Economic Policy Review ISSN 1313 - 0544

GDP in First Quarter of 2006

Author: Dimitar Chobanov / 29.01.2007
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Preliminary data for the gross domestic product (GDP) in the first quarter of 2006 have been recently released. The real GDP growth rate for the period has been 5.6 per cent while the real gross value added (GVA) has increased by 6.4 per cent. Thus the trend for annual economic growth close to 5% that started since the first quarter of 2004 continues.

The key factors for this positive development are the following. One of most important is the established and well-functioning currency board. It determines the relative stability of the Bulgarian Lev from an internal (in terms of goods’ and services’ prices in the local economy) and external aspect (in terms of other currencies). The ability of planning revenues and expenditures at firm level is increased as the total uncertainty in the economy is reduced, thus leading to better business environment.

The next factor contributing to the maintenance of sustainable economic growth is free trade. It is well known that free exchange is a result of the mutual interest of two (or more) sides participating in it. Hence the value each participant places on the thing he or she receives is higher than the value of whatever he or she gives in exchange. Therefore both sides win and are better off when they are allowed to trade freely.

This is valid for exchange on the internal as well as the external market. The process of removing the obstacles to trade (reducing custom duties and other restrictions) related to the European Union integration of Bulgaria and market liberalization in the country have led to greater freedom for individuals, easier access to deeper markets, expanding opportunities to choose where to buy or sell specific good or service.

Directly linked to the EU accession and the normal functioning of the currency board is capital liberalization. It provides investors with the chance to allocate their capitals efficiently, to diversify their portfolios according to their willingness to take risks and, ultimately, to generate a profit from their investment.

While there has been an improvement in these factors in the last years, the conditions are not so great in terms of property rights protection and rule of law. Although some measures have been taken, reforms are protracted and the judicial system is not effective, which is a significant obstacle to acceleration of growth rates. An incentive for the local as well as the foreign investors is to receive and use the fruits of their efforts, which is not sufficiently guaranteed by the valid legislation and government institutions having to enforce it.

The next factor suppressing faster development in the country is the high level of taxation. Amendments in tax laws during the last years have resulted in change in the structure of revenues in a consolidated budget; the share of direct taxes has declined on the account of indirect ones. But redistribution of the generated income in the economy through the budget has even increased to a level of around 43%, meaning that the government takes large portion of individuals’ incomes in one way or another. Creating incentives for labor and entrepreneurship by letting persons decide how to use their money is the way to achieve faster economic growth.

Moreover, the tendency since 2004 is for keeping a large budget surplus, which means that more money is taken from the taxpayers than is needed to finance the excessive consolidated government expenditures that are ineffective. This money (of course, not the whole amount) could be used for investment, which would, in turn, contribute to the acceleration of income growth. This alternative is missed when posing the argument that a current account deficit should be offset by government saving.

What are the effects of those factors? The positive development of GVA is due to industry (real growth rate of 8.8 per cent) and services (6 per cent), while agriculture has contracted by 2.7 per cent. Basically, the share of agriculture has declined on account of the other sectors, but the seasonal character of agriculture should be taken into consideration. Still, in the next quarters a positive growth could be expected in this sector keeping in mind the low base from 2005 caused by the floods.

Concerning the issue about the engine of economic growth in Bulgaria, it is clearly the private sector. The GVA in it has increased by 8.8 per cent while in the public sector it has fallen by 4.2 per cent. This result for the public sector is indicative, and the negative development during the period could not be attributed to privatization because it has been virtually stopped. So, the efficiency of this sector continues to be low considering ever growing costs.

Final consumption has realized a real growth rate of 4.8 per cent because of growth in individual consumption by 5.4 per as well of collective consumption by 0.1 per cent. Implementing policies aimed at limiting the increase of collective consumption consisting of state administration, defense, scientific research and maintenance cost for the settlements is positive because of low (or zero) effectiveness and lack of reforms thus reducing the chance for any improvement.

The share of consumption in GDP calculated on annul basis has reached 88.9 per cent, which is the highest value for this indicator according to available data. Following that, as well as lower net transfers and income from abroad, gross saving has decreased in nominal and real terms. Its amount on an annual basis is around EUR 3.5 billion and its share in GDP is 15.9 per cent while the value of same indicators for the first quarter of 2005 is EUR 3.67 billion and 18.4 per cent of GDP respectively. It could be attributed to growing propensity of Bulgarians to present rather than future consumption because of easier access to credit.

Investment measured by gross fixed capital formation has grown by 21.4 per cent in real terms, thus keeping the tendency for accelerating this rate in the last two years. The share of investment has reached 24.5 per cent of GDP on an annual basis that is the highest value of this indicator, and it is a prerequisite for future real income growth. As domestic saving has decreased, a larger share of investment is financed from abroad. The ratio between domestic saving and gross fixed capital formation on annual basis has continued to fall, reaching 65.1 per cent while it was 91.1 per cent in the last quarter of 2004.

As a result of growing import of saving, the current account deficit has widened. Import growth has exceeded that of exports in nominal and real terms. Along with this, the ratio between those components and GDP has also grown as well as the openness of the economy.(1)

GDP data show positive economic development but the crucial fact is that the government’s policy does not support it. The lack or protraction of reforms lead to keeping growth rates close to current values but not to their acceleration. However, such delays mean missed opportunities in the future in terms of lower incomes and welfare. Apart from this, reforms would be beneficial for the government itself because of the EU requirements that have not been fulfilled yet. Expanding the economic liberty, lower taxes and well functioning judicial system should be the key aspects of government’s policies.

 

 

 

 

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(1) This indicator is calculated as a ratio between the sum of export and import to GDP.