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Spending your way out of the crisis? For Bulgaria it may not be an option



Getting to know Bulgaria’s “Fiscal Reserve”

Recently, Bulgarian commentators and policymakers have been whispering on the status of the “Fiscal Reserve”. This financial instrument is amongst the main indicators of Bulgaria’s economic stability. It is also a source the government draws from to finance extraordinary expenses without recurring to debt. Given the reserves’ importance, it is unsurprising that some wonder whether the government is wasting precious resources now and then.

It is important to notice that Bulgaria’s fiscal reserve is actually an aggregate indicator which includes heterogenous sorts of components. Such a detail is actually essential because the government cannot earmark all of these resources freely for current expenditure. Thus, doubts relating to the fiscal reserve regard not just its level, but also its composition. To get a clearer picture, one may simply say that there are three main categories of assets in the fiscal reserve. First, budgetary institutions’ bank-account balances — which make up the lion share of the total. Second, the ‘Silver Fund’, a reservoir of assets meant to ensure the pension system’s sustainability, which is also quite significant. Finally, accounts receivable from European Union funds for certified expenses and advances, which have been rising steadily. On average, in 2019–2021 these three sources have provided the fiscal reserve with 99% of its value (Figure 1).

Lack of transparency contributes to make the issue even murkier. Publicly available information on the state and composition of Bulgaria’s fiscal reserve are rather incomplete. In fact, the Ministry of Finance only discloses the reserve’s total and a few other data on a monthly basis. Not even the ministry’s quarterly report on the fiscal reserve provides a better breakdown. Meanwhile, the issuance department of the Bulgarian National Bank (BNB) declares only total deposits weekly. Thus, worries on the status of the fiscal reserve appear justified overall.

More extraordinary expenses ahead

Like many other developed countries, Bulgaria has faced widening fiscal deficit due to the pandemic-induced crisis over the past year. The fiscal reserve’s erosion is the unavoidable result of reduced revenues’ and increases spending’s combined effect. Such a downward trend has led many to question public finances’ soundness and the government’s ability to manage the reserve. Moreover, as a caretaker cabinet replaced the previous executive after inconclusive elections scrutiny has intensified in May–June 2021.

In the next few months, the country has to face enormous expenses. This money is going to finance a €25 increase of all pensions as well as employment-support schemes. True, the government has foreseen a 4.9bln-leva deficit (ca. €2.5bln or $3bln) in the current fiscal year. However, is will probably not suffice to cover the cost of these and other measures, estimated at over €4.5bln. Actually, the very fiscal reserve from which the cabinet may want to draw may not be enough.

In fact, according to the latest available data, the Silver Fund sits at just a little over €1.7bln. Meanwhile, budgetary entities’ deposit with the BNB are somewhere in the realm of €3bln. Hence, despite the imminent collection of several taxes, the reserve would have to decrease drastically — something Bulgaria cannot afford. The only other option, is for the caretaker cabinet to finally manage to draft a revision of the budget. Yet, even in this case, there is no guarantee that after the elections in July the new parliament will pass it.

And the Fiscal Reserve keeps eroding

In the meantime, the size of the fiscal reserve keeps shrinking. Usually, its levels follow a sinusoidal trend, with periodical rises and falls. However, in the course of late 2020 and early 2021 revenues have systematically been insufficient to cover for past expenses. As such, each successive withdrawal has reduced the reserves’ total value incrementally. This divergence from established patterns is clearly visible in Figure 2, which disaggregates the fiscal reserve’s three main components.

As of May 2021, the fiscal reserve’s worth was €4.5 billion, as opposed to €5.2bln in May 2020 (Figure 2). In the short term, it had already gone down by €400mln, from €4.9bln in January of that year. Hence, the reserve shrunk twice as fast in January–May 2020 (-8.7%) than in the same period of 2021 (-4.2%).  Simeon Djankov, deputy Prime Minister and Finance Minister in 2009–2013, argued already in mid-March that the government will have to withdrawal several further billion from the fiscal reserve. Similarly, Milen Velchev, finance minister in 2001–2005, argues that a new budget allow more borrowing is a priority.

