European Union membership admission is expected for January 1, 2007 with the Euroland euro to follow accordingly as the new future currency for Bulgaria. The population for this Balkan country is 7.5 million of which an estimated 500,000 have emigrated during the 1990’s. The transition to free market economic principles from the former centrally planned model has been quite painful for Bulgaria. In 1996-97, Bulgaria experienced hyperinflation when inflation reached 550 percent after a communist regime was elected in 1994. The communists implemented inefficient policies which led to financial chaos as state-owned corporations almost collapsed the Bulgarian banking sector. The country’s currency board exchange rate regime was implemented in 1997 from the fallout of the 1996-97 financial sector crisis. Bulgaria’s currency board has restored stability from the monetary instability during the mid 1990’s.
POLITICS: ruling centrist led by ex-King now Prime Minister Simeon Saxe-Cobourg. President Georgi Purvanov since January 2002 when he defeated former President Stoyanov in a presidential election, next elections are scheduled for June 2005. It should be noted that the real political power lies with the Prime Minster as the President title is more ceremonial. During spring 2004, the government lost its parliamentary majority, the Ruling National Movement Simeon II had 11 members that left for an independent block resulting in a minority government. Sofia is the nation’s capita. Communist Soviet rule ended in 1990, a new constitution was implemented in July 1991. Bulgaria joined NATO in March 2004 whereby Bulgaria is providing up to three military bases for U.S. military use. More recently in May 2005, Bulgaria’s parliament approved EU accession. As set out with the EU, Bulgaria must adhere to EU concerns in the area of corruption, environmental regulations, organized crime, updating the criminal code, etc. Any neglect in any of these issues may result in one-year delays for obtaining EU entry.
ECONOMY: buoyant growth, large industrial economy. The economy has turned 180 degrees from the midst of despair during the mid 1990’s with a large economic restructuring and reforms administered. By 1996, the Bulgarian economy crashed with the country in complete economic disarray. In 1997, Bulgaria returned to market reforms with IMF support and a currency board. Inflation declined, increased privatization and foreign investment have taken hold, foreign exchange reserves have increased dramatically and the lev has stabilized after many difficult years during the 1990’s. The Bulgarian authorities appear to be committed to implementing and accelerating economic reforms. Bulgaria has experienced severe economic difficulty at times and growing pains over the last 15 years with its transition to free market open economy from command control similar to other former Communist bloc countries.
Since 1997, the economy has rebounded significantly.Large FDI for Bulgaria’s relative diversified economy which includes industries such as energy - refined petroleum & electricity, nuclear fuel, machinery, tobacco, beverage & food, rose oil production for perfumes, timber and arable lands for agriculture. Bulgaria has extensive minerals and metal resources including coal, copper, bauxite, lead, zinc. Mining today plays a vital role in Bulgaria’s economy along with tourism as it is now valued at $1 billion USD/year due to the country’s increasing popularity.
Year 2004 GDP as measured by purchasing power parity came in at $61.5 billion USD or $8,200 USD per capita. GDP growth is projected at 5.5 percent, 2006 is estimated at 5.5 percent. Year 2004 GDP growth at 5.3 percent, GDP growth since year 2000 has averaged 4 percent. Inflation is projected at 4 percent for year 2005, 2006 at 3.5 percent. Other inflation figures have year 2004 inflation at 3.5 percent, year 2003 at 5.5 percent, year 2000 at 11.4 percent, 1995 inflation was recorded at 35 percent. Current account is in deficit with year 2004 at 8.2 percent of GDP with the trade component at a 12.8 percent shortfall, year 2003 at 8.5 percent. The fiscal deficit is modest at 0.5 percent of GDP. November 2004 external debt at $16 billion USD, public debt to GDP is at 42 percent (2004).Year 2004 unemployment at 12.7 percent, year 2001 was much higher at 17.5 percent reflecting state-owned companies becoming efficient as they eliminated unnecessary jobs.
POSITIVE: educated workforce, corporate tax reductions, good international reserve position and access to global markets. CONCERN: crime, corruption and unemployment, emigration, declining birth rate.
