The Budget Must Be Updated
Krasen Stanchev, founder of the Institute for Market Economics
There is a general push to nationalization and overregulation, which is something like creeping communism or at least statism.
Krasen Stanchev, founder of the Institute for Market Economics
Mr. Stanchev, we have been in a state of emergency for a week because of the coronavirus. What are your estimates of the damage our economy will suffer?
"It's hard to measure anything right now. It's only been seven days since the ban on business and the closure of cities. So at this stage, we can only make assumptions. For example, if we consider the size of the projected GDP for 2020, the maximum loss (that is, assuming that the national economy can be awitched off like an electric stove) would be slightly over BGN 2.3 billion for this calendar week. 335 million a day.
However, this did not happen. Activities in tourism, culture, entertainment, restaurants, cafes and pubs are close to zero. To these should be added a few more reduced segments-domestic transport, power generation (with a small amount), trade in non-food products in small stores, and medical and educational services. Separately, working time is also lost due to childcare, unpaid leave and forced home office. Given the share of these activities in the economy, with many conventions, it can be assumed that the direct loss per day was from 40 to 51 million levs. I'm probably missing something, but - I hope - it's not fatal.
In the long run - if this rate of contraction persists and my assumptions turn out to be correct, the budgeted positive dynamics of GDP (its growth) for this year will disappear as a probable prospect in 2-3 weeks. Needless to say, this is an indicative look.
The state announced measures to support business - through the Bulgarian Development Bank. Do you think this plan is adequate, will it work?
- For now, the measures, as shown by the closure of Bansko, are like fighting the virus with the police: the prosecutor proposes, within an hour the headquarters decides, and after another 30 minutes the city is surrounded! The audience applauds, but the viewers "inside" ... And no one can provide tests to check how many of the fenced in are infected or ill, who they are and where they went before being isolated.
According to this "recipe" - from today to yesterday-a lot of economic activities were stopped. Not that it didn’t have to, but such harshness was not necessary. Many people-both suppliers and users-have already set restrictions, and have also organized compliance with "antivirus" recommendations.
As for "speculation" and price controls - these measures will be an absolute mistake! They can only create deficits in the required safeguards, create new losses for suppliers and provide unsuspected opportunities for corruption. Banning transactions is an even worse policy. And the budget aid queues will burden the government with additional expectations coming from promises to compensate 3/5 of the wages of the unemployed through the Employment Agency.
What exactly bothers you in this case?
- At the moment nobody knows how, on what grounds and for how long the state will have to "distribute" money. What the costs of checking and controlling will be, how long the procedures will take and who exactly should be given away the money is also a complete mystery.
Assuming at least 150,000 people are affected, what money will we need to cover the damage, assuming at least 150,000 people will be affected?
- A few days ago, at a forum, I proposed a long-term abolition of corporate tax. The idea is old, not only mine and is based on sound economic logic. The accounts show that there will be no long-term negative consequences for fisk. Employers suggested something similar, but in the form of a tax break. The managers - in the person of Mrs. Menda Stoyanova - are also projecting on the "tax vacation" option until July, plus delaying payments for 2019 by one month!
So the fiscal reserve will withstand the pressure?
- Today everything is straining the fisc! Starting with the contraction of activities, going through the use of the reserve and getting to the activities of deterring, limiting and treating the infection. February's joy of budget surplus is no longer relevant. Therefore, the budget should be updated immediately. The priorities are clear-establishing the number of infected, limiting the spread and treating the sick patients! Who knows why, so far, only salaries and supplies spending is provided. Only the tests (for every Bulgarian citizen) and the equipment (at today's prices) will swallow at least BGN 250-300 million. If this money is not obtained, in ten days Sofia or some other major city will be "arrested" and will remain so until ... Nobody knows for how long. In other words, our budget needs to be updated swiftly. And, if there is no desire to reconsider policies, we should at least grasp the obvious - the budget cannot finance everything because it is only 37% of the economy. And the money for unforeseen and urgent expenses is only BGN 81 million. In one sentence, the fiscal reserve will reach us in 100 days. And the money for unforeseen and urgent expenses is only BGN 81 million. In one sentence, the fiscal reserve will end in 100 days.
Do you think that in a state of emergency there is a risk of a biased distribution of financial injections to the business?
- I'm sure. If the BDB is to participate in any such scheme, it must be in the form of the so-called "APEX" - credit lines known in the EBRD's practice as risk-sharing schemes. Money should not go through one bank only, there should be clear procedures and strict supervision. In addition, the BBI should reject at least two of this year's lending targets - infrastructure projects and the EU Green Plan.
Do you expect the banking sector to suffer heavy damage?
- And here everything depends on the duration of the pandemic. At the end of 2019, the sector's share relative to GDP was above 96 percent. Loans and receivables from the non-governmental sector - 50% (approximately BGN 55 billion), equity - BGN 15 billion, and liabilities - about 85 billion. If I am right that the economy suffers direct losses of at least BGN 40-50 million a day, there is no way that the stability of the banking system will be affected. Therefore, the measures offered by the individual banks, the banking association and private enforcement agents are imperative. To protect the integrity of the system.
The most important thing in this situation is not to block the economy further. And part of the initiatives I have already commented on, "fighting the virus with the police" and focusing only on the short-term effects will lead to that. And then banks will be affected by this activism.
There is a general urge for nationalization and over-regulation. Overregulation is something like creeping communism, or at least statism.
Such political ideas are always gaining ground and meeting public support in a pandemic. Unlike natural disasters and monumental economic misfortunes caused by governments, as was the case in 1996-1997.
Prior to the outbreak of COVID-19, one of the big topics was Bulgaria's membership of ERM II and joining the euro area. Is the outlook for a successful end to the July talks realistic given the new situation?
"I don't think anyone knows what realistic is." I guess this will be on the agenda by inertia. The weight of the argument that membership will facilitate access to the ECB resources is likely to increase. But I do not know if there will be a Finance Minister of the euro zone who will dare think of such a matter before the pandemic is over.
Does the accession to the Monetary Union lose sense if Germany, France and Italy are among the most affected by the virus?
- The euro's problems are not related to the pandemic. But it deteriorates the macroprudential - to use this Euro jargon - of all EU Member States. To make things right, Brussels has to give up its creeping statism, which has persisted for decades. To abandon policies that allow government intervention in economies and impede both competition between Member States and the competitiveness of the Union as a whole.
How long would it take for the Bulgarian economy to recover and what should be the new business incentive measures?
“It depends how deep we will fall. In the past recession of 2008-2010, recovery took about two and a half years.”