Bulgaria Economic Development

According to National Statistics Institute data for the first quarter of 2005 real gross domestic product (GDP) has increased by 6 per cent. These data are preliminary and will be revised at the end of 2005 but are good basis for analysis.

Gross value added (GAV) increases by 7.1 per cent. The main contributor for this development is the industry with real growth of about 8.2 per cent and services add 7.4 per cent more value but the agriculture sector has shrunk by 1.7 per cent in real terms.

Closer look at the industrial production data shows that the growth for the first quarter of the year has been decelerating after 2003 when it was 18.7 per cent and it was 14.8% and 11.1% for 2004 and 2005 respectively. This may hinge on seasonal factors because the growth in industrial production for the whole year has been rising after 2001. The annual growth has been 2.2% in 2001, 4.6% in 2002, 14% in 2003, and 17.7% in 2004.

Growing part of the value has been added by the private sector which real growth is 12.7 per cent in Q1 2005 relative to 7.4 per cent in Q1 2004, while the public sector has decreased its value added by 8.6 per cent. Privatization of the state owned enterprises is one of the major determinants of this development but on the other hand the number of employed persons in this sector has continuously risen. This means that this sector’s efficiency is even lower and it has become even greater burden for the whole economy. Larger public sector employment is actually deprives private companies of labor and money to pay bureaucrats’ wages. This impedes the economic development and is an obstacle to the real growth acceleration.

The adjustments has been shrunk slightly (-0.1%) differing from the last year data. Then, there was fast development in the financial sector, mainly the banking, which is accounted in this item. After the credit restriction measures taken by the Bulgarian National Bank it is logical the growth rates to decelerate which probably would take effect in Q2 2005. Therefore we could expect a moderate growth in 2005.

The main GDP components – final consumption, gross fixed capital formation, export, and import have also realized a real growth. However, higher growth of final consumption causes a fall in gross savings to GDP ratio after five consecutive quarters of increase. Savings are the source of investments in the economy, which share in GDP is relatively constant and this leads to a higher current account deficit and a financial account surplus because savings are actually imported from abroad.

Growth of gross fixed capital formation has decelerated to 9.2 per cent in Q1 2005 from 22.1 per cent in Q1 2004. This can be an indicator for slower economic growth in the next quarters because the trend during the last years is that lower investment growth leads to lower GDP growth.

One should note that part of the positive economic development is determined by the monetary expansion through low interest rates kept by the European Central Bank. This has directed capital flows to higher return countries like Bulgaria. Although we cannot expect a change in ECB’s policy in 2005 this will happen later. Then, the economic growth would probably fall if the business environment has not changed positively by giving people more economic freedom.