SOFIA (Reuters) – Bulgaria’s government will breach its two-year precautionary agreement with the International Monetary Fund, officials said yesterday, in what analysts have called a move to increase its low popularity ahead of elections next year. Former king Simeon Saxe-Coburg’s cabinet aims to end 2004 with a surplus of 100 million levs ($68.49 million), or 0.3 percent of GDP, 300 million levs less than agreed with the IMF. «If you look at it formally, we are not on our way to meeting this commitment, but this doesn’t mean that it is an obstacle to our successful completion of the program,» Finance Minister Milen Velchev told journalists. «The usual practice in such cases is to ask for an exemption from the board of directors, and we hope one will be granted.» The ministry had originally targeted a fiscal deficit of 0.7 percent of GDP for this year, but it vastly underestimated budget revenues and has been left with an enormous windfall, which totalled $810 million at end-October. The IMF agreed to extra spending that would allow the Balkan EU membership designee to end with a 400-million-lev surplus. But, concerned about fueling demand and destabilizing Bulgaria’s currency board regime – the bedrock of the economy – it did not back a planned extra 300 million levs in spending. Velchev said this would go ahead anyway, following a decision at a secret cabinet meeting last week to allot 260 million levs to a state body for infrastructure projects. «If we want cloudless relations with the IMF, we should have a 400-million-lev surplus, which we can only put in the fiscal reserve and eventually pay debt with,» he said. «Our understanding is that we don’t need such a huge surplus, and we don’t need to be more Catholic than the Pope.» The currency board acts as a straitjacket pegging the lev to the euro, but it demands strict fiscal prudence and prevents the central bank from cooling off overheating or stimulating growth in the economy with interest rates. The IMF’s main concern is the extra expenditure and a plan to hike minimum wages by 25 percent in January will heat up import-boosting demand and fuel an explosion in bank lending that has driven up credits by more than 50 percent this year. Both moves could possibly lead to widening in the current account, straining the currency board and the banking system. But Velchev said unforeseen shrinking in the external shortfall and high foreign direct investment in 2004 justified going against the IMF’s advice. «When we were setting up the program, we expected a current account deficit of around 9 percent, and it was normal to tighten fiscal policy,» he said. Analysts are skeptical as to whether the extra spending and wage hikes will boost Saxe-Coburg’s low popularity ahead of the elections. His National Movement for Simeon party looks set to be beaten by the opposition Socialists, who are leading in opinion polls.