Bulgaria Takes Steps to Salvage Its Future

The sprawling, 30-year-old Chimco chemical factory sitting here in a grayish haze beneath the Stara Planina Mountains hardly seems a pearl in Bulgaria’s crown. It is a collection of gigantic water-cooling tanks, smokestacks and ammonia fumes.

But it is also one of Bulgaria’s few profitable state-owned firms--a busy fertilizer plant employing nearly 2,500 people and raking in more than $20 million annually. And it’s for sale.

Lagging far behind the rest of the former Soviet bloc, Bulgaria has finally taken a few tentative steps toward restructuring a Communist-era economy on the brink of collapse. Scores of state companies are to be closed or sold; a quarter of the country’s scandal-ridden banks have been put in receivership; and subsidies are being slashed on food, utilities and gasoline.

Resistance to reforms has combined with widespread corruption to plunge Bulgaria into its most severe economic crisis since the fall of communism seven years ago. And the government is paying the price: The ruling Socialist Party suffered its worst electoral defeat in presidential voting last week.

The crisis hit one peak over the summer when the government effectively reached bankruptcy. Bulgaria’s currency, the lev, collapsed--at one point losing 80% of its value in a single day--while the internal debt soared and reserves hemorrhaged. Cornered, the government signed a $580-million standby loan agreement with the International Monetary Fund and agreed to austerity measures that in the short term, at least, have only tightened the vise on long-suffering Bulgarians. Inflation is close to 20% a month; wages are among the lowest in Europe.

“Bulgarians have been asked for the last seven years to accept the price of reform, but they haven’t seen the kinds of benefits visible in Hungary, Poland--even in Romania people are seeing a certain improvement,” said a European political analyst based in Sofia, the capital. “The game has been one of stick but no carrot.”

A second IMF installment of $115 million has been repeatedly delayed because of the government’s failure to keep its end of the bargain.

Under the IMF agreement, the government pledges to sell about 30 profit-making companies; 64 losers will be closed; and 70 or so others will be “isolated,” or rehabilitated for possible future sale. Prime Minister Zhan Videnov said he hopes to raise the improbable figure of $1 billion through the sales. But economists also project that up to 70,000 jobs could be lost.

“If they don’t bring in foreign investment to create jobs, it will be a disaster,” one Western diplomat said. “Up until now, they have given lip service to foreign investment, but there have been few deals.”

Furthermore, several prominent international companies have packed up and left in recent months. The country now has the lowest level of foreign investment in Eastern Europe.

Investors have been discouraged by a dizzying succession of governments (six in the past seven years) and by a similar lack of consistency in the rules of the investment game.

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Convinced now that investment may be their only hope, government officials are rewriting legislation to include better tax concessions, relief of some customs duties and an easing of the red tape for investors. Most important, the officials say, the new legislation will include a guarantee that laws governing a particular investment will continue to apply for 10 years, even if a subsequent parliament changes the laws again.

“We are making the first steps--that is important,” said Daniela Bobeva, an economist who is president of the government’s Foreign Investment Agency. “Unfortunately, it’s now and not one, two, four, five years ago. We made some expensive mistakes, in terms of political credibility and political confidence. . . . There was a lack of political will on the part of the government. Now [we realize] there is no other way.”

Here in Vratza, in northwestern Bulgaria, Chimco is one of the first companies scheduled to go on the auction block, and it may be one of the most attractive from a motley lot of mismanaged firms.

Spread over a five-acre plain, Chimco is emphasizing to potential investors what it describes as its self-sufficiency: It has its own water and electricity sources and its own terminal on the Black Sea to facilitate the transportation of exports, the bulk of Chimco’s business.

As Bulgaria’s major producer of urea and ammonia, Chimco’s profits and output have grown since 1990, thanks in part to an expansion last year in world trade of basic industrial commodities, said Executive Director Kiril Petkov. Principal markets for Chimco’s urea include the United States and China.

Government analysts are studying Chimco’s books to come up with a price tag for the plant, Petkov said; South Korean investors have already expressed interest.

“The potential buyer should be prepared to include in the deal the commitment to invest in the complete modernization of the facilities,” he said. “This will secure another 20-year cycle of work for our people.”

Petkov conceded that layoffs are inevitable but said he hopes that no more than 10% of the company’s employees will be dismissed. Chimco is the largest employer in this city of 78,000, and much of the local economy depends on the plant.

“The general mood is one of fear,” said Petko Neykov, 44, a mid-level manager who began working at Chimco 16 years ago. “Right now we are working more than ever, but at a certain point they may start cutting jobs.”

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Vasil Georgiev, 24, a burly laborer, said: “Nothing is very clear yet. Until we know for sure what will happen with the plant, there is a lot of uncertainty about what will happen to us.”

Uncertainty, too, plagues the entire privatization program. Economist Bobeva said she faces criticism from Bulgarians who accuse the government of selling off “the best pearls of the family jewels.” For instance, a 67% share of Sofia’s luxurious Sheraton Hotel was recently sold to South Korea’s Daewoo conglomerate for the bargain-basement price of $22.3 million.

Bobeva also fields nervous inquiries from potential investors from abroad. “I cannot reassure them,” she conceded. “They have to take the risk. We tell them everything that might happen. We present the worst [possible] picture so they are prepared.”

At the crux of Bulgaria’s crisis was an explosion in the number of banks soon after the communist system ended. The banks had little backing and were used primarily to line the pockets of the political cronies running them.

“For a while, being a banker meant having a couple Mercedeses, two bodyguards and two mobile phones per head,” a European diplomat said. “Very little experience in banking was required.”

The banks fed into a chain of reckless lending to state companies that in turn blissfully defaulted on the loans; eventually the banks were insolvent and depositors’ money squandered.

The fire sale of the state companies and the closing of many banks are intended to break the cycle, IMF officials say. But because shock-therapy measures have been delayed for so long, economists say, the impact on Bulgaria’s economy--and on Bulgarians’ psyche--will be all the worse.

“These are all steps in the right direction, but clearly, given the crisis, the big issue is to restore confidence,” an international banker said. “To do that, they will have to continue and possibly accelerate their program.”