Dimitar Kostov, deputy governor of the Bulgarian National Bank and formerly the country's finance minister, said that an improved investment environment would be the best means to avert the risks of imbalances getting out of hand in the fast-growing economy.
In response to questions from Emerging Markets, he said he was not immediately alarmed by Bulgaria's current account deficit, which reached 16% of GDP in 2006.
"Of course, the central bank always has stability as its main concern. But the biggest component of the current account deficit is investment in the construction of the economy, which is an unavoidable part of transition," Kostov said, speaking at the EBRD annual meetings in Kazan, Russia.
He anticipated that the high deficit would continue as long as strong levels of foreign direct investment were sustained, as these are bringing with them strong demand for capital goods imports.
As the Bulgarian currency is fixed to the euro via a currency board arrangement, tools for monetary policy are limited, potentially leaving the burden for cooling the economy on the fiscal side. However, Kostov cast doubt on whether the government could push much further in that direction, having already recorded a budget surplus of 3.6% of GDP in 2006.
“I don’t think there are any similar cases among emerging markets,” Kostov said, referring to the fact that other non-oil economies are not recording such large surpluses. “Even this has its limits; you cannot run a 16% budget surplus to close a 16% current account gap.”
Kostov was satisfied that the level of prudential supervision and enforcement were sufficient to avoid severe deterioration in credit quality as a result of the boom, but added that these measures were unlikely to curb actual rates of credit growth significantly. “We introduced additional prudential requirements in 2006, but these did not have a noticeable macroeconomic effect, so we have removed them.”
This leaves few options to keep the economy on a balanced path, but Kostov emphasized that he was not immediately concerned over macroeconomic stability, due to the high coverage provided by foreign exchange reserves under the currency board, and urged the government to use microeconomic reforms to strengthen the outlook for sustainable growth in Bulgaria.
“The best way that the government can maintain growth prospects in the future is to focus on improvements in the business environment,” Kostov said. “This will help to make sure that investments are well directed, keeping the proportion of non-productive import consumption under control.”