Sofia’s headache

SOFIA – Bulgaria’s current account deficit rose 73 percent in January-May of 2006 year-on-year and analysts said the future EU member needed to do more to attract foreign investment to counter the bulging gap. The deficit, the European Union aspirant’s main economic headache, widened to 1.75 billion euros or 7.3 percent of gross domestic product, from 1 billion a year earlier, central bank data showed. Analysts said a pickup in exports in May was encouraging and could indicate that foreign capital inflows of the past two years were beginning to pay off in the higher output of export industries. «Exports have been picking up, which is good news,» said Simon Quijano, emerging markets analyst with Bank of Austria. «But the external shortfall is still a key problem. What Bulgaria needs is to see a pickup in FDI. The only way for this is to see more infrastructure improvements in the country.» Cumulative exports rose by 30.2 percent on an annual basis in the first five months to 4.6 billion euros, outpacing for the first time this year’s imports, which grew by 29.5 percent to 6.5 billion, central bank data showed. Inflation data released last week showed consumer prices fell 1.6 percent in June, mainly thanks to a seasonal drop in fresh food. It pushed the headline year-on-year rate down to 8.2 percent from 8.5 percent, boding well for the Black Sea state, which hopes to join the EU next year, to undershoot this year’s 6.9 percent inflation target. The expected drop should allow the country to further decrease inflation over the next two years and allow it to introduce the euro as of 2010, Bank of Austria’s Quijano said. «European Economic and Monetary Union in 2010, we are getting there basically,» he said. Containing the current account shortfall, fueled mainly by oil imports and a boom in consumer lending, may prove a tougher task, with the deficit seen spiking to 12.4 percent of GDP this year after hitting 11.8 percent in 2005. Foreign direct investment was 1.2 billion euros in the period, covering 68.3 percent of the current account deficit. The Socialist-led government has announced plans to spend around 5.5 billion euros by 2009 to improve its potholed roads, run-down railways and other infrastructure to attract investors and boost exports. It has also committed to produce a 3 percent budget surplus this year to cool buoyant demand and counter the gap. Fiscal policy is one of the few tools Bulgaria has to influence the economy as it operates under a currency board regime that limits its central bank operations.