Банкеръ Weekly



The International Monetary Fund (IMF) will be taking care of Bulgaria's financial stability till the country's integration into the European Union (EU). That is the final decision of IMF's Executive Board, which approved on June 14 the report on the country's economic situation and the conclusions from the inspection of results from all previous missions of the fund. After discussing these two documents, the Executive Board decided that Bulgaria needs a two-year precautionary agreement with the IMF. Its parameters will be conclusively agreed during the fund's mission to the country, arriving on June 28. The IMF experts, lead by Mr. Hans Flickenschield, will check if the Government and the Bulgarian National Bank (BNB) have fulfilled all commitments, undertaken during the previous visit of the IMF mission in April. It could be safely said that the Cabinet and the central bank tried to fulfil all preliminary conditions for signing the precautionary agreement with the fund. According to Finance Ministry figures, in April 2004 (there is no more recent data) the revenues to the Treasury exceeded its expenditures by BGN529MN. In other words, Finance Minister Milen Velchev has so far strictly observed the promise he gave to Mr. Flickenschield for restricting as much as possible budget expenditures. The commitments for selling the Bulgarian Telecommunications Company (BTC) and hiking electricity and central heating prices by 10% as of July 1 were fulfilled, too. The IMF is relentless that these two requirements should be observed, as its experts believe that proceeds from the big privatisation deals should cover the deficit on the current account of the payment balance, which is expected to exceed EUR1.5BN in end-2004. The hike of electricity and central heating as of July 1 will be the last one of the 3-year schedule for the increase of their prices. Within that period they went up 40 per cent. The aim of those unpopular measures is to ensure funds for current expenses and capital repairs to electricity-generating and heat-producing companies. Moreover, the price rise of electricity and central heating will render the energy companies more attractive to foreign investors and will enable the Government to sell them for more money, which will also cover the huge current account deficit.The BNB has also fulfilled its commitments to the IMF. By end-May the central bank's Board of Governors had introduced all restrictions, demanded by the international financial institution in order to halt the quick growth of crediting. The 120-day term during which a non-redeemed loan must be classified as a loss and entirely covered by provisions from the banks' positive financial results was reduced to 90 days. The BNB forbade credit institutions to increase their equity capital from the current profit except if it is committed to an auditor. In the end of May BNB's Board of Governors made a decision that banks should set aside as mandatory minimum reserves 4% of all funds, which they have attracted for a period longer than two years. According to central bank experts, the effect of all these measures should be visible by early September. If they do not result in a decrease of the growth of credits, the BNB is preparing additional restrictions, such as a more strict system for setting the liquidity ratio and eventually raising from 4% to 8% the mandatory minimum reserves for funds attracted for a period longer than two years. The IMF is firm that the 52-percent growth of released credits, reported in 2003, should not be repeated in 2004. The fund's experts believe that the loans extended by Bulgarian banks are among the main reasons for the increased purchases of consumer goods, and hence - for imports, which results in a big deficit in the country's trade balance. In end-2003 it was around EUR2.2BN and was the main reason for the current account deficit (or as financiers call it in their jargon - a whole in the balance of payments). This means that the money that left the country through trade deals was EUR1.5MN up from the amount that entered Bulgaria. This is quite an alarming fact, having in mind that the deficit should be covered by proceeds from investments (which are not so much in our country) or by loans. In other words, if no measures are undertaken to decrease that deficit, real danger exists of Bulgaria's foreign debt beginning to grow like an avalanche and the currency board and the entire state to fall under its weight. The future precautionary agreement with the IMF is aimed to prevent that snow-slide. The danger is not at all hypothetical, as according to the appraisal of the state-run Agency for Economic Analyses and Forecasts, BNB's forex reserves are expected to go down by EUR700MN-plus in 2004, at that if the current account deficit is restricted to 7.8% of the gross domestic product (GDP). According to some analysts, however, it might reach 10% of GDP in end-2004 due to the high oil prices. In that case BNB's forex reserves which totalled EUR5.8BN in mid-June, might decrease by more than EUR1BN. The signing of a precautionary agreement will guarantee that the Government will be following a policy of strict fiscal discipline, will be closely watching the collection of due taxes, and will not plunge into unreasonable increase of budget expenditures for pensions and salaries to civil servants in the year prior the parliamentary elections. As with the previous agreements with the IMF, the precautionary agreement will be accompanied by a special economic programme, guaranteeing the stability of the currency board arrangement. It will include requirements for the size of the budget deficit and the fiscal reserve, the revenues to the Treasury, the Cabinet's expenses, the collection of overdue receivables from taxes, the amount of the foreign debt, etc. But Bulgaria won't be financed by the IMF each three months, as under the previous agreements. The country will get money only if its forex reserves drop significantly due to external reasons, such as international financial crises or drastic price leaps of energy sources. If such a situation arises the State may count on a loan up to USD300MN from the fund. But a condition has been preset that the Government has fulfilled all its commitments. In other words, the IMF will guarantee by it the currency board stability against any recklessness on the part of Bulgarian politicians. And they are a serious threat, indeed, recalling how many times Bulgarian governments and the IMF came to a break-up, and that in all these cases financial crises followed. This should be best remembered by the predecessors of BSP incumbent leader Sergey Stanishev, who insisted on June 15 that the conditions of the agreement should be discussed between the Cabinet and the parliamentary groups in order to negotiate more advantageous terms for Bulgaria. However, it did not become clear what these terms should be. But it is well-known that if the Government starts to renegotiate the terms of the agreement now, it won't be signed. Moreover, socialist leader Stanishev should realize that if his party wins the parliamentary elections in 2005 and he becomes a premier, the IMF will set to him exactly the same conditions, which it currently sets to PM Simeon Saxe-Coburg-Gotha and his Cabinet. And if he accepts them, he risks to be befallen by the political destiny of former socialist leader and ex-premier Zhan Videnov.

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