-17-

financial system (see Table 9).10 In 1986, compared to what could be obtained in a foreign currency denominated-deposit (see Memo Item in Table 9). domestic interest rates offered a relatively high return on assets. By international standards, interest rates started to be uncompetitive in 1987-88, when the parallel market exchange rate started to devalue." Relative to official inflation, however, interest rates only started to become very unattractive after 1988. Until 1988 depositors could find deposits which offered positive real interest rates, such as was the case of time deposits with banks. In 1989, the real interest rates on the mnst important deposits--savings deposits with SSB and demand deposits with banks--became very negative.

Table 9: Real Interest Rates on Bank Deposits 1/ (End of Period, in Percent per Annum)

||...<br>...<br>. ...<br>1986|.<br>.<br>.<br>.<br>|.<br>.<br>.<br>.<br>|.<br>.<br>.<br>.<br>|.<br>.<br>.<br>.<br>|
|---|---|---|---|---|---|
|||1987|1988|1989|1990|
|Deposits with SSB|......................||...................|.................|..........|
|<br>Demand deposits|-17|17|12|2||
|<br>Savings Deposits|.|-.|-.|-8.|-38.4|
|<br>GeneraL|1|||||
|<br>Childrens'|-.7<br>|-1.7<br>|-1.2<br>|-8.2<br>|-38.4<br>|
|<br>Housin deosits|-0.7<br>|-0.7<br>|-0.2<br>|-7.3<br>|-37.8<br>|
|g p<br>|-0.7|-0.7|-0.2|-7.3|-37.8|
|Enterprises deposits with banks2/<br>Demand<br>Deosits 3/|17|1||||
|<br>p<br>Time Deosits|-.|-.7|-1.2|-8.2|-38.4|
|p<br>1-6 months|14|14||||
|<br>3Months|-.<br>|-.<br>|n.s.<br>|n.a.<br>|n.a.<br>|
|<br>over 3 months|n.e.<br>|n.a.<br>|0.3<br>1|-6.8<br>|-37.5<br>|
|<br>Minimum|n.s.<br>-12|n.a.<br>-12|.3<br>|-5.9<br>|-36.9<br>|
|<br>Maximum|.<br>47|.<br>47|n.a.<br>|n.a.<br>|n.a.<br>|
|<br>|.|.|n.a.|n.a.|n.a.|
|Goverrnent deposits<br>State budet||*||||
|g<br>Localgoverrewnts|--|-|-1.2<br>17|-8.2<br>|-38.4<br>|
|<br>|--|--|-.|-8.6|-38.7|
|interbank deposits with NBB<br>Demand Dit||||||
|eposs<br>Three Mnth' dit|-0.7<br>|-0.7<br>|-0.2<br>|-7.3<br>|-37.8<br>|
|os eposs<br>Deosits vr th|n.a.<br>|n.a.<br>|0.5<br>|-6.6<br>|-37.3<br>|
|p oe ree<br>months<br>|n.a.|n.a.|1.5|-5.7|-36.7|
|MEM0:<br>Reel oortunit Cost of Hldin|65|||||
|ppy og<br>Lev-Denominated Deposits 4/|-.|39.0|34.6|88.3|31.9|

Source: National Bank of Bulgaria and IMF.

Notes: (1) In January 1990 authorities aLlowel accounts in USS and DM. These earn 5 3/4 percent and 5 5/8 percent, respettively, for demand deposits and 6 1/4 percent and 6 1/8 percent, respectively, for time deposits of at least 1 year. (2) The IBB, OFTS, and conmnercial banks. (3) Until June 1988 up to one month, since July 1988 up to three months. (4) Is an estimate of the real interest rate in Levs of ON deposit in the international market. It is defined as: (l**E-p)/(l+p), i* is the international nominal deposit interest rate on a DM deposit, E is the devaluation in the parallel exchange rate Lev/DM and p is the inflation rate (consLuer price index). All variables are end-period estimates 10/ This is consistent with international evidence on countries that experienced hyperinfiation. e.g., Latin American countries. It indicates that depositors only withdraw their savings from the financial system when the real interest rate falls below a threshold and that this is between 0 and -10 percent.

11/ In relation to the DM the Lev devalued by: -8 percent in 1986; 40 percent in 1987; 34 percent in 1988; 100 percent in 1989; and In 109 percent in 1990.