Банкеръ Weekly



MILEN VELCHEV HAS PROMISED TO CUT DOWN BUDGET EXPENSES BY BGN300MNA severe clash between the Bulgarian National Bank (BNB) and the International Monetary Fund (IMF) Mission occurred due to the Fund's requirement to restrict crediting in the country. Still on their arrival in Bulgaria on March 29 the experts lead by Mr. Hans Flickenschield demanded a reduction of the scope of crediting, which according to the IMF was the main reason for the constantly increasing import of goods, inputs and raw materials into the country. However, the addressee of that requirement is wrong. If the Fund wants import to be restricted, it should insist that the Government undertakes measures in that direction instead of pressing the central bank to block crediting.Moreover, IMF's experts demanded from BNB to increase from 5% to 11% the total amount of mandatory minimum reserves which the banks set aside on the money, attracted from citizens and companies for more than two years. Central bank's representatives sharply opposed that idea, because if it is realized the credit institutions (according to preliminary calculations) will have to freeze BGN450MN additionally on their accounts in BNB. Financiers say that blocking such a resource from banks will not only deprive them of proceeds (the central bank does not pay interest on the mandatory minimum reserves), but could also temporarily render difficult the servicing of current payments for some of them (experts call that a temporary liquidity crisis). By the end of negotiations IMF's representatives remained uncompromising in their insistence that drastic measures should be undertaken in order to restrict crediting, as according to them it is among the major reasons for the huge deficit in current account of the payment balance. Financiers who took part in the discussions between the central bank and the IMF Mission said in front of the BANKER weekly that at a certain point of the negotiations BNB's representatives were even considering the possibility of stopping them altogether. Of course, the official statements of the IMF Mission Leader Hans Flickenschield and BNB's Governor Ivan Iskrov did not show that the degree of tension was so high. At the press conference given by the IMF, the Government, and the BNB, at about 14.00 hrs on April 13 (the negotiations ended several minutes earlier), Mr. Flickenschield pointed out that the financial sector in the country was stable, but in order to maintain that stability the current account deficit (which was 8.5% of the GDP in 2003) should be reduced.We came to an agreement with the Cabinet that measures would be undertaken to cut down the current account deficit to 4.5% of the GDP by end-2004, the IMF Mission Leader said. Some of the measures of which Mr. Flickenschield spoke will directly hit a blow on the expenditure part of the budgetThe Fund's philosophy is that a reduction of the budget deficit is one of the ways for cutting down the current account deficit. The Finance Minster Milen Velchev has promised to decrease budget expenses by BGN300MN. It will be at the expense of institutions' costs, payment of interest on the internal and external debt, as well as money for various investment programmes, financed by the State. Mr. Velchev has made a commitment that by September the budget organisations and institutions will get monthly no more than 93% of the funds, earmarked for them. Moreover, a schedule will be agreed with the IMF for the State's collection of overdue payments of taxes, social and healthcare insurances. The aim is that in end-2004 the aggregate amount of the budget deficit would not exceed 0.4% of GDP. But it is thanks to that minimum deficit that the Bulgarian economy could achieve the desirable growth. Moreover, IMF's wish that our budget deficit should be close to zero seems strange on the background of the big budget deficit of 2-3% and above, which countries such as Germany and France venture, although their economies report a lower growth than Bulgaria. The second part of the negotiated measures are intended to result in a restriction of the increase of creditingIn her conversations with the IMF experts BNB's Deputy Governor and Head of the Bank Supervision Department Emiliya Milanova has vindicated the stance that the growth of credits is only natural for an economy which is restoring and modernizing its production capacities. New loans of BGN480MN were released in January and February 2004. But it should be underlined that despite the reported growth, most of the extended credits - 93% - are served regularly, and only 2% have been classified as a loss, Ms. Milanova siad. She explained in front of the BANKER that after the expansion of consumer credits in 2003 the increase is expected to come to a halt this year. There is nothing strange about the fact that people draw loans in order to buy electric cookers, heaters, refrigerators, TV sets, or other household appliances, and cars. It is logical that imports increase due to those credits, because most of these commodities are not made in Bulgaria. I do not think it is proper to restrict the market by administrative measures. Moreover, the BNB may administratively restrict bank crediting, but it cannot influence leasing companies and firms that offer goods at deferred payment. You know there can be no vacuum on the market, and the space vacated by the banks will be immediately occupied by other structures, and they will not be under supervision. I don't believe