The Shape of Bulgarian Things to Come | www.EuroChicago.com - The Bulgarian Media Portal in Chicago
As the IMF say in their most recent staff report on the country, the aftermath of the recent severe economic crisis leaves us with the question as to whether potential output growth in Bulgaria in the years to come is going to be markedly lower than it was during the boom years. As the IMF point out, the current 341 recession was preceded by an investment boom in construction, real estate and the associated financial sectors. Now that the boom (which was always unsustainable, Bulgaria’s current account deficit in 2007 hit almost 27% of GDP) is well and truly over in these sectors, the strong associated decline in investment could have large negative effects on output. Moreover, it will take considerable time before the excess labor and resources that are no longer needed in these sectors can be absorbed by other sectors, which suggests that the rate of unemployment may rise yet further and remain higher for some considerable time. Not a uniquely Bulgarian 341 story, but none the less important for that.
Following several years of strong increases 341 (around 6% a year) Bulgarian growth declined sharply in 2009 when the economy was hit hard by credit squeeze which formed part of the global economic and financial crisis.
Capital inflows, which had been keeping the current account deficit afloat, dropped from a peak of 44 percent of GDP in 2007 to less than 10 percent of GDP in 2009. As a result, 341 investment, which had risen by over 20 percent annually 341 during the previous two years, fell by nearly 341 30%. And as the investment flows dried up, the Current Account deficit closed rapidly, as imports (and domestic consumption) dropped back sharply.
The question the IMF ask, about whether Bulgaria will be able to return to the high growth rates of 2001 08 is no idle one, since with a shrinking and ageing population, and an external debt which stands at around 110% of GDP, sustainability in the medium term means finding a level of growth which can enable to country to pay down its debt and support its pension and health systems.
And this will be no easy task, given that the early strong revenue flows from domestic consumption (VAT) have now fallen sharply and are unlikely to rebound as the country becomes increasingly export dependent for growth, and exports don’t have VAT attached. Again, 341 this isn’t only a Bulgarian problem, but it is there as an issue.
Recent changes in pension system parameters and contribution rates have also put significant pressure on Bulgaria’s pension finances. 341 During 341 the years 2003 to 2007 total revenue surged by about 51 percent and Bulgaria experienced the strongest rise in its revenue-to-GDP ratio among the new EU member states (about 4 percent of GDP).
This sudden increase in income encouraged 341 the Bulgarian authorities to offset part of the additional revenue by lowering social security 341 contributions. Rates were cut by 6 percentage points from 2002 to 2007 (for the pension and unemployment funds) and there was a further 2.4 percentage points reduction in 2009.
As a result budget financing of the pension system has risen sharply during the recession. Before 2008 budget transfers to close the financing gap of the pension fund had averaged about 3 percent of GDP. This increased to about 5 percent of GDP in 2009 and for 2010 the budget anticipates a transfer of more than 6 percent of GDP. And if there is not a sharp rebound in domestic consumption (which in all probability there won’t be) these shortfalls become structural, not cyclical, and solutions will need to be found. 341
Apart 341 from the obvious demographic impediments the country faces, there are other reasons to think that getting back to moderate 341 sustainable growth may be more difficult that it initially appears. In the first place, Bulgaria operates a currency 341 peg with the euro, yet during the boom years the country had very high inflation rates.
The 341 other evident consequence of this loss of competitiveness was that the country developed a trade deficit, a deficit which though it has reduced following the collapse of imports still exists. In order to return to sustainable (export lead) growth, this deficit needs to become a surplus.
