25th February 2023, Skopje – On this day, 30 years ago, 25th February 1993, our country became World Bank member, i.e. part of the global partnership of 189 countries fighting poverty and building shared prosperity. Over the past 30 years, the World Bank has been our partner in the development of the country’s society and economy. World Bank Group has been our support in every step of the way in building a functioning market economy – from strengthening the capacities to financial support for major capital projects to strengthening the human capacities. At the very beginning of this column, which is not much related to the cooperation with the World Bank, but rather to the ongoing developments of the public finances in the country, I would like to express gratitude to the World Bank Group and all of its exceptional experts and professionals who gave their contribution to the development of our economy.
Besides the numerous projects, World Bank support for public finance strengthening, in particular projects in the fiscal area, is worth mentioning. I will focus on the present, in particular the Organic Budget Law and the support for establishing Integrated Financial Management Information System – IFMIS. Yet another ongoing cooperation with the World Bank is preparation of the Expenditure Review, which will significantly contribute to our commitment to fiscal consolidation (gradual reduction of the gap between budget revenues and expenditures, without thereby jeopardizing the economic growth).
I will now turn to the topic much discussed in the public in the past three weeks – public debt. I dedicate this column to fiscal transparency and accountability since they are the highest form of control over public finances. I will touch upon the plan for financing the debt this year, as well as the medium-term debt management strategy, including the fiscal consolidation. Most of the figures have already been communicated, but I believe it is always a good this to put all the cards on the table so as to see the big picture, where we stand and where we are headed.
Public Debt in Times of Crisis
In three years, and overlapping economic crisis worldwide, global public debt surged by around 12 percentage points, while public debt of developing economies grew in average by around 10 percentage points.
Our economy, small and open, is not an exception to the ongoing global crisis. Public debt stabilized in the period 2016 – 2019, following its rapid increase in the period 2008 – 2016. However, it surged by 10 p.p. with the pandemic outbreak in 2020. Abrupt halting of economic activity, as well as the need to finance health, economic and social measures, resulted in deepening of the budget deficit, which was supposed to be financed together with the prior debts falling due for repayment. Six sets of anti-crisis measures, totaling EUR 1.2 billion, were adopted during the pandemic, aimed at mitigating the effects of the crisis on the citizens and the businesses. International financial institutions noted in their reports that economic policies significantly cushioned the decline of economic activity and the effects of the crisis.
Following the overcoming of the initial effects of the pandemic, the economy started to recover. Still, disrupted supply chains, faster recovery of the demand over the supply and the war conflict in Ukraine resulted in new economic crises. National economy started to recover from the blow of the pandemic, however, full revival was slowed down due to new shocks. The Government adopted new set of anti-crisis measures in the amount of EUR 760 million to overcome the effects of the energy and the price crisis.
Starting 2020 till now, adopted anti-crisis measures amount close to EUR 2 billion, funds aimed at easing the consequences from the global crises on the economy and the citizens. Furthermore, over the period of three years, more than billion euros were spent as capital expenditures, current liabilities were settled on regular basis, and arrears were timely settled.
In 2021, public debt rose from 59.7% of GDP to 61%, dropping to 57.1% of GDP at the end of 2022. Although it is more relevant for public debt to be presented as percentage of GDP because it reflects the ability of the economy to service its liabilities, analyzed in absolute terms, it surged by EUR 2.1 billion.
In brief, this is a review of the public debt in the past three years of crisis. Yet, expectations and strategy are more crucial looking ahead. Our main objective is pursuing sound macroeconomic policies, supporting the economic growth and maintaining sustainable level of public debt.
Sustainable Level of Public Debt
Before I further elaborate the annual, medium-term and long-term strategies and plans, let me give a mention to public debt sustainability and its relevance to macroeconomic stability and economic growth.
Level of public debt is considered sustainable when current and future payment obligations are met on regular basis. It depends on many factors, such as level of budget deficit/surplus, economic growth rate, inflation rate, level of development of the national financial market, liquidity of the international capital market, etc. Hence, goals defined in the Public Debt Management Strategy include financing the needs of the country at the lowest cost possible, sustainable portfolio for continuous debt repayment, as well as development of an efficient national financial market.
