Bulgaria - Economic Profile

 

 

The European Commission has considered Bulgaria a functioning market economy since 2002 (see the 2002 Regular Report on Bulgaria's Progress towards Accession [608 KB] ).

It has made further progress with macroeconomic stabilisation and economic reform. Its current reform path should enable it to cope with competitive pressure and market forces within the Union (see the September 2006 Monitoring Report).

The monitoring of the economic criteria in 2006 revealed that Bulgaria has made continued progress since the October 2005 report. Useful steps were taken to contain the external deficit. The privatisation process and the liberalisation and restructuring notably of utilities have well advanced. Some additional progress has been made in improving the business environment and in reducing non-wage labour costs.

However, the current account deficit widened and warrants continued prudent fiscal and wage policies. Deepening of structural reforms requires improving the functioning of the judicial system and further easing the regulatory burden on businesses. The regulatory framework for the labour market needs to be made more flexible.

Macroeconomic situation

GDP growth reached 5.5% for the full year 2005 and 6.1% for the first half of 2006. It is forecasted to amount to 5.4% for the full year 2006 and to5.7% in 2007. Economic growth is mainly driven by strong investment growth as well as by a rebound of domestic demand. The catching-up in terms of GDP per capita, however, has been slow reaching 32.1% of the EU-25 average in 2005 (a 6.2 percentage points increase from 1997). The gap between imports and exports of goods and services increased further to 20.2% of GDP for the full year 2005. The current account deficit widened accordingly to 11.3% of GDP for 2005. Slightly higher imports of services, lower current transfers and lower net incomes also contributed to this result.

Consumer price inflation accelerated towards the end of the year 2005 due to increases in oil and food prices. While average inflation dropped from 6.1% in 2004 to 5 % in 2005, end-of-year inflation rose from 4.0% to 6.5%.
The unemployment rate (ILO methodology) went further down to reach 9.0% of the labour force in the second quarter of 2006, compared to 10.1% in 2005 and even 12.0% one year earlier. Apart from sustained job creation in the private sector, this seems to be due also to an increasing shift of informal employment to the formal sector, following the reduction of social security contributions at the beginning of 2006. . Real annual average wages grew by around 4.1% in 2005 and thus largely in line with productivity gains.

Foreign direct investment (FDI) reached a record high of € 2400.4 million in 2005, corresponding to 11.2% of GDP.

Following a higher than expected revenue performance in 2004 and 2005, the general government balance achieved a surplus of 2.7% and 2.4% of GDP respectively. In 2006 a further government surplus of 3.3% of GDP is expected. Public debt has continued falling from above 100% of GDP in 1997 to 29.8% of GDP in 2005.

More details can be found in the Candidate Countries' Economies Quarterly (CCEQ) published by the European Commission.

Relations with IFIs

In February 2002, the IMF governing board approved a two-year stand-by arrangement worth about US $ 337 million in support of Bulgaria’s comprehensive economic programme. A new 25-month Stand-By Arrangement agreement was signed in August 2004 to the amount of about US $ 146 million to support the government's economic program for 2004-06. This current Agreement is of a precautionary type, i.e. the funds are normally not disbursed.

In June 2006, the World Bank approved its country partnership strategy for Bulgaria for the years 2007-2009. The lending program of up to US $ 300 million per year would involve a series of three Development Policy Loans (DPLs) worth around US $ 150 million each and up to two investment loans per year in the following priority areas: productivity and employment, fiscal sustainability and absorption of EU funds, and social inclusion.
The European Bank for Reconstruction and Development (EBRD) is investing in a considerable number of projects in Bulgaria supporting private sector development in energy, telecommunications, banking, agriculture and general industry. As at 30 September 2006, the EBRD had signed 64 investments in Bulgaria, totalling €1.345 billion. This has helped to generate an additional €3.83 billion from other sources. A total of 79 per cent of investments are in the private sector.