23^rd December 2023, Skopje – Throughout this passing year I have frequently addressed the public through my columns. Although, I admit, when I write, it is extensive and detailed, as an economist, I uphold the fact that forming an opinion for a certain topic requires all information or, as I often say, the big picture. Thus, by writing about the Budget, the tax policy, the public finance reforms, the systemic reforms in the public sector, the strategies for recovering from the multiple crises that affected the economy, as well as both the growth acceleration and the European future plans, by way of facts and figures underpinned by economic theory, I wanted to contribute to increasing the transparency and the accountability, as well as better understanding of the developments, the processes and the goals of our economy.

As we stand on the brink of a New Year, it is an opportune moment to reflect on the path we have walked and what awaits us. A lot of work awaits us next year from an economic point of view, hence we are to see where we stand, what lies ahead and what our goals are. The ultimate goal is a better and more prosperous European future for our citizens through economic growth, better public services, strengthened competitiveness, scaled-up investments in human capital and strategic capital projects.

Let me give the full picture abouth this year’s performance and next year’s expectations over the medium term by elaborating on the macroeconomic indicators and the development strategies.

1. GDP: CHALLENGING YEAR, RESILIENT ECONOMY

Throughout 2023, global economy has continued recovering following the shocks related to the pandemic, the Russia’s invasion of Ukraine and the two-digit inflation. Still, it cannot be said that the global economy had an easy ride, considering the tightened financial conditions and the narrowed fiscal space due to the higher levels of public debt, the geo-political and geo-economic fragmentation, as well as the climate-related risks. Global economy showed high resilience despite the disrupted energy and food markets, and continued its positive economic performance, with its growth slowing but not stalling. As per the IMF autum projections, world economic growth is expected to slow from 3.5% in 2022 to 3% in 2023 and 2.9% in 2024. 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. Germany, as a country to which the domestic companies export the most, is expected to experience economic growth of 0.9% in 2024, following the projected decline of 0.5% in 2023.

Accelerated Growth of the Domestic Economy in the Year Ahead

Against the backdrop of continuous crisis and uncertainty caused by adverse external factors, domestic economy has proven to be resilient and remained on the growth trajectory, although slowdown of economic activity has been registered, as is the case with the global economy. Economic activity is expected to accelerate next year, buttressed by both higher growth at our major trading partners, contributing to growth of external demand, and advancement of the largest investment cycle our country launched through major infrastructure projects. In 2024, economic growth is expected to reach 3.4%, amid scaled-up investments, solid consumption growth and recovered external demand. Gross investments are expected to contribute the most to the growth, above all as a result of the accelerated implementation of the major infrastructure projects funded by the state, i.e. road Corridors 8 and 10, as well as the state support aimed at strengthening the private sector and boosting competitiveness, innovation and technological development of enterprises, by providing alternative financing sources and instruments, and the expected scaled-up investments in expanding, and building new, capacities in the technological industrial development zones contributing to growth of private investments. Moreover, start of the EU accession process is expected to contribute to strengthening the reform processes in the country, providing for enhanced support for investments, additionally boosting the investors’ confidence. Country’s conducive environment and growing interest in and enhanced support for renewable energy investments will furthermore support the investment activity.

Average Annual GDP Growth Rates of Over 5% under the Growth Acceleration Plan

Medium-term expectations are that economic growth will accelerate, supported in particular by implementing activities and measures under the development plans, all in order to achieve the necessary GDP growth rates of around 5% for faster convergence, under the premise than we will face no greater shocks, as was the case in the recent years.

I would briefly touch upon the strategy and the policies to be implemented over the medium term aimed at accelerating the economic growth, in particular the Growth Acceleration Plan and the Public Investment Plan, coupled with the policies on macroeconomic stability and fiscal sustainability. Growth Acceleration Plan 2022-2026 is a general framework which consists of all elements that could contribute to strengthening the growth potential on medium-term basis, which adds to the Strategy for Economic Recovery and Accelerated Growth (SmartER Growth Strategy). The respective Plan suggests innovative ways to finance the investments, both public and private, to consume all the available funds offered from official creditors and to reach all the possibilities to mobilize private investments. Besides the budget funds, following types of financing instruments are also envisaged: grants, stocks, concessions, new types of bonds, public-private partnerships, etc. As for the Growth Acceleration Plan, Ministry of Finance has already successfully carried out the first auctions of development bonds for citizens and green bonds. Project bonds and development bonds, i.e. financial instruments intended for development and green projects, are also planned to be introduced in the period to come.

