Dušan Vujović, Minister of Finance: From Austerity to Shared Prosperity


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At the end of the sixth review the IMF mission praised Serbia’s continued strong overall performance under the economic program, especially the robust fiscal performance driven by stronger than expected revenues

Ministar Dusan Vujovic_2

After ten months the general government fiscal balance is in surplus, indicating that we are more than one billion Euros ahead of the originally projected deficit for this period.  For the whole year, the general government deficit is now officially projected at 2.1% including a seasonal spike in expenditures and the expected assumption of old public enterprise debts. You have just completed the sixth review under the IMF precautionary arrangement.

What remains to be done before the IMF Board scheduled for mid-December?

— The main pending task is the preparation and approval of the 2017 Budget in line with agreed parameters. We will continue with a gradual fiscal consolidation that will allow for a targeted public wage and pensions increase and ensure longer-term public debt sustainability. The fiscal deficit is expected to decline to 1.7% of GDP in 2017, while the pensions and public sector wages will continue to decline as shares of GDP, converging to more sustainable levels over the medium-term. Over the past two years we have already achieved 3.9% of the structural fiscal adjustment. We need to do one small step in 2017 to achieve the 4.0% structural fiscal target set under the three-year program. In short, we are gradually moving from austerity measures to sustainable expansion.

Over the last two years we have seen multiple upward revisions of key macroeconomic variables. What are you expectations for 2016 and projections for 2017?

— Indeed. A pattern of upward revisions has emerged over the last few years. The initial GDP growth projection for 2016 was set at 1.2% and has subsequently been revised to 1.8% and then 2.5%.  The IMF now expects real GDP growth of 2.7% in 2016 with a possible upside potential if the last quarter turns out as good as presently estimated. We have seen similar upward revisions in the fiscal deficit projections. In 2015 the original general government deficit was expected at 5.9% of GDP and the outcome was 3.7%. This year the original deficit number was 4% of GDP and the expected outcome will be only half as big. I see three reasons for this bias. One is the inherent difficulty in predicting the revival of production and GDP following the global recession and the floods in 2014. The other is the extra caution of the IFIs not to fuel unrealistic public expenditure expectations. The last one is underestimation of our efforts and ability to manage the reform process. After two years, as these factors lose relevance, the bias is gradually being eliminated. As a result, projections for GDP growth in 2017 have already stabilised at 3%.

What will be the main sources of economic growth in 2017 and in the medium term 2018-20?

— I expect that the main sources of GDP growth (on the demand side) will expand from investment and exports to include private consumption, already in 2017 but much more in subsequent years. On the supply side processing industries will continue to provide new jobs, generate incomes and value added in 2017 and the medium run. In the longer run, however, modern services will become progressively more important, not only in the traditional IT sector but in the broader digital economy and in the wide area of professional services.  Going beyond sectors, the main source of new value added will be increased productivity, initially by lowering the unemployment rate, and in the longer run through innovation and greater competition.

The role of government is to support these processes through the right institutional and incentive framework. What are the main reform challenges going forward?

— The successful fiscal consolidation and macroeconomic stability will be sustainable in the longer run only if they are supplemented with structural reforms and lead to strong inclusive growth. In our case, structural challenges include the reform of the public sector (public administration, education, and health) to provide citizens with modern and efficient service delivery and free up their time for productive work, learning and leisure. It is equally important to prevent the drain on public resources by large utility companies (Srbijagas and EPS) and state-owned enterprises (for example RTB Bor, Resavica, Petrohemija, Azotara and MSK).  This was the main risk factor in the past and the re-emergence of energy and other arrears must not be allowed. In the initial design of the reform program we emphasised that restructuring of public enterprises is at the core of structural reforms. Delays in implementing PE reforms and accumulation of energy arrears represent a continuous threat to public finance and the reform programme.

How does the Ministry of Finance see completion of the Tax Administration reform?

— The strategy for Tax Administration (TA) reform has been adopted in June 2015. Detailed diagnostic assessment of the organisational structure and key functions of the TA have been completed in early 2016. These findings have been confirmed by the World Bank horizontal and vertical functional reviews. The proposed solutions, grouped into short term actions, medium term organizational and institutional changes, and long run deep TA reform, are now ready to be discussed and approved by the authorizing environment and all the stakeholders. The proposed changes include greater orientation on risk assessment, transition to a more rational network of offices, gradual elimination of non-core functions, improved discharge of key TA functions and responsibilities, better client/taxpayer services, improved appeals process, The Ministry of Finance is vitally interested that we move ahead with the TA transformation (reform) as soon as possible to secure a sustainable basis for a compliance based, transparent and efficient TA system that will broaden the tax base and secure revenue mobilisation for vital social services.

