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Southeastern Europe -The Reform Agenda and Fiscal
Consolidation
Anita Angelovska-Bežoska
National Bank of the Republic of Macedonia
Tirana, June 2012
SEE and the European crisis-inevitable nexus(dealing with distressed partners)
• EU is a natural political and economic anchor of the region...hence, inevitably changes in its economic cycle pose direct and indirect consequences
• Channels of spill-over effects well known
trade channel ( export share in EU 50-60%)
financial channel
expectations/confidence channel
• Implications – on a short run rather limited and expected to be contained, with...
quite sound fundamentals and policies in place
limited financial integration
Slow economic recovery and gloomy outlook
Currently, quite slow recovery (pre-crisis level not reached in all countries)
Unfavorable labor market due to “jobless” growth (unemployment rate above the pre-crisis);
Negative effects on the poverty and social cohesion; Growth prospects pale – the region is in a “waiting room” for a more
dynamic growth of its European peers; the risk of deleveraging; still high risk aversion
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Albania Bosnia Croatia Kosovo Macedonia Montenegro Serbia Euro-area
GDP growth rates2008 2009 2010
2011 2012 2013
Source: WEO database - April 2012
Anemic economic growth and EU convergence reinforce the need for structural reforms
The need for structural reforms and enhanced competiveness emphasizedwith the latest crisis
The region lags behind OECD (Global Competitiveness Index - average of around 4 in SEE and around 5 in OECD) Countries with sound policies and higher flexibility weathered the crisis better Structural reforms necessary for income convergence and EU integration
0
20
40
60
80
100
120
Albania Bosnia Croatia Macedonia Montenegro Serbia Euro-area
GDP per capita in PPP in 2010, EU27 = 100
Source: International Monetary Fund, World Economic Outlook Database,
3
3.2
3.4
3.6
3.8
4
4.2
4.4
4.6
4.8
5
Albania Bosnia Croatia Macedonia Montenegro Serbia OECD average
Global Competitiveness Index 2011-2012
Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score)
3
3.2
3.4
3.6
3.8
4
4.2
4.4
4.6
4.8
5
Albania Bosnia Croatia Macedonia Montenegro Serbia OECD average
Global Competitiveness Index 2011-2012
Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score)
The essence of structural reforms unchanged
Main issues to be addressed: infrastructure enhancement, increase of institutions’ quality, increase of efficiency and innovations...
0
1
2
3
4
5
6
7
Basic requirements Institutions Infrastructure Health and primary education
Global Competitiveness Index 2011-2012
Basic requirements, Score
Albania Bosnia Croatia
Macedonia Serbia
Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score)
0
1
2
3
4
5
6
Efficiency enhancers
Higher education and training
Labor market efficiency
Technological readiness
Global Competitiveness Index 2011-2012
Efficiency enhancers, Score
Albania Bosnia Croatia Macedonia Serbia
Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score)
0
1
2
3
4
5
Innovation and sophistication factors
Business sophistication Innovation
Global Competitiveness Index 2011-2012
Innovation and sophistication factors, Score
Albania Bosnia Croatia
Macedonia Serbia
Source: World Economic Forum (Scores between 1 and 7, with 7 being the best score)
The essence of structural reforms unchanged
Labor market reforms more flexibility, labor employer relations Active labor market policies - better job-matching and training - particular focus on
youth and long term unemployment
Strengthen administrative and institutional capacity - while some
progress has been achieved, much more remains to be done: rule of law and contract enforcement, property rights
fighting corruption
public administration reform
Long-term public finance issues related to health, pension and
social protection systems - high unemployment and poverty
aggravated by unfavorable demographic trends
The essence of structural reforms unchanged
Business environment - key for stimulating foreign and domestic investment - Ease of doing business indicators show that dynamics of the reform process is not satisfactory (Macedonia is outlier)
Education standards & development of knowledge economy lag behind Increase the spending on education and on research and development
0
1
2
3
4
5
6
7
8
9
10
Albania Bosnia Croatia Macedonia Serbia EU15
Knowledge Economy Index 2012
