Банкеръ Weekly

Briefs

GOVERNMENT AND IMF WILL BE AGAIN BARGAINING ABOUT BUDGET

Before the Cabinet of Simeon Saxe-Coburg-Gotha approves the 2005 budget and moves it for debate and voting in Parliament, it must be approved by the International Monetary Fund (IMF). For that purpose the IMF Mission lead by Hans Flickenshield will arrive in Bulgaria on September 15 (Wednesday) and will stay for about a week. Negotiations on the budget will start September 16, morning, in the Finance Ministry and during the following days IMF experts will meet representatives of the Bulgarian National Bank (BNB), as well as the ministers of economy, transport and telecommunications, energy, construction, healthcare, and social policy. They will specify the macro framework for 2005, i.e. GDP growth, inflation, unemployment, and current account deficit. When that framework is ready, the main parameters of the new budget will be agreed. During the three-year period of governmentof the Premier Simeon Saxe-Coburg-Gotha the budget has always been among the most difficult issues in the negotiations with the IMF. Back in December 2001 the then IMF mission leader Jerald Schiff questioned the successful extension of the then effective two-year stand-by agreement, as according to his estimates, the government-drafted 2002 budget included non-commitment for BGN150MN. The IMF mission had to pay an additional visit in order to clarify the debatable issues, although with a lot of mutual concessions. In 2002 the IMF experts also opposed the idea for the introduction of preferences for companies, investing in regions with high unemployment. And although the Corporate Income Taxation Act included provisions on tax-breaks, they were stipulated in such a way as to restrict as much as possible their application. In 2003 IMF's new Mission Leader for Bulgaria Hans Flickenshield insisted that the country's budget deficit for 2004 should amount to 0.5% of its GDP, instead of the Cabinet-planned 0.7 per cent. Then, Finance Minister Milen Velchev succeeded to convince the experts of the international financial institution that a 0.7% deficit would not endanger the country's macroeconomic stability. In mid-April 2004, however, the IMF said the huge deficit in the current account of the balance of payment could undermine the stability of the effective currency board arrangement, and made the Government agree to reduce it to 0.4% of GDP. In July 2004 when negotiating with IMFthe terms of the precautionary agreementMr. Flickenshield demanded from the Cabinet a surplus in the 2004 budget. That condition was adamantly opposed by Finance Minister Velchev. Finally, the Government and the IMF agreed to end the year flat. Following that commitment the Executive Board of IMF approved the precautionary agreement with Bulgaria on August 6, 2004. According to unofficial data, in the 2005 budget the Finance Ministry has projected 0.5% deficit of GDP (pre-estimated at EUR41MN). Budget revenues have been projected at BGN15.2BN, and expenditures - at BGN15.41BN. During the negotiations with the fund next week the Finance Ministry will have to justify the projected revenues for each specific budget item. Moreover, it should explain how will budget revenues be influenced by the introduction of family taxation and the reduction of profit tax and of natural persons' income tax. The money earmarked for education, healthcare, social care, and financing of infrastructural projects - in the expenditure side of the budget, will be scrutinized. Special talks will be held on the Cabinet's intentionto raise the minimum wageby 25 per cent. Mr. Flickenshield's Mission and the Government failed to reach an agreement on that issue in July 2004. Thus, the matter remained to be settled during the negotiations starting on September 15. The reason for the dependability between these two indicators is that the most important issues to be discussed again by IMF experts and the Cabinet will be the deficit in the current account of the balance of payment and the budget deficit. The two indicators are closely bound. But if the current account deficit is lower than in 2003, the IMF might agree to lower revenues into the 2005 budget than expenditures. According to the economic dicta of the IMF, the reduction of budget expenditures is a result of limiting domestic consumption, which in itself is a certain indication about shrinkage of imports. This means only one thing - that the outflow of foreign currency from Bulgaria decreases. Thus, the danger that BNB's reserves may decline is eliminated and the stability of the currency board is retained. The problem,however, is that neither of the two budget disturbers has shown any improvement. Back during its visit in April 2004 the IMF pointed out that the quick growth of consumer credits resulted in higher imports, and hence - to an increase of the current account deficit. Meanwhile, in order to please the IMF, the BNB initiated a series of measures to restrict crediting. E.g. commercial banks were forced to keep on interest-free accounts with BNB mandatory minimum reserves of 4% on the attracted money, repayable after more than two years. Moreover, the credit institutions were banned from raising their equity capital by the amount of their current profit. A new credit register was introduced as well, including all released bank loans. The aim was to reduce the annual growth of credits (mainly consumer loans) to 35 per cent. However, the result of all those measures proved to be unsatisfactory. Within a year - from July 2003 till July 2004 - the aggregate amount of launched credits increased by 53% (from BGN7.73BN to BGN 11.83BN), i.e. as much as within the July 2002 - July 2003 period. The bad news isthat the growth of consumer credits doubled. From July 2002 till July 2003 their volume increased by 35.4% (from BGN1BN to BGN 1.34BN). A year later - from July 2003 till July 2004 loans to citizens rose by another 71%, exceeding BGN2.3BN in end-July, 2004. Considering these indicators it is almost certain that IMF's next Mission will insist on new restrictive measures, for instance increase from 4% to 8% commercial bank's mandatory minimum reserves on the attracted money, repayable after more than two years and introduction of specific liquidity coefficients.Due to the hike of fuel pricesand the import of consumer goods, stimulated by the banks' loans to citizens, the current account deficit has remained unchanged. It was 8.6% of GDP in the end of 2003 and is expected to reach 8.8% of GDP in end-2004. According to some analysts, however, it would exceed 9% of GDP. In April 2004 the Agency for Economic Analyses and Forecasts pre-estimated the current account deficit at 7.6% in 2005. Due to the rising prices of fuels and the growth in crediting, that forecast has already been amended. The agency's experts now predict the current account deficit at 8.3% of GDP in 2005. With such expectations the Government will face difficulties when trying to convince Mr. Flickenshield and the IMF experts that a deficit should be projected in the 2005 budget. Most probablybargaining will again be aboutif the Treasury should end 2005 flat or with a surplus. Negotiations will be obviously quite complicated, as parliamentary elections are due next budget year. This means that as early as this autumn the ruling majority - the National Movement Simeon II (NMSII) and the ethnic Turks' Movement for Rights and Freedoms (MRF) - will start exerting pressure on the key ministers to raise pensions, wages and infrastructural projects, aimed to temporarily decrease unemployment. These pre-election expenditures have never been to the liking of the IMF and its experts have always tried to make the government restrict them.

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