9th December 2023, Skopje – “Economics is not an exact science, it is a combination of an art and elements of science”, as the father of modern economy, the American Nobel winner, Paul Samuelson stated, thereby highlighting that “that’s the first and last lesson to be learned about economics: we are not converging toward exactitude, but we’re improving our data bases and our ways of reasoning about them.” I will hereby add that ensuring better conditions, as well as prosperity, for citizens, should always be the driving force behind the ultimate objective of each economic policy. Macroeconomists are guided by the reasoning in terms of acting in the best interest of the majority of the population, policies that contribute to the general welfare, known in the economic theory as “Pareto-optimality”.
Last week, we announced the new, ninth government set of anti-crisis measures. The citizens and the companies have been expecting these measures. These measures were meticulously designed as per the respected needs of our economy, targeting those categories in most need of such support. The new set of anti-crisis measures is substantial, comprising 23 measures and amounting to total of EUR 662.4 million, EUR 123.7 million out of which as direct fiscal implications, with the remaining as indirect fiscal implications, allocated over 2 fiscal years, while ensuring fiscal sustainability. Moreover, additional budget allocations have been provided in 2023 and 2024 in the amount of EUR 516.3 million for the three systemic measures, or simply put policies, previously adopted.
Amidst global uncertainty, tightened financial conditions and deceleration of the economic growth, the fiscal policy, along with this new set of anti-crisis measures, have been focused on supporting the economic growth and the vulnerable population categories. I was personally flabbergasted by some of the statements following the set announcement, that the political marketing is the reasoning behind it, that there is to be ignition of inflation due to the support to the vulnerable categories, i.e. students via public transport support, support for pupils of low-income families, financial support for pensioners with low pensions, or liquidity injections for companies, mostly small and medium-size enterprises. Nevertheless, we should consider the slowing down of economic activity, which is also evident at our major trading partners, coupled by the expectations for demand reduction. To that end, I wanted to hereby make a brief analysis, with a detailed overview of the measures in order for the citizens to get a full understanding of the measures’ objective and benefits from social and economic perspective. As for the economy, we should always see the complete, i.e. full picture, since it is very easy to manipulate certain types of data.
Consistency of Fiscal Consolidation Policy
To begin with, I would like to address the features of the fiscal policy. Recommendations of international financial institutions and experts are careful considerations of an expansionary fiscal policy in times of high level of inflation. Truth be told, since the pandemic onwards, our budget deficit has been continuously shrinking and, even, considerably faster, according to the fiscal consolidation projected path (since 2020, the deficit of around 8% was almost halved to 4.6%, and it is projected to be 3.4% in the following year already, with expectations for further decrease in medium run as well).
Furthermore, IMF gives clear indications for the fiscal measures to be targeted, focusing on particular categories, where social protection, as well as economic activity support, should be provided. The adopted measures are clearly targeted towards vulnerable categories, companies’ support (primarily SMEs), as well as systemic measures for coping with the crisis. Majority of the measures is time-bound so as to ensure fiscal sustainability.
Anti-Crisis Measures Contributed to a Two-Fold Improvement in Economic Performance in Times of Crisis
Before elaborating on the latest set of measures, I would revert to the previous sets to answer a very important question: “Have the government measures borne results yet?”. The answer is “YES”, and I will substantiate this answer with data and arguments.
Following the accelerated economic growth in 2019, our economy faced several overlapping crises as a result of external shocks in the subsequent four years. In 2020, the economy was strongly affected by COVID-19 pandemic to which the Government had a prompt response in the form of six subsequent sets of anti-crisis measures in 2020 and 2021. The focus was placed on preserving jobs, companies’ liquidity, social safety in addition to the recovery of the domestic economy and creating grounds for accelerated economic growth over the long term.
Due to the global pandemic impact, economic activity in 2020 contracted by 4.7%. However, as per the estimates of the domestic institutions, as well as the international ones, the drop of GDP in 2020 would have been over 8 % in the event of absence of a prompt and strong response by the fiscal policy.
After the mitigation of the pandemic effects, the economy in 2021 experienced a sound recovery of 4.5% on annual basis despite the prolonged impact of COVID-19 pandemic. On the onset of 2021, we adopted another set of measures, which provided for extending support under the previous sets through government financial support intended for employees’ wages during the first quarter of 2021, free-interest loans for the affected companies, financial support for the broadcasters and exemption from multiplex frequency fee, financial support to the citizens by continuing the implementation of the measure related to PIT advance payment deferral, financial support for international transporting companies, credit guarantee scheme, support for sports clubs, abolishment of custom tariff rates on part of raw materials, support for micro, small- and medium-sized enterprises, as well as private health institutions, forgiving the interest on the basis of individuals’ debt towards public institutions and enterprises, and so forth.
