Connect with us

Economy

Rushing through the waiting room: A peek at Bulgaria’s plan to adopt the Euro

Published

on

As it pursued EU membership in the early 2000s, Sofia began debating about its eventual accession to the Eurozone. And, to be truthful, the number of experts and politicians who are at least somewhat hesitant is not small. Moreover, no country has adopted the common currency since 2015, when Lithuania scrapped its currency after its Baltic neighbours. Against the background of Brexit and the pandemic-induced, double-dip recession, it is hard to imagine the stall ending right now. Yet, Bulgaria has a standing commitment to adopt the common European currency affirmed in the 2007 Accession Treaty. Hence, many say that the country remains in the Eurozone’s waiting room without a clear path to get out.

The National Plan for the Introduction of the Euro

But with its National Plan for the Introduction of the Euro (NPIE), Bulgaria is trying to flip the table. According to the document, Bulgarians will go through only one month of adjustments before being unable to use the Lev. This means that the Euro and the Lev will both be legal tenders in the country for a mere month. The only help for consumer will be the use of double-currency price tags for five more months.

According to this tight schedule, Bulgaria would need to consolidate its public finances in the next biennium. In fact, before a country can adopt the common currency it ought to stick to a few strict macroeocomic criteria. In particular, the candidate needs to prove that its currency is stable and its public finances sound. Fortunately for Bulgaria, exchange rates are not a concern thanks to the peculiar currency board it adopted in 1997. However, even a brief look at the remaining four requirements makes it clear how hard joining the Eurozone will be.

Inflation: Soon to become a challenge again

Foremost, one of the hardest criteria for a country like Bulgaria to meet is that relating to inflation. Intuitively, given that inflation measure the change in prices across an economy, there is a simple reason behind this benchmark. In fact, allowing a country where prices increase too fast to join may destabilise its peers and weaken the Euro. Historically, Bulgaria has had lower inflation rates than its western Balkan neighbours which are mostly out of the EU. Nevertheless, prices have been fluctuating quite strongly since the late 1980 until the hyperinflationary crisis of winter 1996–1997.

In technical terms, the country’s 12-months average inflation rate (year-on-year) should be contained under the so-called reference value. Namely, the reference value equals the average of three smallest inflation rates amongst EU countries plus 1.5 percentage points. Significantly, using data for March 2021, Bulgaria offshoots the target by a mere 0.066%. Nonetheless, the pandemic-induced crisis has skewed these calculations slightly giving the impression of a downwards convergence amongst EU countries. In fact, the collapse in both supply and, especially, demand has caused a reduction in inflation across the board. Moreover, the inequality of the post-crisis rebound – a so-called k-shaped recovery – is creating a new gap. In fact, now Bulgaria meets the criteria comfortably, as its 12-month average inflation is 0.13% lower than the reference threshold.

However, other EU governments will soon phase out fiscal supports and their economies should absorb the ongoing inflation spike. Thus, the structural differences between the economy of Bulgaria and its weaknesses will most likely prevail in the near future. As a matter of fact, before the pandemic, Bulgaria’s inflation exceeded the threshold by 0.67%. Therefore, one should expect Sofia’s difficulty in recovering from the crisis to recrudesce in persistent inflation overshooting.

Budget deficit: A heredity of the pandemic

Another, perhaps better-known, ‘convergence criteria’ deals with budget deficits and surpluses, or more specifically to their ratio to GDP. In simpler words, a government incurs into a budget deficit when its expenses are higher than its income streams. Hence, the State has to cover the missing amount by means other than fiscal revenues. Most often, Bulgarian government have been withdrawing money from the “fiscal reserve” — essentially past savings. In addition, Bulgaria also asks for money on the international markets by emitting various types of public bonds. Obviously, when revenues are bigger than expenses the budget registers a surplus. In the last two decades, thanks to its rapid-growing economy Bulgaria has managed to respect this target (Chart 2).

In order to adopt the euro, a country’s government deficit/surplus relative GDP should not exceed 3% in the previous year. Moreover, the European Commission’s published forecasts for GDP deficit/surplus should also be under 3%. Generally speaking, the EU has interpreted these rules strictly, thus considering figures “slightly above the limit” as unacceptable.

Historical data show that Bulgaria’s budget deficit-to-GDP ratio has been constantly in the acceptable range between 2009 and 2019. Apparently, this suggests that Bulgaria should have no particular problem in managing to meet this requirement. But the pandemic-induced recession has changed this simple fact dramatically. In fact, the latest data for 2020 show a deficit around -3.4% — which is still better than the Eurozone’s -7.4%. And all forecasts suggest that the stat of Bulgarian public finances’ health is only going to worsen.

