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 Second World War, 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 centre-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 system, which it says will 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 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.
In October 2009, the government said that it expected a budget deficit of 0.7% of GDP in 2010 but that it would aim for a balanced budget in a bid to speed up entry into the eurozone and avoid a prolonged recession. The government wishes to apply to join the pre-euro ERM-2 waiting room in 2010 and to try to adopt the single currency by 2013. Since 1997, Bulgaria has operated a currency board under which the exchange rate of the Bulgarian lev is fixed to the euro at a level of 1.95583. The currency board arrangement is expected to be maintained until the country joins the eurozone. The new administration’s determination to implement a tight fiscal policy partly reflects its desire to protect the currency board.
The finance ministry said in October 2009 that it would tap international markets through a eurobond issue rather than approach the IMF if it needed extra funds to finance public spending. It added that its ability to tap international markets reflected improved investor confidence in the economy and the new government.
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. Having grown by over 6% in 2008, the IMF forecast in September 2009 that the economy would contract by 6.5% in 2009 and by 2.5% in 2010. Foreign investors have fled the country and many factories have shut down or significantly curtailed operations, reflecting a slump in domestic and export demand.
Growth slowed sharply in the final quarter of 2008—to 3.5% from 7.2% in the last three months of 2007. The economy contracted by 3.5% (year on year) in the first quarter of 2009 and by 4.9% in the second quarter. Private consumption shrank by 5.6% year on year in real terms, investment by 16.3%, and exports by 15.8% during the April to June period.
Bulgaria entered the recession with some considerable advantages. Furthermore, the banking sector is in relatively good shape. According to an IMF report published in September 2009, foreign exchange reserves were high, there was a large fiscal surplus, and there were sizable reserves in the fiscal reserve account. Bulgaria has also avoided the problems that have hit the financial sectors of other European countries. The capital adequacy ratio of the banking system is high (17.6% as of end-June 2009), while the banking sector remained profitable on average during the first half of 2009, despite a rise in provisioning for nonperforming loans. Less positively, prior to the recession the private sector had experienced very rapid credit growth and private sector external debt had increased to around 100% of GDP at the end of 2008.
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 with 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: www.investbg.government.bg.
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 of two years for computers and new manufacturing equipment.
Statistics
GDP growth: 6% (2008 est.)
GDP per capita: US$12,900 (2008 est.)
CPI: 12.3% (2008)
Key interest rate: 5.77% (December 31, 2008)
Exchange rate: 1.3171 leva per US dollar (2008 est.)
Unemployment: 6.3% (2008)
FDI: $42.91 billion (December 31, 2008 est.)
Current account deficit: US$12.07 billion (2008 est.)
Population: 7,204,687 (July 2009 est.)
Source: CIA World Factbook
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