Yet, the ousted prime minister’s party (GERB) is strenuously defending its financial track record and claiming their budget is sufficiently effective. Kiril Ananiev, former Finance Minister, noted that despite the deficit already high deficit, the fiscal reserve is still double its legal minimum. GERB’s leadership are argues that this is the worst state the reserve has ever been in. After all, in 2014 the fiscal reserve was worth only €2.6bln or 10% of GDP “without pandemic or extraordinary expenses”.  Meanwhile, now reserves amount at 4.6% of GDP. Moreover, the reserve is on a deficit in the first quarter of 2021 for the first time.

Causes of a decline

As mentioned above, the official data on the fiscal reserve’s status tend to be rather fuzzy. But the Institute for Market Economy (IPI), one of the oldest Bulgarian think tanks, obtained disaggregated data for 2019-2021. These figures shed an interesting light on the interactions between fiscal policy and a stable fiscal reserve (Figure 3).

By February 28 2021, budgetary entities had about €2.7bln, €409mln of which destined to social security funds and EU-sponsored projects. In addition, the budget for 2021 earmarks €1.6bln for the Silver Fund; the least ‘liquid’ of the fiscal reserve’s three main components. As a result, there are just about €1.1bln available for discretionary spending. To get an idea, the current pension- and salary-support schemes have a combined cost of almost €110mln per month.

At their historical low-point, on August 31 2010, those accounts held €320mln, so the current situation is far from bleak. Yet, changes in the relative weight on the reserve’s total of its the three main components indicate several risks. As regards EU funds, they are rather stable in their absolute amount over the period January 2019–May 2021 (Figure 3). Generally, they fluctuate somewhere in the realm of €1.7–2.2 billion, averaging just under the €2bln mark. Nevertheless, their relative importance is usually quite unpredictable, and in steep rise since September 2020 (Figure 4). The same can be said of the Silver found, the value of which stands around €1bln. But excluding social-security funds, budgetary balances are at their lowest level for the entire period under review. Thus, their relative importance has decreased, making EU financing, pension funds and the Silver Fund significantly more important than before.

The peril ahead: Nationalising social-security funds

The danger could hardly be more evident. Without considerable free resources, the government will need to find new resources to finance any additional expense. Two are the main tools that would allow to replenish the reserve. First, generalised or target tax hikes may be sufficient on their own, or in combination with other tactics. However, they are out of question in this electoral period. Second, debt raised amongst domestic and international investors could be signed at relatively low interest rates. Yet, the current budget allows for no more than €2.3 billion of new-emission debt, which are unlikely to suffice.

Finally, the cabinet may repeat the script played out to save the reserve from its 2010 low. Back then, the government proposed the nationalisation of the National Health Insurance Fundj (NZOK). Since the parliament approved it, the State budget can draw freely on the billions in the NZOK’s balance. This time, nationalisers may eye the nationalisation Silver Fund – which also sustains social security – as the solution.  Thus, they may amend the law destining assets in the Silver Fund to their current purpose to be able to finance urgent expenses. This would put high pressure on Bulgaria’s social security system and, potentially, expose present and future retirees to the risk of losing their hard-earned pensions.

Fabio A. Telarico was born in Naples, Southern Italy. Since 2018 he has been publishing on websites and magazines about the culture, society and politics of South Eastern Europe and the former USSR in Italian, English, Bulgarian and French. As of 2021, he has edited two volumes and is the author of contributions in collective works. He combines his activity as author and researcher with that of regular participant to international conferences on Europe’s periphery, Russia and everything in between. For more information, visit the Author’s website (in English and Bulgarian).

