SUN, 21 OCT 2001 22:47:08 GMT
Can Bulgaria Survive Without the IMF
The New Government Between Pre-Election Promises and New Agreement with
AIM Sofia, September 29, 2001
The first IMF mission that came to Bulgaria after the National Movement
Simeon II (NDSV) came to power was not successfully concluded. The two
sides reviewed the new three-year agreement but during ten days of
negotiations they reached a stage close to the freezing of relations.
Not only the Bulgarian Government and the IMF representative, Gerald
Scheef, failed to agree on the future agreement but parted with totally
opposed stands. "The new round of negotiations will be held after the
Government re-examines its position and shows willingness to draw its
point of view closer to our proposals", stated Mr. Scheef leaving
The outcome of these negotiations has called the future of the
Agreement into question. Whether the IMF support is necessary or not has
always been a matter of dispute in the Bulgarian political life - from
the times of the communist regime, during the rule of Ivan Kostov's
Government of the Alliance of Democratic Forces (SDS) and also today.
The first and foremost problem is whether Bulgaria can manage without
the IMF's assistance and if the answer is "Yes", then whether it should
be done under the IMF terms or Bulgaria's own.
The practice in recent years showed that Bulgaria did not have much
choice till now. Had it not been for the Fund's monetary injections the
country would have not been able to maintain the stability of its
currency. The Currency Board with fixed exchange rate of the lev was
established in 1997, again under the IMF's diktat. The last Agreement
with the Fund expired at the end of Kostov's mandate. Now, the future of
Bulgaria is again a subject of negotiations.
The basic separating line in current talks are the promises NDSV made
about tax deductions and improvements in the social sphere. The
Bulgarian Government should choose between making its pre-election
promises good and concluding an Agreement with the IMF. For the time
being, it seems that there is no way out of this situation that could
make everybody happy.
This will be hard to resolve because Simeon Saxe-Coburg-Gotha has
already publicised the plans of his Cabinet to cut tax rates on incomes
and introduce a zero taxes on capital gain if it is to be reinvested. It
is expected that this would reduce the state budget revenues by 500
million levs, which according to the Cabinet's analysis could be
compensated by higher receipts from customs and excise taxes, as well as
stricter border regime. However, the IMF doesn't think that this is
As a corroborating argument Gerald Scheef's team mentioned the expected
world recession and recommended that Bulgaria should not put high hopes
on favourable economic conditions in the world. Also, the country's
trade balance is deteriorating. In the January - August period the trade
deficit reached USD 910.9 billion.
According to many analysts the long-term problem for statesmen is
whether to give the economy a chance to take a breath of fresh air or to
let it again make its way through the jungle of tax legislation. When
the NDSV experts launched the idea on zero tax rate on reinvested
capital gain, they had in mind positive effects of that measures in
Estonia. However, the IMF's position rarely allows such experiments.
Quite the contrary - the Fund is much more uncompromising today than it
was during the Socialist rule of Zan Videnov. The Fund's experts insist
on strict fiscal policy that can guarantee the budget revenues. As a
rule, risks are undesirable. It is precisely the implementation of this
policy that brought Bulgaria stability in the past four years. But, in
essence both domestic and foreign business circles complained of
"unfriendly" tax environment.
"There is no reason for concern. We cannot expect to reach the same
stand in 10 days time", said Finance Minister Milen Velcev. The belated
start of negotiations will place the Cabinet of Simeon Saxe-Coburg-Gotha
in a very difficult situation because it is not clear what will be the
basis for the 2002 budget. Minister Velcev will have to choose between
the alternative based on pre-election promises and the next IMF mission
and possible conclusion of the Agreement. In the latter case, the
Government will hardly have the time to draft the budget.
Kostov's Cabinet delayed taking more radical measures for the
stimulation of business by using all kinds of excuses, primarily various
external crises - the Russian, the Asian, the Kosovo crisis. Now, the
new Government must decide whether to use the expected economic
stagnation in the world as a justification. Prime Minister
Saxe-Coburg-Gotha knows full well that the Bulgarian business is
expecting his Government to provide stability. Until October, when the
new round of negotiations is scheduled to take place, he will have
something to think about.