Bulgaria WT/TPR/S/121
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I. ECONOMIC ENVIRONMENT
(1) MAJOR FEATURES OF THE ECONOMY
1. Bulgaria is located in south-eastern Europe and occupies the centre of the Balkan peninsula. It
is bordered to the south by Turkey and Greece and to the north by Romania. The Black Sea forms the
eastern boundary while the western border is shared with Serbia and Montenegro, and the Former
Yugoslav Republic of Macedonia. The total land area is approximately 110,600 km2; one third is
mountainous and there are large fertile valleys and plains. The climate ranges from Alpine to
Mediterranean. Bulgaria is endowed with signif icant forestry resources and mineral deposits.
According to the recent census, Bulgaria's population was 7.9 million in 2001, of which 83.5% were
of Bulgarian, 9.5% of Turkish and 4.6% of Roma origin.1 In 2001 the per capita GDP was US$1,712
(Table I.1).
Table I.1
Main economic and social indicators
Land area 110,630.9 km2GDP at current prices (2001) $13,553 million
Population (2001) 7.9 million Per capita GDP at current prices  (2001) $1,712
Annual population growth, 1994-2001 (%) -0.8 Agriculture share in  GVA, 2002 (%) 12.5
Life expectancy at birth (2000) 71.5 Industry share in GVA, 2002 (%) 27.8
  males 67.7 Services share in GVA, 2002 (%) 59.7
  females 74.9 Net primary enrolment (% of relevant age
group in 1997):95.5
Fertility rate, total (births per woman) in
20001.3 Illiteracy rate, adult female (% of females,
15+) in 2001):2.0
Mortality rate, infant (per 1000  live
births) in 200013.3 Illiteracy rate, adult male (% of males,
15+) in 2001):1.0
Rural/Urban residence ratio in 2000 (%) 46.1
Note: GVA refers to gross value added.
Sources: NSI (undated). Excluding lakes, etc;  EC (2002);  IMF (2003b);  World Bank, Bulgaria Data Profile [Online]. 
Available at: http://devdata.worldbank.org.
2. Currently, Bulgaria's major economic activity is services, with the sector contributing  59.7%
of gross value added (GVA) in 2002.2 The main service sectors are communication, transport, trade,
finance, and tourism. The industrial sector accounted for 27.8% of GVA and is dominated by
machinery and metal products, food processing, textiles, chemicals, construction, electronics, and
energy production. Agriculture accounts for the remaining 12.5% of gross value added. The main
agricultural products are grain crops (which account for more than one third of the arable land),
oilseeds, vegetables, fruits, tobacco, and livestock and dairy products.
3. Until 1989, Bulgaria was a centrally planned economy, having been governed by the
Communist Party since the end of the Second World War.3 During this period the economy's structure
                                                     
1 The National Statistical Institute notes that th e population has fallen continuously since 1989 as a
result of net emigration:  in 1997 (following the economic crisis) there was an outflow of 7% of the population
and more recently, declines of 5.1 in 2000 and 5.6% in 2001.
2 Bulgarian national accounts distinguish gross value added, by sector at market prices, and GDP which
includes indirect taxes on products, including VAT, import duties on goods, and financial intermediationservices indirectly measured.  These "adjustment" elem ents of GDP are not allocated by sector (NSI, undated).
3 Until 1944, Bulgaria was a constitutional monarchy, with a pluralistic political system.WT/TPR/S/121 Trade Policy Review
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was geared very largely to its role within the Council for Mutual Econom ic Assistance (CMEA). Over
half of Bulgaria's foreign trade was with members of the CMEA.  Bulgaria imported equipment, fuels
and minerals from other CMEA members to produce capital goods such as electronics and
engineering products for export to the bloc; in addition, Bulgaria was a major exporter of farm and
processed food products, and an important destination for Russian and other CMEA tourists. Bulgaria
has therefore been heavily dependent on foreign trade in goods and services for many years.
4. The political change that occurred in November 1989 paved the way for the restoration of
democratic structures and, with this, reforms aimed at replacing the command-and-administrative
economic system with market principles and mech anisms.  Following a period of severe economic
disruption, the reform process, accelerated and more determined since 1997, has led to renewed
economic growth and revived confidence.  Currently, Bulgaria is among the most rapidly growing ofthe former CMEA economies and, as noted below, the structure and direction of its international trade
have changed radically.
(2) E
CONOMIC BACKGROUND
Early transition reforms
5. Bulgaria's transition process began in February 1991. As in other centrally planned
economies, the transition reforms required extensive macro- and micro-economic restructuring
including liberalization of prices and internal trade; stabilization of inflation, budget deficits, real
exchange rate volatility and foreign debt; structural measures including privatization and liberalization
of the foreign trade regime; and the setting up of fundamental market economy institutions.4
6. Though some measures were undertaken to restructure the economy – including price
liberalization, introduction of internal currency convertibility, and elimination of certain non-tariff
barriers – in general the pace of economic reform was very slow until 1997. During this earlytransition period there was considerable macro- and micro-economic instability, with high inflation;
rising budget deficits (accentuated by government  absorption of losses by state-owned enterprises,
continuing subsidization of state-owned enterprises, and monetization of government deficits by the
banking sectors);  and slow implementation of legislative, institutional, and structural reforms,
including privatization. Furthermore, foreign loans contracted in the 1980s had led to an unsustainablelevel of external debt.
7. The Bulgarian economy was also severely affected by external factors, including the loss of
its main external markets in the CMEA, the Russian financial crisis, and the Gulf and Yugoslav wars.
These disrupted sources of supply for Bulgaria and markets for its exports, and deprived the economy
of vital foreign exchange and investment.
8. As a result of these internal and external factors, the Bulgarian economy experienced a severe
decline in the period up to 1997. The poor economic performance of the early transition period came
to a head in 1996-97;  by 1997, real GDP had fallen to 68% of its 1989 level. In 1996 and 1997,
Bulgaria went through a major economic crisis: real GDP slumped by 14.4% in the two years; foreign
trade contracted by 12%; inflation in nominal terms soared to around 550% in 1997;  the nationalcurrency (the lev) depreciated in nominal terms by some 589% in 1996 and 265% in 1997;  and one-
third of the banks faced closure.
