25th November 2023, Skopje – State Budget is the most comprehensive program document, proposed by the Government and discussed and adopted by the MPs. It reflects all policies, measures and activities the government implements in a given fiscal period. As such, the Budget deserves great attention in the public, especially in times of multiple challenges and global economic crises. In the “new reality” depicted by the “polycrisis” global surrounding, well-devised strategy and adequate plan will make us more resilient and the economy more effective.
Recognizing the challenges of the global surrounding and the development needs of the domestic economy, last year, we strengthened the strategic planning by introducing medium-term budgeting and performance-based budgeting, measured by indicators (key performance indicators), as part of the extensive public finance reform, with the Organic Budget Law included, which incorporates the best practices of the international financial institutions and the EU Directives. International institutions, including the European Union, the International Monetary Fund and the World Bank, have recognized the reform of the Budget planning and execution process as a crucial progress in public finance management.
In addition to strengthening the budgeting process, we are also committed to improving the Budget structure by expanding the development component (sizable capital expenditures) as per the Growth Acceleration Plan and the Public Investment Plan, coupled with proceeding further on the path to fiscal consolidation or gradual reduction of the gap between Budget revenues and expenditures in line with the Fiscal Sustainability and Economic Growth Support Plan. Our goal is each subsequent budget to include strong development component and be fiscally sustainable at the same time, i.e. a budget tailored according to the golden rule of government spending (borrow only to invest).
We have designed the draft 2024 Budget driven by the commitment to boosting economic development and maintaining stability. A week ago, after being adopted by the Government, it was presented to the public. Higher growth is projected in 2024 Budget compared to this year (3.4% in relation to 2.3%), as well as lower inflation (3.6% in relation to 9.2%) and lower budget deficit (3.4% in relation to 4.8%), higher revenues (without, thereby, increasing the public duties), higher capital investments in relation to the deficit, higher wages (by EUR 160 million), higher pensions (by EUR 170 million) and higher social contributions (by EUR 60 million), more funds for active employment measures and health care, student meals and scholarships, reforms in agricultural subsidies and more funds for the municipalities. Thereby, around EUR 60 million is projected for anti-crisis measures as well. In a nutshell, this Budget is designed to provide support to accelerating the growth through substantial investment component, supporting the living standard of the citizens, improving the public services and ensuring fiscal sustainability, thus, preserving macroeconomic stability.
Polycrisis Global Surrounding
In the past three years, almost all economies faced shocks related to the pandemic, the Russia’s invasion of Ukraine and the two-digit inflation, as well as narrowed fiscal space, tightened financial conditions, increased geo-political and geo-economical fragmentation, along with noticable climate changes. However, considering all these circumstances, global economy has shown high resilience – pace of growth slowed down, but it did not stumble. According to IMF autumn forecasts, global growth is expected to slow from 3.5% in 2022 to 3.0% in 2023 and 2.9% in 2024, with stronger negative effects at the advanced economies than the emerging market and the developing economies. Economic activity in the EU is expected to remain weak in 2023, with growth projected at 0.7%, before rising to 1.5% in 2024, and Germany, as our major trading partner, is expected to register 0.9% growth in 2024, following the projected decline of 0.5% in 2023.
Inflation expectations are that it will continue to decline, while as regards the EU countries, it is not expected to return to target of 2% until 2025.
Domestic Economy Shows High Resilience
Despite the challenges posed by the external environment, domestic economy has shown high resilience and remained on the growth trajectory. In the first half of 2023, GDP grew by 1.6%, production experienced broad-based growth, the services sector contributing the most thereto, as well as the positive performance of the industrial production. On the expenditure side, growth in the first half of 2023 was a result of the positive contribution of net export, with reduced domestic demand, amid increased private consumption and declined public consumption as a result of cutting the non-priority expenditures.
Against a background of economic stagnation in Europe, lower, but positive, economic performance is expected in 2023 in our country, with 2.3% growth of GDP. Thereby, inflation rate in 2023 dropped considerably to 3.5% in October, with the annual inflation expected to fall to a single-digit level (9.2%) by the end of the year. Decline of unemployment rate and wage increase in real terms have been registered since Q2 2023 onwards.
Acceleration of Economic Growth in 2024
In 2024, economic growth in the country is expected to accelerate and reach 3.4%, amid scaled-up investments, solid consumption growth and recovered external demand. Gross investments, increasing by 8.4%, are expected to contribute the most to the growth in 2024, above all as a result of the intensified implementation of the major infrastructure projects (road and rail Corridors 8 and 10, gas transmission network, etc.), coupled with the measures for higher performance of capital investments envisaged under the Growth Acceleration Plan. State support aimed at strengthening the private sector and boosting competitiveness, innovation and technological development of enterprises, by providing alternative financing sources and instruments, as well as the expected scaled-up investments in expanding, and building new, capacities in the technological industrial development zones, are expected to contribute to growth of private investments. EU accession process will also strengthen the reform processes in the country, providing for enhanced support for investments. Green agenda will additionally boost the investment growth.
