Bulgaria
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
15 Feb 1996
eISBN:
9781451804317
Language:
English
Keywords:
ISCR; CR; U.S. dollar; exchange rate; broad money; real GDP; balance of payments; state-owned enterprise; debt service; unemployment rate; money demand
Download PDF (7.4 MB)

This paper reviews economic developments in Bulgaria during 1990–95. In 1993, GDP continued to contract, albeit more slowly than previously. Real GDP declined by 2.4 percent owing to a drought-induced collapse in agricultural output. As consumption-driven imports rose and exports fell, the lower real GDP in 1993 was accompanied by a large current account deficit. The adoption of restrictive fiscal and incomes policies in 1994 enabled Bulgaria to retain the gains in external competitiveness acquired from the nominal depreciation.

Abstract

This paper reviews economic developments in Bulgaria during 1990–95. In 1993, GDP continued to contract, albeit more slowly than previously. Real GDP declined by 2.4 percent owing to a drought-induced collapse in agricultural output. As consumption-driven imports rose and exports fell, the lower real GDP in 1993 was accompanied by a large current account deficit. The adoption of restrictive fiscal and incomes policies in 1994 enabled Bulgaria to retain the gains in external competitiveness acquired from the nominal depreciation.

Basic Data and Economic Indicators, 1991-95

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Sources: Bulgarian authorities; and staff estimates.

Staff estimates of volume changes.

First half of 1995.

January-September 1995.

September 1995.

October 1995.

Excludes privatizations by municipalities.

January-August 1995.

August 1995.

NSI trade data based on customs information for the first half of 1995.

Before debt relief.

June 1995.

I. Real Developments

Bulgaria’s real GDP experienced a sharp contraction during its transition to a market economy—such contractions have been termed transitional recessions. 1/ This contraction has produced a cumulative fall in GDP of 25 percent from 1989 to 1992 (Table I.1). This cumulative fall is slightly larger than the real GDP decline experienced in most other transition economies (Table I.2). The GDP contraction primarily reflected the adjustment of the economy to the adverse impacts of the move to international prices for inputs and outputs, the break-up of the former Council for Mutual Economic Assistance (CMEA) trading arrangements, and loss of transit routes to Western Europe with the intensification of UN sanctions on the former Yugoslavia.

Table I.1.

Bulgaria: National Accounts, 1990-94 1/

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Sources: National Statistical Institute; and staff estimates.

SNA 1993 methodology has been used for 1991 data onwards, with progressively more complete implementation.

The first 1993 column values production at producers prices, i.e., including turnover taxes and excises, consistent with treatment in 1990-92. The second 1993 column uses basic prices, excluding turnover taxes and excises, as in 1994. So production by sector in 1994 is not comparable with data for 1990-92, particularly for industry.

Including: indirectly measured financial intermediation services; import duties and VAT from 1994.

Includes government consumption, collective consumption and NPISHs’ consumptive expenditures. NPISHs are non-profit institutions serving households (e.g., trade unions, religious groups, etc).

To make 1990-92 data approximately comparable with 1994, it is assumed that the effective tax rates for these years are the same as observed in 1993. Component data do not add up due to relative price changes.

Measure of real growth using the previous year as the base year. No data available for imports or exports.

Table I.2.

Bulgaria: Small Transition Economies: Cumulative Change in GDP

(In percent)

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Source: Staff calculations.

Includes those years subject to falls in GDP, starting with 1990. Ends in 1991 for Poland, 1992 for Albania and Romania, and 1993 for Hungary and Czech Republic.

In 1993, GDP continued to contract, albeit more slowly than previously. Real GDP declined by 2.4 percent owing to a drought-induced collapse in agricultural output. As consumption-driven imports rose and exports fell, the lower real GDP in 1993 was accompanied by a large current account deficit. The weak current account position in 1993 reflected loose financial policies and an appreciating real exchange rate. This policy configuration led to a collapse in the external value of the lev in early-1994. The adoption of restrictive fiscal and incomes policies in 1994 enabled Bulgaria to retain the gains in external competitiveness acquired from the nominal depreciation. With the narrowing of domestic macroeconomic imbalances and improved external competitiveness, a rapid and substantial turnaround in net exports was generated in 1994. Thus, Bulgaria recorded in 1994 its first positive growth in real GDP (1.4 percent) during the five years of transition.

