Bulgaria's finance ministry should coordinate the management of government liquidity with the central bank in a bid to improve its monetary policy, the European Central Bank has recommended.

The letter, signed by ECB President Mario Draghi, was sent in response to a request from the Bulgarian Ministry of Finance for an opinion on a draft law on public finance, which will lay out the rules for government liquidity management as of 2013.

The draft law has been prepared by the Finance Ministry and is expected to be moved to the budget parliamentary committee this week.

The ECB notes that the management of the government liquidity may interfere with the smooth implementation of monetary policy by BNB.

"Indeed, placing the government liquidity either with BNB or with the Bulgarian banking system may trigger large liquidity effects for the economy which are equivalent to monetary policy operations," Draghi's letter points out.

According to ECB the lack of any prior coordination with the BNB regarding the management of the government liquidity may jeopardize the smooth fulfillment of the monetary policy mandate of the BNB.

The European Central Bank insists that this deficiency is addressed in the draft law.

Bulgaria's government and the central bank clashed in the autumn of 2009, when Finance Minister Simeon Djankov proposed that part of the fiscal reserve be deposited not in the central bank, but in commercial bank to capitalize on the higher interest rate.

Following a meeting with central bank governor Ivan Iskrov, Prime Minister Boyko Borisov announced the government is giving up on this idea and the fiscal reserve will stay untouched.

The other deficiencies, which the European Central Bank letter addresses, concern the availability of timely and reliable fiscal data, which it says is crucial to the proper functioning of budgetary surveillance and the monitoring of budgetary developments.

ECB experts recommend that the Bulgarian government publish cash-based fiscal on a monthly basis for central government, state government and social security sub-sectors, and on a quarterly basis for the local government sub-sector.

Moreover, for fiscal transparency reasons and to ensure compliance with the relevant Union legislation, the ECB suggests that the draft law also obliges the government to publish a detailed reconciliation table showing the methodology of transmission between cash-based data and data based on the European system of national and regional accounts (ESA 95).

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