5  While some stagnation or decline in GDP was likely to occur due to
the contractionary effect of economic transition, the crisis in Bulgaria’s economic performance was
                                                     
4 Yonkova et al. (1999).
5 IMF (2002a) and UNECE (2003).Bulgaria WT/TPR/S/121
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accentuated both by the delays in implementing structural and macroeconomic reforms and by the
external factors peculiar to Bulgaria because of its geographic situation and heavy dependence on
foreign trade.
Later reforms
9. The crisis of 1996-97 inspired the newly elected Government in 1997 to accelerate the pace of
reform. Central among macroeconomic stabilization policies implemented was the establishment of aCurrency Board Arrangement (CBA) under which the lev was redenominated (1 new lev = 1,000 old
leva) and tied to the Deutsche mark (subsequently , to the euro). This effectively eliminated the
possibility of monetizing the government deficit. This tight monetary stance alongside conservative
fiscal policy (sections 3(i) and (ii) below) helped to restore macroeconomic stability; by the end of
1998 (on an end of period basis) inflation fell to 1.7%, and real GDP rose by 4% in the same year.
10. The stabilization of the economy and the subsequent resumption of economic growth were
underpinned by wide-ranging structural reforms encompassing improvements in the regulatory
framework, privatization, labour market reforms, price deregulation, and trade liberalization. In recent
years there has been an added impetus to pursue these reforms, following the invitation in 2000, to
begin negotiations for full EU membership (Chapter  II(5)(ii)(a)). Acceding to full EU membership is
Bulgaria’s main foreign political priority, hence the accelerated pace of reforms. Bulgaria's progress
in its economic reforms has been acknowledged by the European Union, as it was adjudged to have
progressed to a functioning market economy, by the end of 2002.
6
(3) RECENT ECONOMIC DEVELOPMENTS
11. The macroeconomic environment in Bulgaria has improved considerably since 1997
(Chart I.1). This is reflected in real GDP growth  averaging over 4% between 1998 and 2002; a fall in
the government deficit from 10.1% of GDP in 1996 to 0.6% in 2002; decline in inflation generally tosingle digit levels
7; expansion in international trade; and increased participation of the private sector
from 55.9% of gross value added (GVA) in 1996 to 72.7% in 2002. By 2002, total real GDP was
estimated to be at its level of 1991, though still about 15% below its 1989 level. Other
macroeconomic indices, particularly gross fixed capital formation and real total consumption
expenditure, confirm this trend (Chart I.1 and Table I.2).
12. In recent years, exports and domestic consumption have been the two main drivers of GDP
growth, with exports the largest contributor in 2000 and 2001 (rising by 16.6% and 8.5% respectively)
and domestic consumption (rising by an aver age of 5.8% between 1998 and 2002). Investment,
though contributing less than the aforementioned factors, is the most dynamic component of
aggregate demand.  Gross fixed capital formation, spurred by privatization, recorded an averageannual growth of 17% over 1998-2002, indicating renewed confidence in Bulgaria's economy due to
the improved business climate and holding hope for future sustained growth (Table I.2).
                                                     
6 EC (2002).
7 Except in 2000, when consumer price inflation was 10.4%.WT/TPR/S/121 Trade Policy Review
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Table I.2
Economic performance, 1996-2002
1996 1997 1998 1999 2000 2001 2002
Real growth rates (% change)
Gross Domestic Product -10.9 -5.6 4.0 2.3 5.4 4.1 4.8
Nominal growth (% change)
Final consumption .. .. 7.5 8.8 5.7 4.4 4.1
Gross capital formation .. .. 16.3 20.8 15.4 23.3 9.3
Exports (US$ basis) .. -1.7 -12.8 -4.5 20.4 6.0 11.2
Imports (US$ basis) .. -4.5 1.9 11.2 17.9 11.6 8.8
Prices and interest rates (%)
CPI (end of period) 310.8 549.2 1.7 7.0 11.4 4.8 3.8
CPI (period average) 121.6 1,058 18.8 2.6 10.4 7.5 5.8
Lev per U.S. dollar (YOY percent
change)a589.3 264.5 -5.7 16.2 8.0 5.6 -15.1
Real effective exchange rate index(end of period, June 1997 = 100)112.9 116.5 112.4 117.1 117.1 129.9
BNB basic rate 435.0 7.0 5.2 4.6 4.7 4.6 4.0
Time Deposit (leva) 211.8 3.0 3.3 3.2 3.3 3.4 3.2
Public finance (% of GDP)
Overall balance -10.1 -2.0 0.9 -0.9 -1.0 -0.9 -0.6
External financing -2.9 -0.7 -0.9 0.2 -1.5 -0.3 1.5
Domestic financing 15.6 -0.3 -1.4 -1.4 1.2 -1.7 -1.7
Privatization receipts 0.2 3.1 1.5 2.1 1.3 2.9 0.9
Monetary sector (12-month growth rate in %)
Broad money (M3) 124.5 354.4 11.3 13.3 30.9 26.0 12.4
Lev money 52.7 447.4 17.0 14.3 22.9 28.9 16.4
External sector (Share of GDP  in %)
Trade balance 0.3 3.1 -3.0 -8.3 -9.3 -11.6 -10.5
Current account balance 0.3 10.0 -0.5 -5.0 -5.6 -6.2 4.4
External debt (% of GDP)
Total external debt 97 96.2 83.8 82.3 88.9 78.1 71.9
Short-term external debt .. 11.9 8.1 4.8 11.5 9.0 10.2
Reserve cover (months of GS
imports)1.6 5.0 5.6 5.0 4.9 4.8 5.6
a + means depreciation.
