The paper "Exchange Rate Regimes in Bulgaria " is a wonderful example of a Macro and Microeconomics Case Study. Bulgaria is considered to be a small country with a lot of potentials for the new firms to enter and attain long-term growth, along with growing and somewhat stable economies. The country is located in the Balkan area which is considered to be an unstable location for not only Bulgaria but many other countries and makes the country prone to some risk for investments and trade. Bulgaria’ s income level is the lowest among the countries that have faced the transition process.
In order to stop its hyperinflation and deteriorating economy Bulgaria adopted a Currency Board system that speaks for a fixed exchange rate system. (Calvo and Reihnart, 2002) Most of the enterprises were state-owned and were not run in a proper manner and every aspect of them was outdated and unproductive for the Bulgarian economy to perform well. In order to maintain competitiveness and to alleviate the financial burden of these firms on the state budget, the government imposes that the monetary authorities apply a soft budget constraint to the economy.
This policy results in a high and chronicle inflation, and rapid depreciation of the Lev until the fatal crisis of 1996-1997. The severe crisis that the Bulgarian economy was facing resulted in the failure of the first step towards the transition process which focused on moving the economy from a centrally planned system towards more of a market economy. Hence this failure in the first stage of the transition process ended Bulgaria with delayed reforms and an effective privatization process which became very slow and difficult because the planning was not done properly and even the implementation of the program resulted in situations that went out of control for the country to handle.
This delay in the reforms and failure in the first stage of the transition process further deteriorated the position of the government as well as the central bank in the eyes of the public as well as local and foreign investors. Initial conditions of which two most important and strong ones, which adversely affected the privatization process in Bulgaria were the bureaucracy of the government and the instability in the business environment.
(Bitzenis 2003) The case of Rover Company is a major example. During November 1994, the Rover Company purchased a manufacturing concern in Bulgaria, by investing $1.4 million. Subsequently, they withdrew their investment because of the problems they encountered with the government bureaucracy and the misinterpretation of the certain clauses in the agreement already signed with the Government of Bulgaria. (Marinov and Marinova 1997) The companies privatized were priced and offered to investors at a price, which they could not consider as an opportunity.
(Rayome and Stocker 1995) The whole privatization process actually speeded up after the introduction of the currency board during mid-1997. This process further accelerated during 1998-1999. During this period Bulgaria encountered reasonable inflation rates and steady exchange rates. According to Bitzenis initially, analysts considered Bulgaria to take a “ big bang” change. The eleven years study of the changes in Bulgaria depicted a different picture. The only sign portraying the “ big bang” was the freeing from price control of over 70% of the general items.