All plans for inflation and growth will be reconsidered: Finance minister Assen Vassilev

Assen Vassilev, Minister of Finance, talking to Capital weekly

All plans for inflation and growth will be reconsidered: Finance minister Assen Vassilev

We have no signals that 2024 is not an achievable target date for the adoption of the euro, says the Deputy Prime Minister

Assen Vassilev, Minister of Finance, talking to Capital weekly

© Nadezhda Chipeva

Assen Vassilev is Minister of Finance and Deputy Prime Minister for EU Funds in the government of Prime Minister Kiril Petkov. In an interview with Capital Weekly, he explains the philosophy of the state budget for 2022 and his vision for the country's economic policy

During the debates on the budget for 2022 you have said that extraordinary fiscal conservatism in the last 20 years is the reason why Bulgaria is lagging behind all other countries in the EU. Why? Isn't the problem in weak institutions and corruption?

Weak institutions and corruption are very serious problems, as they reduce the efficiency of investments, both public and private. But, on the other hand, what we have witnessed over the last 15 years is insufficient public investment in critical infrastructure. We have invested euro funds with a relatively minimal national co-funding.

In agriculture, national co-financing stood at the minimum rate of 15%, which limited the possibility of making stronger national policies. The allowable rate for co-financing in agriculture is 60%. And many countries that are successful in this sector use the full rate of 60% and target specific programs with the money. What we are betting on for the next programming period, starting on 1 January 2023, is to use national co-financing to full extent, not the minimum rate.

Of course, in the absence of normal institutions, a justice system, may be it is better that we have not made these investments, as it is not clear how efficient they would have been. But the fact that we do not have a working institutional framework is no excuse for the lack of investments.

You have said you were preparing a four-year investment program. Is it ready?

Yes, infrastructure projects have already been identified by the Transport Ministry and the Regional Development Ministry. There is an initial list of projects that are being specified and evaluated. We aim to work very hard with international financial institutions to avoid problems with national institutions and their weakness.

Тhe 2022 budget so far looks more like a one-size-fits-all plan. Do you prepare any reforms?

When additional funds are allocated to a certain system, they are provided on a project basis against clear results or a clear commitment for certain activities. We expect much bigger reforms to be made with the budget revision [planned for second half of the year], but we do not intend to change the main parameters such as deficit or debt. Tax policy must also remain unchanged.
. Which are the risks to the economy and the financial system this year?

The biggest risk is whether there will be a war in Ukraine (the interview was taken before the Russian invasion started). If there is a military conflict in Ukraine, especially if it is a longer and bigger, it will lead to sanctions, on the one hand, and most likely to a significant increase in oil prices. On the other hand, this would not only put to the test the Bulgarian and European economies, we would also have to reconsider all plans for inflation, growth and so on.

Do you mean inflation will go up and growth will slow down?

It depends on Russia's reaction and the response of the United States and Europe. If a military conflict breaks out and Russia restricts its oil exports, prices will rise. At the same time, we have seen in the past how the United States is opening its strategic reserve and prices are falling. So it is difficult to predict what will happen in international markets before we see the initial reactions to such a conflict.

I have said before that inflation is expected to peak in the March-April period. After April, the European Central Bank will most likely move towards tightening the money supply, raising interest rates and, accordingly, this will tame inflation in Europe and Bulgaria. In our country, the energy price rise shock has already happened and the expectations are for calming. We plan to create an energy market segment that will require long-term contracts such as 12-month, 24-month contracts. So then it would be clear what the energy prices will be, at least for electricity, and this will reassure both producers and consumers.

Do you still think that Bulgaria will meet the Maastricht criteria in time, so as to be able to adopt the euro in 2024?

Yes, the basic parameters are set that way.

Is 2024 still an achievable date for the adoption of the euro?

Bulgaria is working very intensively and we have no signals that 2024 is not achievable.

Which are the three priority tasks you have set for yourself as a Finance Minister and Deputy Prime Minister for this year?

Perhaps the most ambitious task is to change the mindset in public structures. It should be focused on the idea that every lev that is being spent belongs to the taxpayers and should be spent efficiently. It doesn't matter if we spend a little or a lot, it matters if we spend efficiently. And this is a very different mindset having in mind what has happened in many of the public institutions during the last decade. If we succeed in this part, we will radically change the efficiency of public investment and the efficiency of the Bulgarian economy.

Bulgaria's Recovery and Resilience Plan has not yet been approved. Do you expect to receive funding under the plan this year?

The Plan has been submitted to Brussels. We expect feedback. In any case, we will start the preliminary implementation of most of the projects in the Plan, for which there are funds in the national fund. We will be able to receive serious advances for the projects that are already in the implementation phase.

A feeling remains that the state has money for everything. On the other hand, a deficit is planned in this year's budget and state finances will continue to be in deficit in the next four years. Some people are worried about this type of policy as Bulgaria was fiscally neat in recent years.

Our policy has several red lines. One red line is that our fixed costs have to be certainly lower than our revenues. And if we look at what we spend on pensions, schools, etc. compared to revenues, we have a surplus of 1.7%. This means the deficit is a function of how much national funds we decide to invest.

Do you mean that the deficit is a function of the capital expenditures?

Absolutely. We are in surplus in terms of all conditionally fixed costs in the country. From then on, it's a political decision how much we decide to invest, what will be the return on these investments. But this certainly does not trigger a Greek scenario in which we borrow to pay pensions. We do not endanger the stability of the system. And the other thing is that these investments should unlock growth. If they do not trigger growth and are ineffective, we will have to reconsider all these policies.

This is what every new government says at the beginning, and in the end, it turns out that it hasn't worked.

Which other government has taken all the political negativity of not increasing salaries in the public administration? Which other government has foreseen real restructuring costs, because layoffs cannot be done with a magic wand without being financially secure?

Assen Vassilev is Minister of Finance and Deputy Prime Minister for EU Funds in the government of Prime Minister Kiril Petkov. In an interview with Capital Weekly, he explains the philosophy of the state budget for 2022 and his vision for the country's economic policy
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