In the third quarter of its landmark year as the EU’s newest member, Bulgaria’s economic challenges have shifted from accession to Eurozone convergence. But notwithstanding years of extensive economic reform – as one of the club’s poorest members, political pressure to ramp up spending remains severe.
Yet finance minister Plamen Oresharski has defied pressure for more populist policies, notably rejecting mounting demands for public-sector wage increases in September 2007. The former director of the government’s debt management office has cautiously maintained fiscal discipline since his appointment in August 2005. In doing so, he has locked in the fruits of unprecedented foreign investment and high employment to bolster the country’s long-term growth potential. While his peers in central and eastern Europe have been racking up public-sector deficits, he has run a fiscal surplus of 3.5% of GDP in 2006, with gross government debt falling to 21% of GDP.
This prudence is not just down to the government’s commitment to the currency board arrangement, which leaves fiscal policy as the only macroeconomic lever to control inflation, Oresharski tells Emerging Markets. It is also a pro-poor strategy, because it boosts private-sector growth to raise ordinary Bulgarians out of hardship.
“The comparatively low level of government expenditure has allowed us to foster economic activity and to lower the unemployment rate to around 7%, which we consider as a more effective tool to address poverty compared to the traditional understanding that the state can improve the situation by giving out social assistance to individuals and households with a low standard of life”.
Such discipline has won the minister praise from investors as well as reducing the country’s risk premium, according to David Heslam, director of emerging European sovereigns at Fitch Ratings. “Both stand-alone and relative to his peers, he has adopted a strong fiscal policy. And to justify such a strong position in any country would be difficult, so I think he has done very well,” Heslam tells Emerging Markets.
Even so, inflation, expected at 8% in 2007, will remain an obstacle to Eurozone convergence. As there is little room to run an even larger fiscal surplus, Oresharski pledges new economic reform efforts to improve the flexibility of the country’s labour market and business environment, helping to ensure that wage gains are accompanied by productivity growth. “As regards the labour market, we will concentrate our efforts to increase its flexibility, attract more people to employment and thus provide the economy with one of its most important growth factors.”
In a period of global financial turbulence, Bulgaria’s current account deficit, which will reach 20% this year, is a further challenge to economic stability. So far, Oresharski has clearly demonstrated his awareness of these risks, alongside an understanding that reaping the maximum benefits of EU membership requires sustainable and well-considered policies. The upcoming 2009 election cycle will be a key test of whether he can keep his eye fixed on the far horizon rather than on immediate political pressures.