20th November 2022, Skopje – 2023 Budget parliamentary debate will commence next week. Democratic process of adopting the most comprehensive plan of Government’s policies and measures during a fiscal year continues. I expect for this year’s debate to arouse great interest, considering the current global context, as well as the new features of the Budget arising from the new Organic Budget Law.
Debates are a good thing. Battle of opinions is always welcomed, hence, it is crucial when adopting vital decisions. Transparency is the second key element. Hence, in the house of democracy, Ministry of Finance team and I, as a Minister, will explain and defend the draft Budget, in an accountable and transparent manner, before the MPs. I will point out that, in addition to the revenues and expenditures balance, we will talk about a much broader concept of policies, since it is essential for the economy to recover first, with adequate medium-term policies for accelerated growth and consolidation of public finances being set afterwards.
Our economy, like the other economies worldwide, faced major challenges in the past three years. The pandemic, followed by the energy crisis and the price pressures, escalating with the uncertainty brought by the war in Ukraine, were the underlying reason why desired economic results were not achieved. However, it does not mean that after the stabilization of the global trends, set strategies and planned tools and measures would not yield the targeted results later on. When talking about economic growth and development, it should be noted that it is not a short-term process, but it is rather a long-term process of structural reforms which will yield sustainable results. Medium-term character of the Budget and its designing on the basis of strategic documents, such as the Fiscal Sustainability and Economic Growth Support Plan, the Public Investment Plan and the Growth Acceleration Plan, as a general framework, is a significant step in the efforts to achieve the goals.
International institutions see the COVID-19 induced crisis as a turning point for the future of the global economy, particularly for the less developed and the developing economies. Although it seems that pandemic effects have been overcome, economic challenges the global economy is facing now, i.e. the high price increase and inflation rates, as well as the challenges in energy supply, are related to, or are delayed effect from, the COVID-19 crisis. World Bank 2022 World Development Report notes that emerging economies have been left with very limited fiscal space, now being even more vulnerable by the impending normalization of monetary policy in advanced economies. The need for early detection of hidden financial risks is also highlighted in the Report, since the balance sheets of households, corporate sector, financial institutions and governments are tightly interrelated. Debt restructuring, as well as ensuring access to finances, are also emphasized in the Report. G20 has pointed out the global health architecture, the digital transformation and the inclusion of micro-, small- and medium-sized enterprises in the digital eco-system, as well as the sustainable energy transition to cleaner sources of energy, as priorities in the post-COVID period.
If common aspects of economic theories about economic growth – classical, neo-classical and modern – are considered, they all indicate development of technology and innovations as driving force for accelerated economic growth, as are investments in both physical and human capital. For instance, according to Smith and Ricardo’s classical theory, economic growth rests on capital accumulation, re-investment, specialization and innovation. Neo-classical theory states that economic growth is the result of three factors – labour, capital and technology. Modern theory of economic growth recognizes innovations and science as the driving force for stimulating economic growth. In fact, endogenous theories of economic growth hold that economic growth is generated from within the system, i.e. enhancement of innovations and human capital generate new growth potential, thus overcoming the declining yields of the limited resources as factors of production.
Analyzing all these factors in the modern post-COVID surrounding and considering the specific features of our economy, in this column, I will elaborate on several more general, however crucial views for higher economic growth in our country. Five key steps for accelerated economic growth are presented below.
1. Gradual, But Viable Fiscal Consolidation
Accelerated economic growth and using public finances to stimulate growth require a fiscal space above all. The pandemic, and the energy crisis, have caused for public debt level in most of the developing countries to surge (following the pandemic, SEE countries experienced increased public debt by ten or so percentage points in average). Thus, fiscal space narrowed, and the international financial institutions recommended these economies to target the fiscal response to the energy and the price crisis in order to maintain macroeconomic stability. Therefore, fiscal consolidation is inevitable so as to be able to talk about economic policies that will encourage economic growth.
