На тези от вас, които четат на английски, предоставям статия, която написах за германския вестник Die Zeit по повод срещата на Г-20. Съжалявам, но наистина не’ам нерви да я преведа.
G-20 Meeting: a View from Bulgaria
Central and Eastern European currencies were battered as a whole earlier this year with some of the more imaginative calling the bloc Europe’s ‘sub-prime’. This is unjust. The situation on the ground is different in each country. And some countries present a different animal altogether.
Bulgaria and several other countries run Euro-pegged currency boards, effectively giving up monetary policy control to the ECB. This leaves them no ability to devalue their way out of the problem or slash rates to boost demand. Fiscal policy is the main recourse. This is naturally one of the hardest routes to take, particularly as the populist winds sweeping the world make fiscal discipline painful indeed.
Bulgaria has, however, done exceedingly well. Surviving a 1,132% average inflation rate in 1997 and running a currency board ever since, Bulgaria uses strict fiscal discipline as a cornerstone of its economic policy. Budget surpluses surpassed 2% of GDP each year for the past 4 years, reaching 3% of GDP in 2008. Foreign investment inflows grew year by year, reaching an average 21% of GDP in 2005-2008. Fiscal reserves hit close to 13% of GDP, and currency reserves reached just below 35% of GDP. External government debt squeezed to 11.4% of GDP at the end of 2008. GDP grew by an average 6.2% in 2005-2008.
Of course, no meal comes free. The inflow of FDI and the price convergence stoked annual average inflation to 12.3% in 2008. Current account deficits grew from 18.4% of GDP in 2006 to 25.3% in 2008.
The consequences of currency board regimes were not much different in the Baltics. Lithuania, Latvia and Estonia’s economies all grew by well above the normal speed limit during the boom years to 2007 in a move also accompanied by widening CA deficits. Latvia was the champion with double-digit growth rates, but it was also the country with the biggest fiscal and external imbalances. Of the three Baltic countries, Estonia was the most prudent, building up fiscal reserves similarly to Bulgaria, though it has also been hammered.
As investors look for a safe haven, countries in currency board regimes are being punished as much as anybody else. Lack of fresh foreign investment, falling budget revenues, slowing economic growth and difficult access to international financial markets have brought the countries to the brink of economic recession and put serious pressure on the currency board regimes.
GDP contracted by around 10% yoy in both Latvia and Estonia in Q4 2008. Lithuania saw a milder drop of 2%. The drastic economic contraction was accompanied by rapidly shrinking CA deficits, falling inflation and rising budget deficits. The outlook for 2009 is bleak with Latvia’s economy seen contracting a record 13% and Lithuania expecting a 10.4% retrenchment. Bulgaria, for its part, forecast over-optimistic 4.7% GDP growth in the 2009 budget, with all budget parameters now appearing moribund.
Coordinated global action to help ensure a soft landing in the currency-board countries is deeply needed. The collapse of a currency board regime in one country is likely to trigger a run on the banks in the other countries, thus wiping out their currency board regimes, devastating their economies and bringing a return of the ghosts of the past.
The IMF will need more gunpowder to address the issues of a global crisis in emerging economies. Bulgaria and the Baltics are not the only examples of countries with financial worries. The crisis is hitting all continents, with Chile the first country in Latin America now expecting recession. In acute cases, such as Hungary and Ukraine, countries may not be able to repay their foreign debt.
As a short-term crisis management policy, the G-20 should agree on a sharp increase of the IMF’s financial resources. The Fund itself should step up macroeconomic research, make it more transparent and should invent creative financial support schemes not only for the countries with liquidity issues to solve, but also for those who have proven sound fiscal and monetary management skills.
In the long term, regulation and global standards are the watchwords. The G-20, the IFIs and the key standard agencies should step up efforts to ensure global accounting standards as well as the regulation of bank capital, derivative products, hedge funds and rating agencies. Tax information exchange should be stepped up and countries should accept the OECD standards on transparency and exchange of information for tax purposes, as already done by major financial centers such as Hong Kong and Singapore. The tax base and the tax rates for direct taxes should remain under national sovereignty. However, EU countries may consider expanding the authority of OLAF or creating an altogether new entity that would keep under strict surveillance national tax and customs inspections in EU member countries.
For Bulgaria, immediate access to the pre-euro ERM-2 zone is of the utmost importance. The country has been a master pupil of the IMF for the past 12 years and fulfils all the Maastricht criteria but the inflation rate. The mechanism would provide a much needed exit strategy. It would also give a strong message to the population.
For all four countries, an immediate arrangement with the IMF is also a must. Latvia, in the worst condition of the four countries, already secured a EUR 7.5bn assistance package from the IMF and EU. Lithuania and Estonia are likely to ask for help soon. Bulgaria should be wise enough to ask for a precautionary agreement. The country’s government has proved it knows how to keep expenses tight but a watchful external eye, especially in an election year, is yet another welcome precautionary measure in difficult times.