Банкеръ Weekly

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THE FISCAL RESERVE IS SOMETHING OF THE PAST

MINIMUM WAGE INCREASE BY 25% WOULD BOOST INFLATIONHans Flickenshield, IMF Mission Leader, to the BANKER WeeklyMr. Flickenshield, what commitments has the Bulgarian Government undertaken to fulfil until the next visit of IMF's Mission?- Well, relatively few because we plan to come back in September for an informal visit. The focus of our present visit was the budget preparations for 2005 which we want to discuss in greater detail in the autumn. We also want to discuss with the Cabinet the planned 25% minimum wage increase as of January 1, 2005. So, these two topics are the foremost on the agenda for our next visit. Of course, we'll also look at the economy in general. We'll consider the latest macroeconomic data, how things have been going in summer, is the programme working, is credit spending slowing down and is the current account deficit decreasing.What size of the fiscal reserve would you recommend to the Government?- You know, when we discuss fiscal policy and fiscal reserve and size our discussions never end. Because for us once the money is out of circulation and sits on an account of the Government it doesn't exist anymore. For economists it's the same if the Government draws money from the fiscal reserve or borrows a new credit when financing is needed. Economically it's the same. So, for us the fiscal reserve doesn't exist. I know for politicians it is important to have money sitting there that could be spent, but if you start spending it what you do is increase expenditures and as a result you have a growing deficit. Therefore, one should make the fiscal plans on the basis of what is needed for pensions, for health, for education, defence, investment, these issues, and then see if they could be financed through tax revenue. And the fiscal reserve is something of the past. These are the profits from selling state enterprises, but it is gone. You said the amount agreed under the precautionary agreement with the IMF is 100 million Special Drawing Rights (SDR). Was that size agreed on the Government's request?- Well, it is a nice round number. I was a Government request. If you have seen one of the copies of the letter of intent we had prepared in April, there it was 280 million SDR. But the Cabinet had thought about it again and said it was too big as they did not intend to use that money anyway. So if you don't need that money why have such a large arrangement? Because any financial institution is charging a small commitment fee - about 0.5% annually of the agreed amount of the credit (to be released if needed). So I think it was a clever decision of your Government not to waste that money. What should happen in order to give that money to the Bulgarian Government?- Well, bad things should happen, what we call a balance of payment need. It would be a situation where the balance of payment has a deficit, not only the current account but the overall balance of payment. That would mean that the current account deficit would be no more financed by proceeds from foreign investment and the reserves of the Bulgarian National Bank (BNB) are falling, so the Government needs to replenish the reserves. You know that your international reserves are above EUR5BN and on the background of that amount our 100 million SDR is not that much. So I think the amount of support is not that important and we don't expect it to be drawn at all. It's just a policy discipline for the Government and an advertisement to foreign investors and to the domestic economy and domestic business people that the Government will pursue a responsible policy the next years. Are there mechanisms for increasing the amount of 100 million SDR?- This is a fairly hypothetical issue of course, but we have had such cases in other countries. E.g. at a certain moment a government needs more financing than initially agreed. Then the IMF augments the amount and sets additional conditions for that increase. So, the number is not once and for all and if the Bulgarian Government wants to have a larger arrangement it could have it. But I don't think that would be necessary. Does it mean a new agreement should be signed if the sum is to be augmented?- No, it's not necessary. But programme is usually modified in such cases because the situation is worsened. Then we say: Look you have to take more policy measures to improve the the situation.At the meeting in Parliament with MPs from the budget, economic and social committees on July 1 the deputies tried to convince you that crediting was not the cause for the increase of the current account deficit. And you disagreed. Why?- Because all textbooks of economics tell you otherwise. You had a credit expansion I think of 7% of GDP last month. This means additional money in the pockets of business people and households. And you can can imagine 7% of GDP is going to be spent. And you spend it on goods and services in the domestic economy, many of which are imported. So imports go up.Have you recommended the BNB to consider additional measures for reducing the growth in crediting?- We do not really make recommendations to the central bank. The BNB is a very professional and responsible institution and it looks for alternatives to slow down credit expansion on its own. Nobody wants stop it. Nobody wants a recession. But it should continue going at a lower rate. So, they are looking for alternative measures and the liquidity of assets ratio is one of them. Credit limits have not been considered so far and we are not recommending them. It would be quite drastic, it would distort competition. If all else fails they are always available, but they have not been considered at this stage. According to some analysts, insufficient supply and not big demand on the Bulgarian market is the main reason for the deficit in the current account of the balance of payment. What concrete measures should the Government undertake in order to increase supply?- We want to increase export capacity and the capacity to produce for the domestic market in order to need less imports. We have quite a few measures in the memorandum which you would see soon. But in the structural area it is identical to what the April copy has. There is a lot said about measures to improve the business climate, staring from business registration, licensing requirements, all the various legal aspects of settlements, out of court settlements, judicial enforcement after a judge passes a ruling, saying you have the right. There are whole series of measures that you'll find in the memorandum quickly, briefly mentioned, but they are complex and require an expert input and a lot of legislation, and after legislation enforcement, application, implementation. Are there any privatisation deals that the IMF would insist on being finalized this year?- We hope to see the start of the divestment of electricity distribution companies. We would also like to see some of Bulgaratabac Holding's enterprises privatized. And we want to see some progress in the preparations for the divestiture of electricity generating companies, something that has already been initiated. The two aspects of privatisation are: to make the economy more efficient by passing into private hands, and to cover the current account deficit by proceeds from privatisation deals. For these two reasons we insist that the process of divestment continues. Will you put any specific requirements for reducing the subsidies to state-run enterprises?- We have mentioned that subsidies should be reduced in general, especially for the Bulgarian State Railways (BSR) which announced a hike of its tariff rates. That means it will get more proceeds and less budget subsidies will be needed. Of course there are social commitments and the Government will perhaps have to subsidize from the Treasure part of the fares for the transport of pupils, student and old people, which the company rendering the service is not obliged to undertake. But of course, these things are from the sphere of microeconomics. We would would like to see subsidies decline in general.Why did you oppose so decidedly the planned 25% minimum wage increase? Is it so risky for the State?- Well, why not 50% or 100% increase? You see, 25% is a huge jump for a year. The minimum wage has been raised on several occasions since October 2001 and the total increase is about 40% now. A new 25% rise would result in a price leap, will additionally worsen the current account deficit and will be a hindrance to the decrease of unemployment in the country. A new steep jump of the minimum wage would be hazardous to industry as it would be higher than the speed of labour productivity growth and firms won't be able to pay higher wages and be competitive at the same time. We are not principally against an increase of the minimum wage, although the modern labour market could function without it, of course. Do you think that the planned 25% increase of the minimum wage has been dictated by the forthcoming parliamentary elections?- I don't know what the motives of the Government were for making such a proposal. You should ask the ministers. But this would be a drastic jump indeed and we would like to discuss it with the Cabinet again in September. What is your personal stance about a reasonable increase of the minimum wage?- Well, say 30%, but within three years, which would be 10% annually. Taking into consideration inflation rate, that makes really 6% a year, which is just a little over the level of production growth. But the Government has already made public that decision and it would be difficult for it now to step back from its promise.

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