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 the IMF

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 Bulgaria.

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 realistic.

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.

Georgi Filipov

(AIM)