However, in late 2021, domestic economy was affected by new global shocks triggered by the energy crisis, which escalated at the onset of 2022 with the effects of the Russian-Ukrainian conflict. Unfavorable trends in the energy markets and the Russian invasion of Ukraine led to a strong growth of global inflation, reflecting increased energy and food prices. Government’s response thereto was once again prompt and efficient, given the adoption of new sets of anti-crisis measures. At the beginning, the measures were geared towards cushioning the prices shocks arising from the rising prices of energy products on the population and the companies by subsidizing the electricity price through direct financial support for AD ESM Skopje and via the preferential VAT rate on electricity, followed by mitigated consequences from the high food prices via measures aimed at freezing prices, increasing minimum wage, pensions, public sector wages and one-off financial allowances/payments to the most vulnerable categories of citizens, i.e. beneficiaries of social assistance and low-income pensioners. The purpose was preserving the purchase power of the population and the companies’ liquidity by gradually targeting the most vulnerable categories of citizens, while also supporting the investments. Measures provided for slowing down the transmission effect from the imported inflation, while providing for stable supply of electricity and preventing price shocks. As a result of the measures focused on curbing the price hikes, inflation has been continuously reducing for twelve consecutive months, accounting for 3.1% in November 2023, upon reaching its peak of 19.8% in October 2022.
During this 4-year period of multiple intertwined crises, for the purpose of responding to the effects on the economy and the living standard of citizens, we started designing the ninth packaged of anti-crisis measures, despite the ongoing adjustments via ad hoc measures, other policies and systemic solutions. During the pandemic, measures were adopted, being aimed at protecting the citizens’ life and health, preserving the jobs, as well as supporting the vulnerable categories of citizens, while also providing substantial financial sector for the business sector, which stagnated due to the administrative constraints in line with the health recommendations as a protection against the pandemic. The fiscal implications amounted to EUR 1.2 billion.
Before the pandemic was finally over, the supply chain disruption, as well as the high demand, triggered new price pressure. Need to intensify the economic activity in the post-pandemic period led to the increased demand for energy products, which, in turn, resulted in higher prices thereof, thus exerting additional pressure on the input prices in the production of food, and other products. Against such background of “heated” prices on the markets, particularly in the EU, as our major economic partner, and in conditions of de facto fixed exchange rate of the Denar in relation to the Euro, price shocks have fully spilled over in our economy as well. Developments became even more complex with the Russian aggression against Ukraine, as the largest exporter of commodities. However, the EU’s energy dependence on Russia caused an even deeper crisis, entailing a coordinated approach in several spheres: short-term measures pertaining to the demand, medium-term measures to reduce energy dependence on Russia, and long-term measures, which will provide for creating conditions for green transition and sustainable development. Moreover, monetary authorities conveyed clear messages for combating inflation, reflecting higher interest rates on the international financial markets, which led to slowed down economic growth in 2022 and 2023 in relation to the initial growth projections. Antic-crisis packages in response to the energy and price crisis, were intended for protecting the most vulnerable categories in the society, as well as extending support to the business sector, all to the end of cutting the costs and providing the required liquidity. Fiscal implications of these sets of measures aimed at protecting the energy and prices crisis, amounted to EUR 760 million.
Prior eight sets of anti-crisis measures amounted to around EUR 1.96 billion in total. Thus, the economic activity decreased by a slower rate in 2020, which was in turn, set off by the growth in 2021, whereby growth in 2022 and 2023 and the growth projected in 2024, recorded accelerated upward dynamics.
Support for 600,000 Households and 70,000 Companies
To the end of extending the targeted support to the vulnerable households and companies in 2023, the new set of measures is aimed at supporting the youth population (pupils and students) from vulnerable families, most vulnerable categories of citizens (low-income pensioners, individuals and children with disabilities, single parents – beneficiaries of guaranteed minimum income (GMI) etc.), farmers, for the purpose of inciting the food production, as well as companies in the process of green transition (taking into account that climate change is one of the factors, which may impact the price pressures in future). If more thorough analysis is to be made, each of these measures is aimed at ensuring social and economic sustainability.
