Economic Policy Review ISSN 1313 - 0544

Trade Deficit?!

Author: Petar Ganev / 09.04.2009
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One of my main claims in the article published a week ago "The Growth of GDP and the problems during 2008" was that the foreign trade deficit was not Bulgaria's most serious problem in the last year and that actually the deficit was created by something good - the record breaking for the country inflow of foreign investments. My other position, respectively, was that during the crisis, when the foreign investors are pulling out of Bulgaria and our foreign trade is shrinking, that would lead to reduction of the trade deficit.

Now, a week later I must return to my earlier claim mainly because once again the media presented the thesis that the crisis would make the lev stronger, which respectively would increase the trade deficit, which would require financing from the currency reserves, which would lead to significant shaking of the currency board. This thesis was stated even by the former prime minister of the country ("The Bulgarian crisis and the anti-crisis policies", Ivan Kostov), who practically used the words of the recently popular Nuriel Rubini.

The fact is that this reasoning is completely erroneous and this could be easily shown with the data for the foreign trade of Bulgaria during the previous year. Let us have a look at what is happening with the imports and exports of the country during the period January 2008 - January 2009. We use the monthly data of the National Statistics Institute (NSI), where one could clearly see the rapid reduction of the foreign trade after October of 2008, where the reduction of the imports is much more rapid than the exports and respectively, the trade deficit decreases.

In order to make it very clear as to what is happening in the last few months, I present the data (again by NSI) only for the trade deficit on the graph below. The sharp reduction of the trade deficit could be clearly seen from the data, which only during January was reduced by almost half - from 1.26 billion levs during December to 664 million levs during January.

Actually, this graph is used also by Georgi Angelov in his recent article „How Fast Do Currency Boards Adjust?", where he shows how the currency board successfully adjusts to the external dis-balance and practically refutes the claims that when the currency is fixed it is adjusting very slowly, which should be a problem during a crisis.

The truth is that, the currency board in Bulgaria is adjusting sufficiently well to the continuously changing conditions. The claims for increased trade deficit as a result of the crisis are completely unfounded and this could be clearly seen from the data. The fact itself that the trade deficit is reduced, i.e. "the problem" is disappearing during a crisis, and grows, i.e. the problem becomes bigger, during the times of fast economic growth, is sufficient to understand how much it is a real problem.