The mission of the International Monetary Fund (IMF) ended on December 16 without an agreement being reached with the Government on one of the key issues - the raising of the minimum monthly wage from 120 to 150 leva as of January 1, 2005.
The Cabinet's position on the issue has not changed, Finance Minister Milen Velchev said. IMF's position for gradual increase, which is to take place in two stages of 12.5 per cent rise each, was not accepted.
The Bulgarian government did not receive an approval from the Fund for the expenditure side of 2005 budget, nor was the Fund tending to accept the way the budget surplus for 2004 was being spent.
This is the bad news, and the good news is that the negotiations will continue, Velchev said. A new IMF mission is expected within two or three months.
The IMF Mission Leader for Bulgaria Hans Flickenschild said the mission had used up all its breathing space for negotiations and further co-ordination with the IMF executive board was needed. The current economic situation seems better than it was when the precautionary agreement approved in August was negotiated, and the failure to reach agreement during this mission is less alarming, he said.
Flickenschild said the IMF Mission would not draw up a negative report and discussion with the Government would continue. The IMF executive board will step in only when and if this review is completed.
Economic growth is higher, inflation and unemployment are falling, and the current account deficit is about one percentage point lower than expected, Flickenschild said.
This year's budget surplus will be about 3.3 per cent of the GDP and the IMF expects about two per cent of it to go towards accommodating the economy's liquidity needs in 2005. If the Government decides to make extra expenditures by the end of 2004, the IMF expects the surplus to drop to about one per cent of GDP at end-December, Flickenschild said.
Velchev said the budget surplus was an estimated 400 million leva. Should the Government decide to spend more than has been agreed with the IMF and spend some 250 to 300 million leva by the year's end, the surplus will fall to some 100 million leva, which is about 0.3 per cent of the GDP.
"If this happens, one of the terms of the agreement with the IMF will indeed be formally broken and we will have to ask the board for an exception to the rules if it is to remain effective. We will do so if it comes to this," Velchev said.
According to Flickenschild, the differences would not have been so large were it not for the elections. The IMF officials, who visited Bulgaria, believe that next year's elections are the driving force behind Government's firm position on the wage increase, despite the inherent threats.
The increase in the minimum wage planned by the Government would affect the other wages as well, Flickenschild believes. Those who get higher wages at present will also request a raise. Ahead of elections, the trade unions are also likely to be more aggressive and the government more likely to succumb to pressure. This will increase the wages in both the public and the private sector, which is our main concern, Flickenschild said.
Unemployment is declining steadily at present, but it is still too high. It is employment, not the wage raise that should be the Cabinet's priority now. We made some concessions but the Government showed less flexibility than in September, when a compromise seemed likely, the IMF mission leader said.
Compared to the expenditures agreed for 2004, the figure in the 2005 budget is 7.5 per cent higher in nominal terms and nearly 4.5 per cent in real terms, which is acceptable on an annual basis. However, the Government decided to allocate an additional 135 million leva for education, while it can save only some 35 million leva from expenditures, i.e. there is a rise by 100 million leva.
Velchev said that failure to reach agreement would not have a negative effect. "I do not mean to say that this sends a good signal, but its importance should not be overestimated. Investors will hardly be impressed, given the good macroeconomic indicators registered in recent months," he said.
The IMF mission left Bulgaria with a bit of concern on some other important issue it came to pursue in the country, such as curbing the lending growth.
Bulgarian National Bank (BNB) governor Ivan Iskrov said a parallel mission of the IMF Monetary and Financial Systems Department was in Sofia to discuss steps to restrict bank lending and the experience of other countries. In 2005, BNB will continue following closely the financial sector's development, particularly bank lending, he said.
Lending growth is projected at 25 to 30 per cent in 2005, about five per cent of GDP, Iskrov said. Meetings with the more aggressive lenders among banks are planned after the New Year.
Employers' ideas
The voice of employers was hardly heard during the last mission of the IMF in Bulgaria, although they will be among the players in the economy that will bare all the consequences of the general economic policy.
To employers the minimum wage is not a topic of discussion, as long as using it as an instrument in the policy of incomes and as a macroeconomic tool is totally wrong. They have long ago insisted that hourly wage should be introduced in Bulgaria and this would spend much of the debate on remuneration. Tax and social security legislation also remain in focus as obstacles for the good business practices.
The Bulgarian Industrial Association (BIA) recommended on December 15 a package of economic measures that could be implemented by the incumbent and the next government. Speaking at a news conference, BIA chairman Bozhidar Danev said the measures concern tax legislation and practice, social security, creditor protection, and public administration.