Measures under the ninth package cover 120,000 young people, around 74,000 people from socially vulnerable categories, approximately 187,000 pensioners, 40,000 farmers, 540,000 users of “MyVAT” application, 600,000 households and 70,000 companies. If one takes into account the systemic measures, the total number covers 338,000 retirees and 106,000 public sector employees. At the same time, the prudent policy will provide for both preserving the fiscal space and ensuring maintenance of macroeconomic and fiscal stability.
New set of measures is divided in the following categories: 1) Measures for supporting citizens and households (support for the pupils and students from low-income families, vulnerable categories of citizens, low-income pensioners and households, farmers); 2) measures aimed at supporting the business sector (more favourable categories for liquidity and investments, wage increase subsidies); 3) measures in support of the private sector (municipalities and public enterprises); and 4) systemic measures contributing to mitigated effects from the price and energy crisis.
Financial Support for Pupils from Low-Income Families, as well as Students
As for the ninth set of measures, funds were projected for supporting pupils in primary and secondary schools, stemming from low-income families (up to two minimum wages, more precisely up to Denar 50,000 as total monthly income). Foreseen financial support amounting to Denar 1,200 per month, covering a 6-month period, pertaining to 70,000 primary education pupils out of total 185,000 pupils from 1st to 9th grade, meeting these requirements. Given the increasing needs of secondary education pupils, financial support amounting to Denar 1,800 per month, was foreseen, covering a period of 6 months and including 35,000 secondary school pupils. Financial support is also planned for students by awarding transportation vouchers, intended for 15,000 students, living outside the place of study, amounting from Denar 600 to Denar 1,200 per student, depending on the place of residence and study.
To sum up, financial support will be extended to total of 120,000 beneficiaries – young people, primary education and secondary education pupils, coming from low-income families, as well as students studying at state university, amount to total of EUR 16.4 million.
Support for over 200,000 Vulnerable Categories of Citizens and Low-Income Retirees
Amid rising inflation, the international financial institutions advise protecting the vulnerable categories of citizens via the fiscal policy, hence, plenty of measures were foreseen under the ninth set of measures, as follows:
Support of the citizens exercising the right to allowance due to disability (10,103 beneficiaries), single parents – beneficiaries of guaranteed minimum income (610 beneficiaries), parents of children with disabilities up to 26 years, using special allowance (6,028 beneficiaries), who are to be awarded funds amounting to Denar 2,000 per month covering 5-month period, all to the end of overcoming the financial difficulties against a background of increased costs of living. Total funds therefor are estimated at EUR 2.7 million.
Measure has been designed for low-income pensioners (receiving up to Denar 19,000) to the end of overcoming the difficulties amid protracted energy crisis effects and stabilization of price crisis. As for pensioners receiving pension in the amount of up to Denar 14,000, they will be extended financial support in the amount of Denar 3,000 per month for a period of 5 months (around 92,200 pension recipients). Those receiving pension in the amount of Denar 14,001 to Denar 16,000 will be extended financial support in the amount of Denar 2,000 per month for a period of 5 months (42,253 pension recipients). Financial support in the amount of Denar 1,500 per month for a period of 5 months will be extended to those receiving pension in the amount of Denar 16,001 to Denar 19,000 (52,798 pension recipients). Total fiscal implications as regards the support to 187,263 persons falling within this vulnerable group amount to EUR 35.8 million.
Direct financial support as a measure for energy vulnerable customers will continue applying, as well as electricity subsidies for low-income families, such as beneficiaries of guaranteed minimum income (GMI) and social pension. Support to households aimed at increasing the energy efficiency and encouraging use of renewables (installation of photovoltaic panels, solar systems and PVC) will continue to be extended as well.
The measures also include advance payment of subsidies for crop production – cereal and vegetable crops, vineyards and fruit plantations and livestock (cattle, sheep, goats). Financial support implemented through the existing IPARD programs is intended for 40,000 farmers.
Support for Boosting Companies’ Competitiveness, Green Transition and Female Entrepreneurship
Second segment of the ninth set of anti-crisis measures includes support to the private sector, above all support to boosting the competitiveness (mainly in the SMEs sector), green transition and female entrepreneurship. Total support is estimated in the amount of around EUR 492 million, provided mainly on the basis of credit lines under favourable terms and conditions from international institutions.
