By Oonagh Leighton
When Milen Burilkov, a Bulgarian student, won the prize of becoming finance minister for the day, Milen Velchev, the bona fide Bulgarian finance minister, must have breathed a sigh of relief. ?Given the magnitude of my workload, I have always dreamt of cloning myself,? says Velchev laughing.
The workload is considerable. Pushing economic growth, controlling the budget deficit, speeding up privatization and strengthening the judiciary are all priorities for the country gearing up for European Union (EU) entry in January 2007. ?I feel as optimistic as I have ever been about our EU entry status,? says Velchev.
Even without a clone Velchev has achieved much in the three years since he took up office. Last year Bulgaria enjoyed growth of 4.5%, outpacing economic expansion in much of western Europe. Velchev is setting his targets even higher for 2004 at 5.3% growth. ?If we achieve this it will be the highest rate of growth in Bulgaria since the transition process began in 1989,? he says.
At the same time Velchev is wielding a tight fiscal policy. He forecasts inflation at 4% in 2004. In addition, Bulgaria has agreed with the IMF to reduce its budget deficit to 0.4% of GDP this year. ?In Bulgaria we
operate a currency board and this adds up to a very safe and stable macroeconomic environment,? says Velchev.
The country has seen a rapid reduction in its debt to GDP ratio. In 2001 this figure stood at 75%, falling to 48% in 2003 and forecast to close at 40% this year. ?This leaves us well under the Maastricht criteria of 60%,? he says.
These achievements have not gone unrecognized. ?The ratings agencies have given us credit,? says Velchev. In the past two-and-a-half years, Bulgaria has had several ratings upgrades. These include since 2000, two upgrades from Moody's, four each from Standard & Poor's and Fitch, and one from the Japanese rating agency JCRA (see table).
REWARD
These developments have been rewarded by foreign investors. The level of FDI has rocketed in the past 12 months. ?Last year was a record year in terms of FDI,? says Velchev, but he adds, ?We are expecting FDI levels to double this year to over $1.5 billion.?
This will include several big-ticket privatizations. Already the sale of BTC, the telecommunications company, has raised about ?230 million. There will also be three separate deals for the sale of the energy distribution sector. The total will include the $350 million raised by the sale of the Bulgarian Savings Bank to Hungary's OTP Bank last year.
All of this leaves the government with a growing pool of fiscal reserves. ?My budget needs are minimal,? says Velchev. ?The only reason I would have to borrow is to refinance existing debt, and there are not many deals maturing over the next couple of years.?
These positive developments looked briefly in trouble when the Bulgarian Socialists Party tabled a no-confidence vote against the government in March this year, a vote that was advocated on seven basic arguments, including negligence towards the constitution and failure with regards to healthcare, education and employment.
It was not successful and the ruling party emerged unscathed. ?This episode was neither a real threat nor particularly damaging,? says Velchev. ?The opinion polls show that the ruling party has increased its support base, and if it did serve any purpose, it is to let the people know that there will not be early elections, and the original date for parliamentary elections still stands at mid-2005.?
With the macroeconomic picture bright in Bulgaria, it is on administrative and judiciary reforms that the government must sharpen its focus.
TAX change
?I am very busy reforming the customs and tax administration,? says Velchev. ?This is one of my top priorities. We started in 2002 when we retained the services of the Crown Agents to advise us over a three-year period. We are considering extending this to early 2007 to coincide with our entry to the EU.? The results are impressive. ?If you use revenues as a measure of effectiveness then we are doing very well. Customs revenues have increased by 30% over a two-year period.?
Velchev's tax reforms include plans to streamline the tax administration process by creating a national revenue agency, and improving the collection of taxes. In addition, the minister has lowered certain taxes. Company profit tax has fallen from 23.5% in 2003 to 19.5% in 2004 and is forecast to fall further to 15% in 2005. Velchev has also lowered personal income tax.
law reform
Strengthening the judiciary should also provide foreign investors with additional comfort. ?The reform of the judiciary is probably the most important outstanding issue, and a new law is being considered in Parliament that will look at various aspects, including the indemnity for judges,? says Velchev.
In March the government and the IMF also announced plans to launch a special package of anti-corruption measures.
Prospective membership to the EU is already working for the country. The EU financial framework proposal for Bulgaria was approved at the end of March. This means that Bulgaria will receive ?4.5 billion over a three-year period from their date of EU entry.
?We regard it as a very positive signal that the European Committee has decided to ring fence certain amounts of money for Bulgaria and Romania in the first three years of their membership,? says Velchev. ?We are talking about very significant amounts of financial assistance, three
times what we are receiving now and the equivalent of 7% of GDP.?