THE International Monetary Fund (IMF) has agreed with the Bulgarian Government on the next precautionary agreement but declared itself against the increase of the minimum monthly salary by 30 leva from the beginning of next year.
The Government and the IMF mission have reached agreement on all points discussed in connection with the signing of the new precautionary agreement with the exception of the minimum salary, Finance Minister Milen Velchev told a news conference on July 5.
The minimum salary, however, will not be a subject of a new stand-by arrangement because it is a minor matter, as far as the macroeconomic outlook is concerned. The issue will be discussed again when the next IMF mission arrives in September.
Trade unions, employers and the Government agreed that the lowest income will be raised by 25 per cent to 150 leva in 2005 (from the current 120 leva). According to the IMF however, any salary increase of more than eight per cent will only be a political decision.
Nevertheless, the Government remains firm in its intention to enforce the planned increase, Finance Minister Milen Velchev said.
If we do not increase the salaries, we will not be able to fight the lower purchasing power of Bulgarians, Minister of Social Policy and Public Works Hristina Hristova said in support of her colleague.
Flickenschild said that an increase of the monthly minimum wage from 120 to 150 leva is too high in real terms, considering that average annual inflation is expected at about 3.5 per cent in 2005 and the productivity of labour remains low. The IMF official said that wages are very low in Bulgaria but said that they cannot be raised abruptly and must be aligned to potential productivity.
When we say that such an increase would narrow the margin between the minimum and the average wage, we must bear in mind that average wages in the private sector remain rather lower than in the public sector, which obviously is not realistic, Velchev said. He argued that a certain proportion of private sector employees declare a minimum wage so as to reduce their social insurance payments.
The new precautionary agreement is expected to be for 100 million special drawing rights, equivalent to about $130 to $140 million. It will be drawn down only in case of balance of payments problems, if capital flows decrease and the current account deficit remains unchanged, Velchev said.
Flickenschild added that the IMF will be making quarterly reviews of compliance with the criteria of the arrangement. As he put it, Bulgaria does not need access to IMF resources and this is not the idea behind the deal. Rather, it seeks to discipline policy, considering that elections are forthcoming and there may be a new government. Under the circumstances, the arrangement gives both investors and creditors a sign that a prudent policy will be pursued, Flickenschild said.
Velchev said that budget revenues are expected to exceed the target by 1.5 to two per cent of GDP this year, especially in terms of value added tax, profit tax and income tax. Agreement was reached with the IMF to allocate a part of these funds to reduce the budget deficit to zero so as to achieve a balanced budget, and to commit the rest (380 million leva or one per cent of GDP) for additional spending.
What matters to us is that this spending be recognised and planned promptly, Velchev said. The Government and the ruling coalition have yet to discuss the allocation of these resources in the coming weeks. Part will be spent on extra investment in infrastructure projects, and another part will cover arrears and outstanding expenditures, but it will be decided at the political level.
Flickenschild noted that, thanks to the fast pace of tax revenue collection, fiscal objectives will not be difficult to attain. Next years fiscal policy will be the same as this year, if the objectives of this programme are achieved, Velchev replied. If not, a budget similar to 2004s will be contemplated.
Concerning the seniority bonus - the other debated point - Flickenschild said the Government has changed its mind in this respect. The fund did not advise simply scrapping the seniority bonus but is concerned that people who have lost their jobs, should not face additional obstacles when seeking a new job. The fund considers that it could hamper re-employment opportunities.
All the documents needed to conclude the agreement and the Memorandum on Economic Policy are expected to be ready within two weeks before August 6, when the IMFs board of directors is supposed to approve the new precautionary arrangement for Bulgaria at its last meeting before the summer break.
The first critical notes against the future precautionary arrangement with the IMF appeared just hours after information about its parameters was announced.
According to members of the Democrats for a Strong Bulgaria (DSB), the newly established party of former prime minister Ivan Kostov, in the new memorandum on the forthcoming agreement with the IMF the cabinet did not defend Bulgarias economic interests but only reproduces the negative aspects of the status quo.
DSB are of the opinion that the document does not contain measures on economic restructuring, completion of privatisation, health care reform and of the modernisation of education in Bulgaria. The party also says the cabinet should be banned from interfering in the liquidity of the banking sector and from withdrawing the fiscal reserve from banks.
Speaking to reporters after the meeting, MP Peter Zhotev said that the IMF officials agreed with most of the points made by DSB. Zhotev said more objections against the agreement may surface, depending on Velchevs decision whether or not to buy back Bulgarias debt to the IMF ahead of schedule.
Union of Democratic Forces (UDF) also criticised the agreement and said it will not do enough to achieving improved economic growth in Bulgaria. UDF financial experts pointed out that the commitments made by the Government will not encourage economic growth at higher levels than those already achieved but would never lead to double digit growth, which the country needs.
