Bulgaria prospers by taking politics out of banking

Liberal economic policies in Bulgaria are yielding results, say observers. Since 1996, Bulgaria's formerly state-owned banks have been privatised, foreign investment has been liberalised and monetary policy has been abandoned.

Bulgaria lacks a monetary policy because it has put in place an institution that is designed to maintain the value of the currency, rather than manipulate the economy.

In the old days, politicians made all the decisions and financed pet projects out of the state-owned banking system.

But the financial sector nearly collapsed from 1996 to 1997, when Bulgaria's currency, the lev, slumped disastrously, from 71 to the U.S. dollar to 3,000 to 1; and many Bulgarians lost the savings they had deposited in the state-owned banks.

Bulgaria then began selling state-owned banks, so a central bank is no longer required to pump money into ailing, mismanaged financial institutions.

It set up a currency board, which pegged the lev firmly to the deutsche mark and later the euro, automatically adjusting the lev's value to movements of the core currency, so that a central bank was no longer needed.

The last state savings bank was sold last month, and because of liberal foreign investment rules, some 90 percent of Bulgaria's private bank assets are controlled by foreigners who have poured capital into the country.

So how has Bulgaria fared from its successes in taking government and politics out of the financial sector?

Its inflation rate, once in the triple digits, is now about 1 percent.

Its economic growth rate is 5 percent.

Bulgaria's national debt, which was climbing to around 100 percent of gross domestic product a few years ago, is now about half that.

It is on track to join the European Union in 2007.

Source: George Melloan, Enlisting Banks in Public Policy Courts Trouble, Global View, Wall Street Journal, July 1, 2003.

For text http://online.wsj.com/article/0,,SB105701664945746200,00.html
For more on Bulgaria http://www.ncpa.org/iss/int/

FMF Policy Bulletin/ 8 July 2003