EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 501 final COMMISSION STAFF WORKING DOCUMENT Country Report Bulgaria 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2020) 150 final}



Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Summary of the main findings from the MIP in-depth review 4.Reform priorities 4.1.Public finances and taxation 4.2.Financial sector 4.3.Labour market, education and social policies 4.4. Competitiveness, reforms and investment 4.5.Environmental sustainability Annex A: Overview table Annex B: Commission debt sustainability analysis and fiscal risks Annex C: Standard tables Annex D: Investment guidance on Just Transition Fund 2021-2027 for Bulgaria Annex E: Progress towards the Sustainable Development Goals (SDGs) References LIST OF Tables

Table 1.1:Financial soundness indicators, all banks in Bulgaria Table 1.2:Key economic and financial indicators - Bulgaria Table 2.1:Assessment of 2019 CSR implementation Table 3.1:MIP assessment matrix Table C.1:Financial market indicators Table C.2:Headline social scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth Table E.1:Indicators measuring Bulgaria’s progress towards the SDGs LIST OF Graphs Graph 1.1: Real GDP growth by demand components Graph 1.2: Potential growth breakdown Graph 1.3: Evolution of GDP per capita in PPS among Bulgarian NUTS2 regions Graph 1.4: Current account developments Graph 1.5: Net international investment position Graph 1.6: Labour market indicators

Graph 1.7: Employment rate by age group and educational attainment level, 2018 Graph 1.8: At-risk-of-poverty or social exclusion rate and its components (AROP, SMD, LWI, MSD) Graph 1.9: Overvaluation gap with respect to price/income, price/rent and fundamental model-based valuation gaps (1) Graph 2.1: Overall multiannual implementation of 2011- 2019 country-specific recommendations to date (1), (2), (3) Graph 4.1.1: Number of hours needed to comply with taxes per year for a medium-sized company, 2018 data Graph 4.2.1: Fundamental-based and prudential benchmarks and NFC debt (1) Graph 4.2.2: Breakdown of annual changes in debt-to-GDP ratios of NFC (1) Graph 4.3.1: Population change and migration balances, 2013-18 Graph 4.3.2: Labour shortage index (1) Graph 4.3.3: Impact of social transfers (excluding pensions) on poverty reduction (1) Graph 4.3.4: Adequacy of minimum income benefits 2017 Graph 4.3.5: Outpatient use vs inpatient use, 2017 Graph 4.4.1: Evolution of unit labour costs Graph 4.4.2: Breakdown of rate of change of REER Graph 4.4.3: Exports of products by R&D activity intensity Graph 4.4.4: Labour share and nominal productivity growth of manufacturing industries (1) Graph 4.4.5: Investment by asset type Graph 4.4.6: Total factor productivity and labour productivity developments Graph 4.4.7: Intramural R&D expenditure by sectors of performance Graph 4.5.1: Greenhouse gas intensity (1)

LIST OF Boxes Box 2.1: EU funds and programmes to address the structural challenges and to foster growth and competitiveness in Bulgaria Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights Box 4.4.1: Investment challenges and reforms in Bulgaria Box 4.5.1: Coal regions in transition Executive summary Bulgaria’s growth prospects remain favourable but there is scope to further strengthen the overall resilience and competitiveness of its open economy. Sound macroeconomic policies have underpinned robust economic growth and historically low unemployment rates. Nevertheless, Bulgaria has been slow to catch up with the rest of the EU and still has one of the highest levels of poverty and income inequality. Broad-based structural reforms and additional investments are needed to boost productivity and achieve sustainable and inclusive growth, especially in the context of adverse population developments, considerable shortages of workers and rising regional disparities. Improving the quality of institutions, fighting corruption and fostering a favourable business climate are important for future growth. Bulgaria’s firm commitment to enter the Exchange Rate Mechanism II provides further impetus to reforms. The authorities continued to tackle the identified macroeconomic imbalances, particularly by strengthening financial supervision and taking steps to address financial sector vulnerabilities ( ). Economic expansion has proved robust in the face of the deterioration of developments abroad, although more moderate growth lies ahead. After accelerating from 3.1% in 2018 to an estimated 3.7% in 2019, real annual GDP growth is expected to slow to around 3% in 2020 and 2021, still underpinned by domestic demand. Private spending will be supported by real wage increases, but curbed by the limited employment gains. Investment is expected to expand only moderately in the context of heightened economic uncertainty abroad and somewhat worsened domestic growth prospects. Exporters are set to preserve their competitive position through productivity gains and product quality improvements and exports are projected to regain modest growth after a small decline in 2019. Employment gains are likely to stall in 2020 and to turn negative in 2021 due to a shrinking labour force and an already existing shortage of workers Potential GDP growth has strengthened in recent years, but not enough as yet to ensure a rapid catching-up process. Potential growth has hovered around 3% since 2016, with total factor productivity the main factor behind its expansion. Investment activity has also contributed to