However, on the other hand, strong fiscal tightening, especially in times when economic growth slows down, can lead to contraction of the economy and negative consequences. Accordingly, following the overcoming of the first and the most severe blow of the pandemic, we commenced to gradually reduce the budget deficit. Under the new 2023 draft Budget, budget deficit drops by 0.7 p.p. in relation to 2022 projections. Our goal in the medium term is for budget deficit to be gradually reduced to below 3%, i.e. below the Maastricht criterion.
I have repeatedly written about the strategy of how to narrow the deficit, i.e. the difference between revenues and expenditures, without thereby jeopardizing the economic growth. However, it is again worth mentioning that this can be attained by putting a mix of measures in place, aimed at improving the budget revenue collection, by strengthening the administrative capacities and improving the services of PRO and the Customs Administration, reducing the informal economy, by also including the tax reform. Moreover, measures are taken for the purpose of reducing and restructuring the budget expenditures, reducing the current expenditures and revising the methodologies for transfers and subsidies. Fiscal Sustainability and Economic Growth Plan has been already adopted to that end. In addition, expenditure-related measures, apart from making savings, also incorporate improving the quality of expenditures, i.e. increasing the share of capital expenditures in the total ones (as foreseen in the 2023 Draft Budget as well), greater support for the private sector, thereby also underpinning the innovations and boosting the competitiveness.
Third part of the fiscal consolidation measures pertain to changing the sources of financing the budget deficit, as well as financing and implementing certain projects via public-private partnerships, Development Fund for Strategic Investments and mobilization of financial capital from the international financial institutions, as well as the private sector. The third type of measure is properly illustrated by this year’s debt portfolio management aimed at financing the deficit, amidst extremely challenging circumstances, wherein the cost of capital rose sharply, due to the monetary policy being tightened by the major central banks. In fact, by combining, for the first time, the issuance of the German registered notes with the funds under the IMF Precautionary and Liquidity Line (last week, the Parliament adopted the Draft Law, as per which EUR 530 million has been made available for a period od two years), as well as funds under the domestic capital market. On the basis of interests alone, few tens of millions of euros have been saved.
Moreover, for the purpose of diversifying the sources of financing, actions will be taken, geared towards enhancing the financial government securities market, which is to be more thoroughly touched upon below.
Mechanisms for controlling the public debt and the deficit have been put into place under the new reform Organic Budget Law. This Law provides for introducing fiscal rules about the debt and the budget deficit, thereby also laying the legal basis for establishing the Fiscal Council – independent body in charge of controlling the fiscal rule implementation.
2. Sound Strategy and Plan on Economic Growth Acceleration
The following adds to the above-mentioned: Growth acceleration requires financial resources, investments, and fresh capital for which other sources, apart from the public sector, should be sought. Therefore, a sound strategy and a plan is necessary therefor.
Strategy for Economic Recovery and Accelerated Growth (SmartER Growth), upon which the Growth Acceleration Financing Plan is based, rests upon four pillars: (i) economic recovery (ii) accelerated, inclusive and sustainable economic growth, (iii) boosted competitiveness of the private sector and (iv) development of human resources and equal opportunities. Most significant measures under this Strategy pertain to public finance sustainability, investments in human capital, physical capital, infrastructure, digitalization, balanced local and regional development, sustainable and healthy environment.
Growth Acceleration Financing Plan is based upon the principle of the Juncker Plan, i.e. in addition to the public capital, the private capital is also mobilized in support of the economic development. Creating and using new mechanisms, instruments, Funds and sources of financing, will provide for producing multiplying effects, as well as mobilizing much more funds and investments from the private sector itself, in addition to the public sector investments. 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, as well as social enterprises, public-private partnerships, concessions and other instruments are also part thereof. These funds will provide for supporting public and private sector projects, entailing boosted competitiveness of the economy, improved quality of life, environment, digitalization, innovations, human capital and social inclusiveness.
Diversification of the sources of financing is also underpinned by the development of the domestic capital market, by introducing new types of financial instruments with diverse application thereof. It is planned to introduce “development bonds”, which will encourage the financing of development projects in the country. Citizens will be able to put their savings in such most secure financial instruments and generate returns, thereby reducing cash savings and underpinning the economic growth. “Green bonds” are also planned to be introduced, geared towards encouraging and supporting environment improvement and protection projects. In addition, “project bonds” are to be introduced, as an alternative wat of financing infrastructure projects, intended for institutional investors.
