THE CREDIT EXPANSION SHOULD BE RESTRICTED
PROFESSOR GARABED MINASSYAN, MEMBER OF BNB GOVERNING BOARD, TO THE BANKER WEEKLYProfessor Minassyan, according to statistical data, there has been a BGN2.8BN deficit in the Bulgarian foreign trade balance for the first seven months of 2004. This deficit is expected to reach BGN5BN at year-end. How would you explain that?- In fact, the balance of payment showed an expected deficit on the current account which includes mainly the commodities and services trade balance. This is something to worry about, because it means that the currency amounts draining from the balance of payment current account exceed those that flow into it. The deficit has to be financed somehow. The question is why does it happen this way, can it have any negative effect and what could be done?The good news is that the deficit on the current account is entirely financed by excesses on the financial account. The biggest part of them is formed by the inflow of foreign investments which were 50% higher in the first half of 2004 compared to the first half of a year earlier. The excess is due to a great extent to the single act of selling the Bulgarian Telecommunication Company (BTC). The financial account also includes the new issues of the foreign debt. If we divide the debt into public and private, the public one has been constantly diminishing in the past years both relatively and absolutely, while the private one has been increasing. It is formed as a debt of companies and enterprises and to a smaller extent - of banks. A great number of these companies are subsidiaries of foreign companies, but they manage to issue foreign debt, too. Our currency law is extremely liberal in this respect and gives freedom to all economic agents to transfer currency across the border both in and out of the country without being asked for explanations. That is how the forming of a private foreign debt becomes an important element of the financial account. This new private foreign debt finances the deficit on the current account, too.The other good news in the structure of the balance of payment is that the Bulgarian currency reserves are growing. The worst comes when the deficit on the current account cannot be entirely financed by the inflow of currency due to foreign investments and should therefore be covered by the currency reserves. This is what happened in Argentina. In Bulgaria, regardless of the big deficits on the current account, the currency reserves keep growing and that brings some relief that the processes are not going on bad.Yet, is the Bulgarian economy endangered if the deficit on the current account keeps growing?- I can assure you that there are no reasons to worry about that because, as far as the currency flows are concerned, the net inflow from abroad is eventually positive. It is this inflow that is used to cover the currency reserves. There are also a number of other positive elements in the development of the Bulgarian economy. Firstly, the registered 6% growth of the GDP. Let's take a look at the turnover on the local currency market - some EUR120MN-EUR140MN circulate there every day. Until a year ago, the turnover was twice smaller. It is also indicative that there is hunger for credits, mostly in the real sector. The main part of the loans goes to the corporate sector which succeeds in convincing the banks of its ability to use them rationally. Moreover, their redemption is not delayed. The borrowers manage to circulate the money and profit sufficiently in order to pay off the credits. There is a very small percentage of delayed credits - just 2 to 5 per cent.But if the deficit keeps growing until 2007, won't it be a problem for the country's integration into the European Union?- There are no great chances for a relative increase of this deficit. Of course, it is possible. In the trade deficit both the import and export have increased. During the first six months of 2004 the export has grown by 10% and the import - by 15%, which caused the deficit in the trade balance. There are other positive things, too - let's say, there is a serious growth in the revenues of tourism which becomes an increasingly active economic activity. These revenues are expected to grow further.Isn't the growth of import at the expense of export an indication that Bulgarian commodities are not sufficiently competitive?- This is a sore spot with many pros and cons. Bulgaria offers good resources for economic activities. The human resource is relatively cheap compared to Europe but we are confident that our quality is not worse than the European one. This is attractive for the foreign investors. As Bulgaria goes closer to its full integration into the EU, all administrative obstacles will be removed and the investors will be even more attracted. Time going by, we become more adapted to the European conditions. We develop a better taste for the higher quality. I am totally convinced that the quality of life in Bulgaria is getting better.In your opinion, are there good reasons for the critics on the part of the International Monetary Fund (IMF) towards the credit expansion?