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Plan for financing accelerated economic growth: 5% GDP growth rates, new investments and stable public debt

The whole world sees 2021 as a year of economic recovery. With the implementation of the immunization process and the gradual improvement of the epidemiological picture, the trust of investors and consumers will grow, which in turn will result in the recovery of investments and private consumption. With the recovery of the economies and the normalization of the supply chains, the trade exchange will grow, as well as the utilization of the production capacities. By relaxing and suspending preventive health measures, the utilization of service facilities will be improved. All this will contribute to the stimulation of economic activity and growth of the economy.

The speed of recovery will vary from region to region and from country to country, depending on the impact of the covidium crisis and the dynamics of the immunization process. Thanks to timely policies to deal with the effects of the pandemic, the resulting crisis is expected to have less of an impact than the global financial crisis of 2008, but developing countries and least developed countries, which are hardest hit, are expected to face greater losses. medium term.

The expectations of international financial institutions for the global economic result are improving. The International Monetary Fund's spring projections are higher than the autumn 2020s, with the expected growth of the global economy of 6% in 2021 and 4,4% in 2022. The upward revision is due to the additional fiscal stimulus announced by several of the world's major economies, the expected economic recovery in the second half of the year as a result of vaccination, and the effectiveness of measures taken by economies to bridge the situation until full vaccination.

Economic growth in the euro area is projected at 4,4% for 2021, which is a slight upward revision compared to the projections from January, but a downward revision compared to the projections from October last year. For 2022, economic growth is projected at 3,8%, which significantly improves expectations compared to the projections from October last year.

Uncertainty about recovery remains high, mainly due to the prolonged health crisis, ie how many vaccines will be administered and whether they will be satisfactorily effective against new strains of coronavirus. Sources of uncertainty are the effectiveness of policies to limit the economic damage from the pandemic, the development of financial conditions and the movement of prices of goods and services, as well as the capacity to adjust the economy.

Conditions and expectations for the economy of the Republic of Northern Macedonia

The April projections of the IMF for the economic growth for the Republic of Northern Macedonia in 2021 with 3,8% growth are close to those of the Ministry of Finance (4,1%). Since the beginning of the year, there have been positive developments in the economy. This can best be seen through the revenue side of the budget. Namely, from the beginning of the year until the end of April, revenues are higher by 11% compared to last year, given that most of the comparison period last year was not affected by the covid crisis. Collection of taxes and contributions is higher by over 12%, with taxes increasing by almost 18%, while contributions increased by 4,5%. The growth of tax collection is due to the high growth of collection of almost all duties, and mostly the growth of VAT by almost 30%.

According to the State Statistical Office, in the first three months, exports of goods registered nominal growth of 18% on annual basis, thus continuing the positive trends in this segment with intensified dynamics. Imports of goods registered nominal growth of 14,1%. Production capacity utilization is also growing, with 71% utilization in February, which is at the pre-crisis level. Positive tendencies are also seen in the industrial production from March 2021, with growth of 7,6% compared to the same period last year. Internal trade data for the first two months show a nominal turnover growth of 0,5%, which follows a period of decline throughout 2020. The average salary continues to grow since the beginning of the year with a growth of 2,7% in February. In March, total credits increased by 5,2%, with growth of lending to both households and the corporate sector, while total deposits increased by 7,4%.

In line with recent macroeconomic and fiscal developments and expectations regarding the international economic environment, the domestic economy is projected to return to the path of economic growth and overcome the shocks caused by the pandemic.

Strategy for economic recovery and accelerated growth - SmartER Growth

One of the brilliant minds, Albert Einstein, believed that every crisis brings opportunities for those who know how to recognize them. Covid crisis can be a chance to put things in the right place systematically, to continue to function better and create more value. Therefore, in addition to measures and activities to recover the economy, we need to create mechanisms that will stimulate economic activity towards higher and sustainable growth in the medium term. That is the goal of the Smarter Growth Strategy, which I wrote about earlier.

The strategy consists of four pillars: (i) economic recovery from Covid-19, (ii) accelerated, inclusive and sustainable economic growth, (ii) strengthening private sector competitiveness, and (iv) developing human resources and equal opportunities.

