Macroeconomic improvements
The few years that have passed since the beginning of the reform
in 1989 have brought about evidence for positive changes. The
reduction of monetary overhang after the price liberalization in
1991, curbing the inflation and bringing the BLV to its market
value are sensitive indicators for the reached financial stability
(see Table 1 and Table 1a).
The GDP figures evidence the changes in the real structure of
the economy as a result of the new set of market prices and private
ownership establishment. The process of restructuring has resulted
in a decrease of the share of industry and agriculture at the
expense of growing services and chemical production.
Economic Indicators 1990-1994 (percentage change over the
corresponding period preceding year unless otherwise noted)
|
1990 |
1991 |
1992 |
1993 |
1994 prog (1) |
GNP per capita(USD) (2) |
|
1,840 |
1,330 |
|
|
Private Sector |
|
|
|
|
|
- share in % of GDP |
|
12 |
16 |
18.5 |
|
- share in % of employment (3) |
5.9 |
9.4 |
16.5 |
|
|
Real GDP growth % |
-9.1 |
-11.7 |
-7.7 |
-4.2 |
-2.5 |
Consumer price inflation % |
21.6 |
474 |
80 |
64.0 |
40-60 |
|
1990 |
1991 |
1992 |
1993 |
1994 |
Exchange Rate (BLV/USD end period) |
2.150 |
21.7 |
24.8 |
32.7 |
53.60(end of June) |
Balance of Payments(4) |
|
|
|
|
|
- Exports (bn USD) |
2.5 |
3.7 |
5.1 |
4.6 |
|
- Imports (bn USD) |
3.3 |
3.8 |
4.6 |
4.8 |
|
- Trade balance (bn USD) |
-0.8 |
-0.1 |
0.5 |
-0.2 |
|
- Current account balance(bn USD)(5) |
-1.2 |
-0.08 |
0.45 |
-1.0 |
|
-
-
1 SIEEE forecasts
2 Estimated by the World Bank, published in The World Bank
Atlas 1994
3 Source: Ministry of Labour
4 Data on payments basis
5 Current account balance, excluding transactions in
convertible currencies with the former CMEA countries, ended with a
deficit of 887 mn USD and 250 mn USD in 1991 and 1992
respectively
Source: Bulgarian National Statistical Institute; Bulgarian
National Bank
The framework of the economic policy of transformation has been
set by agreements with the IMF. It involves enhanced macroeconomic
stabilization, industrial restructuring and privatization
programme. Austerity budget and tighter financial discipline and
restrictive monetary policy are the elements of the 1994 economic
policy agreed upon.
The IMF's condition for imposing hard budget constraints in
front of the inefficient state enterprises resulted in the
Parliament approval of law on bad debts. The state has taken over
bad loans held by the commercial banks and these loans have been
exchanged for long-term government securities, to be denominated in
convertible currency and redeemed in lev. The bonds will be freely
negotiable by the banks. The affected enterprises will make
arrangements with the Ministry of Finance on the repayments of
write-off debts. An Ordinance of Council of Ministers provides for
the participation in privatization of the holders of these
long-term government bonds using them as payment notes in all
privatization deals, including buying of stocks, separate parts of
or the whole enterprise. The combination of privatization efforts
with debt conversion schemes may promote foreign capital
participation in this process . The recent purchase of a 70% stake
in the Chocolate and Sugar Confectionery LTD. of Nestle S.A.
together with taking over the company's debt is an encouraging
indication of foreign investors' interest in privatization. The
buyer will also make extra investment for marketing and
distribution network. It is on this basis that the state Agency for
Economic Coordination and Development has urged the state to sell
off its holdings in indebted enterprises as soon as possible in
order to induce enterprises' restructuring, halt their
subsidy-seeking behaviour and speed up privatization.
Undoubtedly, the growth of the private sector and its increasing
share in the GDP is one of the most positive process of the reform.
A mention has to be made for the unsatisfactory evaluation of the
GDP figures. It has been difficult to compile information on much
of the private sector which leads to its underestimation. Even
controlling for this, the slow progress of privatization is an
impediment to fast private sector expansion. Recently, the
Government has undertaken an ambitious program for speeding up
privatization efforts putting up for mass privatization under
rather vague schemes about 500 state companies (around 36% of the
state assets). The priority arrears include tourism, processing
industry, agriculture and trade. A long-term privatization plan
recently approved by the Privatization Agency envisages that
two-thirds of the economy will be in the private sector by 1997
(see Table 2 and Table 3).
