Bulgaria has entered another period of political instability, which would inevitably hinder growth and increase government debt. Data from the past two decades clearly show that when there is political uncertainty, marked by a sequence of caretaker governments and an inability to form a stable majority, growth is usually weaker, halting the process of economic convergence, while at the same time debt grows.
This is what happened in 2013-2014 when two caretaker cabinets framed the short-lived Oresharski government and amidst the whole political mess, the fourth biggest bank in the country (Corporate Commercial Bank) went bankrupt. The situation was similar in 2021 when we had caretaker governments running the country for most of the year as well as three rounds of parliamentary elections.
The problem, of course, is not simply in the fall of a government and its replacement with a caretaker counterpart. Such a situation is not necessarily bad for the economy. The issues arise when for a long time no majority can be formed and calling for a new round of elections does not actually solve the political crisis but rather prolongs it.
By the way, the period of instability in 2021 could easily be redefined as stretching up to 2022, given that the cabinet of Kiril Petkov lasted twice as short as that of Plamen Oresharski. The most recent elections show that the political crisis in Bulgaria is far from over.
Current data on the country’s economy in 2022 confirm the idea of weaker growth and rising debt during times of instability. At the end of 2021, Bulgaria’s GDP was rising faster compared to the average EU pace, however, during the first two quarters of 2022, it slowed down (4,2% and 4,0% respectively) and underperformed among other member states (growth in the EU was 5,5% and 4% respectively).
If in 2021 we had an excuse for the weaker growth, that being the sharper crisis in the rest of Europe in 2020 and thus the stronger rise back up in those countries, now, in 2022, potential underperformance compared to other member states is exclusively our fault – the country began the year with no budget, the government had no long-term outlook ahead of it, pushing crucial policies and reforms was impossible, and at the end the ruling coalition broke up, leading to another election.
All of this led to the gradual worsening of public finances and an increase in government debt. In March, when the 2022 budget was voted (before the actualization), the forecast of the Ministry of Finance outlined an increase in debt to 29,3% of GDP in 2024.
Recently, the caretaker financial minister Rositsa Velkova presented worrying data for the mid-term financial frame, taking into consideration the mid-year budget actualization and some of the expense commitments for the future. The minister speaks not only about a large deficit in the next year, but also about reaching a debt-to-GDP ratio of 40% by 2025, should there be no fiscal tightening. The last part is a warning for politicians more than anything, but still, the trend of growing debt is clear and not simply induced by the Pandemic and 2020 downturn.
Now, just before the fourth election in less than two years, it seems again that forming a long-lasting coalition is an impossible task. The question of whether there would be a government at all also remains. The 2023 budget is uncertain as well, even though now there is more time between the elections and the end of the year. The price of the political instability may be clearer than ever this time.
As of now we know that 1) a single caretaker government followed by a stable regular one could bring little to no damage to the economy and 2) a longer period of political instability e.g., two consecutive caretaker governments, leads to serious economic consequences. The reason is not only the uncertainty and the frequent changes at the top of ministries and government agencies but also the lack of a working parliament and the blocking of all legislative initiatives. The question now is what the price of two rounds of elections preceded by caretaker governments, happening very close in time, would be.
Alongside all this, it seems that darker times are ahead of Europe’s economy, which is headed for a recession, according to many forecasts. Another issue is that Bulgaria is yet to fulfill its requirements for the implementation of the National Recovery and Resilience plan and doing that on time would be difficult (here you may track the progress, as well as the steps towards adopting the Euro).
All this does not necessarily mean that any regular government is better than a new caretaker one and a new round of elections. There is always the risk that a stable coalition could make many missteps and worsen the economic environment – this is the epitome of the so-called “political risk”, from which one could never be fully safe. Nevertheless, the ongoing instability might be even worse.