Sofia warned against plans to relax its budget policy

SOFIA – Bulgaria’s ruling coalition agreed on Monday to loosen fiscal policy in 2007 so it can co-finance large infrastructure projects funded by the European Union, which it hopes to join next year. Prime Minister Sergei Stanishev told a news conference that his Socialist-led government would aim for a budget surplus of 0.8 percent of gross domestic product (GDP), down from 3.0 percent in 2006. «This will be the first budget of the country as an EU member,» he told a news conference after agreeing with his ruling partners to set revenues at 41.7 percent percent of GDP and expenditures at 40.9 percent. However, the new budget target goes against the advice of the International Monetary Fund, which recommended a surplus of 2 percent of GDP, and drew words of warning from analysts who have previously praised Sofia for its tight budget policy. The worry among economists is that a looser policy could present risks in view of Bulgaria’s huge current account deficit and relatively high inflation, which ran at just over 8 percent year-on-year in April. «I think 0.8 percent is a risk. It’s not as optimistic as I would like to see,» said ING analyst Agata Urbanska. «This is some sort of middle ground between the IMF proposal of 2.0 percent and what they really wanted.» Hemmed in by a current account balance of payments deficit, which was 387.5 million euros in March, and a currency board pegging the lev to the euro, the post-communist country of 7.7 million is being forced to restrain spending. After ending 2005 with a record surplus of 2.36 percent of GDP, the government approved a balanced budget for this year. But it says it must loosen policy to take advantage of the 11 billion euros available on joining the EU to repair potholed roads, outdated airports and other infrastructure. Co-financing projects will cost Bulgaria around 2.1 percent of GDP. Bulgaria will also have to pay 624 million levs (320.7 million euros), or 1.2 percent of GDP, to the Union’s budget and also expects to lose revenues of 450 million levs from tax cuts. Brussels has said Bulgaria should be able to join the EU on January 1, 2007, provided it passes a final Commission review in early October. If the review is negative, membership may be delayed until 2008. The EU has said it is worried about what it says are Bulgaria’s insufficient enforcement of anti-money laundering rules and insufficient financial control over EU regional aid. It also wants clearer evidence of results in dealing with organized crime. Stanishev said the preliminary budget draft foresaw economic growth next year of 5.8 percent, against a forecast 5.5 percent for 2006, while foreign direct investment should reach 2.7 billion euros. The draft sees end-2007 inflation falling to 3.1 percent, from an expected 6 percent this December, and the current account gap – driven by high global energy costs and a lending-fueled boom in imports – should widen to 11.8 percent of GDP next year from an expected 11.3 percent in 2006. Analysts think the current account deficit could be several percentage points wider and said halving inflation may be harder than expected when combined with fiscal loosening.

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