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Josif Avramov
It is possible that the currency board in our country be socialized
(The financial system in the Republic of Bulgaria under the conditions of the forthcoming European Integration and Globalization)
Born in 1959. He is lecturing disciplines in the sphere of finance and financial control at the Faculty of Economics to the Sofia University 'St. Kliment Ohridski', the University of Economics and the Technical University in Gabrovo. He has worked with the Ministry of Finance, the Committee of State and Public Control as a senior adviser to the Economic Commission of the Peoples' Assembly. Author and co-author of the textbooks 'Banking Control', 'Taxation and Customs Control', 'Theory and History of Money and Credit', etc.
Two completely unnecessary and senseless, according to me debates, are periodically raised in the media, at scientific forums and public discussions. The first one concerns the eventual exit of the system of the currency board in our country, and the second one - the preliminary introduction of the Euro as Bulgarian national currency (Euroization) before our EU accession. Both possible hypotheses for the future of our monetary and fiscal policy are unthinkable and even absurd, if applied into practice, irrespective that there are preconditions for their introduction, at that being serious ones.
Referring to the Euroization, I repeatedly made statements and proved that it is not perspective as at the present moment, irrespective of some of its undoubted advantages. As to the future of the currency board, the vision for the exit of Bulgaria from the monetary council system is absolutely clear - upon our EU accession, which will most probably take place, as planned on 01.01.2007. The currency board should not be perceived as an institution fulfilling absolutely the will of the international financial institutions, but as one of the possible monetary systems adopted by Bulgaria on 01.07.1997, actually against the will of the then governors, but with a surprisingly large consensus among the political forces and even among the ever disputing economists in our country.
A lot of economists have supported the monetary council as well as politicians from the Bulgarian left, as for instance the former governor of the BNB Lubomir Filipov and the former Minister of Finance Dimitar Kostov who in an open letter to the media about two years ago proclaimed clearly and categorically that the question about the exit from the currency board is not standing for Bulgaria. They stood at the head of the two most important positions in our financial system, when the currency board was enforced to us by the International Monetary Fund, against their will and that is why they are more like supporters of the removal of this monetary system, but as responsible economists, they stand up for 'its rightful use till our natural integration into the European monetary space'.
According to me the currency board system is not the best for a country in transition to market economy like Bulgaria, but once enforced it is better to be carried out in a way tolerable for the population, even for the economic and the budget subjects. Most of the economists think that the consequences from the exit out of this system will be much more difficult and unhealthy than its continuation. Despite that I do not share the viewpoints for putting an end to the monetary council system, I address myself absolutely seriously and responsibly to them. Even more, among the followers of such a possibility is one of the respected Bulgarian economists Prof. Ivan Angelov, Corresponding member of the BASc, who proposes, not so well motivated, according to me, the so-called creeping rate. He, however, does not foresee and probably excludes the most possible outcome, and namely - collapse during the budget implementation and many difficulties before the financial institutions after our eventual exit from this system, which brings under control the economic subjects, the budget organizations and the commercial banks.
Till our EU membership it is possible that more than one government shall govern in our country and the best guarantee for maintaining the financial stability with us is the currency board actually. Mainly some economic circles in Bulgaria which have accumulated their wealth in not very transparent way, including also the exchange rates differences during the several months of hyperinflation in 1996 - 1997 immediately before the introduction of the monetary council in Bulgaria are interested in the exit from this system. They wish to get easy and fast profits again at the account of the other economic subjects and the enormous part of the Bulgarian people.
It is inexplicable to me why scientists (incl. also politicians who were research workers till recently as Prof. Krastyu Petkov) raise periodically the question for the currency board exit. The scientific debate on the future of the currency board and particularly on the removal of some of its defects is a useful and a necessary one. This debate, however, has to remain on the pages of the scientific issues and in the collections with papers from scientific conferences and it should not 'escalate' by providing extreme recommendations in the most spread media for a termination of the system of the monetary council in Bulgaria by all means. This will be fatal for many economic subjects who will go bankrupt and this will destabilize the Bulgarian economy for a long time.
A change is not desirable also in the Lev/Euro correlation, irrespective of the circumstance that the Bulgarian economy and above all our export orientated enterprises will lose from an eventual rise in the Euro/USD dollar exchange rate, which I consider inevitable in the near future. I admit that such a change of the exchange rate to the Euro is possible but it has to be implemented only as a last (exceptional) option, for which there are no any preconditions at present. The optimum option for the Bulgarian economy is, till our accession to the EU, not to change the present Lev/Euro exchange rate, which is set also in the basis of the essence of the currency board.
