Area Handbook For Bulgaria Part 26

BUDGET

The budget const.i.tutes the basic financial plan of the country's leadership. It is the monetary expression of the annual socioeconomic plan and provides for the financial flows implicit in that plan. The budget is comprehensive; it takes into account all aspects of the economic, social, and cultural activities of the country. In line with the government's policy of gradually placing economic trusts and their branches on a self-financing basis, a progressively larger share of the funds budgeted for the economy is being retained by the trusts rather than channeled to the budget. The sums thus retained by economic organization rose from about 3 billion leva in 1971 to a planned level of more than 5 billion leva in 1973. Ultimate control over the use of these funds, nevertheless, remains with the government, and their disposition is subject to the provisions of the budget.

The national budget is formulated by the Ministry of Finance along lines dictated by the BKP leadership and must be approved by the National a.s.sembly. As a rule only very minor modifications are made in the process of legislative review. Budgets for local governments are prepared as a part of the national budget; in 1972 and 1973 their total amount was equivalent to about 17 percent of the overall national budget. The Ministry of Finance is also responsible for ensuring the scrupulous implementation of the budget. It is a.s.sisted in this task by a nationwide network of state and local inspectors and by agents of the banks. Actual budgetary results are directly affected by deviations from the annual economic plan and therefore seldom, if ever, correspond to the original estimates, which have the force of law.

Systematic publication of budgetary data was discontinued in the mid-1960s. Since then only scattered figures have become available through press reports on the presentation of the budget to the National a.s.sembly and occasional articles by the minister of finance or other ministry officials.

The annual budgets have grown steadily larger. The approved budget for 1973 called for revenues of 7,057 million leva and expenditures of 7,035 million leva. In 1970 actual revenues totaled 5,723 million leva, the expenditures amounted to 5,650 million leva. Usually about 90 percent of budgetary revenue has been derived from operations of the economy, and the remainder has been raised through a variety of levies on the population. The largest single item of revenue--more than 30 percent of the total--has been collected in the form of a turnover tax on sales that has been pa.s.sed on to the ultimate consumer. The second most important revenue source has consisted of levies on enterprises in the form of a profits tax, a tax on fixed capital (interest charge) and miscellaneous other deductions from income. Social security taxes based on payrolls have been the third major source. Levied at a rate of 12.5 percent through 1972, the social security tax was raised by 20 percent in 1973 in order to meet rising costs. In 1972 about four-fifths of the turnover tax and two-thirds of the revenue from taxes on profits and capital was to be derived from industry.

In December 1972 the BKP Central Committee plenum embarked upon a gradual modification of the income tax system that would eventually lead to a total abolition of income taxes for wage earners and collective farmers by 1980. Initially, the existing system is to be improved by introducing unified taxation for all blue- and white-collar workers and collective farmers and by establishing a tax exemption equal to the official minimum rate of pay. Gradual elimination of all income taxes for these population groups in the 1976-80 period is to be synchronized with the contemplated reform of wage scales. At the same time a system of progressive taxation is to be introduced on incomes derived from activities in the private sector that are not in conformity with the amount of labor invested.

The most complete recent information on budgetary expenditures is available from the approved budget for 1972. Out of a total outlay of 6,514 million leva, 3,224 million leva was earmarked for the national economy, and 2,065 million leva was set aside for social and cultural needs. The remaining undisclosed balance of 1,225 million leva, or 19 percent of the total outlays, must have included expenditures for defense, internal security, and government administration. The social and cultural expenditures included; social security payments, 1,054 million leva; education, 532 million leva; public health, 303 million leva; culture and arts, 83 million leva; and science, 93 million leva, in addition to 235 million leva to be provided by research organizations and economic trusts.

Information on the budget for 1973 was more sketchy. No information had been disclosed on the magnitude of the expenditure on the national economy; the usually undisclosed residual was therefore also not ascertainable. The increase in overall revenues and expenditures over those in 1972 was about 8 percent. Outlays for social and cultural affairs, however, were planned to increase by 11.8 percent, including increases of 18.8 and 15.7 percent, respectively, for public health and education. These figures reflected the government's announced program for increasing the well-being of the population.

