The currency markets seem to have gone crazy – the exchange rate of the euro to the US dollar plummeted, reaching a record low, the Swiss franc shot up to reach the level of the European currency, the European Central Bank declared it was going ahead with an ambitious plan to pump liquidity into the Eurozone’s financial institutions, something that is expected to devalue the overly plentiful euro. To what an extent can we expect these perturbations on the currency markets to affect the Bulgarian economy and businesses in this country?

To understand what is going on, we must first remember that the Bulgarian national currency – the lev – is in practice on a fixed exchange rate with the euro. A designated law fixes the exchange rate at BGN/EUR 1.96. In practical terms, in our everyday lives a 2:1 exchange rate is in place. This means that whatever may be happening to the euro will automatically be transferred to the Bulgarian currency: if the European currency is devalued, so is the Bulgarian lev and vice versa.

These fluctuations in the currency exchange rates have a direct bearing on exports and imports i.e. on the prices of export and import commodities. The Bulgarian economy is wide open, hence dependent on international markets. According to the National Statistical Institute, in practical terms the country’s entire GDP passes through foreign trade which is estimated at around EUR 44 billion for 2014. Sixty percent of this trade is with EU partners and the payments are in euro, with third countries accounting for the remaining forty percent, dominant here being the US dollar. In exports and imports to and from EU countries the effect of the currency fluctuations is negligible, as the transactions are in euro and there can be no currency exchange rate losses or profits. But this picture is a far cry from trade with partners from non-EU countries. In this case, the effect of the euro (Bulgarian lev) exchange rate is tangible.

When the euro goes down relative to the US dollar and the other world currencies, Bulgarian importers are forced to buy at higher prices and the earnings of Bulgarian exporters drop because their commodities and services are now cheaper to buyers who pay for them in dollars. In theory that should make Bulgarian exports all the more appealing to foreign partners as they get cheaper. Ultimately, the result should be a growth in Bulgarian exports. In practice, in the latter-day globalized world that is not how things work out because of the huge competition, thus Bulgaria’s exports to third countries have in actual fact been dropping. In other words, Bulgarian importers as well as exporters all stand to lose from the devaluation of the euro. So does the man in the street with prices digging deeper and deeper into his pockets as the appreciation of the US dollar entails a rise in the prices of many essential import commodities such as household appliances and computers. Even the plummeting fuel prices would have brought down prices at petrol stations, were it not for the appreciation of the dollar used in payments with the principal gas and oil supplier – Russia.

In the final analysis, it can be said that the Bulgarian boat has been rocked by the currency storm now raging in the world, though we can take some comfort in the fact that Bulgaria trades mainly with countries payments with which are in euro, i.e. one single currency, hence to a great extent avoiding the negative effect of the currency rate fluctuations.

English version: Milena Daynova