We act towards the economic recovery from Kovid-19 through measures for protection of the health of the citizens and social protection of the most endangered categories, as well as support of the economy, the private sector and protection of the jobs.

After the economic recovery, we envisioned measures and policies for accelerated, inclusive and sustainable economic growth, which are aimed at good governance - ie the rule of law, the fight against corruption and capacity building of institutions. Ensuring fiscal sustainability and macroeconomic and financial stability will be extremely important here. There are also measures to encourage fiscal decentralization, ensure local and balanced regional development, a sustainable and healthy environment, and digitize the economy and public services.

At the same time, efforts will be made to strengthen private sector competitiveness, strengthen trade links and integrate into global chains. We will work to improve the business environment and combat the shadow economy, improve access to finance and technology adaptation, and modernize agriculture. We have already presented some of those measures and opened a public discussion with the academic and business community to combat the shadow economy and tax evasion and to promote fiscal decentralization, and further we will open and debate on other topics and solutions.

Investments in human capital remain among the top priorities in the Strategy for Revitalization and Accelerated Growth. We will work on the development of equal opportunities, development of human resources through investments in education, science and health, encouraging greater activity of the working population and social protection and social security.

In the context of the accelerated growth and the improvement of the standard and living conditions in the country is the Public Investment Plan 2021-2025, which focuses on the implementation of capital infrastructure projects in road and railway infrastructure, energy and communal infrastructure, as well as capital investments. to improve the conditions in the health, education and social system, agriculture, environmental protection. In the period from 2021 to 2025, capital projects in the amount of EUR 3,2 billion are planned, of which EUR 1,3 billion would be financed with budget funds, EUR 112,8 million from donations through IPA funds, and funds from international financial institutions / bilateral creditors capital investments would be financed in the amount of 1,8 billion euros.

In fact, these were the novelties of the budget for 2021 in order to give a clearer perspective on growth and development, ie, these are the three components of the medium-term budget framework: a) the strategy for recovery and accelerated growth, b) fiscal consolidation and c) public investment plan.

The crisis, public debt and fiscal space to finance economic growth

The Covid crisis affected almost all economies to deepen the budget deficit, and thus the growth of government debt. Namely, the decline in economic activity had a negative impact on the revenue side, ie the collection of duties, while the increase on the expenditure side was affected by the growth of health expenditures and stimulating economic measures.

In Europe, except for Norway (which has a negative change in government debt in 2020 compared to the previous year by -1,3 percentage points), there is an increase in government debt. According to the International Monetary Fund, the largest growth of government debt in Europe for 2020 compared to 2019 has Spain with a growth of 27,5 percentage points or government debt of 123% of GDP, followed by Italy with a debt growth of 27 percent points or government debt of 161,8% of GDP and Greece with growth of 24,3 percentage points and government debt of 205,2% of GDP. In the region, besides Greece, Albania has the highest debt growth of 15,6 percentage points and government debt of 83,3% of GDP, followed by Slovenia with growth of 14,9 percentage points and debt of 81% of GDP and Croatia with 14,5 , 87,7 percentage points growth of debt and government debt of 38%. Out of 24 countries, the Republic of Northern Macedonia has a lower government debt of 2020 countries and lower growth of government debt in 22 by 2020 countries. It is especially important that the debt be at a sustainable level, which according to the IMF estimates in the country report from April 70 for the Macedonian economy, does not exceed XNUMX% of GDP. It is also important that the price we pay for the debt is worthwhile, ie the value added - the growth it will produce to be higher than the interest rate.

Here we are faced with the choice between the hammer and the anvil, ie how to finance economic development, while maintaining a moderate and stable level of public and government debt. However, this is not an impossible mission, which I will elaborate on later in this column.

Juncker's plan - 1 euro mobilizes 15

Former European Commission President Jean-Claude Juncker in 2014 unveiled the "EU Infrastructure Investment Plan" or also known as the "Juncker Plan", which aimed to boost economic activity in the EU after the recession caused by the global financial crisis, as well as improving infrastructure in EU countries. The total initial value of this plan was 315 billion euros, while it resulted in 335 billion investments in infrastructure. I mention this plan because of the way this amount of funds was mobilized, ie the creation of a fund to mobilize more funds from private and public sources to finance projects in sectors of key economic importance, such as transport and energy infrastructure, energy efficiency, broadband , innovation and long-term investment funds.

