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Victoria Mindova

The peaceful protests in Bulgaria which have been continuing for six weeks already were stained with blood in the middle of this week. However, the people are adamant and refuse to respond to the provocations which could spoil the main goal which is the fall of Oresharski’s government, new democratic elections and a more transparent government.

GRReporter sought out analyst Krassen Stanchev to comment on the latest developments. He is a Doctor of Philosophy, the founder and long-time chairman of the Institute for Market Economics. He defines himself as a seller of knowledge in the field of market economy and, over the years, he has significantly contributed towards the popularization of the principles of free economy in post-communist Bulgaria.

Despite his busy schedule, Mr. Stanchev has been able to answer our questions via Skype and to present his views and forecasts on the outcome of this crisis situation.

The peaceful protest escalated on the day when the parliament was discussing the budget update. What needs should the loan of one billion leva cover? Are there alternative ways to fill the budget gaps without additional borrowing?

The escalation was provoked. The protests were peaceful for 40 days and the situation was very calm. The unrest lasted for only one night and it does not characterize the protest. It was provoked by several things.

The first was the convening of an extraordinary session on the budget, which coincided with the daily protests. The second was the behaviour of the police towards the protesters. The third factor that influenced Wednesday’s development was the availability of the means at hand such as stones, paving stones and other items. We know very well the area around the parliament building. The paving stones there cannot be removed with bare hands. However, they were at hand.

I think the desire of the people in the parliament was to direct a similar public reaction in order for it to provoke some kind of international condemnation of the ongoing protests. The first speeches of the Chairman of the National Assembly and the leader of the Socialist parliamentary group demonstrated the same.

Furthermore, there is no real reason to convene three commissions to discuss the specific issue in the parliament building when the protests are not subsiding. I know firsthand that it is not necessary to discuss such projects in the parliament building. I think that it is complete nonsense to hold such meetings in this building when protests such as the present ones are taking place outside it.

As for the issue of the external loan, I must say that the budget will be burdened within the limits of the stability pact of the European Union. Most likely, this year's deficit will reach 2%. It is almost impossible for the deficit to exceed 3%, which is the limit set by Brussels.

The issue is slightly different. The main reason for the revision of the budget is to find a response to the purely political disapproval of the work of this government by expanding government spending. The fiscal discipline in Bulgaria is not accidental. It has been imposed because of two major crises. The first was in 1990, and the second one, in 1997, was very similar, in size and behaviour, to the Greek debt crisis at present.

Bulgaria is still paying instalments on the debt formed under communism. Actually, it will be repaid next year. For this reason, Bulgaria’s budget maintained very strict fiscal discipline from 1998 to 2008 and during this period, its deficit had never fallen below the level of GDP growth. In other words, if it is expected that the economic growth will be 1%, the budget is structured so that the deficit does not exceed this limit.

What is happening this year is that the golden rule which we have so far observed will be broken. We expect that this year’s economic growth will be around 0.5%. However, the deficit will be three times higher than the growth of the economy. This is a complete change in the government philosophy. This change is very important for Bulgaria and it has provoked part of the dissatisfaction which has led to slightly more radical demands of the protesters. As to the actual budget, it is being exceeded each year.

The arguments of the government to take a new loan of one billion leva relate to the payments owed to the business. It is important to note that their size is lower than in previous years and this is because we had a temporary caretaker government this year. Traditionally this type of government in Bulgaria is more provident and rational. The people involved in a caretaker government usually do not participate in the elections, i.e. they have no additional expenditures related to the election period.

The revised budget considers the additional funding of amounts that are included in the column of "other expenses" with the promise that they will be discussed when the time comes. This is like signing a blank cheque.

How will the situation develop in the near future in your opinion?

I think that it will be very difficult to decrease the tension and in no way will a reasonable outcome be reached. There is no agreement on a new date for early elections between the parties that are in parliament and there will not be one soon. The protests will have to continue for at least another month or two before this government falls.

Government officials have recently stated that the protests in Sofia are detrimental to the country's economic stability. How would you comment on this statement?

This is unfounded. All macroeconomic indicators are good, including the one of the GDP growth. They are even better in comparison with the same period last year. The relative excess in the budget is the cost of salaries of the police and other authorities that maintain public order.

The protests have been continuing for more than three months already. The first was the February unrest that lasted for 40 days approximately, like the current protests. As you understand, extra pay-outs are inevitable in this case. The only over-expenditure in the budget this year will be connected with this item; there are no other cost overruns in the financial programme. There is no reason to overspend the budget.

The problems in the economy are not caused by the protests. We need to consider the reason for the protests to find out what hinders the development of the economy.

