Bulgaria - Banking and Finance

Investment Policy

In choosing among alternative investment projects, Bulgarian planners in the Zhivkov era faced greater difficulties than investment decision makers in Western economies. True relative costs of labor and materials were masked by state assignment of prices, meaning that funding allocations among projects often were arbitrary. In most cases, investments were not based on efficiency criteria, but rather on plan goals. Artificially low interest rates also discouraged enterprises from efficient investment fund allocation.

The state budget also guided party economic policy under the old regime. Until the reforms of the 1970s, the budget was the primary source of funds for enterprise investment. Budget revenues were originally derived mainly from the turnover tax, a retail sales tax that was also used to regulate demand for various products. Beginning in the mid-1960s, budget revenues were derived progressively less from the turnover tax and more from taxes on net enterprise income.

Banking System

As the chief financial instrument of economic policy making, the BNB assumed virtually all of the financial functions in the country under the centrally planned economy. Only the granting of foreign trade and consumer credits were separate functions, performed respectively by the Bulgarian Foreign Trade Bank and the State Savings Bank--both of which were subordinate to the BNB. The BNB worked with the Ministry of Finance to finance capital investments in the economy. The BNB also monitored the economic organizations that received investment funds to ensure their use for accomplishing plan targets. As enterprises became more selffinancing in the 1970s, a greater share of their investment capital was composed of bank credits granted by the BNB. Between 1965 and 1975, the BNB share of investment funds jumped from 7 percent to 54 percent; the trend then moderated as enterprises began to rely more on retained earnings to finance investments.

Like industry and agriculture, banking under the BCP experimented occasionally with decentralization but remained quite centralized until shortly before the overthrow of Zhivkov. A 1987 reform nominally split Bulgarian banking into a two-tiered system. The function of the BNB was restricted to money supply, although it also retained significant supervisory power. The reform also created several specialized banks including the Agricultural and Cooperative Bank, the Biochemical Bank, the Construction Bank, the Electronics Bank, the Transportation Bank, and the Transport, Agricultural, and Building Equipment Bank--each responsible for an industrial sector.

Post-Zhivkov banking reform began hesitantly but grew more comprehensive in 1991. In a controversial policy decision, the government first increased interest rates from 4.5 to 8 percent in 1990, then let them float freely beginning in 1991. Although the first private commercial bank was established in May 1990, a new National Bank Bill was not passed until June 1991. That law provided for a two-tier bank system independent of direct government control but accountable to the National Assembly. The first tier of the new system was to be the Central Bank, the second a separate system of commercial banks and lending institutions serving private citizens and enterprises. Three-month bank credits would be available to cabinet ministries. The BNB was to issue monthly balance statements and report semiannually to the National Assembly.

Banking and finance

Under the Zhivkov regime, Bulgaria followed the customary communist pattern of a single state-run bank performing all banking and investment functions. Investment policy was the province of state planning agencies, with substantial input from the BCP and the national bank. Post-Zhivkov reform aimed at privatizing and compartmentalizing the banking system, a goal that would likely require years of gradual reform.

Currency and Exchange

The national currency of Bulgaria is the lev, which is divided into 100 stotinki (sing. stotinka). Throughout the communist era, the lev could be used only in domestic transactions because it was not convertible into foreign currency. Bulgarian nationals were prohibited from owning foreign currency, and the law prohibited citizens and foreigners from entering or leaving the country with leva. Like domestic prices, the value of the lev was administratively determined. This led to frequent overvaluing of the lev in terms of hard currencies and black market rates well below official exchange rates. Besides official rates, which were based on a gold parity developed after World War II, a commercial rate was used for business transactions and statistical purposes, and a tourist rate determined the amount received by foreigners in Bulgaria for their domestic currencies. None of these arbitrary rates reflected the relationship of domestic and foreign prices. Trade with Western countries was conducted in hard currency, while the transferable ruble, an accounting device with no convertible value, was primarily used to clear commercial accounts within Comecon. In 1990 the lev was devalued several times, finally settling at rates of about 0.76 stotinki to the United States dollar (official), 3 leva to the dollar (commercial), and 7 leva to the dollar (tourist). The black market rate fluctuated considerably, but ended 1990 at approximately 11 leva to the dollar. In mid-1991 the Bulgarian National Bank (BNB) issued conversion tables for the lev into major world currencies. The official value at that time was 18 leva to the United States dollar.

Prices

Investments in inefficient operations and subsidies on consumer items often led to budget deficits. Often the state simply printed more money to cover its obligations. Eventually this led to circulation of excess currency compared with consumer goods and services available at prevailing prices. Because prices were administratively set, shortages and long lines occurred more often than inflation under the CPE. But party-directed general price increases such as the average 15 percent rise in 1979 usually were quite steep.

In the post-Zhivkov era, economic planners saw marketdetermined prices for most goods and services as their long-term goal. In 1990 the prices of 40 percent of goods and 60 percent of services were freed from administrative control. In the second half of 1990, price liberalization raised consumer prices an average of over 50 percent. In February 1991, price controls were removed from all goods and services except fuels, heat, and electricity. Immediately after this step, average food prices were nearly six times their 1989 level; housing was up 3.7 times, clothing three times more expensive. These levels, established by an independent trade union study, were above the level triggering new talks on compensation payments. (For the second consecutive year, a government indexation program was established to reimburse a share (estimated at an average 65 percent) of the higher cost of living caused by the new price policy in the first half of 1991.) In a two-month period of early 1991, consumption dropped by over 50 percent, but total consumer spending still increased by 11.5 percent.

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