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Economic Challenges of
Bulgaria
Lecture at the Military Academy of
Sofia, July 17, 2003
by Piritta Sorsa,
IMF representative in Bulgaria
Outline
1. Economic outlook
–
–
Short run
Medium-term
2. Key policy areas
CBA
Fiscal policy
Structural reforms
3. Challenges with EU and NATO accession – how to keep
the good performance and spread the benefits for all
citizens
4. Conclusions
1. Economic outlook
Currently the macroeconomy is doing well
– Growth forecast 5% in 2003, 5.5% beyond
– Inflation forecast 4.1% eop, 2.6% ave
– Current account deficit 4.6% of GDP for 2003
– Fiscal deficit 0.7 % of GDP
– Foreign debt 60% of GDP, declining
– Credit/GDP 20%, increasing
– FDI $860 (half from privatization)
– Unemployment about 15 %, declining
Key assumptions
Growth – continued growth of exports and
credit from banks
FDI – in SR depends on EU growth
outlook, privatizations
Bulgaria has a substantial growth
potential in the long-run
Much achieved since 1997 – steady 4-5% growth
But late start in transition (1997) is reflected in still low
FDI (cumulative $547 in 2002) or exports per capita
($840), low productivity (10% of EU levels), high
unemployment, and low incomes compared to more
advanced European transition countries (25% of EU
average)
Investment still only 20% of GDP
Large potential to increase growth, jobs and incomes by
higher investment and increased productivity
The example of other transition countries indicates that
after initial pains progress with transition can bring rapid
increase in incomes
Main challenge to maintain good performance to
overtime increase incomes and lower unemployment
How to do it - with right policies and external
environment potential for 5-6% growth in MT
leading to higher incomes
Maintenance of macroeconomic stability
(currency board, prudent fiscal policy, lower
public debt)
Continuation of structural reforms to increase
efficiency (business environment, privatization,
energy sector and public administration reforms)
Restructuring of the economy
Supporting social policies to cushion social
impact of reforms
2. Key policy areas
First - maintenance of the currency board
key to stability
Requires prudent incomes and fiscal
policies
Second, in a CBA fiscal policy
central to macro-stability
Fiscal goals
low deficit - why?
government goal zero deficit in MT
limits from debt burden, current account deficit
The government’s fiscal priorities
lower tax burden (currently 27% of GDP)
higher social spending (15% of GDP, up from 11.8% of GDP in 1999))
public investment (3.5% of GDP – down from 4.5 % in 1999)
EU and NATO accession expenditures
Military expenditures – 3.3% of GDP in 2000-2003, down from 4.2% in
1999
Eu accession – not yet estimates of future costs
Wat is needed to meet the fiscal
goals
Rationalization of expenditures (energy,
health, education, railway, public
administration);
Improved revenue collection (customs
reform, NRA, other efforts)
Importance of maintaining transparent,
broadbased tax system, predictability of
policies
Challenge to meet the mediumterm needs of fiscal policy
EU accession likely to require higher
public investment
NATO – challenge to maintain overall good
economic performance and raising of
incomes and quality of life of people
Specifics??
Structural reforms
important for EU accession, growth, and
transition to a market economy, and sustainable
fiscal policy
Energy (competitiveness, productivity)
Business environment (administrative barriers, judicial
reform, predictability)
Railway, health and education reforms
Privatization (telecom)
These are also important to increase resources in the
budget for priority goals such as social expenditures
or public investment
restructuring of the economy (privatization,
faster insolvency procedures, abstaining from
state support to unviable industries) e.g. there
are still about 2000 state enterprises of which
more than half are loss makers or have arrears
Currently a major challenge to speed up
structural reforms that always tend to be delayed
Social safety nets
targeting of assistance (much of it already
done)
active labor market policies
higher overall assistance to ease social
cost of transition
The role of IMF
Stand-by program supports the
government’s overall program of reforms
Main focus on the budget, or financial
sector issues
Progress with structural reform important
for the budget as well (World Bank lead in
this area)
3. Specifics of NATO (or EU)
accession
Military spending one aspects
EU and NATO accession require progress
in all areas to make Bulgaria to function
like a market economy, increase people’s
incomes so they support these goals
Difficulties
Resistance to change (interest groups)
Overloading of the government – what should its
role be in an economy?
Dissatisfaction of people with reforms
Incomes of many people have increased in
recent years, but vulnerable groups remain
Pensioners (2.4 million) and unemployed
(600000) have seen little change in their
condition, average pension 90 leva, maximum
180 leva
4. Conclusions
Challenges ahead are linked to sustaining
growth, increasing incomes and lowering
unemployment
Maintenance of macroeconomic stability
and more progress with structural reforms
key
Also attention is needed continuously to
help groups affected by reforms
How to spread benefits more widely?