THE International Monetary Fund (IMF) mission to Bulgaria has not yet reached agreement with the Cabinet and is concerned about the planned parameters of Bulgaria’s Budget 2006.
Mission leader Hans Flickenschild announced this on October 26 at a joint news conference with Finance Minister Plamen Oresharski and Bulgarian National Bank (BNB) governor Ivan Iskrov.
The fund experts met money ministers, trade unions, employers and bankers.
Since no agreement was reached, talks on all unsolved matters between the Cabinet and the IMF will most likely be renewed before the end of 2005 or in early 2006, Flickenschild said.
The two parties have not managed to settle the problem of Bulgaria’s rising current account deficit. The IMF believes it is a serious threat to the country’s economy.
Bulgaria registered a trade deficit of more than 11 per cent at the end of August 2005, which was a nearly 50 per cent year-on-year rise, and it also widened the country’s current account deficit to 7.7 per cent of gross domestic product (GDP), from 3.7 per cent in the same eight-month period of 2004.
The higher prices of energy products and metals caused several upward revisions of the Cabinet’s end-year current account deficit forecast. The last projection, made by Oresharski, envisaged a current account deficit of between 10 and 11 per cent at the end of 2005. The 2004 current account deficit was 7.5 per cent of GDP.
Flickenschild said the deficit would reach at least 13.25 per cent by the end of 2005, when the planned figure in the budget for this year was just 7.5 per cent.
Bulgaria’s private sector was spending much more money that it was making and this was the main reason for the widening current account gap, Flickenschild said. In his view, the country’s foreign debt is also a cause for concern.
Currently, the debt-to-GDP ratio of Bulgaria is 60 per cent, or eight percentage points more than what was forecasted during the first review of the agreement with the IMF, Flickenschild said.
Most Bulgarian economic experts believe, however, that this ratio, as well as the rising current account deficit, is not a direct threat to the country’s economy. This is why many of them criticise the fund of trying to uselessly restrain the Government in its economic policy.
The IMF disagrees and advises the Cabinet to take measures for limiting the rising demand and for encouraging production and supply, in order to shrink the imbalance the country is experiencing.
The first could be achieved through maintaining a budget surplus and with additional measures for limiting credit growth, Flickenschild said.
He also said the central bank had to take a more active part in limiting credit growth, which was among the main factors boosting the current account gap.
“The fund asked us to have a more sizeable shrinkage of credit expansion next year,” said Iskrov. In his words, the argument between the IMF and BNB is over the size of growth. The fund insists on an average of 15 per cent in 2006, while the central bank wants it to be 16-20 per cent. The growth in 2004 was 50 per cent.
Iskrov said the BNB was considering a set of new measures for a further cooling down of the credit expansion. They are related to the minimum obligatory reserves the banks keep with the BNB, harsher requirements for assessing the credit risk and others.
Oresharski said that neither had an agreement been yet reached between the Cabinet and the IMF on the size of next year’s budget surplus. In his view, the surplus should be no more than this year’s size, or one per cent of the GDP. The IMF, however, insists on at least three per cent of the GDP.
