Washington, 12 September 1997 (RFE/RL) - The more than $1 billion that fled the Bulgarian banking system in the crisis of 1996 and early 1997 has been returned to the system since introduction of the currency board, according to a World Bank official.
Coupled with a heavy flow of outside investment money into Bulgarian treasury instruments, the official says Bulgarian banks now have an unusually high level of liquidity (easily exchanged or moved assets). This is pushing interest rates down to just above six percent, according to official Bulgarian statistics, a level that is negative in real terms (below the rate of inflation).
Speaking to a meeting of the U.S.-Bulgarian Trade Council in Washington Thursday, the official -- who asked not to be identified publicly -- said this interest level is too low for the good of the Bulgarian economy, but will rise to more appropriate levels once the banking system begins to lend to private enterprises and businesses.
The official said this is the "key challenge" facing Bulgaria's banks, which are still state owned, experienced only in lending to other state enterprises and agencies which have state-owned assets to offer as collateral for loans.
But now the bankers must adjust to a market-based system where they must learn how to extend credit to private enterprises -- to the risk takers in the economy who have no hard collateral to offer for loans.
The official said the bankers must learn the modern risk-assessment practices which are used to understand business proposals and ideas in their infant stages. They must be able to assess entrepreneurs who may have few assets of their own, but good ideas that if implemented with bank loans could be highly successful.
Bulgaria is developing a stable economy, said the official, and there is a viable private economy of which the banks must become a part. The private sector accounts for about 45 percent of the economy so far, the official said, below the average of all the rest of East and Central Europe. However, he said, that is expected to change dramatically in the year ahead as privatization programs move ahead.
The World Bank official said the Currency Board is so far working better than anyone expected, proving to be the reason for the return of money which had fled the country during the crisis as well as a large influx of new foreign investment.
So far, that investment is concentrating on government financial instruments, he said, but more will be going into the private sector. The Bulgarian embassy in Washington says the total foreign investment in the country exceeded $1.1 billion at the end of July, 1997 -- the first month of the Currency Board's operations -- and that deals worth more than $80 billion had been concluded since then.
Bulgaria's hard currency reserves reached $2 billion at the end of August, and are expected to hit $2.3 billion by the end of this year, according to the embassy. Under the Currency Board, the amount of local currency in circulation is limited to the level of hard currency foreign reserves held by the central bank.
The World Bank official says that while Sofia still has a long way to go in shutting down inefficient and unprofitable state enterprises, he recommends the government focus its public attention more on the creation of new private enterprises and new jobs, the development of conditions to restart general economic growth.
There is a great need to restructure whole industries and use the bankruptcy procedure more forcefully, he said, but the economy will recover more quickly if the public attitude focuses now on building, not tearing down.
A popular environment of attention on restructuring, supported by government policies of a modern, legally-based transparent economic environment will "support and generate business and investment," he said. It requires "a level playing field" for both domestic and foreign investors, added the official.