potential growth, albeit more moderately. The growing export market share, alongside an increasing cost of labour per unit of output produced, suggests that non-price factors, such as quality improvements and continued integration in global value chains, have underpinned Bulgaria’s competitive position. Insufficient investment is holding back the modernisation of the economy. Although investment is increasing, its share of GDP remains below the EU average, holding back the catching-up process. Business environment improvements could support investment. Identifying investment needs in green technologies and sustainable solutions, and securing adequate funding will be key to deliver on climate and energy objectives and shaping a new growth model. Investments in transport, energy and environmental infrastructure could help attracting foreign direct investment and strengthen business competitiveness. More and better targeted investment in digitalisation and in R&D can lead to productivity gains but attention should be paid to the governance and performance of the funded projects. Targeted investment could also help to tackle growing regional disparities, particularly in the North-West region. Bulgaria has made some progress in addressing the 2019 country-specific recommendations ( ). There has been substantial progress in: ·upgrading the corporate governance framework of the State-owned enterprises in line with international good practices; ·reinforcing supervision of the banking sector; ·effectively enforcing risk-based supervision in the non-banking financial sector. There has been some progress in: ·improving tax collection through targeted measures in areas such as fuel and labour taxes;

·promoting adequate valuation of assets in the banking sector and a functioning secondary market for non-performing loans; ·enforcing the recently adopted valuation guidelines and group-level supervision in the non-banking financial sector; ·improving the business environment; ·strengthening employability by reinforcing skills, including digital skills; ·addressing social inclusion through more effective minimum income support. There has been limited progress in: ·ensuring effective supervision and the enforcement of the anti-money laundering framework; ·implementing the insolvency framework roadmap; ·fostering the stability of the car insurance sector; ·focusing investment-related economic policy on research and innovation, transport (in particular on its sustainability), water, waste and energy infrastructure and energy efficiency, taking into account regional disparities; ·improving the quality, labour market relevance, and inclusiveness of education and training, in particular for Roma and other disadvantaged groups; ·addressing social inclusion through improved access to integrated employment and social services; ·improving access to health services, including by reducing out-of-pocket payments and addressing shortages of health professionals. The Social Scoreboard supporting the European Pillar of Social Rights points to some challenges. The share of people at risk of poverty or social exclusion is high (especially for children), while the capacity of social transfers() to reduce poverty remains limited. Although decreasing, the share of young people neither in employment nor in education or training and the share of early school leavers are still high. The level of digital skills is very low. Meanwhile, the employment rate is relatively high for men and women and gross disposable household income continues to increase. Regarding the national targets under the Europe 2020 strategy, the figures for people at risk of poverty, early school leaving and participation in tertiary education have improved. However, more needs to be done to reach the nationally set goals. Bulgaria is still on track to achieve its targets for greenhouse gas emissions and renewable energy. It is not progressing towards its energy efficiency indicative targets and the gap between the current and target levels of energy consumption is widening. There was no progress towards the R&D intensity target. Bulgaria is making progress towards achieving the United Nations’ Sustainable Development Goals (SDGs). Bulgaria has fared well in labour market indicators in SDG 8 ‘Decent work and economic growth’, with employment rates on the rise. In terms of levels, it is one of the worst performers in the EU in SDG 1 ‘No poverty’, which is further exacerbated by adverse t in SDG 10 ‘Reduced inequalities’(). The main findings of the in-depth review contained in this report and the related policy challenges are as follows: ·The banking sector has continued to strengthen, while follow-up measures are expected. Overall, banks are profitable and well capitalised and the ratio of non-performing loans has been falling. Nonetheless, Bulgaria continues to be among the EU countries with high rates of non-performing loans, especially for non-financial corporations. Moreover, the asset quality review and stress test conducted by the European Central Bank revealed the need to increase the capital in two banks. Several important new regulatory guidelines have been introduced and there has been adequate follow-up of already adopted acts. The work on banks’ resolution plans has advanced, and internal rules and procedures introduced in July 2018 are due to undergo review and possible fine-tuning. ·The supervisory framework of the non-banking financial sector has been strengthened, but further