Public Investment Plan includes multiyear capital projects of strategic importance, such as investments in the field of road and railway infrastructure, energy and utilities infrastructure, as well as capital investments aimed at improving the conditions in the health, education and social systems, agriculture, environmental protection. They will be financed through diversified sources, in particular budget funds, donations, above all IPA funds, as well as loans from international financial institutions/bilateral creditors. This Plan includes road and rail sections along Corridors 8 and 10, gasification network, HPP Chebren, wind parks and solar power plants, Skopje wastewater treatment plant and solid waste stations, and many others.

Further progress in the EU integration processes, as well as the Growth Plan for the Western Balkans, which I will touch upon at the end of this column, will also add to the acceleration of the economic growth.

2. INFLATION: AVERAGE HISTORICAL RETURN

Globally, upon last year’s ever highest inflation rate since the 80s of the last century onwards, this year, its stabilization is anticipated. Global inflation is expected to decline from 8.7% in 2022 to 6.9% in 2023, while reducing to 5.8% in 2024. Inflation in the Eurozone is projected at 5.6% in 2023 and 3.3% in 2024. Return to historic low inflation rates of 2% is expected to be achieved in the medium term, i.e. 2025.

In our country as well, upon reaching its highest level of 19.8% in October 2022, the inflation kept decreasing on continuous basis, and as per the latest available data, the annual inflation accounted for 3.1% in November. In cumulative terms, in the period January-November 2023, inflation rate accounted for 10.2%, whereby, as per our projections, inflation will return to single digits or around 9% throughout the year. Further lowering of the inflation rate is expected next year. As per the expectations, inflation will account for 3.6% in 2024, amid maintained stable energy and food prices on the international markets, as well as a further slowdown of the basic inflation, while getting back to historic low targets of 2% in the medium term, i.e. in 2025.

Closing the Gap between Domestic and European Inflation Rate

Measures undertaken by the Government, combined with the tightened monetary policy of the National Bank, generated positive results, if we consider last and this year’s inflation trends, reflecting a sharp drop, while also closing the existing gap as regards the average inflation rate in the EU due to the structural economic differences. In fact, in November last year, annual inflation rate accounted for 10.1% in the EU, while accounting for 19.5% in our country, with the difference being 9.4 p.p.. In November 2023, inflation accounted for 3.1% in both our country and the EU. Large share of food in the consumer price index and energy imports had a strong impact on domestic inflation.

I will hereby highlight that, as of the onset of the energy crisis up to now, Government adopted three sets of measures aimed at coping with the energy and price crisis (in addition to these three sets, since the start of the pandemic onwards, the Government has adopted total of nine sets of anti-crisis measures). Measures aimed at managing the energy and price crisis at the beginning, were geared towards mitigating the price shock from the rising prices of energy products, on the population and the companies, via subsidized electricity price and preferential VAT rate on electricity. Later on, the respective measures were focused on cushioning the consequences of high food prices, by freezing the prices of commodities, increasing the minimum wage, as well as the pensions and the public sector wages, coupled by the one-off financial allowances for the most vulnerable groups. Measures we undertook provided for slowing down the spillover effect of imported inflation and prevention of large-scale price shocks.

I would like to hereby announce the further implementation of the anti-crisis measures in the upcoming year, as reflected by the 9^th set of measures, amounting to EUR 662.4 million. Ten out of these measures will be implemented in 2024, thus further extending the support to the citizens and the businesses, in support of their protection, and for the sake of boosted competitiveness.

3. EMPLOYMENT, WAGES, PENSIONS: GROWTH PROJECTED FOR THIS, AS WELL AS NEXT YEAR

Unemployment reduction trend and employment growth continued in 2023 as well. As per the most recent data of the State Statistical Office, unemployment rate was at historic low in the third quarter this year, accounting for 12.8% at the 15-74 age category, being reduced by 0.5 p.p. compared to the first quarter of 2023. Unemployment rate at the 15-89 age category accounted for 45.7% in the third quarter, increasing by 0.6 p.p. compared to the first quarter, with the total number of employed people being increased by approximately 9,500 during the first three quarters. As expected, positive trends on the labor market will continue in 2024 as well, resulting from the scaled-up investments and the increased need for workforce, the active employment measures and programs and the support for job creation, intended for domestic and foreign enterprises. Thus, number of employed persons is expected to increase by 2%, which will result in additional reduction of unemployment rate next year.

