IMF INSISTS ON ITS RECOMMENDATIONS
THERE IS A BGN455MN GAP IN THE CABINET'S CALCULATIONSJerald Schiff, Head of the IMF Mission to Bulgaria, to the BANKER weeklyMr. Schiff, what did you dislike about Bulgaria's 2003 draft budget? You claimed that the revenues expected from social benefits and VAT are exaggerated. It seems that you failed to convince the Cabinet of the need to correct their amount?- According to the draft budget, the amounts expected to be collected from these taxes are higher than what we forecast. I'm not sure whether we've managed to convince the Government of our opinion, but there are a few sectors in which our views differ. You mentioned some of them - social insurance and value-added tax. In terms of revenues, the Government plans quite a great increase of revenues from social insurance because it relies on the new system of minimum threshholds and the registration of labour contracts. Besides, it expects to collect much more overdue liabilities to the budget than it used to do in the past.All these forecasts may not come true. I don't say they are impossible. But the budget should not be based on such forecasts. We also have disagreements on the amount of expenditures. Some aspects of the expenditure part of the draft budget stipulate lower expenses than those projected for the year 2002. The problem is that it's not clear how these expenses will be decreased in practice. For example, financial assistance to the hospitals is being reduced. Our question is - how will the Government do that? By closing hospitals or making other economies? We have not been given a reasonable answer to this question yet. Hospitals may be allocated less money, but if no other measures are taken simultaneously, this will only increase their indebtedness. The same holds true about the municipalities. They may be launched less money, but if no suitable changes are made in them, local authorities will become insolvent or accumulate more debts. Should the budget be adopted in the way it is now, at year-end we'll see that the budget deficit has become considerably higher.How much do you expect the budget deficit will grow above the level planned in the 2003 draft bill (0.7% of the gross domestic product)?- I think the deficit may reach and even exceed 2 per cent. If the Government succeeds in controlling it at lower levels, it may be compensated by higher debts in various sectors. And this is not a method for keeping the deficit low.What is the difference between your forecasts for the budget and the Government's projections?- It's the difference between 0.7% and 2% of the GDP. The exact figures are changing in the course of the talks, that's why I do not want to say concrete numbers. You can see that the difference of 1.3% of the GDP is an amount quite higher than all those amounts that were mentioned (BGN455MN).One reason you said you do not accept the Government's calculations are the unconscientious taxpayers in the country. Do you think tax evasion has increased in Bulgaria lately?- Data for the past five years show that taxpayers have become less conscientious. Actual revenues are constantly decreasing compared to their potential levels. These levels are calculated on the basis of the highest possible tax revenues compared to the tax rates and the information about the scale of economy. In each of the past four or five years we've been witnessing insufficient revenues from a number of key revenue sources - social insurance for example. This is not a new problem, but it deserves attention because it caused a lot of pressure this year. If no measures are taken, the problem will become more profound.Would you reveal the results from the revision you've made recently - is the Government fulfilling its commitments under the stand-by agreement? Which terms have not been kept?- All commitments undertaken by June 30 and September 30 have been fulfilled. There are also 13 structural criteria. Ten of them have been met, while the other three have not. However, two of them will be met quite soon. One requirement was that the Cabinet adopts the new law on Energy, but it appeared a more complicated process than we had expected. However, as a whole I think Bulgaria has made a progress in the energy sector. The draft bill is almost ready, so we don't think it is a big deal. The other requirement was the accreditaion of hospitals which is an important part of the healthcare reform. It took more time too, but we were assured that the process would be over by year-end. The third requirement was the signing of an agreement for reduction of duty tariffs in accordance with their levels in the European Union (EU). This requirement will not be met, but only because the union opposed to changing the duty system before the country joins the union.The IMF has often praised the Bulgarian banking sector. What is your opinion of the stability of the financial system?- I think that the Bulgarian financial system is still developing very well. Crediting grows very quickly. That's good, but, on the other hand, the bank supervision should be very careful because when banks begin to launch more credits, they take more risks and there may be more delayed payments. Up to now, though, there have not been signs that the banks' credit portfolios are getting worse.What may be the consequences from the fact that the mission failed to reach the expected agreements?- When I arrived here, I realized that this would be a difficult mission. I hoped we could bring it to a successful end. I'm not so surprised that we failed, but I have not lost courage. In the past, the IMF has sometimes made several attempts before reaching an agreement. We definitely want to keep our cooperation with the Government and, as far as I know, the Cabinet still wants to have a joint programme with the Fund, too. That's why we'll have to find a way to reach an agreement. The results from the mission should not be interpreted as a relationship getting worse. It simply means that we have not come to a complete agreement.Will there be an additional mission of the IMF because of the budget?- We'll need to stay in touch with the Government after we go back to Washington. We may come again, but that's not obligatory. What is more important is that we keep talking and come to a solution.