OPEN LETTER
Prof. Krastyo Petkov, PhD
Chairman of the United Labour Block
Dear Mr. Borisov,
I turn to you on behalf of the United Labour Block, which supported numerous initiatives and good policies of GERB before and after the political elections in July/2009. I highly appreciate the fact that GERB managed to consolidate the electoral support of the majority of Bulgarian voters and it removed from power the corrupted three-party coalition in a democratic way. I take into account the heavy burden, which your Government inherited – a crisis situation, which does not have historical analogue in Bulgaria. I comprehend the massive campaign you lead to reveal misfeasance of power of the former political leaders and your attempts to identify irresponsible persons, related to political corruption.
I do believe that you are about to agree that this position is well-intentioned, and is charged with positive appreciation of your first actions as Prime Minister of the Republic of Bulgaria.
However, my Open Letter is devoted to another topic: Budget and Financial Policy – Anti-Crisis Measures. In this field, unconditional support is neither beneficial to the new Government, nor to the Bulgarian people.
I am to try to explain what my worries are based on, and why I appeal to change the course of the already chosen economic strategy you implement.
Budget-2010 is a highly-risk and in any case – non-executable budget!
The situation we are in is a paradox. The bill of the Budget was passed on first hearings in the Parliament with no debate in essence. This is a historical precedent for the last 20 years. In the meantime, two alternative budgets were announced outside the parliamentary doors: one version was suggested by some market fundamentalists; the other – by former left socialists.
On the one hand, the fundamentalists – from the so-called Institutes for Market Strategies, suggest introduction of even more restrictive financial policy against the citizens of the state and extra privileges to the business.
On the other hand, the people around the ex-prime-minister Stanishev, who followed right, non-social policy for a period of four consecutive years, is more concerned now for the poor and the employees-at-will.
Most probably, you have to take into account that the first push you into policy formation, which may burst social discontent among the people due to unbearable tightening of the belt; and the second – exercise themselves in populism, trying to consolidate their wasted confidence credit.
What is about to come is non-problematic /and non-critic/ parliamentary voting of the Governmental Budget-2010. It is the President of the Republic Georgy Parvanov, who serves now as the only institutional opposition – and may exercise his veto rights on the Budget Act, because of the already announced opinion differences in principle. No matter what the course of the events will be in the next few days, it is necessary to simulate the possible what-if scenaria of the first six months of the new budget year, and how they may affect the end-results of the fiscal year.
Bulgarians are exposed to receiving two contradictory signals.
The one is emitted by the Financial Minister /who is full of optimism, and rests on possible economic stabilization after April-May 2010/. What the Financial Minister does believe is that the economy will get stabilized, aggregated incomes of the state will accrue, and additional money will be allocated to retired, socially disadvantaged, sick, and other social groups in the second half of the year.
The other signal was announced by you- that the government may get 1 billion leva (€510 million) from the fiscal reserve in the next summer for not allowing total crack of the social sphere.
Dear Mister Prime-Minister, you will have to do such a financial restructuring maneuver for sure. However, you will need not just one, but may be two or even three billion leva more, to meet the social needs and master the crisis situation.
Here is why your action plan is more realistic from the point of view of the economic logic and operative budgeting, although you have not specialized in global finances. By the way, released foreign forecasts also point-out that for 2010 and part of 2011 there are significant risks for the incomes of the state; and due to this Bulgaria must shift from its traditional conservative budgeting procedures of artificially generated surplus to forced deficit.
The core of the problem is whether the Government may find additional resource without having to handle with the fiscal reserve, which was significantly diminished by the former Government. This is a question, which I will review more thoroughly at the end of my letter, as I want to pay more attention here to your declaration that the Government will make budget update in the mid of the fiscal year. There is nothing wrong with that, in principle, as you kick-started your governmental duties with an emergency budget; and there are follow-up actions of every emergency. However, these follow-up actions must be of a qualitative nature!
As a matter of truth, the first 100 days you were already driven to quickly update the inherited Budget-2009 of Stanishev-Dogan-Saxe-Coburg-Gotha /which was based on the surrealistic forecast of above 4% annual economic growth/. And yet, it is again a matter of truth to admit that this budget update was one-dimensional – to severely cut the public expenditures to reach for a moment a slight surplus of state incomes over state outcomes of 8 million leva (€4 million).
Bulgarian debt balloon is about to burst-out!