action is necessary in the insurance sector. A proper risk-based, forward-looking supervisory process was established. Legal and regulatory provisions were also introduced to improve supervisory effectiveness and practices over valuation methods for the insurance and pension funds sectors and for related-parties transactions in the pension funds sector. The remaining weaknesses in the insurance sector concern the adequacy of technical provisions, the appropriateness of the valuation of non-listed assets and the effectiveness of governance. Moreover, the financial stability of the Bulgarian Green Card Bureau has come into question. Other challenges in the motor third party liability segment, such as poor pricing policies and uncertainty around the compensation of victims of car accidents, are expected to be addressed by forthcoming legislative proposals. ·The private sector continues to shed debt, while maintaining positive credit flows. Most debt continues to be on the books of non-financial corporations. Household debt increased due to intensified mortgage lending, but still remains among the lowest in the EU. Non-performing loans remain high, but have been steadily decreasing. House prices continued to rise, albeit at a slower pace. There are no signs of overheating in the housing market, but the recovery should be monitored.

·The insolvency framework roadmap was adopted in June 2019. The authorities are preparing follow up steps, including legislative changes and capacity building activities that are crucial to the success of the reform. Other key structural issues analysed in this report, which point to particular challenges for Bulgaria’s economy, are the following: ·A major reform is ongoing of the corporate governance framework of state-owned enterprises. It aims to address significant performance and management challenges. A law overhauling the framework and the principles for corporate governance of these enterprises was adopted. The reform will only be completed when the implementing acts of the law are prepared and put into effect. ·The labour market improved further, supported by solid economic growth. The employment rate reached 72.4 % in 2018, while the unemployment rate decreased to 5.2%. However, regional disparities remain high, and the declining working-age population and labour shortages constrain future growth prospects. Long-term unemployment and inactivity rates have fallen to the EU averages. However, some groups still find it difficult to find work, including Roma, young people and people living in rural areas. ·The quality and inclusiveness of the education system continue to be challenging, despite ongoing reforms. This poses challenges for disadvantaged groups, such as Roma and children in rural areas or in vulnerable situations. Persistently high rates of early school leaving and low educational performance, confirmed by the 2018 PISA results, highlight the need for more targeted measures. The reform of vocational education and training (VET) continues, but the employment rate of VET graduates is still below the EU average. Tertiary educational attainment is still below the Europe 2020 target, and the provision of higher education is only partially aligned with the needs of the labour market. The rate of participation in adult learning is one of the lowest in the EU. ·Social challenges remain significant. Although decreasing, the share of population at risk of poverty or social exclusion is still very high. The in-work poverty rate remains a concern, particularly for young and low-skilled workers. Income inequality is the highest in the EU, influenced by the low levels of minimum income and old age pensions. The adequacy and coverage of the minimum income remains insufficient, despite the amendments in the allowance to support home heating. Reform of social services has been further postponed. ·Access to healthcare is limited due to an uneven distribution of scarce resources and low health insurance coverage. Public expenditure on healthcare remains very low, with out-of-pocket payments ( ) covering almost half of healthcare costs — one of the highest shares in the EU. No details of the health insurance reform announced in July 2019 have been released. The strategy for long-term care is under way. ·The potential for research and innovation to support productivity remains underutilised. The low level of public and business investment, the inefficient and fragmented research system and weak science-business links remain key obstacles to an innovation-oriented economy. ·Improving the business environment and institutional quality remains a challenge. Public administration and e-government reforms are progressing slowly and have not led to a significant improvement in the business environment. Despite some progress, public procurement remains a concern. There is a lack of effective coordination between public procurement policy makers. The use of the electronic platform, which can increase the transparency of public tenders, remains limited. Frequent changes in the legislation continue to create regulatory uncertainty and are among the main obstacles to investment. ·Challenges persist in the fight against corruption. While reforms will take time to show results, Bulgaria still lacks a solid criminal track record of concrete results on high level corruption cases that would help to build public trust. A number of challenges persist, in particular ensuring effective criminal investigations, rebalancing