IMF Gives Bulgaria a Passing Grade

Economic News

22 Jul 2010
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In upbeat mood this week, the recently appointed IMF resident representative for Bulgaria praised the country's economic growth, falling inflation and declining unemployment in an exclusive interview with Oxford Business Group. However, he also warned that there was much more work to be done - both before and after EU membership.



"It's important to bear in mind," James Roaf said, "that this nation has tremendous potential and it's doing all the right things to take advantage of all existing opportunities."



In the same manner as his predecessor, Piritta Sorsa, who finished her Bulgarian mission in early September of this year, Roaf is making a concerted effort to dispel some of the negative myths and populist-based conspiracy theories that have plagued a number of IMF missions in the past, most notably Argentina in the late 1990s.



Roaf's PR skills were put to the test upon his arrival in Bulgaria in mid-September during one of his initial meetings with government officials concerning minor disagreements over the proposed fiscal deficit in next year's budget. Despite the IMF's continued insistence that the government maintain the agreed-upon fiscally-prudent deficit figure of 0.5% of GDP, the minister of finance, Milen Velchev, countered in a press conference held shortly after his meeting with Roaf that the 0.7% figure proposed by his ministry was, in his opinion, "quite acceptable". While to date the matter has not been resolved, the IMF representative was quick to assure this reporter that trivial wrangling of this nature was part of the "natural process" in every IMF mission and that at the end of the day, what is of importance is the fact that "the two sides were not that far apart" in their preferred figures.



In fact, one thing that has become increasingly clear in recent months is the amicable relationship that currently exists between the IMF and the ruling party, National Movement Simeon II (NMSII). In July, Roaf's colleagues in Washington described Bulgaria's economic performance as "excellent", highlighting a number of positive macroeconomic indicators that are impressive by any account. GDP growth increased from 3.8% in the first quarter to 4.4% in the second quarter, despite the presence of a world wide slowdown, with the government confident that GDP growth will reach 5% by the end of the year. Unemployment, at the end of August, had dropped to a manageable rate of 12.98% and in comparison to the high inflation that brought the country to its knees during the mid-1990s, inflation is now at a comfortable 9%, according to a report published by the web-based financial news service, ISI, at the end of October.



Unfortunately, this encouraging data has provided little comfort to Prime Minister Simeon Saxe-Coburg Gotha, whose NMSII party finished third behind the Bulgarian Socialist Party (BSP) and the right-wing United Democratic Forces (UDF) in last week's nation-wide municipal elections; capturing a mere 11% of the vote and raising speculation over whether his party has enough support to complete its political mandate.



In the interview and in a speech to the American Chamber of Commerce in early October, Roaf made reference to the paradox that lies at the core of contemporary Bulgarian politics: despite its role as the darling of the international donor community, the government in power is perceived as being increasingly out of touch with the electorates' daily hardships. For instance, 15 years following the fall of the Berlin wall, the average monthly salary remains at lamentable USD150.



"The thing that has surprised me the most since my arrival," Roaf told OBG, "is the mismatch between the macro-economic indicators and the way people seem to feel about the way the economy is going. In Washington, Bulgaria is regarded as a major success story, particularly in light of the improved economic indicators."



The IMF resident representative highlighted an inequitable distribution of the financial gains associated with the transition process, coupled with too high expectations, as factors determining popular discontent. In turn, Roaf made a point of adding that any attempt to provide a transitional state like Bulgaria with income levels matching Western or even Eastern European standards is a Herculean task that will require a great deal of "struggle and sacrifice" on everyone's part. But despite its falling popularity, the government must maintain the will to implement fiscally prudent policies, he said.



During his first few weeks in Bulgaria, Roaf made a point of also urging the government to focus more of its attention on increasing levels of foreign investment as the most coherent means of improving Bulgarians' dismal living standards. Foreign investment in the first half of this year did increase by some 50%, to USD527m, from the same period a year ago, thanks to a sizeable increase in both the manufacturing and banking sector, yet more is undoubtedly required.



In common with many other international observers, Roaf said that the low purchasing power of Bulgarians is impeding the growth of local businesses, the impetus for any emerging market. Moreover, he also said that the government must make more of an effort improve the country's structural framework, particularly the need to foster both a transparent business climate and a more reliable legal environment in which to do business. Bulgaria's Byzantine-like legal system, fuelled by an assortment of entrenched interests, has become the stuff of legends and continues to hamper the government's attempts to successfully privatise two of the country's largest state-owned entities: the Bulgarian Telecommunications Company (BTC), and the tobacco corporation, Bulgartabac. On a more positive note, two weeks ago, the tobacco multinational, British-American Tobacco, expressed an interest in the privatisation of the Bulgarian tobacco giant.



Roaf was also positive about Bulgaria's prospects for joining the EU by the 2007deadline. He said that overall, Bulgaria's progress in the negotiations "is good enough for the European Commission at this particular moment in time... in fact, if we are to assume a more regionally-based perspective, Bulgaria is doing better than some of the countries that are already members."



He added that Bulgaria had received "a very positive evaluation" in its recent EU evaluation report, which was proof that the country was honouring its commitment in adhering to the EU's demands over accession.



According to Pavel Ezekiev, chairman of Bulgaria's Foreign Investment Agency, the EU's recent endorsement of Bulgarian efforts is extremely important. It serves as an "enabling threshold" whereby, through the establishment of a functional stock market, a liquid banking system and growing levels of transparency, Bulgaria has established a reputation for itself as a stable competitor and contributor to the larger international economic community.



Roaf did, however, sound a note of caution, warning that pinning all hope on EU accession, without taking into account the inevitable hardships and sacrifices that are sure to follow, would undoubtedly result in frustration in the near future.



"Its important to bear in mind that just joining Europe doesn't automatically guarantee wealth and future happiness," he said. "With respects to its overall position within Europe, Bulgaria remains a relatively poor country, and this must be taken into account as the country moves consider towards EU accession."

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