SOFIA (Reuters) – Bulgaria and the International Monetary Fund (IMF) said yesterday they had failed to agree over the Balkan state’s 2003 budget, with the government refusing for the first time to obey its main economic mentor. But mindful of its credibility abroad depending on relations with the IMF, the government said it would try again to bridge differences with the fund by the end of this year, signaling its readiness for compromise. The IMF, which has, so far, heaped praise on the government for its prudent fiscal policy, warned that its plans for next year would lead to a significantly higher budget deficit than the target of 0.7 percent of gross domestic product. «We think that there could be a deficit of above 2 percent of GDP,» the IMF’s mission chief Jerald Schiff told Reuters at the end of a two-week visit aimed at resolving budget differences. «Our view is that the current budget is not the one they should go ahead with,» Schiff added. It was the first IMF review that ended with disagreement since Bulgaria signed a two-year $300-million deal with the IMF in late 2001. The government, hit by plunging popularity because it has not met 2001 election pledges for a quick improvement in living standards, plans to raise social spending next year, while hoping to boost tax and social contribution revenue. But the IMF, which has had a huge say in decision-making in Bulgaria since communism collapsed in 1989, disagrees. «Proceeding in this direction may weaken Bulgaria’s overall fiscal health…,» the IMF said in a statement. Caution urged «We are aware that the government has not got enough credit (at home) because, of course, Bulgaria has not been transformed from a poor country into a rich country in one year… But they must be more cautious (with budget estimates),» said Schiff. The IMF said the government was overestimating social security contribution and tax revenues, and expenditure should be more conservative until new measures to raise taxpayer compliance materialize. It also opposes a planned cut in healthcare subsidies given the slow pace of reforms in the sector aimed at closing or privatizing some loss-making hospitals. Schiff said his team was ready to come back to Sofia at any time to try to resolve the differences. Bulgaria expects to receive its fourth tranche under the nine-tranche deal with the IMF in January, provided talks on the budget are completed by that time. «Receiving IMF funding is not the government’s main priority… It is more important to have an agreement with the IMF that sends good signals abroad,» Finance Minister Milen Velchev told reporters earlier yesterday. Despite budget differences, Schiff said the IMF remained upbeat about Bulgaria’s economic prospects. He forecasts Bulgaria’s economic growth at above 4 percent this year and expects it to reach around 5 percent next year and in coming years, although this was dependent on external factors. «If there is war in the Middle East, that could change everything, if the European Union (Bulgaria’s main trading partner) stays in deep recession that could also change things,» he said.