Establishment of State Export Bank – Does It Have To Be Done?

The Sixth roundtable organized by the prestigious newspaper The Economist was conducted in March. During the discussions, the idea for the establishment of a new state-owned bank aimed at a more active and focused policy for promoting the Bulgarian export. The rationale for this suggestion was that the export and import should be balanced.

It seems like the data revision has not relieved the authorities although the current account deficit was substantially lower compared to the previous data. According to the new methodology, the current account deficit was 5.8% of gross domestic product (GDP) instead of 8.5% of GDP in 2004 and 11.9% of GDP instead of 14.9% of GDP in 2005. Resulting from the new methodology, the negative trade balance rose (from 14 to 15.2% of GDP in 2004 as well as from 19.3% to 20.6% of GDP in 2005) and probably has raised concerns among the Bulgarian government officials.

Different ideas addressing the “issue” with the current account deficit were presented during the last few months – increasing the value added tax rate, introduction of import taxes and more comprehensive export strategies. These measures as well as the establishment of an export promotion bank would not have a real effect. National practice shows that different existing state institutions aimed to some extent at stimulating the export. Those are the Bulgarian Export Insurance Agency and the Encouragement Bank. However, according to the government officials, their functions are quite limited and the results are vague.

At present, the number of licensed banks and branches of foreign banks in Bulgaria exceeds 30 [1] . Apart from this, the possible accession of Bulgaria into the European Union would allow the banks licensed by the other EU members to operate in the country. Hence, if the rulers assess the banking system functioning as unsuccessful, the entry of new players into the market in relatively short period would inevitably have a positive influence over the bank sector competition.

The operational results of the commercial banks, however, do not support such doubts. Since a massive privatization of bank system was implemented, only the Encouragement Bank is still owned by the state and the Sofia Municipality owns over 50 percent of the Municipal Bank. Therefore, the greater share of the banking system is private and is owned by foreign investors who have experience and skills in banking. Thus, it is hard to believe, that banks operating in Bulgaria would not provide financing for successful projects whether they are directed toward the external or to the internal market.

The development of banking during the last years shows that the credit activity has significantly risen. This activity has even induced a strong reaction by the central bank aimed at limiting the rate of increase of credit volume. According to the author's calculations based on the Bulgarian National Bank data, the long-term credits for non-financial enterprises which are supposed to be the source for the country's export has continuously risen since 2001. The growth is around 71 percent in 2002, around 65 percent in 2003, 49 percent in 2004, and 31.2 percent in 2005 respectively. Apart from this, the interest rate on these loans has lowered substantially from over 13 percent in 2001 to around 10 percent in 2005. Therefore, there is a strong positive development in bank credits.

However, the state or any of its agencies is not the determinant for this tendency. The retraction of the state from this industry is thus proven to be successful and has a clear result. Of course, the international conjuncture should be taken into consideration, which also contributed to a large extent to the growing volume of credits. The other determinant is the increased competition among private banks as well as better management and information systems that allow processing a greater number of credit requests.

In these circumstances, the government interference through the establishment of new bank looks inappropriate. There would not be an effect from such a bank. It would probably be used for granting credits with lower than market interest rate for projects that would not be financed otherwise. Hence, the government would virtually lower the economic efficiency directing resources to such projects. This, in turn, would reduce the resources available for other projects. So, the government would support less productive projects at the expense of better ones that could be financed by already existing banks.

One should not omit that the new bank would be capitalized with the taxpayers' money. The presence of fiscal reserve account exceeding EUR 2 000 million is at a great value for the ruling majority to undertake a massive investment program. However, as it was already mentioned, the effect from these measures is rather populist. Their purpose is to show the government's concern for a particular “problem” but they do not really solve it. It is also logical to suppose that this state-owned bank would be used for granting loans to companies related to the government officials. Hence, it is possible to create a situation for higher corruption. Banking management also would increase the number of palatable positions that could be divided between the coalition partners.

The conclusion from the specified arguments is that an establishment of something unnecessary for the economy is suggested and the effect from this would not be higher export. Instead of establishment a new bank, the government has to conduct measures aimed at better business environment in Bulgaria. Banking is a good example showing that foreign and local investment and the competition lead to positive development and this is beneficial not only for the banks but also for the population as a whole. It was achieved by opposite measures like retraction of the state from this industry. This is the exact way for the rest of the economy – broadened liberty and less government interference.