SUPREME ADMINISTRATIVE COURT'S RULING ON ELECTRICITY HIKES IS UNFORTUNATE AND EVEN IRRESPONSIBLE
IMF WANTED RESTRICTIONS ON CREDITING TO BE APPLIED WITH A RETROACTIVE EFFECTHans Flickenschield, IMF Mission Leader for Bulgaria, to the BANKER WeeklyMr. Flickenshield, the IMF mission completed on March 16 was short and successful. What agreements did you reach with the Government?- During this mission we managed to achieve what we couldn't do in December 2004. We reached an agreement with the Government on a programme that we can support in 2005 and on the major outstanding issue - fiscal policy. The other issue which we were discussing in December has resolved by itself by the Cabinet's decision to raise the minimum working wage by 25 per cent. However, we convinced the Government that this increase will have some effect on the economy - it will result in a higher domestic demand. Therefore, fiscal adjustments will be necessary in order to restrict it somewhat. So we agreed to estimate the effect of the minimum wage increase when reporting the 2005 budget fulfilment and a budget surplus of 1% of the gross domestic product (GDP).You know that the 2004 budget reported a surplus of 1.75% of GDP which was a pleasant surprise for everyone concerned, including the Government, because in December we could not foresee such huge revenues in the last month of the year. Considering this positive result for 2004 it was easier for IMF's present mission and the Cabinet to agree on a budget surplus of 1% of GDP. Moreover, expenditures will be 9.5% higher than in 2004. Thus, the Government will be able to spend more and nevertheless post a budget surplus in the end of 2005. How much will the public investment company spend on projects? - As Finance Minister Milen Velchev announced today, the initially projected amount of BGN260MN was raised to BGN340MN due to the good financial result for 2004. After talks with us, however, the Government agreed to reduce it by BGN120MN to BGN220MN. The money will be spent to finance projects, specified by the ministries. Most of the expenditures will be made in the second quarter of this year, i. e. before the elections. Did the Government undertake any specific commitments on privatisation deals?- No, there were no new commitments. The divestment of the electricity generating companies should be completed. The privatisation of Bulgartabac Holding should continue but we can not expect much before the elections. This is a debatable political issue and I do not believe the Cabinet would be willing to renew debates on it as they have already caused turmoil. On the other hand, the Government is aware that in order to avoid closing down cigarette factories and making everyone unemployed, they should be restructured until 2007 when they will be facing the competition of EU cigarette makers. And the best way to restructure them is sell them to a strategic investor from the branch that could make them competitive. Perhaps you are contented with the measures for restriction of crediting, undertook by BNB in February. Anyway, don't you think they are too severe?- The IMF approves of BNB measures. They are in fact a part of the programme we agreed on with the Government. Regretfully, due to legal concerns, the central bank could not impose these restrictions as of the beginning of 2005 and they won't be applied in the first quarter of the year. I don't see why the measured approved in February couldn't be applied with a retroactive effect as of January. BNB's lawyers, however, expressed some concerns and the central bank decided to enforce them as of April 1. This, however, opens a window for banks to ramp up crediting without punishment. They may even extend fictitious loans that will be paid back till April in order to open room for new credits. I believe also banks whose credits are less than 60% of their assets, should not be exempt of the restriction to increase their loans by 6% on a quarterly basis. Don't you think that the measures should have been directed towards consumer loans rather that towards all credits?- As a macroeconomist I do not like to set specific measures and assess their effect on various groups. But you are right that consumer and mortgage credits reported the highest growth. BNB has already announced a measure for reducing the rise of mortgage loans. This is the requirement that the size of a mortgage credit may not exceed 70% of the value of the pledged real estate. You could have imposed measures like those in Romania, for instance, where banks are required to make an income test of the borrower and the loan may not exceed 30-35% of his annual incomes. Such a requirement could be introduced in Bulgaria as well in order to cut down crediting in that segment. Which are, according to you, the greatest risks to the country's economy? Is there such a danger this year? Is it the elections?- I hope the programme we managed to agree during this mission will reduce the risks to the country's financial stability, which could otherwise be jeopardized by the forthcoming elections. I believe the programme signals both Bulgarian people and the international community that the country's economy and finances will be stable while politicians are occupied with the carnival of the election campaign. Irrationality may reign in the political environment, but the economy will be managed properly.