The BKP and government leadership look upon the budget as a major tool for executing BKP economic policies. As expressed by the minister of finance in 1973, the budget contains a whole a.r.s.enal of financial and economic levers--levers that must be used ever more skillfully to raise the efficiency of economic performance, to improve the structure of production and consumption, and to bring about a well-balanced economy.

The budget is also considered a tool for exercising effective control over the entire sphere of production and services, not only to ensure smooth current operations but also to inhibit any undesirable departures from official policy.

The disciplinary powers of the budget have yet to be more fully developed to cope successfully with the officially reported shortcomings in the economy. One step in this direction calls for the further intensification of what has been officially called financial and bank control through the lev, that is, the discretionary use of financial sanctions, including the denial of budgetary allocations or bank credits, to enforce strict compliance with specific plan directives.

Another advocated measure is to intensify the public campaign against waste and the irresponsible att.i.tude toward public funds and for tighter financial discipline. An implacable campaign is also to be waged against wrongs done to the citizens in the use of public funds, illegal formation and misappropriation of funds by economic organizations, irregularities in the supply of materials, failure to produce consumer goods despite the availability of needed resources, acc.u.mulation of excessive inventories, and pilferage.

Many apparent violations of economic and budgetary discipline arise because of the frequently inadequate knowledge or understanding by personnel at all levels of the economy of the constantly changing laws and regulations concerning the operation and interrelation of the diverse economic units, particularly in the area of finance. The changes in laws and regulations are the result of an unceasing search for a system that would provide effective incentives toward conscientious and efficient work to all gainfully employed persons.

BANKING AND CURRENCY

Banking

Since early 1971 the country's banking system has consisted of the Bulgarian National Bank and two semi-independent banks attached to it: the Bulgarian Foreign Trade Bank and the State Savings Bank. This banking system emerged after three reorganizations in the 1967-70 period and conforms to the general pattern of inst.i.tutional and management concentration in the economy. In addition to serving as the central bank of issue, the Bulgarian National Bank, an independent agency under the Council of Ministers, is directly responsible for financing all sectors and phases of the economy other than foreign trade and consumer credit, in which fields it supervises the activities of the Bulgarian Foreign Trade Bank and the State Savings Bank. The bank is also responsible for exercising close control over the economic units that it finances, with a view to ensuring the fulfillment of all national economic plans and the scrupulous adherence to existing laws and regulations.

A minimum of current information was available in mid-1973 on the structure of the banks, the relationships between them, and their financial operations. Official statistics are limited to annual data on bank credits for investment and on the volume of outstanding short- and long-term loan balances for the banking system as a whole. Data on outstanding loans are broken down by type of borrower and, in the case of short-term loans, also by purpose. With minor exceptions, no information was available on the volume of loans extended, on loan maturities, or on interest rates after 1970. Statistics had also been published on the volume of personal savings in the accounts of the saving bank at the end of each year.

The total amount of loans outstanding at the end of the year increased from 3.6 billion leva in 1965 to 9.2 billion leva in 1971. The proportion of long-term loan balances rose from 24 percent of the total amount in 1965 to 40 percent in 1970 but declined to less than 36 percent in 1971. The increase in lending activity to 1970 was a direct consequence of the partial shift from predominantly budgetary financing of economic activities to a substantial measure of self-financing by enterprises and trusts. The subsequent decline was related to the tightening of investment credit in an effort to reduce waste in the construction program (see Investment, this ch.). Long-term loans have been granted predominantly, if not exclusively, for fixed investment purposes.

Of the 3.27 billion leva in long-term loans outstanding at the end of 1971, 2.61 billion leva was due from state and collective enterprises, and 660 million leva was owed by private individuals who had borrowed to finance home construction. Only 12.5 percent of the loan balances was due from collective farms--an amount equivalent to barely 62 percent of the sums owed by private individuals. Collective enterprises in industry and services had outstanding loans of only 13 million leva. In relation to the value of each sector's fixed a.s.sets in 1971, the proportion of outstanding long-term loans was: state enterprises, 11.3 percent; collective farms, 16.1 percent; and collective artisans, 2.9 percent.

Nine-tenths of the short-term loan balances at the end of 1971 were owed by state enterprises, and one-tenth was due from collective enterprises.