the workload among courts, and streamlining local prosecution service offices. Bulgaria has taken steps to strengthen the anti-money laundering framework by adopting legislation to complete the transposition of the forth anti-money laundering directive and to transpose the fifth. The new legislation is yet to be assessed. Challenges also remain in analysing risk exposures, using financial intelligence and ensuring effective supervision. Measures to mitigate risks in relation to the ‘citizenship by investment’ scheme have not yet been undertaken. Such schemes have raised concerns about certain inherent risks, also linked to money laundering. ·Inadequately addressed environmental challenges present an obstacle to long-term sustainable growth. Bulgaria remains among the Member States with the largest incidence of pollution-related deaths, with the number of years of life lost due to air pollution and urban population exposure to micro-particles the highest in the EU. There is limited progress in ensuring compliance with urban wastewater collection and treatment obligations. There is still no overarching circular economy programme even though the circular use of material is among the lowest in the EU and there are waste management challenges. ·Bulgaria remains the most energy-and greenhouse gas-intensive economy in the EU by a wide margin. In 2017, Bulgaria needed 3.8 times more energy and produced 4.4 times more carbon emissions per unit of GDP than the EU average. The high energy intensity of the economy and slow progress on reaching energy efficiency targets negatively affects productivity and competitiveness. There is scope for significant energy savings via targeted investments in the industrial, transport and residential sectors and for increased investments in clean energy infrastructure. The Commission’s proposal for a Just Transition Mechanism under the next 2021-2027 multi-annual financial framework includes a Just Transition Fund, a dedicated just transition scheme under InvestEU, and a new public sector loan facility with the European Investment Bank. It is designed to ensure that the transition towards EU climate neutrality is fair by helping Bulgaria’s most affected regions to address social and economic consequences. Key priorities for support under the Just Transition Fund, set up as part of the Just Transition Mechanism, are identified in Annex D, building on the analysis of transition challenges outlined in this report. 1. Economic situation and outlook GDP growth Economic growth in Bulgaria remained strong in 2018 and the first nine months of 2019. Private consumption was the main driving force of economic growth on the back of rapid wage growth and high employment. Overall investment growth was moderate except for investment in machinery and equipment, which was supported by favourable financing conditions and high capacity utilisation. Export growth slowed in 2018, mainly due to temporary one-off factors and became volatile in the course of 2019 as the negative impact of increased economic uncertainty abroad was partially offset by the efforts of exporting firms to diversify across destination markets. In 2019 export dynamics were also influenced by one-off factors. Import continued to increase with strong growth rates in 2018 following developments in domestic consumption and investment, but slowed in 2019. Overall, net exports had a sizable negative contribution to GDP growth in 2018, while in 2019 the contribution was close to zero. Graph 1.1:Real GDP growth by demand components 2019-2021: Winter forecast 2020 for real GDP growth, otherwise Autumn forecast 2019 Source: European Commission Domestic demand is expected to lose some growth momentum, but remain the main growth driver. Limited scope for further improvement in employment is set to weigh on household consumption dynamics, while real wage increases are set to support private spending. In the next two years, investment is expected to grow at a moderate pace against the backdrop of heightened economic uncertainty abroad and somewhat worsened domestic growth prospects. After stagnating in 2019, exports are projected to regain modest growth rates, in line with foreign demand developments. Exporting firms are set to preserve their competitive position by maintaining productivity growth and locking in non-price competitive advantages. Overall, economic growth in Bulgaria is set to slow from 3.7% in 2019 to around 3% in 2020 and 2021. Potential GDP growth has strengthened in recent years, benefiting mostly from gains in total factor productivity. Capital accumulation has steadily supported potential growth in recent years. In contrast to the 2005-2009 period, when investment benefited from large FDI inflows, current investment activity relies largely on domestic savings and EU funds absorption. This implies a more balanced and sustainable growth model, less dependent on typically more volatile external sources of financing, and with a more moderate role of capital as a production factor. The contribution of labour to potential growth is bound to become negative, due to adverse demographics and the exhaustion of the pool of unemployed. Strong productivity gains, underpinned by high investment rates, human capital accumulation and increased efficiency are necessary to ensure a healthy pace of real economic convergence. Graph 1.2:Potential growth breakdown 2019-2021: Winter forecast 2020 for real GDP growth, otherwise Autumn forecast 2019 Source: European Commission Regional disparities

