There is a risk that the advance payment under the Recovery Plan will not come until the end of 2022, warns the IME

There is a risk that the advance payment will not come until the end of the 2022 calendar year, despite public assurances that it could happen by mid-November. The Institute for Market Economy (IME) expresses its concern regarding the development of the events surrounding the implementation of the National Plan for Recovery and Sustainability of Bulgaria (NPVU) in recent months in a statement to the Acting Deputy Prime Minister for the Management of European Funds and to the Acting Minister of Finance Rositsa Zheleva.

The delay in the implementation of the NPVU led, first of all, to the omission of the advance payment, at a time when the cost of financing the budget deficit was close to zero, therefore the lack of an advance did not cause much concern among the rulers. The very design of the Recovery and Resilience Facility is to cover part of the deficit of the member countries, so that they do not have to reduce public spending or take on new debts in difficult times during and immediately after the crisis caused by the pandemic. Paradoxically,

Bulgaria continues not to take advantage of this instrument and it will still not have received the first payment of about BGN 2.6 billion.

Moreover, the government sent a request for payment in the summer while one of the commitments was still not fulfilled and it is not known how the lack of this partial default will affect the funding. The European Commission, for its part, needs time to assess progress and formalize the results of the review into a formal payment recommendation.

The drawing up of the plan and sending it for approval to the European Commission was delayed at first, but even after the approval of the plan we do not see any serious efforts towards the implementation of the reforms set out in it and the launch of the projects, commented the IPI. The political crisis in the last two years did not help speed up the implementation of the plan and put the overall implementation of the reforms in the NPVU at serious risk. Even more serious are the fiscal effects that the delay could have on key budget indicators.

Most reforms and goals require a functioning government and parliament.

At the same time, another, already serious problem with the next stage is emerging - during the six-month period from July to December, Bulgaria has promised to fulfill 66 commitments, most of which require an effectively functioning government and parliament. To date, according to the ISUN information system, 63 stages and goals remain unfulfilled, and the time for this is too short (less than three months until the end of the reporting period). Thus, a little over BGN 1.4 billion, which is programmed somewhere in March 2023, may be delayed for a long period of time. Meanwhile, in the first 6 months of 2023, the administration has promised to complete another 47 measures and reforms, on which progress is zero - and this is a condition for another 1.48 billion BGN for the fall of 2023. The cascading delay, which we believe is inevitable, combined with a possible ongoing political crisis, may have an extremely negative effect on Bulgaria's future opportunities to rely on assistance from the EC for support in other political and economic spheres, the opinion also says.

Another BGN 1.48 billion for the fall of 2023 is also at risk.

And whereas last year the reassurance was that we lost nothing by the delay, now each month and year of delay is measured in tens of millions in additional interest costs. In mid-September, the Ministry of Finance placed two issues on the international capital markets – a 7-year bond for 1.5 billion euros at an annual yield of 4.35% and a 12-year bond for 750 million euros at an annual yield of 4.82%. A few days later, the government also entered the domestic market by placing BGN 200 million debt with 4 years to maturity at a yield of 3.01%, and at the beginning of October a similar issue of just over BGN 100 million was realized at a yield of 4.01%.

The time has probably come for serious consideration of the possibility of debt financing under the Recovery and Sustainability Mechanism - for now, the Bulgarian NPVU does not provide for the use of borrowed funds at the expense of the instrument. This may change if the terms of a possible loan are more favorable than the market financing of the budget. In the presence of a developed capital program for the next three years, an option should be considered to cover part of the needs with funds by adapting the NPVU, instead of covering the same investments through a budget deficit and new government loans at market interest rates.

A small number of EU countries have chosen the option of using loans.

According to the EC, a small part of the countries at this stage have chosen to avail themselves of the loan facility through the Recovery Mechanism. So far, 19 countries do not plan to use the Facility's loan instruments. Of the remaining 7, only Italy and to some extent Romania give priority to loans. This was not surprising for several reasons. First, grants are generally preferred because they are considered “easy money”—funding from the general budget of the union that the state will receive without having to think about how it will ever pay back. Second, grants are more easily tied to reforms for the state and its administration to carry out. Third, the loans further increase the indebtedness of the countries, which is a significant burden for some of them, while the grant funding is an income in the budget and improves the fiscal position. However, in the current situation of rising interest rates, we expect this distribution to change, as the possibility of adjusting the plans is foreseen until the end of August 2023, and if Bulgaria decides to take advantage of it, a debate on financing should start already with the current budget procedure.

The Institute proposes to prepare the necessary documents to start all the procedures from the administrations of the ministries and departments involved in the implementation of the plan, which do not require special political will and the presence of an active parliament and government.

The specialists propose to discuss the possibilities and parameters of using debt instruments under the EU Recovery and Sustainability Mechanism, instead of emissions on the markets and an analysis of the most profitable opportunities for Bulgaria to finance the deficit by including them in the budget debate.

According to the IPSI, the official (and then the regular) government should be more active in sharing detailed information about the discussion of the implementation of the plan with the European Commission and the obstacles that arise before the implementation of the projects and reforms. In our opinion, the ministries are left to act as they see fit, and the emergence of a problem with the implementation of any of the objectives is seen too late when the reaction time is limited. If there are "problematic" projects, they should be identified and managed as soon as possible, so as not to lead to a situation of new defaults and compromising the future payments under the NPVU, the analysts also comment in the statement to the institutions.