Wholesale and retail trade accounted for 36 percent of the outstanding loans; industry and construction were each liable for 28 percent.

Short-term loan balances of agriculture amounted to less than 8 percent of the total sum, and balances of the services sector const.i.tuted less than 0.2 percent. The largest part of short-term loans was granted for working capital purposes, including the procurement of farm products. A balance of almost 1 billion leva, however, was outstanding on loans for the completion of building construction, including a small amount for housing.

A very small, though increasing, volume of consumer loans for the purchase of durable goods and clothing has been granted by the State Savings Bank. The volume of such loans--36.5 million leva in 1966, 48.2 million leva in 1967, and 45.4 million leva in 1968--was equivalent to slightly more than 1 percent of retail sales in the commercial trade network. The outstanding balances of consumer loans at the end of the year rose from 49.1 million leva in 1968 to 102.1 million leva in 1971.

Consumer loans may not exceed the sum of 500 leva and may be used only for the purchase of designated goods. In 1969 the authorized list included twenty-three categories. A sample survey in 1969 indicated that about two-thirds of the loan volume was used to acquire television sets, furniture, and motorcycles; another 20 percent was spent on radios, sewing machines, and scooters.

Apart from consumer loans, the State Savings Bank grants small loans to licensed private craftsmen for working capital and to collective and state farmworkers and other qualified applicants for the purchase of productive livestock, seeds, fertilizers, small tools, and other farm perquisites. The bank also makes loans for adapting premises to the needs of tourism; for current building repairs; and for meeting personal emergencies, including loans to newlyweds for the acquisition of furnishings. Depending upon the purpose of the loans, loan ceilings range from 150 to 800 leva, and maturities extend from ten months to eight years.

The volume of consumer loans was reported to have reached 116 million leva in 1972. Under the economic plan for 1973, the State Savings Bank was scheduled to make loans to individuals for the purchase of consumer goods and other needs in the amount of 203 million leva and for home construction in the amount of 180 million leva. The bank was also expected to lend 141 million leva to people's councils.

Loan funds of the State Savings Bank have been derived from personal savings deposits and, presumably, from interest payments. The bank also conducts state lotteries for the benefit of the state budget. There is no evidence as to whether the bank retains a portion of the lottery proceeds for its own operations. Savings deposits increased almost fivefold in the 1960-71 period to a level of about 3.6 billion leva--a sum equivalent to 64 percent of total retail sales or 150 percent of food sales through commercial and inst.i.tutional channels in 1970.

According to preliminary data, savings deposits rose by 630 million leva in 1972, and they were scheduled to increase further by 870 million leva under the economic plan for 1973. The bulk of savings deposits has been channeled into the budget.

The repayment record on loans by the State Savings Bank was excellent, at least through 1969. The proportion of delinquent loans was reduced from 3.1 percent in 1966 to 0.01 percent in 1969. This result was achieved by a regulation that provided for penalties to be imposed on paymasters throughout the economy who failed to withhold or to report to the bank monthly loan payments. According to a bank official, there had been no need to impose any penalties because the regulation itself proved to be an adequate deterrent.

The loan repayment record of enterprises, trusts, and other economic organizations has not been nearly so good and led to a tightening of credit provisions in 1971. The proportion of overdue short-term loans in the production sector increased from 10.7 percent in 1966 to 11.8 percent in 1971. Similar information on long-term loans has not been published.

The penalty interest rate on delinquent loans is 10 percent (it was 8 percent through 1970), compared to a normal range of 1 to 5 percent on loans for working capital. Whenever a bank loan or supplier credit is delinquent for more than three months and the delinquent amount exceeds 20 percent of the borrower's working capital, the borrower becomes subject to a special credit and repayment regime, the specific conditions of which are not known. The ultimate sanction is the refusal of credit and, at times, even the replacement of the trust or enterprise director. The special credit regime is also applied whenever a trust or its branch (enterprise) stockpiles unneeded inventories; procures materials for production without guaranteed outlets for the output; undertakes a construction program without adequate financial provisions; increases its obligations; or suffers a worsening of its financial condition for any other reason.