There are significant regional disparities in Bulgaria. Regional disparities, measured in terms of variation in GDP per head, have been increasing significantly since 2000, reaching a peak in 2010 and stabilising afterwards at a slightly lower level. The main driver is the concentration of economic activity in the capital region of Sofia and its rapid development in 2000-2010. The capital region of Sofia (South-West) generates more than 47% of the national GDP, and has a per capita GDP level that is almost twice that of other Bulgarian regions. It also attracts more than half of foreign direct investment in the non-financial sector, which is mostly concentrated in the capital itself( ). The poorest performers are the North-Central and in particular the North-West region. Graph 1.3:Evolution of GDP per capita in PPS among Bulgarian NUTS2 regions Source: European Commission From 2000-2010, the Southwest region registered high increases in GDP per capita, while the other five regions lagged behind. After 2010, the GDP per capita increases observed in the capital region became more modest, while the other NUTS2 regions continued their slower but steadier path to growth (see Graph 1.3). This led to the slight reduction in regional disparities that is observable after 2010. However, there are still persistent structural issues that affect productivity and competitiveness at regional level, which slow down the convergence process. Demographic developments also influence regional trends in GDP per capita. The NUTS2 regions that were most affected by demographic changes are North-West (-28.8%) and North-Central (-23.1%). By comparison, the population in the capital region decreased by only 1.3% during 2010-2017 because the natural population change was offset by an increase in net migration (+4.7%) from the other regions. The 2019 European Regional Competitiveness Index points to significant divergences across regions. The capital region is the only NUTS2 region with a substantially better performance. A common pattern emerged across all regions: a tendency for higher scores on the efficiency dimension (higher education and lifelong learning, labour market efficiency and market size), but lower scores on the basic dimension (institutions, infrastructure, health and basic education) and the innovation dimension (technological readiness, business sophistication and innovation). Investment Total investment is estimated to have increased only moderately in 2019. Over the course of 2020-2021, investment is set to regain some momentum but still grow at a relatively moderate pace, against the backdrop of elevated economic uncertainty abroad and somewhat worsened global growth prospects. Public investment increased sharply in 2018 and its growth is set to be positive in 2019 and beyond. The government has sped up the implementation of investment projects. EU financed investment is accelerating and is expected to remain high in the medium term. At the same time, a large share of public investment (more than two thirds) has been financed by purely national resources. This investment has been mainly channelled to road infrastructure and smaller construction projects. Public investment in transport infrastructure and defence is expected to increase in the coming years, based on the government announcing its intention to finance specific projects in these sectors. External position The current account balance is strengthening further. After reaching a surplus of 5.4% of GDP in 2018, the current account balance continued to improve throughout 2019, owing to stronger net exports and lower investment income from foreign direct investment (FDI). Going forward, the current account is forecast to remain in surplus, reflecting, among other things, a positive saving-investment balance due to somewhat subdued investment outlook and a moderate consumption profile in the context of growing disposable income. The current account has been consistently in surplus since 2013 and is above the current account norm( ) of ‑1.1%, reflecting the external rebalancing process that ensued after 2009. Graph 1.4:Current account developments Source: European Commission The negative Net International Investment Position (NIIP) is on a very rapidly decreasing path. Ample liquidity in the banking sector and strong GDP growth are facilitating fast NIIP contraction. NIIP reached -36.2% of GDP in 2018 (down from -44.2% in 2017). Growing reserve assets at the Bulgarian National Bank (BNB) and net deposits of commercial banks abroad account for the largest reduction in net external liabilities. Through the currency board arrangement, the expansion of BNB’s foreign assets reflects growing central bank liabilities, i.e. – currency in circulation and deposits of commercial banks. Net portfolio investment abroad also contributed to the improvement of the external position. The structure of the net external liabilities is favourable for the external sustainability of the economy, as it is mostly made up of FDI equity (see Graph 1.5). Graph 1.5:Net international investment position Source: European Commission Inflation Temporary and seasonal factors influence inflation. Annual headline inflation settled at 2.5% in 2019. Price dynamics have been volatile since the beginning of the year, accelerating to 3.1% in April and declining to 1.6% in September. Food prices have contributed strongly to inflation, influenced by the poor harvest in 