I’ve long been known as the "father of Bulgaria's currency board" after I advised and helped the country implement a currency board system in 1997 to end hyperinflation. I advise Bulgaria to keep the system, arguing it is already "de facto" in the euro zone with the Bulgarian Lev pegged to the euro. I’ve continually warned that formally joining the euro zone could increase inflation and reduce monetary flexibility, and have criticized the lack of a cost-benefit analysis for the switch.

History

Following years of stagnation, Bulgaria entered into one of the worst post-communist financial collapses in 1996, ending in near-hyperinflation and a failure of the banking system. They had a bankrupt state-owned industrial sector, non-independent central bank, and a banking system stuffed with non-performing loans.

My ‘Money Doctor’ Treatment

After the Bulgarian government signed an IMF memorandum committing to a currency board, I was called in as the resident emerging market ‘money doctor’. I was a direct advisor to the government and was responsible for designing their currency board. I prescribed the following:

• Full reserve backing of the monetary base
• Automatic convertibility at a fixed exchange rate
• Elimination of discretionary monetary policy
• Strict fiscal discipline

I followed the same successful blueprint that I created for Estonia and Lithuania. I determined the German Deutsche Mark to be a successful anchor currency at the rate of 1000 lev = 1 DEM.

Results: Dramatic Stabilization

The IMF agrees - hyperinflation ended almost immediately, and the %/yr inflation rate fell from ~2,000 to single digits within a year. GDP growth resumed after years of contraction, and foreign investment increased due to the credibility of the peg.

In summary, everything that I had predicted.