Key recommendations are to introduce mandatory VAT registration for all tax-liable persons engaging in independent economic activities, and to enforce a short time limit for tax cross-checks as a condition for VAT recovery. The BIA recommends that such cross-checks be conducted by privately-run entities employing registered auditors.
In a growing number of cases, commercial transactions are not recognised as tax events and VAT is not recovered, Danev said. Therefore, the BIA suggests that clear criteria for tax events should be formulated.
The BIA also believes that obligatory social security contributions must be reduced significantly, supplementary retirement insurance funds must be allowed greater freedom to make investments, and the mechanism of healthcare financing must be restructured.
In the field of public administration, the BIA calls for structural improvements in the administration system. The creation of new administrative departments must be coupled with staff cuts in old departments which have been stripped of some of their functions, or even complete dissolution of redundant departments.
Trade union achievements
The largest trade unions in Bulgaria harshly opposed the proposals of the IMF for a moderate increase in the minimum wage, as well as for busting the length-of-service benefits currently paid to all Bulgarian employees.
The latter idea was scrapped and further talks on it would hardly reach any effect, as long as Government itself was not too much persuaded of the idea. Cabinet and trade unions suddenly became allies in what was seen as a major resistance against the fund's proposals.
To further strengthen their alliance, Government and the two main trade unions - Confederation of Independent Trade Unions in Bulgaria (CITUB) and Podkrepa Labour Confederation - signed an agreement on December 17 at achieving greater efficiency in the social dialogue.
The commitments of Labour and Social Policy Ministry under this agreement include that it motion amendments to labour legislation after trilateral negotiations. By May 31, 2005 it also has to discuss motions on the need of changes in labour categorisation in some industries and activities according to the specific labour conditions, as well as for determining risky work places or occupations in relation to which employers are obliged to insure them at their expense.
Asked whether the agreement signed today will guarantee social peace, CITUB leader Zhelyazko Hristov said that the trade unions do not commit themselves to concluding social peace in case there are still unresolved problems of employed in Bulgaria in spheres like tobacco production, mining and telecommunications, among others.
Meanwhile, trade unions appreciated as a good sign the decision of Parliament to finally start hourly calculation of the contributory service of employees in Bulgaria. The decision will come into force on January 1, 2005.
Currently, the employers are paying social security contributions on overtime, but they do not add to the employees' length of service yet. If overtime hours are made legal, the employees may submit information to the National Social Security Institute these hours to be added to the contributory service.
The Cabinet's position on the issue has not changed, Finance Minister Milen Velchev said. IMF's position for gradual increase, which is to take place in two stages of 12.5 per cent rise each, was not accepted.
The Bulgarian government did not receive an approval from the Fund for the expenditure side of 2005 budget, nor was the Fund tending to accept the way the budget surplus for 2004 was being spent.
This is the bad news, and the good news is that the negotiations will continue, Velchev said. A new IMF mission is expected within two or three months.
The IMF Mission Leader for Bulgaria Hans Flickenschild said the mission had used up all its breathing space for negotiations and further co-ordination with the IMF executive board was needed. The current economic situation seems better than it was when the precautionary agreement approved in August was negotiated, and the failure to reach agreement during this mission is less alarming, he said.
Flickenschild said the IMF Mission would not draw up a negative report and discussion with the Government would continue. The IMF executive board will step in only when and if this review is completed.
Economic growth is higher, inflation and unemployment are falling, and the current account deficit is about one percentage point lower than expected, Flickenschild said.
This year's budget surplus will be about 3.3 per cent of the GDP and the IMF expects about two per cent of it to go towards accommodating the economy's liquidity needs in 2005. If the Government decides to make extra expenditures by the end of 2004, the IMF expects the surplus to drop to about one per cent of GDP at end-December, Flickenschild said.
Velchev said the budget surplus was an estimated 400 million leva. Should the Government decide to spend more than has been agreed with the IMF and spend some 250 to 300 million leva by the year's end, the surplus will fall to some 100 million leva, which is about 0.3 per cent of the GDP.
"If this happens, one of the terms of the agreement with the IMF will indeed be formally broken and we will have to ask the board for an exception to the rules if it is to remain effective. We will do so if it comes to this," Velchev said.
According to Flickenschild, the differences would not have been so large were it not for the elections. The IMF officials, who visited Bulgaria, believe that next year's elections are the driving force behind Government's firm position on the wage increase, despite the inherent threats.
The increase in the minimum wage planned by the Government would affect the other wages as well, Flickenschild believes. Those who get higher wages at present will also request a raise. Ahead of elections, the trade unions are also likely to be more aggressive and the government more likely to succumb to pressure. This will increase the wages in both the public and the private sector, which is our main concern, Flickenschild said.
