Addendum 6aSeminar on the Promotion ofForeign Direct Investment toSoutheastern EuropeBulgaria

8 November 2002, Tokyo, JIIA
Ministry of Foreign Affairs of JapanThe Japan Institute of International Affairs

REPUBLIC OF BULGARIAREPORT FOR: BULGARIAN MACROECONOMIC STABILITI AND FOREIGNINVESTMENT

From: Lachezar Borisov and Nadya Georgieva

1. Transition to market economy.
In the first quarter of 1997, Bulgaria signed a new agreement with International Monetary Fundwith which marked the introduction of a currency board (July 1997) and a set of an austere andradical new measures for policy reforms.
The German mark was properly chosen as reserve currency and the Bulgarian lev pegged to it.
Compared to the macroeconomic indicators` value from the beginning of 1997, the currency board
policy resulted in considerable decrease of inflation, increased credibility of the national currency
and reduced interest rate
The economy started to recover in 1998 as the year was marked by events favourable impact onmarket reforms, e.g. the three-year IMF agreement and the accession to CEFTA. In 1998 all prices
except for household power consumption and industrial central heating utilities were liberalized.
Bulgaria achieved financial stabilization, 3,5% real GDP growth and 1% end year inflation.
Important steps were taken in the areas of privatization, banking sector reforms, agriculturalliberalization. Fiscal policy was prudent as the general government budget deficit was limited to
0,9% of GDP, and income policy for state owned enterprises was implemented strictly. Structuralreforms were continued in a wide front. Privatization was accelerated, recording the highest levelof sale of state assets in Bulgaria`s history. Liberalization of agricultural sector was continued
consistently with the government program for structural reform. The trade and pricing polices werefully liberalized and the state control on prices of agricultural and food products was eliminated. A
system of licensing helped the development of grain market.
In 1999 (during the Kosovo crisis) all direct transport corridors from Bulgaria to the EU passing
trough Yugoslavia were affected. Traffic on the Danube River was blocked. The total direct losses
for Bulgaria amounted to USD 95 mln. Even so the real GDP reached 2,4%, and the inflation was6.2%. The external current account deficit was contained to an estimated 5.2% of GDP, for the fullyear as exports recovered after midyear. Confidence in the Bulgarian national currency remained
strong, with gross official reserves at USD 3,2 bln and the fiscal reserve account at USD 1,4 bln. At
end – 1999.
The economic changes in Bulgaria continued in 2000 when was the invitation to start accession
negotiations with the EU in December 1999 and their initiations in March 2000.
The macroeconomic results in 2000 – 5,8% real GDP growth and inflation close to 11,4% welladdressed the companies` needs for medium and long term planning. The positive changes
continued in 2001. The economic growth was 4,0%, and inflation close to 4,8%. Budget deficit wasthe lowest in the region: 0,9%. In 2001 Bulgaria realized record gross capital formation: 20,4%. The
real GDP from June 2001 to June 2002 is 5,3% and Bulgaria is among the leaders in CEE.
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By the end of 2001 79,5% of the state assets, which are subject to privatization, were privatized.
The cumulative value of all foreign direct investments in Bulgaria reached USD 4,618 in 2001.
About 80% of them have been generated during the period 1997 – 2001.
The investment climate has been improved by positive changes in the tax legislation. In terms ofincome tax and corporate tax rates Bulgaria has become to the most competitive location in CEE.
The highest bracket for the personal income tax has been dropped to 29%. Since 1 January thecorporate tax rate is 15%. VAT refund period has been reduced from 4 to 3 month.
“Bulgaria is a market economy”, says the EU Commission in its regular 2002 report.