Private consumption, amid declined inflationary pressures, further real growth of wages and employment, increased crediting and expectations for solid remittances inflows will have a positive contribution to growth. Economic recovery at our major trading partners and revival of the global value chains will intensify the foreign trade, contributing at the same time to increased export activity of the domestic companies.
Inflation rate in 2024 is expected to stabilize, being projected at 3.6%, amid maintaining stable prices of energy products and food on the international markets, as well as further slowing down of the core inflation.
Favourable trends on the labour market are expected to continue in 2024 as well, with the number of employed persons increasing by 2% and increase of average new wage by 8.4% in nominal terms, i.e. by 4.8% in real terms.
2024 Budget Framework
Development and sustainability are the two key words describing the 2024 Budget. 2024 Budget includes a development component, as a result of the strong infrastructure investment cycle which will continue next year as well. It is sustainable considering that, despite the sizable infrastructure component, as I have pointed out at the beginning, we proceed further on the path to fiscal consolidation. Budget deficit is reduced by almost one third compared to this year’s projections, accounting for 3.4% of GDP (being only half of the primary deficit, i.e. 1.7%% of GDP, while the other half thereof will be used for paying the interest on the debts accumulated from the previous years). This is in line with medium-term projections under the 2024-2028 Fiscal Strategy, i.e. budget deficit is forecasted to drop to 3% in 2025 and 2026, as per the Maastricht Criteria, which is to be reduced to below 3% in 2027 and 2028, i.e. to 2.8% and 2.5% respectively.
Budget revenues are projected in the amount of Denar 310.1 billion, being higher by 10% compared to 2023, with the expenditures being projected in the amount of Denar 343.6 billion, or by 5.8% higher in relation to 2023. Such projected revenues and expenditures result in lower budget deficit by Denar 9.2 billion compared to 2023, implying less borrowing needs by around EUR 150 million.
Higher Budget Revenues without Increasing the Public Duties
2024 Budget revenue projections are based upon revenue performance throughout 2023, expectations for economic growth and improved efficiency and effectiveness of the public revenue collection system. I would also like to bring to the fore the measures and the activities we implement and will continue implementing, aimed at reducing tax evasion through measures for formalization of the informal economy, as well as by introducing advanced technologies, modernizing and automating the working processes, strengthening the institutions’ capacities for increased and more efficient collection of tax revenues and enhancing the institutional coordination.
Thereby, total budget revenues in 2024 are projected in the amount of Denar 178.1 billion (by around 10% higher compared to the revenues projected in 2023), accounting for 18.1% of GDP in 2024, almost the equal share as in the previous year. The projections also incorporate the expected fiscal effects stemming from the implementation of tax reforms as regards VAT, CIT, PIT, excises and motor vehicles tax. Macroeconomic projections for nominal GDP are also to be taken into account, as well as the final consumption, increased number of employees and increased average wage, higher import and profitability of the private sector. Highest increase in tax revenues is projected at PIT revenues, compared to this year, as per the expectation for increased number of employees, increased wages and expanded tax base, and the possibility for voluntary registration in the system by part of the temporary employed. Better revenue performance is expected at CIT and VAT, as a result of the projected increase in final consumption.
Main objective of the tax policy remains to be fair collection of public duties so as to provide funds aimed at supporting the economic growth and ensuring quality public services. Tax system fairness, efficiency and productivity, high tax transparency, better-quality services and green taxation remain to be priorities.
Social contributions are projected to be higher by 11% compared to 2023, as a result of very reasons I have pointed out for PIT.
What will 2024 Budget Funds be Spent For?
Economic recovery and accelerated growth; regular and timely performance of all legal obligations; smooth implementation of the election activities; fulfilling the obligations arising from NATO membership; support to the private sector and the citizens; intensified implementation of infrastructure projects; attracting foreign investments and encouraging innovations of domestic companies – this is what budget funds will be spent for in 2024.
As for expenditures related to payment of wages, Denar 41.2 billion is projected in the 2024 Budget, being higher by 18% compared to the initial 2023 Budget or by 10% in relation to the Decision on Reallocation of Funds, to be used for implementation of the provisions of the General Collective Agreement for Public Sector Employees. Thereby, I have to emphasize that this amount is projected taking into account the existing number of employees in the public administration, i.e. new employments can take place primarily via mobility and taking over of employees from other institutions in the public sector or by filling vacant positions, in line with the government measures for streamlining and optimizing the public sector workforce.
Share of expenditures related to goods and services in the total expenditures is as same as last year, i.e. by around 7.5%, thereby providing funds for uninterrupted operations of the institutions, as well as the funds necessary for fulfilling the obligations arising from NATO Standards.
