Economic Policy Review ISSN 1313 - 0544

The Bulgarian development bank (BDB) expansion is not a good decision

Author: Veliko Dimitrov / 24.04.2010
Rate This Article:

A year and a half ago the former parliament passed a new legislation about the only Bulgarian state bank (The Bulgarian Development Bank Act) and provided 500 mln. leva from the fiscal reserve. The idea was to provide loans to small and medium enterprises through credit lines so that they can cope better in times of crisis. The decision was taken regardless of the very good Bulgarian private banking sector indicators. If the credit rate really shrank it was due to worse business opportunities and lesser to the extension caused by super conservatism of the bank institutions or lack of resources. So, there was no extra liquidity need and even less it was an executive's problem that has to be solved with fiscal measures.

The apprehensions back then were that common savings distribution will be liked by the BDB. Sooner or later its executives and most likely other interested parties will request extra resources to finance credit lines and even certain projects. Obviously these apprehensions were completely justified. A week ago it became clear that BDB intends to emit obligations specially designed for the private pension funds, i.e. getting fresh resources from them. Those 500 mln. leva were not any different because:

  • The money were part of the common reserve savings - now it is planned to take the extra resources from the compulsory extra pension savings which all insured people are obliged to contribute to;
  • The financing was not transparent nor market oriented and it seems it will be the same way now taking into account the private pension fund emission and its contracted parameters (even if the financing was fully market oriented it would not have been acceptable due to possible administrative funds distribution because this is a state owned bank);
  • Whoever had a good project and sought private banking funding could have received it. Now whoever wants to build and develop infrastructure and the banks decide it is profitable can receive private sector funds too (it is not so easy about Belene*, and probably not achievable).

The BDB cannot guarantee profitable projects respectively the finances received and lent from the pension funds may never come back. In this case the funds will either loose their money (savings of all insured people!) or as this is a state controlled bank, after the money sink in opaque projects, they will be refunded by the budget or the fiscal reserve. So, it is most possible to have a net loss while the only winners will be the project contractors.

The pension funds should not take part in such games because loss in any form is most likely to happen for all of us. There are various investing opportunities regarding the pension funds and it is not necessary to use BDB obligations for diversification. As profitability is concerned even in 2009 crisis they have managed very well and certainly better than the state bank obligations' return.