More than 30 years ago, when foundations of the fiscal architecture of the European Union were laid in Maastricht, limit of public debt of its Member States was set at 60% of GDP. However, it was not set as an absolute limit, since debt of some of the Member States (Belgium, Ireland and Italy) was close to or above 100%. Instead, budget deficit limit was set at 3% of GDP, to the end of regulating new borrowing. Even today, most of the EU countries and the Eurozone experience a debt higher than the Maastricht criterion. In fact, average government debt to GDP ratio in the euro area stood at 95% last year. Still, their debt is sustainable, i.e. the economy has the capacity to produce and to uninterruptedly service the debt. As regards the Maastricht criteria, it is emphasized that they do not correspond to the real needs anymore, considering the time distance when they were set and the present situation with the debt of the EU economies (Gaspar and Buti, 2021).
Number of papers and research by economists elaborate the link between public debt and economic growth. One of the most cited papers is “Growth in Times of Crisis” of Carmen Reinhart and Kenneth Rogoff, a research based on a longer statistical data series on public debt and GDP. They find that public debt rates above 90% of GDP slow down economic growth. According to the estimates of the International Monetary Fund, 70% threshold for countries from Central, Eastern and Southeastern Europe will not adversely affect the economic growth of these economies.
Public debt in our country is below these thresholds, although it shows a growing tendency in the past decade and a half. Since 2008, when public debt accounted for 23% of GDP, it continuously increased by 2016, i.e. it doubled, reaching 48.8% of GDP, i.e. rising by 25.8 p.p.. Debt level stabilized in the subsequent three years and, as I mentioned above, as a result of the pandemic-induced crisis, it increased by 10 p.p. in our country, as was the case with the other economies. In 2021, public debt experienced slightest rise of 1 percentage point, dropping to 57.7% in 2022. Just to reiterate, since 2019 onwards, to the end of adhering to the recommendation of the international financial organizations and greater transparency, non-guaranteed debt is included in the public debt.
Moderate increase of the public debt to 60.6% is projected in this year’s Budget. Taking into account the liabilities falling due for repayment, debt will moderately rise by 1.2 p.p. in 2024 and starting 2025 already, it will gradually drop to levels below 60% of GDP in 2026 and 2017.
Expectations for reduction of the public debt are based on both the strong commitment to gradual fiscal consolidation, i.e. gradual reduction of the budget deficit with each subsequent Budget by rationalizing the expenditures and strengthening the revenue collection, and the commitments to eradicating informal economy. The goal is for the budget deficit to be reduced below the Maastricht criterion (below 3%) in the medium term, without thereby adversely affecting the economic activity.
Financing the 2023 Budget
Over the last three years, under each next Budget being planned, the budget deficit has been gradually reduced. Such is the case with the 2023 Budget, as per which, the budget deficit is projected at 4.6% or by 0.7 p.p. lower compared to the 2022 projections. The 2023 Budget is guided by the golden rule of government spending, as per which investments should be higher than the deficit. The 2023 projected deficit amounts to Denar 42.7 billion (EUR 694.3 million, with capital expenditures being projected at EUR 795 million).
I will also hereby indicate that by adopting and enforcing the draft Law on Solidarity Tax, budget deficit will be additionally reduced, resulting from the anticipated higher revenues. In fact, windfall tax is introduced under the Law, which will have to be paid by companies, which earned an income of over EUR 10 million last year, thus generating significantly higher profit than usual. Base for taxation will be the profit exceeding 20 percent of the average profit generated in the previous three years, which amount will be taxed at a 30% rate. This windfall tax will be one-off, pertaining to the financial performance of the companies generated in 2022. It is expected for the revenues generated on this basis to be collected in the amount of around Denar 4.7 billion (EUR 76.4 million), which will be geared towards budget needs related to the COVID-19 and the energy crisis. This will directly contribute to further reduction of the budget deficit and the public debt by 0.5 percentage points in relation to the 2023 projections, i.e. the budget deficit will account for 4.1% rather the 4.6%, while the public debt will account for 60.1% instead of 60.6% as a share of GDP.
