site.btaUPDATED Economist Plamen Nenov: Low Economic Growth Main Risk for Bulgaria

Economist Plamen Nenov, who on Tuesday headed Bulgaria’s Expert Council for Economic Analyses, initiated by caretaker Deputy Prime Minister for EU Funds Management Atanas Pekanov, gave his first interview after the event to BTA on Wednesday. The Council will be tasked with analysing the dynamics of the Bulgarian manufacturing sector, territorial inequalities, differences in the structure of local economies, the labour market, macroeconomic analyses, and demographic processes. It is not yet clear under which state structure the new advisory body will operate. 

Nenov is an associate professor in economics at the Norwegian Business School, economist and advisor at the Norwegian Central Bank, who has published widely in international economic journals. 

Nenov told BTA that he speaks on his own behalf only and does not commit the Expert Council or the Norwegian Central Bank to his views.

According to him, Bulgaria is lagging behind countries like Croatia and Romania in terms of real economic growth, which poses a risk to the country's development, if it continues for another decade. Nenov argued in favour of the country adopting the euro, saying that "it is already 'hooked' to the European Central Bank's monetary policy through the currency board".

Bulgaria’s Economic Snapshot 

Asked what is the current economic "snapshot" of Bulgaria, Nenov said that according to the latest seasonally adjusted Eurostat data, in the second quarter of 2022 Bulgaria's real GDP grew by about 4% compared to the second quarter of 2022, which is comparable to, but slightly lower than, GDP growth over the same period for the European Union as a whole, which was around 4.2%. Bulgaria’s GDP growth is much lower over the same period than that of comparable countries like Croatia (7.8%) or Romania (5.3%). 

Nenov added that annual inflation in Bulgaria as of August was 17.7% (according to National Statistical Institute data). According to the harmonised index of consumer prices, which allows for comparison with other EU countries, annual inflation in the country is 15%, and 10.1% for the EU. For Croatia and Romania, these figures are 12.6% and 13.3% respectively. 

Hence, Bulgaria's real GDP is growing more slowly than the EU average and comparable EU countries, while inflation in Bulgaria is much higher than inflation in the EU and comparable EU countries, which leads to two conclusions about the Bulgarian economy, Nenov noted. First, Bulgaria's potential GDP, which measures long-run economic growth potential and excludes fluctuations due to the business cycle, is lower than in comparable countries such as Croatia and Romania. This, unfortunately, confirms the trends of the pre-pandemic decade. Second, price pressures in Bulgaria are much stronger in comparable parts of the business cycle of other countries.

Nenov that Bulgaria’s current main challenge and task is to increase potential GDP growth at least to the levels of comparable countries such as Romania and Croatia. The main risk is that potential growth remains persistently low in the next decade, he added.

The economist expects GDP growth in 2023 to slow down compared to growth in 2022. He said that in general it is very difficult to forecast inflation, especially in the current situation of price shocks for energy and other commodities.

Budget Deficit or Balanced Public Finances 

Asked whether a budget deficit or balanced public finances is better for the economy, the specialist said that in general, maintaining structural budget deficits, i.e. deficits even in an environment of relatively strong economic growth and expansion of the economy, is an unsustainable economic policy that leads to the need for strong fiscal consolidation at some point either through spending cuts or tax increases. According to him, both alternatives reduce welfare, and sustained structural budget deficits should therefore be avoided.

IMF Recommendation to Review Taxation in Bulgaria

Nenov was asked to comment on the International Monetary Fund's recommendation to review taxation in Bulgaria, and in particular the "flat tax". He said that the effect of the flat tax on social inequalities is a fact that most economists would agree with. Regarding economic efficiency and the general level of welfare in society, a flat tax on the one hand reduces work incentives of low-income workers compared to a progressive form of taxation. On the other hand, it strengthens the work incentives for high-income workers. Which of these two effects is dominant is an empirical question, Nenov said. According to him, in other countries in general, high-income workers respond less to tax increases than low-income workers, but the effects for Bulgaria have not been estimated. Nenov said that some of his colleagues in the Council have already worked on this issue and could give an opinion on this question in the future.

Euro Changeover

Asked whether Bulgaria should join the euro area, the economist said that the country is already 'hooked' to the monetary policy of the European Central Bank through the currency board. On the other hand, Bulgaria currently has no influence on this monetary policy, and from this point of view, joining the euro area would have a positive effect, Nenov added, saying that the other benefits are related to improving banking supervision, the systemic stability of the financial system, and the reputation of the country in the EU.