Download Interview given by BNB Governor Mr. Svetoslav Gavriiski to Welt

Interview given by BNB Governor Mr. Svetoslav Gavriiski to Welt News
Agency, Frankfurt, September 2000
Q: Dear Governor, may I kindly ask you to make a brief overview of the situation in Bulgaria
of today in comparison with that of three years ago?
A: The situation now is very different if we compare it with that of three years ago. I mean, the end
of 1996 and the beginning of 1997. At that time people received pensions amounting to 5 dollars and
salaries 10 or 15 dollars. It was a very big crisis which led to the political changes. Firm will and
decisiive steps of the new government changed the situation. We signed an agreement with the IMF in
the first quarter of 1997 and decided to implement the Currency Board, which in Bulgarian reality
works as a strong financial system.
Q: Did you personally develop the idea to establish the Currency Board?
A: As a minister of finance in the caretaker government I started negotiations with the IMF about
the Currency Board implementation. My personal opinion was that CB was the last possibility for
Bulgaria to stabilise the financial situation and the economy. Now we can see that was a right decision.
We reached financial stabilisation quickly. In February 1997 inflation was over 200%, in April it was
already negative. We succeeded in six months to stabilise the situation. Since then the stabilisation is a
real fact and we managed in making this process sustainable. Now we expect to see a growth in GDP.
We expected growth of about 4% in 1999 but you know regional events hit the Bulgarian economy,
especially in terms of export and transportation. Nevertheless we expect a 2.5% growth of the GDP for
1999. Let me stress on another important feature of the CB System. We succeeded to increase foreign
exchange reserves. In comparison with beginning of 1997, reserves increased 8 times: we started with
400 million dollars and now we have 3.2 billion dollars.
Q: Why did you decide to peg the Lev to the Deutsche Mark instead of the US dollar?
A: We discussed which currency to peg the Lev to and maybe the political decision prevailed
because we wanted to start negotiations with the European Union. So we pegged the Lev to a European
currency instead of the dollar. We included in our 1997 Law on the National Bank that we peg our
currency to the Deutsche Mark and immediately after the Euro implementation we would be pegged to
the Euro. Now our currency is pegged to the Euro. The rate is 1.96.
Q: How do you see the implementation of the Euro, with your experience with the success of
the monetary policy here. How do you see the success of the Euro in Europe and how will that
ultimately affect you?
A: I think that the Euro has a good future and its depreciation in the first year of implementation is
temporary. I believe that after the initial difficulties the situation will be different and the exchange rate
of the Euro will be higher than it is now. Concerning Bulgaria, I can say the implementation of the
Euro is successful because we increased our export to the European Union - now it is almost 55%.
Probably you know that some years ago our export was 80% orientated to the former socialist
countries. Today Bulgarian export to Russia and the other countries of the former Eastern Block is
comparatively low. To Russia it is about 6% and that fact was favourable, giving us possibilities to
avoid the negative consiquences of the Russian financial crises. Having in mind these structural
changes in our export you could understand why the implementation of the Euro is important for us.
We have a stable currency, our payments are in a stable currency. We do not have problems with the
balance of payments. And I do believe that the implementation of the Euro is a successful initiative.
We think that when we finish the negotiations on accession to the European Union we will be able to
implement the Euro. We have already had discussions with the European Central Bank about our
financial system and its coordination with ECB. Probably it is possible to keep the Currency Board
System during the long period of negotiations and after that to implement the Euro. For us this is the
last stage of negotiations for accession to the European Union.
Q: Given your experience and the role that the Central Bank plays now in the stability of the
Bulgarian economy, what do you think are the main priorities and the main steps that still need
to be taken to solidify the integration into the European Union?
A: The government started the negotiations with the European Union. The role of the central banks is
not very big. The main issue which the central banks will negotiate concerns the free movement of
capital and this is a very significant issue to discuss. Another issue of importance is our legislation independence of the Central Bank is something which the European Central Bank sticks to. We have a
new Law on the Central Bank and according to that law we are fully independent. We are responsible
only to the Parliament. Parliament appoints governor and deputy governors. We do not depend on the
Government neather we lend funds to the Goverment. These in brief are the main issues. And the main
target of the Central Bank is to maintain the stability of prices and to keep the rate of inflation low. I
think that together with the Government we manage to maintain the prices stable. In 1998 inflation was
1% and in 1999 we expect 6.2%. The reason of this higher figure is the price of oil which doubled last
year. Almost all prices in Bulgaria depend on the import of oil, prime and row materials. This is the
main reason why inflation was higher in 1999. We expect the prices to stay stable this year. Our
understanding and my perception is that the Currency Board works well, without problems. There is a
theoretical position that a fixed exchange rate is an obstacle for development but I think we have
sufficient reserves in improving the efficiency of our economy: high internal expenditures make the
prices of our goods high. So, we have to reduce the cost of the production. Our economy is not efficient
enough and we have to invest a lot of money for reconstruction of the industry. In this link we rely very
much on privatization because this is the way to finance the economy. I can say that we have good
achievements in finalising the process of restructuring and privatisation in 1999. Our oil refinery
Neftochim, which is the biggest refinery on the Balkan Peninsula, has been privatized last year. Well,
there are some big deals which are still at the level of negotiation: Bulgarian Telecommunication
company for instance.