This is the next bad news, which you might for surely share with your people, if you are to act as a responsible statesman. The former empowered people consciously disregarded this danger and let you pull yourself the chestnuts out of the fire. Here is why, plain words and rosy promises do not have any real worth – money-talk is needed: who to whom is obliged and how much is the amount in question.
Debt statistics may not provide reliable information you may use to suggest a rescue plan. There are few people who actually know that the former Government removed the debt-of-the-state section from the official financial documents of the country. This ostrich-like philosophy may not hide the fact that the state accrued worth of dues to businesses is of 1,5 billion leva (€765 million). Indebtedness of municipalities is not lesser.
As a consequence to this, it is observed an avalanche-like growth of indebtedness among private businesses. Also, numerous Bulgarian companies are unable to pay-back their bank credits. In the next weeks, when Bulgarian Industrial Association /BIA/ is to announce the results of its latest research of aggregated business debts, these debts may happen to amount 2 or 3 times the Gross Domestic Product /GDP/ of the state.
On top of all listed problems, it has to be stated that for a period of less than five year Bulgarian households have accrued bank credits and debts to shadow financial structures, which are greater than households’ incomes from salaries, rents, and other official incomes. According to a recent research of the Institute of Sociology of the Bulgarian Academy of Science more than 75% of non-business credits are served by households with a total official monthly income of 600 leva (€300), which actually puts them into insolvency.
On its turn – the banks in Bulgaria /95% are foreign banks/ have approved credits worth of 15 billion leva (€7,65 billion) more than the collected deposits. And the reaction of the respective central banking institutions abroad is to stop refinancing to Bulgarian branches. In addition to that foreign banks press their branches in Bulgaria to exercise collection of dues on mortgaged properties and to limit at the lowest possible minimum their credit activity through offering customers record interest rates. Another problem with the banking sector is that nobody knows how much of the deposited money of Bulgarians in the branches of foreign banks departed Bulgaria. However, the State Agency for National Security /SANS/ signaled in February 2009 the ex-prime-minister Stanishev that such transactions do occur. As far as I know, there was no reaction to this report.
Mister Prime-Minister, you personally have convinced yourself that the conflict between commercial banks and their customers, on the one hand, and between the commercial banks and the state, on the other, has ripen; and conflict resolution is not possible through personal meetings and lobbyism. A legal change is needed, which may extend the rights of the Ministry of Finance and the Bulgarian National Bank /BNB/ on controls and intervention in the banking sector, because the savings of Bulgarians do need protection; and also because it comes to transparency of bank information.
Publicly announced intentions of private businesses in the construction and tourist sectors to establish their own branch banks deserve state support. These banks are planned to be established through national capitals. And now is the moment to make such steps: European institutions and the G-20 Forum in Pittsburgh approved support for leading policy of new regulations.
I admit that your team of financial experts has acquainted you with the fact that the total indebtedness of Bulgaria, according to international computations is almost 130% of the GDP of the state. In comparison, I have to mention that when President Obama inaugurated in Washington, this figure for the US was 115% of its GDP. Therefore, your task to safeguard the debt balloon is more complex, taking into account the drastically fallen level of Foreign Direct Investments /FDIs/ in the country /with more than 52%/.
Although there is a very unpleasant question of whether the state is facing a third liquidity crisis, or not, economic answers and political decision must be found.
There is no way to act by analogy. During Lukanov’s term the liquidity crisis came after the announced moratorium on serving the foreign debt. During Videnov’s term private banks and credit millionaires, supported by international speculators demolished the financial system and devaluated the incomes of citizens. Today’s liquidity problem may happen to be even deeper due to a combination of two factors: immense domestic debt and great investment/capital shock.
There must be reaction right now, not in the winter or spring, when the crisis is to get irreversible. Today, there is no panic yet, and still there is much room to maneuver. If a state halts its payments, then it is pronounced insolvent, although this may not be released by an official statement; then it comes the creditor of the last instance – the International Monetary Fund…
There is no chance to get out of trouble without foreign credits!
This was the position of GERB before the elections, as well. It is not yet clear what the economic arguments to decline getting foreign credits 4-5 months after the Election Day may be.
Recession, budget deficit and paralyzed settlement are obvious. Independent international experts have already computed the total financial need of Bulgaria, with which it may overcome the crisis. According to data of The Economist, based on information, released by the IMF, Bulgaria does need a huge credit, equal to 29,4% of its GDP, that is about 18 billion leva (€9,2 billion).
Asking for such a really big credit does not mean to automatically correct the economic course – something, which I plead for.
