Interview with Mr. Dimitar Radev, BNB Governor, for BTA, 24 July 2023
WE SHOULD TIGHTEN BOTH MONETARY AND FISCAL POLICIES TO KEEP INFLATION IN CHECK
The Bulgarian euro coins will feature the Madara Horseman, St. Ivan Rilski, Paisy Hilendarski, and the inscription ‘stotinka(s)’
Mr. Radev, congratulations on your re-appointment as BNB Governor for a second term of office. What are, in your opinion, the key challenges facing the institution?
Thank you! The immediate challenges are arising from the uncertain and changing macroeconomic environment. The agenda also includes the tasks of creating the necessary institutional and technical framework for the successful introduction of the euro in Bulgaria.
What are, in your opinion, the macroeconomic risks for Bulgaria and how do you see their resolution?
These are two subjects and they are interrelated: inflation and economic growth. How they would evolve depends to some extent on external factors, but internal factors, particularly the development of the monetary and fiscal conditions in Bulgaria, are of growing importance.
The BNB has been pursuing a systematic and consistent policy of tightening monetary conditions. The last step in this direction, which came into effect as of 1 July this year, was the increase to 12 percent of the minimum required reserves that banks must hold at the BNB. Practically, this means pulling several billions of levs out of commercial banks. The purpose is to reduce banks’ credit expansion, primarily in the housing loan segment. This will push demand and consumption down, and subsequently inflation.
The decisions to tighten monetary conditions are tough decisions for any central bank. They must be calibrated in a way that helps curbing inflation, without stifling the economy. And this is what we are doing and what we will be doing this year and largely next year.
How would you comment on the fiscal conditions that you mentioned, especially in the context of the adoption of the 2023 budget?
The intent to keep budget deficit down to 3 percent of GDP is a step in the right direction. At the same time, considering the trajectory of the economic cycle and the changes in the structure of budgetary expenditures, a 3 percent deficit means a limited but continuing fiscal expansion. Fiscal expansion is not a factor that contains inflation, quite the opposite. Therefore, it is of utmost importance for us to seek to synchronise the fiscal and monetary conditions. With the objective of controlling inflation in view, this synchronisation in the short run should go towards tightening both monetary and fiscal conditions.
In the long run, which is better for controlling inflation – to keep the currency board in place or to join the euro area?
Participation in an economic and monetary union with historically lower inflation, as the euro area, is a factor, other things being equal, for better control of inflationary processes, both in the short and in the long run. This has been shown by all the data since the formation of the euro area.
Is the date of 1 January 2025 still a realistic target date for Bulgaria’s entry in the euro area?
Yes, if we do the right things and meet the required conditions, focusing on inflation. The only formal condition that the BNB must fulfil is to maintain monetary stability. This condition is fulfilled through the participation of the lev in the European Exchange Rate Mechanism. There is no scenario in which this condition may be breached. The other major task of the BNB is the technical preparations. Considering the progress made so far, I can say that the BNB and the banking sector will be ready for the euro changeover well before the deadline.
If the current political construction proves to be sufficiently stable, I expect that the Government will manage to comply with the remaining, actually the majority of, conditions within its competence.
Which symbols and graphic elements do you think would be appropriate to feature on the Bulgarian euro coins? How far has the process of minting trial euro coins gone?
Having signed a memorandum on this issue with the EC and the Eurogroup last December, now we have the complete documentation to mint the Bulgarian euro coins.
At its last session, the BNB Governing Council have united around the idea that the design of the currently circulating coins should be reproduced, which will ensure continuity of the used currency and will facilitate the recognition of the new currency by the Bulgarian citizens, specifically the image of the Madara Horseman on the low-value coins, St. Ivan Rilski on the €1 coin, and Paisy Hilendarski on the €2 coin.
The national side of the Bulgarian euro coins will feature the inscriptions ‘Bulgaria’ in Cyrillic and ‘euro’ (for the coins of €1 and €2), together with ‘stotinka’ or ‘stotinkas’ respectively (for the coins of 1, 2, 5, 10, 20 and 50 euro cents). An inscription on the edge of the highest-value coin of €2 will read ‘GOD SAVE BULGARIA’ in Cyrillic, which is in line with the Bulgarian historical coinage traditions.
The artistic designs are going to be created and submitted to the Coordinating Council for Bulgaria's preparations for euro area membership. Once they are finally approved, the designs will be presented to the Council of the European Union, the European Commission, and the euro area Member States.
Croatia joined the euro area at the beginning of this year. What experience are your colleagues from Zagreb and from all euro area countries sharing from the changeover to the euro?
There have been no unexpected developments since Croatia joined the euro area. The country's credit rating, which was worse than that of Bulgaria before Croatia joined the euro area, is now better, thereby significantly improving its financing conditions. Inflation is falling, not rising. There is a boom in tourism and investment.
The contacts with our Croatian colleagues are very good. We were helping them in the beginning when we were in the lead of this process, and now we are counting on their support and on the support of the other euro area central banks.
How do you assess the credit market in Bulgaria and do you think that additional measures are needed to influence its sustainable growth? Has the BNB used all its tools in this direction?
The pace of credit expansion is slowing down. We have been influencing the process, using three sets of measures. Firstly, we are using the available monetary policy tools, such as the already mentioned decision to increase the minimum required reserves. Secondly, we are using supervisory and macroprudential policy tools, such as raising the countercyclical capital buffer. And thirdly, the transmission of the ECB monetary policy is accelerating, as it is pursuing the same objective. We are monitoring the process closely and stand ready to initiate additional measures if necessary.
When could we expect an increase in deposit interest rates?
Interest rates in Bulgaria have been rising more slowly due to the high liquidity of our banking system. The upward trend will become clearer towards the end of this year and during next year. And this applies to interest rates on both deposits and loans.
Do you plan any new stress tests for the banking system?
This process has never been halted. Under the Law on Credit Institutions, the BNB conducts stress tests of banks every year. Based on the test results, we set the capital and other mandatory requirements for banks. This process is no longer an issue of wide public interest as were the stress tests in 2016 and 2019, and this is actually good news.
During the COVID-19 pandemic, the IMF decided to distribute USD 650 billion among the countries participating in the Fund. Bulgaria received nearly USD 859 million special drawing rights equivalent to about BGN 2 billion. How were these funds used?
This decision was taken by the IMF Board of Governors, in which I participate. We used the received funds to increase the foreign exchange reserves. This, inter alia, is an example of the benefits from our integration into the European and global financial infrastructure. Similarly, our future participation in the ECB’s capital as a member of the euro area will enable us to have access to the monetary income of the Eurosystem.
