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Bulgaria: Inflation Could Hit 1,000 Percent Says EBRD

London, 16 April 1997 (RFE/RL) -- A report from the European Bank for Reconstruction and Development (EBRD) estimates inflation in Bulgaria this year could soar to 1,000 percent, reflecting the "extreme crisis" in the country's economy.

The crisis is reflected in a predicted 10 percent slowdown in growth, a serious drop in living standards, and a huge increase in bread prices. There has been a deterioration in most other economic indicators, including Bulgaria's external debt and its rising budget deficit.

The report -- prepared on behalf of Bulgarian authorities by the EBRD's country promotion team and bank staff -- was released at the EBRD's sixth annual meeting in London this week.

The report says the economic crisis was compounded by the political crisis after the resignation of Zhan Videnov's Socialist government in December, leaving "a vacuum at a time when negotiations with the IMF over the setting up of a currency board should have been underway."

The report says the crisis reflects Bulgaria's lack of progress in key areas of reform, including privatisation, the restructuring of industry and reform of the banking sector. It also underlined perceptions of corruption and mismanagement of a rapidly deteriorating situation.

The crisis resulted in the Socialists being obliged to hand back their mandate and the creation, in mid-February, of an interim government of experts led by the former mayor of Sofia, Stefan Sofianski.

Elections are now scheduled for April 19, which polls show the rightist Union of Democratic Forces is likely to win.

The dramatic fall in the value of the lev has meant a serious drop in living standards, to the extent that in late 1996 average per capita monthly wages were around $30 a month, roughly one-third of what they were in late 1995, and continuing to fall into 1997.

Bread prices alone rose five-fold over 1996, and by another 300 percent in January 1997, fuelled by poor domestic agricultural performance which may be 25 percent down on last year.

Bulgaria ended 1996 with less than $500 million of currency reserves, one-third of the end-1995 level, and enough to finance only one and a half months of imports.

The report says the poor 1996 performance is all the more striking given that 1995 appeared a good year for Bulgaria. GDP grew by some 2.6 percent, with industrial production up by some 8.6 percent. This took place against a background of lower inflation (of 32.9 percent).

The report says the economic crisis has its roots in the go-slow policies followed by Bulgaria's governments -- of which there have been seven since 1990 -- and the knock-on effects of this on state banks.

Despite the restructuring that has taken place in some sectors of the economy, little action was taken to prevent inter-enterprise debts increasing to today's estimated 16 percent of GDP, or to prevent this impacting on the banks which were obliged to carry the debt.

In early 1996, nervous depositors precipitated a run on some of the banks, forcing their temporary closure, which in turn impacted on the national currency, the lev. In March, 1996, one dollar was equal to 70 leva; in February, 1997, the figure was $1 to 2,200 leva (although the rate recovered to reach 1,500 by mid-March).

The Central Bank attempted a number of methods to check the crisis, including raising interest rates to unprecedented levels and injecting extra capital into the banking system to ease depositors' fears.

But the report says: "In the absence of structural changes in the real economy, these contributed to a worsening of the situation, with the higher interest burden boosting domestic indebtedness and inflation."

The report says the Socialist government's failure to keep a check on spending, the depreciation of the local currency, and high interest rates contributed to a significant increase in year-on-year inflation, which rose to 311 percent by the end of 1996, with hyperinflation developing in the first few months of 1997. Inflation for January this year was 43 percent, rising to 2,435 percent in February.

However the report says that over 1997, provided action is taken and the measures agreed by the government and the IMF work, there "could be the beginnings of a turnaround. But the National Statistics Institute still forecasts GDP growth to be negative -- around minus two percent -- with inflation dropping, at the most hopeful estimate, to maybe half the 1996 level. But one concern is that with over 60 percent of 1997 budget expenses going to meet debt obligations, there will be little money to put into investments which could affect GDP growth.

Unemployment has risen quite steeply during the past year after falling over 1995, from the 1994 level of 12.8 percent to 10.5 percent. Estimates for 1996 suggest an increase back up to 12 percent, a figure that however reflects progress in closing loss-making enterprises.

The report says: "If the government continues pushing through its restructuring program and closes the enterprises as agreed with the IMF, unemployment is expected to rise further over 1997."