CHANGES to the Government’s budget policy and further measures to curb lending growth were the two key results of the latest International Monetary Fund (IMF) mission to Bulgaria.
The mission, led for the last time by outgoing mission head Hans Flickenschild, ended on January 25 with statements that cast both surprise and worry into the hearts of some Bulgarian politicians, business people and experts.
The first surprise was in the words of Finance Minister Plamen Oresharski, who announced that the Cabinet would work for a three per cent budget surplus in 2006. Although the Government’s initial plan was to have a balanced budget with no surplus, it was forced by the IMF to accept the surplus requirement, which could only be eased if the current account deficit is 12 per cent or less.
The Cabinet has set a current account deficit target of 12 per cent in the 2006 budget act.
The current account gap is one of the biggest threats to the growing Bulgarian economy, the IMF believes. The Fund has forecast that this country may have had about 15 per cent deficit at the end of 2005. And while the official figures are yet to be released, it is obvious that this imbalance is not for the good.
“With appropriate policies and the reversal of temporary factors that impacted the external position in 2005 we expect some improvement in the external current account deficit in 2006 to below 13 per cent of GDP,” the IMF said in a statement.
Oresharski said that the country ended last year with a budget surplus equal to 2.33 per cent of GDP in preliminary estimates, exceeding the 2.26 per cent target agreed to with the IMF in April 2005. The Government originally planned a deficit of 0.5 per cent of GDP in the 2005 budget act, but later agreed with the IMF to aim for a fiscal surplus.
The IMF also estimated Bulgaria’s GDP grew by 5.5 per cent last year and would show a similar growth rate in 2006. The IMF said consumer price inflation would slow to below six per cent by the end of 2006 from 6.5 per cent at the end of last year.
Though it looked like the incumbents were quite keen to agree on the three per cent surplus in this year’s budget, another set of measures proposed for fighting the current account deficit came as a blow to them. It is related to lending growth, which according to the IMF, is a key factor fuelling the current account imbalance.
The current account deficit rose strongly last year driven by growing trade deficit that was blamed on a boom in bank lending in the country.
Bulgarian National Bank, which operates under an IMF-advised currency board, has tightened its reserves requirements for local banks to slow the growth in lending. As a result, lending growth slowed to an estimated 30 per cent in 2005 from 50 per cent in the previous year.
BNB governor Ivan Iskrov said that he had “extremely difficult” talks with the IMF but the IMF showed flexibility in the planning of mutually acceptable measures to contain lending growth. The sides agreed on three additional steps.
First, the central bank will make a recommendation, which will not be made into an ordinance, that banks should want to see a disposable income of at least 100 leva for a household member when issuing a consumer or mortgage loan, so that the family’s monthly requirements are met.
Although the IMF insisted that banks should expect at least 50 per cent self-funding for mortgage loans, it was agreed that no such requirement would be set. The measure that will apply is setting higher capital requirements by raising the risk weight of mortgage loans when the customer’s self-funding is less than 50 per cent of the price of the property he or she wants to buy.
The third measure relates to the purchase of certain bonds from the banks, which amounts to lending, Iskrov said. This is to prevent banks from lending to companies through buying out corporate bond issues.
The IMF has warned that loans to individuals in Bulgaria have been rising much faster than corporate credits and posed greater risks for the country’s external account balance. This is why measures will target mainly retail and mortgage loans, except for the third one aimed at corporate lending.
“As a result of the measures that we will offer, we could reach a credit growth of around 17.5 per cent,” Iskrov said. In his view, none of the lending-limiting measures will be introduced for a long time. They will be phased out after Bulgaria joins the EU.
BNB data, published on January 27, showed that the credit portfolio of Bulgarian commercial banks totalled about 18.4 billion leva (9.4 billion euro) at the end of December 2005, up 33.1 per cent year-on-year.
The rise in the loan portfolio was accompanied by a 30.13 per cent annual growth in deposits portfolio to 25.4 billion leva.
