According to the European Commission and other international institutions, Bulgaria’s economy, as well as those of Latvia and Estonia, is overheating for a consecutive year. The growth in loans has increased the difference between solvent demand and the products produced, inflation is increasing, the trade gap is growing and the combination of these events has made Bulgaria less competitive and reduced its potential for development.

In this situation there are always measures that can be taken, which, at least according to basic economic theory, must alleviate or slow down the differences between supply and demand and reduce the existing risks. The question, however, is whether this is a true picture of the current situation and whether using the standard mechanisms to resolve the problem would be the most appropriate. The standard mechanisms include limiting loans and increasing the tax rate on companies and individuals so that total state incomes exceed state expenses (which are large anyway).

With respect to the first part of the question, the answer is yes. Loans have increased, albeit at a slower rate lately; inflation, particularly for 2007, was high; and the difference between imports and exports has grown. However, whether these effects merit the introduction of measures to counteract them is a different issue. The changes in the indicators listed above are not caused solely by changes in the national economy, such as increased solvent demand. During the past 15 months, the price of petrol grew by more than 50 per cent driven by oil prices, which increased from about $65 a barrel to $100 a barrel. At the end of 2001 prices were about $20 a barrel.

In addition, in 2007 the worldwide harvest was worse than expected. This, combined with the high price of energy, affected all other prices. In the financial sector, the mortgage crisis in the US and the consequences, which were felt around the world, led to reduced liquidity in the investment market. Investors re-evaluated the ratio of risk to profit in their portfolios and went in search of higher profits or lower risks. The lower liquidity and the higher discretion should, with all other conditions being equal, lead to a reduction of investment in Bulgaria. This, in turn, should reduce the pressure to increase prices and, in the short term, there should be fewer drivers of a difference between imports and exports.

Over the pasts four months there has been a noticeable outflow of foreign investment from the Bulgarian Stock Exchange. However, in the real sector this is not as concerning as it seems and expectations are that there will be an increase in direct foreign investments during 2008. In other words, as a whole the higher incomes and total value of loans should not be viewed as the only, or fundamental, factor for a “riskier” situation in Bulgaria, according to many macro-economic analysts.

On the other hand, is the question of whether the standard mechanisms previous discussed are being used to overcome the existing discrepancies in foreign trade and to achieve lower inflation. And if they are, how efficiently are they being used. In reality, after the introduction of restrictive measure by Bulgarian National Bank, which included increasing the minimal mandatory reserves, the rate of growth of new loans decreased. However, increasingly credit is being provided through non-banking institutions, such as leasing companies, that are outside the scope of the central bank’s regulations. Therefore, the measures taken to limit the growth in consumption have not necessarily achieved this. At the same time, reducing the liquidity of the banks has made them less efficient.

With respect to the fiscal measures related to withholding income through generating budget surpluses, which are even higher than those required by the EC, it is likely that they would not a have a significant effect on the fundamental problems for the Bulgarian economy – the high inflation and negative balance of the current account. This is because there are additional loan facilities and a will to consume, as well as to use past savings. Secondly, the current taxation system has a relatively higher negative effect on the lower income groups, who do not generally generate an increase in the trade gap; they mainly consume domestic consumer goods and do not buy expensive imported goods. Thirdly the budget surpluses, or part of them, could be spent very quickly – as happened at the end of last year with more than one billion leva.

The surpluses would certainly be spend more inefficiently than if they were retained and spent by the people that earned the income. Therefore it does not make sense to talk about the desire to fight inflation through reducing spending. Fourthly, inflation levels and the gap between imports and exports are a function of the international markets and the difference between national prices and those of economic neighbours. If, for example, the price of oil reaches $200 a barrel, as threatened by the president of Venezuela, the Bulgarian Government, regardless of its efforts, would not be able to hold down prices. If they tried to do this through using administrative measures then many companies would fail and there would be greater unemployment. Finally, part of inflation and the trade deficit are generated by prices in the economy that are influenced by the administration – electricity, water, gas and central heating. According to some estimates, the renegotiation upwards of the prices of energy raw materials from Russia to Bulgaria would increase the trade deficit by more than two per cent of GDP and would affect inflation along the production line.

In conclusion, it could be said that the statements from the EC’s representatives, and those of other organisations, are far fetched and not well founded from an economic point of view. Proof of this could be that over the past three to four years, at least, there has been talk of the economy overheating and large trade deficits but in reality nothing has happened, with the exception of the improved standard of living of Bulgarians. With this in mind, the Government should not look to impose limits since there are few things in the real economy that can be controlled or it makes sense to control.