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Bulgaria: Very few debts and still poor - is this a solution?

Position Yasen Georgiev

Bulgaria makes fiscally everything right and is among the countries with the most stable finances in the European Union, says Yasen Georgiev. He criticizes that the EU has not drawn the right conclusions from the euro crisis: the EU disappointed the states with a strict fiscal policy and increases the euro-skepticism of people who suffer from this policy.

Yasen GeorgievYasen Georgiev (© Yasen Georgiev)


Bulgaria, which joined the European Union in 2007 together with Romania, scores lowest in the EU when it comes to measuring GDP per capita in purchasing power standards at current prices - 53% below the EU average - even despite the progress registered in the last more than ten years.

Similarly to other economies in central and eastern Europe, Bulgaria witnessed high inflation rates during the first transition years after the break-up of the planned economy in the 1990s. Along with price liberalisation, inflation was additionally accelerated by the policy of the Bulgarian National Bank (BNB) in the mid-1990s to provide liquidity to the banking system and to finance the budget deficit directly. Faltering confidence in the national currency (Bulgarian lev) and its constant depreciation forced Bulgarians to exchange their salaries in foreign currencies as soon as they got them. Thus, on an annual basis, inflation increased to more than 300% in 1996 and soared to over 500% in 1997. What is more, the situation described above impacted additionally on the levels of public debt: at the outset of economic reforms in 1991, gross government debt amounted to more than 11 billion USD or 180% of the country's GDP, while, despite nominal decrease, later it accounted for 303% of GDP in 1996.

These economic woes laid the grounds for the fiscal policy to be implemented in the next years and explain to a great extent the direction followed by four Bulgarian governments in a row between 1997 and 2013, the framework for which is provided by the Currency Board regulations adopted in 1997. The International Monetary Fund (IMF) insisted on this adoption in return to the financial assistance requested by Bulgaria in order to prevent currency reserves from running critically low and to avoid a new debt moratorium (as was the case in 1990). Maybe the most obvious implication of the Currency Board is the fixed exchange rate between the country's currency and the 'anchor' currency, initially the deutschmark and afterwards the euro. What contributes to economic credibility in financial markets and an anti-inflationary policy is the automatic convertibility i.e. the foreign currency reserves of BNB must be sufficient to cover at least the entire monetary liabilities in the country. Currency Board provisions reveal also some drawbacks - a limited role of a central bank that cannot serve as a lender of last resort for commercial banks and does not lend to the government. Most important is the fact that the country no longer has the ability to maintain monetary policy according to its own considerations and thus adjust domestic interest or exchange rates in order to fix a country's terms of trade and in this way to stimulate the economy. Thus, according to Currency Board arrangements, Bulgarian governments cannot print money, they can only tax or borrow in order to meet their spending commitments.

To be or not to be - loosening the grip of strict fiscal policy

In the last ten years (2003-2012), Bulgaria's average budget deficit was -0.3, between 2007 and 2012 -1.2% of GDP. Similarly, the general government gross debt totalled 22.7% over the observed ten-year period, 16% in the last five years, and 18.5% of the country's GDP in 2012, thus placing Bulgaria after Estonia (10.1%) and before Luxemburg (22.8%). Thus, this south-eastern European country succeeded to be among the front runners in the Union when it comes to stable government finances. This orthodox fiscal policy is often criticised for playing a constraining role rather than serving as a driver of the economy, which is to some extent understandable as seen mainly from the perspective of large social groups. Nevertheless, in the case of Bulgaria there are several facts that justify this policy of the country's last four governments.

Firstly, unlike other EU member states, whether old or new, no pure austerity measures have been applied in Bulgaria since the outbreak of the crisis. Social transfers and public sector salaries cannot in fact be compared even with those of the other worst-performing EU countries, but they haven't been reduced because of budgetary cuts. On the contrary, despite the moderate increase in pensions and in public sector salaries in the last few years, their purchasing power even increased, by 15% and 12% respectively, in 2012 in comparison to 2008. What is more, the starting position of Bulgaria during the outbreak of the crisis allowed the country not to request financial assistance from the IMF, as was the case in a number of CEE and SEE countries.

