Cause and Effect in European Politics and Law

The World Bank is taking control over its own money

Adelina Marini, Ralitsa Kovacheva, August 13, 2010

What is a loan from the World bank? Or EU funds? You will probably find stupid the way these questions are formulated but obviously it is not only us that are asking them, but also the World bank with the consent of the European Commission and the European Council.

So, what is a development loan?

The loans from the World Bank for the past 20 years, later the pre-accession EU funds and then the structural funds of the Union, have only one purpose - reforming a country, awaken after a long socialist planning coma in an environment of market economy and developing globalisation. Reforming in a way that will help such a country with expertise, technology, know-how and money to start producing the wealth it is striving for on its own.

From the beginning of its cooperation with Bulgaria, the World Bank had agreed to lend the country some $1.5 bn. We will not count the money from the pre-accession funds.

The result

Zero. Currently the active projects, on which the World Bank is working with Bulgaria are in the areas of social inclusion (education for Roma in order to be included in the labour market), health care reform, infrastructure, fighting corruption, energy, water and sanitation. If we had absorbed all these funds properly, maybe we would have avoided the current situation. Furthermore, probably we would have avoided the agreement, signed in Sofia by World Bank's President Robert Zoellick and the Bulgarian Prime Minister Boyko Borissov.

The agreement

Bulgaria and the World Bank have agreed on restructuring the loans of the bank. The total amount of the loans, which Bulgaria had agreed so far with the World Bank Group (including IBRD, MAD) is around $1.5 bn. This practically means that the World Bank is losing patience and faith that Bulgaria is capable of absorbing money for the purposes for which it is borrowed. In fact, the bank's assistance is being realised with the knowledge of the President of the European Commission Jose Manuel Barroso and the President of the European Council Herman van Rompuy a mechanism to be found to assist the newer EU Member States so that they could use the full potential of EU funds.

According to the detailed explanation of Robert Zoellick, the loans will be restructured in such a way that they will no longer focus on laying asphalt on roads but rather on assisting the building of capacity (in terms of administrative, technological and know-how capacity). Besides, the World Bank will send experts to Bulgaria, whose number is yet to be determined, who will work as consultants or project managers. Moreover, these experts will assist Bulgaria not only in preparing projects, financed by the World Bank but also those with EU funding.

Prime Minister Boyko Borissov warned that an absorption of World Bank money would increase the budget deficit but in the same time, he said, the agreement was a strong signal to the international financial markets because, as he put it - many important people around the world read and when they see that the President of the World Bank was in Sofia and praised the government, they would make the right conclusions about the country's achievements. Very interesting was the change in Prime Minister's attitude towards the "accidentally found contracts and annexes", that pumped up the deficit, worth some 1 bn euro:

"Currently we have almost 1 bn euro - it's true that these contracts were signed by the previous government but still they are contracts, real contracts and as Ms Gheorghieva (EU Commissioner for Humanitarian aid) said, we should try and use this construction season to lay asphalt and construct as much as possible. For you, or those of you, who do not know - using the money from the signed agreements with the World Bank, the European Investment Bank and the European Bank for Reconstruction and Development, immediately transfer this money into the deficit. This is why we are not spending it, because it will immediately increase the budget gap".

As it becomes clear, the Prime Minister still insists on laying asphalt, but he is wary about the deficit, since the European Commission has already started an excessive deficit procedure against Bulgaria. And as Boyko Borissov was forced to learn the strict Brussels rules (in the beginning of the year he said that Brussels would not be angry with the deficit), now he has figured out another way to approach the issue. In three weeks (at the latest) with the assistance of World Bank experts, an analysis will be made on the road projects, for which Bulgaria intends to use some loans. The purpose of the analysis is to show for what exactly the government is planning to increase the budget deficit. "Not for pensions, salaries or things which, according to Brussels cannot be increased and nowhere are being increased, but for real construction of infrastructure".

A little later the Premier insured himself, saying that this did not necessarily mean that the planned budgetary deficit for this year would be surpassed, but "as we were advised - a little over 3.1%, 3.2%, if the money of course go for roads and asphalt only and this is well explained to Brussels, then everyone would accept it".

And why the roads are so important the Prime Minister explained like this: "Brussels is not, how to put it, a capital of evil for all countries that violate the 3 per cent deficit barrier. We are not even saying that we will violate it but we want to agree within 3 weeks in Brussels, project by project, to provide all the roads for which we have signed contracts and to make an analysis of the critical spots - whether we will make one third, two thirds, whether we will construct the entire road this year, or next year. The technical equipment we bought yesterday for $1.5 mn will guarantee quality and we guarantee that their money will be spent transparently and we also guarantee that by shooting the road with this equipment and send the photos immediately, they will say - yes, this road must be made because people die on it".

