Transcript PRESENTATION -

Republic of Serbia
Fiscal Council
ANALYSIS OF THE OPERATIONS OF STATE-OWNED
ENTERPRISES
KEY POINTS AND RECOMMENDATIONS FOR BUDGET
REVISION AND MEDIUM-TERM FISCAL ADJUSTMENT:
2015-2017
31 July 2014
Three pillars of fiscal consolidation
1. Reforms – adoption of laws that will lay the foundation for stable
public finances in the medium term
− Law on Pension and Disability Insurance, Law on Labour (economy, but also the
basis for public enterprises and public administration), Law on Privatization
(restructuring)…
− Positive assessment, but the biggest challenge is yet to come (downsizing of
employees), savings will not be made immediately
2. Bringing order in public and state-owned enterprises – the most
difficult and uncertain
− Huge problems: political (interest groups) and professional (redundant employees
and their benefits, uncollected payment for services, inadequate prices, etc.) – there
is still no adequate plan for addressing these issues
− If this is not done, there will be an explosion of public expenditure and failure of
consolidation
3. Establishing a sustainable level of budget expenditure
− Suplementary budget: a step towards reducing the huge deficit and eliminating 2the
biggest imbalances
Public and state-owned enterprises are the
biggest problem
• Already incurred a large fiscal cost (1 billion euros annually)
– And it keeps growing; unless reversed, it will make all savings useless
• Srbijagas
– It has already spent the state funds equal to the value of Telekom and continues to
generate losses
– Network of problems – the problem is not only Srbijagas, but also Azotara,
Petrohemija, MSK, city heating plants…that do not pay for gas
• EPS
– Numerous problems, not only low prices but also redundant employees, poor
payment collection, organisational fragmentation, losses in distribution (thefts)…
beginning of liquidity problems, now the floods – new Srbijagas?
– Other public enterprises have similar problems, but the operations of EPS are
measured in hundreds of millions of euros, which is too much for public finances
• Serbian Railways
– There is no progress for decades - huge government subsidies spent, the 19th century
train speed, project funds not withdrawn
– Huge system (20,000 employees) with problems, together with EPS nearly 60,000
employees out of the total of 250,000 in all public and state-owned enterprises 3
High deficit in 2014 over 2.6 billion euros (8.3% of GDP)
• Projected deficit of 2.5 billion euros has been exceeded for about
150 million euros
– Combined result of drop in revenues of about 400 million euros and
decrease in expenditures of about 250 million euros
• Public revenue shortfall is primarily the result of changed
macroeconomic environment (objectively)
– Extremely low inflation (2% instead of expected 5% - lower public
revenue), recession and larger drop in formal employment than projected
– Missing and budgeted effects of combating grey economy (unrealistically
planned)
• Public expenditures were under control
– Finally stopped salary increase above indexation (there are savings) –
positive
– Inefficient execution of public investment – negative
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Public debt at the end of the year over 70% of
GDP
• In countries like Serbia – even a significantly lower level of
public debt leads to a crisis
– It is difficult to reverse the growth of public debt – it will reach 80% of
GDP (even with substantial cuts)
– Creditors can easily lose confidence - a crisis of public debt
• Large public debt is not the only risk
– Annually over 5 billion euros (17% of GDP) needed to finance deficit and
pay due debt
– According to international standards – there is a risk of crisis with due
payments of over 15% of GDP
• Stopping the growth of public debt share in GDP - fiscal
consolidation
– Investors need to see a credible plan for medium-term adjustment and
stopping of public debt growth in order to continue lending money
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Fiscal consolidation –2 billion euros of savings
• In order to stabilise the public debt by 2017, the deficit must be
reduced to below 1 billion euros (from the current amount
exceeding 2.6 billion euros)
– However, some expenditures will be growing: payment of interests (as
long as there is a growth of public debt) and public investment (currently
insufficient)
– Required savings of nearly 2 billion euros
– Reforms and improvement of public finances are required, but "painful"
cuts cannot be avoided (there are no easy solutions)
• Serbia’s credibility is low and adjustment of 2 billion euros is
possible only in the medium term
– New arrangements with the IMF required
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Possible savings
(million EUR)
400 – 500
Time of full effect
Current situation
Risks
Next 3 to 4 years
Unfavourable – problems are
rapidly increasing instead of
decreasing
Cutting salaries
and pensions by
15%
800
2015
Pending political decision
High – professional (plan and
downsizing of employees,
appropriate prices, collection of
receivables, technical
improvements and investment, etc.)
and political (interest groups)
Low – possible exemption from
salary cuts for individual public
sector categories
Combating grey
economy
300 – 350
Next 2 to 3 years
Reforms (of
earnings and
employment,
pension
reforms, etc.)
