Bulgaria Gets Real about Its Economy

Since Boyko Borisov took over as prime minister, Bulgaria has been more candid and effective about economic reform, but big challenges remain

By Victor Kotsev

Until the parliamentary elections in July, the Bulgarian government appeared to be in denial about the approaching economic crisis. Days after the collapse of Lehman Brothers, and just as financial panic had paralyzed the world, former (Socialist) Prime Minister Sergei Stanishev gave an interview in which he denied the existence of a crisis in Bulgaria and called the country "an island of stability."

Foreign observers strongly disagreed. While the collapse of the Bulgarian stock exchange (which lost about 85 percent of its value in a year and a half) could be explained away as desperate short-selling on the part of foreign investors striving to survive the U.S. subprime crisis, the enormous trade deficit of the country and the many other warning signs could hardly be ignored. A Credit Suisse (CS) global vulnerability report published early this year ranked Bulgaria second most financially vulnerable country on the list, after Iceland (which at that point had just gone bankrupt). Some experts (such as Mary Stokes of RGE Monitor) even questioned the stability of the currency peg – a sacred cow in Bulgarian economics since its inception in 1997 at the International Monetary Fund's urging, and considered by many to be the most important basis of Bulgarian stability.

In this context it is hardly a surprise that last year, when the deputy director of the Bulgarian National Bank claimed that the currency peg was as stable as Orlov Most (one of the symbols of Sofia), many thought it an inapt comparison, and some even privately joked about the demise of the historic bridge. The optimism of the political elite, however, lasted until this year's elections, when a new government headed by Boyko Borisov took over.

In a way, it was a romantic success story for Borisov. While GERB (Citizens for the European Development of Bulgaria), his recently established center-right party, had a persistent lead in the polls, not even the most seasoned pundits were able to predict his sweeping victory and the formation of a single-party minority government (something unheard of in modern Bulgarian history).

The widely assumed corruption and inefficiency of the former government, reflected by constant EU reprimands and blocked union funds, arguably proved crucial; growing nationalist sentiments also helped Borisov. Yet the former coalition's Pollyanna reaction to the snowballing economic crisis at home stands out as a singular factor that added unprecedented urgency to the situation and brought over 60 percent of eligible voters to the polls.

Getting Serious

Immediately after Borisov took office, his team started publishing entirely new figures. The new minister of finance, former World Bank chief economist Simeon Dyankov, announced that the previous government had left a budget deficit of over 1.25 billion euros. It is not entirely clear what the calculation will look like at the end of the year, but Dyankov claimed that the economy would bottom out some time in the coming winter, and that a deficit of more than 1.5 billion euros would be very difficult to cover without external loans.

Emergency measures were announced immediately, targeting two broad areas: government expenditures and the gray economy. Most ministries' budgets were cut by a flat 15 percent, and a number of deals signed by the previous government were revised and canceled, including the lease of two airplanes for the travel needs of ministers. Borisov made it clear that he would not spare even large infrastructure projects should they prove unprofitable or too difficult to fund, and immediately pointed a finger at two Russian ventures: the construction of a nuclear power plant at Belene and the Bourgas-Alexandroupoli oil pipeline. On the gray economy front, he set out to combat corruption and to reform the customs and the revenue collection system.

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