The Transition of the Bulgarian Economy:
The restrictive monetary policy of the Bulgarian National Bank induced a real decrease in household savings and a sharp contraction of the household credits in real terms for the same period.
At least two questions should be asked: firstly: "Has this price been bearable?"; and secondly: "Has the outcome been worth the high social price?"
The answers tend to be negative - in 1994 74 percent of households existed on less than the living wage but the inflation rate (CPI) was 121 percent. Nevertheless the necessity for further financial stabilisation in the country calls for future restrictive monetary and wage policies and future budgetary constraints. Any possible relaxation of the restrictions can be done only on the basis of a rapid increase of the private sector share.
It may seem unusual that a central banker discusses the issues of living standards and social welfare. Simply because - in the developing countries in general - central bankers have always been regarded as being on the other side of the "barricade", and by their restrictive monetary policy "spoil" the living standards. But this is only half true. The central banker is often restrictive in the short run, while aiming for a long-term sustainable growth and hence, an increase in living standards.
Let us see the effect that five years of transition in Bulgaria to a market-driven economy have had on the Bulgarians' way of living. The average real salary in the country shrank in 1994 by 44 percent compared to the 1990 figure. Wages dropped from 5.8 percent of GDP in 1992 to 4.9 percent in 1994 and social security funds from 13.5 to 11.9 percent of GDP. The unemployment rate reached 20 percent of the active population.
What was the responsibility of the central bank for these consequences? In early 1991 the Bulgarian National Bank began the reform with a huge money overhang - the money supply was considerably higher than GDP. More than half of the money supply was held by households. Hence a very restrictive monetary policy was inevitable. Real positive rates on credits were influenced by the interest rate policy of the central bank. The burden of this financial disproportion was so huge it had to be shared between the budget, the banks and also the households. This led to real negative interest rates on the deposit side.
The restrictive monetary policy of the Bulgarian National Bank induced a decrease of household deposit stocks in the banks in real terms, and a sharp contraction of the households credit in real terms for the same period. While the household savings stock in the banks dropped in real terms, the share of the savings in their total expenditure increased.
According to the statistical data, in 1994 the real average wage was 56 percent, and the real average pension 53 percent of those in 1990.
The quasi-fiscal deficits in the form of losses in the real and financial sectors have been only barely reduced. The need for further financial stabilisation in the country means future restrictive monetary and wage policies and future budgetary constraints. A possible relaxation of the restrictions can be allowed only on the basis of a rapid increase of the private sector share. In this area, including in the financial sector, foreign investments have to play a very important role.
However, the very restrictive monetary policy in the second half of 1994 brought some positive results. Since the beginning of the year the exchange rate of the Bulgarian Ley has been rather stable and the average monthly inflation rate (CPI) for the last three months was below 2 percent. For the same period, the rates on household deposits have been positive.
The phenomenon of households being almost net creditors to the financial system must be handled separately by a central banker. On the one hand, in these circumstances the restrictive monetary policy cannot affect that part of the money supply. On the other hand, any further restriction on incomes seems unbearable. So the only possible way to stabilise the monetary supply is to provide incentives for the households to invest in privatisation or in government securities.