Open Society Economist Georgi Angelov: Bulgaria Can Avoid IMF, EU Aid

Novinite Insider » INTERVIEW | Author: Milena Hristova |June 24, 2009, Wednesday // 15:08
Bulgaria: Open Society Economist Georgi Angelov: Bulgaria Can Avoid IMF, EU Aid Photo by BGNES

Interview with Georgi Angelov, Senior Economist at the Open Society Institute Sofia

Q: How would you comment statements that given Bulgaria's external debt and current-account deficit, the country will require some financial assistance from the IMF and the EU?

This is not necessarily true. The structure of the external debt is not bad and the current account deficit is covered by financial account surplus (with the exception of several months when government was running a budget deficit and the central bank decrease the required reserves of banks).

The need for external financial assistance may arise if the government policy is not prudent. For example, if the government is running budget deficits and thus depleting the reserves of the central bank, then the credibility of Bulgaria will fall and the inflow of capital will stop, or even reverse. On the other hand, if the government is following a prudent economic and financial policy, then there would be no need for financial assistance.

Q: Does Bulgaria need emergency aid from the International Monetary Fund? Is a loan similar to those in Romania, Hungary and Latvia necessary?

Emergency lending is needed only in case of emergency. We don't have such situation and with a good policy of the next government, it can be avoided. Hungary, Latvia and Romania are running budget deficits for decade or more. Bulgaria is running sizeable budget surpluses for this period and this is a huge difference.

Latvia had a problem with a big bank - foreigners started withdrawing their deposits from that bank creating financial distress and need for more foreign exchange reserves. Bulgaria doesn't have neither bank troubles, nor deposits by foreigners in our banking system. So, the banking system here is not in emergency, the trust in the system was preserved.

Hungary and Romania were running some of the biggest budget deficits in the EU in 2008 and most of this deficit was financed by short-term debt, that need a continuous roll-over. When the market froze and the investors started to fear of East Europe, these countries had difficulties to finance the deficit and roll-over the debt. Bulgarian government with no deficit and no short-term debt doesn't need to roll-over debt or to issues new debt. So, as far as we avoid deficit in the government budget, we will be insulated from that problem also.

In addition, their currencies of Hungary and Romania started to depreciate thus harming the banks, companies and households - because many of the loans are in foreign currency. When local currency depreciates, the burden of foreign-exchange loans increases thus threatening the financial health of the debtors. The two countries didn't have enough foreign reserves and needed more in order to keep stability of the currency and the economy. Again, Bulgaria is in better shape, because the currency board system is keeping the lev stable and the foreign reserves are huge, one of the biggest in Europe as percentage of GDP.

Therefore, until government policy keeps Bulgaria out of emergency, we will not need emergency loan.

Q: How would you comment the plans of the opposition GERB party to start immediate talks with the IMF and not for a precautionary, but for a stand-by agreement, if they win the elections?

Well, it might be easier for a government to do the necessary reforms with some push from IMF, but it is always better for a government to do the reforms by itself. It should be not forgotten that IMF is associated with the so-called "IMF stigma" - if a healthy country asks IMF for help, then the market decides that the condition of the country is much worse than they thought before. So, most countries that can cope by themselves are avoiding IMF. Thus, they try to differentiate from bad cases like Hungary or Latvia.

Q: What will be the conditions attached to IMF funds?

The standard conditions for Hungary, Latvia and Romania are to cut the budget deficit through spending cuts and tax increases, to strengthen the banking system, to keep relative stability of the currency and low inflation, and to continue structural reforms and improve business environment. Basically, IMF is asking for prudent economic policy.

The problem is that when a country followed imprudent policies, it loses credibility and markets are more suspicious. After that, it is too difficult to rebuild that credibility again, even with IMF help. Not surprisingly, this increases the pain that these economies are suffering. Thus, it is always better to avoid imprudent policies in the first place.

Q: How could a possible devaluation in Latvia, which pegs its lat to the euro via a currency board, pose a direct threat to Bulgaria?

If there are sensible and sober politicians in Latvia, they should never devalue the lat. That would not help them in any way - as we Bulgarians remember from 1996-1997 when the lev was depreciating and there was hyperinflation and huge economic crisis.

If Latvia allows devaluation, they will suffer the most. Latvia doesn't have a currency board, but some kind of quasi-board, but still, that will send a bad signal for countries with currency boards like Bulgaria. They will need to be even more prudent and to strengthen even more their economic policy. We remember how bad economic policies led to collapse of the board in Argentina - but still, we survived by strengthening the fiscal policy.

Q: Is Bulgaria in better health than other east and central European peers during these times of global economic crisis?

Yes, certainly. But this is a continuous fight, the government should be working every day to keep stability, increase competitiveness and improve business environment and investment climate. There is no time for rest - current and next government should not allow any erosion of the stability.

Q: Bulgaria, like other eastern European countries, has already been hit by the global crisis, but are harder blows ahead?

Most probably the situation will continue to worsen for some time. Employment and wages are going down and that will not stop so soon. Of course, government policy is of great importance. A determined, reform-minded government would be better than weak and indecisive government - the latter may even worsen the situation.

Q: The Bulgarian state obviously can't afford the luxury to pour freshly printed money as incentives for struggling companies or those on the brink of bankruptcy. How can it help them?

We tried printing money 12-13 years ago and it is not working, it dramatically worsens the economy in small countries and leads to much more bankruptcies. What is important is to increase the competitiveness and improve the business environment. These are cheap, non-monetary ways to help healthy business. In addition, a social security tax cut may help keep employment. But, some companies that are not competitive and overburdened with debts should fail and this is not a bad thing. If they have taken too much risk, they should bear the consequences. That will teach them a good lesson and will improve the overall competitiveness of the economy.

 

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