In 2023, average wage recorded noticeable growth, which as per the latest data, in October, annual growth of around 17% was seen, i.e. average net wage reached Denar 38,843, increasing by 66% in the last six years. In the past period, wage growth was a result of the Government’s measures pertaining to minimum wage growth of over 100%. Multiple increase of public sector wages throughout the years, while also including the latest 10% wage growth for the whole public sector, had also impact thereon. Moreover, the Government, at several occasions, subsidized the wage increase in the public sector, via both financial support and tax incentives. Pensions also kept increasing via their indexation, experiencing a 21% growth, Next year, it is expected for the average net wage to experience 8.4% growth in nominal terms on annual basis. In addition, shortage of workforce at certain positions in the private sector additionally contributes to the wage growth.

Adopted Systemic Measures for Public Sector Wages and Employment

It is important to note that plenty of systemic solutions were adopted in the past period in view of determining the minimum wage in line with the higher consumer price index, as well as the increase of both average wage and the pensions. Moreover, systemic solution was reached, pertaining to paying the public sector wages in line with the respective methodology, which will enter into force as of 2025, all this being coupled by the vacation allowance payment.

As regards public sector employment, rule was adopted in terms of not hiring new people, except for the purpose of filling in the positions of retirees or outflow on other grounds. As of next year, employment process in the public administration will also be less bureaucratized, thus imposing a greater responsibility for the heads at the respective institutions, which will provide for increased efficiency and effectiveness. This change in the public sector employment process, is a systemic, whereby it will be carried out on the basis of an approved annual employment plan at the budget user or the institution, as well as on the basis of the Budget adopted by the Parliament, accompanied by a statement by the head of the institution, pertaining to the funds provided for the respective employment therein.

4. PUBLIC FINANCE REFORMS

In the field of public finance reform, progress was made as regards the execution of the Organic Budget Law this year. I would like to hereby highlight the already carried out selection of the members of the Fiscal Council, an independent body being already commissioned, which will oversee the fiscal rule implementation, as well as the strategic documents and reports related to fiscal and macroeconomic policies.

Steps were also taken for providing funds and further implementation of the integrated public finance systems, i.e. Integrated Financial Management Information System – IFMIS, followed by State Aid Management Information System – SAMIS, as entirely new state aid management information system, which will be put in place at the Cabinet of the Deputy Prime Minister in charge of Economic Affairs and Coordination of Economic Sectors, as well as completely new Integrated Tax Information System of the Public Revenue Office (ITIS). Public finance digitalization will provide for promoting transparency, accountability and efficiency when managing public finances and rendering better services for citizens.

I would like to hereby stress that the Organic Budget Law is a modern concept of medium-term budget planning in line with the EU Directives and the best international practice. This Law set the framework of a sustainable fiscal policy, strong budget discipline and enhanced transparency. In the upcoming period, as per this Law, fiscal policy is to be focused on public expenditure consolidation, by gradually reducing the deficit in accordance with the set fiscal rules. In the coming period, Ministry of Finance will, with international support, continue to work on preparing by-laws for operationalizing the Law.

5. NATIONAL DEVELOPMENT STRATEGIES

2024-2044 National Development Strategy rests upon the following priority areas: 1. Sustainable, Innovative and Competitive Economy, 2. Sustainable, Local and Regional Development that Ensures Cohesion, 3. Demographic Revitalization and Social and Culture Development, 4. Rule of Law and Good Governance, 5. Secure, Safe and Resilient Society, and 6. Green and digital transformation.

According to the economic growth scenarios for the upcoming twenty years, average GDP growth is projected to increase by 2.6% in real terms on annual basis as per the baseline scenario, and by 4.7% as per the optimistic scenario, i.e. by implementing the reforms in the strategic priority areas under the Strategy. Under the optimistic scenario, as a preferred option, faster raising of the living standard is envisaged in 2044 compared to 2024 (GDP per capita will increase by 70%), as well as a significant drop of the poverty rate (percentage of people earning US$ 2.15 per day will decline from 6.1% to 0.4%), budget revenues accounting for 43.5% of GDP, significantly higher compared to the existing projection of 31.7% of GDP for 2024. To achieve faster convergence with the EU countries compared to the new member countries (Croatia and others), our economic growth should be above 5%, earning us the epithet of “economic wonder-child in the Balkans”.

