The Role of the Currency Board in Bulgaria's Stabilization
IMF Policy Discussion Papers, April 1, 1999
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Bibliographic details
- Authors: Anne Marie Gulde
- Published: April 1, 1999
- Series: IMF Policy Discussion Papers
- DOI: https://doi.org/10.5089/9781451974102.003
Summary
- Focuses on the process leading to the choice of a currency board as a stabilization instrument, and its specific design.
- Argues the arrangement was well designed for the task at hand, combining a traditional rule-based exchange arrangement with a number of legal and structural measures to address pressing bank sector and fiscal issues.
- Emphasizes that the success of Bulgaria’s currency board stabilization must be attributed to a combination of elements, of which the currency board was a crucial, but not the only determining factor.
Context and Rationale for the Currency Board
- The use of a currency board was complicated and controversial because of serious structural problems, including a systemic banking crisis.
- Structural problems, most notably in the banking sector, were equally severe and interdependent with stabilization measures.
- The banking crisis had been smoldering since at least 1995.
- A 1996 review found that out of ten state banks, which still accounted for more than 80 percent of banking sector assets, nine had negative capital and more than half of all state banks' portfolios were nonperforming.
Design Features Emphasized
- Combination of a traditional rule-based exchange arrangement with legal and structural measures aimed at addressing banking sector and fiscal issues.
- The design sought to leverage the currency board’s rule-based credibility while pairing it with interventions targeted at banking-sector stability and fiscal repair.
Key Analytical Findings
- The currency board was a crucial stabilizing instrument but not the sole determinant of stabilization success.
- The interdependence of monetary, legal, structural, banking, and fiscal measures was central to the overall stabilization outcome.
- Addressing systemic weaknesses in the banking sector was essential for the currency board arrangement to function effectively.
Policy Implications and Lessons
- Rule-based exchange arrangements can provide a credible anchor in contexts of severe structural distress when combined with targeted legal and structural reforms.
- Monetary regime design should be coordinated with measures to resolve banking-sector vulnerabilities and fiscal imbalances.
- Crisis response requires a combination of elements rather than reliance on a single institutional instrument.
IMF Policy Discussion Paper: "The Role of the Currency Board in Bulgaria's Stabilization" by Anne Marie Gulde (April 1, 1999).