Unemployment is declining steadily at present, but it is still too high. It is employment, not the wage raise that should be the Cabinet's priority now. We made some concessions but the Government showed less flexibility than in September, when a compromise seemed likely, the IMF mission leader said.
Compared to the expenditures agreed for 2004, the figure in the 2005 budget is 7.5 per cent higher in nominal terms and nearly 4.5 per cent in real terms, which is acceptable on an annual basis. However, the Government decided to allocate an additional 135 million leva for education, while it can save only some 35 million leva from expenditures, i.e. there is a rise by 100 million leva.
Velchev said that failure to reach agreement would not have a negative effect. "I do not mean to say that this sends a good signal, but its importance should not be overestimated. Investors will hardly be impressed, given the good macroeconomic indicators registered in recent months," he said.
The IMF mission left Bulgaria with a bit of concern on some other important issue it came to pursue in the country, such as curbing the lending growth.
Bulgarian National Bank (BNB) governor Ivan Iskrov said a parallel mission of the IMF Monetary and Financial Systems Department was in Sofia to discuss steps to restrict bank lending and the experience of other countries. In 2005, BNB will continue following closely the financial sector's development, particularly bank lending, he said.
Lending growth is projected at 25 to 30 per cent in 2005, about five per cent of GDP, Iskrov said. Meetings with the more aggressive lenders among banks are planned after the New Year.
Employers' ideas
The voice of employers was hardly heard during the last mission of the IMF in Bulgaria, although they will be among the players in the economy that will bare all the consequences of the general economic policy.
To employers the minimum wage is not a topic of discussion, as long as using it as an instrument in the policy of incomes and as a macroeconomic tool is totally wrong. They have long ago insisted that hourly wage should be introduced in Bulgaria and this would spend much of the debate on remuneration. Tax and social security legislation also remain in focus as obstacles for the good business practices.
The Bulgarian Industrial Association (BIA) recommended on December 15 a package of economic measures that could be implemented by the incumbent and the next government. Speaking at a news conference, BIA chairman Bozhidar Danev said the measures concern tax legislation and practice, social security, creditor protection, and public administration.
Key recommendations are to introduce mandatory VAT registration for all tax-liable persons engaging in independent economic activities, and to enforce a short time limit for tax cross-checks as a condition for VAT recovery. The BIA recommends that such cross-checks be conducted by privately-run entities employing registered auditors.
In a growing number of cases, commercial transactions are not recognised as tax events and VAT is not recovered, Danev said. Therefore, the BIA suggests that clear criteria for tax events should be formulated.
The BIA also believes that obligatory social security contributions must be reduced significantly, supplementary retirement insurance funds must be allowed greater freedom to make investments, and the mechanism of healthcare financing must be restructured.
In the field of public administration, the BIA calls for structural improvements in the administration system. The creation of new administrative departments must be coupled with staff cuts in old departments which have been stripped of some of their functions, or even complete dissolution of redundant departments.
Trade union achievements
The largest trade unions in Bulgaria harshly opposed the proposals of the IMF for a moderate increase in the minimum wage, as well as for busting the length-of-service benefits currently paid to all Bulgarian employees.
The latter idea was scrapped and further talks on it would hardly reach any effect, as long as Government itself was not too much persuaded of the idea. Cabinet and trade unions suddenly became allies in what was seen as a major resistance against the fund's proposals.
To further strengthen their alliance, Government and the two main trade unions - Confederation of Independent Trade Unions in Bulgaria (CITUB) and Podkrepa Labour Confederation - signed an agreement on December 17 at achieving greater efficiency in the social dialogue.
The commitments of Labour and Social Policy Ministry under this agreement include that it motion amendments to labour legislation after trilateral negotiations. By May 31, 2005 it also has to discuss motions on the need of changes in labour categorisation in some industries and activities according to the specific labour conditions, as well as for determining risky work places or occupations in relation to which employers are obliged to insure them at their expense.
Asked whether the agreement signed today will guarantee social peace, CITUB leader Zhelyazko Hristov said that the trade unions do not commit themselves to concluding social peace in case there are still unresolved problems of employed in Bulgaria in spheres like tobacco production, mining and telecommunications, among others.
Meanwhile, trade unions appreciated as a good sign the decision of Parliament to finally start hourly calculation of the contributory service of employees in Bulgaria. The decision will come into force on January 1, 2005.
Currently, the employers are paying social security contributions on overtime, but they do not add to the employees' length of service yet. If overtime hours are made legal, the employees may submit information to the National Social Security Institute these hours to be added to the contributory service.
