Bulgaria Escapes Consequences Of Kosovo War, But Not Its Own Economic Blues

Bulgaria's trade deficit has widened this year. However, this should not be attributed to the war in Yugoslavia, but inherent economic weaknesses.

Bulgaria Escapes Consequences Of Kosovo War, But Not Its Own Economic Blues

Bulgaria's trade deficit has widened this year. However, this should not be attributed to the war in Yugoslavia, but inherent economic weaknesses.

Thursday, 10 November, 2005

In comparison with other Balkan countries - in particular Albania and Macedonia - Bulgaria escaped relatively unscathed from this year's war in Yugoslavia.

The economy has slowed down, but that is more a result of inherent economic weaknesses than of the result of fall-out from the conflict next door.

The direct costs to Bulgaria of the war in Yugoslavia were minimal - $700,000 of emergency aid to Macedonia, and the arrival of 317 refugees, all of whom were granted temporary asylum and have since returned home.

Meanwhile, the country's currency board - which maintains a fixed exchange rate and effectively takes monetary policy out of the governments hands - held up well and the three-year reform package agreed with the International Monetary Fund (IMF) in September 1998 kept the country on an even keel.

In the first half of the year Bulgaria's trade deficit widened and was 6.6 times greater than in the same period of 1998 - $541.6 million versus $81.1 million. Such deterioration, however, had been expected.

Earlier government and IMF forecasts had envisaged an annual deficit of about $370 million in 1999. It is difficult therefore to attribute the deterioration to the war in Yugoslavia. The 1990s have been difficult years for Bulgaria and although the country's gross domestic product (GDP) grew by 3.5 per cent in 1998, it had contracted in 1996 and 1997 by 10.1 and 7 per cent respectively.

During the first three months of this year, industrial export sales fell by 26 per cent; domestic sales declined by 12 per cent and GDP went down by 1.2 per cent, compared to the same period in 1998. The economy was therefore already struggling before the NATO bombing campaign got underway.

The immediate impact of the air strikes was, nevertheless, reflected in the trade figures for April and March. Exports for April fell from $335.1 million in March to $283.7, a decline of about one sixth. Imports also went down, but the decline was less dramatic, falling from $453.7 to $442.9 million.

In total, during the first half of 1999, imports declined by 1 per cent and exports by 21.7 per cent. This difference suggests that physical interruption to trade routes, which the government has tried to blame for economic woes, does not of its own explain Bulgaria's declining competitiveness.

The relative improvement of the trade position in the second quarter, that is the lower decline, requires closer examination.

Leading export commodities for the years 1992 to 1997 and the first six months of 1998 were raw materials, metals, chemicals and petrochemicals, and textiles. However, in 1999 these commodities lost more than 50 per cent of their markets. This year the make-up of both exports and imports have changed with investment and consumer goods now making up than half of total trade.

In general, this is a healthy development since the entire output comes from the private sector. However, the private sector is unable to win new markets as quickly as government-owned heavy industries continue to lose theirs.

Foreign investment between January and June 1999 was $220 million, $10 million less than for the same period in 1998. Here again, the risk of investing in a neighbour of Yugoslavia is not the best explanation for the modest figures.

Foreign investment in Bulgaria has been low for many years. Most foreign investment comes through privatisation, and the volume in 1999 depends on the size and attractiveness of privatisation deals, the prospects for green-field investment and the size of the markets (including foreign) for Bulgarian products.

Domestic obstacles to selling enterprises to foreign investors are probably the best explanation for the relative lack of interest. These obstacles include high welfare taxes; bureaucratic red tape; and preferential treatment for insiders, such as management/employee buy-outs that allow the buyers to pay for assets gradually over a 10-year period.

Most of 1999's foreign investment agreements had already been in the pipeline before the war. Initial forecasts were for $210 million foreign investment in the sales of state-owned enterprises and another $290 million foreign investment in green-field, joint ventures and reinvestment.

In reality, the level of foreign investment is likely to exceed forecasts. This is a result of the sale of Bulgarian Telecommunications, whose negotiated price is $510 million as well as large foreign investment in the power sector. Plans are afoot to supply Turkey with Bulgarian electricity.

Although the government claimed that Bulgaria lost between $74 and $150 million in exports during the war, the IMF has remained unmoved and has refused to increase its support to the country's balance of payments.

Krassen Stanchev is executive director of the Institute for Market Economics in Sofia.

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