Bulgaria On EU Excessive Deficit Watch

EU economic and finance ministers approved a proposal by the European Commission (EC) earlier this month to launch an excessive deficit procedure for Bulgaria. The country must bring its deficit to below the bloc’s 3% of GDP limit by 2011.

The country came under scrutiny in April, when it revealed that the real gap in its 2009 budget was 3.9% of GDP, not 0.8%, as reported earlier. The centre-right Citizens for the European Development of Bulgaria government, which came to power in July 2009, blamed the increase on nearly 150 unaccounted procurement deals signed by the previous Socialist-led cabinet in the final months of its tenure.

On the heels of revelations about severe budget data misreporting by Greece, the news from Sofia fuelled suspicions about the actual fiscal situation.

While analysts have rejected any threats of a Greek-type scenario in Bulgaria, experts from the EC’s statistical arm, Eurostat, are due to visit the country this fall to inspect its accounting methods.

Brussels took the first steps towards initiating an excessive deficit procedure for Bulgaria in May, with the adoption of a report that described the excess over the 3% of GDP reference value as “exceptional”.

After years of steady growth and general government surpluses, Bulgaria was hit hard by the global turmoil and its economy shrank by 5% of GDP in 2009, the paper noted, citing the sharp fall in both external demand and foreign investment inflows.

“Reflecting the fall in investment and private consumption, domestic demand declined abruptly, driving down indirect tax revenue, which account for more than 40% of government revenue in Bulgaria,” the EC said in the assessment.

Viewing the country’s excessive deficit in 2009 as “temporary” in the sense of the EU Treaty and the Stability and Growth Pact, it predicted that the gap in this year’s budget would shrink to below the EU limit and the downward trend would continue in 2011.

But in June, Sofia revised the planned deficit for 2010 to 3.8% of GDP, up from the original target of 0.8% of GDP approved late last year, citing a revenue shortfall worth nearly 1 billion euros, largely owing to lower tax collection in the first few months of the year.

This resulted from “a decline in demand, imports and corporate profits”, Finance Minister Simeon Djankov told Bulgarian lawmakers during parliamentary debate on the changes to the 2010 Budget Act in early July.

While the budgets of all ministries — except interior, defence and of transport — were cut, the law envisioned nearly 600m euros in new spending, more than half of it earmarked for debt payments to the private sector. Parliament passed the budget revisions just days before the EU finance and economy ministers endorsed the EC proposal for opening an excessive deficit procedure on July 13th.

Bulgaria “should avoid a deterioration of the 2010 deficit beyond 3.8% of GDP and correct the excessive deficit by 2011 at the latest, implying a structural consolidation effort of around ¾ percentage points of GDP in that year”, the ministers recommended.

The deadline for Bulgaria to take corrective measures is January 13th 2011.