In 2023, public debt falling due for repayment, amounts to Denar 52.1 billion (EUR 847.2 million), Denar 36.5 billion out of which (EUR 594 million) as foreign debt and Denar 15.6 billion (EUR 254 million) as domestic debt.
Repayment of principal on the basis of foreign debt includes the repayment of the Eurobond issued in 2016 in the amount of Denar 27.7 billion (EUR 450.4 million), as well as the debts owed to the following foreign creditors: IMF, amounting to Denar 2.7 billion (EUR 43.9 million), IBRD in the amount of Denar 2.3 billion (EUR 37.4 million), EBRD amounting to Denar 1.2 billion (EUR 19.5 million), IDA, amounting to Denar 0.9 billion (EUR 14.6 million), CEB in the amount of Denar 0.6 billion (EUR 9.75 million), and Denar 0.3 billion (EUR 4.9 million) owed to other bilateral creditors, such as: IFAD, KfW, Japan Bank for International Cooperation and others.
Repayment of the principal on the basis of domestic debt covers the repayment of 2-, 3- and 5-year bonds amounting to Denar 12 billion (EUR 19.6 million), repayment of denationalization bonds, amouning to Denar 0.4 billion (EUR 6.5 million) and repayment of short-term loan, amounting to Denar 3 billion (EUR 50 million). The remaining bonds with 7-, 10-, 15- and 30-year maturities, do not fall due in 2023.
Debts falling due, as well as the deficit, will be financed via foreign and domestic sources. Optimal combination of foreign and domestic sources of financing brings about plenty of benefits, starting from diversification of the public debt portfolio by maturity and currency, until rebound of the foreign exchange reserves, as well as access for the real sector to funds on the domestic financial market.
Borrowing abroad will be realized by issuing the ninth Eurobond on the international capital market, disbursement of a new tranche under the IMF Precautionary and Liquidity Line, as well as by disbursing funds from loans under favourable terms and conditions, extended by foreign financial institutions, as well as credit lines intended for project and budget financing.
Domestic borrowing is projected in the amount of Denar 33.6 billion (EUR 546 million) by issuing government securities and borrowing a loan from a domestic bank. Borrowing on the domestic market will provide for attaining favourable terms and conditions, by using more favourable interest rates, while also optimizing the portfolio by lengthening the maturity and shifting to more adequate auction platform (Bloomberg) for primary issuance of GS. This will provide for greater participation of foreign investors on the domestic market.
In addition, as a result of the prudent public debt management policies last year, amount of EUR 160 million remained as a deposit to be used this year, coupled by putting buffers in place, which provide for greater flexibility as regards the capital market trends. Last year, such buffers allowed us to overcome the period of exceptionally high interest rates on the international capital market, thus providing for making savings worth ten or so million euros.
Investors’ Interest in the Eurobond Issuance – Speaks in Favor of the Sound Economic Polices
I would like to hereby revisit the foreign borrowing, while elaborating on the ninth Eurobond. Despite the last year’s due liabilities, which needed to be refinanced, as well as given the need for financing measures aimed at coping with the energy crisis, although the initial plan was to issue the Eurobond, we did not make borrowing on the financial market. Interest rates on the international capital market were too high, whereby the prudent public finance management provided for creating an option to issue the Eurobond when favourable conditions are created therefor. Judging by the last auction, and compared to other countries with a similar or higher rating than ours, which issued Eurobonds straightaway, we reached the right decision.
I would like to also stress that, in addition to IMF’s PLL, which was made available last year (allocated solely to countries with sound economic fundamentals), coupled by the EC Macro-Financial Assistance, the investors’ great interest in issuing the Eurobond (with the bids amount being by even 2.5 times higher at the last auction of the ninth Eurobond, at the beginning of February 2023) considerably speak in favor of the sound economic polices we implement.
Ministry of Finance stands ready to issue the ninth Eurobond, as soon as favourable conditions are created therefor. We attentively monitor the developments on the capital market, whereby the most optimal decision to issue this Eurobond will be made at the most convenient time therefor, which is to be used for refinancing the Eurobond issued in 2016.
