Economic Challenges of Bulgaria Lecture at the Military Academy of Sofia, July 17, 2003 by Piritta Sorsa, IMF representative in Bulgaria

Outline 1.Economic outlook –Short run –Medium-term 2. Key policy areas CBA Fiscal policy Structural reforms 3. Challenges with EU and NATO accession – how to keep the good performance and spread the benefits for all citizens 4. Conclusions

1. Economic outlook Currently the macroeconomy is doing well –Growth forecast 5% in 2003, 5.5% beyond –Inflation forecast 4.1% eop, 2.6% ave –Current account deficit 4.6% of GDP for 2003 –Fiscal deficit 0.7 % of GDP –Foreign debt 60% of GDP, declining –Credit/GDP 20%, increasing –FDI $860 (half from privatization) –Unemployment about 15 %, declining

Key assumptions Growth – continued growth of exports and credit from banks FDI – in SR depends on EU growth outlook, privatizations

Bulgaria has a substantial growth potential in the long-run Much achieved since 1997 – steady 4-5% growth But late start in transition (1997) is reflected in still low FDI (cumulative $547 in 2002) or exports per capita ($840), low productivity (10% of EU levels), high unemployment, and low incomes compared to more advanced European transition countries (25% of EU average) Investment still only 20% of GDP Large potential to increase growth, jobs and incomes by higher investment and increased productivity The example of other transition countries indicates that after initial pains progress with transition can bring rapid increase in incomes Main challenge to maintain good performance to overtime increase incomes and lower unemployment

How to do it - with right policies and external environment potential for 5-6% growth in MT leading to higher incomes Maintenance of macroeconomic stability (currency board, prudent fiscal policy, lower public debt) Continuation of structural reforms to increase efficiency (business environment, privatization, energy sector and public administration reforms) Restructuring of the economy Supporting social policies to cushion social impact of reforms

2. Key policy areas First - maintenance of the currency board key to stability Requires prudent incomes and fiscal policies

Second, in a CBA fiscal policy central to macro-stability Fiscal goals low deficit - why? government goal zero deficit in MT limits from debt burden, current account deficit The government’s fiscal priorities lower tax burden (currently 27% of GDP) lower tax burden (currently 27% of GDP) higher social spending (15% of GDP, up from 11.8% of GDP in 1999)) public investment (3.5% of GDP – down from 4.5 % in 1999) EU and NATO accession expenditures EU and NATO accession expenditures Military expenditures – 3.3% of GDP in , down from 4.2% in 1999 Eu accession – not yet estimates of future costs Eu accession – not yet estimates of future costs

Wat is needed to meet the fiscal goals Rationalization of expenditures (energy, health, education, railway, public administration); Improved revenue collection (customs reform, NRA, other efforts) Importance of maintaining transparent, broadbased tax system, predictability of policies

Challenge to meet the medium- term needs of fiscal policy EU accession likely to require higher public investment NATO – challenge to maintain overall good economic performance and raising of incomes and quality of life of people Specifics??

Structural reforms important for EU accession, growth, and transition to a market economy, and sustainable fiscal policy Energy (competitiveness, productivity) Business environment (administrative barriers, judicial reform, predictability) Railway, health and education reforms Privatization (telecom) These are also important to increase resources in the budget for priority goals such as social expenditures or public investment

restructuring of the economy (privatization, faster insolvency procedures, abstaining from state support to unviable industries) e.g. there are still about 2000 state enterprises of which more than half are loss makers or have arrears restructuring of the economy (privatization, faster insolvency procedures, abstaining from state support to unviable industries) e.g. there are still about 2000 state enterprises of which more than half are loss makers or have arrears Currently a major challenge to speed up structural reforms that always tend to be delayed

Social safety nets targeting of assistance (much of it already done) active labor market policies higher overall assistance to ease social cost of transition higher overall assistance to ease social cost of transition

The role of IMF Stand-by program supports the government’s overall program of reforms Main focus on the budget, or financial sector issues Progress with structural reform important for the budget as well (World Bank lead in this area)

3. Specifics of NATO (or EU) accession Military spending one aspects EU and NATO accession require progress in all areas to make Bulgaria to function like a market economy, increase people’s incomes so they support these goals

Difficulties Resistance to change (interest groups) Overloading of the government – what should its role be in an economy? Dissatisfaction of people with reforms Incomes of many people have increased in recent years, but vulnerable groups remain Pensioners (2.4 million) and unemployed (600000) have seen little change in their condition, average pension 90 leva, maximum 180 leva

4. Conclusions Challenges ahead are linked to sustaining growth, increasing incomes and lowering unemployment Maintenance of macroeconomic stability and more progress with structural reforms key Also attention is needed continuously to help groups affected by reforms How to spread benefits more widely?