1. Sectoral performance

a. Industry and construction

Industry is dominated by manufacturing and mining. State-owned enterprises (SOEs) accounted for 93 percent of industrial output in 1994 (Table I.3). Limited privatizations of industrial SOEs coupled with poor governance have delayed restructuring, discouraged foreign direct investment, and have permitted decapitalization and profit transfers to private sector groups. Real industrial output decreased from 1990 to 1993, but on a decelerating path from 1991 onwards. Industrial output declined by 2.2 percent in 1993 and then increased by 3.1 percent in 1994. 2/

Table I.3.

Bulgaria: Industrial Sector; Total State and Private 1990-94 1/

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Sources: National Statistical Institute; and staff estimates.

The SNA 1993 methodology has been used by the NSI for 1991 data onwards, with more complete implementation and wider coverage over time. In 1993, there are two sets of data, the first column values production at producer prices, including turnover tax and excises, as over 1990-92. The second column uses basic prices, excluding turnover taxes and excises, as in 1994.

Self-employed and other small private unincorporated firms engaged in market production.

Manufacturing output declined steeply during 1991-92, but at progressively slower rates (Table I.4). Output in the manufacturing sector continued its downward trend in 1993, contracting by 10 percent. This contraction was widespread with two-thirds of manufacturing branches experiencing an average decline of 12 percent in 1993. The food processing industry also suffered from the decline in agricultural production, due to inadequate restructuring of agriculture and a drought in 1993 (for details, see below). A few manufacturing branches (e.g., ferrous and non-ferrous metallurgy, building materials, and printing and publishing), turned the corner and began an output expansion in 1993, with production rising on average by 14 percent.

Table I.4.

Bulgaria: Manufacturing and Mining Production by Branch, 1990-94

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Sources: National Statistical Institute; and staff estimates.

Data for 1990 are estimated under the net material product methodology, and only cover state enterprises, so they are not fully consistent with later data.

First 1993 column is inclusive of turnover taxes and excises, and is comparable with 1992. Second column excludes these taxes, and is comparable with 1994.

Data will not add up, due to relative price changes, at price relatives for each year are those of the previous year.

In 1990, the sum of these two branches it presented in electrical/electronic industry.

The manufacturing sector as a whole recorded its first real growth in 1994; output rose by 2.5 percent. The upturn was more broad based than in 1993; eight branches (of 17) recorded output expansion (e.g., chemicals and oil processing; ferrous and non-ferrous metallurgy; building materials; timber processing; pulp and paper; and glass and ceramics), while another six branches contracted far more slowly. A notable feature of this recovery is its concentration in branches which are involved in external trade and are energy-intensive, benefitting from the real currency depreciation and from comparatively cheap energy. The enhanced external competitiveness of these branches was evident in metal exports which rose by 32 percent in U.S. dollar terms from 1992 to 1994, with energy-intensive aluminum rising by 55 percent in 1994. Imports in U.S. dollars of fuels and mineral products fell by 34 percent in 1994, as domestic oil processing replaced processed imports.

For manufacturing as a whole in 1993, real value added diminished by 1.7 percent. However, value added per employee rose by 7.1 percent in 1993 owing to large scale labor shedding (8.2 percent). In 1994, value added in manufacturing increased by 2.9 percent, while value added per employee rose by 7.7 percent, as labor shedding continued but at a slower pace (4.5 percent) than in 1993. 3/

The privet sector in industry increased its proportion of total industrial value added from 6 percent in 1991 to 16 percent in 1993. In 1994, private sector growth slowed somewhat, but nonetheless the private sector share of total industrial value added increased to 18 percent. However, this share was ouch smaller than the share in services and agriculture, owing to the lagging ownership transfer of industrial SOEs (Chart I.1).

CHART I. 1
CHART I. 1

Bulgaria Value Added of the Economy and by Sectors

(In billions of 1994 leva)

Citation: IMF Staff Country Reports 1996, 013; 10.5089/9781451804317.002.A001

Sources: National Statistical Institute; and fund staff estimates.

