Overheating?!

According to the European Commission and other international institutions the economy of Bulgaria (as well as Latvia and Estonia) is overheating for a consecutive year – the credits increase, respectively increases the difference between solvent demand and the products produced, inflation is increasing, the external misbalances are growing and as an overall result are reduced the competitiveness of the country and its perspectives for development. Respectively, measures had been always recommended, which at least according to the basic economic theory must alleviate or delay the misbalances between supply and demand and reduce the existing risks. The question is whether or not all this is true and whether or not the use of standard mechanisms for solving such problems – limiting of credits, withdrawal and retention of financial resource from the people and the companies, exceeding the state expenses (which are large any way) – are most suitable and the only measures. With respect to the first part of the question – yes, the credits increase even with reduced rate, the inflation particularly for 2007 was high and the difference between imports and exports was increased. However, whether or not these must raze particular concerns, respectively to undertake measures for speedy counter action is something different. The changes in the above indicators are not caused by or assisted only by developments in the national economy such as increased solvent demand. During the last fifteen months   the price of petrol was increased by over 50% – from about $65 per barrel to $100 per barrel (compared to the end of 2001 the price of barrel of petrol was less than $20). In addition, during 2007 the agricultural harvest was worst than expected on a World scale, which combined with the high prices of energy resources affected all other prices. In the financial sector, the mortgage crises in the USA and the consequences form it there and around the World reduced the liquidity of the investment market, respectively leading to reevaluation of the ratio risk-profit in search of higher profits or lower risks. The lower international liquidity and the higher discretion, the other conditions being equal should lead to reduction of the investments in the country, respectively reduced pressure on the prices to go up and fewer generators of import and external imbalance (in the short term).  Although in the last four months a noticeable outflow of foreign investors could be seen on the Bulgarian Stock Exchange, in the real sector this is not the case it seems and the expectations are for an increase of the direct foreign investments during 2008. Or with other words, as a whole the higher incomes and credits should not be viewed as the only or the fundamental factor for a "riskier", according to many analysts macro-economics, situation in Bulgaria.  

On the other hand is the question whether and how efficiently are used the low standard mechanisms – limitation of credits and fiscal holding back of the incomes – aiming to overcome the existing disproportions in the foreign trade and the achievement of lower inflation,  In reality, after the introduction of the restrictive measures by the Bulgarian National Bank, including by increasing the minimal mandatory reserves, the rate of growth of the new credits was reduced. However, there is growing crediting through non banking institutions, such as leasing companies, as we;; as the merchants themselves, which are outside on the regulation scope of the central bank.  In other words, the measures taken to limit the growth of consumption would not act as intended. At the same time, they reduce the liquidity of the banks and make their functioning less efficient.  With respect to the fiscal measures related to withholding income through budget surpluses, which are even grater than those required by the European Commission, it is very likely that they would not have a significant effect with respect to the pointed out as fundamental for Bulgaria problems – high inflation and negative balance of the current account. This is so, because there are possibilities to undertake additional credit obligations, if there is a will to consume, as well as to use savings from the past. Second, the higher withholding of income, according to the current taxation system has relatively higher negative effect on the lower income groups, which are not generators of the external imbalances (they consume mainly domestic consumer goods and do not buy expensive imported goods). Third, the budget surpluses or part of them could be spent very quickly (as it happened around the end of last year with  over 1 billion levs) and certainly more inefficiently than if they were spent by the people who earned that income, hence it does not make sense to talk about desire to fight inflation through reduction of spending. Fourthly, the level of inflation and the difference between imports and exports are a function of the international prices, as well as the level of difference between the national prices and those of the neighbors or the economic group to which one belongs.  Thus, if the price of oil reaches for example $200 per barrel (as the president of Venezuela threatened) regardless of the efforts of the government it would not be able to hold down the prices (if it is done by administrative measures, than a lot of companies would fail and there would be grater unemployment).   Fifth, part of the inflation and the external imbalances are generated by administrative definition of the prices in the economy – electric current, water, gas, central heating. According to some estimates, the renegotiation upwards of the prices of energy raw materials from Russia to Bulgaria would increase the trade deficit with over 2% of the GNP and would surely affect the inflation along the production line.  

In conclusion, one could say, that the statements by the representatives of the Commission and other organizations are fare fetched and not well founded from the economic point of view. A proof of that could be the fact itself that in the last at least 3-4 years there was talk about over heating of the economy and great imbalances; however nothing happened with the exception of the improved standard of leaving of the Bulgarian people.

In this sense the Government must not make an effort to limit this or that, since there are few things in the real economy which could be controlled or it makes sense to control.