- There is definitely a credit expansion in the country. In the last year credits have been growing by 50% every month. The numbers are too big. Usually a growth of some 30% is considered a good one, while below 30% is indicative for the existence of other problems. However, 50% is too much indeed. On the other hand, the credits/GDP ratio is falling behind. We started from an extremely low base with quite a narrow crediting activity. In terms of all criteria for assessment of the level of crediting business, Bulgaria is far behind the developed countries. The crediting activity should be much higher in order for the country to reach a certain level of the credits/GDP ratio that corresponds to the modern economic development in western countries. However, what is disturbing here is the speed by which the crediting activity is growing.Is this speed reasonable?- When it comes to our relations with the IMF, we may talk about a kind of a syndrome of the exacting parent. You know, a child never wants to obey the restrictions that his parents impose. And that makes the parents more suspicious of him. What I'm talking about has something to do with the traditions in this country. All theoretic studies in this field indicate that present cannot be separated from past, that traditions play a role in the social and economic life and changes do not come at once. Here, traditions are related to the behaviour of the creditors and the way of thinking of the borrower... These are inert things that cannot be changed within five or ten years.You think that Bulgarian people forget quickly?- Yes, they do forget quickly. We forget that we broke our heads a decade ago and we now say - no, we'll be careful with the credits and will not let it happen again. With regards to the crediting, there are both positive and disturbing points. The positive are that there is hunger for credits which comes mainly from the real economy. This hunger for money is positive, because the money is not taken for free but is paid off, i.e. it is used efficiently. At the same time, the number of credits launched is growing too fast.Which type of credits cause more worries - the corporate or consumer ones?- There are reserves for each of them, but this is not the point. Statistics is clear that the number of unsettled credits is insignificantly small.For the time being...- Yes, for the time being. This is within the competence of the central bank.And what will happen later with the great number of consumer mortgage credits, many of which may face difficulties being served?- The number of these credits is not small indeed. In their analysis, the IMF and the central bank show that they worry about that. That is why the Bulgarian National Bank (BNB) holds the view that such a long lasting growth of credits should be reduced in order to avoid the events from about a decade ago.The Fund blames Bulgaria for the unrealistic 2005 budget revenues, as well as for the considerable budget surplus. What do you think about these reproaches?- This phenomenon started during the ruling of Ivan Kostov whose cabinet deliberately offered low budgets in order to provide itself with more freedom. The present government adopted the same tactics because it is convenient. Tax collection grew more active, but revenues should be used adequately. The utilisation concerns the implementation of some vital functions of the state that relate more to the long-term development of the country - education, healthcare, judicial system. These higher tax revenues may be used rationally but they should be planned. If we look at the dynamics in the state budget deficit,there is always accumulation of the excess of revenues over expenditures. In the end of the year all the money is poured into the market and that is not good since the proportions get distorted.Is Bulgaria ever going to reconsider the Fund's role of a supervisor and exacting parent whose recommendations it is obliged to take into account? Maybe it would happen in the historic year 2007?- Your question is quite relevant, because every confident person considers the presence of a supervisor teasing and even insulting. But that has been our own fault in the past. From a professional point of view it is absolutely the same who will make recommendations and how they will be accepted. What is important is that these recommendations are appropriate from an economic point of view. But this is our history and we should not forget the syndrome of the bad child who gets mischievous when left alone. In the last 15 and more years, our history showed that whenever we did something we did not do it well. It happened with the moratorium on the foreign debt payments imposed by Andrei Loukanov. We remained isolated from the financial world when we were in the greatest need of fresh resources. The second time was in 1995 when we said we were wise enough, we knew everything and were able to do everything, so we did not need the IMF. Then we tried everything to make them sign an abortive agreement. The Fund is not a perfect organisation but it did us much more good than evil. Do you think that the separation from the IMF will come as a result of a political decision?- No, this is a natural process. We are already near a decision to separate from the Fund. We could draw the line and tell them - we do not need you any more. However, I myself approve the attitude of our government which requested help from the Fund. The agreement that we are going to sign with the IMF does not stipulate financial proceeds. We have given up getting financial assistance, but we need the Fund as a consultant. Because the IMF's commitments to us are very much a guarantee to the foreign investors that things are going on well here.