Public debt: The upcoming test

The third convergence criterium is strictly related to the second as it regards public debt and its ratio to GDP. In order to understand this link, one can imagine debt as a result of the accumulation of deficits over time. In fact, saving or ‘reserves’ may help cover for deficit for some time when it is necessary. But running massive deficits for many years will lead to the depletion of all savings. Thus, prolonged deficits will eventually create an enormous pile of debt in the same way surpluses lead to savings. Since Bulgaria mostly had a balanced budget, it also boasted a small debt over the last decades (Chart 3).

Adoption of the Euro is contingent on a country’s debt-to-GDP ratio being below the 60% limit as a general rule. Still, there can be exceptions in particular cases it the ratio has “sufficiently diminished and [is …] approaching the reference value at a satisfactory pace”. Clearly, the data show that for Bulgaria it will be hard to miss on the debt-to-GDP target anytime soon. In fact, this indicator has been constantly in the acceptable range between 2009 and 2020. Nevertheless, as indicated in the previous paragraphs, the pandemic-induced recession has worsened the country’s publica finances significantly. If anything, Bulgaria is already on the verge of asking the markets for several billion euros in loans in 2021. Thus, if the deficit does not get under control soon and GDP growth does not restart, the debt will rise.

Relatedly, if the debt grows Bulgaria may also face rising interest rates. But, to join the Eurozone, a country’s 10-year security should pay no more than the EU’s reference value. Predictably to determine this rate the EU follows the same procedure it applies for the inflation benchmark. Thus, Bulgaria may miss on the fifth convergence criterium as a result of an increasing debt. Though this scenario is still unlikely looking at the data (Chart 4).

Beyond the numbers: The domestic and international political consequences

In a word the macroeconomic obstacles to Bulgaria’s adoption of the Euro are not only numerous, but predominantly pressing. But fixing the economy – which is easier said that done – is not enough. Embracing such a fundamental change requires leaving the institutional trench war in which Bulgaria is still stuck behind.

On this regard, it is foundational that the Coordination Council for Preparation of the Republic of Bulgaria for Eurozone Membership which prepared the NPIE sat under the joint chairmanship of the Governor of the Bulgarian National Bank (BNB), Dimitar Radev, and the caretaker Minister of Finance, Asen Vassilev. Considering that the current cabinet and the BNB have previously been on the odds this is a rather good sign. In fact, by means of Radev’s presence, the BNB signalled its practical, immediate availability to move forward with the NPIE.

However, this agreement amongst technocratic elites and part of the political establishment is not enough for the Euro’s successful adoption. After all, few countries that joined the Eurozone on the spur of a similar consensus have fared well. On the contrary, the country needs to build a sincere, nation-wide agreement on the acceptability of the connected, painful sacrifices. Otherwise, as other weaker economies that joined the Eurozone without educating their populaces beforehand, Bulgaria risks suffering massive setbacks. Nevertheless, it is in the EU’s best interest to help Bulgarian authorities in forging this nation-wide consensus. After long years of failures, delays and internal fragmentation, Bulgaria’s adoption of the Euro may finally revert the tide. Not least, such an achievement has the potentiality to restore other Balkan countries’ confidence in the EU. Therefore, one may dream of Bulgaria joining the Eurozone as resuscitating commitment to and reviving the drive towards enlargement. However, if Bulgaria

Fabio A. Telarico was born in Naples, Southern Italy. Since 2018 he has been publishing on websites and magazines about the culture, society and politics of South Eastern Europe and the former USSR in Italian, English, Bulgarian and French. As of 2021, he has edited two volumes and is the author of contributions in collective works. He combines his activity as author and researcher with that of regular participant to international conferences on Europe’s periphery, Russia and everything in between. For more information, visit the Author’s website (in English and Bulgarian).

Continue Reading
Comments

Economy

The Monetary Policy of Pakistan: SBP Maintains the Policy Rate

Published

on

The State Bank of Pakistan (SBP) announced its bi-monthly monetary policy yesterday, 27th July 2021. Pakistan’s Central bank retained the benchmark interest rate at 7% after reviewing the national economy in midst of a fourth wave of the coronavirus surging throughout the country. The policy rate is a huge factor that relents the growth and inflationary pressures in an economy. The rate was majorly retained due to the growing consumer and business confidence as the global economy rebounds from the coronavirus. The State Bank had slashed the interest rate by 625 basis points to 7% back in the March-June 2020 in the wake of the covid pandemic wreaking havoc on the struggling industries of Pakistan. In a poll conducted earlier, about 89% of the participants expected this outcome of the session. It was a leap of confidence from the last poll conducted in May when 73% of the participants expected the State Bank to hold the discount rate at this level.

The State Bank Governor, Dr. Raza Baqir, emphasized that the Monetary Policy Committee (MPC) has resorted to holding the 7% discount rate to allow the economy to recover properly. He added that the central bank would not hike the interest rate until the demand shows noticeable growth and becomes sustainable. He echoed the sage economists by reminding them that the State Bank wants to relay a breather to Pakistan’s economy before pushing the brakes. The MPC further asserted that the Real Discount Rate (adjusted for inflation) currently stands at -3% which has significantly cushioned the economy and encouraged smaller industries to grow despite the throes of the pandemic.

