for Bulgaria, Hans Flickenschild, right, arrived in Sofia on October 12
to lead what he described as difficult talks with the Cabinet on this
country's next year budget. The IMF wants a three per cent surplus
and cutbacks in some social policy and taxation alleviation plans of the
Government.
RECORD-BREAKING economic growth, accompanied by a skyrocketing trade deficit, and measures in line with Bulgarias accession to the European Union, marked the year 2005 for this countrys economy.
Bulgaria got a new Cabinet in August, dominated by the Bulgarian Socialist Party, with the National Movement Simeon II and the Movement for Rights and Freedoms as coalition partners.
The first months of the new Government showed good continuity compared to the previous cabinet in two key priority fields - EU accession and conservative budget policy, strongly influenced by the International Monetary Fund (IMF).
The annual report by the European Commission on Bulgaria put gross domestic product (GDP) growth figures at six per cent for 2005 and 5.5 per cent in 2006 and 2007. Local think tanks were a bit more pessimistic saying that Bulgaria would end 2005 with 5.7 to 5.9 per cent economic growth, which would see a decline in 2006.
In its late October report on the countrys economy, the Centre for Economic Development (CED), the local partner of the World Economic Forum, said that Bulgarias GDP would grow by 5.7 to 5.8 per cent in 2005.
This was better than 2004, when GDP growth was 5.6 per cent. However, it represented a slowdown after the record high level of 6.1 per cent in the first half of 2005, said Alexander Bozhkov, board chairman of the CED, while presenting the report.
Bozhkov said that Bulgaria needed to achieve and maintain a GDP growth of at least eight per cent to be able to reach the average level of EU member states in the next few decades.
Bozhkov warned that GDP growth in 2006 would drop to between four and five per cent.
New projection data, provided by the consulting company Industry Watch also in late October, made macroeconomists more optimistic and they forecast an average economic growth of 5.1 per cent in 2006.
Forecasts of a slower pace of growth in 2006 were based on expectations of a contraction in exports by some heavy industries, which could not be compensated for by a stronger dynamic in the leading export sector - clothes, textiles and footwear.
Yet even according to the most negative scenario, Bulgarias economy would register growth of at least 4.5 per cent next year, most experts said.
According to the macro projections, maintenance of a relatively stable economic growth was linked to the preservation of an increase in investments and exports. Exports will continue to grow by about 11 per cent in real terms. Imports will grow faster than exports (by about 11.5 per cent for the import of goods and services).
Inflation (measured by using the average annual index of consumer prices) in 2006 is expected to be at a level of five to 6.6 per cent. This means that consumer prices will increase faster.
The higher inflationary expectations for 2006 are based on the administrative regulation of prices and a rise in excise duties.
Although the EU and local forecasters did not appear overly concerned about the rapidly deteriorating current account deficit of Bulgaria, saying that a certain narrowing should take place in 2006, this was one of the main concerns of the IMF. The Fund still plays a leading role in forming this countrys budget policy, and thus economic policy overall.
The IMF mission left Bulgaria in late October, concerned about the planned parameters of Bulgarias budget for next year. Even a later unofficial visit to Sofia by IMF mission leader for Bulgaria, Hans Flickenschild, did not produce progress.
The fund and the Cabinet did not manage to settle the problem of Bulgarias rising current account deficit. The gap was expected to reach 13.8 per cent by the end of 2005.
Bulgarian National Bank data, made public on December 12, showed that Bulgarias current account deficit was more than 2.2 billion euro, or 10.5 per cent of GDP, in January to October 2005, up from a figure of 918.6 million (4.7 per cent of GDP) for the same period in 2004.
The January to October 2005 trade deficit was 3.2 billion euro (15.1 per cent of GDP), increasing by almost 1.2 billion euro from the same period of 2004.
By definition, the current account is used to mark the inflow and outflow of goods and services into a country. Earnings on investments, both public and private, are also put into the current account.
Surging global oil prices were one of the main reasons for the rise in trade deficit, contributing to nearly half of the rise. Global crude oil prices surged more than 50 per throughout 2005, boosting costs for firms and consumers. Even tourism, which registered a certain growth, could not compensate for the worsening of the trade balance.