Sources: IMF (2002a); IMF (2002c);  IMF (2003b); AEAF (2001);  AEAF (2002a);  AEAF (2003) and BNB online 
information. Available at:  http://www.bnb.org.Bulgaria WT/TPR/S/121
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13. The shares of agriculture, industry and services in GVA were 12.5%, 27.8% and 59.7%
respectively in 2002.  In general, agriculture’s share in GVA has declined over time, while that of
services has been increasing and the share of industry has remained relatively stable. The long-term
decline in the performance of the agriculture sector may be attributed to the fragmentation of land
ownership following the land reform and rest itution process (Box IV.1); consequent under-
capitalization and low investment, especially in machinery and in irrigation; and difficulties inaccessing credit and low investment in the sector. These factors made agriculture highly vulnerable to
adverse weather conditions, especially droughts. The industrial sector's performance has been mixed.
The decline in several subsectors, such as the machinery and equipment, transport equipment,
metallurgy and metal products, pulp and paper products, can be partly attributed to the collapse of the
CMEA as well as delayed privatization and technical obsolescence; whereas other subsectors, inparticular the export-oriented industries such as textiles and clothing, are booming
(Chapter IV (4)(iii)). The most dynamic sector has however been services; its contribution to GDP
was twice that of manufacturing in 2001. Communications, trade, finance, credit, insurance, and
tourism report the fastest growth rate. This could be attributed to the privatization and
demonopolization reforms as well as improvements in the regulatory environment. In 2002, both
services and agriculture showed rapid growth (5.1% each) while the industrial sector grew more
slowly at 3.5%.
14. Notwithstanding the turnaround in macroeconom ic performance, there remain structural
concerns. One principal concern is the high level of declared and disguised unemployment. Total
employment in 2002 was 27 % lower than in 1990.
8  The National Statistical Institute (NSI) estimated
                                                     
8 Self-employed persons, employers, and unpaid family workers accounted for 11% of the labour force
in December 2001.405060708090100110120
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Real GDP Employment Consumption Gross Fixed Capital FormationChart I.1
Trends in selected macroeconomic variables , 1989-
a
Source:Indices, 1989=100 for all variables except gross fixed capital formation where 1990=100.
UNECE Common Database; 2001 and 2002 data based on projections from AEAF (2003 ).Index 1989=100aWT/TPR/S/121 Trade Policy Review
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that 19.5% of the labour force were "unemployed" (i.e. actively seeking work) in December 2001,
while 12.7% of the labour force were "discouraged" (i.e. no longer seeking work).  Unemployment is
also very unevenly distributed over the country, with  under 5% in Sofia and significantly higher levels
in rural areas and some industrial towns.
15. Very recent trends in employment have been more encouraging.  In 2002, total employment
increased for the first time in the period of economic restructuring, possibly reflecting sustainedeconomic growth: the unemployment rate in December 2002, at  16.8%, was 2.7 percentage points
lower than a year earlier
9, and the private sector was the main contributor to new employment.
Unemployment had declined to an estimated 15.6%, by end-March 2003.10 This is partly due to
measures taken by the Government to bring "grey economy" workers into the mainstream through
active labour market measures, including public sector employment relief, compulsory registration oflabour contracts (resulting in the registration of 428,800 new labour contracts between January and
April 2003) and the institution of minimum insurance thresholds.
16. Along with high unemployment, there is significant poverty, although the level has improved
significantly since the crisis years of the mid-1990s. According to one estimate, in 1996, 88% of the
population fell below the "social minimum" level (corresponding approximately to the averageincome) and 29% below the "basic minimum" income even when in-kind payments were taken into
account.
11  A recent World Bank study notes that, compared to 1997, relative poverty (defined as two
thirds of the mean per capita income) had fallen substantially by 2001, from 36% to 12.8% of the
population, but that using a monetary poverty line of US$4.30 per day, poverty in Bulgaria still
affected nearly one third of the population. The study also notes that, although a comparison of 1997
and 2001 shows that the situation has improved considerably, comparison with earlier years shows
that poverty is still much higher than before the transition.12
17. Unemployment and poverty are strongly associated; the World Bank notes that households in
rural areas constituted two thirds of the poor; children in large households and pensioners over 75
years old represented high-risk groups; almost 80% of the poor were poorly educated people; and over
60% were ethnic minorities, with a strong focus on Roma.  Rural poverty was considerably higher
than in urban levels, although alleviated by subsistence agriculture on family plots, and there was asubstantial difference between the breadth and depth of poverty in Sofia city, the richest region, where
unemployment was lowest, and other urban and rural areas.
18. Tracking the recent improvement in the economy, Government sources note that the average
annual real wage increased significantly in 2002. The Bulgarian Agency for Economic Analysis and
Forecasting (AEAF) points out that the average r eal wage in the economy increased by 7% compared
with 2001. Along with that, the real dispos able income of households grew by 1.8%.
19. With rapid economic growth, the current account balance deteriorated from a surplus of
US$1,046.3 million in 1997 (10.1% of GDP) to a defi cit of US$842.2 million (6.2% of GDP) in 2001,
largely due to the increasing trade deficit (section (4) below). In 2002, against the background of a
slowly recovering world economy, the current account deficit decreased to US$677.4  million or 4.4%of GDP. Bulgarian exports remained relatively stable despite the nominal appreciation of the lev
                                                     
9 AEAF Semi-annual survey, January-June 2002 [Online].  Available at:
http://aeaf.minfin.government.bg.
10 Data for the first quarter of 2003 are not comparable with previous periods because of changes in the
methods of the Labour Force Survey.
11 Noncheva, 1997.
12 World Bank (2002).Bulgaria WT/TPR/S/121
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against the U.S. dollar, slow growth of the world economy, and low demand on international markets.
In 2002 the surplus on the financial account improved and reached US$1252.8 million, thus covering
nearly twice the current account deficit.
(i) Monetary and exchange rate policy
20. The Bulgarian National Bank (BNB), the central bank, has as its main responsibility to
maintain the stability of the national currency.13 This objective has been defined under the Currency
Board Arrangement (CBA). Under the BNB Act, the Bulgarian lev has been fixed to the euro in the
same ratio as the Deutsche mark (€ 1 = BGN 1.95583). Other key provisions of the CBA include a
requirement for full coverage of all issue department liabilities by foreign reserves and gold14;
elimination of the BNB's ability to lend to banks,  with the exception of narrowly defined credit from
the Banking Department to temporarily illiquid but solvent banks15; and the inability of the BNB to
extend credit to the State or any State agency.16
21. The introduction of the CBA created an effective nominal anchor, which the Bulgarian
economy needed. Since its instigation, annual inflation rates have generally fallen to single digit
levels (Table I.2). Bulgaria intends to retain the CBA arrangement until it accedes to the European
Monetary Union. To ensure full compliance with the European Central Bank regulations, the BNB
Act will be amended according to a schedule adopted in the negotiation on Chapter 11 of the EU
acquis communautaire,  which was opened in March 2002 and provisionally closed in April 2002.
