Cause and Effect in European Politics and Law

Bulgaria's real budgetary deficit is 2-3%, according to EXPAT CAPITAL

euinside, February 21, 2010

A new macro economic point of view emerged in Bulgarian analytical space these days - the financial company EXPAT CAPITAL presented for the first time its own analysis of the macro economic situation of Bulgaria. A managing partner in the company is the former minister in two governments with the participation of the former tzar's party NDSV - Nikolay Vassilev. A contribution to the analysis also has the managing partner of Industry Watch Lachezar Bogdanov.

According to the analysis, Budget 2010 is too big as percentage of GDP. The current government has increased public spending up to 42.3% of GDP for 2010, although its initial intentions were to reduce spending to 30-35% of GDP. The government even promised additional funding for some sectors of the economy like agriculture, healthcare and internal affairs. According to EXPAT CAPITAL, spending could reach 43.5% and the recommended level is 39%.

12% of this spending will finance pensions this year, shows the company's forecast and recommends this amount to be reduced to 9%. Regarding the deteriorating demography a serious reform of the pension system is required. This should include freezing and even reducing pensions and increasing of the retirement age. EXPAT also recommends several other measures, whose implementation must start immediately:

- healthcare reform, including closure of around hundred hospitals;
- changes in the pension model, aimed at reducing pensions' spending as a percentage from GDP;
- additional cuts in public administration (17,000 public servants were cuts for the period 2005-2009, but the current government promises more);
- privatisation and concession deals, public-private partnerships which could help replace all necessary public investments in infrastructure with private funding.

The analysts from the financial company are worried also by the fact that neither the current nor the previous government paid any attention to the current account deficit and, therefore, they did not apply any policies in this area. The big trade deficits and the current account deficits mean that the state does not produce enough competitive goods and services, that it is importing too much and lives beyond its capabilities. It also means that the currency, maybe, is seriously overestimated.

With regard to the crisis, the forecast of the company is pessimistic. The first half of the year is expected to be worse than now because the bad credits well increase together with the serious writing off of bank assets. They also predict that a lot of industrial companies as well as small and medium enterprises will bankrupt. The lack of liquidity in the economy will also continue. Stagnation in the construction sector is expected too together with turbulences at the fund market. If the EU does not reach economic growth of at least 1% this year, we cannot expect a turning point for Bulgaria in 2010.

On one of the most discussed issues lately because of Greece's problems and other countries' problems in the euro area - the budgetary deficit - EXPAT CAPITAL strongly criticizes the government by saying that the real budgetary deficit for last year must have been 2-3% and not as the cabinet claims - 0.7%. The company points out that its forecast is calculated not on a real cash basis but on the basis of accumulation. It is this indicator that causes serious discrepancies with the data the government is providing and which the European Commission is expecting. The forecast of the analysts is this year the budgetary deficit to reach 2% because of populist pressures. The recommended level is 1% of GDP, the data of EXPAT CAPITAL show.

Sources from the European Commission explained for euinside that when the finances of a country are being assessed in the annual Spring Convergence Reports, the way the budgetary deficit is calculated is not taken into account. It is possible for the sake of better media position the government to report the deficit on a cash basis. The forecast of the Commission is this year Bulgaria's budgetary deficit to reach 1.7%.

Because of the threat of protests, the government of Boyko Borisov froze the pension reform and is also stepping back in the healthcare reform.

The first presentation of EXPAT CAPITAL was attended by many politicians, former ministers and presidents. According to the former head of state Petar Stoyanov one of the very serious challenges for Bulgaria's accession to the eurozone is that many of the Western partners are not aware that in fact it was the currency board that played crucial role for Bulgaria's survival in the crisis. Unlike many other countries, Bulgaria remained relatively stable but this obviously is not well understood. Therefore more efforts should be invested this positive news to be explained, Mr Stoyanov added.