Janko Guzijan: Fulfillment of the Promises in a Few Years Time

Janko Guzijan, State Secretary, Ministry of Finance, in the interview for EU Market magazine says that if by judging from numerous moves that the National Bank of Serbia has made in the last year or two, it is clear that we will face extremely restrictive monetary policy in the future, as well. However, the direction of our fiscal policy is not completely clear yet. Announcements given to citizens in the election campaign indicate that there will definitely be some changes in this area.

According to Janko Guzijan, State Secretary in the Ministry of Finance, objectives of the fiscal policy were recently defined by adopting the Memorandum on the Budget and Economic and Fiscal Policy.

The Memorandum envisages that over next three years the budget should transit from deficit into surplus, while the inflation should be reduced and foreign trade gap narrowed – Guzijan told “EU Market”. – Our intention is that in the planned period of three-four years, keep tax rates at the current level. Tax laws shall be changed, of course, but in order to reduce administration and bureaucracy, establish fairness of taxation and improve control.

Janko Guzijan, State Secretary, Ministry of Finance, for EU Market magazine, July 16, 2008

Judging from numerous moves that the National Bank of Serbia have made in the last year or two, it is clear that we will face extremely restrictive monetary policy in the future, as well. However, the direction of our fiscal policy is not completely clear yet. Announcements given to citizens in the election campaign indicate that there will definitely be some changes in this area.

According to Janko Guzijan, State Secretary in the Ministry of Finance, objectives of the fiscal policy were recently defined by adopting the Memorandum on the Budget and Economic and Fiscal Policy.

The Memorandum envisages that over next three years the budget should transit from deficit into surplus, while the inflation should be reduced and foreign trade gap narrowed – Guzijan told “EU Market”. – Our intention is that in the planned period of three-four years, keep tax rates at the current level. Tax laws shall be changed, of course, but in order to reduce administration and bureaucracy, establish fairness of taxation and improve control.

Pro-European coalition announced considerable changes in the tax system and social policy. How feasible is it, and how long would it take?

It is not possible to fulfill all that was promised in the next year. However, it would be possible to do so over a longer period, in at least four to five years time, depending on the performances of the economy. Fiscal policy cannot improve unless expenditure is restructured. Election campaign promises cannot fit into planned revenues for the next year. Expenses partly can, but only by taking rights away from some beneficiaries in order to give them to another.

Another solution would be to resort to increasing tax rates, but I do not support that scenario. It will be difficult, because it will not be possible to fulfill all the promises in the short term, but later, during mandate of the new Government, when new jobs are created, the objective may be reached.

Whenever a new budget is projected, the public speculates whether it is a developmental or a social budget. In your opinion, how will next year budget be conceived?

I think that the issue of developmental or social dimension of the budget has been artificially imposed. Every budget in the world is conceived in both directions, because every state has to fulfill its current liabilities toward pensioners or the vulnerable ones. There are just nuances in different concepts. Also, schools and universities need to be built, as well as road infrastructure, border crossings… When we look at the structure of the government spending, it has to leave room for current expenses that do not produce new assets for the state, but also for capital expenses that increase the assets.

I do not see that the next budget will be drastically different from this year’s. What I see as our chance is to build more in the next year, and thus increase the capital part of the budget, and to do so through new loans. In that sense, the most important thing is to make a good plan of public works in order to have creditors’ support it and to create a bigger asset over the loan period of the next ten-twenty years, so that the debt may be repaid more easily.

A possibility that there may be a „gap“ in the budget has been announced, referring to the last quarter of the year. Do you think there should be further borrowing, even though precisely these years have been declared as „critical“ ones regarding the repayment of installments to the foreign creditors?

There will be no black years, despite long lasting warnings issued by a fraction of our economists. If accountable fiscal policy is preformed and restructuring of the economy is completed in a quality manner, i.e. if we succeed in the attempt to employ workers and the existing capacities, the situation will be absolutely under control. There is a misconception that only old debts should be repaid, whereas international experiences are showing that the states repay old loans and take new ones. Namely, it is not a bad policy to take a new loan, if you are going to use it to build something valuable for the state – a new asset.

As regards budget execution from September onwards, it is certain that a problem will be opened. Up till now, we have resolved similar situations by bridging gaps either by using donations or from privatization receipts. However, now that we do lack both of those, we have to seek new solutions. That is why, probably, all budget liabilities will not be executed and some expenses may be cut. Of course, in doing so we will prioritize some payments – wages and various welfare payments, for instance. However, some projects can definitely wait until the next year. We will probably launch on issuance of bonds, to a certain extent, but it should be done very cautiously, because this operation is extremely expensive due to the high domestic interest rates.

Fiscal balance depends on budget revenues. How can taxpayer compliance be improved?

Every year we register a certain success in combating the grey economy. Increase in budget revenues, namely, outpaces economy growth every year. For instance, nominal rise in revenues in the first six months was around 19 percent. For better results, we need intensive cooperation between the Prosecutor’s Office, police, tax and customs authorities. These authorities have formed joint units that work in coordination on combating fraud.