22. Because inflation in Bulgaria has been above the German (and now EU) average, the real
effective exchange rate has consistently appreciated since 1997, raising concerns for the impact on
Bulgaria's competitiveness. Such appreciation is  commonly experienced in the early years in most
transition economies. In the case of Bulgaria it appears to be accounted for by a "Balassa-Samuelson
effect"; that is, given rigidity in the nominal ex change rate, productivity growth in the tradeables
sector arising from the liberalization of the economy may be translated through wage increases into
price increases in the non-tradeables sector.17  Nonetheless, wages in Bulgaria appear to remain
competitive as estimates of productivity-based on dollar wages indicate actual wages to be
significantly below the estimated equilibrium wage.18 Furthermore, business perception does not see a
misalignment in the real exchange rate; a recent surv ey revealed that businesses in Bulgaria perceived
the exchange rate to be appropriately valued.19  Trends in 2002 and the first quarter of 2003 show
higher levels of REER appreciation, mainly due to  the nominal increase in the value of the euro
against the dollar.  This could have implications fo r Bulgaria's short- to medium-term competitiveness
in exports to non-euro-zone countries; Bulgaria's capacity to continue improving its domestic factor
productivity will therefore be important.
                                                     
13 BNB Act (1997), Article 2(1).
14 BNB Act (1997), Article 29.
15 BNB Act (1997), Article 34.
16 BNB Act (1997), Article 46; except on-lending of proceeds of purchases from the IMF, for which a
clear procedure is established.
17 IMF (2002a). The divergence between prices of tradeables and non-tradeables is also noted by the
AEAF in successive reports (see for example Semi-Annual Survey (2001).
18 World Bank (2001a).
19 IMF, 2002a.WT/TPR/S/121 Trade Policy Review
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(ii) Fiscal policy
23. The Government's fiscal policy seeks to achieve a gradual reduction in the general budget
deficit and a balanced budget from 2005 onwards.20 Government revenue and expenditure are both
projected to fall in relation to GDP, from 40.6% and 40.3% respectively in 2001 to 35% by 2005.21 It
is the expressed intention of the Government to continue with prudent fiscal and incomes policies in
the context of the CBA until it achieves EU entry, as well as implementing further structural reformswith favourable effects on the fiscal balance.
24. The Government's fiscal position has improved significantly since the establishment of the
CBA. Tax revenues rose from 31.9% of GDP in 1996 to 38.7% in 2000 (of a significantly higher
GDP), continuing to rise in leva terms, though not as a share of GDP, in 2001 and 2002.
22 The overall
deficit has fallen from an average of 6.9% of GDP between 1991 and 1996, to around 1% between1998 and 2001, with deficits of 0.6% of GDP projected for 2002 and 2003.
25. The Government’s objective is to shift the structure of taxation from direct taxation of income
and capital to indirect imposition on consumption, principally through excise duties and VAT. Income
tax reduction is to be spread across all income groups, but with greater emphasis on low income
groups.  Corporate and personal income tax rates were reduced to maxima of 23.5% and 29%respectively in 2002.
23 Further reductions are planned for the corporate income tax: to 20% in 2004
and 15% in 2005.
26. Proceeds from privatization have been a main element in financing the deficit since 1997,
raising some concerns about the future impact on the fiscal balance of declining privatization
revenues. However, ongoing reforms are intended to secure the sustainability of the fiscal position in
the medium term. The shift from direct to indirect taxation is expected to improve tax yields.
Improvement in tax administration is also under way.  The project to establish a National RevenueAuthority
24, and other reforms in tax collection are aimed at increasing revenue. VAT refunding has
been accelerated and made more resistant to fraud by the obligation to open a VAT bank account.
Revenues from excise duties are expected to increase in both absolute and relative terms (from 3.7%
of GDP in 2001 to 4.3% of GDP by 2005); by contra st, the share of revenue in GDP from customs
duties is expected to fall from 0.7% of GDP in 2001 to 0.3% in 2005, largely due to the broad scopeof Bulgaria's free-trade agreements with its main trading partners (Chapter II(5)(ii)).
27. On the expenditure side, macroeconomic stability has contributed to lower interest payments.
The Government is committed to reducing subsidies under its agreement with the IMF, and to greater
targeting of social spending on vulnerable groups. Structural reforms, including privatization, have
already been instrumental in reducing government expenditure via lower subsidies to loss-makingstate-owned enterprises. Currently, the focus is on reducing and restructuring subsidies in education,
energy (district heating, support of mines in mono-industrial regions), transport, and health care (in
this case, moving to funding through national health insurance) in order to reduce long-term fiscal
risks. On the other hand, increased subsidies are ex pected in agriculture through the State Agricultural
Fund and the Tobacco Fund, and assistance to a growing number of pensioners and active labourmarket support are expected to lead to increased spending.
                                                     
20 AEAF (2002b).
21 AEAF (2002b).
22 IMF (2003b).
23 Corporate income tax is exempted when investment is made in regions of high unemployment.
24 IMF (2003b).Bulgaria WT/TPR/S/121
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28. The Government's ambitious fiscal policy aims are highly dependent on continued economic
growth, as well as on improved tax compliance.  New structures in areas like social security, utility
pricing, and health insurance are yet to be implemented and will depend on public acceptance and
goodwill.  Reduction in direct taxation may assist compliance;  however, the move to higher reliance
on VAT and excise duties may increase consumer price levels and, depending on the effectiveness of
tax administration, could lead to greater risks of evasion in these areas.25
(4) TRADE AND FOREIGN DIRECT INVESTMENT PERFORMANCE
(i) Trade patterns26
(a) Trends in the total value of trade
29. In 1989, before the transition, Bulgaria's exports were estimated at US$8.3 billion, of which
$5.1 billion went to the CMEA and about US$3.2 bi llion to other countries. The collapse of the
CMEA led to a drastic fall in the value and volume of exports, such that by 1992, total exports were
estimated at US$3.9 billion. Since the beginning of transition reforms in 1991, export values have in
general fluctuated in accordance with the performance of the economy.  In 1992-94, they averaged
around US$3.9 billion; after a rise to some US$5 billion in 1995, they fell back to US$4 billion in
1999. Recent estimates show a rising trend:  in 2001 exports were estimated at US$5.1 billion and in2002 at US$5.7 billion.
