site.btaPolitical Instability to Cut Growth, Up Debt, Think-Tank Warns

Bulgaria is in the grips of yet another political crisis after the turbulence of 2021, when the country saw three parliamentary elections and seven months without a regular government. The nation seems set for a recurrence of the cycle of awarding government-forming mandates, putting together caretaker cabinets and holding snap parliamentary elections. It will be difficult to find a new government formula. All this is happening against the backdrop of a major revision of economic growth forecasts, inflation hitting a 20-year high, controversies going on about the health of public finances and the level of the public debt, and a proposed state budget update whose outcome is unclear. As the political players are keeping tensions high, it will be useful to cast a sober glance at the longer story about the Bulgarian economy.

Over the last two decades, the country has seen at least three economic crises and five caretaker governments. The deep recessions of 2009 and 2020 were caused by external shocks: a global financial downturn and a pandemic, respectively. Between 2012 and 2014, the national economy registered very low growth, with 2013 even experiencing a decline of GDP. Two of these three periods of Bulgaria's economic history overlapped with, or were followed by, periods of political volatility and interim governance. The interrelation between economic development and political crises deserves a closer look.

20 years of catching up: the impact of political crises

Over the last 20 years or so, Bulgaria's per-capita gross domestic product based on purchasing power parity gradually rose from under 30% of the average EU level to 55%. Despite all crises and challenges, the first two decades of the 21st century were a time of growth and a narrowing living standard gap between Bulgaria and the average level in the EU. Each of the two decades deserves a separate analysis.

The first 10 years: In 1999 and 2000, per-capita GDP in Bulgaria was under 30% of the EU average, which was essentially the starting point of the years of growth. Over the 10 years until 2010, the national economy experienced considerable growth, with per-capita GDP reaching 45% of the EU average. In each of those years, despite the global downturn of 2009, Bulgaria was catching up with the average EU member state. The gap was narrowing by about 1 percentage point a year, or even more.

The second 10 years: Between 2010 and 2020, per-capita GDP in Bulgaria grew from 45% of the EU average to 55%. The catching-up was basically sustained, albeit at a lower rate, but there were two years in which the gap did not narrow. Those were 2013, when the national economy contracted somewhat, and 2021, when Bulgaria's growth was lower than the average level in the EU.

One cannot help noticing that the two periods within the last 20 years when Bulgaria was not catching up with Europe were times of political crisis and caretaker governance. The first time was in 2013, when the nation had its first interim cabinet in the new millennium, followed by the government of prime minister Plamen Oresharski and lingering political instability. The Corporate Commercial Bank (Corpbank), the country's fourth-largest lender, was closed down in 2014, triggering a nationwide banking crisis. Another caretaker cabinet was formed. A steadier political solution was not found until near the year's end.

The second time was in 2021, when the country had two successive caretaker cabinets and basically spent the whole year voting for new parliaments until some governance formula was found. All this delayed the implementation of many policies, with no investments and reforms made under the Recovery and Resilience Plan, and the political unrest eventually led to a decline in economic growth. The general picture is clear: over a period of 20 years there were two times that Bulgaria was not catching up with Europe, and both times were marked by political volatility and interim governance.

The government debt in times of political crisis

The question of the government debt always pops up during periods of political instability. Again, it is worth having a look at the long story. During the first decade of the period under review, the government debt shrank considerably from over 70% of GDP in 2000 to 15% of GDP in 2010. Interestingly, the effect of the 2009 downturn was not so dramatic: the debt-to-GDP ratio increased by just 2-3 percentage points. The second decade was different. The debt increased from 15% of GDP in 2010 to 25% in 2020. Debt growth peaked in 2014, when GDP growth slumped, the country was plunged into a political crisis and caretaker governance, and Corpbank failed. After a slight decrease of the government debt in the years of economic growth, the COVID-19 pandemic brought about another rise in 2020.

It is noteworthy that the low rate of economic growth and the political instability in 2013-2014 had a stronger impact on the debt than the 2009 downturn and the 2020 pandemic had. In other words, Bulgaria responds better to external shocks, while domestic problems and political volatility can inflict greater damage on financial stability. The upcoming debate on the proposed revision of the state budget will be important because all the ideas about expenditure adjustments can push the government deficit up, and hence, the debt.

Budget-related discussions on the government debt have intensified over the last few days. As usual, everyone blames everyone else for the nation's indebtedness, sometimes citing the debt-to-GDP ratio, sometimes referring to the nominal amount of the debt. In 2000-2010, the government debt dropped both nominally and as a percentage of GDP. In the second decade of the century, it grew substantially in nominal terms.

Nominal government debt growth was observed in four periods: (1) the crisis after the 2009 downturn; (2) the political instability and the failure of Corpbank in 2014; (3) the COVID-19 pandemic in 2020; and (4) the political instability in 2021. These were also times of higher government deficit, which inevitably leads to a higher debt level. As in the case of economic catching-up, here we see that political instability increases the government debt.

Our analysis shows at least two things. First, two consecutive decades have seen long periods of economic growth in Bulgaria and a gradual catching-up with the average standard of living in the EU. From a medium-term perspective, the challenge is to maintain the catching-up throughout the third decade of the century. Second, political instability and caretaker governance are very likely to have an adverse impact on economic growth and public finance. Therefore, it is incumbent upon the politicians to act responsibly, show moderation in the debate on the state budget revision and find a steady political solution relatively quickly.