GDP in 2006

The National Statistics Institute recently released preliminary data for the gross domestic product (GDP) in 2006. Apart from this, data since 2002 were revised leading to significant difference in some indicators. The real growth rate of the Bulgarian economy keeps its pace although there is a slight deceleration since 2004.

The key precondition for the positive development of GDP during the last few years is the expanding of economic freedom. The reforms virtually commenced in 1997. They include privatizing state owned assets, especially before 2000, liberalization of some industries, reducing the control on prices and wages by the government. Introduction of the currency board provided stability of Bulgarian lev calming the inflation expectations. The capital controls to and out the country were removed thus giving chance for larger capital inflows and foreign investment. Labor market regulations were relieved, the power of labor unions decreased thus raising the flexibility.

The consequence of reforming was the fast development in financial sector where the higher competition led to supply of larger number and more attractive products. The access to credit is easier for the companies at more favorable terms. As a whole, the efficiency of resource allocation rose, which means higher productivity, more chances for profits and capital accumulation and real economic growth.

Of course, there are some factors which impact on the growth rate and its long term potential is negative. These are insufficient level of property rights protection, complicated and expensive procedures for collection of claims, declining efficiency of public administration and healthcare system, worsening quality of education.

The result of the central bank and government policies and predominantly of the activities in the private sector is 6.1% real growth of GDP in 2006. According to revised data, there is a slight slow down relative to previous couple of years when the real rate is 6.6% and 6.2% respectively (it was 5.6% and 5.5% according to previous data). The revision is for the period between 2002 and 2005 and changes are due to the foreign trade data by the Bulgarian National Bank as well as the reporting of adjustments where a new methodology for indirectly estimated services of the financial intermediaries is applied (FISIM).

For three years in a row there is a real growth rate exceeding 6%, which is the best result for the Bulgarian economy since the beginning of reporting. The growth rate of GDP per capita also declined from 7.2% in 2004 to 6.8% in 2005 and 6.7% in 2006 and the real income per person in the country is still about 1/3 of the EU average.

The increase of gross value added (GVA) in real terms is 6% in 2006 meaning that the trend is reverse to the GDP. The rate is higher since 2003 (4.2%). The highest real growth rate in 2006 is in the industrial sector (8.3%), while in services it is 6.1%. The reasons for this is the higher investment in these sectors, favorable conjuncture on the international markets, especially for the heavy industries, and greater competition in services.

As the climatic factors led to significant slump in 2005, the expectations for 2006 were for recovering of production in the agriculture given the more favorable weather conditions. This did not happen and the real decline is 1.9%. Some of possible determinants are the insufficient level of investment, small agriculture land parcels, the lack of infrastructure for selling of production. As a result the share of agriculture sector in the GVA fell to 8.6%.

After the data revision there are no data for the value added by the type of ownership thus hampering the comparison. Previous data unambiguously showed that the source of growth for the economy was the private sector where the productivity was higher and rising while in public sector it was exactly opposite. Such limitation of the scope of easily accessible data is not recommendable but probably it is done because of the implied lower efficiency of the public sector.

Investment expressed by the gross capital formation reached 31.9% of GDP, while the gross savings are 16.2% of GDP. Therefore savings from abroad are needed to finance investment leading to a current account deficit. Government policy for a budget surplus and the policy of the central bank to restrict the growth rate of crediting probably lead to lower inflation but also to lower production of goods and services. Public savings limit the possibility for private ones by taking the resources from private sector. Part of these savings were spent at the end of 2006 which is reflected by the data. During the first 9 months of the year, the collective consumption was smaller than in 2005 in real terms by 1.1%, while in the last quarter of 2006 the real growth rate is 7.8% leading to a growth of 1.7% for the whole year.

Lower efficiency of public spending than private means that redistributed funds by the government could find more productive use in hands of their creators. In 2006 the opportunity for significant reduction in tax burden was again wasted which could have a positive impact on the supply side of the economy. The reduction of social security burden was 6 percentage points had the expected effect but it was not sufficient. The overall budget revenues were initially underestimated leading to higher than expected by the government revenues. The positive development is in terms of budget spending which share fell to 37.2% of GDP while it was 38.9% in 2005. Budget revenues had still a high share of GDP 40.8%. Therefore, the government redistributes large proportion of generated income which is one of the limitations before the higher long term growth potential.

Revised GDP data showed a picture for the Bulgarian economy which is slightly different from previous one. The real growth rate in 2006 is not the highest one but they are lower than in 2004 and 2005. Apart from this available data do not allow comparison with years before 2002 as they are not revised. Given that the analysis of the current state of the economy and the past development should be made cautiously. Still, the broadened economic liberty is fruitful which lead to higher long term growth and more opportunities for investment and profits.