Fiscal policy cannot do anything more than what it does in terms of its support to the economic activity, but the monetary policy contribution is missing, Vice Prime Minister and Minister of Financed said in the interview for “Kapital” magazine.
If NBRM reduced the interest on time, economic growth in 2010 would have been higher
(Interview for “Kapital” Magazine)
Fiscal policy cannot do anything more than what it does in terms of its support to the economic activity, but the monetary policy contribution is missing, Vice Prime Minister and Minister of Financed said in the interview for “Kapital” magazine. According to him, NBRM displayed late reaction regarding the reduction of reference interest rate at the end of last year, thus decreasing the potential for economic growth in the first half of 2010. Stavreski claims that 2010 Budget is realistic and quality in relation to the budget spending. He expects for the economy to exit the recession in the second half of the year. Vice Prime Minister expects for the stability of the exchange rate to be retained this year as well, emphasizing at the same time that it is of great importance for Macedonia to exit deflation.
After the period of New Year–related euphoria ended, and the onrush of work obligations started to cool the festive impressions, “Kapital” magazine, as always, vigorously elaborates the key economic topics in the state at the beginning of 2010. This time, through an interview, we present to you the considerations and the expectations of Minister of Finance and Vice Prime Minister, Zoran Stavreski, for the economy in 2010. As leading government official in charge of economic issues, we discussed with him on many topics. Starting from the centralized financial sector supervision, topic that was highlighted in the public last month, than budget policy, capital investments, subsidies in the agriculture, foreign investments, as well as the most painful topic on the relations between the Government and NBRM, fiscal-monetary policy relation.
– At the end of last year, the centralized financial supervision was largely discussed, but the public still does not know what kind of financial supervision model the Government strives for. “Kapital” magazine wrote about what kinds of models exist in different countries. What example does Macedonia follow?
Stavreski: There is no universal financial system supervision model in the EU countries, but countries in which, it is fully or partially integrated predominate. Out of 27 countries, supervision is fully integrated in 14 countries (banks, insurance companies, pension funds and securities market), and it is partially integrated in another two countries. In 12, out of 14 countries, where the supervision is fully integrated, it is carried out in special supervisory institution, independent of the executive power and out of the Central Bank. There is no specific example, which Macedonia should follow, we should rather create solution, which will be the most appropriate to our conditions. However, it is a fact that the unison of financial supervision in one institution is rational for small economies. This was recommended by the European Commission several years ago, and even more after the financial crisis, imposing the need for more efficient exchange of information on investments of financial institutions in risky instruments. All these facts speak in favour of the need for consolidation of the supervision in one institution, which will be independent and professional.
– If banks also fall under the control of the mutual regulator, what will it mean for NBRM functioning? What kind of internal restructuring will this institution undergo, in terms of both its technical functioning and managing staff?
Stavreski: In relation to the solution, if banks also fall under the unique regulator, the same NBRM experts, who currently carry out the supervision of banks, would supervise the banks in future as well, probably as directorate within the institution for integrated financial supervision (Banking Supervision Directorate, Directorate for Supervision of Insurance Companies, Directorate for Supervision of Securities Market and Directorate for Supervision of Pension Funds). However, it is too early for this discussion. First, the best institutional solution for the Republic of Macedonia should be argumentatively reached.
– How long will it realistically take to integrate the supervision functions of the financial market in Macedonia, having in mind the necessary legal changes? What are the Government deadlines thereof?
Stavreski: Government did not set any deadlines regarding this issue. It needs to be argumentatively discussed, without any emotions. The fierce reaction of some persons about the location, who would have gained or lost power was unnecessary. Supervision of insurance companies was within the Ministry of Finance not long ago, so we have decided to assign it in an independent Agency, responsible to the Parliament. It shows that it does not have any other intentions. One should have virtue to argumentatively discuss the pros and cons the presented idea.
– What are your forecasts for 2010 at economic level? What are developments going to be at macroeconomic level and in the real, banking and financial sector compared to 2009?
