Bulgaria's Only Hope

By: Sam Vaknin, Ph.D.

Also published by United Press International (UPI)

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There is something worrying about a neophyte politician who promises to improve the living standards of his electorate "in 800 days" - less than 80 days after he returned to his country following an absence of 50 years. There is an eerie similarity between the promises made by the UDF upon its ascendance to power four years ago - and those made by the ex-King's party on the election trail. Ivan Kostov, the former Prime Minister, also came to power surrounded by eager, reform-touting, Western minded, business-orientated young geeks. They were all co-opted by corrupt interests within the year. Kostov lost power because he failed to improve the economic lot of ordinary citizens while displaying a suspicious reluctance to tackle virulent corruption in high places. Curiously, the economic advisor to the President of Bulgaria is the PM's son - Cyril Koburgotsky.

After taking an oath of loyalty in parliament, the new PM attended a special prayer service. Prayers are called for. The Bulgarian economy is sputtering. After a spectacular recovery of 11% between 1998-2000, growth has stalled, unemployment is close to 20%, and inflation shot up to 8%. Half the population is under the official poverty line. A sham privatization of state assets allowed criminal business groups to infiltrate the Bulgarian economy. The private sector is encumbered by venal red tape and inflexible labour laws. These problems are further compounded by the deteriorating economic outlook of Turkey, one of Bulgaria's largest trade partners - and the political strife in Macedonia, its neighbour and vital transport route.

The new Minister of Finance, Milen Velchev, 35, is an expert in the restructuring of sovereign external debt and has worked for Merril Lynch in London. In an interview he granted to "The Economist" (July 21st-27th issue) he had nothing original to say. "Our economic philosophy is much the same as the UDF's". But he did promise to be "more radical" in implementing it. No wonder the UDF pledged it "would co-operate with the new government on issues that would continue the reformist programme of the past four years". Mr. Saxe-Coburg already vowed to preserve the crowning achievement of the previous government, the DM-pegged currency board. To fight corruption, he promised to streamline procedures in investor-friendly "one stop shops".

How is all this related to the rampant poverty of the PM's constituency? It is not. In the heat of the campaign, the Royal did not hesitate to dole out promises of interest-free loans (5000 levs - c. 2200 US dollars - per household), coupled with massive increases in pensions and pay. There is not the slightest chance or intention to keep these profligate undertakings. The new economic ministers are fiscal conservatives, aiming at zero public borrowing. Interest free loans? To small businesses only, mumble the embarrassed former stock broker, Velchev: "Don't expect miracles. We would hope that things start improving by the third year. The king himself talks of 800 days." The PM made clear that "The Bulgarian economy cannot grow without growth of the income of the population", and that he intended to attract back Bulgarian flight capital by revamping the banking system, introducing international accounting standards, and attracting foreign investors to buy shares in Bulgarian firms.

In December 1999, in an interview to the BBC, Velchev said: "In 1999 Bulgaria consolidated the macro-economic stability that it achieved in 1997 and 1998. (It was) a successful step by the Government the fact that the World Bank and the IMF guaranteed the balance of payments and the gradual increase in Bulgaria's foreign exchange reserves. This gave the necessary political courage to carry out the redenomination of the lev... (Yet) no successful deals were completed in 1999... There has been talk of successful deals in the energy sector for quite a long time, but there is still no information that any of them has been finalized. ... Giving grounds for even greater concerns is the small interest in the pearl of the Bulgarian banking system - Bulbank - which means that very few Western banks find business in Bulgaria promising. The key deal which we are all following at the moment is the privatization of the Bulgarian Telecommunications Company, whose completion is still not certain. As a consultant to one of the potential buyers I do not want to comment on why the talks took so long," said Velchev.

Macro-economic stability, privatization of key state assets, and a restructuring of the baking sector are still the main concerns of the new Minister of Finance.

His colleague, US educated Deputy Prime Minister and Minister of the Economy, Nikolai Vassilev, 32, is an emergent market analyst. His economic agenda includes the tired - and hitherto vague - recipes of privatization, fighting corruption, reinforcing capital markets, and tax reform to encourage re-investment by firms. Vassilev and Ljubka Kachakova (a PriceWaterhouseCoopers Brussels employee) authored the inventory of free-market slogans that passes for the economic platform of National Movement for Simeon II. Kostov immediately pointed out the incompatibility of said platform with Bulgaria's current and future obligations to the EU.

"We are going to finish the process... within 2-3 years. Everything that should be privatized will be privatized." - said Vassilev recently, referring mainly to the tobacco monopoly, the telecom, and one or two major banks.

In a debate about the recent issuance of Eurobonds by Bulgaria, Vassilev made these comments:

"Each country has its good and bad moments. If a state like Bulgaria bears problems and then decides to emit for the first time Eurobonds, it is not necessary to sell them. The emission of eurobonds is required because afterwards private companies may enter the international markets ...  The budget deficit must be next to 0 per cent and the currency board must remain unconditionally".

He suggested a reduction of profit tax and income tax and predicted that such a cut will prove to be conducive to economic growth.

On another occasion, as a member of the "Bulgarian Easter" initiative of the previous government, he expressed concern regarding the decline in Bulgaria's foreign exchange reserves due to the need to repay 1.3 billion US dollars of foreign debt this year. He warned against a negative tendency in the trade balance of Bulgaria as imports far exceeded exports in the last few years. In the same event, he opinionated that the capital markets should be completely liberalized. He argued for free purchases of land - including agricultural land - by foreigners. He identified these restrictions as the cause of the decline in the value of Bulgarian assets and its divergence from the EU. Bulgarians - he exclaimed - underestimate the potential role and contribution of capital markets. "In the updated 'Program 2001' of the Bulgarian Government, the economic and financial policies of the incumbents are reduced to envisioning support for the commercial banks of the most elementary type" - he accused. Foreigners - he added - "have no confidence" in the Bulgarian capital markets. He succeeded to attract the attention of Kostov himself, who responded to him at length.

But the emerging eclectic political maelstrom that coalesced around the former King does not include only Wall Street whiz kids. Some distinctly unsavoury characters have crept into the lists fielded by the party in Russe and Burgas. Foreigners are worried. Gunter Verheugen, EU commissioner for enlargement remarked, undimplomatically, that there are "reasons to be concerned about some of the promises" made by the campaigning King. Georgy Ganev, a leading Bulgarian liberal economist, summed it up neatly in an interview in the "Financial Times": "Either there will be an economic crisis because the new government will try and meet these expectations. Or there will be a political crisis because it will not." The consolation prize? "The myth of the king will fill a big hole in the lives (of the Bulgarians)." - says Andrey Raichev, Director of Gallup Bulgaria, to the same paper.

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