300 – 400
Next 2 to 3 years,
longer for pension
reform
≈ 1,900
By 2017
Initiated personnel changes in the
Tax Administration, some
positive effects are already
noticeable: increased collection of
contributions and excise tax on oil
products, decreased revenue from
cigarette excise taxes
Adopted the reform Law on
Pension and Disability Insurance;
the central registry data are being
prepared; beginning of the salary
grade scale reform announced for
autumn; there is no information
about downsizing plans at the
local level, in the sectors of health
care, education, state
administration, etc.
Unfavourable – trends of deficit,
enhanced problems of public
enterprises
Public and
state-owned
enterprises
Total
Favourable – still low interest
rates, political environment
Moderate – presently on the right
track, but major challenges still lie
ahead
Low – for pension reform
Moderate – for salary grade scale
High – for redundancies
The highest risk – bringing order in
the business operations of public
enterprises
Fiscal consolidation must be comprehensive
•
It is futile to cut salaries and pensions without solving the issue of public and stateowned enterprises (∙∙∙∙∙).
•
It is insufficient to solve the issue of public enterprises without cutting salaries and
pensions (----); it is necessary to do both ( ─ ).
•
In order to stabilise the public debt, it is necessary to reduce salaries and pensions by
15%
smaller reduction of salaries and pensions would require additional adjustment measures,
probably further tax increase – an inferior measure
most
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Fiscal consolidation and growth
• The major deficit adjustment (3% of GDP) in the first year of
consolidation (2015) – Front-loading
– Each successful fiscal consolidation has the biggest deficit reduction in the
first year
– Important for entire programme credibility - a smaller deficit makes the
continued fiscal consolidation less risky - will be rewarded with confidence
– Political economy – it’s now or never
• Strong deficit reduction leads to reduced economic activity,
which can be mitigated
– Fiscal consolidation of 3% of GDP would lead to a temporary drop of GDP by
roughly 1%
– If not mitigated = deflation and recession  failure of programme
– It can be avoided with a broader package of fiscal and monetary policy
measures to boost economic activity
– Positive effect on economic growth from increased public investment
(recovery after the flood), business environment (Law on Construction, etc.),
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attracting investors, perhaps considering fiscal and credit incentives
Public revenue in 2014
• Revenue shortfall of about 50 billion dinars
• 30 to 35 billion objectively, due to changed economic
circumstances
– Inflation below the lower bound: 2-2.5% against the projected 5.5%
– Greater drop in employment: 1.5% against the expected 0.7%
– Economic recession, floods
• 20 billion dinars due to optimistic budgeting
– Revenue from grey economy included in advance; however, measures have
not been implemented in the first half of the year
• The 2013 trend of weakening tax discipline has been
stopped
– Efficiency of VAT collection unchanged compared to 2013
– Collection of payments for contribution partially improved
– Pace of excise tax collection is extremely divergent
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Excise tax revenue
20000
16000
12000
8000
q1
q2
q3
q4
q1
2012
q2
q3
2013
Oil products
q4
q1
q2
2014
Tobacco
• A large growth of excise tax collection recorded for
oil products
• A large drop recorded for tobacco products
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Combating grey economy
• One of conditions for fiscal consolidation and
sustainable economic growth
• It is possible to increase revenue by 350 million
euros by 2017
• It requires a systemic approach and political support
− Ad hoc measures implemented in 2013, attracting media attention,
are not the right solution
• Some progress has already been made​​, but
substantial efforts are still needed
− Personnel improvements, more efficient control system
− Coordination of tax authorities, inspections, judiciary
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State-owned enterprises
• Revenues are not sufficient even for salaries
• Illiquidity
− Explosion of short-term debt and spillover to the state
• Failure to collect payment for supplied goods and covering
debts of loss-generating enterprises
• Low sales prices of goods and services
− Imposed social function
• High number of employees and mass of earnings
− Number of employees, salaries, 13th salary, bonuses, loans
• Public procurement
− Possible savings
• Low investment
− Lagging behind for decades
• Poor management, party management
− Inappropriate selection of management, sponsorship, public
procurement, incorrect accounting reports
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Problem solving guidelines
• Professionally and politically challenging process:
– Concurrent elimination of several problem sources (Srbijagas, EPS,
etc.)
– Problem diagnosis and awareness exist, we need consistent
implementation
– Reform of public enterprises affects interests and it is politically and
socially challenging
• This has to be done:
– Privatization; stop the practice of selling without collecting payment;
price liberalisation; downsizing of employees and reducing salaries;
greater investment and improvement of performance indicators; hard
budget constraints; transparency; resolving the future status of
enterprises in restructuring; corporate governance; centralised
monitoring of the operations of enterprises
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