GDP in 2005

Preliminary data for the gross domestic product (GDP) in 2005 were released recently as well as revised data for 2004. Real GDP growth in 2005 is 5.5 per cent, which was not a surprise for the independent analysts and for the government agencies’ experts. Some difference from the expected level can be found in the nominal GDP that reached BGN 41 948 million which means that the nominal growth is 9.6 per cent. The growth rate has slowed down relative to 2004 in real and in nominal terms which can be accounted as an unfavorable development for the economy.

Real growth rate of the gross value added (GVA) is 5.1 per cent and is also slower than 2004 (5.4 per cent). The tendency during the last few years is for the GVA to increase fastest in real terms in the industrial sector and in 2005 its growth was 7.3 per cent while the growth in services is 6.6 per cent. One of the reasons for this positive development is the increasing share of private property in these sectors due to the privatization and the natural emerging of new enterprises in the country. During the last year as well as the preceding years some measures were taken which created a better environment for business and the most substantial one is the reduction of the corporate tax rate to 15 per cent and the lowering of labor taxation. Unfortunately, the chance for more sizable changes in tax legislation was missed because of the implemented policy for fiscal surplus. Thus more money than needed for financing the superfluous expenditures of the government was taken from companies and citizens.

In 2005, the ratio between the revenues in consolidated government budget and the GDP reached its highest value after the introduction of the currency board which implies that the total tax burden on the economy has risen. Thus the government restricts the freedom of Bulgarians to dispose the income they produce and reduces their incentives to work and to take a risk by entrepreneurship that, in turn, lowers the opportunities for higher economic growth.

Indeed, higher economic growth is a necessity for Bulgarians because the level of their income is still too low relative to the citizens of the European Union 25 (31.8 per cent) and relative to these of the United States (20.9 per cent). However, this is determined to a great extent by the labor productivity, taking into account all the inherent shortcomings in calculation of this indicator, which is 32.5 per cent of EU 25 average and 23.7 per cent of this in the United States.(1)

While one can observe real growth in the sectors of industry and services, this is not the case in the agriculture where the physical volume of the production falls by 8.4 per cent in 2005. The influence of floods is visible at the greatest extent precisely in this sector although the effects stemming from it spread into the other sectors. Measures taken by the government were not adequate and granted funds did not achieve the desired results. Their utilization was nontransparent and almost unnecessary due to the way it was done. The lack of development in the agriculture is a substantial problem and if there are more floods again in 2006 the results will be similar.

Private sector share in the value added continues rising because of the tendency of its production to increase while that of the public sector decreases. While in previous years it was due to the privatization of the state-owned enterprises, in 2005, due to the parliamentary elections, the privatization process virtually stopped. Hence the amount of the state property did not change significantly, the number of employed persons in this sector rose but the “value added” dropped down by 5.2 per cent.(2) The private sector is the real engine of the economy and it created sustainable new jobs thus expanding the employment as a whole.

The other important elements of GDP are the adjustments which include net taxes on products and indirect assessment of the financial intermediaries’ services. Dynamic development of crediting during the year and the rise in excises on some goods led to real growth rate of 8.1 per cent which is slightly higher than the rate in 2004. It looks like the attempts of the central bank to restrict the credit expansion have not affected the results of commercial banks in full strength in 2005 but one can expect that this would happen in greater extent in 2006.

The final consumption in 2005 accelerates its growth to 6.8 per cent from 5.1 per cent in 2004. Individual consumption has a larger contribution for this because it increases by 7.4 per cent while collective consumption rises by 2.2 per cent. The development during the last quarter is of particular interest because the collective consumption falls by 4.7 per cent which is a significant difference relative to the situation in the preceding years. Then, the growth rate of this indicator was the highest exactly in this quarter (in 2004 it is 7.8 per cent, in 2003 it is 8.2 per cent, in 2002 it is 8.3 per cent). Collective consumption is a measure for government’s expenditures on collective services like maintenance of settlements, scientific research, administration, defense and security of the country. Reducing these costs represents a positive development because their size is too high relative to the results which stem from them.

An important role for this progress is played by the persistence of the International Monetary Fund officials for a fiscal surplus which forced the government to limit the unnecessary spending at the end of the year. An example for such spending was the situation at the end of 2004 when a company for public investment projects had to be created because the government was not able to spend the money as was planned. Apart from this, in 2005 the amendments in legislation were made that limit the opportunities for budget spending without the approval of the parliament.

The rise in consumption, however, contributes to a fall in savings in the Bulgarian economy. Gross savings in 2005 represent 16.9 per cent of GDP while they were 19 per cent of GDP in 2004. This development is combined with a rise in investments measured by gross fixed capital formation which reaches its highest ratio to GDP since the democratic changes of 23.8 per cent. The result is a higher current account deficit due to insufficient savings to finance these investments. If the direction of these two indicators retains in 2006 one can expect higher deficit in the current account of the balance of payments.

The real growth rate of the GDP in 2005 is significantly higher than the EU average which is around 1.6 per cent but, on the other hand, it is lower than in Latvia – 10.2 per cent, Estonia – 9.8 per cent, Lithuania – 7.5 per cent, Czech and Slovak Republic – 6 per cent. These countries realize higher growth at higher base. Hence, the real divergence of Bulgaria from them is even larger. Data for these countries are indicative that the economic policies implemented by their governments during the last years are successful. These policies are directed toward broadening the economic freedom, lower and flatter taxes, facilitating starting and doing business, and advancing the protection of property rights. Some aspects of these policies were adopted in Bulgaria but, unfortunately, the political will for faster and deeper reforms that could accelerate growth is absent. For this reason one cannot expect that this will happen in the next few years and the incomes in the country will remain low for a long time to come.

 

 

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(1) Data are taken from Eurostat.

(2) One can argue if the public sector really adds value to the economy. This that is actually done in this sector is a redistribution of the value added in private sector.


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