The cause for the protests is the fact that the so-called majority in parliament is trying to use the power structures of the state, in particular the State Agency for National Security (SANS), in order for it to impose economic interests on the politics and economy of the country. This appointment was related to the influence of a particular bank that serves Russian interests in Bulgaria. Not only one or two but maybe more than ten political appointments of this type have been made over the past year.

There have been a series of such appointments which show the clear connection of the government with the oligarchy, which is not a precise definition since this is a group of people who always win and are always friends with the government in power (regardless of its colour). We call this friendly capitalism or Crony capitalism.

So far, the decline in foreign investments is the most embarrassing development in economic terms. Their value in the first quarter of 2013 was three times lower than their level in the same period last year.

What is the cause for the withdrawal of foreign direct investment from Bulgaria in your opinion?

I think this is a result of the general government inefficiency which has been recently observed. Bulgaria remains an extremely favourable investment destination both for European and for other foreign partners. The record attracting of foreign direct investments was in 2008 when they accounted for 32% of GDP.

In March, Emil Kabainov from the Union of Democratic Forces supported the cancellation of the currency board in Bulgaria. What is your opinion about this?

Firstly, this man has no idea of ​​economy and secondly, he no longer has any representative functions in his party. Thirdly, there is no important political force to begin to openly “dismantle” the currency board. What can happen is the hidden “dismantling”, namely when the budget deficit increases and there is no way to raise the taxes to pay the debts. In this case, we can talk about cancellation of the currency board, as happened in Argentina.

Currently the system in Bulgaria is very stable. The reserve of the currency board amounts to almost one hundred percent of the reserve of the central bank. In other words, there is no reason for concern except for the things that are happening in the political sphere.

Under what circumstances do you think that it would be appropriate for Bulgaria to join the euro zone and adopt the euro as its official currency?

It is when the euro zone begins to meet the same criteria of economic stability that it itself has set and when they are being observed in Bulgaria. Currently only three countries meet all the requirements of the European Union and they are all outside the euro zone. They are Denmark, Sweden and Bulgaria.

To what extent do you think that the debt crisis in the euro zone and especially in Greece has affected Bulgaria?

I do not think that this crisis is a problem of the currency. It is rather due to the behaviour of the European Central Bank which, since 2009, has been irrational. The international financial crisis in 2008-2009 led to a decline in foreign investment. Foreign direct investments in 2010 were eight times lower than in 2008. This is the impact of the crisis. As to the Greek crisis, I believe that it has no significant impact on Bulgaria for one simple reason - it is not Greece (figuratively) that owes money to Bulgaria but vice versa. For example, Greek banks are interested in the good development of Bulgaria because then the local branches will pay off their debts to the Greek parent companies.

Bulgaria is the poorest country among the members of the European Union ...

This is not true. According to the latest data of the European Statistical Office Eurostat Romanians are the poorest.

The most important thing is that Bulgarians are poor. The first failure in the modern history of Bulgaria was in 1960, followed by the bankruptcies in 1976 and 1990. This last failure we are talking about happened on the basis of the previous two. Then we had the same people who had brought the country to the previous failures and who continued to try to govern the country until the next collapse in 1997. What should the behaviour of rational citizens and voters be in this case?

The problems in the healthcare sector and in the social policy are very serious. What should be done in order for the standard of living in the country to improve sustainably and for the pensions to increase?

This could happen immediately in all areas if the design of the social, pension and healthcare systems is changed. This year's government costs for these purposes amount to 58% of the total spending. In order for the spending in these areas to increase, other sectors should suffer. This translates into a reduction in the funding for the support of the police and army, or for the maintenance of the public administration or some other item of the budget.

What can be done to improve the situation in these areas is for the hidden costs of citizens to become apparent. For example, for each 1.5 leva the government spends in the field of education the citizens should spend the same amount for the education of their children. The same applies to healthcare too - each contributor to the system must know what he or she gets in return for a given amount. If you know that 50% of what you have contributed remains for you, you will know the amount which will be at your disposal and you will know whether you can afford a test- tube baby or if you will be able to adopt a child. Now nobody knows where his or her contributions go.

What do you think are the strongest sectors of Bulgaria, which could become the driving force of the sustainable economic development of the country?

Logistics, transport, tourism, mining and new technologies, including the IT sector have the largest share in the GDP. The largest employers in Bulgaria are developing primarily in these sectors.

How do you see Bulgaria in a year?

A new government will operate in a year. It is impossible for the next elections to repeat the same results which we obtained this May. This confidence is based on the radicalism of the current majority, if we can call it that. The voters realize that the behaviour of today's power is a continuation of the behaviour of the previous government.