Economy and Trade
Bulgaria, located in the eastern Balkans, was part of the Ottoman Empire for 500 years before gaining its independence in the 19th century. After the World War II, the country was a satellite of the Union of Soviet Socialist Republics until the latter’s demise in 1991. Little progress was made in reforming the economy in the 1990s, a period when the Communists retained great influence over policymaking. However, market reforms were instituted from 2001 onwards, and in 2007 Bulgaria joined the European Union. The economy grew by an average of just over 5% between 1997 and 2007, while agriculture’s share of GDP fell from nearly 27% to around 8%. Bulgaria’s main trading partners are Greece, Russia, Germany, Turkey, Italy, and the Ukraine. Its major exports include clothing, footwear, iron and steel, machinery and equipment, and fuels. It imports machinery and equipment, metals and ores, chemicals and plastics, and fuels, minerals, and raw materials.
Economic Policy over 12 Months
The new Center-Right government that won the July 2009 general election has sought to restore order to the government’s finances by cutting spending. It has also cracked down on corruption and the gray economy, which accounts for between 25% and 40% of GDP. The authorities have prioritized the construction of roads and other transport infrastructure. Immediately after the election, the government announced emergency measures, including a 15% cut in the budget of most government departments. The authorities also announced reforms of the customs and the revenue collection systems, which it says would bring in an extra €600 million in revenues by the end of 2009.
The European Union—which had blocked funds and reprimanded the previous administration for its shortcomings—responded by announcing the unblocking of hundreds of millions of euros’ worth of funds. However, Brussels has also urged Bulgaria to do even more to tackle corruption and organized crime and to reform the judiciary.
The new government has also adopted a new approach to Russia, a major investor in the country. Bulgaria is almost entirely dependent on Russia for its energy needs, and was badly affected by a disagreement in January 2009 between Moscow and transit country Ukraine, which blocked gas supplies to many areas of Eastern Europe. The previous socialist-led government had strong ties with Moscow. However, in September 2009 the new administration launched a review of plans to build a new nuclear power plant, which was to have been constructed by a Russian firm, as well as to participate in two Russian-led pipeline projects. It says that such projects must match the national interest and the EU agenda.
The government has run one of the tightest fiscal policies of any EU government—it recorded the smallest budget deficit of any country at 0.8% of GDP in 2009. This has helped to underpin the country’s creditworthiness—in January 2010, the ratings agency Moody’s upgraded its outlook on Bulgaria from stable to positive.
The government is targeting a budget deficit of 0.7% of GDP in 2010, a goal that will prove challenging, according to an International Monetary Fund (IMF) report published in March 2010 which said that the authorities’ revenue projections seemed optimistic. However, the organization added that increases in excise duties and a number of reforms to improve tax compliance are important contributions in preventing a further erosion of tax revenues. In terms of spending, the 2010 budget includes a freeze in public wages and general pensions, streamlining of the public administration, and stricter controls on healthcare spending.
Economic Performance over 12 Months
Bulgaria enjoyed 12 years of consecutive growth until 2009, when the credit crunch and the global economic downturn plunged the country into a deep recession. In the years that preceded the global economic and financial crisis, large capital inflows into Bulgaria generated a domestic demand boom. This brought strong GDP and employment growth, but also widened the current account deficit to very high levels, and led to an overheating of the economy, with high wage growth and double-digit inflation, according to an IMF report published in March 2010.
The boom came to an end in the fourth quarter of 2008, amid the global crisis that followed the default of Lehman Brothers. A sharp adjustment in capital inflows led to a contraction of domestic demand, while the recession in Bulgaria’s trading partners caused a drop in exports. Consequently, GDP contracted by 5.1% in 2009, according to the IMF.
Bulgaria entered the recession with some considerable advantages in the shape of high foreign exchange reserves, a large fiscal surplus, and sizable reserves in the fiscal reserve account. Furthermore, the banking sector is in relatively good shape, with the country avoiding the problems that hit the financial sectors of other European countries.
The capital adequacy ratio of the banking system is high (17% at the end of 2009) and well above the regulatory minimum of 12% and the EU minimum of 8%; the coverage ratio of nonperforming loans by provisions exceeded 80%; and banks continued to report profits in 2009.
The recession has had some positive effects on the country’s external accounts. In September 2009, the central bank announced that the current account had moved into surplus for the first time in five years, reflecting a fall in consumer spending. The country registered a current account surplus for July 2009 of €102 million, compared to a €439 million current account deficit in July 2008. In the first seven months of 2009, the current account gap fell to 7.2% of projected GDP, from more than 14% in the same period of 2008. The recession has also led to a dramatic reduction in inflation, which fell from almost 15% in June 2008 to 1.3% in August 2009. High inflation and a persistently large current account deficit have hampered the country’s efforts to join the eurozone.
Support for Inward Investment and Imports
Bulgaria is keen to attract foreign investment. For more information on the incentives available to foreign investors, see the website of the Invest Bulgaria Agency, the government agency responsible for foreign investment in the country.
Bulgaria is part of the EU customs union. Decisions regarding quotas or customs suspensions to be applied to goods imported into Bulgaria are currently taken at the Community level. More information on EU trade policies can be found on the following website: ec.europa.eu/trade.
Tax Exemptions
Bulgaria provides a wide range of incentives to investors. These include: zero corporate income tax rate for investment in high-unemployment areas; a two-year VAT exemption for imports of equipment for investment projects over €5 million that create at least 50 jobs; and depreciation over two years for computers and new manufacturing equipment.
Statistics
GDP growth: −5.1% (IMF, 2009)
GDP per capita: US$12,600 (2009 est.)
CPI: 1.6% (2009)
Key interest rate: 0.55% (December 31, 2009)
Exchange rate versus US dollar: €0.7338 (2009)
Unemployment: 9.1% (2009)
FDI: US$47.31 billion (December 31, 2009 est.)
Current account deficit: −US$5.812 billion (2009 est.)
Population: 7,148,785 (July 2010 est.)
Source: CIA World Factbook
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