I can not but agree with the conclusion that one of the major reasons for the low standard of living of the Bulgarian citizens are the financial restrictions as a result of the currency board. True is also the fact that as a consequence of the monetary council our trade is low, respectively our pay balance is being aggravated. But these and also other arguments are not sufficient for a radical change in the monetary system with us. The financial chaos, otherwise, which will settle here after our exit of the board, manifesting itself into bankruptcies of enterprises and banks and further impoverishment of millions of Bulgarians, as a result of an inevitable galloping inflation (hyperinflation is not also excluded), will send off our country to the group of the underdeveloped and we shall enter the EU after 2015 or even after 2020. For a state like Bulgaria, in which corruption is high, the financial discipline and the financial control are at a low level, and the nonpayment of taxes is as if 'a question of honour' for the larger part of our economic subjects and the 'thefts' from the budget and from the security funds are regular, the currency board system is as if most appropriate.
What does the definition 'socialization of the currency board' which is not used till now in theory and practice mean? I think that these recommendations have to be followed even in the first years after our EU accession. They are brought to:
I. Working out and adoption of a strategy for an economic growth (a program project for economic development), which is to cover a 5-6 year period. It has to outline both priorities and clear commitments on the part of the government to the business, incl. also a financial frame for the period. The encouragement of the small and the average business has to be outlined as a first priority task. In this relation the draft project for changes and amendments in the Small and the Average Sized Enterprises Act, regulating the establishment of a National Guarantee Fund for the small and the average sized business, which to guarantee to 50% of the investment credits of the credit applicants, meeting the criteria, included in the projects, has to be adopted with priority. The development and the implementation of a strategy for demonstrating the achievements of the Bulgarian manufacturers, incl. also the possibilities for tourism, sport and rehabilitation with us on the market of the advanced countries is also necessary. In the strategies mentioned, special attention must be paid to Bulgaria's return to the traditional markets as these of Russia and the countries of the AIS, the Arab countries and the Balkan states. The attention to the economic relations with the Republic of Macedonia (incl. also establishment of joint financial institutions, enterprises, regular transport and communications links, improvement of the infrastructure, and etc.) must be taken into consideration.
II. Improvement of our economic legislation as regards to: provision of transparency and stability of the normative regulations in the sphere of economics to the economic subjects; termination of the so called covered tax burden by means of increasing of the state (predominantly court) and local taxes, increase in the security limits and others; transfer of powers of the ministries and institutions to the territorial subdivisions; analysis of the reasons and the consequences of the debts among the companies (according to the data of the Bulgarian Economic Chamber it is over 42 billion BGN) and working out of a project (incl. a legislative also) for its reduction.
III. Change of the so called philosophy of our European Integration - this suggests to report in the negotiation process the competent and motivated viewpoints of the employees' and branch organizations with a view to a maximum protection of the interests of the Bulgarian manufacturers, tradesmen and tour agencies, incl. also as regards to their certifying according to the EU standards and so on. An improvement is necessary in informing the economic subjects on projects and programs of the EU; reduction in the customs tariffs to a maximum degree in conformity with the agreements with the EU and decrease in the bureaucratic formalities upon carrying out the customs control at the same undertaking decisive measures for doing away with the illegal import of goods: undertaking active measures to decrease corruption in the state and the public administrations, comparable to those of the EU countries and particularly in regard to the use of the funds from the European programs; working out of a short-term program for the full participation of our overseas commercial agencies to really assist the Bulgarian companies, as well as assignment of functions related to promotion of tourism, incl. also the so called cultural tourism of our cultural and information centers abroad.
The fulfillment of the following positive proposals is also necessary:
1. Fluent lasting increase in the incomes, respectively of the consumer purchasing capacities of the Bulgarian population. It is not completely correct that the low inflation, resulting from the currency board with us is hardly going to distance us from the EU because of the circumstance that in 6-8 years the price level in Bulgaria will be 3-3,5 times lower than the level in the EU countries. The convergence in the price levels in the Community countries has been done successfully, though not without any problems for their inhabitants, particularly for those with less financial potential. There was a certain tension available in some of the poorer countries as Greece, but there was some dissatisfaction from the introduction of the Euro even in some more developed countries as Germany, where in some branches relatively more significant increase in the prices were observed .
