EBRD Praises and Warns

Economic News

22 Jul 2010
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While praising progress so far, the latest report from a top European agency also warns that much still remains to be done with Bulgaria's economy. Meanwhile, the authors of the European Bank for Reconstruction and Development (EBRD) report also expressed their frustration at the government's lack of popularity -- despite its success with reforms.

The EBRD's annual survey of Eastern Europe's emerging markets, entitled "Integration and Regional Cooperation", contained tentative praise for the country from the bank's Director for Southern and Eastern Europe, Olivier Descamps.

"Bulgaria has made considerable progress," he said. However, "a lot of work still needs to be done."

To date, the EBRD has won the admiration of Bulgaria's financial community, earning the distinction as one of the country's largest investors, with a cumulative total of EUR784m committed to 54 projects across the country, this year alone.

Speaking in Sofia on November 21, Descamps also drew attention to Bulgaria's role "as the obvious leader in the region in terms of a number of indicators" -- 4.5% GDP growth at the end of third quarter, inflation at a negligible 3% and unemployment at a manageable 12%.

He also said Bulgaria was well on the way to fulfilling a role as "the key driver in the region's economic growth".

This praise was in keeping with that given by the EBRD's Country Director for Bulgaria, former Barclay's Bank executive, John Chomel- Doe, who spoke to Oxford Business Group in mid-November -- before the report's release.

He said that the Bulgarian government had "substantially improved the business environment within the country" and was "progressing well with a reform process that had initially been quite difficult".

Yet Chomel-Doe also expressed his surprise at the lack of initiative by the current government in publicly touting these positive macroeconomic indicators.

"This government has taken all the proper steps in combating corruption through customs reform, privatisation laws to avoid the dodgy deals of the past and taking steps to change the constitution to facilitate judicial reform," he told OBG. "These are very positive steps and I find it quite frustrating that the government in power has not been able to communicate this message more effectively to the public."

The report did also include some important recommendations for ensuring the Bulgarian economy's future success. First and foremost, the EBRD stressed the importance of completing the privatisation process in a transparent manner.

This is particularly relevant in light of the fact that on taking office with an overwhelming majority in the autumn of 2001, the National Movement for Simeon II (NMSII) had promised that mid-way through its first term (the end of 2002) it would complete the privatisation of two of the largest remaining state-owned entities: Bulgartabac and the Bulgarian Telecommunications Company (BTC). However, despite its promises, the government has so far failed to sell off either.

Secondly, if Bulgaria is truly earnest in its ambitions to increase much-needed foreign direct investment (FDI) in the coming years, which in the words of the report "remains low in per capita and cumulative terms when compared to the more advanced accession countries," judicial reform must begin to bear fruition soon.

The report also stresses the need for a more concerted effort to attract FDI. In his OBG interview, Chomel-Doe advised potential foreign investors that in order to avoid the stifling array of regulations involved in doing business in Bulgaria, "greenfield type investments were definitely the best way forward in this type of emerging market."

Many foreign investors claim that brown field investment deals of the type pursued in the early and mid-1990s were plagued with problems from the start. They site party political disputes, judicial partiality and successive governments' tendency to drag their feet as major deterrents to investment. These problems have sometimes been so severe that foreign investors often state that if asked to do it all over again, they would have never invested here in the first place.

Yet despite these structural impediments, FDI continues to grow. According to the CANSTAT Statistical Bulletin, a publication based in Brussels, from January to March of this year, FDI amounted to approximately USD203m, as compared to USD122m for the same period last year. This should provide some cause for celebration and serve to silence the sceptics, at least for a little while.

In one of the report's final recommendations, the EBRD underscored the need to "improve living standards in a sustainable manner". In a country with some 8m people, the report said, nearly a quarter of the population (24%) are still living in poverty, despite the positive macro environment. In addition, 34% of those who are employed have recently experienced a decrease in earnings, according to National Statistical Institute figures from October.

Here lies the answer to the apparent paradox at the core of both the EBRD's and IMF's analysis of the Bulgarian economy. While the two are quick to praise Bulgaria's "healthy and positive" macroeconomic indicators, the population at large has still not seen the benefits of their nation's transition to a market-led economy. For many, there are stagnating living standards, a lack of purchasing power and a pessimistic view of the future.

Chomel-Doe told OBG that the unequal distribution of wealth has been a major factor in creating this opposition between the overall figures and the reality experienced by many Bulgarians. This has prevented "steadfast improvements at the macro level from filtering down to the micro level," he said, while the government's politically toxic stoking of expectations in promising to dramatically improve the populace's daily lives within the by now infamous '800 days' ultimately added to the sense of pessimism.

While many observers question whether the current government will last out its full term, Chomel-Doe is confident that Prime Minister Saxe-Coburg will retain control and that his party's disastrous performance in the recent municipal elections was in fact "quite normal, considering that the majority of governments, even in the West, tend to face rising unpopularity during mid-term elections."

That being said, if the NMSII is to break contemporary Bulgarian political tradition by winning a second term in office, it is in its political interests to ensure that average Bulgarians, not just outside foreign analysts based in Washington and Brussels, begin to see real economic gains. While it is one thing to have the support of the international financial community, electoral victory lies in convincing an increasingly disillusioned electorate that they are about to experience real, positive change - and for the first time in a long time.

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