19th August 2023, Skopje – The journey is quite often as important as the destination itself. Road to fully-fledged EU membership, by building a democratic society and sustainable market and competitive economy, is equally essential as the membership itself. I view EU membership as a recognition and a window of new opportunities for our country and citizens, once we accomplish the main task, i.e. “bring Europe home” and implement reforms which will provide for economic and social development. As eminent economist Joseph Stiglitz would say “Development is about transforming the lives of people, not just transforming economies”. EU membership and EU accession process will both contribute to advancement of the structure of the economy and convergence to the developed European economies, building a functional social system through the rule of law and improved public services and everything else that will provide for better life of our citizens.
Ten days ago, the European Commission published the first Draft Screening Report for our country, comprising a group of chapters, i.e. Cluster I – Fundamentals. Inspired by its contents, as well as the very importance of this document for the further EU integration process, I would like to elaborate on the findings and recommendations given by the European Commission and the further actions.
Couple of Words about the EU Accession Process
Couple of words about the EU accession process so as for the reader to get a deeper understanding of what this particular Report is about. EU aspiring country submits application to the Council, comprised of all EU Member States. The European Commission submits an opinion on the application, and all EU Member States decide unanimously to grant the country candidate status.
After candidate status conditions are met, the accession negotiations are opened with the agreement of all Member States. The European Commission then proposes a draft negotiating framework. During negotiations, which are structured according to clusters and chapters, the candidate country prepares to implement EU laws and standards. Once negotiations on all areas are finalised, the Commission gives its Opinion on the readiness of the country to become a Member State. Based on this Opinion, EU Member States decide unanimously to close the negotiation process, and the European Parliament, yet another important EU body, must also give its consent. The accession process is completed once an Accession Treaty is ratified by all EU Member States.
Negotiations are conducted on the basis of chapters divided in 6 clusters (Fundamentals; Internal Market; Competitiveness and Inclusive Growth; Green Agenda and Sustainable Connectivity; Resources, Agriculture and Cohesion; External Relations). Negotiations on each cluster open as a whole – after the country fulfils the opening benchmarks.
Negotiations on the Fundamentals open first and close last, and progress under the “Fundamentals” Cluster determines the overall pace of negotiations, hence the vital importance of the Draft Screening Report for this particular cluster. “Fundamentals” include functioning of democratic institutions, public administration reform (including public financial management), rule of law and respect for human rights, border control, functioning market economy, public procurement, statistics, financial control.
When this Report was published, the public in our country focused a bit more on the rule of law, fight against corruption and organised crime, fundamental human rights and public administration reforms. However, economy and sound public financial management are equally essential. Therefore, I have dedicated this column to the analysis and the recommendations pertaining to this part of the “Fundamentals” Cluster.
Considerable Progress in Public Finances
Let me start with my area of expertise – public financial management. In its Report, the European Commission notes that the Government is well advanced in Budget formulation, execution and reporting. Implementation of the PFM Reform Program reflects high degree of transparency, while the adoption of the Organic Budget Law provides for carrying out the critical reforms in budgeting, thus strengthening the fiscal sustainability (medium-term budgeting, Integrated Financial Management Information System – IFMIS, introduction of a fiscal council and fiscal rules). The reforms need to be sped up, and to accomplish the comprehensive and ambitious reform embedded in the new OBL, our country needs to adopt an action plan and speedily establish the new institutional structures foreseen under the OBL and ensure skilled and adequate staffing of key reform units in the Ministry of Finance, the PRO and the Customs Administration in a timely manner.
Few words about the public finances reform. PFM Reform Program or “Smart Public Finances” is designed to address all weaknesses identified in recent diagnostics of the international organisations (PEFA, PIMA, TADAT, SIGMA). It covers reforms in public internal financial control, public procurement, external audit and public financial management, i.e. all aspects the European Union evaluates. In addition to the adoption of the OBL, which is the main driver of large part of the public finances reform process, other pieces of legislation are prepared or are in the process of preparation, such as crucial amendments to the Law on Financing Local Self-Government Units, the Law on Public Enterprises, the Law on Financial Discipline.
One of the major public finances reform is the implementation of the Integrated Financial Management Information System – IFMIS, contributing to enhanced efficiency by interconnection between the fragmented IT systems used in public finance and greater predictability and control in Budget execution. Functional and technical documentation has already been prepared, funds for its implementation have been provided, and the Ministry of Finance, in collaboration with the World Bank, is in the final phase of preparation of the tender documentation for procurement of services for development and implementation of IFMIS.
Moreover, accounting and reporting are strong foundations of the PFM system, while transparency of Budget execution has been enhanced through the Open Finance Portal, however, it can be further improved.
With respect to the other conclusions within the competences of the Ministry of Finance, EC assessed that the legal framework on public procurement has a high level of alignment with the EU acquis. The legislative framework for public financial internal control is mostly adequate, but a new PIFC Law, prepared by the Ministry of Finance, needs to be adopted.
Furthermore, the assessment of the country’ official statistics in the Screening Report is worth mentioning, with the country having reached high level of alignment with the EU acquis and international standards, which is coordinated by the State Statistics Office, and the Ministry of Finance contributing by producing data.
Strengthened Fiscal Discipline
Overall fiscal discipline has been improving over the years, while public expenditure and revenue plans are credible. As regards economic criteria, i.e. market economy functioning, and in view of the macroeconomic stability, the European Commission estimated that public finances have a sound track record, resulting from the improvements in fiscal governance over past years, and the ongoing Government reforms to increase public revenues, better target expenditures, and increase the share and the implementation of capital expenditures.