Analysts expected that while the gap in the growth rates of imports and exports should start declining in 2006, the trade deficit will still increase further. The continuation of this trend and improvements in the terms of trade should however lead to a narrowing of the trade deficit in 2007. Improvements in the services and transfer balances should allow for a slight reduction of the current account deficit already in 2006 before a smaller trade deficit will lead to a more significant reduction in 2007.
Foreign direct investment (FDI) in Bulgaria, which play a significant role in offsetting the negative impact of the current account deficit, totalled almost 1.5 billion euro (6.9 per cent of GDP) in the first 10 months of 2005, up from 1.4 billion euro (7.2 per cent of GDP) year-on-year. FDI hit a record high of 2.1 billion euro in 2004 and this figure was not expected to be achieved by the end of 2005.
Most foreign investors in Bulgaria use local small- and medium-sized enterprises (SMEs) to conduct their operations in this country. This conclusion was made in a report to a survey entitled Bulgaria: Beyond the Facts, which looked at the links between local SMEs and foreign investors in six countries in Central and South East Europe.
Carried out by BBSS Gallup International at the initiative of the United Nations Development Programme, the survey was presented at the Southeast Europe Economic Forum (SEEF) held in Sofia on November 1 and 2.
Participating in the survey of the 100 largest foreign investors were corporations that, on average, maintained production branches or operations in 80 countries and permanent staff of 1022 people in each country. The survey was done in October and November 2005.
The largest percentage of SMEs used were those operating in the field of services, 70 per cent; followed by those in the sphere of transport, 65 per cent; trade 59 per cent; and communications 57 per cent, according to the survey.
The survey said that foreign investors in Bulgaria, Romania, Hungary, Poland, Croatia and Serbia-Montenegro forecast growth in their joint business with SMEs. Their intention to use local suppliers more actively was based on some of the advantages of SMEs, including flexibility, lower prices and geographical proximity.
There were also, however, clear barriers to growth in the share that local suppliers took in the business of large foreign investors. The main problems were linked to product quality and services offered, the skills level of human resources, and the abilities of SME managers to plan and develop their businesses as a whole.
According to large investors, the services sector lacked good customer care, while production output lacked constant guaranteed quality. Insufficient skills in human resources in small companies were among the core reasons for the problematic quality of the services they delivered.
And shamefully enough, 13 years after the start of privatisation in Bulgaria, the country had not yet concluded its major deal, according to an evaluation by the Privatisation Agency (PA), published in mid-December.
The PA statistics showed that by the end of 2004, most funds came from the sale of the Bulgarian Telecommunication Company (BTC).
The buyer offered nearly 230 million euro in cash payment.
In all cases in the 13-year period, the buyer was a foreign company. Statistics showed that 169 state-operated companies were owned by foreign businesses in early 2005.
Shortly before the end of the privatisation process, 89.2 per cent of the formerly state-operated activities had become a part of the private sector.
And last but not least, Bulgarian households ended 2005 in fear of the increased prices of electricity and heating that, introduced in October and November, were expected to eat into households thin budgets in the winter months.
Bulgarias November consumer prices rose by a preliminary one per cent month-on-month because of increased food and energy costs, according to a National Statistical Institute report.
The rise followed 1.2 per cent inflation in October.
Food prices rose by 1.6 per cent month-on-month in November, driven mainly by increases in meat and fish prices.
November non-food prices eased 0.1 per cent on the month, as petrol prices fell by about eight per cent. On the other hand, the state-regulated energy prices for households rose. Prices of services rose by 1.4 per cent month-on-month in November after a 0.4 per cent increase in the previous month.
Year-on-year consumer price inflation was 6.9 per cent in November. Cumulative inflation for the first 11 months of the year was 5.6 per cent.
In November, the Governments Agency for Economic Analysis and Forecasts (AEAF) raised its end-year inflation forecast to 5.1 per cent, from the previous 4.5 per cent, largely because of the surge in oil prices on global markets in 2005 and heavy floods that hit Bulgaria in the summer.
The AEAF expected average annual inflation rate to be 4.7 per cent, up from the previously forecast 4.4 per cent. Bulgarias cumulative inflation was four per cent in 2004 and the average annual inflation was 6.2 per cent.