It is about the European Fund for Strategic Investments (EFSE) which had a multiplier effect on investments 1:15, so that the funds from the Fund guaranteed and thus mobilized 15 times higher investments than the funds in the fund. The multiplier effect occurs by guaranteeing loans for new activities through the European Investment Bank (EIB) in the ratio of 1: 3, while the EIB offers instruments that multiply the capital in a ratio of 1: 5.

The World Bank also recommends finding new instruments and ways to finance major capital projects, ie Maximizing Finance for Development (MFD). This concept envisages various solutions for financing projects including private and public capital for optimal results. Thus, economies, especially developing economies and middle and low income economies, increase access to capital as well as the range of different sources of financing, which goes in favor of efforts for sustainable economic development.

Biden's Build Back Better Plan

Biden's "Build Back Better" plan guarantees that overcoming the deep public health and economic crisis, while facing the ongoing climate crisis, will begin a cycle of investments aimed at creating the jobs needed to build modern, sustainable infrastructure and to provide completely clean energy in the future. In addition to the American Resque Plan, which costs about $ 2 trillion, or about 10% of US GDP, "Build Better" is expected to create millions of new well-paid jobs, as well as build a more resilient and sustainable economy - the one that will lead the United States on an irreversible path to achieving net zero emissions by 2050 at the latest.

Financing plan for recovery and accelerated economic growth

In line with our efforts for fiscal consolidation, as well as the efforts to double the economic growth and achieve annual GDP growth rates of about 5%, in the Ministry of Finance in the final stage of preparation is the Plan for financing the recovery and acceleration of economic growth, which we will soon present and discuss in public. This plan provides answers to new ways of accessing capital to finance the recovery and acceleration of economic growth, through projects in the public and private sectors. With the plan we want to increase the total investments in the economy, while staying on the set course to gradually reduce the fiscal deficit, and thus keep the debt at a stable level.

The main point of this plan is to create a multiplier effect by creating and using new mechanisms, instruments, funds and sources of funding, ie in addition to the planned public investments in the amount of about 4 billion euros for the period 2021-2025, funded by the budget, IPA funds and international financial institutions, to mobilize several times more funds and investments from the private sector. This will increase total investment and accelerate the growth of gross domestic product and job creation.

The plan consists of creating development funds, innovation support funds, guarantee funds, equity funds, venture capital funds and similar instruments to support export companies, small and medium enterprises, as well as social enterprises. Public-private partnerships, concessions and other instruments for financing public capital projects are planned, as well as the private sector. These will be projects that are listed within the National Investment Committee (NIC), as well as new projects that may arise as initiatives from the public or private sector.

The recovery financing and accelerated growth plan will support public and private sector projects that will mean improving the competitiveness of the economy and improving the quality of life, ie will cover areas of environment, digitalization, innovation, human capital and social inclusion.

The development of conceptual solutions, concepts, institutional and legal frameworks, technical assistance will be provided in cooperation with international financial institutions such as the World Bank and the European Investment Bank (EIB). Additionally, in the coming period, the World Bank is expected to submit a Pre-feasibilty study, which will provide a complete picture and outline of the creation and implementation of these activities. Implementers will be the Development Bank, the Fund for Innovation and Technological Development, the Directorate for Technological-Industrial Zones and other institutions with the involvement of commercial banks and investment funds.

The Ministry of Finance is working on regulation of new financial instruments

In order to implement the new financial instruments, it is necessary to create an appropriate institutional framework that will enable their application, as well as their further upgrading. The creation and adoption of several legal solutions that will support the creation of these funds is in the process.

Within those legal solutions is the Law on Investment Funds which is in parliamentary procedure. It proposes the introduction of supply funds and fixed assets and regulates the conditions for opening a branch of a foreign management company on the territory of RSM, as well as the possibility for a management company from RSM to manage investment funds by acquiring qualified participation in a foreign company or by opening at a branch abroad.