Growth during the boom years was driven by large capital 341 inflows that fueled strong growth in the non-tradable sector. As future capital inflows are likely to remain at a level well below that of the boom years, with growth in the non-tradable sector remaining weak at best, future growth will only be rebound if the tradable sector takes over as an engine of growth. And with lower investment, the robust employment 341 growth the country saw during the years 2001 08 will be difficult to reproduce. Much of the strong employment growth was driven by strong growth in the non-tradable sector. Total employment rose by 20 percent during this period, a
As the IMF say in their most recent staff report on the country, the aftermath of the recent severe economic crisis leaves us with the question as to whether potential output growth in Bulgaria in the years to come is going to be markedly lower than it was during the boom years. As the IMF point out, the current 341 recession was preceded by an investment boom in construction, real estate and the associated financial sectors. Now that the boom (which was always unsustainable, Bulgaria’s current account deficit in 2007 hit almost 27% of GDP) is well and truly over in these sectors, the strong associated decline in investment could have large negative effects on output. Moreover, it will take considerable time before the excess labor and resources that are no longer needed in these sectors can be absorbed by other sectors, which suggests that the rate of unemployment may rise yet further and remain higher for some considerable time. Not a uniquely Bulgarian 341 story, but none the less important for that.
Following several years of strong increases 341 (around 6% a year) Bulgarian growth declined sharply in 2009 when the economy was hit hard by credit squeeze which formed part of the global economic and financial crisis.
Capital inflows, which had been keeping the current account deficit afloat, dropped from a peak of 44 percent of GDP in 2007 to less than 10 percent of GDP in 2009. As a result, 341 investment, which had risen by over 20 percent annually 341 during the previous two years, fell by nearly 341 30%. And as the investment flows dried up, the Current Account deficit closed rapidly, as imports (and domestic consumption) dropped back sharply.
The question the IMF ask, about whether Bulgaria will be able to return to the high growth rates of 2001 08 is no idle one, since with a shrinking and ageing population, and an external debt which stands at around 110% of GDP, sustainability in the medium term means finding a level of growth which can enable to country to pay down its debt and support its pension and health systems.
And this will be no easy task, given that the early strong revenue flows from domestic consumption (VAT) have now fallen sharply and are unlikely to rebound as the country becomes increasingly export dependent for growth, and exports don’t have VAT attached. Again, 341 this isn’t only a Bulgarian problem, but it is there as an issue.
Recent changes in pension system parameters and contribution rates have also put significant pressure on Bulgaria’s pension finances. 341 During 341 the years 2003 to 2007 total revenue surged by about 51 percent and Bulgaria experienced the strongest rise in its revenue-to-GDP ratio among the new EU member states (about 4 percent of GDP).
This sudden increase in income encouraged 341 the Bulgarian authorities to offset part of the additional revenue by lowering social security 341 contributions. Rates were cut by 6 percentage points from 2002 to 2007 (for the pension and unemployment funds) and there was a further 2.4 percentage points reduction in 2009.
As a result budget financing of the pension system has risen sharply during the recession. Before 2008 budget transfers to close the financing gap of the pension fund had averaged about 3 percent of GDP. This increased to about 5 percent of GDP in 2009 and for 2010 the budget anticipates a transfer of more than 6 percent of GDP. And if there is not a sharp rebound in domestic consumption (which in all probability there won’t be) these shortfalls become structural, not cyclical, and solutions will need to be found. 341
Apart 341 from the obvious demographic impediments the country faces, there are other reasons to think that getting back to moderate 341 sustainable growth may be more difficult that it initially appears. In the first place, Bulgaria operates a currency 341 peg with the euro, yet during the boom years the country had very high inflation rates.
The 341 other evident consequence of this loss of competitiveness was that the country developed a trade deficit, a deficit which though it has reduced following the collapse of imports still exists. In order to return to sustainable (export lead) growth, this deficit needs to become a surplus.
Growth during the boom years was driven by large capital 341 inflows that fueled strong growth in the non-tradable sector. As future capital inflows are likely to remain at a level well below that of the boom years, with growth in the non-tradable sector remaining weak at best, future growth will only be rebound if the tradable sector takes over as an engine of growth. And with lower investment, the robust employment 341 growth the country saw during the years 2001 08 will be difficult to reproduce. Much of the strong employment growth was driven by strong growth in the non-tradable sector. Total employment rose by 20 percent during this period, a
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