Borisov's golden opportunity

By bne IntelliNews October 13, 2009

Andrew MacDowall in Sofia -

As to-do lists go, the International Monetary Fund's one for Bulgaria is daunting. But it also presents a rare opportunity for the hugely popular new prime minister to take advantage of his substantial political capital and make the structural changes that should underpin Bulgaria's economic development for years to come.

On September 21, the IMF published the concluding statement of its staff visit to Sofia, forecasting a deep and prolonged recession in Bulgaria and laying out its recommendations for wide-ranging reform to lift the country from the doldrums, which include deep long-term spending cuts, an overhaul of the public sector and a shift to new drivers of growth.

The IMF's immediate forecasts certainly make for grim reading. Bulgaria's economy is expected to shrink by 6.5% this year, and fall another 2.5% in 2010, faring somewhat better than the severely crisis-hit Baltic states, but still suffering more than most of its EU partners and the surrounding non-EU member states.

While much of the rest of the world - particularly emerging markets - appears to be pulling strongly out of the downturn, Bulgaria's pain is likely to be prolonged.

During Bulgaria's boom years of 2003-2008, growth ranged between 5% and 6.6%, and foreign capital flowed strongly into the country, fuelling expansion and filling the public coffers. The government was able to increase public spending while maintaining the fiscal surplus ordained by the IMF in the wake of the country's 1997 economic crisis. Meanwhile, private sector external debt swelled to around 100% of GDP. The sharp tightening of liquidity by foreign banks caused by the credit crunch and global recession has cut credit growth to near zero.

The government was fortunate to have run a surplus for some years, and built up considerable foreign exchange reserves. Nonetheless, the crisis has cruelly exposed the public sector's weaknesses and private companies' focus on sectors in which dynamism has quickly turned to dust - most notably, construction and real estate.

As the Fund remarks, for the early months of the year, the government did little to address the fiscal situation - rapidly falling revenues with only vague, and unfulfilled, promises of reduced spending. This can be attributed in part to the European and general elections of June and July respectively.

Enter, after the second poll, Boyko Borisov, latterly mayor of Sofia, whose GERB party swept to a crushing victory over the Socialist-led ruling coalition, with a shade under 40% of the votes and 116 of 240 seats in Parliament. Rapidly installing highly-regarded former World Bank economist Simeon Djankov as Minister of Finance, Prime Minister Borisov has pledged to put Bulgaria's house in order.

Public finances first

The Fund asserts that getting public finances on an even keel is the most pressing priority, a view apparently shared by the new administration. Djankov has announced an across-the-board 15% cut in public spending by year-end, a reduction even more drastic than that recommended by the IMF, which favours targeted cuts. "Most of the Fund's recommendations are already planned by the government," Svetla Kostadinova, executive director of Sofia's Institute for Market Economics, tells bne. "Overall, the judgement is pretty much the same, though the approach is different."

Kostadinova argues that the budgetary situation presents a golden opportunity to cut public sector inefficiency that had been ignored during the good times. "There are a lot of things that can be done," she says. "Often there are two or three public bodies with overlapping responsibilities, while there are regional branches that could be closed with better use of technology."

Georgy Ganev, programme director at the Centre for Liberal Strategies, concurs: "Administrative effectiveness is very low... It should be possible to spend much less money with the same social result."

With the initial argument over spending cuts apparently won, Borisov and Djankov may have an opportunity to press home their advantage and embed pro-market reforms seen by many as the key to ensuring long-term growth. "Bulgaria has partly suffered so badly due to over-regulation," Kostadinova says. "There is not enough space and freedom for companies to recover from the recession, and productivity remains low. Furthermore, healthcare, education and pensions must all be overhauled. The government has all the resources to ensure change happens."

Ganev is more sanguine about the challenges ahead, but agrees that Borisov may have a rare opportunity. "The most important issue is to promote very serious reform in each and every government agency, and there will be political and bureaucratic opposition," he says. "The government will therefore have to pick its fights. But Boyko Borisov can build on the coalition of support from Brussels and ordinary Bulgarian people, and is the first leader to be in a position to take on the old crony elites, which previous governments relied upon."

The IMF's call for a "shift to a new growth pattern", away from real estate, construction and financial services, however, could prove more problematic. Kostadinova and Ganev are sceptical of the wisdom of the government promoting some sectors over others; its job is to create the conditions for the private sector to flourish more broadly. Long-term investment in the education sector will be required to promote modern export-oriented industries that the Fund wishes to see.

The new government has impressed the international community thus far. It now has a unique opportunity to restore momentum to Bulgaria's reform process.

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