BY MARIA ZETCHEVA
REFORM ROUND TABLE BULGARIAN DOCUMENT No. 4
CONTENTS
INTRODUCTION
1.
INFLATION MEASUREMENT
1.1.
Retail Price Indexes (RPI)
1.2.
Consumer Price Indexes (CPI)
1.3.
Producer Price Indexes (PPI)
2.
PRICE POLICY
3.
DYNAMICS OF PRODUCER AND CONSUMER PRICES DURING 1991 AND
1992
3.1.
Producer Prices
3.2.
Consumer Prices
4.
CONSEQUENCES OF PRICE LIBERALIZATION
INTRODUCTION
Price liberalization occupies a central place in
every stabilization program. Its purpose is to reach a rational
relative price structure and thus to eliminate the imbalance
between the solvent demand and supply of goods and services, set up
in the terms of administrative valuation of prices. By removing
price level control arises a possibility of unfolding hidden
inflationary processes in the economy. The choice of a
liberalization scheme is an important problem in this aspect. It is
to direct the completion of price liberalization process so that an
optimum effect is reached. This problem has been differently solved
in countries which economies are in a state of transition. In
general, there are two alternatives how to carry out the price
reform: a simultaneous liberation of prices of almost all
commodities (carried out in Poland and Yugoslavia) or a gradual
price liberalization (Romania and Hungary).
The stabilization program in Bulgaria, supported by
the IMF, began in condition of acute macroeconomic imbalances,
considerable loss of export markets, and limited external financing
which was due to the declared moratorium on foreign debt payments.
The fiscal and monetary policy, along with exchange rate
liberalization, price reform and income policy are its main
components. In February, 1991, through an enormous jump in the
general price level, Bulgarian government carried out a
simultaneous liberation of prices. Its main idea was, in a short
period, to eliminate the accumulated macroeconomic imbalances and
reduce money overhang, while removing price deformations.
The purpose of this study is to examine the existing
measurers of inflation and to make an analysis of the price policy
carried out by the mid 1992. The price dynamics, as well as the
main results of their liberalization and the expected development
of inflation process will trace out tendencies in a short-term
perspective.
1. INFLATION
MEASUREMENT
From practical and socially-political point of view
the question of the accurate report on inflation is gaining in
importance. In connection with its measurement two problems
arise:
1. What price index measures inflation?
2. How to calculate the total price index from the
different prices of goods and services?
The inflationary impact on various economic sectors
is different. The only way to determine this impact is by using the
official statistical data which reflect the changes in the entire
price system. The National Statistical Institute (NSI) has a
considerable progress in the development of consumer, retail, and
producer price indexes. Real deflators of the final demand elements
and this of GDP are still not under production. Import and export
price indexes are annual and to a considerable degree
unreliable.
The most widely spread conclusions regarding the
power and volume of the inflationary processes are drawn on the
basis of consumer and retail price indexes. They are under
development since May 1990.
1.1. Retail Price
Indexes (RPI)
The total retail price index (RPI) measures the
change in goods' and services' retail prices, weighted with the
realized commodity and services turnover. It is calculated on the
basis of a combination of about 1400 goods and services. There are
few stages in the algorithm of its calculation:
1. Defining the average price pi
of a given good i for the scales of the entire country as an
arithmetic mean of the average good prices in the particular
regions*, weighted with the relative share of the population in
them.
2. Defining the relative prices
pi1/pi0 for each of the 1400 goods and
their generalization in price index Pk of a group
with homogeneous goods k. The lack of commodity turnover
data at such a low level necessitates the number of registrations
for each separate good's prices to be used as weights. The
registrations number of the previous month has served as weights
during 1991 (i.e. the weights have been changed monthly at this
level of generalization). Since 1992 the number of price
registrations of each good in 1990 has been used as weights.
However, the acute domestic shortage of goods in 1990 makes this
index inaccurate.
3. Thus obtained, the subgroups indexes of goods and
services Pk, at a higher level of generalization,
are weighted together with the commodity turnover realized in the
retail commercial network Qk of each subgroup
k during 1990. Thus, the total RPI is calculated on the
basis of their further aggregation.
