Implications of EU accession for Bulgarian Economy and perspectives for Korea-Bulgaria economic cooperation

Sofia, UWDE, 3 May, 2007

Bulgaria's Monetary Policy Dilemmas and Challenges

Following the EU-Accession

Ivanka Petkova, PhDEconomic Policy Institute

1. EMU-Membership Frame

1. 1 EMU-Membership Frame (Bulgaria and Romania)

• Bulgaria (and Romania):

obligation to adopt the Euro;

no opting-out,

no requirement on the concrete schedule

• Pre-requisites:meeting the Maastricht convergence criteria,

stay of minimum two years in ERM2,

agreement on an entry exchange rate level

1. 1 EMU-Membership Frame (Bulgaria and Romania)

• Entering EU simultaneously, • but different starting points to join the EMU

Bulgaria Romania

Bulgaria (CBA), Estonia (CBA), Lithuania (CBA), Latvia (peg basket)

Hungary (a wide band to the Euro, IT), Czech Republic, Slovakia (managed float, IT), Poland (float , IT)

1. 1 EMU-Membership Frame (Bulgaria and Romania)

• different monetary policies and prospects for EMU-membership:

Bulgaria: ERM2 Mechanism: to be used to fully prepare to Euro-adoption

Bulgaria: is meeting the Maastricht criteria, except of the inflation criteria

Bulgaria and Romania (cont.)

Bulgaria and Romania (cont.)

Bulgaria and Romania (cont.)

1. 2. Bulgaria‘s Room of Maneuver

• Inflation criterionPrice competitiveness

• Budget criterion• The challenge of co-financing of EU-transfers

• How long in the ERM2• Fixing the central parity (albeit a 15%

oscillation band is allowed on each side)

Real Effective Exchange Rate Dynamics

Real Effective Exchange Rate

80,0

160,0

11997 1998 1999 2000 2001 2002 2003 2004 2005 2006

2. Bulgaria’s Major Dilemmas and Challenges

2.1 The Choice between Growth and Monetary and Financial Stability

• Growth, competitiveness and/or imposed monetary stability;

• Experience of the current EMU-members

2.2 Vulnerability of Exports

0

2000

4000

6000

8000

10000

12000

14000

11997 1998 1999 2000 2001 2002 2003 2004 2005 2006

2.3 Financing of Trade Deficit and CAD;

Trade Deficit (Mln. Euro)

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

2.4 Role of FDI

Dynamics of Trade Deficits and FDI (Mln. Euro)

0,0

2000,0

4000,0

6000,0

8000,0

10000,0

12000,0

1 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

FDI

2.4 Role of FDI (cont.)

• New priorities of attracting FDI under the conditions of EU-membership

Conclusion

• Growth, competitiveness and monetary policy constrained by the convergence criteria

• During the ERM2 period :non-existent capital controls;

limited ER flexibility IR higher than in the Eurozone

THANK YOU FOR YOUR ATTENTION