We have two large fields of grey economy. The first one is trade and the second is employment. As regards the latter, I believe we will find a solution in the foreseeable future. Namely, social tensions are high, as people have lost their jobs and it would difficult to cut off their source of revenues. On the other hand, control of trade in goods, collection of excise and taxes will be more rigorous and I believe that with time evasion will further decline.

Do you expect reactions from large corporations and wealthy individuals at the announced changes in the tax system, according to which they will definitely pay higher liabilities?

The dilemma exists, especially in the developed countries. It is believed that excessive taxation of those that are business-related successful prevents development of the business itself. That is why the debate is present in every country. In Serbia, however, the tax system is not as progressive as it may be. The fact is that the number of persons who reportedly earned over 1.4 million dinars in 2007 was around 20,000, which would be only one percent of the overall number of persons employed. I believe that in reality the number of people with revenues that exceed the limit is far higher, at least judging from the types of cars that the people drive, the apartments they buy… This proves that our system is not progressive enough, or even entirely implemented as it is.

Can we expect that in the next year, when there will be no more socially-owned capital in Serbia, at least according to the law, there will also be no more subsidies to the enterprises…

There are three large groups that use subsidies in Serbia today. Primarily, it is the agriculture. That segment, if we look at the European Union practice, will grow or at least will not decline. As regards public enterprises, primarily Zeleznice Srbije Railway Company, there will also be no room for any significant cuts. The third and the smallest group comprise socially-owned enterprises that are in the process of restructuring. Some 3 billion dinars has been apportioned for them from this budget – around half percent of the overall budget. If these firms are privatized by the end of the year, we will make some saving there also. That money, for instance, may be used to build standard bridge in Serbia.

The Memorandum that was recently adopted by the interim government is rather ambitious and entails prominent increases in all areas. How feasible is that?

These medium-term plans are supposed to be ambitious. That document, namely, incorporates two parallel and equally important areas. The first one is objectives – for instance, higher economic growth, lower inflation and unemployment, etc. But there are also ambitious policies. In order to generate set objectives, the policies have to be implemented. These are monetary, fiscal and structural adjustment policy. Therefore, in order to achieve the objectives, these policies need to be implemented, and they are implemented by politicians. Every failure in implementation of policies has an impact on achievement of the objectives.

Our foreign debt is constantly rising, due to external borrowing of our companies. Why is that so, and how can we prevent such large external borrowing of our companies?

The tendency is that a lot of capital is entering Serbia from the outside, because money outside is cheaper. I have heard that companies save a lot of money that way, up to three or four percentage points. This tendency is good if companies take the loans for purchase of new equipment and production improvement. Furthermore, it would be good if the loans are used to launch new projects that would, for instance, involve import substitution or increase of exports. However, if those funds are spent prevailingly on acquisition of non-durable goods, this phenomenon can turn out to be very bad for Serbian economy.

Can the state control the borrowing?

The state is not controlling that anywhere in the world. However, this tendency can involve large financial risk for any state – those private loans are repaid in euros and if the state generates foreign currencies as foreign exchange inflow, it will be able to repay the loans. This means that if we are not able to generate enough euros from exports, we will be unable to repay the loans. Let me remind you that Argentine did not have a large public debt, but a huge private one. The state turned bankrupt due to the private borrowing.

Is the reason for their external borrowing the poor offer of bank services in Serbia?

Loans in Serbia are more expensive due to the restrictive policy of the National Bank of Serbia. However, there is a reason for the restrictiveness. Monetary policy attempts to compensate the fact that the state is spending more than it receives. In the end, the expense is paid by the citizens, because someone has to pay the price. If we restrained the fiscal policy today and eased restrictiveness of the monetary policy, it would reflect negatively on the groups that are budget funds’ beneficiaries. Once again, in order to have a macroeconomic balance, someone has to pay the price.

The country’s credit rating has declined increasingly. How much time would we need to recover the rating we had, for instance, in the second half of the year? Would it take as long to regain the trust of our foreign partners as it did to lose it…

Credit rating of our country slid due to the political factors, and that is why good news from the political scene can bring us back to the regional average. At this moment, we are below the regional average and at the level of Ukraine and Turkey. We are a couple of rungs below Bulgaria and Romania and only good news from the country that would indicate we are ready for the EU integrations may lead to improving our credit rating. Today any foreign firm that wants to enter this market looks at the credit rating, and every transaction is reduced by the rate of the rating. For instance, if you consider buying a bank of equal performances in Bulgaria or in Serbia, you will pay less for the one in Serbia, only because of the credit rating.

Despite all that, it seems that foreigners who decided to do business in Serbia are doing quite well…

It is true that Serbia, over the past few years, has been a country where foreign investors are welcome. At the same time, it is evident that foreigners have entered the existing firms and only boosted efficiency of those companies, by introducing new technologies and setting up new management system. What is definitely a problem with investments in Serbia is the fact that there are not enough greenfield investments.

(Author: Gordana Bulatovic)