The use of the commodity turnover as weights is an
essential shortcoming, as far as the high-priced goods realize
larger turnover, other conditions equal, and hence higher weight
which increases the actual variation in prices. This is the general
defect of all indexes using fixed weights. If the relative goods'
price changes during the period of inflation, then the demand for
goods and services which prices have a smaller increase goes up.
Thus, the used method to calculate the RPI does not reflect the
effect of the change in demand. It corresponds to a larger weight
of goods whose prices are growing relatively faster, and vise
versa. Consequently, the total index indicates higher values than
the actual increase in prices.
Since May 1990 (since the beginning of its
development) the weights of goods have been changed twice and these
of services - three times, without ensuring a proper statistical
consistence and compatibility at these transitions. That is why,
the RPIs do not only indicate the changes taking place in the price
level.
Until mid 1992 that index was one of the
coefficients used in correcting the size of wage bill on quarterly
basis.
*They correspond to the former 28 regions which
Bulgaria was divided into.
1.2. Consumer
Price Indexes (CPI)
The consumer price index (CPI) measures the change
in the prices of goods (or group of goods) and services, using the
relative shares of different types household expenditures (derived
from their budgets' survey) as weights. It is constructed on the
basis of the retail prices indexes for 11 groups of goods and
services* weighted with the household expenditures' structure in
calculating the total CPI. By the beginning of 1992, an expenditure
structure as of 1989 has been used for the calculation of CPI. This
structure has undergone substantial changes during 1990 and
especially 1991. Since 1992 the weights have been actualized by
putting the expenditure structure as of October, 1991 into
practice. The revaluation of the index in using the same weights
(these of October, 1991) provides the following results:
Table: Consumer Prices Chain Indexes
Months (NSI)
|
Total Index Total
|
Revalued Index
|
January 1991
|
113.60
|
112.98
|
February
|
222.90
|
235.82
|
March
|
150.50
|
149.24
|
April
|
102.50
|
101.45
|
May
|
100.76
|
100.51
|
June
|
105.89
|
105.29
|
July
|
108.39
|
108.16
|
August
|
107.50
|
108.69
|
September
|
103.80
|
103.71
|
October
|
103.27
|
103.04
|
November
|
105.02
|
104.97
|
December
|
104.92
|
104.82
|
* These groups are as follows: food products;
tobacco and beverages; clothing and shoes; housing, heating,
electricity, home furnishing; cultural and social life; health and
hygiene; postal and transportation services; taxes and fees;
others.
General public usually identifies the increase in
consumer prices with the level of inflation. The inflationary
impact is different depending on the character of goods (or groups
of goods) on which the income is spent. In connection with this,
additional CPIs are under development for the different types of
households (with different incomes, place of residence, social
status, etc.). However, they are not practically appliable to
differential correction of the incomes of different types of
households while adapting to inflation.
1.3. Producer
Price Indexes (PPI)
In 1991 the NSI did not publish producer price
indexes (PPI). That is why, the dynamics of the physical volume of
output was measured indirectly and quite roughly through
elimination of the price level impact on the volume of production.
The indicator "change in price level effect" was estimated
subjectively by the enterprises themselves, which could not always
succeed in "clearing" away the impact of changes in output
structure. According to the statisticians, this method was
extremely inaccurate, unreliable and with questionable chances for
implementation (particularly in the area of construction, trade,
etc.).
During the last year NSI began to work on a
statistically reliable PPI. It is based on data about 600 groups of
goods and was published for the first time in February, 1992. Since
March, 1992, the observed aggregate was broadened over 950 groups
of goods.
During 1991 the index constructed on the basis of
"change in price level effect" has increased less compared to PPI
(their values are 396.4 and 503.1 respectively, 1990 == 100).
This means that the physical volume of the industrial output
during 1991 has been overstated due to the officially used
deflator.
Unfortunately, the PPI developed by NSI, was
estimated on variable basis until April, 1992 (per month of 1990).
This made it difficult to trace out the price dynamics in 1991.
Since the beginning of 1991 chain indexes of these prices were
constructed in the Agency for Economic Coordination and Development
(AECD) on the basis of the output structure as of May, 1991*. They
were calculated on the basis of a combination of 372 groups of
commodities where data about the produced quantities was available
as well as the average monthly prices for every month of 1991.
