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Macedonia's Framework Agreement - VIII. Interviews with then Minister of Finance of Macedonia, Nikola Gruevski

by Sam Vaknin

Interviews with then Minister of Finance of Macedonia, Nikola Gruevski

Two interviews conducted by Sam Vaknin during the civil war crisis and immediately thereafter (2001)
Author of "Malignant Self Love - Narcissism Revisited"

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."

"Red Tape?"

"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."

Milcho Mancevski, the Macedonian director, chillingly anatomized the dynamics of inter-ethnic conflict in his fatherland in the much acclaimed film, "Before the Rain". It is now "After the Rain" in this small and landlocked country. Following a year of civil war and heavy-handed interference by the "Big Powers", Macedonians face, on September 15, a stark electoral choice among discredited political parties and oft-disgraced politicians.

Nikola Gruevski served as Minister of Trade in the first government formed by the VMRO-DPMNE party following its landslide victory in the September 1998 elections. The youthful minister, then only 29 years old, proceeded to become the Minister of Finance. He was at his country's economic helm ever since.

Q: The International Crisis Group has just published a report accusing this government - and its predecessors - of gross corruption. Do you concur?

A: There is corruption in this country, but, despite existential threats, we have been fighting it more resolutely than any previous government. Look at our record: an anti-money laundering law replete with a directorate, an anti-corruption law, a hotline to report abuses and venality. Most of these steps were introduced in parliament but obstructed by successive governments run by the current opposition.

We fight corruption structurally as well. We have reduced taxes and customs duties, deregulated, increased the salaries of civil servants, introduced unprecedented transparency in our work. We are fighting the informal sector of the economy. We have filed 500 tax evasion lawsuits against managers. We have criminalized fiscal offenses and made them punishable by up to 5 years in prison. We have introduced fiscal cash registers in all retail outlets, big and small. To reduce the number of cash transactions, all salaries in the public sector will now be paid through a national payment card.

Q: You failed - yet again, the opposition says - to secure a standby arrangement with IMF in the latest round of negotiations in May-June this year. Then he World Bank froze its disbursements, followed by the donors who pledged money in a much publicized conference in March. What's going on?

A: I do not subscribe to conspiracy theories. But I must admit that I was taken aback by the clearly politicized decisions of both these institutions. They treated us unfairly. Though we complied with every demand of the IMF and implemented more reforms than they even asked - because we thought it was good for us - they never came through. We were able to conclude only a meager $13.8 million arrangement with them, 2 years ago, of which we drew only $3 million.

We have introduced a value-added tax, restituted to its rightful owners property confiscated by the socialist state, repaid in full foreign currency accounts frozen by previous governments, privatized the largest bank and many loss making enterprises, introduced fundamental legislation on dozens of critical economic issues, deposit insurance, collateral registries, a new payment system - and this is a partial list. Suffice it to say that in its year 2000 report, the European Bank for Reconstruction and Development (EBRD) ranked us number 1 among 26 countries in transition for intensity and scope of reforms.

And yet, the World Bank just declined to disburse the second tranche of one of the two agreements we signed with them because - as it irrelevantly claims - we failed to conclude an arrangement with the IMF. They are reluctant to be the only multilateral to give us money. The donors, inevitably followed suit. Only the money pledged to support the Ohrid Framework Agreement, concluded between all major political parties - Macedonian and Albanian - last year, has arrived. The rest - the bulk of it - is frozen.

This may have to do with the West's desire to get rid of this prime minister, an outspoken critic of some Western policies in this part of the world. I must warn that such iniquitous behavior may adversely affect the attitude of my fellow ministers towards obligations we assumed vis-a-vis the World Bank. Macedonia needs the Bretton-Woods institutions in the future and intends to continue its close collaboration with them. But they have let us down in a time of dire need.

Q: The IMF says that it did not sign an arrangement with Macedonia because it refused to be seen to support a populist, pre-electoral, scheme to compensate the savers of the defunct TAT savings house...

A: The collapse of the TAT pyramid scheme exposed severe shortcomings of Macedonia's bank supervision at that time as well as massive involvement by state officials at the highest ranks. Even the then prime minister - currently the head of the opposition, Branko Crvnkovski - admitted in parliament to the existence of an "octopus" of organized crime which he vowed to eradicate. Our decision to partly compensate the savers - by issuing them tradable certificates convertible to residual state-owned shares - simply acknowledges the responsibility and involvement of state structures in their misfortune.

Q: Indisputably, the country's major problem is its unsustainable unemployment. Will your second term be better than your first in this regard?

A: Unemployment, as consistently measured by the Bureau of Statistics, based on a workforce survey, has declined from 34.5 percent, when we assumed office - to 30.5 percent now. This despite the fact that we had to fire tens of thousands of workers as part of a structural reform of state-owned and loss-making enterprises much-delayed by previous governments.