One of the measures pertains to supplementing the credit line for support to SMEs to increase energy efficiency and boost green transition, by issuing green bond (in 2023, Ministry of Finance issued the first green bond in the amount of Denar 600 million). This measure has provided for crediting SMEs through the Energy Efficiency Fund and the commercial banks under favourable terms and conditions, all to the end of encouraging them to invest in energy efficiency and renewables projects.
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. Credit guarantee scheme is an instrument of the Development Bank, under which guarantees are issued to companies with insufficient loan collateral as security for part of the collateral for the loans extended by the commercial banks and the saving houses.
Yet another measure to help cover liquidity of the companies is the 7th EIB credit line for SMEs, mid-cap companies and green transition in the amount of EUR 100 million, supporting companies’ investments in energy efficiency and renewables. This EIB credit line will be made available through DBNM to the commercial banks, which will equally participate in the financing, providing favourable crediting terms and conditions for the companies for investments in energy efficiency and renewables. Under this facility, 30% of the funds is targeted for financing energy efficiency and renewables projects, while the other 70% of the funds will be used for other purposes.
Agence Française de Développement (AFD) has provided EUR 50 million credit line for the companies as support for investments, empowering environmental stewardship, tackling climate change effects, enhancing female entrepreneurship, and driving forward digital transformation. Female entrepreneurship and green investments will be also boosted with the CEB credit line for financing, micro-, small- and medium-sized enterprises for job creation and retention in the amount of EUR 50 million. Green Finance Facility (in cooperation with EBRD, UNDP and the commercial banks) provides access to green financing for small- and medium-sized enterprises, individuals and households for investments in RE and EE innovative solutions, amounting to EUR 40 million.
An important measure for both the companies and the private sector employees is the social contribution exemption for the existing employees having their wages increased by Denar 3,000 to Denar 9,000 (last paid wage is taken into account, for employees receiving wage up to the level of average monthly wage at national level). Basis of comparison is the average of the last 3 monthly wages paid. The employer pays the PIT, but is exempt from paying health and pension insurance contributions on the increased portion for a period of 12 months. This measure is aimed at reducing tax evasion and grey economy and supporting the private sector in paying higher wages.
The set of anti-crisis measures also includes a measure aimed at preventing a possible dairy crisis, by allowing use of dried milk as basis for production of milk and dairy products and bring down their price.
System and Sustainability
Third and fourth segment of the ninth set of anti-crisis measures covers sustainability of both the public sector and the systemic measures to mitigate the effects from the price and the energy crisis.
Sustainability-oriented measures envisage continued implementation of the measure for public sector energy efficiency on-lending through the World Bank Project. Energy Efficiency Fund within the Development Bank will become operational with the support of the World Bank, through which EE and RE projects will be financed, all to the end of allowing easier access to capital for the public entities.
Systemic measures are aimed at providing a systemic response to the citizens’ needs whose income is paid from the Budget, in line with the macroeconomic trends, for the purpose of fiscal sustainability. Budget funds allocated for these systemic policies to protect the living standard of both the pensioners and the public sector employees, who are to “repay” with greater public service efficiency and higher professionalism of the administration, amounted to EUR 189 million in 2023, with around EUR 327.3 million envisaged in 2024. I will hereby mention the increase of public sector wages by aligning them with the average wage growth and redefining the public sector wage system by creating a systemic solution. This is a measure the implementation of which is to start next year, setting up a proper structure for public sector wages, something that did not exist before. It will provide for a decent life, fairness and bigger incentive for the employees. This solution adds to the system we have already established for pension increase, foreseeing pension indexation, starting March 2024, by applying a combined model of 50% increase of the average wage and 50% increase of costs of living.
There is no Simple Recipe for Recovery, But Rather a Consistent Policy Adjustment and Enhancement
In closing, the effects of these measures will be practically visible once their implementation starts and the macroeconomic data are analyzed, as is the case now with the previous sets of measures. International financial institutions and economists will than be able to debate the outcome of this set of measure. On the other hand, citizens and businesses, which are to reap the benefits of the measures, will appreciate the effects thereof much earlier.
As a final point, there is no universal recipe for faster recovery and accelerated growth. It will be rather a process of a consistent adjustment and enhancement. The model is to be tailored according to the economic structure, surrounding and expectations. Big picture is needed when tailoring the strategy, with the wellbeing of the citizens always being the starting and the ending point. This is the economic formula for success.
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