* The chain PPIs for 1991 have been constructed by Valentin
Tchavdarov, an expert in the AECD on the basis of the initial data
provided by the NSI.
NSI also introduces a monthly chain index since May,
1992.
Chain producer price indexes:
Note: Starling trow May, 1992 is shoun the NSI's
chain index.
The examined three types of price indexes measure
the scales and intensity of the inflationary process for the
households, on one hand, and for the industrial output, on the
other. They will be used as measurers of inflation in the further
analysis.
2. PRICE
POLICY
The measurers concerning the market price-formation
transition undertaken during 1990, were rather limited and the
greater part of goods and services (amounting to over 2/3 of the
retail commodity turnover) became an object of direct price
control. In spite of the high inflation reached at the end of the
year (64%), a powerful inflationary potential was established. Thus
the government was forced to carry out a radical price
liberalization as an unseparated part of the overall stabilization
program at the beginning of February, 1991. In this case the
correction in prices affected all goods and services although in
different degree. The average price level increased more than 2.2
times within a month only and thus became considerably higher than
the one originally expected*. Some limitations remained over prices
of a narrow range of essential commodities and some strategical raw
materials and fuels which were gradually declining in accordance
with the stabilization program. So, after the liberalization
process was completed, the price system included several types of
prices depending on the degree of control set over their
growth.
* About three times for the whole 1991.
2.1. Fixed Prices. These prices have been
introduced since the 1-st of February, 1991 and are fully
controlled. They cover four commodities - electricity, thermal
energy, propane-butane gas, and coals. Soon the oil products have
been added to this list but in June, 1991 they have been dropped
out from the commodity group having fixed prices. The increase of
fixed prices compared to their previous level has been
differentiated according to the final consumer. The newly fixed
prices have been increased from 4 to 14 times while using the
products assigned to meet the economic needs and between 3 and 7.5
times when referring to households. Consequently, the fixed prices
of electricity, thermal energy, and coals have been increased with
70% since June, 1991 and again between 25 and 60% for the separate
products in May, 1992.
2.2. Limited prices. They have become
operational since June, 1991 and are a further step on in the
liberalization of prices of oil products (gasoline, diesel, mazut)
and of liquid natural gas. The level of these prices serves as a
top limit of the particular contractual prices. Price limits are
defined on the basis of the average international prices of the
indicated products and BGL average exchange rate. To thus formed
BGL equivalence trade discount limits, ranging to 8% of the
currency and profit expenditures, excises, tariffs, import taxes,
and other fuels' payments are added. The fuel price limits were
first calculated on monthly basis, and since December, 1991 - every
15 days .
2.3. Forecasted Prices. Introduced in
February, 1991 they are aiming at controlling the prices of goods
and services of common use. The list has firstly included 14 goods
and services but their number has gradually declined. In August the
tariff rates referring to different kinds of transport have
decreased and the goods which are under government control have
declined to 7 since May, 1992. The original forecasted prices have
been thrice corrected by the mid 1992: in June and in August, 1991,
and in May, 1992. In contrast to the price limits, forecasted
prices can be exceeded which makes their control functions less
efficient. Prices of the essential commodities are an object of
control only in case that they exceed the forecasted prices of
these commodities. When the sale prices begin to exceed the
forecasted ones, the actual prices must subordinate to the
normatively established maximum efficiency based on full
expenditures. The income received from its exceeding is considered
illegal. In case that expenditures are proven to take place, no
limits for the increase in prices exists. Despite their regular
correction, as practice indicates, the real prices are
systematically higher than the forecasted ones. For example, in the
period between the two revaluations (from August, 1991 to May,
1992), the prices have gradually exceeded the forecasted ones with
15%, and with 16% until June, 1992, after the correction from May.
This means that the prices - subject of forecasting are relatively
free and practically out of control.
2.4. Minimum Procurement Prices. They were
introduced in July, 1991 for some basic agricultural products and
aimed at stimulating their output. Their level serves as a lower
limit in the contract prices between the organizations of producers
and purchasers.
2.5. Entirely Free Prices. That group
includes all remaining goods. Their prices freely respond to the
goods and services demand and supply. Its range broadens more and
more along with the gradual drop of some goods from the groups
subjected to pricing limitations.