With the support of the World Bank, the Ministry of Finance is working on the Law on Alternative Investment Funds, which should be adopted during 2022 and which will regulate the operation of venture capital funds.

Another law that is aimed at new instruments for capital mobilization is the Law on Amendments to the Law on Macedonian Bank for Development Promotion, which refers to the credit-guarantee scheme (Guarantee Fund). With the guarantee scheme, the state offers an additional opportunity for easier access to financial resources by taking part of the credit risk together with the commercial banks. This facilitates access to finance for micro, small and medium-sized companies.

With the amendments, this law envisages the establishment of funds that can be managed by the Development Bank on behalf of the state, which will refer to lending in the country, issuance of payment guarantees, loans and other forms of collateral, redemption, sale and collection of receivables. factoring and forfeiting on behalf of clients, trading in securities on its own behalf and for its own account, collecting, processing and analyzing information on creditworthiness of legal entities and their sale, economic-financial consulting, credit insurance against commercial and political risks and investment insurance. These funds will be able to be replenished from the Budget of the Republic of Northern Macedonia, loans and credit lines from international financial institutions, donations from the country and abroad and revenues from the activities undertaken.

New development funds and new competencies for the existing ones

The possibility of establishing different development funds that will target projects in the public and private sector and will use different mechanisms for raising capital is being considered.

One of those possibilities that are being considered is the Export Company Support Fund, which will support export-oriented manufacturing companies through favorable credit products.

Another possibility is the establishment of an Investment Fund, which would support larger projects, primarily capital - educational projects such as construction of kindergartens, schools, gyms, etc., whereby selecting companies that would be involved in the whole process would be gave preference to small and medium companies. In that way, on the one hand, in addition to investments in capital goods, small and medium enterprises would be supported.

Another fund provided for in the Plan for Financing for Recovery and Accelerated Economic Growth is the Fund of Funds. The focus of this Fund will be to stimulate greater investment of growing-focused businesses. The target group will be small and medium companies in the phase of development and expansion of business activities and based in RSM.

The Law on Alternative Investment Funds, which is being prepared, will regulate the establishment and operation of venture capital funds, which will collect investments from institutional investors and private entrepreneurs who will invest larger amounts.

The establishment of a Strategic Investment Fund, intended for financing infrastructure and investments, is also envisaged. This fund will provide the necessary financial support to cover the extensive infrastructure and investment agenda in the free - economic and industrial zones in the Republic of Northern Macedonia. Following the piloting, the model can be expanded to cover all such operations in the country, without restrictions, but with the support of international private and institutional investors.

For the establishment of some of these funds, it is possible to use the already established institutional capacities, such as the Fund for Innovation and Technological Development, the Development Bank and the Technological Industrial Development Zone.

An additional financing instrument, in addition to the funds, is planned to be crowdfunding (group financing). The establishment of this type of instrument will require technical assistance to assess whether the existing regulations are in line with the concept of group investment and preparation of a possible legal framework and organizational requirements for the establishment of this concept. The time frame for the establishment of this instrument is until the second half of 2022.

It is also planned to design and issue a development bond. It is a new instrument in the securities market that aims to mobilize funds for new development projects.

The purpose and expected results of the Plan for financing the economic recovery and accelerated growth

The plan aims to finance the recovery of the economy affected by KOVID-19 and to support accelerated and sustainable growth, while maintaining fiscal stability by mobilizing capital from the private sector, in addition to the funds allocated from the budget.

Expected results in the medium term of the Plan are: Double the economic growth from an average growth rate of 2,5% in the past decade at growth rates of 5%; increase of investments in public infrastructure, as well as increase of investments in the private sector through a mechanism of multiplication of finances with private ones in addition to public sources of financing; maintaining fiscal stability within the Maastricht rules for public debt and budget deficit. Consequently, investments and accelerated growth dynamics will contribute to increasing jobs and improving the standard and quality of life of citizens.

We are facing hard work, public discussions, debate and exchange of ideas to reach the best solutions that in the medium and long term will lead to economic development and better living conditions for our citizens.

(The language in which they are written as well as the views expressed in the column "Columns" are not views and reflections of the editorial policy of "Free Press")

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