BANKING SYSTEM: government is committed to strengthening the banking sector after the financial chaos in 1996 when bank runs took place. The nation’s central bank, Bulgarian National Bank (BNB) holds a healthy position of foreign exchange reserves amounting to $7.5 billion USD including gold reserves for year 2004 (over 5 months of imports). Broad money supply has expanded at moderate to high growth over the last five years with 2004 measuring 18 percent. Multi-currency bank accounts in Bulgaria are available. Interest rates have the BNB basic rate at 2.03 percent as of May 1, 2005, a similar level to the eurozone.
REGIONAL ANALYSIS: Kosovo/Serbia, Turkey, EU, Black Sea, Romania
The fallout of the Kosovo war in the late 1990’s impacted Bulgarian trade routes coupled with the Russian financial crisis in 1998 during this time. Both Russia and the Ukraine play an important role as Bulgaria imports natural gas from both of these countries. Today, Bulgarian GDP per capita is one third the European Union average. A growing danger for the lev is the potential for a significant downturn in the Turkey economy as Turkish domestic interest rates are in a rising trend.
KNOWLEDGE: Foreign Investment and Tax Incentives
The Bulgarian government is planning to cut corporate tax rates to as low as 12 percent in an effort to attract further FDI. This tax reduction will help to reduce the informal black market economy that represents upwards of 25 percent of GDP. Bulgaria is trying to lure American companies and others to set up operations in Bulgaria to take advantage of its highly educated labor force and large wage differentials to the EU.
CURRENCY: ISO symbol ‘BGN’ (code for new lev since July 5, 1999 when it was revalued at 1,000 to 1), ‘BGL’ (old lev), Bulgarian lev, leva. At time of review on May 16, 2005, the Bulgarian lev had a currency exchange valued at 1.5469 BGN to the US-dollar (USD) and/or 1.955583 BGN to the Euroland euro (EUR). The currency board system in place is backed by the IMF with the lev pegged to the Euroland euro at 1.95583 BGN. The currency exchange rate regime is open and free. The currency board arrangement has successfully reversed high inflation and has provided for a foundation for stability to re-occur. As measured by purchasing power parity, the lev was approximately 35 percent undervalued to the USD as of May 2004.
CURRENCY HISTORY: currency board arrangement established in July 1997 when the lev was fixed to the German Deutschemark, in order to restore confidence in the lev by eliminating unnecessary spending and avoiding further hyperinflation after several years of significant currency depreciation. The currency board is the hardest form of a pegged exchange rate regime and is appropriate for countries with an unstable weak monetary history. A floating exchange rate regime was implemented in February 1991
Historical exchange quotes include: year 1991 at 18.4 (float) BGL to the USD, 1992 at 23.3, 1993 at 27.1, 1994 at 54.2, 1995 at 70.7, year 1996 average at 483.4 which include November 1996 at 316.5 and December 1996 at 465.7, 1997 at 1,740 BGL to the USD (currency board) July 1998 at 1784.88, June 1999 at 1875.11, year 2000 at 2.12 BGN to the USD, 2001 at 2.18, year 2002 at 2.07, year 2003 at 1.732, 2004 at 1.614. The lev has been in circulation since 1881.
CURRENCY FORECAST: EU membership in 2007 followed by euro entrance within two years thereafter. By joining the EU, Bulgaria will receive billions EUR for infrastructure, health, agriculture which will ultimately raise Bulgaria’s standard of living. Bulgaria’s economic goal towards 2007 is to maintain a high GDP growth rate of at least 5 percent, experience declining public & external debt ratios, the current account deficit is to be financed by continued strong FDI capital inflows as the economy continues to import as it modernizes. The exit strategy for the lev is adopting the Euroland euro, however, Bulgaria prior to adopting the euro must enter the Exchange Rate Mechanism II (ERM-II). The lev will then be pegged to the euro maintaining an exchange rate within 15 percent of its central bank rate for two years.
UPDATED: May 16, 2005