The current price policy affects price dynamics and
to a large degree determines the inflationary processes during 1991
and 1992.
3. DYNAMICS OF
PRODUCER AND CONSUMER PRICES DURING 1991 AND 1992
3.1. Producer Prices
Dynamics of producer prices were estimated on the
basis of indexes developed in AECD for the period January, 1991 -
April, 1992 and later on - in NSI.
From the beginning of 1991 until mid 1992 producer
prices increased by 4.5 times. Only during the first months after
the price reform was introduced (February and March) they increased
by 148%. The indexes indicate a further increase in the producer
price level until August, slight drop during September-October, and
a new increase which continues until the end of the period in
question. During the first period of increase (April-August)
producer prices rose by 51.7% and in the second period - their
increase slowed down, though it continues to be high, and from
October 1991 until June 1992 price level increases with another
30.7%.
Significant changes occurred in the structure of the
relative producer prices. The prices of the "first echelon"
industries (Electricity and Heating, Coal Industry, Ferrous and
Non-Ferrous Metallurgy), which production was systematically
undervalued in the past, register a sharp rise within the range of
5-10 times. Contrary, Machinery and Fabricated Metal products, and
Electrical and Electronic Equipment prices, which were artificially
high before the reform, indicate much lower increase compared to
the industrial average.
According to producer price indexes, calculated by
the NSI on "change in price level effect" basis, producer prices
for the first nine months of 1991 (compared to the same period of
1990) had increased by 282%. The main contribution (about 80%)* for
the registered increase have the materials used in industrial
production**. This is due to their high relative share in the
current expenditures structure, as well as to the higher increase
in materials' prices for the first nine months compared to other
expenditures. The increase in materials' prices, calculated on
"change in price level effect", is more than four times. The fuels'
price index is 859.5%, and raw materials' one is about 400%. As a
result of the different inflation rate, the share of fuels in the
total material expenditures increases from about 7% to 15.6%. The
raw materials maintain their basic share. There is a sharp increase
in material expenses in the overall structure of expenditures (from
72.06% in 1990 to 79.59% during the first three quarters of 1991).
Wages' share in the current expenditures decreases from 11.34% in
1990 to 7.69% for the first nine months of 1991.
The average annual producer price index for the
whole 1991 is 396.39%. Some significant differences are observed in
comparison to the first nine months.
At annual basis, the contribution of used materials
prices to the total increase in the price level decreases (by
approximately 8 percentage points). This is due to the surpassing
rate of increase in labor prices and other expenditures at the end
of 1991 compared to the invested materials.
* Due to the above described defects of "change in price
level effect" indicator, assessments for some tendencies could be
done, though without guaranteed exactness of their quantitative
measurement.
** Included are raw materials and metals, fuels, energy, and
other material expenditures.
During 1991, the average annual increase in wages
was 170% (and as of the end of the first nine months - by 137%).
The quick nominal (in some months real) increase in wages, during
the last quarter of 1991 and at the beginning of 1992, reflects in
their increasing share in the industrial current expenditures
structure.
Structure of Expenditures in Industry
Despite the wage increase at the end of 1991, it
still has a slight effect on the total increase in producer price
level throughout the year - only about 7% of it was due to the
wages increase in the industrial sector.
CPI dynamics and PPI dynamics
Soures: NSI, AECD
As it could be seen on the graph, the total producer
price level has increased less compared to the consumer prices. The
initial price shock has mainly affected consumer prices, from April
to August PPI fluctuates increasingly compared to consumer price
index, and then they begin to diverse. Some industries
manufacturing goods and services for personal consumption could be
juxtaposed the producer and retail prices dynamics. There are
substantial differences between the production and consumption
prices, which indicates that mediators have a significant
contribution in defining the final price level. However, this does
not mean that producers did not take advantage of inflation, as
traders did. Practically, the price processes occurring in
production and consumption spheres have a certain autonomy.
Producers do not only sell, but buy on prices, different from
consumption prices, so the final result is a product of the
developments in the relative prices and production efficiency.
