Economy Minister Nikolai Vassilev and Finance Minister Milen Velchev are crucial for the economic development of Bulgaria, according to the Economist Intelligence Unit.

"The government, which is dominated in economic policy by two people with experience in Western financial institutions, is expected to focus on making improvements to the business environment," the EIU said in its latest country outlook for Bulgaria, published last Friday.

According to the EIU, the government appears to have a genuine intention to reduce corruption both in business and in public administration areas such as customs collection. Resistance from vested interests and possible clashes with other cabinet members will make this task difficult, but the company's analysts assumed that it will be at least partly successful in improving the business environment over the next two years.

Another focus of policy will be on managing the large financing requirement and the current-account deficit that makes up part of it. This will entail a new credit agreement with the IMF and attempts to shift more foreign debt to longer-maturity, lower-interest credit, which will be achieved through the issue of Eurobonds once conditions are right.

Attempting to contain the large current-account deficit is also likely to lead to a cautious fiscal policy. "This is already apparent in the government's attempt to balance promised tax cuts with other plans to increases energy prices and cut the public administration workforce," the EIU wrote. The report's writers expect the consolidated budget deficit to remain below two per cent of GDP in 2002-03, although they expect it to rise slightly in 2002, as revenue falls short of expectations.

The EIU predicted slower growth of Bulgarian exports to certain key markets, such as Germany and Italy, while exports to Turkey and other countries may decrease. Other factors with an adverse effect on the Bulgarian economy are the weak euro and high fuel prices. International interest rates will be favourable for Bulgaria's foreign debt payments, as their 2001-2002 levels will be lower than in 2000.

The EIU projects average annual inflation in Bulgaria at 7.3 per cent in 2001, 5.8 per cent in 2002, and 4.4 per cent in 2003. "As the currency board arrangement puts strict limits on the money supply, the overall trend of inflation over the forecast period is expected to be downward. After rises in the minimum wage and child allowances due in October 2001, some upward pressure on inflation over the next two years will come from a resumption of energy price rises, tobacco price increases that could take place in 2002, and an increase in pensions, which, if implemented, would put upward pressure on inflation via stronger demand."