THE budget deficit, as well as the deficit of political will to make changes to tax policy, have further intensified in the past week, according to devastating data on the country’s current account gap.

Finance Minister Plamen Oresharski has become the central figure in a dispute in society and the ruling three-party coalition about how the state should comply with the most recent spending limitations imposed by the International Monetary Fund (IMF).

On September 8, Oresharski surprised state officials and the media by launching a plea for all ministries to review their budgets and look to reserves to help overcome the one billion leva gap under Bulgaria’s agreement with the IMF.

His fellow ministers are required to present by September 19 their reports which Oresharski will use to propose cuts. Requests for additional financing will not be considered until the end of the year. Urgent funding will be approved only by the Cabinet.

The Cabinet will have the right to distribute only a part of the budget surplus, the parliamentary committee on the budget decided on September 8.

Parliament will be responsible for remaining funds. Until now, no limits were put on Cabinet spending of budgetary resources. The only condition, set by the IMF, had been for the country to end the year with a budget surplus of one per cent of gross domestic product, or 417 million leva.

Budget revenues at the end of July were more than 6.8 billion leva, up by 928.3 million or 15.7 per cent from the same period a year ago, the Government said on September 8.

A 16.3 per cent increase in tax revenues and a 13.1 per cent rise in non-tax revenues contributed to improved budget revenues this year. Tax revenues totalled 5.5 billion leva or 62.8 per cent of the annual target.

However, the state will have to spend much of the surplus on flood relief, following the disasters this summer. 

The Cabinet designated Minister of State Policy on Natural Disasters and Accidents Emel Etem to prepare a report on the urgent need for extra funds in 2005 to cover flood damages. Health Minister Radoslav Gaidarski will draft a report on necessary structural measures and the urgent need of funding the healthcare system.

Oresharski and his colleagues might have felt better if it was only the flood damages they had to cover. Unfortunately for them and all Bulgarians, there is now a much bigger worry.

A 40 per cent year-on-year growth in Bulgaria’s trade gap boosted the country’s current account deficit to seven per cent of GDP up to July, from 3.9 per cent in the same seven-month period of 2004, the Bulgarian National Bank said on September 12.

Bulgaria’s current account deficit was almost 1.5 billion euro (2.8 billion leva) at the end of July, versus 747.5 million euro a year earlier.
Surging global oil prices were one of the main reasons for the ballooning trade gap, contributing 126 million euro to its rise, said the head of the balance of payments and foreign debt department at the central bank, Emil Dimitrov.

Investment goods were the main driver of the 24.3 per cent rise in imports through July, with a nine per cent growth.

International investors are carefully monitoring Bulgaria’s current account gap as the country operates under an IMF-controlled arrangement, which pegs its currency, the lev, to the euro and does not allow the Government to protect the domestic economy with monetary tools.

The IMF said earlier in September that it was worried that Bulgaria’s widening current account deficit could threaten the country’s macroeconomic stability.

Cash inflow from foreign tourists visiting the country and remittances from Bulgarians working abroad have so far helped to offset part of the rise in trade deficit. Bulgaria earns most of its tourism revenues in July and August, when foreign tourists flock to Black Sea resorts.

Tourism services brought 637.4 million euro in net revenues to Bulgaria’s balance of payments in the seven months through July, up from 557.6 million euro in the same period a year ago, but could not help to slow the rise in the current account deficit.

Some Bulgarian economists are less worried by the widening gap in the country’s balance of payments and attribute the trend to incoming capital and the capital underspending in previous years. The Government has not yet shown how it would tackle the problem.

The ruling Bulgarian Socialist Party, after making a slew of unrealistic promises during the parliamentary election campaign, is in a jam. Prospects for higher salaries, lower taxes and more social assistance have crumbled after it became clear that the IMF would not allow such a severe blow to the fragile macroeconomic framework.

The lack of political will suffered another severe blow after the largest associations of employers in Bulgaria told Prime Minister Sergei Stanishev on September 13 they would not tolerate any socially-marked measures that would have a negative impact on their operations.

Employers want the Cabinet to abolish the minimum wage, provide additional payments for extra working hours and a scope of other quasi-tax arrangements that they believe only encourage the grey economy. 

Stanishev also has to cope with pressure from coalition partners – the National Movement Simeon II and the Movement for Rights and Freedoms – which have different views on the country’s tax policy for 2006.

The three parties will have to discuss later this month a bulk of changes to the effective tax rules and reconcile the promises made on the election trail with the parameters of the state budget. If the partners stick to their coalition agreement, direct taxes will remain intact while budget outlays will be kept under 40 per cent of gross domestic product.