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Wednesday, July 23, 2003

Some Background on the Bulgarian Economy

Oh no, not more about Bulgaria! I'm afraid so. Here's some general economic background for those who are interested. It is background up to the year 1998, which is when the most recent wave of out migration really got going. Note the inflation rate in 1997, 1,028%, much of this in a matter of weeks.

From the onset of transition, the economy of Bulgaria has been characterised by delays in introducing reforms and macro-economic imbalances. Failure to restructure or privatise loss-making state firms created a growing burden of bad debts in the banking sector, aggravated by soft loans to influential private-sector players and lax central bank refinancing. Banks operating under distorted incentives and lax supervision and excessive central bank refinancing left few resources for serious investment.

The local currency, the Bulgarian Lev (BGL), crashed in 1996 leading to a major liquidity crisis, followed by a crisis of confidence in the banking system and in the local currency. Significant losses of private savings caused serious distress among the public. GDP per capita fell from USD 1,637 in 1991 to USD 1,230 in 1998, while the average rate of growth of private consumption per capita during 1990-98 was –0.8%.
By 1996 the rate of inflation that had been high throughout the transition period accelerated to 121% and reached hyperinflationary levels in early 1997. The economic crisis at the end of 1996 and early 1997 was aggravated by political factors, namely the lack of confidence in the Government. In April 1997 the Government of Bulgaria (GOB) signed a stand-by agreement with the IMF (the fifth) and in June 1997 a currency board was introduced, by pegging the national currency to the DM. These measures restored financial stability. While the inflation rate in 1997 was 1028%, it fell to 18.9% in the first year after the introduction of the currency board, and has declined to single digit levels since then. Since 1997, there has been a reversal of the disastrous economic situation of 1996-97 and before. Real GDP, which fell by 10.1% in 1996 and 6.9% in 1997 is estimated to have increased by 4.1% in 1998 and 3% in 1999. Gross fixed capital formation, that fell by 13.5% in 1996 and 22.1% in 1997, is estimated to have increased by 9.2% in 1998. The official unemployment rate, which reached 16% in 1993, and was 11.1% in 1995 to 12.5% in 1996 and 13.7% in 1997 declined to 12.2% in 1998, and the average annual wage increased from 1,051 USD in 1996 and 995 USD in 1997 to 1,328 USD in 1998.

Real incomes in Bulgaria declined considerably since 1989, and lost a great part of their purchasing power due to high inflation between mid-1996 to early 1997, and this affected the real level of consumption negatively. There was a massive wage erosion in the period 1990-1995 that encompassed the whole public sector. The average reduction in the wage purchasing power for the period 1990-1994 was 42.8%. A recent International Labour Organisation - United Nations development Programme (ILO-UNDP) report indicated that income distribution has worsened considerably since 1992, and poverty has risen dramatically (ILO, UNDP, 1998). It is these developments that gave rise to considerable emigration of Bulgarians abroad.
Source: Evgenia Markhova, Earnings Performance of Bulgarian Immigrants in Greece

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