[stop-imf] IMF to Bulgaria: Balanced budget not good enough

[robert weissman]

http://www.sofiaecho.com/article/imf-wants-bulgarian-policy-rethink/id_1252=
6/catid_23
Mon 24 Oct 2005
IMF wants Bulgarian policy rethink
Ivan Vatahov

Cabinet urged to take new approach to income and taxation

The International Monetary Fund (IMF) has asked the Cabinet to
reconsider its income and taxation policy for 2006.


This emerged from a series of statements made by Prime Minister Sergei
Stanishev and other ministers in the past week after meetings with IMF
mission leader for Bulgaria Hans Flickenschild. Since Flickenschild
arrived in Sofia on October 12, his talks with Bulgarian state officials
have been held in total secrecy.


On his arrival, the only hint Flickenschild gave to the media was that
he would insist to the Government that next year=92s state budget should
be planned to include a surplus. This was the first contradiction with
the Cabinet=92s plans for a balanced budget for 2006.


According to Flickenschild, there was a good basis to achieve a
significant surplus, as both the economy and tax base were growing
quickly, which was leading to significant tax revenue for the budget.


He said the surplus was needed for a number of economic reasons =96 the
private sector was rather unbalanced, private savings were decreasing,
and consumption =96 often funded by loans =96 was growing significantly. At
the same time, investment volume had increased and there was a great
imbalance between the reduced savings and the volume of investments,
Flickenschild said.


He said that the Bulgarian National Bank should consider a further
tightening of its restrictions on growth in consumer lending, which is
blamed for the country=92s widening current account gap. Bulgaria=92s
current account deficit was 1.635 billion euro at the end of August, or
7.7 per cent of GDP. There are projections that it will reach 10 to 11
per cent of GDP by the end of 2005. (Read more on page 6.)


Asked about the idea of using part of the surplus for social payments,
Flickenschild said that he was acquainted with the Cabinet=92s intention
to do so, though it should be seen what the final result from such a
step would be.


Commenting on the planned six per  cent reduction of social security
contributions paid by employers, which was also in the Government=92s
plans, Flickenschild said that in principle this was a good decision,
because of elevated labour costs in Bulgaria. A decrease of the social
security burden would make the country more competitive, as this would
stimulate both production and exports, he said.


What stunned the business community most were reports that the IMF
official had asked the Cabinet to achieve a budget surplus of three per
cent of GDP next year. This means that the state will continue to
redistribute a major portion of GDP and be the main driving force behind
economic growth. Business people, however, consider this, unacceptable.


Ivo Prokopiev, Union of Employers in Bulgaria chairman and vice
president of the Bulgarian International Business Association, said they
were worried by the way in which all debates on Budget 2006 were led. In
his view, this was an offence against the Bulgarian economy, because its
growth potential is artificially suppressed and postponed.


Unfortunately, the IMF is very conservative in relation to Bulgaria. The
problem lies in the fact that the Government allows this to happen,
Prokopiev said.


But the Bulgarian Socialist Party (BSP)-led Cabinet has nothing else to
do but listen and rely on the Fund. Stanishev said on October 13 that
there was not enough money for the Socialists=92 main promise to business
=96 the introduction of a zero tax rate on reinvested profit and
accelerated depreciation.


What is more, the planned reduction in employers=92 social security burden
by six per cent next year was not certain either, he said. According to
Stanishev, the IMF was urging a four per cent decrease.


The increase in government-sector wages and pensions by five per cent
from January 1 2006 has also been revised, Stanishev told a meeting of
the parliamentary group of the BSP. The raise for the lowest income
groups would be eight per cent, while people with higher incomes will
get a minimum increase, he said.


The only official statement by Flickenschild in the past week came after
a meeting he had on October 17 with Labour and Social Policy Minister
Emilia Maslarova. Flickenschild found =93reasonable=94 the 2006 plans of
Maslarova in the labour market policy as a key source of income increase.


The two discussed wages and social security contributions, social
assistance, unemployment benefits and family allowances, monthly child
benefits and other protected incomes.