Stavreski: Together with the conflict 2001, 2009 was the hardest in all these 19 years of transition. Global economic crisis imposed a number of temptations for the Government, the financial sector, the economy and the citizens. Having in mind all this, I am satisfied that we jointly succeed in performing relatively well, compared to the other countries. We were the third best economic performer in Europe, there were not many lay offs, there were not many companies that went bankrupt, we succeeded in providing funds for regular payment of social rights, pensions, etc. EU exit from recession, as well as the last data in November on termination of the 12-month negative trend of the industrial production are encouraging for 2010 forecasts. However, we should be careful optimists. In 2010, Macedonian economy will undoubtedly both exit recession and realize positive growth of around 2%. However, the recovery will be gradual, more expressed in the middle of the year. At macroeconomic level, I expect for the stability of the exchange rate to be retained, however, it is important for our country to exit the long-term and dangerous inflation. Many things depend on the external factors and on the monetary policy as well. There is no economy recovery without credit and lower interest rates. Monetary policy has applied too restrictive exchange rate for very long period, thus unnecessary prolonging and deepening the recession in Macedonia. If the monetary policy is not loosened very soon, more and more companies will face the problem of iliquidity and failure, leading to reduction of lay offs. Fiscal policy cannot do anything more than what it does in terms of its support to the economic activity, but the monetary policy contribution is missing, Vice Prime Minister and Minister of Financed said in the interview for “Kapital” magazine. Neither retaining the stability with excessive price (interest rates) nor setting the direction whether the policies need to be tightened or loosened is proficiency. Proficiency is rather to retain the stability of the exchange rate at the lowest possible price, with the lowest interest on the Central Bank bills. Proficiency is also to react by changing the monetary policy on time, when everything else significantly changed in the economy. All indicators suggested that end of the third quarter 2009 was the appropriate period to react. However, this did not happen. The fact that the monetary policy was not loosened on time has caused for the Republic of Macedonia to face lower economic growth and job loss. Even if the monetary policy is loosened tomorrow, reaction of banks so as for the economy and the citizens to feel benefit therefrom will take several months. So, NBRM late reaction already reduces the potential for economic growth in the first half of 2010. One cannot apply same monetary policy when foreign currency reserves are at the level of EUR 1,176 million, the same as in May and almost EUR 1,590 million today, when the trade deficit is drastically reduced, balance of payments is positive and the export starts to increase. One more thing: legal obligation and goal of NBRM is to ensure price stability, expressed as low inflation rate. Stability does not mean five-month deflation, which is sign of “ill organism”, being direct consequence of the too restrictive monetary policy. Long-lasting deflation means that NBRM does not fulfill its main goal set by law. Policy detrimental to the economy and the citizens cannot be conducted under the guise of independence. Is there a single Central Bank in Europe except for NBRM that, during the biggest global crisis in 2009, applied two-fold increase of interest rate and than kept it at that high level for whole seven months? If exchange rate stability may be kept with interest rate of 5% or 6%, why should it be 8.5% or 9%? How much does it cost NBRM and our country? Who has benefit therefrom and who pays the price?
– Parliament adopted the 2010 Draft Budget Opposition MPs harshly criticized it… Which are the economic sectors that projected GDP growth of 2% will be mostly based on and what is the projected increase of revenues of 3.4% based on? How will budget revenues be collected next year, if it is generally recognized that most of the large companies announced closure of plants and lay offs. Is government projection sustainable, are sources of budget revenues reliable?
Stavreski: 2010 Budget is very realistic. Here it is why: nominal GDP is projected to increase by 4% (2% real growth and 2% inflation), budget revenues are envisaged to increase with lower dynamics of 3.4%, while budget expenditures with even lower one of 2.8%.
Budget revenues are in correlation with the economic activity, i.e. nominal GDP growth (personal consumption, investments, export and import), so their projections to increase with rate lower than the nominal GDP is proof for how realistic and possible their realization is.
