It all started when figures released by the Ministry of Finance earlier this month showed that budget revenues were 11% up on the same period last year. The data also showed that the budget surplus had reached 445m euros by the end of August.
According to financial analysts, this unexpectedly high budget surplus came on the back of conservative budget planning and improved tax collection.
Good news for Bulgarians, one might have thought, yet subsequent talks with the IMF in Washington early in October, which were meant to give the government more leeway to spend part of the surplus on infrastructure and education, failed to produce a consensus.
In an interview with the OBG on October 11, Minister of Finance Milen Velchev explained why the government has been seeking to revise its fiscal policy.
“The fiscal stance agreed with the IMF in June,” Velchev said, “was based on higher current account deficit projections. We expected the current account deficit to widen from 8.6% to 9% of GDP. In the meantime, a series of monthly balance of payments releases shows that the current account deficit will be significantly lower than originally expected.”
The current projection is that the current account deficit will be 8.3% of GDP. Meanwhile, foreign direct investment (FDI), which finances much of the external deficit, is expected to double from last year to 2bn euros – almost 10% of GDP and well in excess of the expected current account deficit.
According to a recent BBC monitoring report too, Stanley Fischer, the former first deputy-managing director of the IMF, has reportedly accepted Velchev’s view that the projected current account deficit poses negligible risks to the national economy. Instead, Fischer said it opened up new opportunities for the country’s fiscal policy.
Yet, the current IMF desk-chief for Bulgaria, Hans Flickenschild, reportedly has a different view. He told the Bulgarian Darik radio that the Fund would object to any efforts by the government to widen additional budget expenditures from the initially imposed cap of 1% of GDP to around 1.8%.
In addition, he also issued a warning over plans to hike the country’s minimum wage.
“The government would have problems with signing the new precautionary agreement if the plan for raising the minimum wage by 25% next year were implemented,” he told listeners.
Yet, while the local media has been focusing a lot on the minimum wage dispute as a possible rift between the IMF and Bulgaria, Velchev told the OBG that “The local press is overstating the significance of the minimum wage dispute and that it is not the main item of discussion with the IMF.”
Moreover, he added that a working compromise would be found on this issue which would ensure that the IMF programme with Bulgaria didn’t come off the tracks.
Meanwhile, the government’s plans over the method of allocation of the surplus have met with stiff domestic criticism.
Speaking on October 10, President Georgi Parvanov said that, “The government should not bypass the lawmakers through underestimated fiscal revenues that leave options for discretionary spending at the end of the year.”
Parvanov recommended that the fiscal ministry debate all additional fiscal transfers in a package with the budget for next year.
Reacting to the president’s remarks, government spokesman Dimiter Tsonev told local media that, “The issue of distributing the over-performance of budget revenues has long been solved by the Constitutional Court, which makes the political debate superfluous.”
Tsonev then expanded on this by referring to a Constitutional Court decision made back in 2001. According to this, the Council of Ministers is the body that has the competency and powers to distribute the government budget revenue surplus, if such a surplus exists. Tsonev also said that it was quite natural for such decisions to be made at the party level.
Elaborating on plans for how the surplus might be spent, Velchev told the OBG that, “Part of the surplus, we have agreed with the IMF, will be spent on covering arrears in central and municipal budgetary areas. The rest we are proposing to spend in infrastructure investment and investment in educational infrastructure – such as computers for schools.”
Velchev was also keen to stress that despite this Bulgarian fiscal policy will be more restrictive next year than last year.
“We will end up tightening the fiscal policy between 0.6 and 1.5% compared to last year,” he said.
While the debate is rages on, the government is therefore keenly aware of the need to reassure international observers that this does not mark the loosening of fiscal policy ahead of a crucial election year.
