Why Bulgaria
Economy Background
In 1991, Bulgaria chose its way to a fast and radical economic reform, which began with the signing of Bulgaria’s first program with the International Monetary Fund (IMF). The main goals of this program were to cut down inflation, slow down the decline of economy, achieve relative stability of the national currency and encourage private sector rapid annual growth until 1995. Within the first four years, the cornerstones of legal and institutional framework of the market economy were put in place. Macro-economic stabilization and structural reform were the key elements of economic reform, with monetary and incomes policies aimed at curbing inflationary trends.
After two years of growth, the GDP dropped down again in 1996 and 1997. The main reasons for the decline were structural reform blockages, slowdown of privatization and the loss of international market position for Bulgarian companies following the disintegration of the CMEA. The embargo on ex-Yugoslavia and debts of over USD 2.5 billion owed to Bulgaria by third world countries further worsened the state of the Bulgarian economy. The government supported loss-making public sector enterprises at the expense of draining out the banking sector and causing severe macro-economic disbalances.
The severe depreciation of the national currency in early 1997 was the main factor for the high inflation during the whole year. The increasing net prices of fuel and electricity reached and surpassed international levels, which added to the high end-year inflation level.
In the first quarter of 1997, a new agreement with the IMF was reached, which marked the introduction of a currency board (July 1997) and a set of austere and radical new measures for reform.
The German mark was properly chosen as reserve currency and the Bulgarian lev was pegged to it at a 1000 BGL/1 DEM exchange rate, effectively the current free market rate. The introduction of the currency board did not immediately curb inflation, which failed to drop-down to the levels in Germany. Compared to the macroeconomic indicators’ value from the beginning of 1997, the currency board policy resulted in considerable decrease of inflation rate, increased credibility of the national currency and a reduced interest rate. Furthermore, all these factors, leading to a sharp decrease in the loans interest rate within the economy, subsequently reduced the government’s debt interest payments, as well as the share of short-term debt, issued to finance the budget deficit.