Six Years Currency Board

On July 1, 1997 the Currency board was introduced in Bulgaria. It will not be far-fetched if we say that this was one of the fastest, most radical and most positive reforms implemented in Bulgaria and may be that is the reason why it receives such public support.

The most visible, immediate and direct effect of the Currency board is the huge decrease of the inflation. The average inflation before the introduction of the Currency board was above 210% per annum and after its introduction it is less than 6%. In other words, because of the Currency board the rate of increase of the prices decelerated more than 35 times. The slow increase of the prices decreases also the so-called inflation tax rate (the decrease of the purchasing power of the money), which was 55% on average in the years before the introduction of the board and fell to slowly more than 5% in 1997. The low and better-foreseen inflation makes it possible longer-term planning by the firms and individuals, which positively influences the economic development.

The economic growth before the Currency board was minus 4.6% per annum on average, and because of that reason between 1989 and 1997 the economy recorded economic drop of 32% (the biggest economic drop was registered in 1990 and 1996 – 9.1% and 9.4% respectively). After the introduction of the Currency board the growth is positive, more than 4% per annum on average (the fastest growth was in 2000 when it reached 5.4%).

In the period before 1997 the investments (measured by the gross fixed capital formation) were decreasing by 9% annually. After the introduction of the Currency board the investments are increasing by more than 20% on average. This is a reflection of the fact that the money printing, practiced before 1997, does not secure more funds for investments but quite the contrary – it decreases the real investments and savings.

Another thing showing the huge difference between the periods before and after the introduction of the Currency board is the level of budget deficit. Up to 1997 the deficit is 6.3% of GDP per year on average – a strikingly huge number. After the introduction of the Currency board the budget is very close to balanced – there are small surpluses in some years and some small deficits in other.

As a result of the economic slump and the issuance of new debt for the period until the introduction of the Currency board the ratio between the public debt and GDP is 168% on average (the maximum was in 1996 when this indicator exceeded 300%). After 1997 this indicator was gradually decreasing reaching a level of less than 50% in the middle of 2003.

One of the important indicators for the confidence in the economy is the level of foreign investments.  The difference between the period before and after the introduction of the Currency board is more than ten times – between 1990 and 1996 the foreign investment are 63 million dollars on average and from 1997 to 2002 they are 692 million dollars per year. As a share of GDP they increase from 0.8 to 5.6%.

Of course, it will be far-fetched to insist that the faster economic development is entirely because of the operation of he Currency board. Other important reforms made after 1997 should not be forgotten (the liberalization of the internal and external trade, privatization, tux cuts etc.). However, it is obvious that without a stable monetary unit the economic activity is hampered. In that sense the introduction of the Currency board is a radical reform that ensured the one of the necessary conditions for economic development. If all the other reforms were made in such a radical way, Bulgaria would already catch up economically with the countries of Central Europe.

Connecting the analysis with the current problems of the politicians to elect governor and deputy governor of BNB on time a fact should not be neglected – that because of the currency board and the absence of monetary policy this delay in the election will not affect the economy much. If BNB conducted monetary policy, the results of which depend to a great extent on the credibility of the governor of the Central bank, in the following months and even years the Bulgarian economy probably would experience a period of economic and monetary instability. That’s why the existence of the Currency board serves to by-pass even political problems that in other situation would have provoke a crisis.

After all presented above it is natural to reach the conclusion that the Currency board should continue its operation till the acceptation of the euro as a payment medium in Bulgaria (irrespective of when this will happen).