Interest costs in excess of those planned lower the economic organization's income and, under the prevailing incentives system, also reduce the funds available for the payment of wages, salaries, and bonuses. Loan delinquency and the a.s.sociated penalty interest rate, therefore, often bring about the reduction or elimination of bonus payments and, in extreme cases, the withholding of a portion of regular pay. Application of the more severe sanctions entails a serious deterioration of the economic organization's finances that adversely affects its production program. Through close contact with borrowers and detailed supervision of their operations the bank endeavors to forestall delinquencies and the attendant losses to the economy. In December 1972 the Council of Ministers adopted a decision to enhance the role of the banking system in administering the economy by intensifying its partic.i.p.ation in the formulation of economic plans and by expanding its authority in monitoring plan fulfillment.

Currency

The currency unit of the country is the lev, divided into 100 stotinki (see Glossary). It is a nonconvertible currency with a variety of exchange rates, usable only in domestic transactions. Since January 1, 1962, the lev has been officially defined to contain 759.548 milligrams of fine gold--equivalent to 1.17 leva per US$1 at that time. This exchange rate was valid only for commercial transactions. In the wake of the United States dollar devaluation on December 18, 1971, the official commercial exchange rate was set at 1.08 leva per US$1 (greenback--see Glossary). A further revision of the exchange rate was put into effect on February 13, 1973, which established a parity of 0.97 leva per US$1.

The subsequent decline in the value of the dollar in foreign markets did not call forth another official exchange revaluation to mid-1973.

The official tourist exchange rate for so-called capitalist currencies underwent similar revisions and was set at 1.65 leva per US$1 on February 14, 1973. The noncommercial rate for ruble area countries, based on a parity of 0.78 leva per 1 ruble, was equivalent to 0.64 leva per US$1 until that date; thereafter, at the new ruble-United States dollar parity, it was equivalent to about 0.59 leva per US$1.

In addition to the official exchange rates, there are three varieties of clearing account rates. The multilateral transferable ruble is used to clear accounts with other European members of the Council for Mutual Economic a.s.sistance (COMECON--see Glossary). Socialist bilateral units arise from bilateral trade agreements with other communist countries.

Neither of these two exchange varieties has private markets abroad.

Bilateral clearing units arise from bilateral trade and payments agreements with about thirty noncommunist trading partners. These clearing units are traded sporadically abroad at varying rates of discount.

The lev has been traded on the black market in exchange for so-called capitalist banknotes or gold coins. The black market rate of the lev fluctuated between 4.60 leva per US$1 in January 1963 and 2.58 leva per US$1 in June 1972.

Except for small remittances or travel allocations to other communist countries, the lev is nontransferable for residents; resident status applies to all physical and juridical persons who have resided in the country for more than six months, regardless of their citizenship.

Ownership of or trade in gold, foreign currencies, or so-called capitalist securities is prohibited, as is the import and export of Bulgarian banknotes. There are no investments by noncommunist country nationals in Bulgaria.

Exchange transactions are administered by the Bulgarian National Bank jointly with the Ministry of Finance, the Ministry of Foreign Trade, and the Bulgarian Foreign Trade Bank. Bulgaria is neither a member of the International Bank for Reconstruction and Development nor of the International Monetary Fund. Statistics on currency in circulation, the public debt, foreign exchange reserves, gold stocks, and the balance of payments have not been published.

FOREIGN TRADE

Foreign trade is a state monopoly. Trade policy is formulated by the BKP and government leadership; it is translated into a complex set of laws and regulations designed to encourage the expansion and qualitative improvement of production for export, to promote import subst.i.tution, and to bring about greater efficiency in production and foreign trade operations. Control over foreign trade is shared by the Ministry of Foreign Trade, the Ministry of Finance, and the Bulgarian National Bank through the Bulgarian Foreign Trade Bank.

Along with other elements of the economic structure, the foreign trade apparatus and the laws and regulations governing foreign trade have been frequently modified. As a result, there are two basic types of foreign trade organization: those attached to and serving individual economic trusts with a large export volume and organizations serving several trusts whose export activity did not justify a separate export department. Two foreign trade organizations that imported most industrial materials were attached to economic trusts responsible for the domestic distribution of supplies. Foreign trade organizations affiliated with trusts retain their legal ident.i.ty and are not considered to be branches of the trusts they serve. Relations between foreign trade organizations and the trusts whose products they handle are governed by contracts, the framework of which is provided by official regulations. As a rule, foreign trade organizations carry on their activities for the account of the trust. There are a few organizations, however, that trade for their own account, and there are also a few economic trusts that have the right to engage in foreign trade activity directly.

