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Bulgaria: OECD Report Points Way Out Of Economic Crisis

  • Breffni O'Rourke

Prague, 2 April 1997 (RFE/RL) -- The Organization for Economic Cooperation and Development (OECD) today urged Bulgaria to steer a course of comprehensive reform measures to pull itself out of economic crisis.

The influential Paris-based OECD issued a survey examining the ruinous state of the Bulgarian economy and suggesting steps needed to bring the country to a healthy basis for future development.

The report recalls that at the time of the last OECD survey in 1992, Bulgaria had just embarked on a bold "shock" reform program, including the abolition of central planning, the liberalization of prices and the removal of most barriers to foreign trade. At the time, the OECD said that much had been achieved in very difficult circumstances -- but that "the most difficult part may still be ahead."

That phrase proved prophetic, in that now, when a measure of economic stability and growth are taking hold in much of Central and East Europe, the OECD says Bulgaria is in the midst of a major economic crisis.

The OECD lists the virtual collapse of the banking system, a plunge in gross national product, the rapid devaluation of the lev currency, high inflation, a budget crisis, and a general loss of confidence in economic policy.

The OECD expresses hope that the crisis may at last have provided a context for decisive steps to deal with issues like loss making enterprises and banks, the acceleration of privatization and improvement in the overall environment for domestic and foreign business. It says there are no easy solutions, but it sets out 14 recommendations designed to help the country's economic rehabilitation.

It says the roots of the instability in Bulgaria lie in the failure to carry through structural reform, so that what's needed is a sweeping program of macroeconomic structural change. But that in itself is not enough given the collapse of confidence in the country; the government must simulateneously adopt a strategy to restore Bulgaria's credibility.

The OECD warns that Bulgaria will not be able to do all this on its own. It calls for a major international committment to provide resources to underpin the reforms, as well as to provide expertise and to monitor progress. In order to get this outside support, the Bulgarian government must clearly demonstrate the political will to carry through the process to a successful end.

The OECD reviews in details Bulgaria's plans with the International Monetary Fund to create a currency board -- a mechanism to underpin a fixed exchange rate through 100 percent backing for the lev with foreign currency reserves. It says the currency board may well hold the best promise for stabilisation and the restoration of confidence, but it warns that to make it succeed, strong simultaneous steps are needed to solve problems in banking, enterprise restructuring and fiscal imbalances.

Restoring confidence in banking will be difficult, the OECD predicts, but it emphasizes that only those commercial banks must be allowed to continue which are well capitalized, sufficiently liquid and closely monitored. Without these conditions, the banks may persist with their present bad habits, including excessively risky loan policies, which could seriously hinder the banking sector revitalization, and jeopardize the success of the currency board itself.

The report urges the Bulgarian government to promote the expansion of foreign banks in the country, to help promote the development of the commercial banking sector and supply expertise and at least some liquidity, as well as proper commercial credit to companies.

Also critical to the success of the currency board are reforms in the enterprise sector, and in this contest the OECD foresees difficult times ahead for Bulgarian companies. It says they are generally characterized by low competitiveness, and the need to highly restrict access to subsidies, together with the general lack of commercial credit, will cause general liquidity problems for companies.

Nevertheless, the government must press on with isolating and shutting down many of the worst loss-making enterprises. As the general experience of economic transition shows, unless the authorities can make real the threat of insolvency, enterprises will simply let debt build up to fill the gap created by the removal of subsidies. This would threaten to entangle virtually all firms in a complicated web of debt. It says rising enterprise debt is already a major problem in Bulgaria, and only a genuine threat of bancruptcy can help enterprises focus seriously on this.

Another set of simultaneous policies must address the fiscal crisis. The OECD notes that under a currency board, the Bulgarian government would no longer have access to its present sources of deficit finance. Direct loans from the National Bank would no longer be possible, and commercial banks would initially be in no position to absorb large issues of state securities. Therefore the budget deficit would probably need to be financed mostly from external sources and privatization revenues, and policies to restructure part of the government debt might also be necessary. These fiscal problems can be somewhat eased if the establishement of a currency board can help restore confidence in the lev.

The OECD says the authorities must expect that the process of economic recovery will be accompanied by substantial real appreciation of the currency the lev. This will be associated with increases in prices and wages, and may cause difficulties for many exporters. But this has to be tolerated, in that efforts to counter the rise of the lev could make import of investment goods too costly and cause distorted investment decisions.

As to taxation, the OECD says high and unstable taxation has been a major deterrent to foreign as well as domestic business. The country's budgetary problems will continue for some time to make a heavy tax burden inevitable, but the OECD calls for development of a reform strategy involving a reduction of the tax burden on companies, more stable tax laws, and more effective enforcement.

As to foreign investment, the report says that the virtual collapse of the domestic capital market greatly increases the value of foreign capital. It urges the government to work hard at streamlining the procedures that foreign investors must confront, and most importantly to develop a reputation for upholding the spirit and content of contractual agreements. It notes that opportunities for foreign investment lie with the continued acceleration of the privatization process. In addition, the OECD calls for liberalization agricultural markets and completion of the land restitution process.

The OECD survey, though released today, has not been able to take stock of the reform measures promised recently by the new interim government of Prime Minister Stefan Sofiansky. Sofiansky has won praise in international circles for his decisive initial steps, and he and his government have developed a wide-ranging program in conjuction with the IMF. An international donor conference is set to take place next week to discuss Bulgaria's specific needs and how the international community can help.