After the Rain

Interview with Minister of Finance Nikola Gruevski

By: Sam Vaknin, Ph.D.

Also published by United Press International (UPI)

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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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