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How Bangladesh became Standout Star in South Asia Amidst Covid-19



Bangladesh, the shining model of development in South Asia, becomes everyone’s economic darling amidst Covid-19. The per capita income of Bangladesh in the fiscal year 2020-21 is higher than that of many neighbouring countries including India and Pakistan. Recently, Bangladesh has agreed to lend $200 million to debt-ridden Sri Lanka to bail out through currency swap. Bangladesh, once one of the most vulnerable economies, has now substantiated itself as the most successful economy of South Asia. How Bangladesh successfully managed Covid-19 and became top performing economy of South Asia?

In March 1971, Sheikh Mujibur Rahman declared their independence from richer and more powerful Pakistan. The country was born through war and famine. Shortly after the independence of Bangladesh, Henry Kissinger, then the U.S. national security advisor, derisively referred to the country as a “Basket Case of Misery.” But after fifty years, recently, Bangladesh’s Cabinet Secretary reported that per capita income has risen to $2,227. Pakistan’s per capita income, meanwhile, is $1,543. In 1971, Pakistan was 70% richer than Bangladesh; today, Bangladesh is 45% richer than Pakistan. Pakistani economist Abid Hasan, former World Bank Adviser, stated that “If Pakistan continues its dismal performance, it is in the realm of possibility that we could be seeking aid from Bangladesh in 2030,”. On the other hand, India, the economic superpower of South Asia, is also lagging behind Bangladesh in terms of per capita income worth of $1,947. This also elucidates that the economic decisions of Bangladesh are better than that of any other South Asian countries.

Bangladesh’s economic growth leans-on three pillars: exports competitiveness, social progress and fiscal prudence. Between 2011 and 2019, Bangladesh’s exports grew at 8.6% every year, compared to the world average of 0.4%. This godsend is substantially due to the country’s hard-hearted focus on products, such as apparel, in which it possesses a comparative advantage.

The variegated investment plans pursued by the Bangladesh government contributes to the escalation of the country’s per capita income. The government has attracted investments in education, health, connectivity and infrastructure both from home and abroad. As a long-term implication, investing in these sectors helped Bangladesh to facilitate space for businesses and created skilled manpower to run them swiftly. Meanwhile, the share of Bangladeshi women in the labor force has consistently grown, unlike in India and Pakistan, where it has decreased. And Bangladesh has maintained a public debt-to-GDP ratio between 30% and 40%. India and Pakistan will both emerge from the pandemic with public debt close to 90% of GDP.

Bangladesh’s economy and industry management strategy during Covid-19 is also worth mentioning here since the country till now has successfully protected its economy from impact of pandemic. At the outset of pandemic, lockdowns and restrictions hampered the country’s overall productivity for a while. To tackle the pandemic effect, Bangladesh introduced improvised monetary policy and fiscal stimuli to bring them under the safety net which lifted the situation from worsening. Government introduced stimulus package which is equivalent to 4.3 percent of total GDP and covers all necessary sectors such as industry, SMEs and agriculture. These packages are not only a one-time deal, new packages are also being announced in course of time. For instance, in January 2021, government announced two new packages for small and medium entrepreneurs and grass roots populations. Apart from economic interventions, the government also chose the path of targeted interventions. The government, after first wave, abandoned widespread lockdown and adopted the policy of targeted intervention which is found to be effective as it allows socio-economic activities to carry on under certain protocols and helps the industries to fight back against the pandemic effect.

Another pivotal key to success was the management of migrant labor force and keeping the domestic production active amidst the pandemic. According to KNOMAD report, amidst the Covid-19, Bangladesh’s remittance grew by 18.4 percent crossing 21 billion per annum inflow where many remittance dependent countries experienced negative growth rate. Because of the massive inflow of remittance, the Forex reserve of Bangladesh reached at 45.1 billion US dollar.

