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Bulgaria will apply in November to join the exchange-rate mechanism, the European Union’s two-year currency stability test before the country can drop the lev and adopt the euro, Finance Minister Simeon Djankov said.

“We have already started preparing the necessary documentation to apply to join ERM in November,” Djankov said in an interview in Sofia yesterday. “There is great uncertainty about what happens in the whole region in terms of the financial crisis. It doesn’t affect our application, but may affect the speed with which it is considered.”

Joining the exchange-rate mechanism would bring the Balkan country, the poorest in the EU, closer to the umbrella of the euro region and the protection of the European Central Bank. Bulgaria and the Baltic states of Latvia, Estonia and Lithuania, also EU members, have had to resist pressure to devalue their currencies as eastern Europe’s recession takes its toll.

The lev is already linked to the euro in a currency board that keeps the Bulgarian currency at 1.9558 to the euro. Joining the exchange-rate mechanism may allow the lev to fluctuate by as much as 15 percent around a central band, though the central bank has said it will leave the lev tightly pegged to the euro through the duration of the two years.

Worse Than Expected

Djankov, 39, a former World Bank chief economist, took over the Finance Ministry and became deputy premier in Prime Minister Boiko Borissov’s new Cabinet on July 27. During his first four days, he has lowered the country’s 2009 economic forecast to a contraction of 6.3 percent and found the state budget is in worse shape than described by the ousted administration.

The new government of the Balkan country has promised to stem the deepening recession, fight corruption, raise living standards and push the economy closer to western Europe by taking the euro as soon as possible.

The central bank has said it will voluntarily keep its own tighter exchange rate system, similar to that adopted by Latvia when it joined the mechanism in 2005, until formal adoption.

Bulgaria, which joined the EU in 2007, had to abandon initial plans to join ERM-2 shortly after EU entry because of accelerating inflation and a record current-account deficit. Djankov forecast the inflation rate will fall to 2.8 percent at year-end after dropping for a 12th month in June to 3.7 percent.

Euro Outlooks

The EU’s eastern members, among the countries hardest hit by the global financial crisis, will see their euro-adoption plans complicated by the recession, Fitch Ratings said in an April 16 report. Its latest forecasts for euro adoption were 2015 for Bulgaria and Romania, 2014 for the Czech Republic, Hungary and Latvia and 2013 for Estonia, Lithuania and Poland.

To adopt the euro, candidates need to keep their budget deficits to within 3 percent of gross domestic product, debts to 60 percent of GDP and 12-month average inflation rates to within 1.5 percentage points of the average inflation rate of the three EU nations with the slowest consumer-price growth online cash advance.

“We are aiming for a balanced budget,” Djankov said. “To do that, we need about 2.5 billion lev ($1.7 billion) either in extra revenue or in spending cuts. It turned out the previous government has spent all the surplus in wasteful projects.”

The new government yesterday adjusted this year’s budget to correspond to the new GDP forecast, he said. The recession has led to a 16 percent slump in revenue for the state.

IMF Loan

Securing a loan from the International Monetary Fund, following Latvia, Romania, Hungary and Ukraine among others, to support the currency peg to the euro, is not an “immediate priority,” Djankov said.

“We plan to get the IMF involved in the analysis of the budget both for the remaining part of 2009 and especially in the preparation of the 2010 budget,” Djankov said. “The IMF analysis can quickly be used for a possible loan in 2010, if it becomes obvious that the 2010 budget cannot be done just with the cuts.”

Bulgaria faces a budget deficit for the first time in eight years. The IMF forecast a shortfall of 1 percent of GDP this year and urged the previous government to cut spending 20 percent.

“If the markets calm down, Bulgaria might issue Eurobonds in nine months,” Djankov said. “The size of the IMF loan and the Eurobond issue will depend on the budget deficit.”

Government debt amounts to 13 percent of GDP and the Cabinet aims to keep its public debt burden below 60 percent of GDP.

Loopholes

The Cabinet plans to cut 15 percent of all administrative costs starting next week to help save 1.2 billion lev this year, Djankov said. Plugging loopholes in excise tax collection and curbing contraband would help cover part of the remaining 1.5 billion-lev gap, he said.

“If the economic situation worsens further than we expect, we may have to do more budget cuts and do formal revision of this year’ budget asking parliament’s approval in October - November,” Djankov said. To speed up the effect of the current budget cuts, they will be enforced as a government decision, as parliamentary approval would delay them by a month, he said.

The government is also prepared to sell its 44 percent stake in the Bulgarian Stock Exchange “if we find a good investor,” Djankov said.

Other anti-crisis measures include transferring 250 million lev to the state-run Bulgarian Development Bank to increase lending to private industries, Djankov said, and speeding up reimbursements of value-added taxes held up by the previous government for more than three months.

Setting up a holding company which will hold the remaining government stake in utilities, State Railways, companies including Bulgartabak, airports and seaports, will eliminate an existing conflict of interest in the ministries that are in charge of the government stakes, he said.

Source

Filed under: money by Finance Boss