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BULGARIAN ECONOMY ON THE ROAD TO EUROPEAN UNION AND ECONOMIC
AND MONETARY UNION
IVAN ISKROV
GOVERNORBULGARIAN NATIONAL BANK
14 July 2006Athens
2
OUTLINE
• INITIAL CONDITIONS AND TRANSITION PROCESS
• MACROECONOMIC AND FINANCIAL FRAMEWORK
• ECONOMIC DEVELOPMENTS AND POLICY CHALLENGES
• EU AND EMU PERSPECTIVES
• REGIONAL PERSPECTIVES
3
INITIAL CONDITIONS AND TRANSITION PROCESS
• Planning economy with lack of functioning markets
• Bulgarian economy was highly integrated within Council for Mutual Economic Assistance
• Economy was not subject to competitive pressure
• Distorted incentives
• Transition was a unique process without historical experience to draw from
• Political consensus on society’s priorities was a key prerequisite for successful transition
4
MACROECONOMIC AND FINANCIAL FRAMEWORK
• Euro-based currency board since mid 1997
• Prudent and predictable fiscal policy oriented towards balanced budget or surplus
• Withdrawal of the state from the business through large scale privatization of the state owned enterprises
• Liberalization of the markets – free movement of goods, services and capital
• Government policy oriented towards improvement of investment climate
5
GENERAL GOVERNMENT BALANCE
-4
-3
-2
-1
0
1
2
3
4
1999 2000 2001 2002 2003 2004 2005
% o
f G
DP
Maastricht criterion
6
GOVERNMENT DEBT
0
10
20
30
40
50
60
70
80
90
1999 2000 2001 2002 2003 2004 2005
% o
f G
DP
Maastricht criterion
7
BULGARIAN SOVEREIGN SPREAD
0
200
400
600
800
1000
1200
14/4
/00
14/7
/00
14/1
0/0
0
14/1
/01
14/4
/01
14/7
/01
14/1
0/0
1
14/1
/02
14/4
/02
14/7
/02
14/1
0/0
2
14/1
/03
14/4
/03
14/7
/03
14/1
0/0
3
14/1
/04
14/4
/04
14/7
/04
14/1
0/0
4
14/1
/05
14/4
/05
14/7
/05
14/1
0/0
5
14/1
/06
14/4
/06
b.p.
EMBI+ Bulgarian Sovereign Spread EMBI+ Emerging Market Spread
9
FOREIGN DIRECT INVESTMENTS IN BULGARIA
0
2
4
6
8
10
12
14
16
1999 2000 2001 2002 2003 2004 2005
% o
f G
DP
10
REAL GROWTH OF GROSS FIXED CAPITAL FORMATION
0
5
10
15
20
25
1999 2000 2001 2002 2003 2004 2005
%
11
SHARE OF THE GROSS CAPITAL FORMATION IN GDP
0
5
10
15
20
25
30
1999 2000 2001 2002 2003 2004 2005
% o
f G
DP
12
GROWTH OF THE REAL GDP PER PERSON EMPLOYED
-4
-2
0
2
4
6
8
10
1999 2000 2001 2002 2003 2004 2005
%
13
GROWTH OF THE UNIT LABOUR COSTS
-8
-6
-4
-2
0
2
4
6
8
10
1999 2000 2001 2002 2003 2004 2005
%
Nominal Unit Labour Costs Real Unit Labour Costs
16
ECONOMIC DEVELOPMENTS AND POLICY CHALLENGES
• High consumption and investment growth
• Dynamic credit growth
• External imbalances
• Limited scope for policy reaction of the central bank
• Limits of conservative fiscal policy
18
SAVINGS AND INVESTMENTS BALANCE
-20
-15
-10
-5
0
5
1999 2000 2001 2002 2003 2004 2005
% o
f G
DP
Current Account Government "S-I" Balance Private Sector "S-I" Balance
19
EXTERNAL POSITION
-25
-20
-15
-10
-5
0
1999 2000 2001 2002 2003 2004 2005
% o
f G
DP
Current Account Balance Trade Balance
20
CREDIT TO THE PRIVATE SECTOR
0
5
10
15
20
25
30
35
40
45
50
1999 2000 2001 2002 2003 2004 2005
% o
f GD
P
21
GROWTH RATE OF THE CREDIT TO THE PRIVATE SECTOR
0
10
20
30
40
50
60
1999 2000 2001 2002 2003 2004 2005 May-06
%
22
EU AND EMU PERSPECTIVES
• BNB and Government signed in 2004 an agreement that defines the strategy for Euro adoption
• Joining Exchange Rate Mechanism II immediately after EU membership
• Maintaining unilaterally currency board at the current exchange rate – BGN 1.95583/EUR 1
• Bulgarian economy is in good position to fulfill Maastricht criteria
• Inflation criterion is a challenge
24
AVERAGE INFLATION
-4
-2
0
2
4
6
8
10
12Jan
-99
Ju
l-99
Jan
-00
Ju
l-00
Jan
-01
Ju
l-01
Jan
-02
Ju
l-02
Jan
-03
Ju
l-03
Jan
-04
Ju
l-04
Jan
-05
Ju
l-05
Jan
-06
%
Inflation
Maastricht inflation criterion
Inflation excl Administrative Prices and Excise Tax Effects
25
REGIONAL PERSPECTIVES
• Greek business and politicians extended consistent support to economic and political reforms in Bulgaria
• Greek economy has very strong ties with Bulgarian economy through trade of goods and services and direct investments
• The accession of Bulgaria and Romania in EU opens economic opportunities for the Balkans that our region have never had in its history
26
GEOGRAPHICAL STRUCTURE OF FOREIGN TRADE (2005)
4%6%
9%
14%
15%
52%
EUROPEAN UNION BALKAN COUNTRIESOTHER EUROPEAN COUNTRIES (incl Russia)ASIAN COUNTRIESAMERICAN COUNTRIES OTHER
9%
6%
5%
4%
10%
10%
13%
19%
23%
GERMANY ITALY GREECE FRANCEBELGIUM SPAINUK OTHER OLD MEMBER STATESNEW MEMBER STATES
All EU