Bulgaria's government strives to keep stability amid pay demands

(SOFIA) - Bulgaria's government is striving to improve competitiveness and maintain economic stability while facing a wave of demands for salary increases less than a year after joining the European Union as its poorest member.

Schools and nurseries across the country have been paralysed for the past ten days as tens of thousands of teachers have gone on strike to double their pay.

University professors are also preparing to boycott classes and take to the streets, following protests this summer by medical staff, miners, public transportation drivers, factory workers and pensioners.

The average monthly salary in Bulgaria barely reaches 200 euros (282 dollars), official statistics show.

But many employees receive part of their pay under the table, economists say, judging by an increased buying capacity and a boom in credits.

Analysts have estimated that 30 percent of all transactions in Bulgaria are made in the grey economy of undeclared incomes and scraped social security payments.

"Sacrifices during the transition period were justified until now by the need to enter the European Union. But people were also tired of being poor and were waiting for things to fall into place by themselves after accession," Prime Minister Sergey Stanishev commented Wednesday.

Meeting the 100-percent pay rise demanded by teachers and other staff in the school sector would pump inflation even higher than the record 12 percent on an annual base reached in August, he explained.

Some 120,000 people, or a quarter of all state employees, work in the Bulgarian public school system.

Stanishev said Bulgaria will maintain its currency board arrangement with the International Monetary Fund in order to maintain economic stability ahead of joining the eurozone.

The austerity policy, imposed by the IMF in 1997, linked Bulgaria's currency, the lev, to the deutschmark and then to the euro, enabling Bulgaria to emerge from a severe financial crisis and maintain economic stability ever since.

But in order to bring incomes and living standards up to EU averages, Bulgaria would also have to dramatically boost its productivity growth by investing in education and skilled labour, Stanishev said.

He also urged businesses to help the government improve education in order to counter the shortage in skilled workers.

A recent World Bank study showed that Bulgaria could only match EU averages by 2040 if it raised productivity growth to five percent per year from the current two percent.

Stanishev brushed aside demands by the trade unions to finance the requested salary hikes by spending the 1.5-billion-euro surplus accumulated in the state budget up to September.

Maintaining a budget surplus is necessary to compensate for the large current account gap that is expected to reach 18 percent of gross domestic product by the end of the year, the finance ministry insisted.

Bulgaria is also projected to rack up a 2.5 percent surplus and six percent GDP growth in 2008.

But the government's ability to generate surpluses is not only due to improved revenues but rather to its inability to implement projects already planned for in the budget, like a new bridge to be built over the Danube between Bulgaria and Romania, a European diplomat in Sofia told AFP.

Another serious "handicap" is the ever worsening current account and trade gap and the tedious state administration, he added.

In order to encourage foreign investment and improve the business climate, Bulgaria has already cut the corporate tax rate to 10 percent -- the lowest in Europe -- and is also planning on introducing a 10-percent flat-tax rate for all employees starting in 2008.

These reforms have put Bulgaria among the 10 best reformers in the World Bank's 'Doing business' ranking this year.