It was also noted that in addition to the turbulent period, rife with major challenges resulting from several global crises, we managed to keep the gradual fiscal consolidation path. EC pointed out that although the Government provided substantial budget support in times of energy crisis, the deficit (4.5% of GDP) remained below the Government’s projections (in 2022). The several successive crises contributed to rising debt, as in most countries, however, I will hereby highlight that we are, as a Government, committed to implementing fiscal consolidation and thereby ensuring long-term fiscal sustainability, as the basis for sustainable economic growth (at the end of July 2023, public debt accounted for approximately 55% of GDP, with the general government debt being below 50% of GDP). As of 2020 onwards, both budget deficit and public debt have decreased every year, despite the continuous external shocks in the economy.
Report also notes that over the years, nine Eurobonds have been issued at competitive interest rates, testifying to its consistently good standing in capital markets.
During the 2022 energy crisis, provoked by the Russia’s war of aggression against Ukraine, fiscal and monetary policy response was appropriate and well-coordinated, relying on significant fiscal support and monetary tightening. Macroeconomic stability was maintained. EC also highlighted the significance of the Law on Financial Stability, regulating the role of the Financial Stability Committee, thus setting up the framework for macro-prudential measures. Financial stability was also preserved, while non-performing loans has been decreasing continuously in the past ten years, as stated in the Report.
Combatting Informal Economy and Labour Force Market
As regards other structural changes, tackling informal economy was also brought up in the Report. Concerning he fight against informal economy, it is worth mentioning the data throughout the screening process, and in line with the assessments of the international institutions (IMF, UNDP, GIZ). As per the estimates, the share of the informal economy dropped from 37.6% of GDP in 2016 to 21%-29% of GDP in the period 2019-2021. However, the rate is still high, and it is necessary to take further steps to reduce the informal economy. Via the Government’s Strategy and Action Plan to combat the informal economy, positive effects have already been felt as regards the formalisation of businesses, by reducing the informal rate from 18.6% in 2018 to 12.1% in 2021.
Certain improvements were also recorded as regards the labour force market. European Commission assessed that during the pandemic, the government measures provided for preserving the jobs via wage subsidies and support for the companies’ liquidity, as reflected by the jobs in the industry, being kept despite the economic performance generated in this sector. Unemployment rate is further decreasing with more intensive dynamics in relation to the labour force. However, structural challenges are still present, which are yet to be addressed such as the gender gap as regards the employed people, as well as the youth unemployment. European Commission noted that the Youth Guarantee provided for reducing the youth unemployment. Active employment measures, geared towards the development of the necessary skills to match labour demand and support the vulnerable categories when seeking job, must be further extended, all to the end of overcoming this structural challenge.
On the Right Path to Developing a Functioning Market Economy
Economic growth is driven by domestic demand. Private consumption is bolstered by stable disposable incomes, sustained by government measures such as indexed wages and pensions, support to jobs, increases in the minimum wages and tax incentives as stated in the Report. Country’s trade openness is high (2022: foreign trade accounted for 171% of GDP), with the EU as the largest trading partner. Industrial production sector, including manufacturing destined for exports, is highly import-extensive. Share of products with higher value added is continuously increasing.
Digitalisation is advancing, however, it is estimated that the government support and the e-services can contribute to speeding up this process.
Our country’s commitment to harmonising with the EU Standards in the field of energy and transport is also highlighted in the Report. Energy crisis in 2022 and import of electricity highlighted the urgent need to implement reforms in this sector. I will hereby emphasise the plans on pursuing the green agenda for the purpose of increasing the energy sustainability and the energy efficiency.
All in all, EC believe that Republic of North Macedonia is on the right track in developing a functioning market economy, as well as that it should keep implementing reforms adopted at the Economic and Financial Dialogue between the EU and the Western Balkan countries and Türkiye. Great deal of the required reforms have already been implemented. However, the other reforms should be also implemented throughout the negotiations, as well upon becoming an EU Member State. In other words, as I indicated at the very beginning of this column, “the journey is quite often as important as the destination itself”. EU accession negotiations guide us in gaining momentum as regards the reform implementation, as indispensable not only for joining the EU, but being also a necessity upon becoming an EU Member State.
Right Moment for Getting Close to the EU and a Growth Plan
Few days ago, President of the European Commission, Ursula von der Leyen, conveyed a strong message from Madrid, at the occasion of overtaking the Spanish presidency, when she stressed that it is impossible to imagine EU future without Western Balkans. This statement was welcomed by Prime Minister of Spain, being also supported by France and Germany, whereby the Berlin Process for Western Balkans was reaffirmed as well. This clearly speaks in favour of the momentum of the EU integration process, the favourable geographical position, which should be unquestionably taken advantage of.
EU’s current support and goodwill towards the Western Balkan countries is also seen from the announcement for additional funds and other advantages in support of the development of the countries in the region. As EC President announced, the new initiative for Western Balkans support is built on four pillars: bring the Western Balkans closer to the EU Single Market, deepen regional economic integration, accelerate fundamental reforms and encourage economic growth by increasing pre-accession funds. Western Balkan countries will be given the possibility to reap, much earlier, the benefits from the main driver of the EU economic growth – the Single Market. Common regional market may, to a great extent, provide for speeding up the EU accession process, as well as make the countries more attractive place for foreign investors. Intensified reform process is also a positive signal for the investors, whereby the easier access to the Funds will contribute to implementing the infrastructure development projects.
In the meantime, the reform agenda must be pursued with as stronger dynamics as possible, as same as the implementation of our Growth Acceleration Plan. We unquestionably aspire to joining the EU. Road to the EU and the EU itself could contribute to our primary goal – well-being and a better life for our citizens, coupled by broader perspectives thereof.
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