The Government and the IMF mission have reached agreement on all points discussed in connection with the signing of the new precautionary agreement with the exception of the minimum salary, Finance Minister Milen Velchev told a news conference on July 5.
The minimum salary, however, will not be a subject of a new stand-by arrangement because it is a minor matter, as far as the macroeconomic outlook is concerned. The issue will be discussed again when the next IMF mission arrives in September.
Trade unions, employers and the Government agreed that the lowest income will be raised by 25 per cent to 150 leva in 2005 (from the current 120 leva). According to the IMF however, any salary increase of more than eight per cent will only be a political decision.
Nevertheless, the Government remains firm in its intention to enforce the planned increase, Finance Minister Milen Velchev said.
If we do not increase the salaries, we will not be able to fight the lower purchasing power of Bulgarians, Minister of Social Policy and Public Works Hristina Hristova said in support of her colleague.
Flickenschild said that an increase of the monthly minimum wage from 120 to 150 leva is too high in real terms, considering that average annual inflation is expected at about 3.5 per cent in 2005 and the productivity of labour remains low. The IMF official said that wages are very low in Bulgaria but said that they cannot be raised abruptly and must be aligned to potential productivity.
When we say that such an increase would narrow the margin between the minimum and the average wage, we must bear in mind that average wages in the private sector remain rather lower than in the public sector, which obviously is not realistic, Velchev said. He argued that a certain proportion of private sector employees declare a minimum wage so as to reduce their social insurance payments.
The new precautionary agreement is expected to be for 100 million special drawing rights, equivalent to about $130 to $140 million. It will be drawn down only in case of balance of payments problems, if capital flows decrease and the current account deficit remains unchanged, Velchev said.
Flickenschild added that the IMF will be making quarterly reviews of compliance with the criteria of the arrangement. As he put it, Bulgaria does not need access to IMF resources and this is not the idea behind the deal. Rather, it seeks to discipline policy, considering that elections are forthcoming and there may be a new government. Under the circumstances, the arrangement gives both investors and creditors a sign that a prudent policy will be pursued, Flickenschild said.
Velchev said that budget revenues are expected to exceed the target by 1.5 to two per cent of GDP this year, especially in terms of value added tax, profit tax and income tax. Agreement was reached with the IMF to allocate a part of these funds to reduce the budget deficit to zero so as to achieve a balanced budget, and to commit the rest (380 million leva or one per cent of GDP) for additional spending.
What matters to us is that this spending be recognised and planned promptly, Velchev said. The Government and the ruling coalition have yet to discuss the allocation of these resources in the coming weeks. Part will be spent on extra investment in infrastructure projects, and another part will cover arrears and outstanding expenditures, but it will be decided at the political level.
Flickenschild noted that, thanks to the fast pace of tax revenue collection, fiscal objectives will not be difficult to attain. Next years fiscal policy will be the same as this year, if the objectives of this programme are achieved, Velchev replied. If not, a budget similar to 2004s will be contemplated.
Concerning the seniority bonus - the other debated point - Flickenschild said the Government has changed its mind in this respect. The fund did not advise simply scrapping the seniority bonus but is concerned that people who have lost their jobs, should not face additional obstacles when seeking a new job. The fund considers that it could hamper re-employment opportunities.
All the documents needed to conclude the agreement and the Memorandum on Economic Policy are expected to be ready within two weeks before August 6, when the IMFs board of directors is supposed to approve the new precautionary arrangement for Bulgaria at its last meeting before the summer break.
The first critical notes against the future precautionary arrangement with the IMF appeared just hours after information about its parameters was announced.
According to members of the Democrats for a Strong Bulgaria (DSB), the newly established party of former prime minister Ivan Kostov, in the new memorandum on the forthcoming agreement with the IMF the cabinet did not defend Bulgarias economic interests but only reproduces the negative aspects of the status quo.
DSB are of the opinion that the document does not contain measures on economic restructuring, completion of privatisation, health care reform and of the modernisation of education in Bulgaria. The party also says the cabinet should be banned from interfering in the liquidity of the banking sector and from withdrawing the fiscal reserve from banks.
Speaking to reporters after the meeting, MP Peter Zhotev said that the IMF officials agreed with most of the points made by DSB. Zhotev said more objections against the agreement may surface, depending on Velchevs decision whether or not to buy back Bulgarias debt to the IMF ahead of schedule.
Union of Democratic Forces (UDF) also criticised the agreement and said it will not do enough to achieving improved economic growth in Bulgaria. UDF financial experts pointed out that the commitments made by the Government will not encourage economic growth at higher levels than those already achieved but would never lead to double digit growth, which the country needs.