3. Human and Physical Capital Investments
Both public and private investments are driving force of economic growth and development. Making investments in both human and physical capital is the multiplying part of the GDP equation. Hence, the focus is placed on investments, as per the new Draft Budget as well.
Human capita investments are classified as one of the five key priorities of the Government. I would like to hereby indicate that with technical assistance from the World Bank, we work on Human Capital Strategy, by which North Macedonia stands out as the first country in the region to have such a strategic document in place.
We strive for allocating higher funds with each next Budget as investments in the infrastructure development. Budget structure is changing in terms of having stronger development component. Each next Budget incorporates scaled-up investments. Despite placing special focus on the realized investments at several occasions, the public should be also aware that higher projected funds provide for scaled-up investments. Moreover, mechanisms have been implemented, such as CAPEF, aimed at boosting the implementation as a percentage of the projected amount.
As for next year, higher capital expenditures by around 50% are projected compared to the present year. Budge was designed according to the golden rule of government spending – borrowing, i.e. deficit, solely for the purpose of supporting new investments.
In addition, boosted economic growth can be attained via digitalization, being recognized as a driving force of economic growth in the present-day circumstances, both in the developed and the developing economies. It is a catalyst of the labor and capital productivity growth, as well as way of obtaining products and services at lower price. Digitalization in public sector will provide for improving the services towards the private sector, and simplifying the procedures, while boosting the innovations and the competitiveness in the private sector.
I would like to use this opportunity to address digitalization in the field of public finance, more precisely the Integrated Financial Management Information System – IFMIS, being regulated under the new Organic Budget Law. This system should contributed to increased efficiency and transparency of public finance management operations by transiting the existing defragmented and disconnected systems to a single centralized web-based platform. IFMIS is expected to support the amended legal and institutional budget framework, thus responding to the existing challenges by expanding the scope as regards monitoring the budget execution and the fiscal reporting, covering all expenditure cycle phases (from procurement until payment), as well as getting a picture of consolidated public expenditures in a timely manner. IFMIS will provide for, among other things, establishing a multi-year budget framework, introducing a public investment management function related to the future public-private investment system, an automated system for monitoring the liabilities, including multi-year commitments and centralized data on the assumed liabilities, management of fixed assets and debt management.
Furthermore, its integration will ensure comprehensive and timely availability to the data on public finance, thus contributing to increased efficiency in projecting the liquidity and managing the financial flows as regards the budget. Last week, the Parliament adopted the law, which will provide for realizing this Project in cooperation with the World Bank.
As of the onset of the latest crisis, “sustainability” is unquestionably the key word. Sustainable energy, sustainable agriculture, sustainable finance are the prevalent topics among economic policy makers. Sustainability is a set of smart and accommodative policies that would yield results over a longer time period. Hence, the discussion and implementation of these policies are exceptionally significant for attaining the desired accelerated and sustainable growth. Under the investment agenda, this aspect is certainly taken into account, while as regards finances, development budget policies and fiscal decentralization, in addition to the fiscal consolidation, are also considered.
Resilience amid Times of Crisis and Accelerated Growth Thereafter
Acceleration of economic growth certainly does not have a unique formula, but the steps I elaborate rather play an important role in its attainment. Consistency in implementing the respective policies is also crucial in the overall outcome. It is important to take actions, step by step, while speeding up the implementation later on. Thus, economic growth and improved living standard for us all, can be achieved.
Consistency, commitment and endurance are of vital significance in gaining success. It is similar to the human body, particularly characteristic for athletes. They must constantly prepare to keep their body in excellent physical shape so as to be able to withstand the effort and successfully achieve the desired goal, while improving their performance! The same applies for the economics, we are continuously working on reforms and policies, providing for maintaining growth in times of crises, as well as its acceleration in the medium and long run.
Fatmir Besimi, Minister of Finance