As for each projection for the next 12 months, there are possibilities for underperformance and overperformance, depending on many external and internal factors.
We will attentively monitor the budget execution on both the revenue and the expenditure side, whereby, the projected level of budget deficit of 2.5%, being optimal for the existing conditions, would not be violated in any situation. It is optimal, since it provides, through temporary more expansionary budget policy, to undertake anti-recession measures to the end of supporting the economic activity, and at the same time, it does not jeopardize the macroeconomic stability and public debt sustainability.
– How many budget funds were secured with collection of fines on the basis of different offences, i.e. what is the level of this budget revenues compared to 2008? How many funds from these items are projected to be collected in 2010?
Stavreski: Revenues collected on the basis of fines are insignificant portion of the total budget. In 2008, they amounted to Denar 390 million, as of November 2009 inclusive, Denar 440 million was collected. Throughout 2009, projected revenues collected on the basis of fines were in the amount of Denar 527 million, and the same level of revenues was projected for 2010 as well. If you compare them with the total budget, the revenues collected on the basis fines participate with only 0,3% -0,4%. Accordingly, allegations that the budget revenues are secured with the collection of fines are absurd. Fines are necessary in case where the law is violated, workers are not registered or when contributions are not paid to workers. You know how it was a while ago: contributions have not been paid to workers for years, they were not even aware of that, and it was just before their retirement that they faced the painful truth of being pilfered throughout their years of service. Or, they were registered as receiving lower salary bases, which is again stealing from both the workers and the state, as well as undermining the stability of Pension and Disability Insurance Fund and the Health Insurance Fund. Companies that do not work pursuant to law are at the same time disloyal competition to thousands of other companies, regularly settling the liabilities towards the workers and the state. Therefore, all those who due to political or other reasons strive for non-punishment or criticize the government institutions, must be aware that they promote anarchy and grey economy. Of course, the relation of all government institutions with the companies and the citizens must be professional and correct in every case.
– So far, you emphasized several times that what is most important is that there will be more funds for infrastructure next year, i.e. capital revenues will increase by 16% compared to 2009. However, it is a matter of amount of funds that are not sufficient for projects called capital projects, and on the other hand, these are the same old projects announced by the Government few years back. Why does the Government give new funds for old projects each year? Why have not these projects been realized so far? Where is the problem? Is it a matter of problem in the policy, setting the goals or the problem of operating nature?
Stavreski: Capital investments are usually multi-year projects and therefore they are repeated in many budgets. We can give example for road construction. Preparation of feasibility studies, main and design project and other project documentation will take around two years so as for the construction to begin. Construction itself last several years. It is similar with the other public investments. There are realistic reasons as for why most of the capital projects drag on from year to year. Can you imagine that after so much talking in the past 15 years, there were no prepared project documentations for the gas power line, the railway towards Bulgaria or the Porece-Skopje road? However, I do not deny the fact that the weak capacity of the administration is also a reason for the long-lasting preparation of capital projects. However, in the past two years, we worked on preparing the projects and reaching their construction phase and the construction finally begun in 2009. In any case, I expect for the capital investments performance to be intensified next year. What is especially important is that we accepted the advise of experts for significant increase of the development component of the Budget in 2010. No budget has ever before provided for increase of capital investments by 18%, or EUR 58 million. In order to provide room for capital expenditures, we made saving in all other positions. Above all, we reduced the unproductive current expenditures for goods, services and salaries by over EUR 40 million. Therefore, I believe the budget is not only realistic, but it is also much more quality from the point of view of the budget spending structure.
– What is the effect of the so-far Government policy of subsidizing the agriculture and what results do you expect from the increase of agricultural subsidies by 10.9% next year? Have you considered any changes in the agricultural policy, maybe in terms of giving subsidies to manufacturers, who by importing ready-made products contribute to the foreign exchange inflow?