Bangladesh’s success in managing COVID19 and its economy has been reflected in a recent report “Bangladesh Development Update- Moving Forward: Connectivity and Logistics to strengthen Competitiveness,” published by World Bank. Bangladesh’s economy is showing nascent signs of recovery backed by a rebound in exports, strong remittance inflows, and the ongoing vaccination program. Through financial assistance to Sri Lanka and Covid relief aid to India, Bangladesh is showcasing its rise as an emerging superpower in South Asia. That is why Mihir Sharma, Director of Centre for Economy and Growth Programme at the Observer Research Foundation, wrote in an article at Bloomberg that, “Today, the country’s 160 million-plus people, packed into a fertile delta that’s more densely populated than the Vatican City, seem destined to be South Asia’s standout success”. Back in 2017, PwC (PricewaterhouseCoopers) report also predicted the same that Bangladesh will become the largest economy by 2030 and an economic powerhouse in South Asia. And this is how Bangladesh, a development paragon, offers lessons for the other struggling countries of world after 50 years of its independence.

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Build Back Better World: An Alternative to the Belt and Road Initiative?



The G7 Summit is all the hype on the global diplomatic canvas. While the Biden-Putin talk is another awaited juncture of the Summit, the announcement of an initiative has wowed just as many whilst irked a few. The Group of Seven (G7) partners: the US, France, the UK, Canada, Italy, Japan, and Germany, launched a global infrastructure initiative to meet the colossal infrastructural needs of the low and middle-income countries. The Project – Build Back Better World (B3W) – is aimed to be a partnership between the most developed economies, namely the G7 members, to help narrow the estimated $40 trillion worth of infrastructure needed in the developing world. However, the project seems to be directed as a rival to China’s Belt and Road Initiative (BRI). Amidst sharp criticism posed against the People’s Republic during the Summit, the B3W initiative appears to be an alternative multi-lateral funding program to the BRI. Yet, the developing world is the least of the concerns for the optimistic model challenging the Asian giant.

While the B3W claims to be a highly cohesive initiative, the BRI has expanded beyond comprehension and would be extremely difficult to dethrone, even when some of the most lucrative economies of the world are joining heads to compete over the largely untapped potential of the region. Now let’s be fair and contest that neither the G7 nor China intends the welfare of the region over profiteering. However, China enjoys a headstart. The BRI was unveiled back in 2013 by president Xi Jinping. The initiative was projected as a transcontinental long-term policy and investment program aimed to consolidate infrastructural development and gear economic integration of the developing countries falling along the route of the historic Silk Road. 

The highly sophisticated project is a long-envisioned dream of China’s Communist Party; operating on the premise of dominating the networks between the continents to establish unarguable sovereignty over the regional economic and policy decision-making. Referring to the official outline of the BRI issued by China’s National Development and Reform Commission (NDRC), the BRI drives to: “Promote the connectivity of Asian, European, and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road [Silk Road], set up all-dimensional, multi-tiered and composite connectivity networks and realize diversified, independent, balanced, and sustainable development in these countries”. The excerpt clearly amplifies the thought process and the main agenda of the BRI. On the other hand, the B3W simply stands as a superfluous rival to an already outgrowing program.

Initially known as One Belt One Road (OBOR), the BRI has since expanded in the infrastructural niche of the region, primarily including emerging markets like Pakistan, Bangladesh, and Sri Lanka. The standout feature of the BRI has been the mutually inclusive nature of the projects, that is, the BRI has been commandeering projects in many of the rival countries in the region yet the initiative manages to keep the projects running in parallel without any interference or impediment. With a loose hold on the governance whilst giving a free hand to the political and social realities of each specific country, the BRI program presents a perfect opportunity to jump the bandwagon and obtain funding for development projects without undergoing scrutiny and complications. With such attractive nature of the BRI, the program has significantly grown over the past decade, now hosting 71 countries as partners in the initiative. The BRI currently represents a third of the world’s GDP and approximately two-thirds of the world’s entire population.

Similar to BRI, the B3W aims to congregate cross-national and regional cooperation between the countries involved whilst facilitating the implementation of large-scale projects in the developing world. However, unlike China, the G7 has an array of problems that seem to override the overly optimistic assumption of B3W being the alternate stream to the BRI. 