Secondly, there is beyond any doubt a safe level of government debt for Bulgaria higher than the present, that can allow extended government spending - but a quick historic overview of the last 70 years reveals the inability of Bulgarian governments to work under circumstances of higher indebtedness - financial crises, high inflation rates and debt moratoria have always accompanied periods of high public debt.

Thirdly, with a currency pegged to the euro in line with the provisions of the Currency Board, which will be in place until the country enters the eurozone, Bulgaria is in fact connected to the single European currency, but understandably enough could not participate in the decision making process in the euro zone, let alone count on any financial rescue plans. This is why, unlike countries in the euro zone, EU bail-out has never been an option for Bulgaria, and this also explains why the country could not afford to go the way of some euro countries.

In the fourth place, the structure of the Bulgarian economy has to be also taken into account. As the 2012 second edition of the Economic Review of the BNB states, it is very likely that an increase in government spending cannot accelerate the growth of the Bulgarian economy to the extent that a higher budget deficit and further debts are justified. Since the Bulgarian economy is small and open, any additional payments by the government will generate income that will be spent mainly on purchasing imported goods rather than stimulating domestic production, to create jobs and boost wages. The years of economic growth could be a good reference point in this regard, since at that time domestic demand generated considerable trade deficits and contributed significantly to the negative current account balance.

Fifthly, the fields in which Bulgaria has to catch up with EU standards and average performance are much greater than those where the country could present itself as an outstanding example, or why not as a trend-setter in a group of states that have to rethink the role of public spending for the long-term sustainability of their societies. Therefore, it is more than appropriate for Bulgaria to start capitalising on its achievements in the sphere of public finance also by highlighting the social price it pays for maintaining low levels of public indebtedness. In this regard, it is admirable that, in 2011 and 2012, Bulgaria raised the question that financially stable member states should enjoy certain benefits e.g. contribute less to projects that they currently co-finance with the European Union. This is not an increase in EU funding per se, but an opportunity for countries to relocate domestic funds planned for co-financing of EU projects to other fields. The latter will contribute to meeting cohesion goals and increasing absorption rates. However, it seems that the EU has not yet drawn the right conclusions from the eurozone crisis - in 2011, the European Commission, the European Parliament and the Council agreed to measures for temporary increase in EU co-financing rates from structural funds and the Cohesion Fund for six member states in financial difficulties (Greece, Ireland, Portugal, Romania, Latvia and Hungary). In consequence, these countries will have to find less national match-funding, while EU contributions will be increased to a maximum of 95%. This could be a good measure for growth and competitiveness boosting for troubled economies whose domestic budgets are under considerable pressure, though it is per se anything but encouraging for countries observing the criteria for financial stability and playing according to the common rules. What is more, such approaches definitely do not support financially strict governments when election time comes, and could rather nurture euro-scepticism amongst voters.


Achieving sustainable economic growth or, in the case of the newest EU members, faster convergence on borrowed money proves to be working only for societies and countries that could, more or less, control their spending. Running a budget deficit and increasing government debt is in itself not a bad fiscal policy, but this has to be much more in line with medium or long-term goals and strategic investments, rather than with current and sometimes purely populist needs. Bulgaria is not an exception in that sense, particularly in the summer of 2013, when a heated debate over budget revision and absorption of new external debt attracted entire public attention to the role of fiscal policy, thus overshadowing many internal shortcomings and neglecting the necessity for deep reforms in many fields that could not be compensated by increased government spending. Otherwise, the country threatens to experience a scenario which has already been seen in the southern parts of Europe.

Yasen Georgiev is Executive Director at Economic Policy Institute (EPI), Sofia. EPI is a non-governmental, politically independent and not-for-profit organization providing economic research and interdisciplinary analyses of economic and socioeconomic trends in Bulgaria and South Eastern Europe.

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