3.2. Consumer
Prices
The consumption and retail prices are very similar
in their tendency to change. The differences between them consist
in different weight that food and non-food products have in
defining the total price indexes. The change in the prices of food
products is of biggest importance for CPI dynamics (their weight in
CPI is close to 47%). However, food products represent only 24.6%
of the turnover which is used in calculating the RPI. The prices of
non-food products have the biggest part in the formation of the RPI
(58% of the turnover of goods and services in 1990). That is why,
the CPI surpasses the RPI exactly in those cases when food products
prices increase faster than the remaining groups of goods. As a
result, the CPI was higher than the RPI in February, August,
December 1991, and March and May 1992.
Chain consumer price indexes and
retail price indexes
From the beginning of 1991 until mid 1992 the
overall price level increased by more than 8 times. The price shock
at the beginning of 1991 resulted in large scale inflation - only
in March and April consumer prices increased by 235.5% and retail
prices - by 229.6%. After a period of relative stabilization the
inflationary processes "blew up" again during the summer months
when a new, though much weaker, inflationary wave spread following
a change in the price system - for 3 months the prices went up by
23.4%. If the shock period is eliminated, the average monthly
increase in the price level during 1991 is 4.65%. In May 1992
prices increased again by 11.9%. If this price shock was ignored,
the average monthly increase in price level for 1992 is 4.68%, i.e.
the high inflationary level from the previous year remains.
Prices of food, non-food products, and services have different
dynamics and thus their effect on the RPI is also different.
Retail price indexes
Source; NSI
Prices of food products registered the
highest and sharpest increase during the price "boom" from the
beginning of 1991 (only in February by 185.6%). In few months
during the observed period (February, August, December 1991, March
and May 1992) their dynamics is surpassing in respect to the
average price level increase, however, in February and August the
increase in food products' prices is far above the average one.
Their level increases by 375.8% at average annual rate, which is by
41.6 percentage points above the average growth. The outlined
tendency in relative prices, along with the imposed minimum
procurement prices, appeared favorable to farmers. However, if the
price shock is excluded, after March 1991 until mid 1992 the prices
of food products fall behind the average increase (indexes 184.8%
versus 219.5%).
From February 1991 until mid 1992, the prices of
such an important groups of goods as: bread and bread products,
meat products, butter, milk, cheese, and baby food increase by more
than 9 times, having an average increase of food products' prices
by 640.6%. These groups make up close to 1/3 of food products'
turnover.
Prices of non-food products have a decisive
importance for retail prices dynamics. During the biggest part of
the period, non-food products' chain price indexes are higher than
the total RPI, but their values are very close to it. The biggest
deviation in upward direction is observed in June and July. In this
period gasoline and diesel prices, which make up about 10% of the
non-food products turnover, were released. Until mid 1992 their
increase is smaller than the increase in non-food products as a
whole (gasoline prise index - 388% and diesel - 488%). During
February and August 1991, and May 1992 (the periods with the
highest inflation) the prices of non-food products lagged behind
the average increase in prices. During 1991 they increased by
292.6%, i.e. increase by 51 percentage points slowlier than general
price level. If the price shock effect is eliminated, the prices of
non-food products surpass the average increase (indexes 225.9
versus 219.5).
Since the beginning of reforms the prices of
services increased mostly (by 757.7%). During the initial price
shock from February and March the adaptation of services prices, as
well as these of food products, caused an increase of these retail
prices higher than the average one. A very high increase (by 28.5%)
in the value of service activities was registered in May 1992. The
registered peak points in the growth of services' prices, could be
attributed to a large degree to the new fixed electricity and
heating prices. The highest increase in prices until mid 1992 took
place in air transportation (12.6 times), heating (11.7 times),
electricity (9.3 times), communication services (13.2 times). They
make up 27.6% of the total services value. Even if the period
between February and March is excluded, the value of services
continues to increase at faster rate compared to the average one
(indexes 247.2 against 219.5%).
During the observed period a similar changes in the
relative prices occurred in the overall structure of consumer
prices. The highest price increase was registered in the following
spheres:
housing, home furnishing, postal services, and food
products. After the first two months of the price reform, food
products drop out from the group with price increase higher than
the average one (indexes 192.7 against average 211.85).