One major contention in the B3W model is the facile assumption that all 7 democracies have an identical policy with respect to China and would therefore react similarly to China’s policies and actions. While the perspective matches the objective of BRI to promote intergovernmental cooperation, the G7 economies are much more polar than the democracies partnered with China. It is rather simplistic to assume that the US and Japan would have a similar stance towards China’s policies, especially when the US has been in a tense trade war with China recently while Japan enjoyed a healthy economic relation with Xi’s regime. It would be a bold statement to conclude that the US and the UK would be more cohesively adjoined towards the B3W relative to the China-Pakistan cooperation towards the BRI. Even when we disregard the years-long partnership between the Asian duo, the newfound initiative would demand more out of the US than the rest of the countries since each country is aware of the tense relations and the underlying desperation that resulted in the B3W program to shape its way in the Summit.

Moreover, the B3W is timed in an era when Europe has seen its history being botched over the past year. Post-Brexit, Europe is exactly the polar opposite of the unified policy-making glorified in the B3W initiate. The European Union (EU), despite US reservations, recently signed an investment deal with China. A symbolic gesture against the role played by former US President Donald J. Trump to bolster the UK’s exit from the Union. As London tumbles into peril, it would rather join hands with China as opposed to the democrat-regime of the US to prevent isolation in the region. Despite US opposition, Germany – Europe’s largest economy – continues to place China as a key market for its Automobile industry. Such a divided partnership holds no threat to the BRI, especially when the partners are highly dependent on China’s market and couldn’t afford an affront to China’s long envisaged initiative.

Even if we assume a unified plan of action shared between the G7 countries, the B3W would fall short in attracting the key developing countries of the region. The main targets of the initiative would naturally be the most promising economies of Asia, namely India, Pakistan, or Bangladesh. However, the BRI has already encapsulated these countries: China-Pakistan Economic Corridor (CPEC) and Bangladesh-China-India-Myanmar Economic Corridor (BCIMEC) being two of the core 6 developmental corridors of BRI. 

While both the participatory as well as the targeted democracies would be highly cautious in supporting the B3W over BRI, the newfound initiate lacks the basic tenets of a lasting project let alone standing rival to the likes of BRI. The B3W is aimed to be domestically funded through USAID, EXIM, and other similar programs. However, a project of such complex nature involves investments from diverse funding channels. The BRI, for example, tallies a total volume of roughly USD 4 to 8 trillion. However, the BRI is state-funded and therefore enjoys a variety of funding routes including BRI bond flotation. The B3W, however, simply falls short as up until recently, the large domestic firms and banks in the US have been pushed against by the Biden regime. An accurate example is the recent adjustment of the global corporate tax rate to a minimum of 15% to undercut the power of giants like Google and Amazon. Such strategies would make it impossible for the United States and its G7 counterparts to gain multiple channels of funding compared to the highly leveraged state-backed companies in China.

Furthermore, the B3W’s competitiveness dampens when conditionalities are brought into the picture. On paper, the B3W presents humane conditions including Human Rights preservation, Climate Change, Rule of Law, and Corruption prevention. In reality, however, the targeted countries are riddled with problems in all 4 categories. A straightforward question would be that why would the developing countries, already hard-pressed on funds, invest to improve on the 4 conditions posed by the B3W when they could easily continue to seek benefits from a no-strings-attached funding through BRI?

The B3W, despite being a highly lucrative and prosperous model, is idealistic if presented as a competition to the BRI. Simply because the G7, majorly the United States, elides the ground realities and averts its gaze from the labyrinth of complex relations shared with China. The only good that could be achieved is if the B3W manages to find its own unique identity in the region, separate from BRI in nature and not rivaling the scale of operation. While Biden has remained vocal to assuage the concerns regarding the B3W’s aim to target the trajectory of the BRI, the leaders have remained silent over the detailed operations of the model in the near future. For now, the B3W would await bipartisan approval in the United States as the remaining partners would develop their plan of action. Safe to say, for now, that the B3W won’t hold a candle to the BRI in the long-run but could create problems for the G7 members if it manages to irk China in the Short-run.

