The reshuffle and after

Nikola Popovski

The Government reshuffle that was long announced, which turned into a key, and perhaps even the only argument for Stevo Pendarovski’s victory in the second round of presidential elections, was intended to answer many of the issues for which the current government did not even come close to delivering adequate responses, turned into an antipode of itself. It did not give almost any seriously acceptable and positive response, except one very negative, and it all came down to the dismissal of perhaps the only healthy pillar in the Government of those who need to take care of the stability and development of the Macedonian economy. Like dozens of times to date in the brief history of Macedonian independence, when the government did not deliver the results it announced or expected itself, and when its confidence decreases daily, as it does now, the fault is sought directly and solely in the Ministry of Finance and the line Minister. It is a mistake with possibly even more serious consequences.

If we take a look at the government’s reshuffle from another perspective, we will easily realize that it was not a reshuffle to replace those who failed on any ground, but a direct confirmation of those who kept their posts, but did not deserve to. And they have exactly one year left to complete their terms before choosing the unfortunate solution called “transitional (Przhino) government”, which is actually putting the most important state organs and almost the entire state administration in unnecessary standstill before the autumn elections in 2020.

The reshuffle of the Minister of Finance as a fact, the announcement that there will not be a new minister at all, and a few announcements about what should be expected from that ministry in the next 12 months, can bring some problems where nobody expects them. The current minister has thus introduced some stability and predictability of public finances after that “tsunami period” from 2007 to 2016 when deficits, public debt, unnecessary spending, hiding data that should be publicly available, non-transparency, disregard for some of the basic principles of governance with the public finances and especially the unbalanced expenditure side of the budget policy, threatened the whole economy in the short, medium and long term.

The current new fiscal announcements, called “courageous solutions and courageous decisions” mean that, on condition that revenues continue to be realized with the same dynamics, the expenditure side of the budget will be strengthened with new positions out of which those that sounded most seriously were the ones for growth of social protection expenditures, agricultural subsidies, the level of pensions since January 2020 and the salaries of the administration since September 2019, including the announcements of a budget-compensated new increase in the minimum wage in the country, and several others.

Let’s be honest, these are much more than just courageous decisions. They are at the edge of a possible abyss. Today, North Macedonia has achieved a relatively satisfactory equilibrium level in the economy characterized by low inflation and a stable exchange rate with a relatively satisfactory level of foreign reserves, low market interest rates, low level of public finance deficit measured through the general government deficit and relatively sustainable, moderate and non-performing public debt, low level of current account deficit of the state, balanced between the high level of trade deficit and the high level of secondary income stream (foreign exchange remittances of our emigrants) and general liquidity of public finances, which provide funding vital public goods. But in that equilibrium level, however, there are some serious gaps that are manifested by insufficient levels of economic growth, absolute high rate of unemployment, relatively high levels of poverty and large, probably rising social differences, as well as other failures. This acceptable balance exists and is maintained only because of the existence, to a large extent, of the only view that, fortunately, is shared by the Ministry of Finance and the National Bank in this regard. Economic policies that will lead to maintaining a “relatively satisfactory level of equilibrium in the economy” and will go a step further towards the gradual elimination of existing imbalances and “some serious gaps” are welcomed. But in their implementation they must be clear as “the light of day” that the existing balances must not be disturbed and abandoned. They are much more important than any unsuccessful attempt to remove existing imbalances because it could have a fatal ending.

With the parliamentary and government reshuffle decisions, now positions are clearer in relation to the above problems. What remains unclear is the positions of the National Bank, which has a significant part in the policies of their creation and maintenance. As a rule, it will neither comment nor declare any government policies. Especially not for those related to fiscal policies on public revenues and expenditures and in addition to them for social policy and protection. But if they are in the direction of abandoning some of the existing and economic equilibrium acquired with a lot of sacrifice, then one thing is certain – it will have to work. Unfortunately, its actions will not be followed by fanfare and announced in three, six or more months in advance, as these days we hear from the top officials of the executive and legislative power, as well as the leading political parties. It will act silently and will be transparent only after a certain measure has already been taken and implemented.

Probably in the next six to ten months the NB governor will sleep with one ear open, and not with one eye. She would not want to suddenly hear a big surprise that would make her more stringent in the current relatively standardized monetary policy to eventually compensate for the announced and relatively vague, even slightly threatening expansionary fiscal policy of the Ministry of Finance in the current format that would have contributed for an uncontrolled increase in the final consumption of households in the economy, growth of imports and trade deficit, current account deficit, reduction of foreign reserves, interest rate growth and prices in the domestic economy, and precisely in that order. This would probably initially be triggered by a gradual increase in the budget deficit and public debt in conditions of worsening the structure of public expenditures, a slight stagnation or falling in the value of the stock market indices and a slight disruption of the country’s external position.

The government, in such a hypothetical, but already circular and publicly presented adventure, might think that the classical effect of the Phillips curve, according to which the increased broad demand will cause certain price movements and hence short-term growth of employment and economy, and will increase expectations of voters would bring some electoral benefits next year. It is a trap into which the monetary authority should not fall, and is likely to start countermeasures in the domain of monetary policy in order to create pressure on the relaxed fiscal policy. There is no other way out, except for the NB to be destined for victory in advance.