30. Similarly, the value of total imports has fluctuated considerably since the pre-transition
period. In 1989, the total value of imports was about US$9 billion, of which US$4.6 billion from the
CMEA. By 1992, total imports had fallen to US$ 4.5 billion, mainly due to the drastic fall in real
incomes that occurred during the early transition period. Imports rose to US$5.3 billion in 1995;
however, as with exports, this trend was curtailed by the 1996/97 economic crisis and imports fell to
about US$ 4.9 billion in 1997. Since the resumption of economic growth, imports have resumed theirrising trend. In 2001 and 2002 total imports were estimated at US$7.3 billion and US$7.9 billion
respectively.
31. With improved economic performance in recent years, Bulgaria’s merchandise trade balance
has fallen from a surplus of US$ 321 million in 1997 to a deficit of US$ 1.6 billion in 2002.  In
relation to GDP, its share has moved from +3.1% to –10.5%.
27
(b) Geographic pattern of merchandise trade
32. The geographic distribution of Bulgaria’s trade in goods has changed radically following the
inception of transition reforms. In 1989, 78.5% of exports were estimated to have gone to the CMEA,
with the bulk destined for the Soviet Union; the remaining 21.5% went to non-CMEA countries, with
the EU accounting for 11%.28  The influence of the CMEA on Bulgaria's import structure was less
strong than on exports, but nonetheless still dominant in the pre-transition period. In 1989, over 50%
of imports were from the CMEA countries.
                                                     
25 See discussion in CSD (2002).
26 All pre-1991 data used in this section are derived from World Bank (1991).
27 IMF (2003b), payments basis.
28 Bristow (1996) using World Bank (1991) data. The figure for the EU includes the former German
Democratic Republic.WT/TPR/S/121 Trade Policy Review
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33. Chart I.2 shows that the current direction of Bulgaria's trade differs markedly from the pre-
transition structure and indicates the country’s growing trade integration with other European markets.
Already in 1995, the EU accounted for almost two-fifths of Bulgaria’s exports, a share that had risen
to over half by 2002. Within the EU, Italy, Germany, Greece, and France were Bulgaria's main export
partners in 2002. On the import side, the EU accounted for some 37% in 1995 and one-half in 2002.
Other preferential partners (EFTA, CEFTA, and Turkey) accounted together for some 16.5% ofexports and 13.6% of imports in 2002. The Russian Federation accounted for 1.6% of exports and
14.5% of imports. The United States took 4.7%  of exports and supplied 2.2% of imports.
34. The principal factors contributing to the radical change in Bulgaria's direction of trade have
been the shift resulting from the collapse of the CMEA and the reorientation of policy towards
integration with the EU and conclusion of other regional and bilateral agreements. Above all, theincreased shares of Bulgaria's trade with the EU and CEFTA may be attributed to the growing
influence of preferential trading arrangements (see Chapter II(5)(ii)). Even though liberalization of
Bulgaria’s trading regime within the multilateral sy stem has also contributed to re-orientation of its
trade links, the share of Bulgaria’s trade conducted purely on MFN terms has declined from around
one half in 1995 to about one third in 2002 for imports and from about one half to about one quarterfor exports.
(c) Commodity pattern of merchandise trade
35. The collapse of the trade structure associated with central planning, together with structural
reforms, has also led to fundamental changes in the product composition of Bulgaria’s trade. During
the existence of the CMEA, Bulgaria’s export trade was predominantly in machines and equipment; in
1989 these accounted for about 50% of Bulgaria's exports. Other important exports during the pre-
transition era were fuels, mineral resources and metals; processed food products; and industrialconsumer goods; these jointly accounted for some 36% of exports.
36. Principal imports during the CMEA era, as important inputs for Bulgaria's heavy machinery
and equipment industry, were machines and equipment (37% in 1989) and fuels, mineral resources
and metals (34% in 1989).
37. The use of different categorizations of exports and imports during the pre-transition period
and currently (SITC and HS) makes it difficult to accurately compare Bulgaria's commodity pre- and
post-transition trade structure. Nonetheless, some broad changes are observable. Most significant is
the dramatic reduction in exports of machines and equipment, from about half of Bulgaria's exports in
1989 to less than 5% in 2002. The share of consumer goods in exports rose from around 10% in 1989
to some 27% in 1995 and 35% in 2002
29; this increase is largely being driven by rapid export growth
in clothing and footwear, which tripled in value, from US$313 million (6.3% of exports) in 1995 to
US$1.2 billion (20.7% of exports) in 2002. "Raw materials" accounted for over half the value of
exports in 1995 and 42% in 2002, with metals accounting for some 14% and chemicals for around
3.5% (Chart I.3).
                                                     
29 This comparison is only indicative as the definitions of consumer goods in 1989 and 1995/2002 are
not the same.Bulgaria WT/TPR/S/121
Page 11
Chart I.2
Direction of trade, 1995 and 2002a
Per cent
1995 2002
a
Source: Preliminary data.
