The impact of the 14-month Plamen Oresharski administration on Bulgaria’s government debt can now be quantified at a net 2.5 billion euro, or an increase of 5.9 percentage points to 22.8 per cent of gross domestic product (GDP) forecast for 2014, according to data from the country’s Finance Ministry.
At the end of July 2014, days before the Oresharski cabinet departed office, the government debt (both domestic and foreign) swelled to 9.4 billion euro, compared to 6.9 billion euro at the end of May 2013, when Oresharski was sworn in.
To be fair to the now-departed cabinet, more than half of the new debt came down to circumstances outside its control – it borrowed 1.49 billion euro on foreign markets in July in part to refinance the US dollar-denominated bonds due in January 2015, worth an estimated 810 million euro at the end of July. Furthermore, it borrowed 1.23 million leva (about 630 million euro) in five-month government bills on June 30 on the domestic market to boost the liquidity of local banks under a state aid scheme approved by the European Commission.
On the other hand, the 42nd National Assembly left office in early August with the ruling axis that backed the Oresharski administration refusing to endorse a Budget revision bill that included an increase on the annual borrowing limit – keen, no doubt, to shift the political costs of new debt onto the new parliamentary majority expected to emerge after the October 5 early elections.
Sluggish Budget revenues collection – well behind target and lending renewed credibility to criticism that revenues were inflated to justify higher spending by the Oresharski administration – means that the next cabinet will face a higher-than-expected deficit, forcing it to issue new debt.
Additionally, the new legislature will have to make a decision on the Corporate Commercial Bank (CCB), now under the special supervision of the Bulgarian National Bank (BNB).
The lender has 3.7 billion leva in guaranteed deposits, according to the BNB, but the state deposit guarantee fund has only 2.1 billion leva available. A government loan has been floated as the most likely solution to make up the difference, but with no money earmarked for that purpose in the Budget, that would require additional borrowing.
The Budget revision bill rejected by Parliament envisioned a total 3.4 billion leva increase of the borrowing limit for this year (on top of the 4.4 billion leva in the current Budget), including 2.7 billion leva as a ‘buffer’ to cover potential costs to deal with any fallout from the CCB situation.
(Centre-right opposition party GERB, widely expected to win the October 5 elections, said that the proposal did not go far enough and that Bulgaria would have to borrow even more to cover the full costs of additional spending by the Oresharski administration.)
The bill also would have raised the government debt ceiling to 21.4 billion leva – as it stands, the current ceiling of 18 billion leva (about 9.2 billion euro) has been exceeded by about 432 million leva, but that will not trigger a government shutdown, because the ceiling applies only to the debt figure at the end of the year.
As it stands, that target will be met given that the Finance Ministry can borrow no more than 700 million leva under the current Budget framework, while the 1.23 billion leva borrowed to boost banking sector liquidity will be repaid in November.
It is far from certain that the 700 million leva will be sufficient to cover the deficit, making a Budget revision and additional debt highly likely to be passed by the next National Assembly, although any new spending – whether on CCB or to make up for halted EU funds – will have to be kept in check to avoid EU’s excessive deficit proceedings, which would be triggered if the deficit goes above three per cent of GDP.
Despite the sharp increase under Oresharski, Bulgaria remains one of the EU member states with the lowest government debt ratios, well below the 60 per cent threshold in the Maastricht criteria for adopting the euro – not that Bulgaria is contemplating a switch to the common currency in the coming years.
But it also represented a sharp departure from the fiscal austerity policy under the GERB government in 2009/13, which borrowed a total of 3.3 billion euro during three and half years in office. In relative terms, Bulgaria’s government debt under GERB increased from 14 per cent of GDP in July 2009 to 16.2 per cent of GDP in February 2013.
(Photo: M van den Dobbelsteen/sxc.hu)