Winter Chill

Economic News

22 Jul 2010
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As the ghoulish inflationary pressures of past, present and future converge on Bulgaria in the run up to Christmas, people here will be wishing the government had the resources of Santa Claus at its disposal to keep them warm and well fed.



While the economy has been chugging along quite nicely, with growth in the first half of 2005 stated as 6.2% by the National Statistics Institute (NSI), there is mounting pressure on prices from several directions. Like buses, the many causes of inflation seem always to come at once.



For individual consumers, the most obvious worry is the coming rise in gas prices, which are sure to translate into higher central heating and hot water bills this winter. Gazprom, the state gas importer and distributor, has requested from the State Commission on Energy and Water Regulation (SCEWR) a 22.5% gas price hike from October to reflect the steep rise in hydrocarbon prices on the international market.



While SCEWR has suggested such a rise will be allowed, heating companies, already struggling to cover expensive modernisations, have made clear that any such rise in fuel prices will be passed on to consumers. Central heating bills could rise as much as Lv13 (6 euros) per MW/hour in November.



While the global rise in oil and gas prices is affecting inflation the world over, raising transport costs and power prices, Bulgarians must also face the consequences of the successive floods that have caused so much damage to the country this summer. Food prices, which normally fall in August when there are abundant fruits and vegetables, actually rose 0.7% in August, as the flooding damaged crops and killed livestock. Food prices have also been affected by the rise in transport costs.



As a result of these factors, inflation rose to 0.6% in August from 0.1% the previous month, according to the NSI. But whereas the government might have been able to offset these present inflationary woes with a subsidy or a reduction in fuel duties, as has happened in some countries, this year the Bulgarian Ministry of Finance finds its hands are tied.



While any budget surplus must be spent on disaster relief in those regions worst affected by the deluge, there is also constant pressure from the International Monetary Fund (IMF) to practice fiscal conservatism and rein in spending. The resulting squeeze on public expenditure will leave many exposed to any rise in prices. The IMF's current agreement with Bulgaria demands that the budget must end 2005 with a surplus equivalent to at least 1% of GDP. Despite this, many think the government should be investing more in infrastructure to pave the way for the country's future.



The past also threatens to catch up with Bulgarian consumers this winter, as the newly privatised electricity distributors have requested a rise in power costs to meet their investment needs after years of neglect. Three European power companies, Czech CEZ, Austrian EVN and German E.ON, which bought up the seven distribution companies last year, have been citing a need for a 20% rise in electricity prices for both households and industrial consumers in order to meet the costs of investment and modernisation.



The government fears public discontent if electricity prices rise for households, given other inflationary pressures and also given that the subsidy to those households using electric heating will be cut this winter, affecting some 82% of the country. As a result, a 16% hike will only be passed to industrial customers and businesses from October, pending approval from SCEWR.



Business leaders are livid. Such a policy, they say, runs against Bulgaria's energy strategy and European economic norms. Across Europe, governments keep energy costs lower for industry and business than for households to encourage economic activity. Small businesses will be the worst hit, the chairman of the Bulgarian Industrial Association, Bozhidar Danev wrote in an open letter to the government last week, since they had not factored such a steep rise into their business plans. Neither would the move actually protect consumers from further inflationary pressure, since they will be hit by the corresponding rise in the cost of goods and services.



As if these economic spectres were not frightening enough in a country where the average monthly income is just 150 euros, Bulgarians are haunted by the prospect of major tax increases in 2006 as the government brings its excise duties further in line with EU tax polices.



For ordinary consumers, the bleak reality of the future is higher prices for fuel, alcohol and cigarettes. Higher fuel duties will raise prices by an average of 2.6%, according to the Ministry of Finance, and the new policies regarding duty on cigarettes will add almost 20% to the price of Bulgaria's favourite brand, Victory. The reason for such sudden duty increases is that the government wants to lump all these hikes together this year, in order to avoid too much pressure on inflation first in 2008/9, the year before it joins the European Monetary Union and adopts the euro. Tax increases on cigarettes could add 1% to inflation in 2008 if they are left any later. The Finance Ministry has also proposed an upwards correction on the excise duty for alcoholic beverages ahead of the 2007 deadline for EU membership.



Overall, it looks like this Christmas could be a frugal one for many Bulgarians. There are increased calls for government intervention to compensate businesses for rising costs and protect consumers from rising prices, especially among employers' and business associations, who fear that Bulgaria's competitiveness and economic growth is doomed without state help. Others feel it is time for the Bulgarian government to ditch the IMF's conservative approach in order to free up funds for compensation, subsidy and much-needed investment in the country's infrastructure.



Certainly, this might bring a little Christmas cheer to some of Bulgaria's poorer households. But would a return to fiscal profligacy and state protection of local business and industry really be beneficial to Bulgaria's emerging economy in the long term? They may not like it, but perhaps Bulgarians are just going to have to tighten their belts a little this winter, and ride this one out.

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