The Domino Effect of War
As the war gains momentum, Macedonia's feeble economy continues to deteriorate. Each day of fighting costs US$1 million, and everybody is losing. Business people are asking from the government to prepare, in addition to a peace plan, a program from ending the serious economic crisis
AIM Skopje, June 15, 2001
Very few business people expected the war in Macedonia to last this long. The fighting has been going on for over three months. Everybody has felt its, from the smallest firms to the biggest state-owned and private companies in all sectors of the economy. The war is having a detrimental effect on merchants, transporters, tourist companies, the hotel industry... The damage has reached millions of U.S. dollars. The exact figure is not known, and each day of fighting roughly costs about one million dollars. The Macedonian economy, otherwise very fragile, is now not only on its knees, but faces its worst days ever. Analysts estimate that it is presently where it used to be 15 years ago and that if the war does not end soon it will need twice as long to recover from this shock. These fears might be exaggerated, but the statistics are mercilessly clear.
Almost all indicators of economic activity during the past four months showed a downward trend this year. The worst situation is in foreign trade, which went down 21.9 percent -- exports dropped 10.9 percent and imports 29.3 percent. Exporters have suffered the most because of numerous contract cancellations. The January-April industrial output was 7.5 percent down compared to the same period last year, and including May, even 20 percent lower. Only 11 of 30 production sectors registered a slight increase. At this point, 26,000 companies employing 120,000 people have had their bank accounts blocked, and this disease is spreading. Among them are companies which until recently were considered good and reliable business partners, and which can now neither pay their debts nor collect what others owe them. Cash is nowhere to be found. Overdue payments, according to the state Payment Traffic Institute, have reached DM1.2 billion, up DM200 million since the beginning of the year, and likely to grow further. The state cannot collect custom duty and VAT regularly, which further aggravates the situation.
The Chamber of Commerce and Industry has warned that the Macedonian economy might experience the domino effect. Growing illiquidity could lead to spiraling inflation, destabilize the exchange rate and cause devaluation of the national currency. "We are on the verge of recession," Dusan Petrevski, the chairman of the Macedonian Business Association, firmly says. If armed clashes with ethnic Albanian paramilitary troops continue unabated without the government doing anything but helplessly watching, in October Macedonia will face a social war as well, analysts say. Almost 400,000 people are unemployed and are living below the poverty line. This is why business people are asking that the government, in addition to a peace plan, also prepare a program for taking the country out of the deep crisis. The end of negotiations between International Monetary Fund representatives and a delegation headed by Finance Minister Nikola Gruevski, in Skopje, is being awaited with impatience. Many are urging that the methods used to estimate damages be harmonized with international standards, so that accurate assessments of the magnitude of the economic destruction can be obtained and, once that becomes possible, compensation demanded from those who started the war in Macedonia!!!
A new projection of Macedonian macroeconomic policies in conditions of war, according to Gruevski, takes into account the difficulties caused by the security crisis and reduces the parameters otherwise planned for this year. It has been agreed with the IMF that the GDP should grow 2.5 percent instead of 6 percent, if the war continues in the next two months. Inflation is planned to increase 4.5 percent if the war is not over by the end of the year. The estimated budget deficit, in the same conditions, is planned at US$230 million. It is very fortunate that the previous year was successful, that is, that there was a budget surplus, making it easier to foot the bill for defense spending. The current hard currency reserves, although down by US$110 million, are still capable of providing macroeconomic stability, the finance minister says. The central bank governor, Ljube Trpeski, and the government's financial advisors, university professors Trajko Slavevski and Mihailo Petkovski, are convinced that the war will not endanger the stability of the national currency, which is at the core of Macedonia's economy stabilization course, that it will not cause inflation or devaluation of the denar by the end of the year. Foreign experts envisage a 10 percent devaluation, without, however, giving a deadline, given that everything depends on the duration of the war.
The situation is under strict control, money is not printed, and the government intervenes only if pressures appear or if there is turmoil on the foreign currency market, and there will be no surprises, domestic monetary experts say. They back their optimism by measures that should be undertaken this week to reduce the money supply in circulation and protect the domestic currency's foreign exchange rate, endangered by a growing demand for foreign currency. Namely, instead of the official rate of 31 denars for one German mark, 35 denars and sometimes even 40 are now being paid. The central bank increased interest rates and issued treasury notes to balance the demand. Daily limits on the purchase of foreign currency have been introduced, after which commercial banks stopped selling foreign currency altogether. The measures are still in force and their effects have already been felt, monetary experts say.
Their optimism, however, is not shared by business people and bankers, who have directly felt the effects of the measures. The former, because turbulence on the foreign currency market has made it impossible for them to find the funds to purchase raw materials and maintain production. They say there is no production at all, and that all factories are idle. Managers are powerless, they pray that the war will stop, but there is no one in the government to hear their pleas, let alone listen to their problems or help them resolve them. Times are hard; one has to be patient. He who survives will have stories to tell!
Bankers are also dissatisfied. They claim that the central monetary authorities, protecting the domestic currency's foreign exchange rate by issuing treasury notes with higher interest rates, are depriving them of their job. They are forced to increase interest rates as well, and the remedy which is applied, they say, is a "necessary evil which is more damaging than useful." They say that the monetary authorities decided to respond belatedly, because the denar was "floating" for four months, and they openly doubt their expertise. They require that urgent changes to laws that govern the use of foreign currency in business, so that exporters who keep their money in foreign banks should be obliged to transfer them to domestic banks within 90 days at the latest and not in six months, as is required now.
Minister Gruevski says that the only way to avoid a recession is to activate a new investment cycle in the public sector for which funds were obtained through the sale of Macedonia Telekom before the war. Of this, only 23 percent was used in five months. Gruevski has faith in courageous business partners from abroad who have interests here and believe that Macedonia will overcome the current security crisis, and are not abandoning the country in times of trouble. He says these are agricultural investors from Greece, Slovenia and France, but will not disclose their names.
Independent economic analysts, however, do not share these views. For them the only remedy for the ailing Macedonian economy in these extraordinary circumstances are maximum restrictions on budget spending. They advise that an urgent rebalance of the budget be carried out and 15 percent cuts introduced for all, meeting conditions from existing arrangements with the IMF and the World Bank so that badly needed money for interventions in the economy will arrive, as well as a well prepared donors' conference once the war ends. They are convinced that, preoccupied with security problems, the Macedonian government does not have the right answers to its economic woes. The best evidence of this, according to them, is the government's undefined attitude towards companies that have been making losses and which should have been sold or closed long ago, as required by international monetary experts. This includes eight major money guzzlers: Jugohrom of Tetovo, Makedonka of Stip, the Skopje car factory, the Veles porcelain, the lead and zinc mine in Zletovo, and the battery factory in this town. The state body in charge of structural reforms determines what ought to be done, but the government does the opposite. No decisions have been made and the uncertainty continues. Their fate is tied to the fate of about 7,000 workers from several towns who are supposed to be fired. The government decided to alleviate the situation and sent cash to cover their pension and health insurance, which they are years behind in paying, but is refusing to pay salary arrears. The dissatisfaction is enormous. There is a war going on but they are simply ignoring it. They have nothing else to do but protest each day. Some block major roads, others gather in front of the government building, pelt the windows of the finance ministry with eggs, and some even pitch tents in front of the Macedonian Parliament, waiting for MPs to take pity on them and try to help them in their plight. Whether they will live to see that remains uncertain.
Branka Nanevska
(AIM)