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The government and the IMF will probably fail to reach an agreement on the fiscal policy for 2006.
submited on 27.10.2005 in category Political stability | Fiscal affairs | Monetary policy | Macroeconomic developments
submited on 27.10.2005 in category Political stability | Fiscal affairs | Monetary policy | Macroeconomic developments
The IMF mission maintains its position that high level of public expenditures and the fast expansion of private sector external indebtedness nourish the current account deficit. The latter is expected to exceed 13% of GDP by the end of 2005. Meanwhile a new set of Central Bank restrictions on banking credit will be set in place in order to keep credit growth lower than 15 or 20 per cent in 2006.
Macroeconomic data however do not prove the IMF concerns yet – i.e. the current account deficit is not an indicator for a depletion of domestic savings. Growing imports are a reflection of increasing foreign investment flows to the country. At the same time we observe a fast expansion of private business sector external borrowing – debt grew to EUR 6.5 billion, or 1.8 billion since the beginning of 2005. At present however this should be considered a micro-level concern, or a ‘sector’ trouble for those industries that have grown primarily upon debt financing.
We concur with the IMF position that high level of public expenditures crowds-out private investment and encourages consumption. In the present Bulgarian economic environment a budget surplus which piles up to the fiscal reserve restricts current private consumption and reduces liquidity – in other words acts to countervene the monetary expansion which was brought about through the banking credit growth. In this manner the ‘forced’ public saving neutralizes the unsustainable effect of the monetary expansion on the business sector.
Macroeconomic data however do not prove the IMF concerns yet – i.e. the current account deficit is not an indicator for a depletion of domestic savings. Growing imports are a reflection of increasing foreign investment flows to the country. At the same time we observe a fast expansion of private business sector external borrowing – debt grew to EUR 6.5 billion, or 1.8 billion since the beginning of 2005. At present however this should be considered a micro-level concern, or a ‘sector’ trouble for those industries that have grown primarily upon debt financing.
We concur with the IMF position that high level of public expenditures crowds-out private investment and encourages consumption. In the present Bulgarian economic environment a budget surplus which piles up to the fiscal reserve restricts current private consumption and reduces liquidity – in other words acts to countervene the monetary expansion which was brought about through the banking credit growth. In this manner the ‘forced’ public saving neutralizes the unsustainable effect of the monetary expansion on the business sector.
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