4. CONSEQUENCES
OF PRICE LIBERALIZATION
Inflation during 1991-92 resulted in decline of real
incomes, devaluation of savings and debts to banking system,
decline in demand, output, and employment. The character of the
inflation could be defined as "cost-push" inflation*.
*The conditionality in distinguishing between
"cost-push" and "demand-pull" inflation is well known. The existing
until-1991 prices, entirely defined by administrative means and
hidden inflation demand, could be considered the main cause for
manifestation of cost-push inflation, i.e. the cost-push inflation
is manifestation of the grounded from the previous economic system
demand-pull inflation.
The heavy burden of inflationary processes was taken
by the households. Price liberalization during 1991 and restrictive
income policy led to a sharp decline in population's real income.
While prices increased at average annual rate of more than 4.3
times, incomes increased nominally by approximately 2.5 times. As a
result, during 1991 the real disposable income decreased by 42%
compared to the previous year. Wages decreased even more - by
approximately 50%. It was due to the increase in unemployment (by
16.5%), as well as to the decline in real wage (by 42.4%). The
transition to negotiated wages after August 1991, as well as the
appearance of new sources of income, led to a relaxation of the
income restrictions at the end of 1991 and the beginning of
1992.
The increase of interest rate in 1991 was not enough
to compensate the inflation and to preserve the real savings.
Throughout the biggest part of 1991 and until mid 1992 the real
interest rate on deposits was negative. From February 1991 until
June 1992 inflation devaluated not only the accumulated interest on
deposits, but 74.8% of the deposits themselves. This fact, though
not very clearly expressed, is observed even if the price shock
months (February and March) are excluded. From April until the end
of 1991, the inflation has "destroyed" 9% of the nominal deposits,
and until mid 1992 - another 12%. Population reacted to the
devaluation of savings by restructuring its savings into time
deposits which bring higher interest. The lower degree of liquidity
of time deposits' assets additionally relaxed the inflationary
pressure on domestic market.
The inflationary processes were favorable to all
debtors in the economy. The state budget's national debt was
highly devaluated. It decreased from 35% of the GDP at the end of
1990 to 16% in 1991. As a result of the transition to market
pricing system, the volume of subsidies* sharply declined, which in
turn decreased budget expenditures.
Enterprises-debtors also took advantage of
the increase in prices since their debts to banking system
devaluated. The real interest rate on new credits granted to
producers until the middle and during the last two months of 1991
was negative which is equivalent to a specific subsidizing of
enterprises. In spite of this, the main part of producers are
unable to repay their credits. One of the major reasons is that a
growing number of enterprises have difficulties in realizing their
production because of the decline in aggregate demand. This, in
turn, determines the continuing decline of economic activity* *.
From the beginning of 1992 the interest rates on credits granted to
producers are positive which additionally aggravates the problems
with enterprises solvency.
* Currently, subsidies are only granted for production of goods
which prices are fixed.
** In 1991 the GDP, in real terms, declined by 16.7%, and during
the first half of 1992 compared to the same period of last year -
by 12.6%.
Price liberalization, high interest rate, and
restrictive fiscal and income policies brought about a decline in
the aggregate demand and reduced the inflationary pressure. In
spite of this, the inflationary potential is still grounded in the
Bulgarian economy due to limitations in the pricing of some goods
which prices are not determined by free market principles.
The BNB financing of a substantial part of the
budget deficit, the further adaptation of wages to the high prices
level, as well as the forthcoming resumption of external debt
payments - all this in a condition of continuing output decline -
add to the list of the potential sources of inflation. Because of
the prolonged high monthly inflation rate, the inflationary
expectations of both producers and consumers remain unpaid. The
threat that increase in prices in Bulgaria could assume inert
character still exists.
Because of non-exhausted inflationary sources, the
official estimates of 63% inflation rate at the end of 1992 seem
unrealistic. Only until mid 1992 prices have increased by 40.8%.
This means that the average monthly inflation rate should not
exceed 2.5% until the end of the year, which is hardly to be
achieved. The 63% inflation rate until the end of 1992 could be
achieved, but at the expense of postponing the next step in price
liberalization, which will put off the impact of the inflationary
impulse only temporarily. In this sense, an estimate of about
75-80% inflation rate at the end of 1992 seems more
appropriate.
|