Economic Update

With news last week of a record high in Bulgaria’s consolidated budget surplus, there came both a sense of well-being and an immediate dispute. With a delegation from the International Monetary Fund (IMF) in town until December 16, the debate over just what to do with this surplus took place right under the watchful eyes of the global financiers. And, just as the government made strong commitments to spend the extra, the Fund urged caution and a further tightening of belts.

Finance Ministry data issued December 7 showed that the budget surplus had reached a record high of Lv1.475bn ($1.00bn) at the end of October. This was also a sharp rise on September’s surplus of Lv1.299bn ($884.85m) and left the fiscal reserve up by nearly Lv260m ($177.11m), month-on-month, to a healthy looking Lv5.835bn ($3.97bn).

The same figures showed that government budget revenue amounted to Lv8.434bn ($5.75bn) at the end of October, with tax revenue totalling Lv6.912bn ($4.71bn). Spending, meanwhile, stood at Lv4.75bn ($3.24bn).

Thus, when Bulgarian Finance Minister Milen Velchev gave his regular on-line chat on December 8, he said that the expenditure of an additional Lv300m ($204.35m) by the government this year would still leave an end-of-year surplus of some Lv150m ($102.18m). This was a comment aimed at the IMF, who failed to reach agreement with the government over its plans to disburse this so-called “Christmas bonus” when it last came to Sofia earlier in the autumn.

Velchev has been in talks with IMF mission leader for Bulgaria, Hans Flickenschild, since his arrival in country on December 2. The talks, part of the first review of the two-year standby agreement between Bulgaria and the Fund, are to focus on what to do with the budget and above all, with expenditure policy in 2005.

A Bulgarian plan to spend extra on education has been criticized by the IMF for being well intentioned, but misguided. Parliament is yet to decide on the proposed spending of Lv135m ($91.96m) on the computerisation of educational establishments, research, repairs and transport to village schools.

Flickenschild’s delegation argues that there is ongoing concern over the country’s external vulnerability and there are also worries about economic overheating. In such circumstances, plans to spend should be questioned.

“We need to see how one can, all of a sudden, very late in the year, throw in an additional Lv135m to spend on education without there being, as far as I know, any specific purposes for this money to be spent,” Flickenschild told reporters last week.

At the same time though, the government has also been pushing plans for a hike in the minimum wage.

“We will insist on a monthly minimum wage of Lv150 ($102.18) to the IMF mission, as set out in the government-proposed 2005 national budget,” Labour and Social Policy Minister Hristina Hristova told reporters on December 6.

Hristova argues that the Lv150 – a Lv30 ($20.44) increase from the current level – corresponds more closely to the real minimum price of labour in Bulgaria. In addition, the government argues, this level would help reduce unemployment, as low pay is currently deterring some from taking up job vacancies. The hike would also have the effect of raising tax revenues.

However, it appears these arguments do not stand well with the IMF. Flickenschild told reporters that such an increase in the minimum wage “would be a step backward from what [the government] had indicated at the last visit”, back in September.

Yet the Fund leader did hold out some hope that a negotiated solution on this issue was possible, saying that he had received “some indications about flexibility on the government side”.

The other major outstanding issue the IMF is seeking to tackle is that of bank credit. The Bulgarian National Bank (BNB) did take a number of measures some weeks back to try and squeeze credit growth, but, Flickenschild said, “They have so far not shown much success. We knew it would be difficult in a situation of a currency board and open capital account to be successful with these measures.”

In measures that came into effect on December 6, the BNB decided to raise to 8% the rate of minimum required reserves on deposits that the commercial banks are obliged to keep with the central bank. At the same time, the BNB also decided to exclude the banks’ cash holdings from reserve requirement purposes. These steps are expected to gradually drain some Lv225m ($153.27m) of liquidity from the sector.

As the IMF delegation head suggested, however, that may not be enough and it may also be too gradual a decline. BNB data shows that the credit boom has been largely unchanged over the last few months, with October alone showing a credit expansion of some Lv420m ($286.1m).

The credit growth may also not be doing the balance of trade any favours either, as the latest preliminary National Statistical Institute figures showed a Lv3.921bn ($2.67bn) deficit for January-October this year. In US dollar terms, the trade deficit increased from $1.791bn last year to $2.456bn for the first ten months of 2004. Demand for imports surged 18.5% over the period, with credit boom likely to be responsible for a significant slice of this.

Much food for thought then as the talks continue between the government and the IMF. Finding a compromise may not be easy, but seems very necessary if markets and lenders are to find some reassurance.