What are your plans to additionally strengthen tax revenues by fighting shadow economy and reforming the tax system?

— Coordinated efforts of the Ministry of Finance, the Tax and Customs Administration are aimed at detecting, monitoring and reducing (fighting) the shadow economy. We do this by discharging our core legal responsibilities as well as through additional initiatives that include NGOs and a wide range of stakeholders. At this time the main sources of risk fuelling the shadow economy range from smuggling, illegal re-export activities and reimbursement of VAT, to improper accounting practices and manipulations of books. The problem is exacerbated by the fact these activities are done both by mafia-criminal structures in unregistered companies and formal sector employees in legally registered companies. It is difficult to estimate the level of the shadow economy in Serbia. Based on partial and imprecise information we have, including the results of targeted tax audits in recent years, the size of the shadow economy appears to be quite large, well beyond the acceptable levels of around 10% to 15% of GDP in comparator countries. Reducing the scope for shadow economy is an important element of that strategy. The state can raise the level of public awareness regarding the negative consequences of the shadow economy, improve the inspection system, and more effectively prosecute crimes and infringements. It can reduce the scope for shadow economy by providing incentives for non-cash payments and electronic book-keeping, engaging broader public through tax-receipt lottery, and many other ways.

You mentioned a few times that better public debt management is an important element of long-run fiscal sustainability. How do you plan to address foreign exchange risks associated with higher FED interest rates anticipated by many analysts? 

— Public debt is falling a year ahead of schedule envisaged in the IMF supported program and our three-year fiscal strategy. Presently, public debt is at 70.8% of GDP and projected to stay below 74% of GDP at the end of 2016 despite the anticipated assumption of old debts from public enterprises. The key to lowering the share of public debt in GDP and achieving sustainable public debt levels is to secure a primary surplus and lower the cost of financing below the increment in GDP secured through long-run growth. We already have the primary surplus and soon will meet the second condition as our GDP growth rate will stabilise above 3% and the cost of our debt (interest payments) will soon be lowered below 3% of GDP. The recently ratified budget support loan from Abu Dhabi Development Fund does not increase the level of public debt and it does not change the currency structure of the public debt. At the same time it contributes to lower cost of public debt by about 4% (i.e. USD 40 million annually per one billion of refinanced USD loans contracted in 2011-12).

The size and scope of Government involvement in the financial sector proved to be one of the main challenges in transition economies. What are the remaining issues related to Government ownership in banks and insurance companies?

— The immediate task is to implement fully the NPL resolution strategy through more decisive action that will significantly reduce bad loans. We are particularly interested in advancing the process in stateowned banks. We are also continuing with the privatisation process of banks and insurance companies with large state ownership. Finally, we are ensuring that the banks that will stay in state ownership (such as Poštanska) are properly managed and focused on the areas of operation aligned with their capacity and business model.

Agriculture and related processing industries have been performing below expectations. What can the Government do to change that?

— From the Ministry of Finance point of view, the Government can modernise and align subsidies and other incentives extended to agriculture with EU rules and methods (i.e. IPARD based reimbursement of 50% of capital expenditures in qualified projects). This could help move agriculture from present orientation to subsistence farming and provision of basic staples, milk and meet at low (subsidised) prices to modern export orientated sector supplying quality food to European Union and world markets. Present extensive subsidies targeting small (subsistence) farms and old rural families should be moved to the ministry responsible for social protection.

There were numerous announcements of large infrastructure projects in the recent months. What is the rationale of these projects and the financial/fiscal feasibility?

— We plan to introduce a decree on Public Investment Management that will provide a consistent methodology for evaluating all development (investment) projects, first at the project identification stage, then at the level of pre-feasibility study, and last at the level of feasibility study / appraisal (when financing is secured).  The methodology also includes monitoring and evaluation during project implementation and inclusion of these results in the planning of future projects. This methodology, which will also rank already evaluated projects following the EC single project pipeline framework, will help us better manage the pipeline of all investment projects to maximise development results and minimise the cost of financing.

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