Source: World Bank (Scores between 1 and 10, with 10 being the best score)
0
20
40
60
80
100
120
140
Albania Bosnia Croatia Kosovo Macedonia Montenegro Serbia OECD
average
Ease of Doing Business
2011
2012
Source: World Bank (Scores between 1 and 183, with 1 being the best score)
Public finances in SEE countries in the midstream of the crisis(widening deficits and growing debt)
Deterioration of fiscal positions in the region:
deeper deficits, especially when crisis hit - some recent retrenchment the impact of automatic stabilizers counter-cyclical, expansionary policies high and rising public debt
-8
-6
-4
-2
0
2
4
6
8
Albania Bosnia Croatia Kosovo Macedonia Montenegro Serbia EU 27
Fiscal balance (% of GDP)
2007 2008 2009
2010 2011 2012
Source: Eurostat, WEO database - April 2012
0
10
20
30
40
50
60
70
80
90
Albania Bosnia Croatia Macedonia Montenegro Serbia EU 27
Gross public debt (% of GDP)
2007 2008 2009
2010 2011
Source: Ministries of finance, Central banks, Eurostat, WEO April 2012
Public finances in SEE countries in the midstream of the crisis -effects on external vulnerabilities
The deterioration of public finances has also contributed to the rise of external debt and external vulnerability in general
Private external debt falling in most countries as a result of deleveraging
0
20
40
60
80
100
120
140
Albania Croatia Kosovo Macedonia Montenegro Serbia Euro-area
Gross external debt (% of GDP)
2007 2008 2009
2010 2011
Source: Central banks, Eurostat, ECB, IMF and WEO April 2012
-100
-80
-60
-40
-20
0
20
40
60
Albania Bosnia Croatia Kosovo Macedonia Serbia Euro-area
Net international investment position (% of GDP)
2007 2008
2009 2010
2011
Source: Ministries of finance, Central banks, Eurostat, WEO April 2012
Fiscal retrenchment appears to be inevitable...
-to avoid budget financing problems as funding needs have risen (deficits and repayments);
-to preserve the trust of the financial markets into the policies (financing costs);
-to prevent a build-up of excessive external exposure and accompanied risks;
-to preemptively act in the face of aging population and problems of the pension and health system;
-to keep buffer for future adverse developments;
-to avoid a risk of solvency in a medium term and jeopardizing the independence of the monetary policy (fiscal dominance);
Fiscal consolidation and costly reforms -can they be concomitant ?
The option of delaying the one or the other not
preferable: fiscal consolidation is necessary for sustainability reasons and jump-
starting growth
structural reforms are necessary for a sustainable medium-term growth
and convergence reasons - but also in order to be better prepared for
any future shocks
In addition, sustainable public finances are in themselves
necessary for supporting continuous reforms
There is no easy solution how to combine them, but there is some
good practice (do's and dont's)
Fiscal consolidation(speed, scope, segments)
Gradual consolidation (avoid front loading) - preferable in times of slack in the economy
Fiscal multipliers are stronger in recessions - too much austerity hinders growth
Clearly communicated medium- term consolidation strategy (a credible commitment that will provide more room for fiscal policy)
Expenditure-adjustments tend to be more effective than revenue-based ones (though rigid structure of expenditures poses limits)
Pro-growth budget: rebalance expenditures, by downsizing unproductive ones
Fiscal consolidation(speed, scope, segments)
Improve PFM to:
increase the efficiency and effectiveness of the scarce budgetary resources;
better align fiscal outcomes with the macroeconomic objectives
Main focus in the PFM area to:
medium-term budgeting (realistic and meaningful medium term forecasts, clearly identified risks);
performance budgeting (focus on outputs, not on inputs);
commitment control (prevent arrears);
liquidity management (more efficient use of cash).
Reform prospects amidst uncertainty
Recent crisis has negatively affected the “mood” for structural reforms
The public support crucially conditioned on:
stabilization of the euro-area;
EU approach towards further enlargement
In a scenario where EU returns to growth path and EU enlargement policy proceeds as before the crisis => strong incentives for institutional, political and economic reforms (awareness for deeper and faster reforms);
In a scenario of a bigger recession in EU (and SEE), as well as EU dealing with itself => detrimental effect on appetite for structural reforms, and further risks of political instability
