site.btaBulgaria Needs Sustainable Policy Framework, Consolidation of Macroeconomic Framework - Central Bank Governor

Bulgarian National Bank (BNB) Governor Dimitar Radev, who was awarded an honorary doctorate from the University of National and World Economy here on Tuesday, said at the ceremony that the banking sector is in good shape and those working in it are doing well. Radev presented a picture of the current political and macroeconomic environment, dominated by multiple crises, and listed three steps that need to be taken: the creation of a sustainable and working policy framework, the consolidation of the macroeconomic framework and the development of institutions.

Regarding the sustainable policy framework, the Governor pointed to the existence of a regular government with clear priorities as the minimum requirement for the country if it is to move forward despite the uncertain environment. He pointed out that Bulgaria's current government is regular and added: "It put on the agenda important issues for the country, including on the country's accession to the eurozone, for which there has been no significant development in recent years". This act has been appreciated by the markets and rating agencies.

Such developments, however, do not guarantee that the country's political construction is sufficiently stable to ensure its development and prosperity, Radev said.

The second group of steps to be taken is related to the consolidation of the macroeconomic framework - the monetary and fiscal conditions in the country, as well as the introduction of the necessary structural reforms.

Joining the euro area will ensure the direct and rapid transmission of the monetary policy of the European Central Bank (ECB) to the Bulgarian economy. It will also remove the need to maintain liquidity buffers in the Bulgarian banking system, which are effectively a frozen resource that could otherwise support the growth of the Bulgarian economy.

Radev said that the effect of upgrading the monetary board with euro area membership on the short-term monetary conditions in Bulgaria is difficult to predict due to the number of possible scenarios. On the one hand, we are witnessing a faster-than-expected decline in inflation in the euro area, and on the other we have a decline in economic activity. And if these trends deepen in the euro area, then the question of interest rates, which are now in restrictive territory, will inevitably be on the agenda. It is possible that, in the event of such a development, a shift in interest rates towards more neutral levels could be considered. But the opposite path is still possible, Radev said.

Monetary conditions in Bulgaria in this transition from a monetary regime to euro area membership will also depend on the country's development, including in terms of inflation, economic growth, fiscal position, credit risk. But the factor that will determine the direction of Bulgaria's monetary policy in the short term the most is the timing of Bulgaria's accession to the euro area. The decision on that will be clear in the spring of 2024. If the decision is positive for entry in 2025, this decision will be accompanied by a planned and gradual reduction in the reserve requirements for commercial banks. But if it is negative, it will mean an adverse development in terms of the level and trajectory of inflation and will in all likelihood lead to a further tightening of monetary conditions in Bulgaria.

Fiscal conditions are the second element of the macroeconomic consolidation. It is the result of the consistently applied policy from 1997 to 2020 and remains solid, under the conditionally named doctrine of the broadly balanced budget, Radev said.

In his words, the country's macroeconomic development cannot be successful without undertaking structural reforms - in energy, transport, infrastructure. The main focus of structural policies should be on demographic development. Reforms in this direction should not be delayed any longer, as they cover the health, education, labour market and pension systems.

Poorly functioning institutions are a chronic problem for the country, the BNB Governor believes. Many of the proposed reforms could not be implemented before reforming the institutions themselves. The upcoming constitutional amendments have the potential to create the necessary institutional framework for this.

As a positive example in the country's institutional development, Radev pointed to the BNB, which was in a deep institutional crisis and subjected to strong political and public pressure in 2014 and 2015. Today it is the only central bank in the EU that works in close cooperation mode with the ECB and the only public institution in the country that is a full member of an important eurozone institution, he said.