Firstly, to reach to an Agreement with the IMF, time is needed to arrange negotiations within and without the country. Trade Unions and employers are not any more exclusive partners of the Government, as membership in their organizations is minimized respectively to 15% of the employed, and to 10% of the businesses. In addition to that, there are more than half a million people, who are self-employed or engaged in running family businesses and they are about to be left off-the-board. A nationwide consensus is more than needed, but to get such a consensus in Bulgaria is a difficult task.
Secondly, what credit to ask for? Of more than 40 countries, which used the services of IMF during the last two years, there are only three countries, which stood bound to the so-called Flexible Credit Lines, provided by the IMF. Poland is one of these three countries, and it was the only one of the NMS in the EU , which managed to receive an advantageous credit. This credit was utilized to restructure the economy of the country and provide stimuli to the economic agents.
I ask myself – can we use the Polish strategy? Do we have influential lobbyists, who may provide support to the Bulgarian cause? Is it possible for you personally, and for the tireless Minister of Finances to eliminate the brokers, who oscillate around the people in power and Bulgarian National Bank, and who received immense profits from “helping” the servicing of the foreign debt of Bulgaria and its international credit lines? These challenges are really serious. Overcoming these challenges is not a way to win friendships…
Thirdly, the recently passed “Program of the Government of the European Development” may serve as a basis of a long-term anti-crisis strategy, if a couple of terms are met: (1) to bind the program with several yearly budgets, which cover the crisis cycle; thus, you will end the prevailing budget fetishism in Bulgaria, and start using the budget as a tool of economic policy/; (2) to add financial computations, terms for executions, and executives to implement the priorities of the program/; (3) to give way to publicly-private international investments in the road infrastructure; (4) to coordinate the program with the European strategies for employment and other recent policies of the EU;
Briefly said, to the short-term scenario (Budget-2010) it must be added a mid-term anti-crisis scenario and a road map to exit the recession, which is expected to coincide with all the four years of your governmental mandate, and probably with the beginning of the next governmental mandate.
Dear Mister Prime-Minister,
As a citizen of the Republic Bulgaria, I would like my forecast of the forthcoming exacerbation of the economic and financial woes of the country to fail. Then I will be pronounced pessimist.
In case, however, my professional analyses get confirmed, then you will be the one exposed to the most severe hardship, which happens to national leaders once in a century – to lead Bulgaria out not just of a regular crisis cycle, but out of a deep depression, marked with increasing poverty, massive and increasing unemployment, and a wasted economic decade.
In such a critical moment personal charisma and tough character, which you undoubtedly have, cannot be put in motion. You may help yourself, if you act in-time. You stepped on the ruling deck of the Bulgarian national ship, when the storm already caught it, and the crew was not prepared for this challenge. Today, some of the passengers are under stress, while others have already swallowed water as a result of the sharp decrease.
Change of course is necessary, if we want to avoid shipwreck suffering!
With Respect: Prof. Krastyo Petkov, PhD
25 Nov 2009
Notes:
GERB – the political party, which presently has majority in the Bulgarian Parliament – 116 of 240 seats;
Three-Party Coalition – a political coalition, which was composed by the following three parties – Bulgarian Socialist Party /BSP; left party; former Bulgarian Communist Party/, Movement for Rights and Liberties /abbreviated DPS in Bulgarian; ethnic-based party, whose electoral support stems primarily from the votes of muslims, living in Bulgaria/, and NDSV /the party, established by the former King of Bulgaria – Simeon II Saxe-Coburg-Gotha/. The Three-Party Coalition ruled from 2005 to 2009.
Lukanov’s Government – Mr.Andrey Lukanov was Prime-Minister of Bulgaria in 1990, affiliated to BSP. Lukanov was assassinated in 1998;
Videnov’s Government – Mr.Jan Videnov was Prime-Minister of Bulgaria for the period 1994-1996; Mr.Videnov is affiliated to BSP.
Mr. Simeon Dyankov – Minister of Finances, and Deputy Prime-Minister in the GERB Cabinet; Mr.Dyankov is a former expert in the World Bank and Head of the project “Doing Business”;
Simeon II Saxe-Coburg-Gotha – Prime-Minister of Bulgaria in the period 2001-2005; Mr.Saxe-Coburg-Gotha is a son of King Boris, but since World War II kingdomship in Bulgaria was never re-established, and Simeon II was never pronounced King Simeon II.
Български