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Text File | 1994-05-02 | 18KB | 363 lines

<text> <title> Bulgaria: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Bulgaria </hdr> <body> 1. General Policy Framework Bulgaria in December 1990 faced a serious recession. First, the previous socialist (formerly communist) government cut Bulgaria off from external trade financing by imposing a debt-service moratorium in March 1990. Second, the socialist government failed to control macroeconomic factors such as the government budget deficit. Third, Bulgaria's terms of trade and foreign markets collapsed, especially in the Council of Mutual Economic Assistance (COMECON). Finally, sanctions against Iraq hit Bulgaria particularly hard: Bulgaria could collect neither Iraq's large trade debt nor receive substantial deliveries of contracted oil. In February 1991 the new coalition government introduced a three-part economic reform package: 1) macroeconomic stabilization in conjunction with the International Monetary Fund (IMF); 2) preparation for a World Bank structural adjustment program through passage of legislation conducive to an open economy; and 3) unilateral liberalization of the trade regime as a first step toward accession to the General Agreement on Tariffs and Trade (GATT). Stabilization required a normal range of monetary policies: the government established internal convertibility with a floating unified exchange rate; freed almost all prices; raised interest rates; subsequently and periodically adjusted the discount rate and reserve requirements to control bank liquidity; and imposed credit controls. Exports of U.S. capital goods and other industrial inputs were adversely affected by the tight monetary policies, devaluation of the Lev, and continuing lack of external trade financing. Despite an average fall of 65 percent in the standard of living over 1991, exports of U.S. consumer goods, including automobiles, have risen given the relative weakness of the dollar versus European convertible currencies. On the fiscal side, the government cut the cash budget deficit by reducing subsidies and outlays for military and capital projects. It created a government securities market to fund half the deficit through issuance of treasury bills. Government and business observers expect a secondary market to develop in 1992. The deficit and its monetization through central bank credits remain larger than planned owing to a heavier than expected burden of social safety net payments. While continuing its debt-service moratorium, the government has borrowed extensively from the IMF, World Bank, and Group of 24 to support its balance of payments. The government announced tax reforms to move from an unwieldy system of turnover taxes to a combination of value added tax, profit tax, and income tax. Relatively high marginal rates of the new system remain a disincentive to U.S. investment. A severely restrictive wage policy was relaxed in November 1991, leading to inflationary pressures. Preparation for structural adjustment included passage of laws on accounting, restitution of agricultural land, protection of competition, protection of foreign investments, and a commercial code. The government also decentralized the largest state enterprises by breaking them up. These structural changes have not yet led to creation of free wholesale markets or ended retail price maintenance: factories still set prices and margins all the way to the retail level. Distribution networks remained monopolistic throughout 1991. The government appointed in November 1991 intends to pass a privatization law and to amend the foreign investment and land restitution laws to make conditions more attractive for foreign investment. 2. Exchange Rate Policies In February 1991 the government floated the Lev against convertible currencies at a unified exchange rate. The transferable Rouble (TR) is no longer used in Bulgarian foreign trade, but the government has had to adjust the Lev:TR coefficient for outstanding TR balances. The Central Bank sets an indicative daily U.S. dollar rate for statistical and customs purposes, but commercial banks and others licensed to trade on the interbank market are free to set their own rates. A parallel market operates openly, if illegally, offering about a four percent premium. The Central Bank lacks sufficient reserves to hold the dollar to any given range. With the Lev at an average 18 to the dollar, U.S. exports are expensive, but for goods such as autos and some machine tools the United States remains fully competitive with Western Europe and Japan. Only few commercial banks are licensed to effect currency operations abroad. Companies may freely buy foreign exchange for imports from the interbank market. Bulgarian citizens may buy only 50 dollars' worth of hard currency per year. Companies are required to repatriate, but no longer to surrender, earned foreign exchange to the Central Bank. Bulgarian citizens and foreign persons may also open foreign currency accounts with commercial banks. Foreign investors may repatriate 100 percent of profits and other earnings; treatment of capital gains remains ambiguous under the current foreign investment law. A permit is required for hard currency payments to foreign persons for direct and indirect investments and free transfers unconnected with import of goods or services. 3. Structural Policies Bulgaria's new market-oriented laws on accounting, land reform, competition, foreign investment, and the central bank and commercial code do not inhibit U.S. exports, which are more affected by the government's tight monetary policy. However, the restrictive nature of the land reform and foreign investment laws will inhibit U.S. investment until they are amended by the new government formed November 8. The government intends quickly to pass laws on privatization, intellectual property rights and commercial banking, as well as to revise the labor code. As a first step toward large-scale privatization, the previous government decentralized ("demonopolized") the country's 160 largest state enterprises. Management and marketing inexperience in many of the resulting autonomous firms has led to at least two potential major breaches of contract in 1991 against U.S. firms. While these cases were successfully resolved, one can expect a certain unpredictability in commercial dealings until privatization is well rooted. Of major interest to U.S. business will be forthcoming revisions to the tax structure, including introduction of a value-added tax in mid-1992 in place of the current turnover tax and plans to consolidate and lower some rates. Aside from the turnover tax, other major taxes currently applied include a general income tax and corporate profit tax. While average tax rates are relatively low according to the IMF, marginal tax rates are too high to stimulate the economy according to U.S. experts. In 1991 most of the tax burden fell on corporate profits, which created a significant drag on companies' ability to import capital goods and inputs. The government plans to offer new private firms substantial profit-tax relief for the first three years provided that they create jobs. There is no export tax, but a temporary 15 percent import surcharge on some products and a one-half percent customs tax. 4. Debt Management Policies Bulgaria's former communist regime more than doubled the country's external debt from 1985 to 1990. With more than 10 billion dollars outstanding, the government declared a debt service moratorium in March 1990. Bulgaria services three small convertible currency bond issues. Of Bulgaria's current 12 billion dollar debt, more than 80 percent is owed to foreign commercial creditors; almost half of the commercial debt is trade financing. The cutoff of trade financing by Western banks in the wake of the moratorium remains the main barrier to imports from the U.S. and elsewhere.