Omerbegović-Arapović for NAP: Federal budget surplus is a government deception, debt burden is increasing

The FBiH Government does not have much room for celebration. The government's optimism and talk of a surplus are unfounded, believes macroeconomist Dr. Adisa Omerbegović-Arapović in an interview for the Patria agency, after the Government announced that the Federation is in surplus for the first time in ten years and that reforms are yielding results.

“The FBiH budget recorded a surplus of 60.8 million KM in the period from January 1 to June 30, 2017. The total financial result of all cantons is also in surplus, amounting to 137.2 million KM, and municipalities also achieved a surplus of 60.1 million KM,” stated Minister of Finance Jelka Milićević after last week's Government session.

Omerbegović-Arapović, on the other hand, believes that the current surplus the Government is talking about is a deception, as it comes from the reduction of large capital investments. There is no mass road construction or other major public investments, but there are huge payments to creditors. Therefore, says Omerbegović-Arapović, there is a current surplus, but it is completely irrelevant because the long-term budget picture is very negative.

Patria: According to data from the Central Bank, the consolidated budget of the Federation of BiH has recorded a net surplus for two consecutive years, amounting to 133 million KM in 2015 and 383 million KM in 2016. What caused these surpluses compared to the deficits in previous years?

Omerbegović-Arapović: A surplus represents the difference between revenues on one side and expenditures with net acquisition of non-financial assets on the other side in the budget of the Federation of BiH. The answer lies in the huge reduction of investments in non-financial assets, i.e., capital investments, which is a notorious result of this Government. In the years when a net deficit was realized, capital investments were the cause of the deficit. In economic theory, governments increase public spending when the private sector falters, in order to stimulate economic growth. Public spending is precisely desirable in the domain of public investments that affect economic growth and have long-term positive economic effects. Thus, capital investments in 2010 amounted to 281 million, in 2011 to 339 million, in 2012 to 443 million, in 2013 to as much as 646 million KM, and peaked in 2014 when as much as 686 million of public money was invested.

With the arrival of Prime Minister Novalić's Government, government investments in 2015 fell to a level lower than in 2010, amounting to only 221 million KM, and in 2016 they did not significantly increase, amounting to 248 million KM. The reduction in public investments enabled these net surpluses, which the Government is trying to boast about. Unfortunately, these surpluses are not the result of a significant reduction in current expenditures, privileges, and luxuries in current spending, but are the result of reduced spending where it is desirable, which is the sphere of public investments. This is actually a debacle for this Government!

Patria: You claim that the surplus boasted by the FBiH Government is a deception. What is your proof?

Omerbegović-Arapović: A current surplus does not mean much when considering the overall picture of the Federation of BiH budget. It is such that for several years we have registered current surpluses, but the budget structure is significantly deteriorating because the debt burden in the budgets is growing. In 2014, 54% of total budget revenues went to servicing the debt. In 2017, two-thirds, or 66% of the budget, goes to servicing the debt.

The forecast for the next few years is even worse, and more and more total revenues, i.e., tax money, are needed to service the debt. Because of this, we constantly have to borrow money, so without new borrowing, we cannot bear the burden of old and new debts, and there is less and less money for capital investments.

Fewer investments, and more money to creditors, and there you have a surplus!

Therefore, this Government works more for the interests of creditors than for the interests of its own citizens. So, we are in a deep structural deficit, because our revenues are significantly lower than total expenditures and outlays, and this will worsen in the coming years due to irresponsible borrowing. The current surplus, which the Government talks about, is a deception because it comes from reducing large capital investments. There is no mass road construction or other major public investments, but there are huge payments to creditors. Thus, there is a current surplus, but it is completely irrelevant because the long-term budget picture is very negative.

Patria: The FBiH Government also boasted that they have proven they can operate without IMF money. How do you comment on that statement?

Omerbegović-Arapović: The current arrangement with the IMF enabled this Government to restructure part of its obligations, i.e., to convert part of its short-term obligations into long-term obligations. Without such an arrangement, the debt burden in the budgets would be even worse. Therefore, it is unbelievable that the Government boasts about its ability to survive without IMF loans.

The amount of the IMF tranche is already planned as revenue in the current budget of the Federation. The FBiH Government can only replace IMF money with other, more expensive sources, which it has been doing for months. It issues treasury bills and bonds, and then repays more expensive money to other creditors in a shorter period, but this only temporarily bridges the lack of money in the budget for the Government. This primarily benefits wealthy creditors, for whom it is a secure source of income, and citizens pay the price. These creditors are commercial banks that thus become richer by the interest the Government pays, and we citizens become poorer in the long run because we will pay equal or higher taxes in the future to repay these loans.

What is particularly bad is that these loans are spent on current expenditures, not on capital investments or some reform that would eventually create stronger economic growth or sufficient revenue to service these loans in the future.

Therefore, replacing a favorable IMF loan with another, less favorable loan, is not a proof of capability. On the contrary. Furthermore, our authorities have committed to reforms through the Letter of Intent with the IMF, as the main condition for lending, so the statement that they can do without the IMF might be a prelude to being able to do without reforms! Equally important is that an IMF loan means foreign exchange inflow, which contributes to currency stability, and loans from commercial banks do not contribute to this because they will not increase the foreign exchange reserves of the Central Bank.

On the other hand, too much exposure of commercial banks to public budgets increases the risk in the financial system, and thus indirectly destabilizes the currency board, i.e., the currency itself.