Transcript of the meeting

Bulgaria: The Dual Challenge of Transition and Accession
Macroeconomic Developments
Transition Delayed by a Decade
1980’s - mid 1990’s: Late and uneasy start…
 stop and go stabilization policies
 slow structural reform
 soft budget constraints
 legacy of heavy debt burden
...resulted in a deep decline in output and high inflation,
culminating in a deep financial and economic crisis
1
Bulgaria: The Dual Challenge of Transition and Accession
Macroeconomic Developments
1. Macroeconomic Developments
1997- 99: Stabilization successful thanks to CBA- Process
of economic transformation well underway
 growth resumed and maintained despite adverse
external shocks
 inflation under control
 fiscal position is sound
 restructured banking sector is sound and profitable
 industrial restructuring accelerated
 public and investors’ confidence improved
2
Bulgaria: The Dual Challenge of Transition and Accession
Macroeconomic Developments
Table 1. Key Economic Indicators
GDP Growth)
CPI, eop
Primary Balance (% of GDP)
Overall Balance (% of GDP)
Gross Domestic Investment
(% of GDP)
(ow public investment)
Current Account Balance
(% of GDP)
Gross Official Reserves (US$ m)
(in months of imports)
External Debt (in % of GDP)
1995
1996
1997
1998
1999
2.1
32.9
8.3
-10.9
310.8
6.4
-6.9
578.5
5.7
3.5
1.0
5.54
2.4
6.2
2.6
2000
(prel.)
5.0
11.4
2.7
-6.3
15.7
1.1
-0.6
-12.7
8.4
0.7
0.2
-2.5
11.4
1.0
4.4
1.0
14.7
3.8
-0.5
-1.0
19.0
4.7
-5.5
-1.0
15.7
3.7
-5.5
1,546
3.1
77.4
793
1.6
96.8
2,468
5.3
95.9
3,056
6.1
81.8
3,222
5.9
79.7
3,460
5.4
83.4
3
Bulgaria: The Dual Challenge of Transition and Accession
Macroeconomic Developments
Maintaining Macroeconomic Stability under CBA
Key Elements: Fiscal Sustainability and Healthy Financial Sector
1) Fiscal Sustainability:
 Broadly balanced budget; explicit direct liabilities under
control (debt, health, pension)
 Continuous attention required regarding contingent
liabilities such as implicit guarantees to municipalities,
SOEs, public agencies, long-term contracts such as PPAs
or take or pay contracts in energy sector. Strong fiscal risk
management framework required.
4
Bulgaria: The Dual Challenge of Transition and Accession
Macroeconomic Developments
2. Healthy Financial Sector
 Banking sector solvent, profitable and gaining
credibility
 Regulations and supervision considerably
strengthened
 Privatization well-advanced (18.8% state-ownership
of banking sector assets)
 Self-financed Deposit Insurance Fund is in place
 As a result of past trauma, intermediation is low
5
 Harmonization of EU Directives well underway
5
Bulgaria: The Dual Challenge of Transition and Accession
Macroeconomic Developments
 Regulatory and supervisory foundations of capital markets in
place
 But low level of activity
 State divestiture from insurance sector has started
 Further strengthening of the regulatory framework and
supervisory bodies of the non-bank financial sector to be pursued
and implementation/enforcement enhanced.
6
Bulgaria: The Dual Challenge of Transition and Accession
Reform Agenda
Main Elements of the Reform Agenda
1. Improve the business environment by:
 pursuing the reform of public administration and judicial
system
 promoting greater participation by non-governmental
groups and by citizens to improve the working of the
legal, judicial, regulatory and administrative systems and
ensure adequate oversight
7
Bulgaria: The Dual Challenge of Transition and Accession
Reform Agenda
Main Elements of the Reform Agenda
2. Promote the provision of competitive infrastructure
services
 Establish appropriate market, governance, and regulatory
mechanisms (clear market rules and structure; pricing
reform; independent regulator)
 rump up private investment under a sound regulatory
framework which allows investors to assume an
increasing share of the market risks and rewards
associated with their investment
8
Bulgaria: The Dual Challenge of Transition and Accession
EU Accession
CEM - Key Aspects
 Growth and Poverty alleviation
 EU Accession
 Need to be competitive in the unified market
Given these objectives, the question is:
How to spread the cost of compliance? What to
do now? What to do next? What to leave for the
longer term? ==> Sequencing is important.
9
Bulgaria: The Dual Challenge of Transition and Accession
EU Accession - Agriculture
EU Accession: Sequencing is Important
1. Agriculture
In the medium-term, Bulgaria will have to make decisions in
regard to harmonization of its trade policy with that of the EU.
When to adopt the trade measures (tariffs and export subsidies)
of the CAP (trade and price support measures and their
associated interventions mechanisms)?
Key Considerations:

evolving CAP policies

costs for both Bulgarian consumers and taxpayers
10
Bulgaria: The Dual Challenge of Transition and Accession
EU Accession - Agriculture
Scenarios for Policy Adjustment to CAP
Scenario A: Bulgaria keeps its current liberal trade and market
policy
Scenario B: (Rapid) Partial adoption of current CAP, without
(Scenario B2) or including (Scenario B2)
compensatory payments
Scenario C: Adoption of CAP Agenda 2000, without (Scenario C1)
or including (Scenario C2) compensatory payments
Scenario D: Complete removal of current divergences.
11
Bulgaria: The Dual Challenge of Transition and Accession
EU Accession - Agriculture
Summary of Simulation of Effects under Policy Scenarios
Scenario
A
B1
B2
C1
C2
A2000, A2000,
Current CAP, excl. CAP, incl. excl. dir. incl. dir.
policies dir. paym. dir. paym. paym.
paym.
D
Nonintervention
EU Agricultural Policy Effects on Agricultural Producers
NRP, main productsa,b
perc
ent
ERPa,b
2.1
38.2
38.2
22.8
22.8
0.0
3.9
31.8
107.0
11.7
100.8
0.0
Gross output valuea
perc
ent
M€
1,687
2,242
2,652
2,006
2,491
1,575
VA at domestic pricesa
M€
565
717
1,127
608
1,093
544
M€
544
544
544
544
544
544
M€
-
152
561
43
528
-21
a
VA at border equiv. Prices
a
Change in VA at domestic prices
Expenditure on food
c
Change in food expenditure
Change in real income
c
EU Agricultural Policy Effects on Households
2,312
2,210
M€
2,105
M€
-
-207
-105
+38
perc
entt
0.0
-5.1
-2.7
1.0
EU Agricultural Policy Effects on Taxpayers
-32
-22
2,067
Change in expenditures
M€
-
Direct payments
M€
-
Structural Funds
M€
-
Cohesion Fund
M€
-
372
-
Bulgaria’s contribution to EU budget M €
-
110
-
-
409
Other Transfers
1897
-
484
-
12
Bulgaria: The Dual Challenge of Transition and Accession
EU Accession - Agriculture
Summary of Simulation of Poverty Impact under
Policy Scenarios
Share of poverty in population
[ percent]
Poverty line 1
Poverty line 2
Current situation
Scenario A: Base-run
20.0
36.0
Inelastic demand response
Scenario B: Current CAP
24.8
40.7
Scenario C: Agenda 2000
22.3
38.3
Scenario D: Non-Intervention
19.6
34.9
Elastic demand response
Scenario B: Current CAP
23.5
39.4
Scenario C: Agenda 2000
21.7
37.7
Scenario D: Non-Intervention
10.4
35.2
a
Total population 1998: 8,283,200.
Source: World Bank (1999b), own calculations.
Number of poor citizens a
[million]
Poverty line 1
Poverty line 2
1.66
2.98
2.05
1.84
1.62
3.37
3.17
2.89
1.94
1.80
0.86
3.26
3.12
2.91
13
Bulgaria: The Dual Challenge of Transition and Accession
EU Accession - Agriculture
Sequencing is Important
Bulgaria should now focus on:
 reforms to improve the ability of its agricultural sector to
compete in the Single Market
 set up the institutions that will be required for CAP
implementation,
 leaving the trade policy and price support measures until
the time of accession once reforms in the sector have
strengthened its ability to compete in the Single Market.
14
Bulgaria: The Dual Challenge of Transition and Accession
Complying with the EU Environmental Directives
Efforts Made so far ...
 Bulgaria has made good progress harmonizing its environmental
legislation with that of the EU -- air, water, waste, nature
protection, and chemicals
 Environmental expenditures 1992-98 averaged 1.0% of GDP
 Environmental quality has improved
 Air and water pollution have been reduced and exposure to
some pollutants has fallen in hot spots -- decline resulted
from pollution control measures and overall economic
decline
15
Bulgaria: The Dual Challenge of Transition and Accession
Complying with the EU Environmental Directives
The Level of Compliance Costs will be High …
 Directives require investment of €150-200 per person
 When spread costs over 15 years and include O&M, annual cost
for compliance in drinking water, wastewater, solid waste, and
air pollution, annual expenditures as percentage of GDP
approximate:
 5-7% of GDP by end of implementation period (2015)
 Compared to 1.0-1.3% of GDP in 1997/1998
16
Bulgaria: The Dual Challenge of Transition and Accession
Complying with the EU Environmental Directives
Specific Interpretation of Requirements Changes
Compliance Cost Importantly



E.g. Flexibility of Urban Wastewater Treatment Directive
Requires wastewater treatment plants in all settlements over
2,000 people unless either plant involves excessive costs or
brings no environmental benefit
Requirements vary for sensitive/non-sensitive areas
Towns 2,000-10,000
with system
0%
40%
100%
All non-sensitive
(EUR billion)
0.44
0.66
1.87
All sensitive
(EUR billion)
0.57
0.81
2.04
17
17
Bulgaria: The Dual Challenge of Transition and Accession
Complying with the EU Environmental Directives
Compliance with Environmental Acquis will Bring
Benefits ...
 Population will have cleaner rivers, air drinking water and
cleaner products
But cost will either come from taxation or they will pay
higher fees for environmental services

Some benefits in the short-term, but most will be longer-term
 Some benefits will be close to the investment site, but many will
be in neighboring countries
18
Bulgaria: The Dual Challenge of Transition and Accession
Complying with the EU Environmental Directives
Impact of Accession on Household Budgets under
Rapid versus Delayed Implementation
 Impact on poor urban
households if full
compliance occurs by
2015 could be regressive
and difficult to manage
Share of household expenditure
30%
25%
20%
15%
10%
High Case by 2020
High Case by 2015
Current 1999
5%
0%
1
Poorest
2
3
4
5
6
7
Per capita expenditure decile
8
9
10
Richest
 Impacts could be reduced
if compliance is spread
over a longer period (say
2020) -- this will allow
incomes to catch up
19
Bulgaria: The Dual Challenge of Transition and Accession
Complying with the EU Environmental Directives
Sequencing is Important
 There is flexibility in interpreting environmental directives.
 Detailed impact studies will help identify optimal sequencing
starting with the directives which offer high benefits with
respect to costs and leaving compliance to the environmental
directives with the highest cost/ benefit ratios to the time when
their fiscal and welfare impact are more compatible with the
country’s level of wealth and welfare.
20