Growing through Debt and Inflation: An Inquiry into the Esoteric and Exoteric Aspects of Bulgaria's Currency Board

Bulgaria, a new EU-member and an IMF star student is in dire straits. In the wake of the political and economic crisis of 1996–97, the country introduced a currency board arrangement (CBA), which provided the monetary framework for the foreign-investment-led growth that followed. This arrangement, which has been hailed as successful ever since, merits a reassessment in light of a disaster waiting to happen. In addition to double-digit inflation rates, the country's current account deficit reached 25.1 percent of GDP in 2007 and 25.3 percent in 2008, while its Gross External Debt has more than tripled since 2003. The purpose of this paper is to examine the role of the CBA in Bulgaria's transition to a specific variety of capitalism that features high share of foreign ownership of productive and financial assets, large and growing dependence on capital imports, and trade dependence. The paper argues that rather than being a technical detail, the introduction of the currency board signified a radical reconfiguration of dominant economic interests in the transition to capitalism marking a shift from domestic-led redistribution of national wealth to foreign-led mode of accumulation. Not only was thereby the dominant position of foreign creditors cemented, but indebtedness has become embedded as an underlying feature of the capitalist development of the country. The gigantic external imbalances that developed under the board have produced mountains of foreign debt whose servicing is likely to perpetuate a heavy drain of economic surplus for generations to come as well as the firm placement of the country under the constant tutelage of creditors-serving organizations.