Банкеръ Weekly



We Will Resume Negotiations when We See Conditions for Progress

Jerald Schiff, IMF Mission Leader for Bulgaria to the BANKER weekly

Mr. Jerald Schiff, 43, is married and has a son. His professional career with the IMF started in 1989. So far he has had the opportunity to work with the relatively stable economies of Lithuania, Latvia, Estonia. These countries have also introduced the currency board arrangement. Mr. Schiff has a good knowledge of the Russian finances too. He has been directly monitoring them since the 1998 crisis until March 2001. Since April 2001 the present head of the IMF Mission for Bulgaria has been working as advisor to Mr. Michael Deppler, who is Director of European Department I of the Fund, a figure that has acquired an emblematic meaning for Bulgaria. For it was exactly Mr. Deppler who in 1996 together with Ms. Ann McGuirk served an ultimatum to the government of Mr. Zhan Videnov requiring that the government closes Bulgarian banks, restructures the real sector and introduces the currency board arrangement.

Mr. Schiff, in your judgement, does the Bulgarian Government have a prepared budget and a macroeconomic framework for 2002 or is it waiting for the IMF to provide it with IMF's data?- There are people in the Government working on the macroeconomic projections. It is with them that we have been discussing the issues on which we differ. According to me we managed to agree on the point that the budget deficit for 2002 should be very small. Now we are trying to agree on the measures to reach that goal. We focus on the need of implementing structural reforms that will provide for expenditure cuts. We try to understand where the resources for the increase in social expenditures will come from, given the fact that the Government insists on tax cuts. We want to make sure that the budget is realistic and is not based on assumptions that will never come true. It makes no sense to draw up a low-deficit budget if it is not going to be applied in practice.

Is there a danger of not signing an agreement?- I am an optimist. I think that at a certain stage there will be an agreement. Of course one can never be sure how discussions will run. I think the Government wants an agreement and the IMF wants to support the Government. This makes me believe we will come to an agreement.

Who were the ministers that you found it most difficult to talk with?- I think that we struck good relations with all ministers I have met so far. The new Government however needed some time to get used to the way we work. I think that in the beginning the ministers were a bit surprised by the depth we go into on each and every issue and by the detailed information we require from them.

What does the Government need to do before the IMF Mission decides to come back to Bulgaria?- We are ready to come back as soon as we are convinced we are going to make a progress with the talks. For the time being we have reached an understanding on the general issues only. The Government needs to decide however what it wants to do in certain areas, as well as announce its measures in details.At that point we haven't stated that the Government needs to do anything special. Simply we would like to feel that there are good prospects for progress.

What are the issues where your views differ most from those of the Government?- Our views on the macroeconomic framework for 2001 - the GDP growth and the inflation rate - we largely view them the way the Government does. However, our views on the external economic situation are not the same. We think that the GDP growth for this year will be between 4 and 4.5% (editor's note: the projection in the Year 2000 macro framework is for 5.2%). Our analyses show that inflation may reach 4 per cent.According to us the trade balance and the current account deficit will perform considerably worse than we initially projected. We are witnessing some negative trends in the import and the export. And because of that the deficit we project for the current account is higher than the projection of the Government. Our estimations show that by the end of 2001 the current account deficit may go beyond 7% of GDP. These projections however do not account for the tragic events that took place in the U.S. two weeks ago.As regards the current account deficit for 2002 we are reconsidering that indicator at the moment. We analysed it before the events in the U.S. occurred and at that time we thought the current account deficit would see a gradual improvement over the next year. Now we need to examine this issue more carefully. Probably both import and export will be lower. There is still a great uncertainty concerning oil prices. Initially people thought oil prices would soar dramatically and now they are even going down. We are going to profoundly analyse these issues over the coming months.

What should the level of the budget deficit be in order to preserve the financial stability in the country?- For this year the budget deficit has been planned at the rate of 1.5% of GDP but I think the Government should strive at a lower budget deficit. For next year we would like the budget deficit to be much lower than 1.5 per cent.

Have you come to a common view with the Government on the level of subsidies and the way they will be allocated between municipalities, the district heating and the NSSI?- All these issues are under discussion. Indeed it is difficult to agree on only one budget element, like subsidies or taxation policy. We need to examine and discuss all elements. We try to draw the Government's attention to the important structural reforms which have been postponed for quite long, for example reforms in the field of district heating, the energy sector and the railways. All these have been under discussion for quite long now and the implementation of each of these reforms requires substantial government subsidies. This poses further difficulties on the way to reaching other objectives, like tax cuts or increases in social expenditures.

What budget savings and in what areas has the Government committed itself to make during the next year?- Many of these issues are based on the assumption that we have come to an agreement with the Government, and since we haven't I am not able to answer this. I think the Government is already aware of the need to determine its priorities. May be this is the reason for the slow pace of the talks. I do not think it is our business to say specifically which program should be financed and which should not. All we can do is to point at the financial implications of the different types of government policies.

Is the Fund inclined to consent to the introduction of a corporate profit tax zero rate on reinvested earnings?- In the past our program included a gradual reduction of corporate profit tax rates - by 5% each year. The IMF still supports that opinion. We are not quite inclined to accept a zero rate on reinvested earnings because we think the budget expenditures will be quite big and we are not sure this is the best way to encourage investment. Actually the process of changing the tax legislation and the tax administration may prove quite complex. We would not like the Government to be hasty. Eventually it may turn out that measures taken by it make it easier for some companies to avoid paying taxes. We would rather prefer to see a gradual reduction of corporate profit tax rates.

In your opinion will the tax breaks help in getting the grey economy out in the daylight?- Usually the grey economy is bigger when taxes are too high. Its size will grow whenever the business community faces too many administrative barriers like many license regimes and big corruption. These factors push businesses in the direction of grey economy. And while lowered taxes may bring the economy out in the daylight the high social security contributions are one of the most important factors that contribute to the thriving of the grey economy.

How do you assess the increase of the minimum wage from BGL85 to BGL100, which will lead to higher costs for the employer?- We have openly said that we do not approve of that increase. We prefer to see the previous system preserved, where the minimum labour wage was tied to the public sector wages. This made the growth of the minimum wage clear, easy and predictable.Going back to the question about the grey economy, I think that an increase of the minimum wage may only make employers return to the grey sector. Many people in the Government do not share our opinion (editor's note: but most of the businessmen do). Concerning the budget I think the impact will depend on whether the social benefits are directly tied to the minimum wage. Because in that case, parallel with the rise of the minimum wage a number of benefits will automatically rise and to a large extent this will incur absolute expenditures for the budget.

The 2002 payments of Bulgaria in service of its foreign debt amount to USD 1.4 billion. Is there a danger that the country may delay the servicing of these payments should it fail to sign an agreement with the Fund?- I do not think at this stage there is a danger for Bulgaria stopping the servicing of its debt. Your country still has a considerable level of dollar reserves. Our aim is to ensure an implementation of such a policy, which will guarantee that the country is not going to fall into a crisis at all.

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