BULGARIAN ECONOMY ON THE ROAD TO EUROPEAN UNION AND ECONOMIC AND MONETARY UNION IVAN ISKROV GOVERNOR BULGARIAN NATIONAL BANK 14 July 2006 Athens

2 OUTLINE INITIAL CONDITIONS AND TRANSITION PROCESS MACROECONOMIC AND FINANCIAL FRAMEWORK ECONOMIC DEVELOPMENTS AND POLICY CHALLENGES EU AND EMU PERSPECTIVES REGIONAL PERSPECTIVES

3 INITIAL CONDITIONS AND TRANSITION PROCESS Planning economy with lack of functioning markets Bulgarian economy was highly integrated within Council for Mutual Economic Assistance Economy was not subject to competitive pressure Distorted incentives Transition was a unique process without historical experience to draw from Political consensus on society’s priorities was a key prerequisite for successful transition

4 MACROECONOMIC AND FINANCIAL FRAMEWORK Euro-based currency board since mid 1997 Prudent and predictable fiscal policy oriented towards balanced budget or surplus Withdrawal of the state from the business through large scale privatization of the state owned enterprises Liberalization of the markets – free movement of goods, services and capital Government policy oriented towards improvement of investment climate

5 GENERAL GOVERNMENT BALANCE Maastricht criterion

6 GOVERNMENT DEBT Maastricht criterion

7 BULGARIAN SOVEREIGN SPREAD

8 REAL GDP GROWTH

9 FOREIGN DIRECT INVESTMENTS IN BULGARIA

10 REAL GROWTH OF GROSS FIXED CAPITAL FORMATION

11 SHARE OF THE GROSS CAPITAL FORMATION IN GDP

12 GROWTH OF THE REAL GDP PER PERSON EMPLOYED

13 GROWTH OF THE UNIT LABOUR COSTS

14 EMPLOYMENT GROWTH

15 UNEMPLOYMENT RATE

16 ECONOMIC DEVELOPMENTS AND POLICY CHALLENGES High consumption and investment growth Dynamic credit growth External imbalances Limited scope for policy reaction of the central bank Limits of conservative fiscal policy

17 REAL GROWTH OF CONSUMPTION

18 SAVINGS AND INVESTMENTS BALANCE

19 EXTERNAL POSITION

20 CREDIT TO THE PRIVATE SECTOR

21 GROWTH RATE OF THE CREDIT TO THE PRIVATE SECTOR

22 EU AND EMU PERSPECTIVES BNB and Government signed in 2004 an agreement that defines the strategy for Euro adoption Joining Exchange Rate Mechanism II immediately after EU membership Maintaining unilaterally currency board at the current exchange rate – BGN /EUR 1 Bulgarian economy is in good position to fulfill Maastricht criteria Inflation criterion is a challenge

23 LONG-TERM INTEREST RATES Maastricht criterion

24 AVERAGE INFLATION

25 REGIONAL PERSPECTIVES Greek business and politicians extended consistent support to economic and political reforms in Bulgaria Greek economy has very strong ties with Bulgarian economy through trade of goods and services and direct investments The accession of Bulgaria and Romania in EU opens economic opportunities for the Balkans that our region have never had in its history

26 GEOGRAPHICAL STRUCTURE OF FOREIGN TRADE (2005) AllEU

27 GEOGRAPHICAL STRUCTURE OF THE EU’s FDI IN BULGARIA AllEU