Sectoral strategies and programs with action plans are also necessary for successful implementation of the National Development Strategy. Implementation of new strategies by areas and priorities revised and prepared in the last two years will also play a significant role, and they are as follows: Human Capital Development Strategy, Smart Specialization Strategy, Export Promotion Strategy, Sustainable Development Strategy, Energy Development Strategy, Digitalization and Cybersecurity Strategy, Local and Regional Development Strategy, Public Finance Management Strategy, Strategy for Formalization of Informal Economy, as well as strategies in the field of agriculture and food security development, social protection, health, education, culture, tourism, support for youth and sports, security and defense.

We have been intensely working on the development strategies in cooperation with other international institutions and the European Union, among which I would single out the Growth Plan for the Western Balkans 2024-2027 in the amount of EUR 6 billion for the whole region, around EUR 900 million out of which will be in support of our economy, as well as the WB 2024-2028 Country Partnership Framework in the amount of around EUR 900 million intended for our economic development.

6. PROSPEROUS AND EUROPEAN FUTURE

I would particularly like to address the Growth Plan for the Western Balkans, being a great opportunity bestowed by the European Union to the countries from the region for a rapid convergence and accession to the EU. This Plan practically allows the countries from the region to take advantage of some of the benefits the EU brings even before becoming members thereof. Its implementation is expected to foster economic growth, as well as accelerate the socio-economic convergence of the Western Balkan countries to the EU, and accordingly their EU accession. The Plan is based on four pillars, aimed at: 1) enhancing economic integration with the European Union’s single market; 2) boosting regional economic integration within the Western Balkans; 3) accelerating fundamental reforms, and supporting the Western Balkans’ path towards EU membership, improving sustainable economic growth including through attracting foreign investments and strengthening regional stability and 4) increasing financial assistance to support the reforms through a Reform and Growth Facility for the Western Balkans.

In addition to the significant financial support extended to us through this Plan, we are being provided with the opportunity to accelerate the reform agenda implementation and get closer to the EU, or as I often say, “to bring EU home, before becoming part of EU”. This four-year Plan is to be launched this coming year and we are to be prepared to make full use of this hand extended.

7. SOCIAL CONSENSUS AND AGREEMENT

The future belongs to the future generations whereas it depends on our present decisions. These decisions are the ones that ensure the continuation of our essence. Therefore, it is of vital importance to have an intergenerational social agreement, de facto a contract confirmed as a most advanced form of social awareness and essential to the development of human civilization, which indisputably sets man apart from all other living beings on our planet. Handing the ‘baton of acquired knowledge’ from one generation to another made us into the most intelligent beings, an envy even to the most hardworking bees whose entire industrious life is dedicated to creating honey for themselves and others, in harmony with nature. It is, in fact, in their biological programming and their lifespan is identical to all bees and each of their next generation, since they, unfortunately, do not possess the intelligence and collective consciousness of the humankind.

Becoming an ‘economic wonder-child in the Balkans’ requires a social consensus on the strategic priorities, as well as a social open dialogue for all key issues. Leadership is a requisite, reflecting collective consciousness for better future and intergenerational agreement for this generation to provide brighter future for the next one, which, in turn, will stay here so as to pass the behest to the next generation, each following suit. I am confident that this is possible. Leadership and clear vision for the future will lead us through the differences and the short-term beliefs towards achieving agreement for the strategic priorities. Consensus and agreement on the key development priorities, more competitive economy, advanced technologies and sustainable development, higher standard and quality of life, clean environment, safe and prosperous country!

In conclusion, despite my nature tendencies as a realist and the positive expectations for the economy reflected in this column, I would like to remark on the everlasting presence of risks. We are to, therefore, stay alert and vigilant, to make use of the possibilities and to take appropriate measures and policies for overcoming dangers. Sound strategy, implementation plan and consistency and commitment to the respective plan, as well as social consensus regarding the strategic priorities are a cornerstone for a more prosperous future for us all. Only then, the results will come forth!

I wish you a joyful and prosperous 2024!

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