Bulgarian National Bank [Online ].  Available at:  htt p://www.bnb.b g.(a) Exports
Total: US$4,967.0 million Total: US$5,687.8 millionEU 
39.3Italy
8.6
Belgium  1.7
Other 
OECD 1.6France
  3.5Germany
9.2
Greece
6.5
CEFTA 
3.9Russian 
Federation
10.3Turkey  7.6Other EU
9.9Other
33.2
Yugoslavia 
0.8United States 3.3Italy
15.4
Belgium  4.8Other OECD 0.4
France
  5.3Germany
9.5
Greece
9.2CEFTA 5.4Russian 
Federation
1.6
Turkey
9.3 Other EU
11.4Other
19.8
Yugoslavia 
3.0
United States
 4.7EU 
55.6
(b) Imports
Total: US$5,318.7 million Total: US$7,897.0 millionEU 
37.3 EU
 50.2
United Kingdom
2.4France 3.0Greece 
3.6
EFTA 2.0Germany
13.0
Italy 5.9
Other OECD
1.6Ukraine 2.7
Other EU
9.4
Russian 
Federation
31.4Turkey 1.7Other countries
16.7
CEFTA
4.1United Kingdom
2.6France 5.6Greece 
6.0
EFTA
 1.4Germany
14.3
Italy 11.3
Other OECD 
1.8Ukraine 
3.1
Other EU
10.3Russian 
Federation
14.5
Turkey 
4.9Other countries
14.6
CEFTA
7.3
United States 2.5
United States
 2.2WT/TPR/S/121 Trade Policy Review
Page 12
Chart I.3
Structure of trade, 1995 and 2002a
Percent
1995 2002
(b) Imports
Other
5.1
a
Source: Preliminary data.
Bulgarian National Bank [Online].  Available at: htt p://www.bnb.b g.Total: US$5,318.7 million Total: US$7,897.0 millionRaw 
materials   
36.4Clothing and 
footwear
1.4
Other raw 
materials
25.3Plastics and 
rubber 3.1
Electrical 
machines
2.8Other consumer 
goods 9.3
Textiles
7.9
Others 
investment 
goods  6.6Crude oil and 
natural gas 
29.0
Machines 
and 
equipment
6.7Vehicles
2.9Investment 
goods 18.8Mineral 
fuels, oils 
and 
electricity
34.1 Raw 
materials   
35.1Clothing and 
footwear
4.4
Other raw 
materials
20.3Plastics and 
rubber 4.3Electrical 
machines
3.3Other consumer 
goods
 14.6
Textiles
10.3Others 
investment 
goods  6.9Crude oil and 
natural gas 
16.2
Machines and 
equipment
9.6Vehicles
5.2Other mineral 
fuels, oils and 
electricity
3.7
Investment 
goods  25.4Mineral fuels, 
oils and 
electricity 20.2Consumer 
goods 19.0(a) Exports
Total: US$4,967.0 million Total: US$5,687.8 millionRaw materials
51.9Clothing and 
footwear
6.3
Investment 
goods 13.9Consumer 
goods
27.4Other consumer 
goods
21.1
Iron and 
steel
10.3Other 
investment 
goods
9.8
Chemicals 
5.7Other raw 
materials
29.3 Other 
metals
6.5Petroleum 
products
5.7Other
1.1
Machines and 
equipment
4.1
Raw materials
41.8Clothing and 
footwear
20.7
Investment 
goods  13.2Consumer 
goods
35.2Other 
consumer 
goods
14.5
Iron and steel
6.5Other 
investment 
goods
8.3
Chemicals 
3.5Other raw 
materials
24.0Other 
metals
7.8Petroleum 
products
5.9Other
3.9
Machines and 
equipment
4.9
Other
1.3Bulgaria WT/TPR/S/121
Page 13
38. The structure of Bulgaria's imports in 2002 was dominated by raw materials (35% of the
total); textiles and plastics and rubber jointly accounted for 15% of imports. Investment goods
accounted for one quarter of imports, with machines and equipment the largest element. Mineral fuels,
oils and electricity were one fifth of the total, with crude oil and natural gas accounting for 16.2%.
Again, due to the data limitations mentioned earlier, only broad comparisons are feasible, but there
appears to be a significant drop in imports of machinery and equipment since the transition reforms.In 1989, this category accounted for 37% of all imports, as against 9.6% in 2002; this decline may be
attributed to the contraction of Bulgaria's heavy machinery sector. Imports of consumer goods, on the
other hand, have risen in share, from 5.6% in 1989 to 19% in 2002.
39. Both demand and supply factors have contributed to the radical change in Bulgaria's direction
and composition of trade.  The collapse of the CMEA was a seismic shift with major effects on exportdemand and consequently on the structure of the domestic economy in the early 1990s. The inability
of the products that Bulgaria supplied to the CMEA markets (particularly engineering goods) to
compete in other international markets contributed to  the change in the product structure of exports
between the pre- and post- transition periods, and to a consequent change in the demand of imported
inputs.  The disorganization of the farm and food manufacturing sectors resulting from the landrestitution process (Chapter IV, Box IV.1) reduced production possibilities in these areas. The
reorientation of Bulgaria’s trade structure towards western European, particularly EU markets, has
been spurred by market liberalization on a multilateral and, above all, regional basis.  This
liberalization, together with an inflow of foreign in vestment in the  tradeables sectors, has changed the
structure of exports to focus much more on labour-intensive light manufacturing and natural-resource-
intensive products; and has opened up new sources and types of imports, including inputs to these
industries and consumer goods. As the situation of production and trade in Bulgaria is stilldeveloping, a challenge for business and Government in Bulgaria is to establish where the country’s
long-run comparative advantage may lie, in a world of new trading relationships and differing patterns
of trade (Box I.1 and Table I.3).
(ii) Foreign direct investment
40. As with other indicators of economic performance, trends in foreign direct investment (FDI)
inflows to Bulgaria show a sharp contrast befo re and after the introduction of the accelerated
structural reforms in 1997. FDI inflows to Bulgar ia in 1992-96 averaged some US$153 million per
annum (10.5% of gross fixed capital formation), whereas the average for 1997-2002 was
$692.3 million.
30  The increase in FDI inflows may be attributed at the microeconomic level to
privatization and improvements in the regulatory framework and incentive structure for foreigninvestors (Chapter II(4)). The improvement in the macroeconomic environment since 1997 and the
move since 2000 to accede to the European Union have also been significant in attracting FDI to
Bulgaria. The improved investment environment is reflected in  recent improvements in Bulgaria's
credit ratings by international credit rating agencies such as Standard & Poors and Fitch IBCA.