Another field in which we pay special attention is our foreign economic policy, on regional and
continental level. Although it is not easy to differ the questions and the projects by this scheme having
in mind the process of globalization as well as the fact that Bulgaria and Romania negotiate with the
EU. I think that start of the negotiations could be stimulating factor for our relations with the
neighbouring countries. We rely very much on the improvment of the situation on the Danube because
the destroyed bridges create big obstacles for us, especially for our transport. We also think that we
will be able to reach an agreement with Romania about the construction of a new bridge over the
Danube. Improvement of the conditions for our export is a strategic goal. Not only because we have a
negative current account balance for 1999. Yes, it is important to increase the support for the export in
order to improve the trade balance but it is more important to organize transport routes which will serve
for decades.
Despite this negative trade balance, I can say that we do not have problems with the balance of
payments because we have direct foreign investment flow and revenues from tourism and other
services. I would like to mention our good relations with foreign financial institutions. Our three-year
agreement with the IMF, as well as the agreements with the World Bank and the European Union
provide sufficient financing for Bulgaria.
Q: Regarding this financing, you have set down the basis now for economic reconstruction
which is in its final phases. You have a solid base, an extremely successful Currency Board but
regarding the relationship with the European Union and foreign institutions, how important are
your close ties with Germany and German financial institutions for your future and current
policies?
A: I think that our relations with Germany are very important. Germany is the biggest foreign
investor in Bulgaria and our currency is pegged to the Deutsche Mark. Especially in the banking
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system, I expect to see German banks in Bulgaria. It is important for the banking system good foreign
banks to operate here because, frankly speaking, the experience of our bankers needs to be improved. It
is necessary to create real competition in the banking sector. And I rely very much on the participation
of foreign banks to help in this direction. Unfortunately so far German participation is not remarkable. I
would like to see more German banks, why not Deutsche Bank, to participate in the tender of Bulbank.
Q: But you said that there has been a lack of German banks and financial institutions’
participation in Bulgaria. Do you think that perhaps the image of the country or the region for
that matter is tarnished by the Kosovo crisis? Do you think that maybe those variables have
influenced or overshadowed the opportunities that exist in Bulgaria?
A: Yes that is true. And I think that is understandable. It is very difficult to think that foreign
companies will invest in a region where there is a war and other related problems. But after the end of
Kosovo war the situation is different. And the relations between Bulgaria, Romania, Macedonia and
Albania could not keep the old cliches. We try to improve these relations and I think that the need for
reconstruction of the region is crucial for all of us. New projects and well grounded ideas could attract
foreign investors. There are already indications from some German and other foreign banks.
Q: You mentioned that the financial sector has solidified and it is now stable here in Bulgaria.
Eventually it needs more investment - how would you actively propose to reach potential German
investors and institutions, to differentiate perhaps Bulgaria from the rest of the region and show
the things that you have mentioned such as the stability of the system, the stability of the
currency and some of the opportunities that you just mentioned?
A: Having in mind the financial stability and sound situation as a whole I can say that now Bulgaria
is the most stable country in the region. We hope the financial stabilisation and the good prospects for
development could attract foreign investors. They could prefer to stay in this country because the
situation is stable, the environment is good, and the legislation is very close to the European. These key
factors could attract foreign capital. I understand that it is necessary for the investors to see their
interest. I do not expect them to stay here only for the sake of Bulgaria. And I could assure them: there
are good business possibilities here. Believe me, the situation will be different very soon.
Q: How do you think the increase of the involvement of foreign banks and foreign institutions
will affect the competition, which you said is good.
A: I understand our bankers very well. They had a very bad experience with a huge amount of bad
loans some years ago and they are reluctant to extend new credit. Credit activities are relatively low. It
is necessary for them to see good examples, to see how the good banks work. That is why we pay
attention on the bank privatization. New owners will bring know how, new atmosphere, new
investments. And our bankers will be stimulated to increase their lending activity. Participation of
foreign banks could only improve the competition and subsequently the lending conditions.
Interviewer Karen Herzog.
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