Moreover, immediately after we formed the first government, we discovered that 90,000 unemployed in Skopje, the capital city, went unreported due to "computer errors". Many of the "employed" were the result of a law introduced by the SDSM (the socialist opposition) to boost employment artificially before than 1998 elections by heavily subsidizing it.

Q: Let's tackle other alleged failures of the government. The burgeoning trade deficit, for instance...

A: It's pretty much constant throughout the years, with the exception of 2001, which was a war year. This year it will be lower. Moreover, a current account deficit in a developing country is not necessarily a bad thing. Depends what foreign borrowing and investment are used for. If these funds are used to finance the purchase of capital assets and raw materials - then such a deficit is actually a sign of health and vitality rather than a warning sign.

Q: The budget deficits...

A: What budget deficits? In 2000, the only year without an external shock, we ended up with a surplus of almost 3 percent of GDP. In 1999, the year 350,000 refugees from Kosovo swamped our country, we had a 1 percent budget deficit. The only serious deficit in my tenure was last year - c. 4 percent. But we had to purchase weapons and materiel, pay salaries to tens of thousands of army and police reservists, host almost 100,000 internally displaced people... Under the circumstances, I think that we ended up with a very reasonable shortfall. Israel has a 4.1 percent budget deficit after one year of Intifada, Croatia had 8 percent after the war with Serbia.

I just received the latest figures. This year, our budget deficit - at 1.8 percent of GDP - will be lower than even our most optimistic scenarios and it flies in the face of the IMF's pessimism.

Q: But a lot of the revenue was generated by a tax on financial transactions, affectionately known as a war tax...

A: This tax was levied in agreement with the IMF. It skimmed 0.5 percent off every financial transaction - hardly an insupportable burden. We wrongly predicted that the crisis will end after 6 months. Yet, the emergency - and its consequences - are still on-going. We are still paying the wages of 8000-10000 reservists. In any case, this distortionary and bad tax will be eliminated by yearend.

Q: Your government have been accused of lack of transparency in privatizing state assets and of misusing privatization proceeds to finance current budgetary expenditures.

A: This is rich, coming from the opposition party which - when in power - privatized more than 90 percent of all state assets, at a fraction of their true value, mostly to cronies and relatives. Macedonia may have lost $2-3 billion - equal to its entire GDP - as a result of this "privatization".

This debate is really about whether foreign investors should be welcome here. We think they should, the more and the sooner, the better. We were under constraints agreed with various multilateral lenders, such as the World Bank, to sell or shut down loss makers by a given date. The opposition, when it was in power, amended the privatization law to allow for direct sales of assets to strategic investors, without a tender. We sold three enterprises this way: Okta, the oil refinery, Feni, the ferronickel mining outfit, and Ski Centar, a mountain resort.

The sale of Okta provoked a public outcry. I was not involved in this particular deal at the time, but I can tell you that only the current owner, the Greek Hellenic Petroleum, submitted a bid. We saved the company, it is profitable, it employs people, and it has invested in a $110 million pipeline which is now being extended to Pristina in Kosovo and Nis in Yugoslavia. We have heeded public opinion and reverted to sale of state assets by international tender and through the stock exchange, albeit at great discounts.

Most of the proceeds of privatization do not actually reach the central budget at all and, therefore, can hardly be misused. The money ends up being invested in the privatized firms, or offsetting past debts, or buying shares from workers and management.

Consider, for instance, the proceeds of the privatization of Makedonski Telekom. All the money has been voluntarily placed at the central bank, under the supervision of the IMF. One third is being invested in a myriad small infrastructure projects, such as water treatment facilities, sewerage, hospital supplies, and so on. Another third is earmarked to support pension reform when we introduce a private pension system. It remains intact. The third part was used to repurchase Macedonian sovereign obligations. I am delighted to note that even last year, as Macedonia was fighting for its territorial integrity, if not its very existence, these obligations were traded at 65 cents to the dollar and there was a dearth of sellers.

Q: The ICG report published last week claims that foreign direct investment in Macedonia crashed by 60-70 last year...

A: Untrue. During the opposition's economically ruinous reign, Macedonia attracted less than $10 million in foreign direct investment annually. This has shot up to $150 million two years ago - and $120 million last year, at the height of the security crisis. These figures exclude the $300 million sale of our telecom to MATAV, the German-Hungarian multinational.

Q: If you lose the elections, what would become of your legacy? Aren't you afraid that it will all be unraveled by your successor?

A: Depends who this successor is. Regrettably, the opposition is still led by the same change-resistant and xenophobic stalwarts. I am afraid that you are right. It may all be rolled back when I am gone.

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