for farmers, all to the end of easier coping with the food supply crisis. Additional funds have also been provided for transfers to the energy companies, for the purpose of maintaining the electricity price at low level.
Under the latest set of measures adopted in October, being presented by the Government on Sunday, targeted measures have been again put in place, amounting to approximately EUR 360 million, being intended for the most vulnerable categories of citizens, providing targeted support for the public and health institutions, supporting the liquidity of companies and investing in the energy efficiency and renewable energy sources, all to the end of generating the most optimum results. Financial support has been planned to be extended to around 42,000 social security beneficiaries, people exercising the right to disability, parents of children with disabilities up to the age of 26, exercising the right to a special allowance, people with disabilities using the right to a third party aid and care rather than the disability-related right, single parents- beneficiaries of guaranteed minimum assistance, unemployed persons – beneficiaries of the right to pecuniary assistance (bankruptcy workers). They will receive Denar 3,000 per month for a period of four months, i.e. a total of EUR 200 as a financial support geared towards handling the crisis more easily. Financial allowances have also been projected for the recipients of lower pensions, whereby those receiving less than Denar 11,500 per month will be extended total of EUR 100, while those whose pensions amount from Denar 11,500 to Denar 14,000, will be extended EUR 50. It is a matter of around 160,000 pension beneficiaries.
As part of the measures aimed at supporting the companies, it is envisaged to expand the scope of companies, being beneficiaries of the guarantee scheme under the Guarantee Fund of the Development Bank, by simplifying the application criteria therefor. Moreover, direct credit line has been projected to be provided as liquidity support for micro, small- and medium-sized companies, sole proprietors and craftsman operating in the field of production. VAT refund will be speeded up and increased, adjusted by the effect of the inflation and the real growth, whereby the measure implemented via the Development Bank and the commercial banks, pertaining to the crediting of projects related to energy efficiency and renewable energy sources, will be extended, while providing additional support for consulting services needed for the project preparation.
Subsidizing the energy companies will pursue, the goal of which is maintaining a lower electricity price than the market one, while primary and secondary schools are to also join the regulated market, while electricity will be sold to healthcare institutions at a price lower than the market one.
Some of the anti-crisis measures under the set adopted in March, have also been extended. The 5% preferential VAT tax rate on household electricity will apply by the end of the year. Direct financial assistance for the vulnerable electricity consumers (Energy Poverty Program) will also be extended. VAT exemption when importing natural gas and electricity, heating energy or cooling energy, will continue to apply until the end of the year. Credit line for green transition implemented via the Development Bank remains to be available.
The Government adopted Fiscal Sustainability and Economic Growth Support Plan
In addition to the set of measures aimed at providing support to the most vulnerable citizens and companies, the Government also takes actions geared towards preserving the macroeconomic stability. I would like to hereby mention the Fiscal Sustainability and Economic Growth Support Plan, intended for the budget users, which the Government adopted on Sunday.
Plan comprises consolidation of wage expenditures by streamlining, as well as optimizing the public sector employees on the basis of the functional analysis, as well as by reorganizing the way of performing work duties depending on their nature and introducing remote work for up to 30% of the employees, via their rotation, without thereby disrupting the regular operations of the institutions. Consolidation of expenditures related to goods and services has also been projected by making savings on overhead and travel costs and office supplies, coupled by the introduction of new capital expenditure execution mechanisms, also including CAPEF mechanism, delivering positive results so far.
At the same time, activities will continue to be undertaken, aimed at improving the public revenue collection through further improvement of the tax regulations to the end of optimizing the tax system, as well as strengthening the capacities for public revenue collection, as well as intensified revenue collection from tax and customs debtors. Activities will be undertaken so as to increase the efficiency and effectiveness of the excise revenue collection system, by developing policies, systems, procedures and instruments for efficient revenue control and collection, further enhancement of the paperless system for handling the excise documents and increasing the efficiency of excise controls by introducing targeted controls over high-risk excise goods, as well as by intensifying the cooperation with the relevant agencies in the EU countries and the international institutions. In addition, activities have been reinforced, being aimed at tax evasion prevention, as well as raising the public awareness about the detrimental consequences from the informal economy, and strengthening the tax morale.
I previously wrote about the public finance management reforms, above all the new Organic Budget Law, which are to be further elaborated in one of my next columns.
In conclusion, I would like to stress that the ongoing battle is on many fronts and that every action we take has impact on multiple levels. We are putting efforts to also overcome this crisis in the most optimal manner, with as less consequences as possible. I believe we will be able to attain this, as we actually managed to overcome the COVID-19 induced economic crisis, as noted by the international financial institutions. By keeping a cool head and by having both a broad perspective and a strong sense of personal responsibility by all social stakeholders, we will manage to overcome this challenge as well. We will put this crisis behind us together, and the time needed therefor depends again upon each and every one of us.
Fatmir Besimi, Minister of Finance