Construction has been more robust through the transition than manufacturing; construction activity in 1994 was above its 1991 level, though measurement is complicated by problems with valuation of inventories. The driving force in the construction sector has been the rapid rise of private construction activity as state construction has declined. Growth of private construction was 54 percent and 20 percent in 1993 and 1994, respectively, reaching almost half of total construction by 1994.

b. Services

The service sector has grown from 43 percent of total value added in 1991 to 52 percent in 1994 (Table I.5). 4/ After falling by 20.7 percent in real terms in 1992, the service sector declined more slowly in 1993 and 1994, by 2.6 percent and 2.7 percent respectively. However, these declines were the result of contrary underlying developments in the state and private components of the service sector. State services contracted by 10.3 percent in 1993 and 7.8 percent in 1994, and were totally responsible for the decline in total services. Private services grew quickly, rising by 37.2 percent and 14.2 percent in 1993 and 1994, respectively. As a consequence of these diverging trends, the share of the private sector in total output of the sector expanded from 8 percent in 1991 to 27 percent in 1994.

Table I.5.

Bulgaria: Services Sector; Total, State and Private 1990-94 1/

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Sources: National Statistical Institute; and staff estimates.

The SNA 1993 methodology has been used by the NSI for 1991 data onwards. In 1993 there are two sets of data. The first column values production and producer prices, including turnover tax and excises, as over 1990-92. The second uses basic prices as in 1994.

Including the sectors: housing and municipal services; business services; science; education, culture and art; health and social security, sports recreation, and tourism; finance, credit and insurance; government; and other sectors of non-material production.

Within the service sector, trade and transport showed steady positive growth during 1993-94. The very dynamic private sector achieved double-digit growth rates (37 percent in 1993 and 19 percent in 1994 in these branches combined). Accordingly, the share of private business in trade and transport increased significantly. With restitution of small shops and freedom of entry, the private sector has come to dominate retail trade, with a 61.7 percent share in 1994, up from 20.4 percent in 1991. In transport, private bus and trucking companies compete strongly with the state-owned railway, lifting the share of private transport services fivefold since 1991 to 25.9 percent in 1994. Communications, which remains virtually entirely in state hands, has grown slowly; by 6.7 percent in 1993 and only 0.1 percent in 1994.

“Other services”, which accounts for 65 percent of total services, was the only branch to decline in 1993 and 1994, falling by 7.1 percent and 6.1 percent, respectively. This branch consists mainly of subsectors highly dependent on the Government or the fragile banking system; e.g., education; health care; financing, credit and insurance; and social security. Thus the declines in output reflect budgetary pressures and restructuring difficulties in the banking sphere. The private share of this sector remains low, though this is partly because imputed rentals on dwellings, which are largely privately owned (97 percent in 1994), are excluded. After falling an estimated 30 percent in 1992, state-produced other services fell 12 percent and 9 percent in 1993 and 1994, respectively. The main reason for the decline was lower measured value added in finance and insurance—down 75 percent in 1992 and 59 percent in 1993 (Table I.6). In 1994, measured value added in finance and insurance stabilized. The ongoing reduction in state-produced other services was also driven by declines in education (16.8 percent), in health and social welfare (12 percent), and in government services (11.7 percent). Despite overstaffing, employment shedding in these three branches was limited to only 0.9 percent. Thus, measured valued added fell in these branches primarily due to reduced real wages in 1994.

Table I.6.

Bulgaria: Services by Branches, 1991-94

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Sources: National Statistical Institute; and staff estimates.

First 1993 column is inclusive of turnover taxes end excises, and is compatible with 1992. Second column excludes these taxes, and is compatible with 1994.

Data will not add up, due to relative price changes, at price relatives for each year are those of previous year.

c. Agriculture 5/

The collapse in agricultural output during the transition has stemmed from the demand decline from CMEA markets, adverse weather conditions in 1993, delays in agricultural land ownership reform, and relative price distortions due to trade policy and price controls. In 1994, gross value added in agriculture was 30 percent below its level in 1991—compared to a 10 percent contraction in value added for industry over this same period (Table I.7).

Table I.7.

Bulgaria: Total and Private Agricultural Production, 1990-94

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Sources: National Statistical Institute; and ataff estimates.

Data from 1990 use the net material product methodology.