Bulgaria, which at present has around 24% purchasing power in comparison to that of the EU countries, will adapt itself with comparatively much more difficulty to the price levels in the Community. The solution is to be found mainly in the fluent income increase, as well as in the introducing of an annual updating of a compulsory minimum rate which is to ensure a worthy existence (first 1,50 BGN per hour or minimum working salary of 240 BGN - MWS), as well as interlinking of the minimum working salary with its size at an eight hour working day, and the minimum pension respectively has to be 70% of the MWS (after 01.01.2004 the MWS is 120 BGN - author's note). The increase in the incomes is extremely necessary also because of the strongly reduced internal consummation, which is on the brink of the critical minimum.
2. Seeking investments has also to be increased, as the size of its increase should significantly get ahead that of the personal seeking. The increase of seeking investments is done mostly by increase in the loans guaranteed by the state for a number of large infrastructure objects as: the motoring highway to Istanbul, Athens, Nis, Varna and Burgas, the second nuclear power station in Belene, the tunnels under the Shipka Mount Peak and the Petrohan passage, new terminals at the ports of Lom, Varna and Burgas, the modernization of the railway infrastructure, including also the construction of speed trains to our two Black Sea ports; finalization of the railway line to Skopje, the reconstruction of the airports in Sofia, Varna and Burgas, the rehabilitation of the existing capacities of the power stations in the Maritza Basin; the gasification of some of the power stations, finalization of the dams, ensuring the regular water supply of: Gabrovo, Lovech, Kustendil, Vratsa , Montana, the construction of a second bridge on the Danube River and eventually of a third one; continuation of the construction of the Underground in Sofia; the oil pipeline Burgas-Aleksandroupolis, etc.
This would have been done by an increase in the budget deficit to 1,5%, which is almost half of the planned in the so called Maastricht criteria (3%). The budget deficit for 2002 of the EU most developed country - Germany is 2,7%. It is not necessary for Bulgaria to strive to a null budget deficit, irrespective that it is in a currency board. Thus the taxation burden during the next years could become more tolerable for the economic subjects and for the population.
Two aims will be achieved with the increase in the investment loans guaranteed by the state: the first one is the acceleration of the economic growth; the second one is turning Bulgaria into an energy centre of the Balkan peninsula, which is a guarantee for an economic independence and security; the third one - decrease in the high unemployment with us and fourth place - by developing its infrastructure Bulgaria will accelerate the process of its EU accession.
3. Third, according to me, the socialization of the currency board will be set if the taxation policy starts to become envisaged and able to be prognosticated, while the taxation burden - tolerable for the tax payers. It is necessary that every economic manager or foreign investor be informed at least for a period of 3 years, and even better for a period of 5 years, what taxes, excise taxes, tariffs, fees and other state receipts he is due to pay to the fisc. During the period of almost 15 years that have past, the taxation policy of not even one of the seven former governments, including also the present one, has not been able to be forecasted. The strongest proof in this direction is the memorandum on the 7th stand-by Agreement with the IMF, where there is not even a line for the intensions of the Cabinet as regards to the taxation policy for the next three years (the agreement with the IMF is until March 2004 and covers the budgets for the next three years), but includes in itself a retrospection of the tax changes that have come into force from the beginning of 2002.
It is necessary to decrease by two points the size of the tax on the added value, as well as to introduce a differentiated rate for some first priority goods in the following 2-3 years. A number of other concessions are possible, the most important being an introduction of a voluntary VAT registration and a decrease in the term for paying back the tax credit to 14 days. It is necessary to change the levy with a corporate tax (a tax on the profit) in relation to the introduction of a fast depreciation (from 1.01.2003 it was cancelled) for a certain number of high-tech assets predominantly. It is possible that a null rate can be introduced upon the reinvestment of the profit of fixed tangible assets, which influence directly the settling of an added value in the production and the services, as well as of tax concessions for the introduction of new productions. It is necessary as of the next 2005 to introduce the family income taxation by which birth rate is to be stimulated. The patent taxes have to be reduced to a degree to be more stimulating than restricting for the small business, and reduction is also introduced with them by 20 (30) % for investments done and by 20% for efficiently deposited securities.
4. It is necessary that the basic interest rate (BIR) approaches the market levels. BIR is defined at present in favour of the budget, and not in favour of the economic subjects in Bulgaria. The BIR will be more precise if it is specified on the basis of the interest rate of the Frankfurt Financial Market, known as FIBOR + risk extra of 3-4 %.
