Interview of the Minister of Finance, Milorad Katnic, for Pobjeda

PODGORICA - New Eurobonds issue will be carried out in the first half of the year and the maximum planned borrowing, envisaged by the Budget for this year, amounts to EUR 180 million, while anticipated borrowing with multilateral financial institutions amounts to EUR 53 million for infrastructural projects financing, said Milorad Katnić, PhD., Finance Minister in an interview to “Pobjeda”. He said that this year’s objective is to reduce public spending to 44.5 percent of GDP. Katnić, who is the youngest Minister in the Government of Igor Luksić, says that, regardless of the fact that Montenegro has emerged from recession, the state bodies should further endeavor in spending taxpayers' money more efficiently.

Borrowing

Minister Katnić, which borrowing model will be predominant in this year?

Budgeted borrowing level is EUR 180 million and EUR 53 million for financing infrastructural projects. Last year we made a début with the Eurobonds issue in the amount of EUR 200, being successful both in the number of investors that applied and in the number of requirements under which we received money, because we shouldn’t neglect the fact that we are the country without the investments credit rating, entering for the first time into the quite turbulent market after some European countries emerged from the crisis. However, in my opinion we shouldn’t praise ourselves with borrowing. It is to some extent a necessary evil, because you must provide money to finance liabilities prescribed by the law.

In which phase is the process?

We have commenced preparations for the Eurobonds issue in this year. We are already in the process of selecting financial institutions that will have an advisory role in the process. This is an extremely complex process requiring a lot of preparation and documentation development, simultaneously encompassing the opinion exchange with investors and organization and holding of numerous meetings. Right timing and selection of advisors is a key to success for both the issue and the collection of money under more favorable conditions. The Eurobonds issue encompasses several advantages, primarily concerning the fact that in this way the state is being presented to a great number of investors, who through the purchase of Eurobonds will become familiar both with our economy and the investment opportunities, and secondly, in this manner we are opening doors to the private sector and institutions for cooperation with the investors operating on this market. This is both the most transparent process and the borrowing model, because the Eurobonds are traded as stocks in the stock market, through the offer of bonds investors offer prices for them. Because of the advantages such as a diversified investors basis, transparency of the entire process and opening doors to the private sector, the Eurobonds represent the most optimum borrowing model existing on the international market.

What is the planned borrowing amount?

We are expecting to enter into the market with the new Eurobonds issue. The amount will depend on the market circumstances and our needs. We are also reviewing the option of refinancing old liabilities, especially for those liabilities generated from last year’s issuance, and we will certainly consider all these options. Definition of timing and the amount for entering the market should not be defined in advance, it should rather be the part of the result of an in - depth analysis of the market circumstances, our needs and potential investors interest

Credit Rating?

One of our objectives is the credit rating improvement. We are not close to the investment credit rating, and the wakening of our economic performances due to the crisis generated the rating lowering issued by the Credit Rating Agencies - Standard & Poors and Moody’s. Credit rating becomes important issue both to the government and the entire economy, because borrowing expenses of our banks, citizens and economy are exposed to it. Credit rating and competitiveness improvement are some of priorities in the work of the Ministry of Finance.

Public Spending

Public spending grew in years of the crises due to the payment of certain social contributions and expenditures financing of the government. Because of the crisis, earlier plans aimed at the decrease in public spending were revised. At which level is the public spending and what are the projections for the next year?

In Montenegro, we are facing with the negative consequences of the crisis, due to which, plans that recently were defining the decline in public spending were subjected to revision. In 2009, public spending referring to the greatest extent to social contributions, thus it amounted at 51% of GDP at the end of the year. This is significantly above the level that should provide for the dynamic economic growth. Furthermore, increase in public spending generated negative impact on certain international indicators. Thus, one of the main objectives of the Ministry of Finance is to reduce public spending in its relative amount. We attained objectives set in 2010, and we surpassed the plan envisaging the spending at the level of around 49%, and according to the preliminary data it amounted at 47%. This means that the decrease in total public spending amounted at around 4 percentage points. I believe that this will result in improved indicators with the international institutions when making estimates next year, and more importantly, it is a confirmation that we are on the right path in laying out foundations of a sound and sustainable public finance.

What are the projections for the next year?

In this year, the total public spending is planned at the level of around 44,5 percent of GDP. In case of the absence of major turbulences in the economy, this is an attainable objective. We have envisaged the reduction in spending bellow 40 percent of GDP, as a medium – term objective. It is important to maintain capital expenditures at a significant level, above 5 percent of GDP, and to lay out a sound foundation enabling long term growth based on capital investments of both the government and the private sector. Pursuant to the medium and long - term policy, the Ministry of Finance will use its best endeavors in decreasing the total public spending, leveraged by the increase in capital investments transfers.

At the time of the crisis, the Ministry of Finance ordered all spending units to apply cost – saving measures. Will such measures still be effective?

Exit from recession doesn’t imply that we overcame the effects of the crisis. The crisis has left in-depth consequences, especially in public finance of Montenegro and other countries. This primarily refers to the public spending, deficit and public debt. All parameters increased in most of the governments. Thus, I have seen that some Euro zone countries are facing problems in reference to the budget, budget financing, fiscal stability and sustainability. It is very important for Montenegro, being a small and open economy, and being exposed to external shocks, to pay greater attention to the fiscal stability and sustainability issues. Fiscal vulnerability is still subjected to the residual effects of the crisis and we must be cautious and very conservative, thereon. The economic growth is not implying the increase in budget allocation. Regular payment of pensions, wages and social benefits are the key priority of the budget, as well as servicing of all liabilities prescribed by the law.