2. Industrial structure
Structure of Output by Industrial Sub-sectors
Industrial sub-sectors%Mining
5.4
Foods, beverages and tobacco
18.4
Textile, leather and clothing
6.2
Wood products
1.2
Pulp, paper products; publishing
3.3
Chemicals, chemical products, fibres,
9.1
rubber and plastic products
Basic metals except casting
10.1
Metal products, machinery and7.8
equipment, castingElectrical and optical equipment
3.4
Transport equipment
1.3
Electricity, gas and water supply
14.6
Non-metal mineral products
3.3
Others5.2
Total:
100.0
Source: National Statistical Institute, 2001

Structure of Gross Value Added(close to GDP)
Economic sectors%
Agriculture and forestry
14.5
Industry
27.8
Services
57.7
Total:
100.0
Source: National Statistical Institute, 2001

Sectors which were most attractive to foreign companies during the transitional period
and in 2001.
Foreign direct investment inflow by sectors and by years in USD m
Nr

Sector

2001

Total bysectors

1.
2.
3.
4.
5.
6.
7.
8.
9.

Petroleum, chemical, rubber and plastic products
Mineral products (cement, glass,...)
Telecommunications
Metallurgy
Mechanical products
Food products
Wood products, paper
Textile and clothing
Electrical eng., electronics, computers and communicationequipment
Construction
Leather and leather productsElectricity, gas and water

11.5
19.4
177.4
37.2
16.6
42.9
5.3
33.7

289.8
249.2
229.6
139.7
120.6
118.8
105.6
90.5

27.0

73.0

18.8
0.2
0.8

44.3
22.1
19.5

10.
11.
12.

3. Socio-economic infrastructure and goods market
2Power Generation
The power engineering has been designated for a strategic sector in Bulgaria over many
decades. In 2000 the power plants produced 40,927 million kWh electric power including:• Nuclear Power Plant (NPP) -18,178 million kWh (44.4% of the total output);• Thermal Power Plants (TPP) -19,791 million kWh (48.4% of the total output);• Hydropower Plants (HPP) and Pumped Storage Hydro-Power Plants (PSHPP) – 2,958 million
kWh (7.2% of the total output).
The total installed generating capacities in Bulgaria are 13,183 MW, out of which:- in TPP -6,553-MW (49.7%);- in NPP -3,760-MW (28.5%);- in HPP and PSHPP – 2,870-MW (21.8%).
Main directions of the current reform in the electricity sector are:- implementation of clear regulatory rules;- privatization of some HPP, TPP, electricity distributing companies, etc.;- implementation of the competitive market model;
reconstruction of the existing capacities and building new ones through attracting investors.
Transportation
Based on its geographical disposition, transport system, infrastructure, warehouses, customs
system, experience and labour force, Bulgaria has a good potential for future logistics development.
The road infrastructure of Bulgaria comprises of more than 37,000 km roads, 416 km of which are
highways. There are 6,500 km of developed railways, more than 64% of which are electrified.
The main Bulgarian ports are Bourgas and Varna. Both of them serve over 60% of the foreign
trade of Bulgaria.
The Danube River is the international water road of the country.
There are 5 international airports in Bulgaria: Sofia, Varna, Bourgas, Plovdiv and Gorna
Oriahovitsa (the latter is used mainly as a cargo airport).
Access to large consumer market
Bulgaria has a great access to large consumer markets. Bulgaria has access to consumer
markets of EU CEFTA Other OECD countries1, Balkan countries2, CEFTA and others.
Territorial structure of export and import:RegionEUEFTA
Other
OECD
countries1
Balkancountries2
CEFTA
countries
CIS andBaltic

Export
2001
USD%
mln

Import
2001
USD
%
mln

Turnover
2001
USD%
mln

2793.7
64.8

54.8
1.3.
0

3574.4
90.3

49.4
1.3

6368.1
155.1

51.7
1.3

731.3

14.3

569.1

7.9

1300.4

10.5

368.0

7.2

42.9

0.6

410.9

3.3

247.0

4.8

550.3

7.6

797.3

6.5

298.2

5.9

1714.2

23.7

2012.4

16.3

596.2

11.7

688.7

9.5

1284.910.4

5099.21007229.9100

12329.1

100(formerUSSR)

countries
Other
countries

TOTAL12Bulgaria has preferential market
access:(Free trade agreements with:)• WTO membership from 1996
• European Union Association Agreement,
signed in 1993
• EFTA Agreement from 01/07/1993• CEFTA member from 01/01/1999• Free Trade Area with Turkey from01/01/1999• Free Trade Agreement with Macedonia
from 01/01/2000• Free trade agreements signed with
Lithuania(08/05/2001),
Israel(08/06/2001), Croatia (04/12/2001) andEstonia(11/12/2001),
completednegotiations with Latvia

