Prudent fiscal and structural reforms in recent years had boosted foreign investment and economic growth in Bulgaria in recent years, but the Government should continue a tight fiscal policy, said International Monetary Fund first deputy managing director John Lipsky.
Speaking on June 7 at the end of a two-day visit to Bulgaria, Lipsky said that part of Bulgaria’s success could be attributed to global conditions conducive to development.
A tight fiscal policy should be maintained in case of a change to global conditions, and also because of Bulgaria’s growing current account (CA) deficit, he said.
During his visit, Lipsky met Government officials and trade union leaders. He made the visit, his first, to familiarise himself with “current reality” in Bulgaria and assess for himself the progress that had been made.
He said that he could see no obstacle to the country later this year joining the ERM-2 exchange rate mechanism, a precondition to the adoption of the euro, and, when price criteria had been met, adopting the common European currency.
He told a June 7 news conference: “This is a particularly important moment in Bulgaria’s development. First of all, [...] the global environment is unusually supportive for the Bulgarian economy. Secondly, the impressive reform efforts that have been made here over the past few years are changing investor attitudes regarding the opportunities here. The establishment of broad reforms, of prudent fiscal policy, and the successful implementation of the currency board arrangement have led to the great success of Bulgaria becoming a member of the European Union this year.
“In economic terms, the principal challenge is to maintain prudent fiscal policies, to support macroeconomic balance by maintaining the currency board arrangement, and to make the appropriate space for private initiatives through structural reforms that should help to produce the new investment and the efficiency gains that would allow continued strong growth in the future that is the essential ingredient necessary to raise the standard of living for all Bulgarians.”
Lipsky said that the IMF expected that Bulgaria’s CA deficit in 2007 would add up to about 16.6 per cent of GDP. Economic growth would be about six per cent, and inflation would drop to just less than 4.5 per cent.
Finance Minister Plamen Oresharski said that Bulgaria would maintain its current fiscal and macroeconomic policies.
“Bulgaria has the ambition to offer a good example for the Fund even after our arrangements expire,” Oresharski said.
Bulgaria operates a currency board arrangement, which ties the lev to the euro, forbids Bulgarian National Bank (BNB) from lending to the Government, and links the level of cash in circulation to that of the foreign reserves held by BNB.
This means that the only means that the Government has to influence the economy is fiscal policy, and this makes Oresharski’s reassurance to the IMF important. Bulgaria has said that it intends retaining the currency board arrangement until it adopts the euro.
Asked whether the Government should increase spending, Lipsky said: “If confidence were lost about the predictability, responsibility and prudence of governmental policies, the loss of confidence would do much more to damage the prospects of Bulgarian prosperity than any short-term sacrifice in prudent policy.”
