The Bulgarian government lowered its forecasts for growth in 2002, after prompting from the International Monetary Fund (IMF), announced Finance Minister Milen Velchev on Friday.

"In the wake of current events in the world economy after September 11, we have decided with the IMF to reduce our growth forecast from 4.5 to four per cent," Velchev told a press conference.

The government and the mission of the IMF, led by Gerald Schiff, reached an agreement on the macroeconomic framework of the 2002 budget, Velchev announced. The budget deficit is projected at 0.8 per cent instead of 0.75 per cent as the IMF insisted. In 2002, spending will increase, with social spending registering the largest growth, by over 600 million leva or by nearly 20 per cent compared to this year.

For the time being, bank transfers to offshore zones will not be charged taxes. "Levying a tax on such transfers has not been included in the package of tax changes the government is going to discuss," Velchev said. The profit tax which all companies will pay is set at 15 per cent.

An agreement was also reached on the partial introduction of value added tax in tourism. The tax rate will be 20 per cent, but the effective figure will be 10 per cent as 50 per cent of the tax represents repayable tax credit, explained the finance minister. VAT will be levied on Bulgarian made medicines, as well.

According to Velchev, the agreement reached on the framework of the budget is an important step towards concluding a new loan arrangement with the IMF. Before the IMF mission's arrival, there had been a lot of proposals made by the government that were disagreed on by the fund, he added. As examples, he cited the increase in minimum wage and child benefits, delaying the full introduction of VAT in the tourist industry, and the reduction in income tax charged on natural persons.

"Except the zero rate on reinvested profit, we made a great progress regarding all these issues, with both sides making compromises. I think, however, that on the whole the IMF made more compromises than we did," he said.

Schiff recalled that the purpose of the mission was to reach an agreement on the parameters of the 2002 budget. "We succeeded in doing it, and this is a very important element of the future agreement which we will sign," he said. In his words, the budget is good, making it possible to run a small deficit.

In the mission's opinion, the implementation of the budget will be no problem but the government should continue its efforts to restructure the economy and improve the performance of the tax administration.

Later on Friday, Velchev informed Parliament about the agreement reached with the IMF regarding the tax legislation and next year's budget. The tax and budget bills will be submitted to Parliament early next week, he said, emphasizing the 20 per cent increase in social spending.

The agreement with the IMF includes carrying out structural reforms in the sectors where it has been delayed because of the general elections - privatization, the energy sector, and transport, the finance minister said.

The government believes that the previous cabinet did not manage the country's foreign debt efficiently, Velchev said. According to him, they did not issue Eurobonds though the market conditions were good for doing so. The profit loss as a result of mismanagement of the foreign debt is estimated at four billion leva, which is as much as the amount of all social spending in 2001, he said.

The government does not plan any substantial increase in its fiscal deposits, Velchev said. He recalled that the government deposit in the Issue Department of the National Bank of Bulgaria has shrunk over the past months because of the lack of external financing to cover the deficit of about $70 million in the balance of payments, and the need to make payments servicing Bulgaria's foreign debt.

Velchev projected that the deficit in foreign trade will reach $1.5 billion this year, with a growth in imports of about 11 per cent and in exports of about six per cent. The annual inflation is expected to be around 4.5 per cent. The government had to adopt a more restrictive tax policy because of the large foreign trade deficit, he said.

By a proposal of the Coalition for Bulgaria, on November 2, the Parliament will discuss the structural aspects of the future arrangement with the IMF. The coalition demanded to make an analysis of the economic aspects of the former government and of the implementation of the previous agreement with the IMF. They also wanted to know how the Bulgarian economy would be made competitive and how people's standards of living would be improved.