Stavreski: Agriculture is one of the priorities of the Government programme and I may conclude that we remained consistent to what we promised. We reached incredible EUR 110 million for agricultural support compared to EUR 6 million annually in 2006. Process of increasing the subsidies from year to year was also accompanied by process of learned lessons, by both farmers and government institutions. What is most significant is that the problems are more and more smaller each year, and the effects regarding the increase of production and export of agricultural products are more and more larger. Accordingly, there is increasing number of farmers registered for subsidies and much less problems with the payment each next year. Even in time of crisis, the agriculture had successful year in general. This does not mean that there are no problems or room and need for improvement. Macedonian agriculture, not only the primary but also the manufacturing part, may achieve much better export performance with better organization. Taking into account that the current amount of subsidies is really big, there is room and need for more serious support to manufacturers, which may additionally strengthen the export effects of the agricultural policies. I am happy to see that, in the last two-three years, people, who were not previously engaged in agriculture, have become aware of the perspectives offered by this branch as a result of the significant support through subsidies. Combining the state support with their visions and entrepreneurial spirit, more and more investors decide to invest in new production plants for wine, cheese, canned food, etc. Therefore, I am sure that the Macedonian agriculture has excellent perspective.
– Interesting gesture of the Government was sending the lowest income pensioners in spas. Somehow, the public gets the impression that pensioners and farmers are the most privileged social groups in the society… What type of advantages real sector companies require from the Government? What are their new requests vis-a -vis the consequences of the global recession, they feel?
Stavreski: It is normal for pensioners, beneficiaries of social welfare and farmers to be somehow the most privileged ones, since they are the most vulnerable categories of population. This is the case in every country. However, it is important for the Government to find optimal balance in its policies, mainly the budget, by which it will also satisfy the interests of all other citizens and companies. Let’s not forget that as for the real sector companies, the Government reduced the taxes to the lowest level in Europe; reduced the social contributions as significant cost for the companies; decreased administrative barriers, price and number of documents for running business; exempted them from reinvested profit tax, being a support of around EUR 150 million; provided favourable credits in the amount of EUR 100 million from EIB; provided for reprogramming the old inherited debts and written off the interests on those debts so as to help them in coping with the iliquidity problem in crisis situation, etc. Model we chose was support to all sectors and all companies, being a logical choice in conditions of small country with limited financial opportunities for support. Otherwise, if we opted for selective approach, we could have use these funds in helping (only for a short period of time) the three-four largest companies, but thousands of other companies would have gone bankrupt with much worse effects on employment and other social effects. And again, after a while, such assistance would have been insufficient even for these large companies as well, since there is no way to compensate loss of 50% to metalworks producers on the market, or drop of metal prices by 40%, 50% or 60%. Therefore, I am confident that we have chosen the most optimal model of support for the economy, in which, with the available resources we have achieved the largest effects. In any case, we remain open for considering all proposals from the companies, we must jointly continue to look for solutions to exit the crisis. Even in January 2010, we could implement one measure the Chambers of Commerce required, which seems acceptable and will help them overcome the liquidity problems more easily.
– In the past two years, the Government announced several foreign investments, many of them in the free zone Bunargik. However, almost nothing of all pompously announced projects is implemented on the ground. Why?
Stavreski: We have proved that we can attract significant amount of foreign investments in the years before the global crisis. In two years only, 2007 and 2008, they exceeded EUR 920 million, being more than the cumulative inflow of foreign investments in the previous 15 years (excluding the sale of the state monopolies Telekom and ESM). This speaks best in favour of the quality of implemented reforms for improving the business climate and attracting investments, also verified with the progress achieved on the list of World Bank Doing Business Report. On the other hand, I think it is malicious to blame the Government for not having more investments in 2009, the year of the biggest global crisis since the Second World War onwards. Which Government at global level was successful in attracting foreign investments, i.e. which Government could be successful when all investors, as a result of shaken confidence and fear, primarily strived for their own survival. However, I am confident results achieved in improving the business climate, as well as our stubborn persistence in promoting Macedonia as an attractive destination to foreign investors, after the global crisis ends, will result in more investments.