site.btaIMF Managing Director Georgieva Talks to BTA on Her Second-Term Priorities, US Economy, Bulgaria in Eurozone and Tax Reform

IMF Managing Director Kristalina Georgieva gave an exclusive interview to BTA - her first for a Bulgarian media outlet since her re-election for a second five-year term.

Talking to this special correspondent at the IMF headquarters, Georgieva discussed her priorities at the head of the international financial institution, the flat tax in Bulgaria and the country's eurozone joining prospects. 

IMF Priorities

The interviewee said that after price increases peaked in 2022, the disinflation process is making good progress and some countries started to lower interest rates. China is in inflation, and Japan has switched from negative to positive interest rates.
In the coming months, the Bank of England and the European Central Bank may well opt for lower the interest rates ahead of the Fed.

Even though the world economy proved surprisingly more shock-resistant than expected, the updated projections show a low growth rate. Combating inflation and increasing fiscal buffers is crucial, but at the same time it is important to find out how to transform the economy so as to increase labour productivity and augment the growth.

The most disappointing fact that the IMF has established is that labour productivity is low everywhere. The US is a little better in this respect because innovations there are doing better and the labour market relies on migrants. Paradoxically, immigration is seen as an issue politically while economically it helps America.

In Bulgaria, the quality of education is lower but the digital infrastructure is better, and obstacles to entrepreneurship should be reduced, the IMF Managing Director pointed out.

The Fund's activity must be steady, she argued. "We have injected BGN 1 trillion in the world economy since 2020, and we set up a new facility: a long-term loan with a 10-year grace period for countries susceptible to climate change," Georgieva recalled.  

"The 50% increase of the IMF quotas reassures us that the Fund can cope. We want to establish a more flexible financing system (the Global Financial Safety Net) that can ensure stability to economies in crisis," she pointed out.

US Economy

Replying to a question, she says that the US should be careful with the fiscal support for the economy and should keep looking at the figures before deciding that they can lower the interest rates. "When people have work and savings, they are more prone to spend, which is good for growth but is bad for inflation," she commented.

"Higher interest rates are a cold shower for entrepreneurs. This is not good for the country's exports because of the stronger dollar. It is not good for the rest of the world, either, because higher interest rates in the US leads to devaluation of the rest of the national currencies and higher interest on government, corporate and personal debts," Georgieva pointed out.

Bulgaria: If and When in Eurozone

"Just as the rest of the world, Bulgaria prioritizes inflation control and has achieved a lot in this respect. Inflation keeps going down, and we expect to see it within the range of some 3% by the end of the year. Sofia has a way to meet the eurozone entry requirements," the IMF Managing Director said.

"But, just as in the case of the US, both people and business should be supported, but this support should not translate into higher inflation. This is bad for Bulgaria's eurozone entry as well as for Bulgarian citizens themselves, as inflation taxes people's incomes and especially the poorer part of the population is badly affected. It takes political will and political prioritization," Georgieva said, referring to reports received from the country. 

"We are aware that new elections lie ahead, but we are also aware that when the principal political forces are unanimous on a subject, the objective can be achieved. Personally, I don't think we should miss this chance. We have already delayed this step several times. We should have been there ahead of Croatia, then together with Croatia, and now we are after them, but I hope that the decision to ahead to be backed up the relevant political steps," the IMF chief commented.

She argues that, being in a currency board arrangement, Bulgaria consumes the monetary policy of the European Central Bank. "I haven't heard Bulgaria wishing to abandon the currency board arrangement. So why should we be willing to consume a policy which is shaped without our participation?" she asks.

"We saw that the former socialist countries that entered the eurozone did not experience skyrocketing prices but their economic indicators improved. In the event of a shock, membership of the eurozone can come handy, too, because it have safeguards and don't have to rely on ourselves only," Georgieva reasons.

Asked whether 2025 remains a feasible target for Bulgaria adopting the euro,  she says it is feasible. Until September, there is still time to bring inflation down to the required levels. To this end, governments should not inject pro-inflationary impulses into the economy until that time. "If we meet the criteria, accession to the euro area will go ahead as planned."

Asked about the question raised during the IMF's latest mission about a reform of Bulgaria's tax system, the interviewee says: "I believe it is time to review the 10% flat tax. We have successful businesses, successful people - this is wonderful. But this means that they can contribute a little but more to the quality of the workforce, to the quality of infrastructure, of the country as a whole. This will benefit their own business and the quality of their own life," Georgieva commented.

"When Bulgaria adopted the flat tax, this was the right decision. The idea then was to bring the money to light. Now we have better institutions, and we don't have to bring the money to light by a 10% flat tax. If you look at the world, a differentiated tax rate is viewed as the right option. A differentiated ta rate or, in other words, progressive income taxation, makes it possible for society to share a country's resources more successfully," the IMF Managing Director told BTA.