site.btaUPDATED July 1, 1997: Currency Board Takes Effect, Pegging Lev to Deutsche Mark

On July 1, 1997, a strict exchange rate regime known as "currency board arrangement" was introduced, anchoring the Bulgarian lev to the Deutsche Mark in a ratio of BGL 1,000 per DEM. From the same date, the central bank's obligation to exchange leva for German marks on demand within a margin not exceeding 0.5% from the official exchange rate took effect.

The regime became a fact on the date of entry into force of the relevant provisions in a new Bulgarian National Bank Act, which was conclusively passed on June 4, 1997. Parliament resolved on the currency anchor by 134 votes in favour, 7 against and 4 abstentions. The Socialist MPs stood out of the procedure in protest of the refusal of the majority of the United Democratic Forces to debate the matter.

Reasoning its proposal to peg the lev to the German mark, the Government said that trade with EU Member States represents 31.3% of Bulgaria's imports and 36.5% of the exports. Germany is this country’s principal trading partner, accounting for about 10% of its foreign trade. The Government also believe that binding the lev to the mark will boost the competitiveness of Bulgarian exports and their share on West European markets.

The euro replaced the Deutsche Mark as a peg currency on January 4, 1999, when the exchange rate was fixed at BGL 1,955.83 per EUR 1 (BGN 1.95583 per EUR 1 after the July 1, 1999 re-denomination of the lev).

Twenty-eight years later, the currency board arrangement is still in effect. It will lapse if Bulgaria adopts the euro as its national currency, which is expected to happen on January 1, 2026.

Following is the BTA English Language Service's curtain-raiser of June 30, 1997 on the introduction of the new exchange rate regime:

“Currency Board Introduced Formally as of July 1

Sofia, June 30 (Alexander Kirov of BTA) - The currency board is to be introduced formally in Bulgaria as of July 1, 1997. The Bulgarian lev is pegged to the German mark at an exchange rate of 1,000 leva/DM 1, and the functions of the National Bank of Bulgaria (BNB) are reduced to interventions on the currency market in support of the exchange rate fixed.

Compared to similar mechanisms introduced in other countries, the currency board in Bulgaria can be described as a "soft" version. According to the structure approved, the role of a currency board is assigned to the BNB Issuing Department, while the "tough" version involves the establishment of a special institution.

The decision to introduce a currency board required considerable changes in the BNB Act. The other law necessary for the introduction of the currency board, the Commercial Banks Act, was passed a week before the end of June.

The discussions on the introduction of a currency board in Bulgaria as a possible way out of the grave economic and financial crisis began in November 1996. The proposal for it came from Michael C. Deppler, Director of European I Department of the International Monetary Fund during his ten-day visit here in early November. He described the measure as extreme and painful but the only possible one to achieve economic and financial stabilization. The IMF's condition for opening negotiations on the currency board was the major political forces in Bulgaria achieving a consensus on its introduction.

Early in December 1996, Zhan Videnov's Socialist cabinet that had the helm of the country at the time declared the government accepted the currency board introduction assuming full responsibility for the lack of a political consensus. Initially, the position of the Bulgarian Socialist Party (BSP) was that the currency board had an alternative but later the party stood up in support of the proposal.  The Union of Democratic Forces (UDF) said at the time that introducing the currency board under Videnov's cabinet and with the programme for structural reform made by the same government would be tantamount to "suicide".

The views and positions of the Bulgarian financial circles on the currency board were contradictory.

In mid-December an IMF mission came to Bulgaria to ensure the technical conditions for the currency board introduction. Initially, the IMF planned the introduction of the currency board in February 1997. Intensive preparations for it started early in January 1997 but were suspended due to the resignation of Videnov's cabinet.

In the meantime, after President Peter Stoyanov took office at the end of January 1997, the political forces signed a declaration on national salvation which envisaged to institute a currency board. Stefan Sofiyanski's caretaker cabinet reopened negotiations with the IMF in February. The IMF mission ended by concluding a new standby agreement for 680 million US dollars and a decision on putting the currency board in place which was supported by the major political forces again.

In July 1996 Bulgaria concluded its fourth standby agreement with the IMF for 580 million US dollars and the first tranche of the funds amounting to 116 million US dollars was received in the same month. The second tranche was scheduled for the beginning of September 1996 but was delayed as Bulgaria did not meet the respective conditions.  The IMF sent two missions and finally decided that Bulgaria would be unable to attain the parameters set forth in the memorandum to the agreement, namely, one-digit inflation, liquidation of loss-making enterprises and a budget deficit of less than 40% of GDP.

"The dispute on whether to institute a currency board in Bulgaria is pointless," incumbent Prime Minister and UDF leader Ivan Kostov said early in April 1997.  Though such a complex financial mechanism spells risks, the currency board will lead to the country's financial stabilization, he pointed out. The parliamentary elections were held on April 19 and the UDF won an absolute majority.

At the end of May Parliament elected the cabinet proposed by PM Ivan Kostov and approved its programme until the year 2001 which envisages stabilization of the country by putting a currency board in place. An IMF mission arrived in Bulgaria a few days later and finalized the parameters and the structure of the currency board with Kostov's cabinet. The IMF officials approved the macroeconomic framework of Bulgaria's national budget for 1997 and made the first review of the fulfillment of the new standby agreement.

The economic situation in Bulgaria is not so difficult and thanks to the efforts of the Government, things are under control, Johannes de Beaufort Wijnholds, IMF Executive Director and Head of Netherlands Constituency (which includes Bulgaria), said in early June. AK/KH/ 20:38:25  30-06-1997 - 0 –”