VZCZCXRO2529
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
DE RUEHSQ #0048/01 0351026
ZNR UUUUU ZZH
R 041026Z FEB 09
FM AMEMBASSY SKOPJE
TO RUEHC/SECSTATE WASHDC 8002
INFO RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE 0463

UNCLAS SECTION 01 OF 03 SKOPJE 000048 
 
SENSITIVE 
SIPDIS 
 
DEPT PLS PASS TO USAID 
TREASURY FOR WLINDQUIST 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL EAID MK
SUBJECT: MACEDONIA'S 2009 BUDGET: SEEKING FISCAL STIMULUS VIA HIGHER 
CAPITAL INVESTMENTS 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY 
 
Summary 
------- 
¶1. (SBU) On December 29, the Macedonian Parliament passed the 
country's largest budget since independence, projecting a general 
government deficit of 2.8 percent of GDP.  With this budget, the GoM 
continues to implement a fiscal program characterized by low and 
flat tax rates with increased public investments in railways, road, 
and energy infrastructure, in an effort to respond to possible 
effects of the global financial crisis.  However, the fiscal 
stimulus likely will not be enough to counteract effects of the 
crisis, particularly if the GoM does not proceed with important 
structural reforms in key areas to improve the business climate and 
provide security for investors.  End Summary. 
 
Fiscal Stimulus for Faster Growth 
--------------------------------- 
¶2. (U) The Macedonian Parliament passed the 2009 budget on December 
29, after four days of debate.  Minister of Finance Trajko Slaveski 
characterized the fiscal policy in 2009 as consistent and 
coordinated with GOM monetary policy aimed at securing stability of 
the Macedonian denar, which is pegged to the Euro, and expansionary 
in infrastructure investments in response to possible effects of the 
global financial crisis and ensuing economic slowdown.  According to 
Slaveski, the budget will enable (and assumes) GDP growth of 5.5 
percent in 2009, and will increase employment. 
 
Relaxation of Fiscal Policy 
--------------------------- 
¶3. (U) In 2009, the GoM will loosen fiscal policy, increasing 
spending and projecting a general government deficit (the deficit of 
the central government plus the state pension, employment, health 
and road funds) of 2.8 percent of GDP.  The central government 
deficit in 2009 is projected to run USD 225 million, or 2.4 percent 
of GDP.  The increased deficit spending also represents a break with 
IMF recommendations, which the GoM saw as too conservative and 
hindering faster growth.  Macedonia did not renew its arrangement 
with the IMF after the expiration of the Stand-By Arrangement in 
August 2008, and Minister of Finance Slaveski publicly repudiated 
the subsequent IMF Article IV Review that urged tighter spending. 
 
The Largest Budget So Far 
------------------------- 
¶4. (U) The GoM expects to collect revenues of USD 3.4 billion (Note: 
The budget is presented in Macedonian denars.  Exchange rate used 
for all calculations: 1 USD = 45 denars), 5.8 percent more than the 
revised 2008 budget.  Revenues in the central government budget are 
expected to reach USD 2.5 billion, 8.3 percent more than the revised 
2008 budget. 
 
Central Government Revenues in millions of USD: 
                     2008      2009           2009 
Type of tax         actual   projected   pct. of total 
Personal income tax   193       230           9.2 
Profit tax            191       231           9.3 
VAT      804       947          38.0 
Excise         301       322          12.9 
Import duties    139       155           6.2 
Non-tax revenues      347       463          18.6 
Other revenues    128       142           5.8 
 
Reduction of Social Contributions 
--------------------------------- 
¶5. (U) As a continuation of tax reform policies begun in 2007, the 
GoM decided to reduce social contributions beginning January 1, 
¶2009.  Contributions to the Pension Fund will decrease from 21.2 
percent to 19 percent of gross wage, payments to the Health Fund 
from 9.2 percent to 7.5 percent, and to the Employment Agency from 
1.6 percent to 1.4 percent.  Further gradual reduction of 
contributions will continue in 2010 and 2011.  Collection of all 
social contributions and the personal income tax will be centralized 
in the Public Revenues Office, and calculated on a single tax base. 
Further reduction of the average customs duty will continue in 2009, 
as an obligation of WTO membership.  The Customs Administration is 
expected to collect about half of all budget revenues in 2009, as 
was the case in 2008. 
 
Expenditures 
------------ 
¶6. (U) The GoM projects 2009 general government expenditures to be 
USD 3.7 billion, 9.6 percent higher than in 2008.  Current 
expenditure will dominate with 82.5 percent of the total.  The GoM 
will expand capital spending by 7.1 percent compared to 2008. 
Expenditures in the central government budget are projected at USD 
2.7 billion, which is a 15.5 percent increase from the 2008 budget 
 
SKOPJE 00000048  002 OF 003 
 
 
as revised in July. 
 