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COVID-19: New Dynamics to the World’s Politico-Economic Structure



How ironic it is that a virus invisible from a naked human eye can manage to topple down the world and its dynamics. Breaking out of CoronaVirus, its spread across the globe and the diversity of consequences faced by the individual states all make it evident how the dynamics of the world could be reversed in months. Starting from the blame games regarding coronavirus to its geostrategic implications and the entire enigma between COVID-19 and politics, COVID-19 and economies have shaken the world. Whether it is the acclaimed super power, struggling powers or third world states or even individuals, the pandemic has unveiled the capability and credibility of all, especially in political and economic domains. Wearing masks in public, avoiding hand shake and maintaining distance from one another have emerged as ‘new normal’ in the social world of interaction.

Since the pandemic has locked its eyes upon the globe, world politics has taken an unfortunate drift. From the opportunities for leaders to abuse power during state of emergency (which is imposed in different states to limit the spread of novel Coronavirus) to the likelihood of rise of far-right nationalists to the emergence of ‘travel bubbles’ between states (such as New Zealand and Australia) and the increased chances of regionalism in post-pandemic world to the new terrorist strategies to gain support and many others, all are result of the pandemic’s impact on the political world, one way or the other. Since the end of WWII, the United States has taken the role of global leadership and after the Cold War, it became more prominent as it was the sole superpower of the world. Talking ideally, pandemics are perceived to bring up global cooperation but in the COVID-19 scenario it has started a whole new set of debates, sparkled nativism versus globalization and the sharp divide in global politics has drifted the focus from overcoming the global pandemic through global response to inward looking policies of leaders.

Covid-19 has impacted every sphere of life, be it social, political, health or economic. The pandemic itself being the result of a globalized world has affected globalization badly. It is the best illustration of the interrelation of politics and economics and how the steps in one sector impact the other in this interdependent, globalized world. Political actions such as restricting travel had drastic economic impacts especially to the countries whose economy is largely dependent on tourism, foreign investment etc. Similarly, economic actions such as limiting foreign products’ access had political implications in the form of sudden unemployment and downturn in living standards of people.

For the first time in history, oil prices became negative when its demand suddenly dropped when industries were shut down almost everywhere. Russia and Saudi Arabia’s oil clash which led to increased oil production by Saudi Arabia further complicated the situation. This unprecedented drop in oil demand and consequently its price would only help in the economic recovery of countries. Covid-19 has impacted three sectors badly. First of all, it affected production as global manufacturing has declined due to decrease in demand. Secondly, it has created supply chain and market disruption. Finally, lockdowns affected local businesses everywhere. Bad impact aside, pandemic has led to the change in demand of products. Instead of investment and foreign trade, states having strong medical and textiles industries have got the opportunity of increasing exports. This is because there are requirements of face masks everywhere to avoid contagion. Need for medical instruments have also increased such as ventilators in developing countries specially. 

The only positive impact of Coronavirus is that it fostered environmental cleanliness. It is said that it can avert a climate emergency but the fact is that, as soon as the lockdown will be eased and businesses will begin returning into functioning, economic growth and prosperity will be prioritized over sustainability and we might even witness, more than ever, carbon emissions into the atmosphere.

Novel coronavirus has brought new dynamics to the world’s politico-economic structure. While the world has the opportunity to come close for cooperation and consensus to fight it, we might witness increased regionalism in the post-pandemic world as a cautious measure and alternative where crisis management would be more cooperative and quick. There is a likelihood of the emergence of an international treaty or regime to ban bio-weapons. While the prevalence of political optimism is not assured in the post-pandemic world, we are likely to see the interdependent economic world, as before, to overcome the economic slump and revive the global economy. 

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