Bulgaria will be ready to adopt euro in 2009, central banker says

SOFIA – EU hopeful Bulgaria will be technically ready to adopt the euro upon accession in 2007 but must stay two years in the eurozone’s ERM-2 waiting room, the country’s central bank governor, Ivan Iskrov, said late on Tuesday. Bulgaria keeps its lev pegged to the euro in a currency-board straitjacket introduced in 1997 after an economic crisis crippled the country’s banking sector and sparked hyperinflation. The system’s tight restraints should allow Bulgaria to meet virtually all of the so-called Maastricht criteria immediately after accession, planned for January 1, 2007, Iskrov told Reuters in an interview. But he said that, following the example of Estonia and Lithuania which joined the EU last weekend, the fact of having a currency board will not free Bulgaria from the obligation to wait two years in the ERM-2 before swapping levs for euros. «Our estimate is that if we join the European Union on January 1, 2007, and there are no negative signs that make this appear unlikely, we hope to be ready to enter the eurozone immediately,» he said. «But unfortunately, we have the final decision from the European Central Bank that the currency board cannot be a substitute for ERM-2 entry. Therefore Bulgaria intends to unilaterally maintain a fixed exchange rate at the present level until joining the eurozone.» The European Commission says countries should keep their currencies trading in a tight band against the euro in ERM-2 for two years ahead of adopting the single currency. Last week, Prime Minister Simeon Saxe-Coburg said Bulgaria should adopt the euro in 2009-2010. The currency board pegs the lev to a fixed value against the euro. It also restricts government spending and reduces the central bank’s monetary policy to maintaining foreign currency reserves equal to money in circulation. Iskrov said the final decision of when to join the ERM-2 would be political, but that two consecutive governments had pledged to keep the currency board until euro adoption, and that the lev’s rate of 1.95583 per euro would stay unchanged. «A main role of the central bank is to try to assure the European Commission at the moment of joining the European Monetary Union that this is the correct rate,» he said. «We will do our best to… show we need to keep the rate unchanged.» To adopt the euro, an EU member must meet strict criteria on the government’s fiscal deficit, state debt levels, currency stability, and inflation. Bulgaria already meets all but the last of these conditions. Bulgaria’s wide current account gap should stay stable this year after almost doubling in 2003, but foreign investment should continue to cover most of the shortfall, Iskrov said. Bulgaria’s external imbalance ballooned to 8.4 percent of its gross domestic product (GDP) in 2003 amid a credit boom and a spike in imports, which the authorities are taking steps to offset to avoid endangering the economy. Watching its progress closely is Bulgaria’s economic mentor, the IMF, which Iskrov said should sign a new standby accord with the Balkan state in July that outlines strict economic guidelines through 2007. He said this year the external gap should stay at last year’s levels, which is almost two percentage points above the Finance Ministry’s target, but foreign direct investment of around $1.5 billion should cover 80-85 percent of the shortfall. Imports, which are significantly outpacing sales abroad, should remain dominated by investment-related and production-boosting goods, such as machinery and raw materials, posing no threat, he added. Iskrov said that around two-thirds of this year’s expected foreign direct investment (FDI) should be in so-called greenfield projects, while the rest would be mostly privatization receipts. FDI was $1.42 billion last year. In addition, some $700 million in foreign income was expected to be repatriated by Bulgarians working abroad, he added. «We would be happy if we don’t widen the deficit, or if it does widen, then it would be due not to financial inflows but to FDI from imports of machines and similar items,» he said, adding that the gap should narrow to 7.0 percent in 2006. Under a recommendation from the IMF, the central bank has agreed to put the brakes on Bulgaria’s lending boom to slow credit from a growth explosion of 50 percent in 2003. It will widen the scope of mandatory reserves to include deposits of over two years in maturity and withdraw deposits from local commercial banks, reducing liquidity. Analysts say the new precautionary IMF agreement, seen as a last step to help Bulgaria to wean itself from the global lender’s assistance, will be a strong signal that the country is catching up with more developed European states. Annual inflation, which the government estimates at an average of 4.0 percent this year, will actually be closer to last year’s levels, 2.3 percent on average, Iskrov said.

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