it is right that active crediting should be moved from a regulated to a unregulated sector, Ms. Milanova commented. Asked by the BANKER what effect will an eventual reduction of credits to leasing companies and firms that offer commodities at deferred payment have, the Director General of BNB's Bank Supervision Department Peter Andronov said they could without problems ensurefinancing from abroadAccording to BNB's statistics, in the end of 2003 the aggregate volume of credits, directly extended to Bulgarian companies from abroad, exceeded EUR3BN (about USD6BN), while all loans released by Bulgarian banks were slightly over BGN9BN. Drawing loans from abroad means that interest on them is paid also abroad and not to Bulgarian banks. Therefore, if restriction of crediting in the country does not result in an increase of external financing, this will lead to a reduction of proceeds аnd hence, a decrease of domestic banks' profits. Consequently, the taxes they pay to the State will be less, Mr. Andronov is adamant. According to him, new steps for restricting free funds of banks from abroad, with which they may extend credits (the so-called liquidity), should be undertaken only after seeing the effect of BNB's measuresThe new requirements for grading of overdue loans will be applied as of end-April. According to them, credits that have not been serviced for more than 90 days shall be reported as losses for the banks and should be covered by 100% provisions (the money, set aside by banks from their positive financial result for the unserviced loans; until now this was demanded for credits which have not been serviced for more than 120 days). The requirement that all loans should be entered in a unified credit register of the BNB (so far this was a must only for loans exceeding BGN10,000) will become effective as of June. The term that banks' current profits shall not be acknowledged as part of their capital basis if not audited, will also enter into effect in June. This will restrict the volume of big loans, because under the Banks Act and Ordinance No 7, the credits allocated by a bank to a company may not exceed 25% of the credit institution's capital basis. The effects of all these measures will become evident within two or three months after they are launched. According to experts, new restrictions on credits could be considered only thereafter. The tense negotiations between the BNB and the IMF Mission ended on the noon of April 13 with mutual compromises. The two sides prepared jointly a package of restrictionsto be introduced stage-by-stage if the growth of crediting does not decrease. In the words of BNB's Governor Ivan Iskrov, the aim is that in end-2004 the increase of released loans is no more than 30% up from the end of 2003. For the purpose, we shall not raise the amount of mandatory minimum reserves, but we'll expand their scope, Mr. Iskrov explained. He specified that mandatory minimum reserves will be required not only on 2-year deposits of firms and citizens, but also on longer-term deposits. The amount of mandatory reserves on attracted money, repayable after more than two years, will be 4 per cent. If we see that this measure does not yield the necessary effect, we'll raise the amount of mandatory reserves on long-term attracted funds to 8%, Mr. Iskrov said. This will practically mean that banks will have to set aside provisions on their proceeds from bonds, too. On the background of these restrictions imposed by the central bank, the most important question is how, according to the IMF, long-term savings could be stimulated, having in mind the fact that the restrictions will be levied to the banks, both on the credits they extend and on the funds (deposits, bonds, etc.), attracted for over a 2-year period. However, BNB's experts claim that the scheme for mandatory minimum reserves, proposed by Mr. Iskrov, was the only possible way for reachinga compromise with the IMFUnder that scheme, the aggregate amount of banks' additional expenses for mandatory minimum reserves is about BGN40MN, while under IMF's requirements the expenses would have been BGN150MN for each percent of increase of mandatory minimum reserves. Had the Fund not agreed with that proposal, we would have to cancel the agreement with it, a councillor of Mr. Ikrov who wanted to remain undisclosed commented. For the time being the argument between BNB and IMFis considered as settled, and the negotiated package of measures for restriction of crediting will be included in a programme which the Government will have to implement if in June the Executive Board of the IMF makes a decision that Bulgaria needs a precautionary agreement. According to Mr. Flickenschield, part of the measures which concern the budget should begin to be applied immediately, as they will not bring the desired effect if we wait till the middle of the year. The general impression from that Mission is that in their willingness to find a way to reduce the deficit in the fiscal reserve, the IMF experts were overzealous. It would be better to overcome the deficit in question by increasing production and export, rather than by cutting down consumption and import. And production goes up by improving the terms for the attraction of investment and creation of an environment where creditors feel better protected from unfair debtors. In that sense, IMF's attempts to administer the bank market in Bulgaria would hardly have a positive result.

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