The Bulgarian Cabinet has decided to extend by six months the country's agreement with the International Monetary Fund (IMF).

This was announced by Finance Minister Plamen Oresharski at a news conference on May 17, marking the end of another review mission of the IMF to Sofia, led by the fund's European Department deputy director Ajai Chopra.

The announcement came as a surprise because earlier statements by Bulgarian Government officials pointed to a possible end of the agreement with the IMF, which expires in September this year.

The agreement, which has a role as a precautionary tool for the country's macroeconomic stability, was supposed to expire after Bulgaria joins the European Union. Under the agreement, Bulgaria was to withdraw money from the fund in case it would need to support its balance of payments. However, such money has not been used so far.

The six-month extension of the accord will cover three months of effective relations - from October to the end of 2006, and another three months - to the end of March 2007 - when technical parameters will be negotiated. The schedule has already been agreed on with the European Commission during the recent visit of the EU commissioner on economic and monetary policy Joaquin Almunia in Sofia.

From the beginning of 2007, when Bulgaria will hopefully become a EU member, the IMF will no longer directly monitor Bulgaria's financial performance.

Bulgarian National Bank governor Ivan Iskrov told the same news conference on May 17 that from the moment Bulgaria becomes a EU member, its banking and financial policy legal framework will be the same as the one of the union.

One of the biggest concerns of the IMF for Bulgaria's future, however, rests with the country's income policy.

This was expressed by Chopra during the meetings he had with top Bulgarian officials over the week preceding the May 17 news conference.

This country's income policy should be as flexible as possible to ensure long-term competitiveness of the country, Chopra told Labour and Social Policy Minister Emilia Maslarova on May 10.

Therefore, in Chopra's view, wages should be only agreed on at the company level, because each company has different a competitiveness and productivity level. The IMF is against the serious wage hikes introduced by the Cabinet.

"We told the IMF that we propose clear regulations in regards to the income policy although we have a market economy," Maslarova said.

These regulations should comply with the inflation forecasts and the growth of labour productivity, she said.

In the public sector, the Labour and Social Policy Ministry has proposed full adjustment of wages to inflation plus an increase, equivalent to 75 percent of the GDP growth, while in the private sector the ministry recommends adjustment of up to 65-70 percent of the growth of productivity of labour added to full adjustment to inflation on an annual basis.

Maslarova said she kept on insisting on higher incomes for pensioners as of July 1 2006.

The IMF recommended following all factors hindering more active involvement in the labour market, said Maslarova.

The fund representatives reportedly again raised the issue of removing seniority and length of service bonuses, asking whether the issue could be settled by June. However, Maslarova's ministry replied that this issue could be settled only by an agreement of the social partners (Cabinet, trade unions and employers).

In an attempt to solve the issue of wages and seniority bonuses, the leadership of the Bulgarian Industrial Association (BIA) on May 11 met with IMF's mission team led by the fund's resident representative in Bulgaria, James Roaf.

According to BIA chairman Bozhidar Danev, there were three main reasons for the inflation pressure on the Bulgarian economy over the first few months of this year: the increase in excise duty rates and some fees, the increase in regulated prices and rising international fuel prices. Danev concluded that higher inflation was generated by external factors and by some actions of the Bulgarian Government, and not by problems of industry.

It was, therefore, totally unacceptable to pressure employers into offsetting inflation by increasing wages, especially when wage growth had outstripped productivity growth since 2002, Danev said.

He expressed full support for the IMF's position that seniority bonuses should be abolished, and that pay rates and pay structure should be negotiated at the level of individual enterprises.