Incl. Australia, Canada, New Zealand, USA, Turkey, Japan
Incl. Macedonia, Croatia, Albania, Yugoslavia, Bosnia and Herzegovina

33. Labour market
The unemployment in July 2002 is 17.09%, high but less than in 2001, and 2000.
Dynamic of unemployment per month:
U n e m p lo y m e n t

1 8 .51818

1 7 .5

1 7 .3 2

1 7 .0 917
1 6 .5
X ІІ 2 0 0 0Х ІІ 2 0 0 1

V ІІ 2 0 0 2

Labour cost ratio (average monthly salary USD), by sectors:
Labour cost ratio
Sectors(average monthlysalary USD)
128
92
208
120
219
99
118

Total
Agriculture, forestry and fishing
Mining and quarrying
Manufacturing
Electricity, gas and water supplyConstruction

Trade repairing activities
Hotels and restaurants

80

Transport and communications
Financial intermediation
Real estate, renting and business activities
Public administration; compulsory social security
Education
Health and social work
Other community, social and personal service activities
State organizations

•148
245
140
168
120
115
115
129

There are 2 labour unions in Bulgaria

Bulgaria education• Bulgaria’s secondary education is among the best in the world: 5th in the world in sciences,
11th in mathematics (World Bank and The Economist ranking)• Bulgarians rank second in international IQ tests (MENSA International)• Bulgarians are among the top university students worldwide (2nd in the world in SAT scores)• Many students abroad• Excellent labour quality
4. Industrial policy4

Privatization
About 52.5 % of the assets of the state-owned enterprises, representing 79.5% of the assets
subject to privatisation, have been privatised by the end of 2001, as displayed in the next figure.
The sale of the large enterprises in the major branches (chemistry, metallurgy, the militarydefence complex, machine building) has been almost completed. The enterprises, which are still notdenationalised, had until recently a monopoly status in infrastructure branches like energy,communications, and railway transport.
1993

0.56%

1994

3.03%

1995

4.65%

1996
1997
1998

The privatisation process is regulated by the Law
on Privatisation and Post-Privatisation Control(LPPPC), which came into effect on 23 March 2002. It
abrogated the old privatisation law, which has been inforce since 1992. A new Regulation on Tenders wasadopted on 5 March 2002. The other regulations issued
in line with the old law shall be effective in case they
do not contradict the provisions of the new one.
The changes in the privatisation legislation
concentrate the sale process mainly through thePrivatisation Agency for the purpose of making it moretransparent and effective.

10.84%
38.64%
45.42%

1999

71.11%

2000

77.81%

2001

79.51%

Anti-monopoly policy measures
The new Law on Protection of Competition came into force on 12.05.1998 repealing the Law
on Protection of Competition from 1991.The main objective of the Law is to secure protection andgood conditions for the expansion of competition and free initiative in the economic activities, inorder to make them main regulators of the market economy in Bulgaria.
The Law provides protection against:• agreements, decisions and coordinated practices;• misuse of a monopolistic and dominating position on the market;• concentration of economic activities and unfair competition;• other actions which may result in prevention, restriction or breach of competition.
The Law applies to all enterprises that carry out activities in Bulgaria, including the enterprises
with foreign investment.
Pursuant to the Law on Protection of Competition “enterprise” means any natural person, legalperson or entity pursuing activities on the relevant market, regardless of the particular legal form.
Commission for the Protection of Competition
The Commission may permit:• preliminary equalization of the general terms for enterprises which offer contract’s conclusion
by applying general terms as provided for in the law;
• state aids designated to:
1. accelerate the economic development in regions with low living standard or unemployment
above the average for the country;
2. promote the economic growth in particular economic activities or regions as provided for in thelaw;
3. support the implementation of projects that are of significant importance for the country or to
surmount considerable difficulties in Bulgaria’s economy;
4. state aids monitoring of the countries with which Bulgaria has established monitoring for stateaids.
• concentration of economic activity as provided for in the Law;
• exemption of the prohibited acts as set forth in the Law.

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