Interview with the Minister of Finance
Of the Republic of Macedonia
Mr. Nikola Gruevski
By: Dr. Sam Vaknin
First Part also published by United
Press International (UPI)
Second Part also published by United Press International (UPI)
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The Minister of Finance of the Republic of Macedonia is an unenviable position nowadays. It is a small country (9,600 sq. miles, 2 million inhabitants) and one of the poorest in Europe (1,900 US dollars GDP per capita). Saddled by its socialist past and an Albanian insurgency – largely imported from Kosovo, across its northern border – it still managed to grow by more than 5% last year and to reform its economy substantially.
The credit for most of this belongs to its 30-years old Minister of Finance, Nikola Gruevski.
To interview Mr. Gruevski is refreshing. He is emblematic of a generation of humble and efficient technocrats, which sprang across Central and Eastern Europe following the demise of Communism. He readily accepts that the older generation – “whose personality was formed during socialism, talk the (Western-capitalist) talk but don’t walk the walk”.
“Why a Minister? What’s in it for you?”
“The challenge, the opportunity to make a difference. I was a critic of past economic policies. I cannot afford to miss the chance to implement my ideas”.
These ideas span all the spheres of Macedonia’s economy.
“Value Added Tax was introduced and immediately generated a budget surplus that was used to pay off internal debt and to reduce other taxes. Macedonia has among the lowest personal income tax and corporate profit tax rates in the world (15% each). The windfall also enabled Macedonia to offer one of the most investment and capital markets friendly regimes in the world, with first year tax exemptions for new and newly-listed businesses. VAT had an adverse effect on inflation. Still, even as energy prices surged, Inflation increased, but tolerably so (by 5%).”
The Minister is aware of the informal economy in his country but insists that VAT has brought a large chink of it into the open. As an example he gives the reduction in outlandish tariffs on raw materials, machinery and other goods which led to a commensurate reduction in cross-border smuggling. “More taxes and tariffs will be reduced” – he reassures me.
Perhaps the sector that was most revolutionized is banking with a completely new legal infrastructure: a banking law, deposit insurance law, bankruptcy and collateral laws. Coupled with new arrangements with the IMF and the World Bank, these led to a restoration of public trust in the banking sector. For the first time, savings in banks actually increased by a third. Another first was the purchase of three leading Macedonian banks by foreign banks from Greece, Slovenia and Germany. “Other foreign banks are interested to open branches here” – he says proudly – “This will greatly enhance the competition and revitalize the banking sector”. “Even with the current crisis?”
“In the 1999 Kosovo crisis, Western investors and trading partners escaped. Greek investors, who know this region better, came in and picked up enterprises at bargain basement prices. I hope investors from other countries learned the lesson. Since the current crisis started, we have sold our biggest bakery – Zhito Lux – and our biggest fairgrounds – Skopski Saem – to Greek and Slovenian investors. The new owners of Macedonia’s largest bank, Stopanska Banka, (‘National Bank’ of Greece”) are planning to increase the capital.
“My work in this Ministry is all about trust and transparency. We pay off the internal debt to citizens and banks ahead of schedule. We passed a law to compensate savers whose foreign exchange savings were frozen during the break-up of Yugoslavia – and already paid back some of it. We have restored property expropriated during socialism to its rightful owners faster than any other country in transition (under a denationalization law enacted last year). We have revamped our property rights laws. The result? Last year we had more than US$ 150 million in foreign direct investment (FDI), the best year ever. And this is excluding more than 300 million US dollars paid by MATAV for 51% of the Macedonian Telecom.”
“Most of these investments are from Greece. Doesn’t it look like a hostile takeover?”
“No way” – he laughs – “What is more natural for one neighbour to invest in another? The USA is the biggest investor in Canada. Greece is to us what Germany is to the Czech Republic. It would have been very worrying had they showed no interest to invest here”.
“On the whole, the 1999 Kosovo crisis was bad for us. What we need is peace and stability. Actually, following the war, Macedonia lost half of its market share in Kosovo to new entrants. Our industrial production has decreased by one eighth. Inter-company debt shot up from 600 million to 1 billion DM (and stayed there ever since). We received less than one fifth of the aid we were promised. The Stability Pact – which encompasses the entire Balkan – is hardly an answer to our specific needs. We were left to pay the bill.”
“The current crisis is likely to shave a few percentage points off our GDP growth target (6%). It depends on its length and intensity. We are afraid to again lose markets we have laboriously cultivated after the Kosovo war. Unemployment will again edge up. We have the support of the IMF and the World Bank but we may have to divert resources to the war effort.”
“Has Macedonia been offered financial assistance by anyone?”
“I asked several foreign governments to help us with support for our budget, payment balance and the procurement of strategic goods, such as oil. I have received no response until now.” – he shrugs – “But the crisis did not breach the budget framework. It contains reserves, which we intended to use for structural reforms. We may have to re-allocate the money to the Defence and Interior Ministries.”
“Any other effects? On the foreign exchange rate? Capital flight?”