The misunderstanding

While the Prime Minister was concerned about the budgetary deficit and the asphalt, the World Bank President and his former subordinate and now EU Commissioner Christalina Gheorghieva, spoke of something else. The restructuring of the loans is aimed at finding a way to increase significantly Bulgaria's capacity to absorb EU funds. According to Robert Zoellick, there are many countries in trouble which, however, are not in the good Bulgarian situation to have at their disposal 7 to 10 bn euro of grants, not loans. Ms Gheorghieva added that currently the money absorbed from the EU is only 10%, given that only 3 years remain until the end of the 7-year budgetary period of the EU.

"We have to accelerate the absorption of the available resources from the EU funds and in the meantime, as President Zoellick said, to make a request for the next financial perspectives. This is why we have only one year time. We have to absorb capacity from the World Bank in areas where the bank is already working like, for example, roads, energy and to look for those key areas which Bulgaria defines as priority ones for the next 7-8 years, in order that we could have project management, ready to be used when in 2014 the next programming period starts", the European Commissioner explained.

In other words, the World Bank is taking control over its own projects and also over those which will apply for European funding. This cannot mean anything else but an absolute failure of the efforts of the country to demonstrate capacity to do on its own, formulated diplomatically by President Zoellick like this: "And what this stems from, in fact, is a point the Prime Minister made to us and that is that the European Commission is designed for countries that are at a certain level of development, so there's big negotiations to get countries into the EU. And once they're in, the European Commission doesn't have the focus on some of the issues that we're talking about here".

And regarding the deficit, for which the Premier spoke, the Bulgarian EU Commissioner was forced to explain further that it would be quite an awkward situation if everyone remain after today's meeting (August 10) with the impression that the World Bank recommended Bulgaria to increase the deficit. The further explanation of Ms Gheorghieva gave more clarity but also a lot of food for deliberation: "The agreement actually provides for an independent eye to see what plans we have currently here in Bulgaria, what their realisation means for the deficit of the country, so that the government could take an informative decision what to do and what not".

In other words, Bulgaria is incapable of defining its priorities, especially in a moment when the discussion on the parametres of the fight, which will start next year on the next 7-year budget of the EU, is heating up.

On his behalf Robert Zoellick refrained from commenting on the deficit but emphasized on the debt part: "The budget forecast have to take into account estimates of growth which produce revenues and then expenditures. Your deficit is something about 3% and then in the US it is 11%. But another important part is that Bulgaria's debt as a percentage of the economy is only about 15% of the GDP. The EU rules are 60% and many of your western European neighbours are over 60%. So, what has to be developed by the government as a whole is a forecast, trying to estimate the expenditures and the revenue. And what we were broadly talking today is, given the credibility that the government has developed, are there some additional investments that can boost growth and if you boost growth you also boost revenues."

These words of the World Bank's President show unequivocally that, although praised, the government is not doing well with making budgetary forecasts. Maybe because it is not doing well with planning, programming and management of projects, which can be externally financed. And maybe, also because the constant talking about increasing, reducing and then again increasing of the budgetary deficit, accompanied by updates of the budget and constant corrections of the Convergences programmes, speaks to the World Bank that it is possible the country, in some point in the future, not to be able to pay its debt. What can be added for more clarity is the context of the visit.

The President of the World Bank came to Bulgaria as a first stop of a three-leg European tour and the group in which our country is included does not create a very good context for the conclusions, which "the important people around the world" will derive - after Bulgaria Robert Zoellick visited Moldova and Latvia. Both countries, together with Bulgaria, were mentioned in the latest World Bank report on Global Economic Perspectives as some of the worst hit by the crisis European countries, with big current account deficits and "vulnerable external debt dynamics". "While industrial production fell less deeply in Lithuania and Bulgaria, for example, because of the sharp contraction in domestic demand required as financing of large current accounts dried up, output has not recovered to the same degree and remains 11 percent and 21 percent, respectively, below pre-crisis peaks", the report says.

The clarification on debt is also important because the agreement, signed on August 10, is related to restructuring of debt, no matter that according to the Prime Minister, the World Bank's experts will come here paying their own salaries. The small detail is that they will not finance their work themselves because this money will have to be one day paid off by Bulgarian taxpayers. In this sense Robert Zoellick assured that the restructuring would not lead to a change of our country's financial status, because the bank is lending at very low interest rates - around 3%.

And in the end, World Bank's readiness to assists might be interpreted as support and praise for the current government. With no less power, however, it could be interpreted as a failure of all recent attempts our country to be forced to understand that only reforms (but real ones) could make it stand on its feet and become independent from constant external incitement and nudging. Or, as President Zoellick said: "We will be successful if in a number of years we will be able to move out of business and Bulgaria handles it on its own. But right now you've got talent at the ministerial level but you don't have in depth in some of these particular areas where an investment today will make revenue and productivity and draw business tomorrow".