Dr. Raza Baqir further went on to discuss the current account deficit staged last month. He added that the 11-month streak of the current account surplus was cut short largely due to the loan payments made in June. The MPC further explained that multiple factors including an impending expiration of the federal budget, concurrent payments due to lenders, and import of vaccines, weighed heavily down on the national exchequer. He further iterated that the State Bank expects a rise in exports along with a sustained recovery in the remittance flow till the end of 2021 to once again upend the current account into surplus. Dr. Raza Baqir assured that the current level of the current account deficit (standing at 3% of the GDP) is stable. The MPC reminded that majority of the developing countries stand with a current account deficit due to growth prospects and import dependency. The claims were backed as Dr. Raza Baqir voiced his optimism regarding the GDP growth extending from 3.9% to 5% by the end of FY21-22. 

Regarding currency depreciation, Dr. Baqir added that the downfall is largely associated with the strengthening greenback in the global market coupled with high volatility in the oil market which disgruntled almost every oil-importing country, including Pakistan. He further remarked, however, that as the global economy is vying stability, the situation would brighten up in the forthcoming months. Mr. Baqir emphasized that the current account deficit stands at the lowest level in the last decade while the remittances have grown by 25% relative to yesteryear. Combined with proceeds from the recently floated Eurobonds and financial assistance from international lenders including the IMF and the World Bank, both the currency and the deficit would eventually recover as the global market corrects in the following months.

Lastly, the Governor State Bank addressed the rampant inflation in the economy. He stated that despite a hyperinflation scenario that clocked 8.9% inflation last month, the discount rates are deliberately kept below. Mr. Baqir added that the inflation rate was largely within the limits of 7-9% inflation gauged by the State Bank earlier this year. However, he further added that the State Bank is making efforts to curb the unrelenting inflation. He remarked that as the peak summer demand is closing with July, the one-way pressure on the rupee would subsequently plummet and would allow relief in prices.

The MPC has retained the discount rate at 7% for the fifth consecutive time. The policy shows that despite a rebound in growth and prosperity, the threat of the delta variant still looms. Karachi, Pakistan’s busiest metropolis and commercial hub, has recently witnessed a considerable surge in infections. The positivity ratio clocked 26% in Karachi as the national figure inched towards 7% positivity. The worrisome situation warrants the decision of the State Bank of Pakistan. Dr. Raza Baqir concluded the session by assuring that despite raging inflation, the State Bank would not resort to a rate hike until the economy fully returns to the pre-pandemic levels of employment and production. He further assuaged the concerns by signifying the future hike in the policy rate would be gradual in nature, contrast to the 2019 hike that shuffled the markets beyond expectation.

Continue Reading

Economy

Reforms Key to Romania’s Resilient Recovery

Published

on

Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.

Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.

The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.

Yet the road ahead remains highly uncertain, and Romania faces several important challenges.

The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.

Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.

Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.

The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.

How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?

Reforms in several key areas can pave the way forward.

First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.

Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.

Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.

Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.

Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.

None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.

Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.

I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.

First appeared in Romanian language in Digi24.ro, via World Bank

Continue Reading

Economy

US Economic Turmoil: The Paradox of Recovery and Inflation

Published

on

The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.

The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.

The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.

Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!

Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.

Continue Reading

Publications

Latest

Travel & Leisure12 hours ago

Four Seasons Hotel Mexico City Reveals Five of the City’s Hidden Gems

The Concierge team at Four Seasons Hotel Mexico City, members of the Les Clefs d’Or international association, invites you to...

East Asia14 hours ago

Will US-China Tensions Trigger the Fourth Taiwan Strait Crisis?

Half a century ago, the then-National Security Advisor Henry Kissinger flew to Beijing in the hope of seeking China’s alliance...

South Asia16 hours ago

The Indo-US bonhomie: A challenge to China in the IOR

The oceans have long been recognized as one of the world’s valuable natural resources, and our well-being is tied to...

Uncategorized18 hours ago

The day France fustigated Big Tech: How Google ended up in the crosshair and what will follow

At the beginning of April 2019, the European Parliament approved the EU’s unified regulation on copyright and related rights. Since...

Middle East20 hours ago

Politics by Other Means: A Case Study of the 1991 Gulf War

War has been around since the dawn of man and is spawned by innate human characteristics. Often, when efforts at...

Economy22 hours ago

The Monetary Policy of Pakistan: SBP Maintains the Policy Rate

The State Bank of Pakistan (SBP) announced its bi-monthly monetary policy yesterday, 27th July 2021. Pakistan’s Central bank retained the...

Intelligence24 hours ago

China and Russia’s infiltration of the American Jewish and Israeli lobbies

 – First: The reasons for the registration of (Communist Lobbyists in the Middle East in the United States of America)...

Trending