Denar 83.6 billion is projected for pension payment, or higher by EUR 170 million as per the set Penson Calculation Methodology (the pension indexation is carried out as per the CPI trends, accounting for 50%, and the increase in the average wage paid to all employees, accounting for 50%).
Funds are provided for payment of social protection for the most vulnerable categories, being higher by EUR 60 million (guaranteed minimum income, social security, social transfers). Higher funds are also projected for the active employment measures (Denar 2 billion), as well as for payment of unemployment benefit.
Higher funds are also projected for healthcare, i.e. by approximately EUR 45 million compared to last year, by which funds are provided for procuring “Trikafta” drug, and other medicine-related programs, followed by healthcare services, settlement of liabilities of the public health institutions, as well as higher wages for all employees in the public health sector in line with the General Collective Agreement.
In the course of 2024, new agricultural subsidies models will be implemented as per new criteria, which will be based upon the generated yield (basis subsidy and additional support), all to the end of increasing the food production. Under the new model, priority is given to the crops and products of vital strategical significance for the country.
Subsidies to the private sector are also projected, intended for supporting small- and medium-sized enterprises, boosting the competitiveness, innovation activity, technological development and research, new investments, supporting the export and conquering new markets, supporting job creation and similar.
Increased transfers to local government units (LGUs) are also forecasted, being based upon the projected increased percentage of VAT revenues distributed to the municipalities (from 4.5% to 6% from the VAT collected in the previous year). General grants for the municipalities are also increased by 15.5% compared to 2023, all to the end of increasing the municipal fiscal capacity. These funds will be distributed in three portions as follows: basic portion – 4.5%, performance portion – 0.75% and equalization portion – 0.75%. Funds will also be provided for increasing the municipal wages via block grants.
Funds are projected for anti-crisis measures, amounting to EUR 60 million, aimed at supporting the most vulnerable categories of citizens and businesses. Funds for this purpose are provided in other programs of the ministries, such as the Energy Poverty Program in the Ministry of Economy and the Program for Guaranteed Minimum Income in the Ministry of Labor and Social Policy. In addition to the government’s programs for supporting investments and economic growth, favorable loans have been also provided from the European Investment Bank (EIB), the Council of Europe Development Bank (CEB) and the French Development Agency (AFD), amounting to EUR 200 million, to be made available via the Development Bank of North Macedonia and the commercial banks, which will provide additional EUR 200 million for these credit lines for the business sector, being focused on green transition, digitalization, liquidity and investments. The favorable loans intended for the business sector next year, amount to EUR 400 million. The systemic measures are certainly worthy of attention, being already implemented in the current year, which will be further applied throughout the next year and beyond, i.e. the legal solutions pertaining to the methodology for continuous harmonization of minimum wage, pensions and wages in the public sector as per the price movements and the economic growth, thus ensuring a better standard of living for our citizens. These funds amounted to EUR 190 million in 2023, whereby, in 2024, they are projected in the amount of EUR 330 million.
Capital Expenditures as per “Golden Rule” of Government Spending
In the course of 2024, budget funds are projected for capital expenditures, amounting to Denar 45 billion or higher by Denar 11.5 billion (EUR 187 million) compared to the budget deficit, in line with the golden rule of government spending. Substantial investments are projected in the field of road infrastructure, related to the design process and the construction of part of Corridor 8, such as expansion of Tetovo – Gostivar highway, construction of new highway Trebenishta – Struga – Kjafasan and construction of Gostivar – Bukojchani section. As regards Corridor 10d, construction of Prilep-Bitola section is planned, along with preparation of a feasibility study for construction of Tetovo – Prizren road.
Funds are also projected for continuation of the Reconstruction of Eastern Part of Railway Corridor VIII, Rankovce – Kriva Palanka Section, funded with World Bank loan, as well as section Kriva Palank to the border with Bulgaria, with EBRD funds and WBIG grant. Western part of Road Corridor 8 will also be financed by constructing Kichevo – Bukojchani highway section, with EBRD loan, as well as Kichevo – Ohrid section with EXIM Bank. Moreover, construction of Skopje – Blace highway section will be financed with EBRD loan whereby improvement of the road infrastructure of the municipalities will be implemented through the World Bank’s Local Roads Connectivity Project. Activities aimed at implementing Western Balkans Trade and Transport Facilitation Project continue.
During 2024, funds are projected for further implementation of the first and second phase of the Project for Construction and Reconstruction of Eastern part of Railway Corridor 8, whereby it is planned for implementation of the third phase thereof to also commence. As for railway infrastructure, in 2024, in cooperation with the EBRD, a project will be prepared and implemented, foreseeing a construction of a joint railway border crossing with the Republic of Serbia, i.e. construction and equipping of Tabanovce rail station. IPA funds will be used for implementing the Project for Construction of Gradsko- Drenovo Road Section, as Part of Corridor 10d.
