STINA news agency phone/fax: ++ 385 21 488-945, 488 936, 321 421 E - mail: stina@zamir.net stina@st.tel.hr The Network of Independent Journalists for Central and Eastern Europe - Weekly service Issue No. 238. - September 7, 2001. Bulgaria : NEW REFORMS - COUNTING WITHOUT IMF By Peter Karaboev The wave of huge popular support that rocketed former Bulgarian king Simon up to the power this June is slowly turning to disappointment. Great expectations and Simeon's promise to help Bulgarians live much better after 800 days were faced on 19 August with announcement of Premier's first steps of "radical" economic reforms. But few days later it turned out that reforms are not so radical, the plan rises eyebrows in IMF and some basic calculation showed that benefits are going to the rich Bulgarians not to the mass of poor common few millions. And to make things more complicated, Simeon's team of leading members of his administration (who are supposed to implement his plans) is still under construction more than 2 months after the elections. So, what measures did Simeon Saxe Coburg-Gotha promised? Speaking to the nation he said that he is expecting the package of tax and social measures to lead to a significant increase in investments, accelerate economic growth, and create new jobs. The package starts with "radical tax reform from 1 January 2002, customs restructuring, some changes in certain laws and in the privatisation process. The lowest month salary rises with 17% to 100 leva (1 Bglev=1 DEM) and it will be free from income tax. There will be lowering of the income tax from current 20-38% to 18-29%, zero tax on money used for re-investment, zero tax on capital income from bonds trade. New structure of national custom control will include foreign inspectors called by the Government for better control and fighting the corruption. In the name of the speed there'll be no "negotiations with eventual biers" during the privatisation and the whole process will go through the Agency for Privatisation. New 20 mln. leva Micr dit Fund will be established to help starting or small business. State help for children is doubling (but it's - no joke - a funny 17 DEM per month). So far "the good news". The "bad" ones were that since 1 October 2001 there will be less budget spending and 10% of state administration will loose there jobs (close to 6 thousand people). Starting with 1 October the prices of power and heating are rising with 10% and IMF is asking for more. The 10-per-cent increase in heating and electric power will apply both to companies and citizens, and will encompass both the day and night rates for electricity. Budget wages (covering more than 400 thousand people) will not be increased on 1 October because inflation is lower than that initially incorporated in the national budget, and consequently, real income has not decreased, Deputy Prime Minister and Minister of Labour and Social Affairs Lidiya Shuleva explained later. According to Minister of Finance Milen Velchev, the calculations of the Finance Ministry suggest that, as a result of the reform, tax revenues will decrease by almost 500m leva. The savings resulting from cuts in the state administration, decrea in capital expenses, and restructuring of other state budget expenditures are expected to amount to the same sum. Minister Velchev is expecting a significantly higher income from customs and fees and a higher percentage of taxes collected, which was understood as eventually new and higher customs and fees. All these measures are still a promise at least because there is no Budget-2002 to give some base for analysis. But the very first calculations showed that - if it is going to be in today's frame - tax lowering in fact TAKES MONEY AWAY from millions of Bulgarians. Most benefits are going to people with high wages, but officially they are no more than 4 thousand Bulgarians. Many people with small business or wishing to start one were allured by Simeon's pre-election promise for tax free 5 thousand leva credits. Now his party explains that money will go to the regions with highest unemployment and the program will cover only 4 thousand people without permanent job, who can offer credible business plan (if they ever have seen how to fill one). This "help" is considered by analysts as a compensation for unemployment because it's just 1/13-1/14 of Bulgaria's GDP for 2002 and about 3 times less in volume than the existing credit programs. The benefits will go to administration that distr es these loans rather than to the people in need. The rest will have to look to other credit sources, meaning that for them nothing will be changed. Because if the Government is working on social base, banks are following only the rules of the market and profit, not investments in risky "low level" enterprises. Up to 73% of small business start-ups in village regions are still counting on family help and non-formal credits. Banks in Bulgaria are asking for guaranties