31
These higher ratings are expected to add to Bulgaria's image as an increasingly attractive investment
location, thus bolstering future FDI inflows.
                                                     
30 FDI flows are often influenced by special, "lumpy" events, such as the sale of a major bank in 2000
and of GSM second generation licences in 2001.
31 See for example Republic of Bulgaria online information.  Available at:
http://www.government.bg/English/Press/Office/News/2003-07-24/1538.html.WT/TPR/S/121 Trade Policy Review
Page 14
Box I.1:  Revealed comparative advantage and Bulgaria's trade
Comparative advantage is an important theoretical concept in international trade.  However, it is difficult if not
impossible to measure, being based on pre-trade price relationships, which are, by definition, not observable.  Variousmethods have been used to approximate the concept indirectly using information derived or "revealed" from post-trade situations and observable data.  The measurement derived from these has been called "revealed comparativeadvantage" (RCA) (Bowen et al, 1998;  Greenaway and Milner, 1993).
The measure of RCA used here for Bulgaria is based on the observation of net export flows (exports minus imports)
for each product at the two-digit SITC classification, and nor malized by their weight in Bulgaria's total trade. This
measure focuses on comparative advantage among tradeable goods in a particular economy. Positive values indicate
some level of comparative advantage and negative values indicate a comparative disadvantage; hence the higher theRCA value for a product the higher is its expected degree of comparative advantage and vice-versa.
Given that this RCA structure existed under a centrally planned regime, it did not necessarily correspond with the
comparative advantage of Bulgaria's economy, but may rather be a reflection of Bulgaria's assigned production role insatisfying the CMEA market. Due to the market-oriente d reforms implemented during the transition period, in
particular in the latter half, competitiv e forces are expected to  engender production and trade changes that should
better reflect Bulgaria's true comparative advantages. Table I.3 shows estimates of the changes to Bulgaria's RCAduring the transition  period.
The results suggest that, with the exception of metalworking machinery (SITC 73), the comparative advantage that
Bulgaria appeared to have had in machinery products (including transport equipment (SITC 79), power generating(SITC 71), electrical machines (SITC 77), office machines (SITC 75) and other special industrial machinery (SITC72)) has been eroded as a result of the ensuing competitive forces resulting from the market-oriented reforms;Bulgaria is observed to be at a comparative disadvantage (negative RCA's) in trading machinery products as opposedto its favourable situation during the centrally-planned period. Products remaining at a comparative disadvantage(negative RCA's), for both the pre- and post-reform periods include: gas, natural and manufactured (SITC 34); petrol,petroleum products and related materials (SITC 33); coal, coke and briquettes (SITC 32); metalliferous ore and scrap(SITC 28); textile yarn, fabric, etc (SITC 65); and chemical materials (SITC 59).
On the other hand, the net exports of non-ferrous metals (SITC 68) and iron and steel (SITC 67) appear to have with
stood the competitive forces resulting from the market-oriented reforms as the RCA's have remained favourable(ranging between 5% and 8.3%) during the transition period. Clothing and accessories (SITC 84) is however observedto have emerged as the product in which Bulgaria has its highest comparative advantage; though it was observed to becompetitive even in the early transition period with an RCA of 3.4% in 1992, its comparative advantage hasconsistently increased over the transition period to an RCA of 11.8% in 2000. Other products that have withstood thecompetitive pressures during the transition period and emerged favourably include: footwear (SITC 85); cork andwood (SITC 24); furniture, bedding etc (SITC 82); pre-fabr icated buildings, fittings, etc. (SITC 81). Tobacco and
tobacco manufacturing (SITC 12), one of Bulgaria's main agricultural exports (see Chapter IV), has a relatively highRCA value but is actually declining in importance; in 1992 it had the highest RCA of 6.3% however by 2000 it wasthe 8
th highest and its RCA value had fallen to 1.2%.
Using net exports (see Table I.3) as a measure of RCA, and data from World Bank (1991), computations of the pre-
transition (1989) RCA structure shows Bulgaria to have had comparative advantage in machinery, equipment(12.6%); food and related products (7.4%); and consumer goods (4.5%). Comparative disadvantage during this periodwas shown in fuels and minerals (-19.6%); non-food materials (-3.2%), and chemicals and rubber (-2%).
In general, the evolution of Bulgaria's trade structure reveals a movement in comparative advantage towards labour-
intensive light manufacturing products as well as products that are intensive in their use of natural resources withwhich Bulgaria is well endowed. Comparative disadvantage is observed in machinery products, natural resources withwhich it is not well endowed but are of vital importance for industry, and other raw materials used in the production oflight manufacturing industries.
The above calculations reveal past trends in Bulgaria's  RCA.  However, given the ra pid changes taking place under
the transition process, Bulgaria's comparative advantage is still evolving.  The Government is of the view that, apartfrom clothing and accessories, Bulgaria is likely to have comparative advantage in: (i) machinery and equipment –although major investment is needed in equipment and development of human capital; and (ii) in food and relatedproducts, where proximity to EU markets and ecologically clean production are seen as advantages, but where severedislocation has resulted from the land restitution process and complementary investments are lacking.