Export plans are approved by the Council of Ministers for each economic trust in physical and value terms and by major trading areas, that is, member countries of COMECON, other communist countries, Western industrialized nations, and developing countries. Trusts pa.s.s their trade plans to foreign trade organizations. The plan of a single trust may be apportioned among several foreign trade organizations, and many foreign trade organizations receive plan a.s.signments from several trusts so that their own foreign trade plan is a composite.

Under the regulations of 1971, as amplified in 1972, and unlike earlier conditions, the financial results of export operations are directly reflected in the producer's profit position. This circ.u.mstance is counted upon by the leadership to motivate trusts toward attaining optimum efficiency in export production and toward adjusting output to foreign market requirements. Financial incentives to surpa.s.s official foreign trade targets are provided by allocating the producers and foreign trade organizations a portion of the receipts from excess exports and a portion of savings made on imports through import subst.i.tution. Excess exports may not be made by diverting output scheduled for the domestic market, and savings on imports may not be made at the cost of quant.i.tative or qualitative deterioration of the domestic supply.

Producers for export are obligated both to produce the items called for by the export plan in accordance with specifications and to meet contractual delivery dates; with few exceptions, they have no direct contact with foreign buyers. It is the responsibility of the foreign trade organizations to seek out the most profitable markets and to handle all physical and financial details of the trade transactions. It is also their duty to keep producers currently informed about changing conditions in world markets and to make them aware of needed adjustments in production.

Standard subsidies per 100 leva, differing by trading area, are granted on all exports. These subsidies, in effect, modify the official exchange rate so that trade is actually conducted on a multiple exchange rate basis. Subsidies from the state budget are also provided for exports, the returns from which do not cover costs. Special bonuses are offered to economic trusts and their branches that fulfill or surpa.s.s their export a.s.signments to noncommunist markets. Proceeds from exports are credited to the economic trusts and not to the foreign trade organizations.

Relations between economic trusts and foreign trade organizations are determined in broad outline by government regulations. Specific details, however, including precise financial arrangements that are the core of the relationship, must be worked out by the parties to the contract.

This situation provides opportunities for friction that may be harmful to the export program. Trusts and export a.s.sociations were therefore enjoined to undertake negotiations in a cooperative spirit and to avoid taking advantage of their monopoly position as producers or exporters.

Disputes that threaten to involve financial losses are to be settled by the Ministry of Foreign Trade and the Ministry of Finance.

Total trade turnover increased more than 3.5 times in the 1960-71 period to a level of 5 billion leva, including 2.55 billion leva in exports and 2.45 billion leva in imports. The growth of trade was erratic, particularly in the case of imports. Over the entire 1960-68 period, however, the average annual growth of exports and imports was almost identical--13.9 and 13.8 percent, respectively. In the subsequent three years exports rose almost twice as rapidly as imports, though at a lower rate than in earlier years. The change in the relative rates of growth during the 1969-71 period--10.5 percent for exports and 5.6 percent for imports--helped reverse the consistently negative trade balance of the earlier period and produced trade surpluses in three consecutive years.

The great bulk of the trade has been carried on with communist countries, primarily the Soviet Union. The share of these countries in total trade, however, declined from 85 percent in 1961 to 78 percent in 1970; it had fallen to 73 percent in 1966. Communist countries outside COMECON, primarily Cuba and the Democratic Republic of Vietnam (North Vietnam), accounted for only 3 to 4 percent of the trade annually. The Soviet Union alone provided more than half the imports and absorbed an equal amount of exports. The German Democratic Republic (East Germany) and Czechoslovakia were the main COMECON trading partners after the Soviet Union, but the volume of trade with these countries was very much lower. The share of East Germany in the total trade had been 10.5 percent in 1960 but ranged between 8 and 8.6 percent in the 1965-70 period. The proportion of trade with Czechoslovakia declined from 9.7 percent in 1960 to only 4.8 percent in 1970.