of nearly 200% of the credit they are asked for. In almost 65% of the cases banks are asking for guaranties from a third part. In recent weeks it was announced that some other prices will go up - 20% increase in telephone services, new high taxes on tobacco, fuel and alcohol... So where all king's promises went to? Maybe the most confused situation developed around relations with International Monetary Fund (IMF) - the main Bulgaria's foreign creditor and guardian of the currency board. First reaction came only hours after Simeon's reform plan. Talking to "Dnevnik" (www.dnevnik.bg) daily IMF mission head for Bulgaria Gerald Schiff said on 21 August that "International Monetary Fund is strongly concerned about the tax reforms recently proposed by the Bulgarian government". The planned tax reforms will make it difficult to register a minimum budget deficit, necessary for the functioning of the currency board, Schiff said in his statement. Schiff praised solely the proposed changes in the privatisation process and the promised reduction in state administration expenses. Finance Minister Milen Velchev said just before Schiff's statement that IMF was warned in advance, and has not opposed reducing taxes and increasing certain groups of incomes. Than, speaking agin to "Dnevnik" Velchev said "the Bulgarian government is more concerned about planned tax reforms in the country than the International Monetary Fund". The government is ready to take steps to reduce expenses, thus keeping 2002 budget deficit below 1.5 pct, Velchev said. But it was too late to silence IMF concern. BULGARIA'S MINISTERS SEEN TAMED BY IMF, was Dow Jones headline on 29 August. "Bulgaria's top ministers (...)seem to have bowed to the fact that their country is still beholden to the International Monetary Fund. The government, which has been extremely outspoken in the last couple of months with regard to its intention to change things around in the small South-eastern European country - often without consulting key multilateral institutions such as the IMF - has now adopted a much more cautious approach." DJ's CAPITAL MARKET REPORT said. "We need the stamp of approval of the IMF in one form or another. This has a powerful signalling effect and it is important for us as well, domestically," Krassimir Katev, newly appointed head of Treasury and Debt Management in Bulgaria, said in an interview with Dow Jones Newswires. "They have to realise that Bulgaria is a small country with no strategic importance to anyone. Remove the IMF support and lev will crumble, rates rise sharply and the prices of Brady instruments plummet," said local Western financial advisor to several Bulgarian companies. The government has grown quiet in recent weeks about its original plans to issue a debut Eurobond in the near future, conduct debt buybacks and debt swaps. Bulgaria issued $5.16 billion worth of Brady bonds in 1994 to restructure an $8.1 billion commercial debt. The country bought back some $200 million of Discount Brady bonds last year as part of efforts to reduce its foreign debt burden. "We seek to reach a funding agreement with the IMF of between $100 million and $150 million, which means the chances of a buyback operation will be less," Velchev said in an interview with Reuters few days later. Bulgarian bonds already underperformed their emerging market counterparts in August after traders decided an outright buyback of Brady bonds was less likely than previously hoped, analysts said on Wednesday. Than on 3 September came reaction by Piritta Sorsa - permanent IMF representative in Sofia. She said that minimum wage increase may lead to more unemployment. We are ready to negotiate on 1-2 years stand-by agreement instead of extended 3-years program that closed in July 2001, Sorsa said to local Internet-based news service Mediapool (www.mediapool.bg) . This statement showed that IMF is more interested in short term programs. But there is still concern about fiscal results of Simeon's plans on budget deficit balance, she said. We don't know the details but we see some income gaps, some measures are pushing away foreign investors, tax burden remains too heavy for Bulgarians. It's in the field of the guessing how quickly improved customs can fill the gap because it's well known that it takes some time to feel the real effect. And - of course - Bulgaria should not forget the global (almost) recession that means decreasing in Bulgaria's export and import volumes, Sorsa said. IMF Mission is coming to Bulgaria on 11 September and will work with the Government to 27 September. Too much depends on the outcome of these negotiations. But there is already a question popping up behind them - What was the reason to swept former ruling coalition away with king's populist agenda if it's already clear that Bulgaria's "fairy tale" promises can't be fulfilled in short term or at least until IMF writes down its part. For there are no fairy tales with both King and IMF.