Source: WTO Secretariat.Bulgaria WT/TPR/S/121
Page 15
Table I.3
Evolution of Bulgaria's revealed comparative advantage during the transition period
SITC Products with highest  RCA's (RCA) 1992 1996-99
(average)2000
84 Clothing and accessories 3.4 7.2 11.8
68 Non-ferrous metals 4.6 6.5 8.3
67 Iron and steel 4.0 6.1 5.0
56 Fertilizer, except grp272 3.1 2.8 1.9
85 Footwear 0.7 1.6 1.8
04 Cereals, cereal preparations 2.2 0.4 1.5
11 Beverages 1.9 2.8 1.3
12 Tobacco, tobacco manufacturing 6.3 2.7 1.2
51 Organic chemicals 0.0 0.9 1.1
24 Cork and wood 0.7 0.9 0.9
82 Furniture, bedding, etc. 0.5 0.6 0.7
81 Prefab buildings, fttng, etc .. 0.3 0.7
73 Metal working machinery 1.1 0.6 0.6
74 General industrial machines .. -0.3 -1.0
89 Misc. manufactured gds nes 0.8 -0.5 -1.0
71 Power generating machines .. -0.1 -1.0
77 Elec. machinery appar, parts, nes .. -0.6 -1.0
59 Chemicals materials nes -1.0 -1.4 -1.1
28 Metalliferous ore, scrap 0.4 -2.0 -1.3
75 Office machines, adp mach -1.0 -1.5 -1.7
32 Coal, coke, briquettes -2.7 -3.3 -1.9
76 Telecommunication. sound equipment., etc. -1.4 -1.7 -1.9
72 Special industry machinery -2.3 -2.3 -2.2
33 Petroleum, petrol. product -19.6 -8.5 -4.4
65 Textile yarn, fabric, etc. -0.8 -3.6 -5.3
78 Road vehicles -5.9 -3.9 -6.5
34 Gas, natural, manufactured -6.3 -8.0 -7.9
RCA: revealed comparative indicator ((Xi/X - Mi/M) *100) where Xi and Mi refer to the value of exports and imports of the  ith
commodity and X and M refer to total value of exports and imports respectively.
Source: Comtrade database; 1992 estimates obtained from OECD (1999).
41. FDI inflow rose steadily from US$505 million in 1997 to a peak of over US$1 billion in
2000. Overall FDI inflows declined markedly in bo th 2001 and 2002 due to the stalled privatization
process and the run-up to parliamentary elections. With the scheduling of some large privatization
transactions in 2003, a recovery of FDI inflows is expected. Since 1998, FDI has been higher from
non-privatization sources than from privatization sources (Table I.4).
42. The leading foreign investors in Bulgaria are from the European Union. Within the EU, the
major investors since 1992 have been Germany (US$637.6 million), Greece (US$634.3 million) Italy
(US$569.9 million), and Belgium (US$484.2 million) . Investments from Greece and Italy soared
particularly following the privatization reforms, whereas investments from Germany have remainedWT/TPR/S/121 Trade Policy Review
Page 16
relatively stable over the transition period. Significant non-EU investors were the United States
(US$309.9 million), Cyprus (US$274.5 millio n), and Russia (US$202.1 million).
Table I.4
Foreign direct investment in Bulgaria, 1998-2002
1997 1998 1999 2000 2001 2002
Total FDI 504.8 537.3 818.8 1,001.5 812.9 478.7
Equity capital 491.9 504.6 500.3 754.8 566.7 333.0
From privatization 421.4 215.6 226.7 366.0 19.2 135.6
From non-privatization flows 70.5 289.0 273.6 388.8 547.5 197.4
Other capital 12.5 -17.0 351.0 188.5 240.0 92.9
Reinvested earnings 0.4 49.8 -32.5 58.3 6.3 52.8
Source : Information provided by the Bulgarian authorities.
43. Inflows of FDI to Bulgaria have mainly been  in manufacturing and services, which absorbed
some 42% and 49% of FDI inflows over the 1992-2002 period. Privatization has created relativelygreater opportunities for foreign domestic investment in the manufacturing sector. FDI in
manufacturing has been principally in petroleum, chemical, rubber, and plastic manufacturing (17.2%
of the sectoral total), mineral products (16.2%), mechanical products (9.45%), and the food industry
(8.7%). FDI in the services sector has been principa lly in financial intermediation (23% of the sectoral
total); sales, maintenance, and repair services (14%); communications, including sales of second-generation GSM licences (9%); and tourism, including hotels and restaurants (3%).
44. The agriculture sector accounted for less than 0.5% of total FDI flows during the same period,
reflecting the chaotic state of agriculture and food production following the transition, and the
difficulties experienced in land reform and restitution (Box IV.1).
(5) OUTLOOK
45. The Bulgarian economy is expected to continue its recovery. Government projects real GDP
growth over 2003-05 at an annual average of 5.17%.  Domestic consumption is increasing rapidly and
making a major contribution to GDP growth.  Trends in investment, as reflected in gross fixed capital
formation, are highly positive, and foreign direct investment is playing a significant role.  These
trends are expected to continue.
46. Stability in the macroeconomic environment is expected to continue, as the authorities are
committed to maintaining the Currency Board Ar rangement (until Bulgaria joins the European
Monetary Union) and a continuation of the conservative fiscal stance with the goal of achieving a
balanced budget by 2005. The current account deficit appears sustainable in the short run, being
supported by strong inflows on the financial accoun t. Future reforms in administered prices, in
particular in the transport and energy industries, as well as the shift from direct to indirect taxation
and to financing of the health sector through a public insurance scheme, may lead to a decline andpossible adverse redistribution in disposable income (with implications for consumer demand
patterns) and an increase in inflation.
47. The major role of trade in spurring growth in  the Bulgarian economy is expected to continue,
emphasizing the importance of positive developments in the external environment. IMF forecasts of
the international price indices of key Bulgarian exports show an overall positive trend over 2003-05.
32
                                                     
32 IMF (2003b).Bulgaria WT/TPR/S/121
Page 17
The Government regards exports as a major force underlying Bulgaria's future GDP growth.  This will
depend, however, on recovery in the world economy and, in particular, in the euro-zone on which
Bulgaria's trade increasingly depends. Recent impr ovements in Bulgaria's credit ratings are likely to
attract further FDI, with potential positive impact  on competitiveness of Bulgaria’s productive sectors
and their ability to access new markets. Other extern al developments favouring Bulgaria's integration
in the world economy include the recent invitation to join NATO in 2004 and its potential accessionto the EU in 2007.
48. Attainment of the highly favourable growth performance projected by the Government will
hinge on further domestic policy reforms as well as developments in the external environment. On the
domestic front, policies slated to be implemented over this period include improvements in
competition via the deregulation of monopolies in the energy, railway transport, andtelecommunication industries; investment promotion via further improvements in the legal,
regulatory, and institutional framework; restructuring the manufacturing and services sectors to allow
for the generation of high-value-added, particularly export-oriented industries; improvements to the
quality of core infrastructure; reduction in the share of administered prices; privatization of the
insurance institutions; and further trade liberalization.