POLITICS and prices have always been linked in Bulgaria and the year 2005 proved a perfect example.
It was an election year, and for some, that says it all. The fact that parliamentary elections were held on June 25 can easily divide the year in two: pre-election promises and post-election disappointment. In one of the last years on the country’s road toward EU accession - scheduled for January 1 2007 - most Bulgarians expected an improvement of their social and economic status as the cornucopia of EU membership was on the horizon. Things turned out slightly differently.
At the beginning of 2005, everything was going well. In February, the National Assembly, dominated by the ruling National Movement Simeon II (NMSII), approved the Consumer Protection Bill that provided that all goods should have labels in Bulgarian and that these labels should declare prices in leva, should include VAT and all additional taxes and fees, as well as prices of all goods and services that a consumer has to pay additionally. An EU style indeed. As the elections were approaching, then-prime minister and NMSII leader Simeon Saxe-Coburg bet on a social agenda. He promised a package of social benefits, including state repayment of parts of the loans extended to young families with children, child bonus payments for all families, additional pension funds from privatisation proceeds and the budget surplus. The International Monetary Fund soon put his enthusiasm to an end. As the NMSII pronounced itself to be a party supporting Bulgarian business, promises of low taxes were made in the run-up to the election. The first promise was to introduce only two rates for personal income tax. This was envisaged as part of introducing flat tax principles - a revolutionary issue in a country dominated by low incomes and high taxes. Next was the idea to reduce corporate profit tax, from 15 to 12 per cent, which according to the NMSII, would attract more foreign investors and help Bulgaria’s economy adapt to EU standards. Last, but not least, was value added tax (VAT). On April 20, the NMSII said that it was planning to cut VAT to 18 per cent in 2007 if the party was re-elected in the June 25 elections. This launched a wave of similar promises. The Bulgarian Socialist Party (BSP) said that it was planning lower and differentiated VAT rates for medicines, bread and milk. The Democrats for a Strong Bulgaria backed the NMSII and proposed VAT rates of 17 per cent. At the microeconomic scale, Bulgarian parties were doing fine. For the majority of Bulgarians however, it was a different situation. After the parliamentary elections, a new Government was formed by the BSP, NMSII and Movement for Rights and Freedoms with BSP leader Sergei Stanishev as Prime Minister. People expected more social benefits, as promised by both the BSP and the NMSII. What happened? Bread prices increased from 0.80 leva to 1.10 leva a kilogram. Mills in the country ran out of wheat. The price of flour increased to 450 leva a ton. Reserves from the 2004 harvest were already depleted. Most of these were used to cover the quota for the EU. It became clear that a wheat crisis was ahead. High import prices made a 1.40 leva bread price likely, which caused discontent among Bulgarians. The next surprise was increases in electricity prices. On September 8, the State Commission on Energy and Water Regulation (SCEWR) announced that it was considering an increase in power prices for industrial consumers by up to 16 per cent from October 1, but planned to leave prices for households unchanged. The act defied calls to increase prices for households but leave industries untouched. Foreign companies previously insisted on new price increases and elimination of the low rate applicable to the first 75 kWh of electricity used every month, which is a form of social protection for Bulgarians. Despite BSP promises of low heating prices, on September 19 SCEWR said that the average price for central heating in Bulgaria would most probably jump by 12 to 13 leva a megawatt-hour. Hikes were needed as the state could completely cease subsidies for companies and because Bulgargaz - the state-owned gas importer and distributor - had asked for an increase in fuel prices. The reality was clear. Bulgarians were facing one of their toughest winters since the last major economic crisis of 1996-97, with rising central heating prices for households and electricity used by small and medium sized businesses. What went wrong?
The natural gas price increase was justified by record high prices on the international market. Bulgargaz said the price of the gas was also tied to international oil prices and the exchange rate of the US dollar against the euro, under a contract with Russia’s Gazprom, which is the main supplier of natural gas for Bulgaria. Somehow this was not considered while parties were delivering their election promises.
The more than 80 per cent of the country’s population who have no access to central heating but that use electricity in the winter was deprived of its current pro-social tariff with lower prices for the first 50 kilowatts of power used each month. This type of social assistance was eliminated as of October 1.
Stanishev’s explanation for not fulfilling pre election promises was simple: “We are simply not allowed by our IMF agreement to spend more than we have”. A sad but true explanation.
However, this was not enough for Bulgarians, and the winter months brought public resistance to the ever-increasing cost of living. An example was the teachers’ strike at the beginning of December. Teachers demanded a 20 per cent increase in their salaries. With the risk of other professions going on strike, the Government will have to deal with further consequences of unfulfilled promises in 2006.
Nature also had its say during 2005. Massive downpours hit Bulgaria during the summer, causing an almost complete collapse of Bulgaria’s transport network. Devastating floods destroyed vast areas of planted crops, and several people and numerous farm animals drowned. The floods continued through the whole summer, and heavy downpours combined with poor control of dams in the country proved devastating. Central and western Bulgaria suffered the most during the crisis, but every Bulgarian felt the effect. Nearly 15 000 households were hit, with 800 houses damaged seriously. Bridges, roads, school and company buildings were flooded and partly destroyed. The tragedy was complete. The fact that it happened during the transition period between the old and the new Government delayed official reaction. Talks on a government coalition dragged on for more than a month while people were forced to sleep outside their houses. When the new Government was approved, it acted by purchasing 295 trailers to be used as temporary housing, and moved homeless families into school buildings. Later the sad truth became clear again. The state budget managed to cover only a third of the financial damage, estimated on 891 million leva. Again the official explanation was the restrictions by the IMF, which led to some debate whether the country should continue its relations with the Fund. The recovery strategy showed that Bulgaria would need at least two years to recover from the disaster completely, the impact of which for sure will be on the agenda for Bulgaria in 2006.
