Finance Minister Milen Velchev submit a package of draft bills amending the tax code to the Council of Ministers yesterday. The 2002 draft budget will go to it on Monday.

Velchev announced his intentions on Tuesday after meeting with the IMF mission leader for Bulgaria, Jerald Schiff.

"If a tax on transfers to offshore zones is introduced, it will probably be much lower than the announced 25 per cent, such as five per cent, for example," said Velchev. The final decision as to whether to introduce this tax will be taken in the next two days, he said.

"In late November or early December, another IMF mission will pay a visit, during which an agreement is expected to be signed between Bulgaria and the fund," Velchev said.

Schiff arrived in Sofia on Monday for another round of talks with the government on the macroeconomic framework of the 2002 budget. He assessed the government's proposals for Budget 2002 as good without commenting on details. "In general, the government's proposals form the basis for a reasonable budget," said Schiff, adding that each of the measures would be discussed this week.

Schiff recalled that the IMF would insist on a 0.75 per cent budget deficit for the next year, and that the fund has not revised its position. In his words, the mission wants to see whether the budget proposed by the government is realistic and whether the announced budget deficit of 0.8 per cent can be achieved.

But the details that Schiff refused to provide were actually given by the resident representative of the IMF in Sofia, Piritta Sorsa. "We are concerned with the current account deficit and in this context we are discussing with the Bulgarian government the need to tighten the fiscal policy," Sorsa said, in an interview for the Bulgarian National Radio on Sunday. "Our recommendation is to keep the deficit at 0.5 per cent of the GDP in 2001 and 0.75 per cent in 2002, which will be discussed in the talks this week," she said.

Sorsa said that another unfavourable consequence is the appreciation of domestic credit for emerging markets. However, the reduction of interest on the external debt would be beneficial for Bulgaria, she admitted.

Asked to comment on the plans for tax increases, which the Council of Ministers unveiled the previous week, Sorsa said that the whole package of tax changes was still being discussed with the IMF. "Much progress was achieved with regard to the disputed issues during the visit to Washington of the finance minister, Milen Velchev, but we are nevertheless concerned with the possible impact of the announced plans on the budget," Sorsa said.

Speaking about the proposed introduction of a zero tax rate for reinvested profit, which has been postponed, Sorsa said she doubts that the measure would attract foreign investors.

"We shall try to reach an agreement on the macroeconomic framework and progress in the negotiations towards an agreement while the next mission will continue with a more detailed discussion of the other elements in the program," Sorsa said, having in mind the mission that is going to come to Bulgaria in November.

"The Bulgarian economy is feeling the changed international situation following the September 11 terrorist attacks and it is impossible to predict how long this will continue," Sorsa said. "Demand in Europe is slowing down after the terrorist attacks, which has an impact on Bulgarian exports. At the same time, imports will grow, which poses a certain risk for Bulgaria's current account," she added.

The doubling of child benefits, tax preferences for employers to create jobs for the long-term unemployed, and the structural adjustment of the public-finance sector were discussed on Wednesday by the labour and social policy minister, Lidia Shuleva, with Schiff.

"At present we have no divisive issues with the IMF, even on the controversial matter of child benefits. They do not mind the double increase but they want their application to be means-tested, which is what the public was not happy about," Shuleva said.

The IMF is concerned about the efficiency of the structural adjustment in the public-finance sector, said Shuleva. "This is something that the previous government used to promise as well but did not accomplish properly."

The six per cent increase in pensions in the middle of next year, budgeted for 2002, was also discussed at the session with the IMF.

Shuleva opposed the increase of licence tax for each additional job created. "This runs counter to our employment promotion policy," Shuleva said. This tax burden on companies paying licence tax will most probably be eliminated, Shuleva revealed after her meeting with Schiff. Additional tax preferences for employers hiring long-term unemployed were also discussed.