Central Government Expenditures in millions of USD: 
                      2008       2009         2009 
Expenditures        actual   projected   pct. of total 
Wages and allowances   449        541          19.9 
Goods and services     368        465          17.1 
Transfers              854      1,052          38.7 
Interest               58         69           2.5 
Capital expenditures   408        584          21.5 
Other expenditures     12          8           0.3 
 
Transfers Growing by 27.4 Percent 
--------------------------------- 
¶7. (U) The single largest item on the expenditures' side is 
transfers, growing by notable 27.4 percent in 2009.  About 45 
percent of all transfers will go to the extrabudgetary funds 
(Pension Fund, Health Insurance Fund and Employment Agency), to 
cover for regular adjustment of pensions, past losses, and current 
losses due to lowered contributions' rates.  Current transfers to 
units of local government will absorb 26 percent of all transfers, 
and 90.6 percent of them will be spent for firefighting brigades, as 
a new responsibility transferred to local governments in 2008. 
About 20 percent of all transfers the GoM will use for subsidies, 
out of which USD 174 million is in agriculture, and about USD 20 
million for Macedonian National Television.  The rest of the 
transfers in the amount of USD 97 million will go to social 
assistance programs. 
 
Wages, Allowances, Goods, Services, Also Going Up 
--------------------------------------------- ---- 
¶8. (U) Wages and allowances in 2009 are projected to grow by 9.7 
percent to account for the promised 10 percent wage increase in 
public administration and for some new hiring necessary for 
equitable representation of minorities and mandated by the 2001 
Ohrid Framework Agreement (FWA).  In particular, the Secretariat for 
Implementing the FWA, established in 2007, will increase its budget 
in 2009 by 70.5 percent.  The GoM increased spending for goods and 
services by 5.6 percent in 2009, incorporating in this item the 
costs for the local and presidential elections, GoM's programs for 
free goods and services, especially in education and health, as well 
as expenditures for the GoM's marketing commercials. 
 
Capital Spending, a Cure Against Crisis 
--------------------------------------- 
¶9. (U) The GoM in 2009 is focusing heavily on capital investments as 
a way to alleviate possible effects of the global economic slowdown. 
The budget allocates USD 584 million, 9.5 percent more than in the 
revised 2008 budget.  Some of the major projects mentioned include 
road and railways infrastructure investments in Corridor X and 
Corridor VIII, investment in a ski-center near the border with 
Greece, reconstruction of schools, building sports halls, new 
university facilities in Stip, completion of upgrades to the Skopje 
City Stadium, building low-cost and subsidized apartments, as well 
as investments in water irrigation and sewage systems, in 
information technology projects, and in environment.  The GoM will 
continue promoting the country abroad, trying to attract foreign 
investors, for which it allocated USD 6 million to the Agency for 
Foreign Investments. 
 
Higher Budget for Important Programs 
------------------------------------ 
¶10. (U) Through the 2009 budget, the GoM has signaled that it 
intends to pursue important structural reforms, while increasing 
spending for several specific government programs.  Most notably, it 
raised the Ministry of Justice's budget for judicial reform from USD 
7.2 million in 2008 to USD 11.4 million in 2009.  The GoM increased 
the Ministry of Defense's budget from USD 154 million in 2008 (1.8 
percent of GDP) to USD 185 million in 2009 (2.0 percent of GDP.) 
Also, in accord with its EU membership aspirations, it raised the 
budget of the Secretariat for EU Affairs by 250 percent, to USD 14.7 
million. 
 
Financing the Deficit 
--------------------- 
¶11. (U) The projected 2009 budget deficit will be primarily financed 
by domestic and foreign borrowing.  The GoM expects to borrow USD 
133 million from the domestic market by selling government paper, 
and USD 111 million from the foreign market, including USD 20 
million from World Bank's Second Programmatic Development Policy 
Loan (PDPL 2).  In addition, the GoM is planning to withdraw about 
USD 89 million from its deposits with the National Bank of 
Macedonia.  Regular payments on its domestic and foreign debt will 
cost the budget USD 163 million in 2009. 
 
Comment 
 
SKOPJE 00000048  003 OF 003 
 
 
------- 
¶12. (SBU) The GoM based 2009 budget projections on a rather 
optimistic scenario of 5.5 percent GDP growth.  This contrasts with 
the National Bank's growth projection, which ranges from 3 to 4.5 
percent.  Results in Q4 of 2008 in several industries have shown 
that effects of the global economic slowdown have damaged their 2009 
growth prospects, manifested in particular by slowed foreign direct 
investment.  Considering that revenues from some of those industries 
-- such as metallurgy and ferrous metals -- are large contributors 
to the state budget, the GoM will face serious challenges staying 
within the already loosened 2.8 percent deficit.  The GoM needs to 
continue structural reforms which will improve the business climate, 
while respecting the rule of law, property ownership, and contract 
enforcement.  In addition, fiscal stimulus through increased capital 
expenditures will fail if the GoM continues poor budget management 
throughout the year, and especially if it does not conscientiously 
spend allocated funds for efficient capital projects.  End comment. 
 
 
NAVRATIL