5. A greater liberalization of our currency regime is necessary in relation to repatriation of the capital transactions, which to a certain degree was done in 1999 with the adoption of the Currency Act, but this is still insufficient.
6. A significant decrease of the license and permission regimes for the business in our country is needed. They even have increased after the introduction of the currency board instead of becoming less. In this relation, the increase in the procedures transparency on assigning the public orders in our country by means of: participation of specialists from the employers' and branch organizations in the development of the technical assignments and in assessing the applied offers, i.e. the assessment to be also carried out by independent experts; introduction of an arbitrary procedure in solving disputes, connected with the assignment of public orders; upon proved guilt on the part of the assigner there has to be regulated the possibility to reimburse the expenditures made on the part of the participants in the competition; simplifying and unifying of the procedures and the documentation, connected with them; ensuring a higher degree of publicity of the process of assigning of the public orders in relation to putting an end to the possibility of concluding additional annexes which to replace the contents of the contract and to provide more detailed information from the public register, incl. also for the participants who have not won the competition, is of particular importance.
7. Achieving stability in the state and the public administration, which regardless of the recent adoption of the State Employee Act, is not yet available in our country. The frequent staff changes are the reason for the inefficient governing decisions which have lasting and even irretrievable consequences to the Bulgarian economy. That is why it is necessary to apply the practice which existed till the Second World War, when upon a change of a minister, or a mayor respectively, only the deputy ministers and the deputy mayors were changed, while the chief secretary and the rest of the employees remained working, which is considered as a guarantee for sustainability in the administration.
8. A radical change in the philosophy of the social assistance in our country which has to be orientated towards creating employment, not only towards providing financial aid ( it has to be left only for the diseased and the aged people) is needed. Funds from international sponsoring programs and financial institutions should be developed and sought for the healthy people and people in active age for work, through which they could be involved in the economy.
9. A considerable improvement of the financial control in our country, the budget control including tools is also necessary. The Chamber of Accounts has to become a well functioning institution, and as a result of the conducted audits significant extra incomes for the fisc have to be accumulated and it must have methodological functions in respect to the rest of the financial and monitoring institutions. The agency for state internal financial control must also improve the efficiency of its state audits and to expand its powers in regard to new activities. The tax and customs control have considerable reserves and if the control on the incomes improves considerably, more than 20% incomes to the budget can be accumulated. It is necessary to pass urgently a Financial Police Act as well as to bring the activity of the Agency 'Bureau for Financial Investigation' in conformity with the international standards for money laundering. The optimization of the post privatization control, which is very unsatisfactory at present, is necessary. The above activities will guarantee more incomes for the budget than an increase in the taxes (not a good example in this context is the ill-considered increase in the patent and property taxes and tariffs from the beginning of 2002) and there will be a possibility for softening the fiscal restrictions enforced by the currency board.
10. Adoption of a middle-term program on increasing the competitiveness of the Bulgarian economy by identifying its financing, terms, stages and persons in charge for its implementation according to branches and sub-branches.
11. Putting into practice in our country the experience of Ireland, Hong Kong, Singapore and other developed countries as to the attraction of foreign investments. An urgent adoption of the long expected Free Industrial Zones Act is needed and a preparation of setting up of 3-4 zones along the Black Sea coast, in the region of Petrich-Sandanski and Svilengrad.
12. A more flexible and a more rational policy is necessary when the expenditures sphere of the budget is concerned, which has to be in compliance with the transfer to a program budgeting. In this connection a restriction of the expenditures in the state and the municipal administrations for expensive repairs, expensive cars, mobile phones, unnecessary business trips abroad, provision of houses owned by the institutions at preferential prices and later on a possibility to be bought out at lower prices from the markets, etc. is required. Retransfer of the savings to the spheres of: education, science, culture and healthcare.
The proposed fiscal changes, interlinked with the compulsory achievement of a maximum degree of sustainability in the state and municipal administrations, will lead to the proposed socialization of the currency board. I agree with the conclusion made in the said open letter, that Bulgaria has never been in a normal constructive period, which is the reason for not reaching the immanent of the currency board rates of 6 - 8% growth. This has hindered the compensation of the essential negative consequences of the fixed rate as well as the improve of the much aggravated trade and payment balance of our country. I think that by means of a wise fiscal and monetary policy these disproportions in our country, upon the introduction of the board, would have been overcome and in the remaining several years to our EU accession we shall achieve the mentioned economic growth, the competitiveness of the Bulgarian economy will increase as well as the living standard of the Bulgarian people.
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