Not so surprisingly, little. In 1999, people bought foreign exchange in a frenzy and when the crisis abated sold double the amount back to us at a loss. The National Bank of Macedonia (NBM) intervened then and is intervening now. But, we have hitherto spent only US$ 7 million on this (another 25 million were given to our refinery to purchase oil, to prevent pressure on our currency market). We likely would have spent this amount anyhow, to absorb excess liquidity. Moreover, our reserves have doubled to c. US$ 700 million (or 3.5 months of imports) since 1999 (not counting the 300 million or so from the privatization of the Telecom). It is an entirely different situation.”
“You are talking about excess liquidity on the one hand – and about a mountain of inter-company debt, on the other. Isn’t this a contradiction?”
“Only on the face of it. In the last 12 months, the average interest rate charged to borrowers in Macedonia declined from 21% to 14%. Good borrowers pay less than 10% per year. The implementation of a new, commercial bank managed payment system, will increase liquidity. The liquidity in the banking system is so high that the inter-bank lending rate is at 7%, or half the market rate. Money supply aggregates are high and growing. Still , many of the firms are not eligible to receive new credits. A lot of the outstanding inter-company debt is dead, belongs to long defunct firms, or to massive loss makers. As firms are privatized, it will either be privatized as well, or deleted. A small part will be borne by the government. Illiquidity remained virtually unchanged since 1999.”
“In other words, most company debt is non-performing or bad? How does this reflect on the banking system?”
“No, these debts are not in the banking system at all. They were created by the previous management of state owned firms in the previous regime. The IMF has officially confirmed that more than two thirds of the loan portfolios of our banks in the year 2000 are in the A and B least risky categories. Stopanska Banka, which constitutes close to 50% of our entire banking system, has just finished cleaning up its portfolio, a major achievement of far reaching structural importance.”
“This is the second time you mention the IMF. Some people accuse them of being socially insensitive. Unemployment, for instance, is blamed on the structural reforms that they imposed on Macedonia.”
“We sometimes disagree with the recipes of the IMF and they do tend to administer the same advice to all their clients. But their contribution is positive and important. The provide credit and thus signal to investors that the right economic policies are implemented. Politicians, dependent on voter satisfaction often need prodding to implement painful reforms. Some of the measures included in our arrangement have increased unemployment. We had to sell or shut down 12 large loss makers. Another 30 are to be sold or closed. We have pared more than 3000 workers off the state administration payroll. But this is a drop in the unemployment bucket.”
“Why is this persistent unemployment?”
“Many reasons” – he sighs. It is clear that I touched a raw nerve – “Unemployment is over-stated. Many workers in the informal economy go unreported (this, hopefully, will change with the lower taxes). Albanian women often refuse to work but register as unemployed, to get the attendant benefits. Still, unemployment is way too high. GDP needs to grow consistently over at least 5 years to make a dent. The private sector and its small and medium enterprises should be the engine of growth. But the private sector in Macedonia has stagnated. Previous governments sold firms to cronies. This was called “management buyout”. The old-new managers-owners had no vision, no new technology, and no new products. Their firms created negative value added. Moreover, they crowded out newcomers by, for instance, absorbing the credits made available through the banking system. 81% of the credit aggregate in 1999 went to 16 loss makers. Less than 20% reached the private sector. It was an old boys network built on the residues of socialism. Additionally, there is a lack of good projects, deficient property rights legislation and enforcement, a dysfunctional and politicized banking system. The unstable region added to our problems.”
“That, too, although this was not a major obstacle and the new company law makes it much easier to establish a firm and run it. But the governments pre-1998 seemed to be bent on repelling foreign investors rather than attracting them. They placed legal entry barriers. This is changed now. We crave foreign investors and welcome them.”
“Perhaps too much? Recent privatizations – notably of Okta and Skopski Saem – were criticized as lacking in transparency.”
“Skopski Saem was privatized through the stock exchange after a proper notice was published in the press. It was open to anyone. In the past (1996-7), the World Bank recommended that we privatize also through direct negotiations. Okta – the refinery – was about to be shut down when a white knight appeared. We did not miss the opportunity to salvage this important asset. All three companies privatized through direct negotiations are now profitable. The new law allows us to privatize only through the stock exchange or a public tender. I hope this will put an end to the criticism.”
“Anything to conclude?”
“In the last year and a half we have gone through a compressed
version of the structural reforms other, much richer, countries took a
decade to implement. We passed numerous crucial laws. We liberalized the
foreign exchange regime. Rebuilt the tax administration. Are implementing
a treasury system. Restructured the customs and the payment system. Reduced
tariffs and excise on certain products. Passed amendments to countless
economic and financial laws (such as the insurance law). We are preparing
the ground for an Internet revolution in our country. We recently passed
a digital signature law and are preparing other cyber-laws. We did all
this – and endured unprecedented geopolitical turmoil – while keeping inflation
low, forex reserves high and record FDI. I have every reason in the world
to be optimistic.”