Institutional Public Debt Sustainability Framework in the Long Run
In both the medium and the long run, plenty of mechanisms have been foreseen, for the purpose of ensuring the public debt sustainability, thus providing for stability and economic growth. The new Organic Budget Law, under which Fiscal Council and fiscal rules were introduced, the Fiscal Sustainability and Economic Growth Support Plan, as well as the Growth Acceleration Plan, also including the medium-term Public Debt Management Strategy, are the strategic documents that will contribute thereto. It might be said that these are the four pillars, laying the foundations for the debt sustainability.
Maastricht Public Debt and Budget Deficit Limits were incorporated in the new Organic Budget Law. These are numerical rules, setting the 60% limit for the public debt and 3% limit for the budget deficit in the medium term, being already included in the Fiscal Strategy. Independent body – Fiscal Council will also be established, which members are to be elected by the Parliament (upon proposal by MASA, the National Bank and the State Audit Office), which will be responsible for supervising the strategies, the projections and the implementation of the fiscal polices. Fiscal Council will be established this year, with funds being projected in the 2023 Budget for its operability. However, the new Organic Budget Law and the reforms related thereto, were welcomed by all international financial institutions, being also acknowledged under the latest EC Progress Report.
Optimization of the Operating Processes and Spending Cuts
Under the Fiscal Sustainability and Economic Growth Support Plan, measures have been set, aimed at consolidating the expenditures in the government institutions, and improving the revenue collection. It also incorporates measures and recommendations for the public enterprises and the state-owned companies.
This Plan was broadly debated among the public – in a nutshell, it is crucial to make considerable savings by rationalizing and optimizing the operating processes. When rationalizing the expenditures, focus is also placed on improving the capital expenditure execution, also coupled by the Public Investment Management Assessment – PIMA and the methodology for assessing the performance of capital investments via Smart Key Performance Indicators, being introduced under the new Organic Budget Law. Plan also covers mechanisms for strengthening the capacities for public revenue collection, as well as intensified revenue collection from tax and customs debtors, along with increased efficiency and effectiveness of the excise revenue collection, via development of policies, systems, procedures and instruments in support of efficient control and revenue collection. In addition, activities aimed at preventing the tax evasion, raising the public awareness about the detrimental consequences of the informal economy, as well as strengthening the tax morale, have been intensified. Measures have been foreseen, geared towards enhancing the inspection supervision, the inter-institutional coordination of the controls, further process digitalization, such as e-invoice, e-fiscalization, track and trace system for the excise goods, etc.
Given that the budget deficit and public debt are measured as a percentage of GDP, the economic growth contributes to the consolidation process. Growth Acceleration Plan contributes to carrying out the fiscal consolidation in two manners, these being: economic growth acceleration mechanisms, i.e. doubling the average growth in the past period to 5% growth rates or even higher in the medium term, as well via mechanisms for mobilizing the private investment capital and lowering the state new debt (such as public-private partnerships, development funds and financial instruments).
New Types of Instruments on the Financial Market
The mentioned mechanisms for mobilizing private capital in support of the public needs, contribute to the development of the domestic financial market, by introducing new types of instruments, foreseen under the Public Debt Management Strategy. Ministry of Finance is already working on diversifying the sources of financing and introducing new types of financial instruments with diverse application thereof. One of these instruments are the “development bonds”, focused on financing the development projects in the country, intended for the citizens, where opportunity will be given for their purchase from the banks, the pension funds and other participants on the financial market. Furthermore, issuance of “green bonds” is planned, which purpose will be financing projects aimed at promoting and protecting the environment. “Project bonds” will be used for financing projects in the field of infrastructure, which will be available for purchase by the institutional investors, whereby the “development bonds for citizens” will be geared towards mobilizing the cash savings of citizens, lowering the amount of the cash and reducing the informal economy. Thus, the citizens’ returns from their savings, will be higher.
By having well-designed strategy in place, as per which new borrowing for repaying debts will be gradually reduced, by narrowing the deficit and boosting the growth and improving the debt repayment capacity, the public debt curve could be lowered. What we all need to do so as to attain the desired results is to remain committed thereto.