At a seven-year high, the inflation data for August produced a serious outcry across local and international economic communities alike. While opinions on whether it was a one-time event or the start of a long-term trend were split, many financial institutions significantly raised their inflation outlooks for the year.
The latest to do so was the International Monetary Fund (IMF). It raised its 2007 inflation estimate from 4.4 per cent to eight per cent and its current account gap projection from 16.6 per cent to 20 per cent. The revised projections came days after the IMF was scheduled to perform its regular autumn mission in Bulgaria.
IMF experts attributed the increase to the unexpectedly high price increase in foodstuffs. As previously reported, the countrys agricultural sector had been hit hard by a succession of cold and dry spells. As seasonal, and therefore one-time, factors were the reason for the price increases, the IMF was confident price rises were set to return to normal levels and would be contained within four per cent for the full year 2007.
Many foreign economic experts, however, went beyond seasonality. Seconding the opinion of Prime Minister Sergei Stanishev, Ariel Emiryan, an economist at French bank Societe Generale, said higher GDP and industrial output growth, as had been seen in Bulgaria, always went hand-in-hand with higher inflation.
With such macroeconomic dynamics expected to persist in the mid-term, the country should prepare for more dynamic price increases, Emiryan said in an interview with Bloomberg newswire. He also recommended that Bulgaria delay entry into the Eurozones waiting room, the Exchange Rate Mechanism II. He gave the divergent goals of countries willing to adopt the euro and those seeking fast economic growth as explanation of his recommendation.
While the achievement of real convergence presupposes higher inflation, the coverage of Maastricht criteria - the reverse, Emiryan said.
Giving preference to convergence, he advised that the country refrain from efforts to harness inflation as this would also inevitably reduce the countrys economic growth rate.
Nevertheless, local experts believe Bulgaria should restrict growth of domestic consumption through measures curbing retail loans growth and seeking to narrow the foreign trade gap. Both are cited as the prime reasons behind soaring domestic demand.
The measures are in urgent need of implementation. According to data from the National Statistical Institute, the volume of goods and services imported in the first six months of the year rose by 11.9 per cent year-on-year against a 4.1 per cent increase in the volume of exports. In nominal terms, the foreign trade deficit reached six billion leva.