In the field of utility infrastructure and waste management, construction of water supply and sewage systems in the municipalities will continue with intensified dynamics, whereby the major capital projects in this field are the Regional Solid Waste Management Project and the Wastewater Treatment Plant Skopje Project.
In 2024 in cooperation with the World Bank, implementation of the new Municipal Sustainable Development Project will commence, by which the government’s support for the municipalities will be further extended, and the implementation of the Public Sector Energy Efficiency Project will continue as well.
At the same time, landscaping of technological industrial development zones will continue, with substantial capital investments being planned in the field of health, education, childcare and sport. I would also like to hereby draw attention to the procurement of medical equipment and the reconstruction of the General Hospital in Kichevo, although the list of projects is even lengthier.
To the end of supporting the agricultural sector, substantial capital investments are foreseen, being intended for rural development, construction of hydro systems, boosting of the competitiveness and modernization of the agricultural holdings.
Activities will also be carried out for the purpose of introducing Integrated Financial Management Information System, Tax Integrated IT System and Management Information System on State Aid, as part of SMART finance concept.
Deficit Financing and Debt Repayment
Projected 2024 deficit and repayment of the debt amounting to Denar 45 billion will be financed via domestic and foreign borrowing. Domestic borrowing will be realized by issuing government securities and/or domestic loan, under favorable terms and conditions, with favorable interest rates. Foreign borrowing may be realized by issuing debt securities on the international capital market, by disbursing the loan funds from the EU Macro-Financial Assistance, followed by the loan extended by the Council of Europe Development Bank, as well as by disbursing funds from favorable loans extended by foreign financial institutions and credit lines intended for financing certain projects and budget deficit. Choice of a financing source will be based on the favorable ongoing developments on the international capital market.
For the purpose of prudent public finance management, Ministry of Finance will consider the possibility for active debt portfolio management and usage of innovative financial instruments.
Considerable portion of the foreign financing of the Budget has been already provided by rescheduling the prior debts and performance-based budgeting as regards the reforms and the policies with favorable loans extended by the respective international financial institutions. In the course of 2022, the International Monetary Fund made EUR 530 million available to our country through the Precautionary and Liquidity Line, EUR 260 million out of which is intended for boosting liquidity ( EUR 100 million in 2022 and EUR 160 million in 2023), as a basis for additional funds amounting to EUR 100 million as EU Macro-Financial Assistance, followed by the EUR 150 million under the Sustainability and Resilience Development Policy Loan from the World Bank and OPEC, EUR 90 million extended by the KfW Development Bank, whereby additional EUR 50 million is expected during the first quarter of 2024 from the Council of Europe Development Bank (CEB). Total portfolio is worth EUR 650 million – package for budget financing under favorable terms and conditions with maturity deadline longer than 10 years and grace period of up to 5 years, with interests lower by 4 percentage points in average in relation to the Eurobond yield currently traded on the global financial markets. Budget savings on the basis of interest alone amount to EUR 260 million, covering a 10-year period, almost equaling the maturity period under this package. I would like to hereby also add that the guarantees on the loans extended for the above-mentioned infrastructure projects will entail additional favorable loans for long-term funding of infrastructure projects in support of development, with 20-year maturity period, 5-year grace period and even more favorable interest rates.
Thereby, when touching upon the financing of our economic growth and development, the newly announced EC 2024-2027 Growth Plan for the Western Balkans is worthy of attention, as per which EUR 6 billion will be provided for the region, EUR 2 billion out of which as grant funds and EUR 4 billion as concessional loans with a maturity period ranging between 20 and 40 years. EUR 3 billion out of these funds will be intended for budget support for reforms and development policies, while EUR 3 billion will be geared towards infrastructure development-aimed investments.
Consistent Budget Reform
In summing up my views on the next years’ Budget, I would like to hereby stress that I am pleased that we have remained committed to attaining the desired results arising from the Organic Budget Law reform. Considerable emphasis should be placed on ensuring fiscal sustainability, as a precondition for macroeconomic stability and economic development. We remain consistent as regards all other systemic documents, being part of the public finance reforms – Growth Acceleration Plan, Public Investment Management Assessment, Tax System Reform Strategy (in view of expanding the tax base, rather than increasing the taxes), Strategy for Formalization of the Informal Economy, etc. As for the economy and the management, efficient goal setting, putting a strategy and an action plan in place, are crucial for accomplishing the expected outcome. Given that fiscal transparency is the highest form of fiscal control, I expect fruitful discussions on the 2024 Budget in the Parliament in the upcoming days.
The best description of the “new normality” we are going through in this multi-crisis period is based on the popular saying: “Bad things happen fast and unexpected, while a lot of hard work and patience are hidden behind pleasant circumstances”.
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