The government does not posses a magic wand.

The Budget means the balance between giving and taking, and we shouldn’t jeopardize the economy with an excessive taking. It would be ideal for the government to have a magic wand and to fulfill all the needs, which for sure, would mean a more "cozy" position of the Ministry of Finance and the government. In the absence of the magic wand, we have a situation that in order to give to someone you need to take from somebody else. Usually when the government takes, it exceeds what it gives, because it must finance its operating costs. For this reason, it is very important not to jeopardize the economic activity, but to create conditions for greater allocation and bigger redistribution cake (stake). Thus, the lesser the taking is the greater is the giving. And that is the main task of the Ministry of Finance.

What would be your message to your colleagues from other departments, offices and bodies financed from the budget?

Always behave rationally and efficiently. The crisis has taught us that that a measure of the government aimed at mitigating the crisis by increasing the public spending is not always the best one. For ensuring a long - term stability, structural reforms and the quality of services provided by the government are the best answer to the crisis. This means the provision of better services to citizens and economy with a same or less funds. This sounds nice, but at the same time it is difficult to achieve, which is why it requires the change in the manner of public administration organization, as well as the awareness raising. It is not pleasant to say that we need to reduce spending in order to lay out the foundations for a long –term growth, but I believe that it is always better to opt for difficult things and the truth, than to support unrealistic things.

The stock of the public debt and is Montenegro in the group of high risk counties?

According to preliminary data, at the end of last year the debt amounted at around 41,5 percent of GDP. Pursuant to the Maastricht criteria, the debt must not exceed 60 percent. We have the situation in which the debt of some governments is exceeding 100 and 200% of GDP, while others are facing huge fiscal problems even with a significantly lower stock of debt. The amount of 41.5 percent in Montenegro is a sustainable one, and this is something what we can handle. However, it is important that the public debt is closer to 30 than 40 percent of GDP in the mid - term.

What is the debt structure?

We have a qualitative debt structure with the long term maturity, while the debt stock is mostly Euro denominated, thus it is neither exposed to a high currency risk nor to the refinancing risk. We assumed the significant part of the FRY debt, and the remaining part was assumed through restitutions and liabilities in reference to the payment of old foreign currency exchange savings and pensions. Now our borrowings policy is focused on capital projects and projects adding value to future generations. This means that if we are already burdening the state and future generations, than we should debit them with the value that will generate benefits in the future, such as the infrastructural projects or investments in education, health, ecology.

The amount of planned budgetary deficit is 2,6 percent. Is it realistic to retain it at this level?

I believe that the deficit is realistic and sustainable, and this is supported by the recognized institutions that have complimented our fiscal performances, both last year’s and this year’s projections. Our goal is to generate the primary surplus in the next year, or to generate surplus by reducing expenditures by the repayment of interest. Planned deficit level of 2,6 percent is lower than the one prescribed by the Maastricht criteria, thus the public finance area is in compliance with the most important rules prescribed by the European Monetary Union.

What are the most important activities aimed at eliminating business barriers? Can we expect more aggressive policy implementation in eliminating procedures identified by the WB Doing Business Report?

In my opinion we succeeded in laying out a solid basis in previous years and that we now can, as you say, implement more "aggressive" approach in eliminating business barriers for the citizens and businesses aimed at facilitating their communication with state bodies. We will focus on several areas. In the area of public finance, the emphasis will be placed on payment of taxes. The system is still overburdened by a large number of fiscal rules, taxes, and often some discretionary rights taxes or duties at the central and the local level. Often, the procedure of paying taxes is time consuming and expensive and it requires a lot of improvements. In this area, our priority will be to establish more efficient administration for the collection of taxes, to introduce a simplified collection and payment, which means costs, procedures and time reduction. If there are taxes, which, inter alia, are used for public spending financing, and relatively low rates, then we need to provide for their simplified payment and cost effective application of regulations.

International organizations suggested that the government should improve property protection and registration? What is planned in this area?

Economic activity and security depends on property security and registration. We want to improve this area, to have a reliable and efficient real estate registry, as well as to provide lower property registration costs. In addition to the payment of taxes and issuing building permits, WB has recognized that the property registration indicator requires improvements. We undertook activities in the part referring to the development of legislation. In reference to the obtaining of building permits, together with the line ministry, we are developing amendments to the laws that should contribute to the improvement of this indicator, implying lower costs and reduced time period for obtaining the permits. Last year, we have significantly improved registration of business organizations, by decreasing the number of institutions and required documents. Now we have two institutions within the system, but we will take a step forward – our objective is to one institution, that would, preferably in a single day, issue documents regarding registration of business organizations.

Will there be any changes at the managerial level in entities under the competency of the Ministry of Finance?

I have initiated consultations and I will quite soon propose to the Government the solutions for all heads of entities. I am counting on colleagues who have been performing their job well. Objectives and tasks of authorities, as well as obligations and activities ahead of us are more important than the names. The essence is to reach an agreement on our future activities, and if we succeed, it will be easier to agree on solutions. I wouldn’t talk about the names now, some consultations are finalized, some names are more or less known and soon they will be formalized and public.

Will there be any changes?

I will continually use my best endeavors to strengthen institutional and human resources capacities of ministries and administration. The Ministry of Finance was known for this process and I wouldn’t link it to the change of Minister.

What would you like to be remembered for as the Minister of Finance?

Certainly for consistency. To do what I believe, and to stick to my promises.

Of course, a legacy of not only good indicators, but also people who will be able to ensure future finance stability and economic prosperity.