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between 1 percent and to 2.6 percent, they turned very negative<sup>in 1989. This was despite the</sup> authorities adjusted the nominal BIR from 4 percent to 4.5 percent in<sup>June 1988. In 1989, taal</sup> interest rates on working capital and investment loans hovered between<sup>-4.2 percent and -5.7</sup> percent and in 1990 between -35.5 percent and -36.4 percent.<sup>Therefore, the negative real</sup> interest rates became an instrument for transferring low-cost resources<sup>to enterprises. The -35</sup> percent annual real interest rate in 1990 implied that a third of the real outstanding<sup>enterprises</sup> stock of debt was forgiven in this year.

Table 6: Real Interest Rates on Bank Credit 1/ (End of Period, in Percent per Annumn)

||1986|1987|1988|1989|<br>1990|
|---|---|---|---|---|---|
|Basic interest rate (BIR) 2/|1.3|1.3|2.3|-5.0|-36.3|
|Credits to socialist sector||||||
|Investment credit|1.8|1.0|1.6|-5.7|-36.4|
|Working capital|2.1|2.1|2.6|-4.2|-35.5|
|Credits to households||||||
|Goods and services|0.8|0.&|1.3|-5.9|-36.9|
|Housing|-0.7|-0.7|-0.2|-7.3|-37.8|
|Credits<br>for<br>financing<br>state||||||
|budget deficit 3/||||||
|Short-term: State Budget|-|--|-1.2|-8.2|-38.4|
|Locat Goverrnments|--|--|-1.7|-8.6|-38.7|
|Long term||||||
|From NBB: Old loans<br>|-|-0.2|0.3|-6.8|-37.5<br>|
|Newloansin 1989|--|--|--|-5.9|-36.9|
|From BFTS 4/|--|0.2|0.3|-6.8|-37.5|
|FromSSB|-0.7|-0.7|-0.2|-7.3|-37.8|
|MEMO:||||||
|Investment credit<br>from SICF 5/|-2.6|-2.6|-2.2|-9.1<br>|-39.0<br>|
|opportunity<br>Cost of Domestic Credit 6/<br>.**.........**.....................<br>.................................................................|-1.5|44.1|39.5|92.4|33.0|

Source: National Bank of Bulgaria and IMF.

(1) Real interest rates were estimated using the<sup>formula: Ci-p)/C1+p), i is the</sup> nominal interest rate and p is the inflation rate. (2) NBB's<sup>Loans to other financial</sup> Institutions. BIR nominal interest rate was increased from<sup>4.0 percent in June 1988</sup> to 4.5 percent in September 1988. (3) UntiL June 1988 up to one month, since July 1988 up to three months. (4) Is an estimate of the<sup>real interest rate in Levs of DM</sup> deposit in the international market. (5) This is the maximum interest rate. SCIF loans to agriculture were interest free. (6) Is an<sup>estimate of the real prime</sup> lending rate in levs for borrowing in Deutsche Marks<sup>in the international</sup> market. It is defined as: (i*+E-p)/(1+p), i* is the international nominal prime lending rate on a DM loan, E is the devaluation in the parallel, exchange rate 1ev/ON and p is the inflation rate (consumer price index). All variables<sup>are end-period estimates.</sup> However, until 1991 the real interest rate failed to measure accurately<sup>the true opportunity</sup> cost of credit. In Bulgaria, prices of goods, which are used<sup>to compute the real interest rates, were</sup> subject to controls. Therefore, to the extent that ratianing of<sup>goods prevailed at the controlled</sup> prices, these prices understate the true price level and thus<sup>the real interest rate also understates</sup> the true opportunity cost of credit. To correct this problem, the<sup>opportunity cost of domestic credit</sup> (see Table 6) has been estimated by calculating what would<sup>have been the cost in levs of a loan</sup>