Privatization of State Enterprises by April 30, 1994
1. Decision to open the procedure |
443 |
- on whole enterprises |
365 |
- on separated parts of enterprises |
78 |
2. Transactions concluded - total |
97 |
- auctions |
29 |
- tenders |
50 |
- direct negotiations |
18 |
Municipal Privatization by April 30, 1994
1. Decision to open the procedure |
775 |
- on whole enterprises |
26 |
- on separated parts of enterprises |
749 |
2. Transactions concluded - total |
101 |
- auctions |
77 |
- tenders |
23 |
- direct negotiations |
1 |
Stronger signs of recovery emerged in October 1993 which made
the decline of production less steeper than in 1992. Nevertheless,
there still has been little restructuring, as indicated by the fact
that branches which have increased their output include energy
production, coal mining, chemical industry, whereas production fell
in the branches in which Bulgaria is believed to have a comparative
advantage. Trade liberalization following opening up of the economy
together with the changes in the real stricture of the economy
introduced new trade patterns.
The recent changes in the supply side of the economy are
parallel to developments on the demand side. Retail volume in the
end of 1993 in the private sector rose by 16.1% while in the state
and cooperative sector the decline was still considerable. Another
component of the aggregate demand which underwent developments is
private consumption. The decrease in household consumption as a
proportion of their disposable income is reflected in an increase
in the flow of households savings. During the 80s the savings-GDP
ratio was about 5.1% while in 1991-1992 this ratio reached 21%-22%
(see Bank Review, January 1994). The dynamics of the
saving-investment ratio show the share of the former in financing
capital formation. The period of financial stabilization is marked
by low investment activity of the population - throughout 1991-1992
the net share of investment expenditure in population savings
reached its minimum - under 3%, against 31% in the 80s (see Bank
Review, 1994).
In the monetary sphere the dynamics in money aggregates is
influenced by the current restrictive monetary policy. The increase
in quasi-money (transfer of money assets into time deposits) of the
population turned to be a net source of financing the other
economic agents. On the one side, the depreciating effect of the
inflation accompanied with the high nominal interest rate
crowded-out private investment outlays rather than accommodating
them; on the other side the underdeveloped financial markets limit
the scope for diversification of households assets. Thus, it is
rather unlikely to expect mass privatization schemes initially to
accumulate vast quantities of assets required for large-scale
privatization. The pace of the urgent restructuring of inefficient
SOEs can be promoted by attracting foreign capital for
privatization. Debt-equity transactions as a mode for financing
foreign privatization can immediately contribute to the recipient
economy's efficiency through introducing "responsible" ownership
and efficient management.
Foreign trade and payments
The Interim Agreement with the EU (pending the ratification of
the Association Agreement) was approved by the EU Council of
Ministers in December 1993. By the terms of the agreement, about
70% of Bulgaria's industrial exports are to enter the EU duty-free.
About 50% of Bulgaria's total exports to the EU are in "sensitive
sectors", where the concessions are far less generous and thus
requiring market standard quality for Bulgarian goods. It is the
effect of foreign capital for setting up profit-maximizing ventures
that will raise country's export competitiveness. If promoted in
import-substituting sectors in the medium-term inward investment
will exert positive effect on current account balance. In the 80s
excessive state involvement in the economy through government
spending mostly financed from external borrowing has led to the
external debt expansion and budget deficits. The situation was
further aggravated during the past years of the reform when a
moratorium imposed on its servicing in 1991 has put Bulgaria in
financial isolation and discouraged investment in it. Said to be
not a creditworthy country economic reforms have been carried out
in an unfavourable environment. According to World Bank's
classifications Bulgaria is a severely indebted, lower
middle-income country: its GDP per capita is bellow $ 2,695 and
either one of the two key ratios for 1989-1992 is above the
critical level (see Table 4).
|
1990 |
1991 |
1992 |
1. SUMMARY DEBT DATA
|
TOTAL DEBT STOCKS (EDT) |
10,867 |
11,970 |
12,146 |
Long-term debt (LDOD) |
9,813 |
9,987 |
9,951 |
Public and publicly guaranteed |
9,813 |
9,987 |
9,951 |
Private nonguaranteed |
0 |
0 |
0 |
Use of IMF credit Short-term debt |
0 |
414 |
590 |
Short-term debt |
1,055 |
1,569 |
1,605
|
2. DEBT INDICATORS
|
EDT/export of goods and services (%) |
153.7 |
285.5 |
203.2 |
EDT/GNP (%) |
57. |
106.6 |
110.7 |
It is for this reason, that the deal signed with the London Club
creditor banks which could lead to a total reduction of 47,1% of
BulgariaŠ²s debts to the commercial banks is an unique opportunity
for improving Bulgaria's financial image . There were some recent
policy discussion concerning Bulgaria's potential for meeting its
obligations on the deal and the short-run effect on the balance of
payments to be effected by the initial payments on the deal. The
debt reduction which corresponds to the ratio among the debt
instruments and creditors' choice to exchange their debt holdings
into equity investment will soften the pressure on the balance of
payments. Another aspect of debt-equity-swap (DES) schemes will be
their positive effect on the budget. At present, the tough fiscal
policy is an indispensable tool for the economy management and
regulation of budget deficit. Thus, debt-equity programs will
relieve budget expenditures for debt servicing and could raise tax
revenues from the return on equity investment in the country.
Further and more detail analysis of Bulgaria's costs and benefits
from DES schemes will be given in the third part of the paper.
|