There is no rule for the minimum amount of fiscal reserves, says Deputy Minister of Finance Vladislav Goranov in an interview with the press. Moreover, he said maintaining the reserve at very high levels may come too costly for taxpayers. Mr. Goranov said that many other countries do not maintain such reserves and when they need money, they issue loans, and he gives the example of Italy. The reserve, explains Goranov, was created during the introduction of the currency board upon recommendation of the IMF to guarantee that Bulgaria will be able to service its loans to the Fund.
All these claims of the deputy finance minister in fact are quite a strange mix of half-truths, whose sole purpose is to justify a further reduction of the fiscal reserve.
It is true that the fiscal reserve is a financial instrument that does not exist in most countries. It is true also that there is no generally accepted rules for its size and is partly true, the IMF called for its creation in 1997 to ensure that Bulgaria will be able to pay its foreign debt. The assertion of Goranov about the IMF, however, is only partly true because the fiscal reserve was created to ensure the state’s solvency in general, and not just to secure the loans provided by the fund. The BANKER weekly needs to remind the Deputy Minister that the biggest liabilities in 1997 were those of the Brady bonds to private creditors, and only then came debts to the IMF, followed by those of creditor countries in the Paris Club, the World Bank and the EBRD.
It is a fact that the fiscal reserve dies ensure liquidity of the state. It ensures that Bulgariay may at any time meet its current obligations towards the domestic and external markets. And every business man knows that liquidity has a cost. The example of Italy, which Goranov gives – when there is not enough money in a state’s treasury, the latter may decide to issue debt is probably not the most appropriate to follow, knowing what measures had to be taken by Rome so that Italy may not follow the example of Greece. But it is true that countries with developed economy and strong exports continuously operate on international debt markets and their bonds are known to investors. Even if these countries are not threatened by bankruptcy. The example here again is called Greece. If it had accumulated fiscal reserves over the past twenty years along with piling obligations, it would now be up in the same unenviable situation? Hardly likely.
But in order to come back to the problems of Bulgaria – the question is why has the state continued to accumulate fiscal reserve even after having repaid the IMF and the Brady bonds?
For those who do not remember the government’s reserves had its biggest volume – 11 billion lev in the autumn of 2008 and when the amount of the foreign debt was 4.8 billion euros or 9.6 billion lev. Back then at a press conference at the Ministry of Finance a reporter of the BANKER asked Finance Minister Plamen Oresharski – if it was reasonable to accumulate additional reserve having in mind that its size allowed for repayment of the entire debt. The importance of the response given by Minister Oresharski then was probably not obvious for many people: Maybe I’ll calm down only when our fiscal reserve can cover the yearly expenses of the state At that time – in 2008 the half-yearly expenditure of the state amounted to around 12.5 billion lev. In practice Mr. Oresharski was talking about the level of liquidity that each financial structure, including the State is required to maintain. Not surprisingly, the minimum liquidity levels are fixed in the regulations governing the activities of banks and insurance companies and pension funds. The same applies to the state.
And now, as the deputy finance minister raises the issue that no minimum level of fiscal reserves is recorded as obligatory anywhere in the country’s legislation, it now becomes high time this misunderstanding is removed. Maybe the National Assembly should fix in the law governing the State Budget the lowest admissible threshold of state relative to annual expenditures in the consolidated budget.