2018 and the spread of the African swine fever beginning in April 2019. Services inflation outpaced that of total goods on the back of strong wage growth and factors specific to catering services, such as a more pronounced seasonality and higher prices of food. Unprocessed food and energy prices are expected to sustain inflation around 2.3% in 2020, while the assumed path of oil prices is set to hold inflation at 1.9% in 2021. Labour market There is a growing shortage of workers in the context of steady economic growth. The unemployment rate decreased further (see Graph 1.6) and at the end of 2018 was below its pre-crisis level (5.2% against 5.6% in 2008), while employment and activity rates continued to rise and approach the EU averages (2018: 72.4% and 76.3%; EU 73.2% and 78.4%, respectively). At the same time, adverse demographic trends, high inactivity rates for some population groups (such as Roma, people living in rural areas or those neither in employment nor in education and training) coupled with and labour shortages remain key challenges to future growth. Graph 1.6:Labour market indicators Source: European Commission Strong wage growth continues, although not evenly across sectors. In 2018, real compensation per employee grew by 5.4%, faster than productivity, which increased by 3.2%. While public sector wages increased by 10.9%, wages in the private sector grew by 4.2% (European Commission, 2019c). Private sector wage growth was driven by services (10.8%), and in particular the “professional, scientific and technical activities” sector (11.6%). Wage discrepancies across regions and sectors remain relatively high. Integration into the labour market differs among population groups and regions. The positive economic developments of recent years did not benefit the whole population equally. There are still noteworthy discrepancies in employment and inactivity rates depending on age, education levels and across regions (see Graph 1.7). In 2018, the share of young people aged 15-24 not in education, employment or training (NEET) decreased further, but was still 15.0 % (EU average 10.5%). Likewise, 15.4% of the low skilled active population was unemployed, while the share was much lower for the medium skilled (4.4%) and high skilled populations (2.4%). To add to these divergences, differences in employment rates between the best and the least performing regions are as large as 15 pps.

The rate of people living in poverty remains very high, though it is declining. Despite a continuous downward trend (from 41.3% in 2015 to 32.8% in 2018) poverty or social exclusion still affect 2.3 million Bulgarians (see Graph 1.8). Poverty risks are more prominent for children, the elderly, the low skilled, people with disabilities, and Roma, with differences across regions. The risk of poverty, including in-work poverty, continues to be much higher among those with less-than-primary, primary and lower secondary education. While poverty and social exclusion risks declined by 16.4 pps nationwide since 2010, they decreased only by 8.9 pps in the less developed North-West region. Graph 1.7:Employment rate by age group and educational attainment level, 2018 Source: European Commission Income inequality started to decrease, driven by a steady rise in earnings. In 2018, the income of the richest 20% of the population was 7.66 times higher than that of the poorest 20%, with the impact of social transfers on reducing poverty still significantly low (25.4% compared with 33.2% for the EU). This reflects the low level of social spending and the limited redistributive effects of the taxation system. Inequality of opportunity remains high, as shown for instance by the high poverty risk facing children whose parents have primary or lower education. Between 2010-2019, gross disposable household income per capita has been increasing at a similar rate to that of the GDP per capita, which suggests that increases in income have reached households as well. However, income distribution in the population aged 16+ points to the importance of economic activity and education levels. The average equalised disposable income of employed people with higher education is 6.3 times higher than that of the unemployed. Graph 1.8:At-risk-of-poverty or social exclusion rate and its components (AROP, SMD, LWI, MSD) Source: European Commission Financial sector The banking sector maintained high capital and liquidity ratios, supported by economic growth. The system-wide CET1 ratio( ) was 18.5% at the end of Q2 2019 and funding was comfortable on aggregate, with the loan-to-deposit ratio at 77.4%. Total assets in October 2019 were 8.6 % up on one year earlier. Banks profitability slightly improved in 2018 and remained at a high level in 2019, with return on equity at 12.1% in Q2. Non-performing loans (NPLs) remain relatively high, but have been steadily decreasing and the secondary market has become more dynamic. The NPL ratio has been on a downward trend across individual banks and segments, declining to 6.9% at the end of Q2 2019 (from 9.2% a year earlier). However, it remains one of the highest in the EU (well above the EU average of just below 3%)( )(see Section 3 and 4.2). NPLs by non-financial corporations (NFCs) also decreased, but still stood at 11.1% of total loans and advances in Q2 2019 (compared with 15.4% a year earlier) and were even higher for domestically owned banks (at 19.4%). Credit activity strengthened further. In October 2019, growth rates reached 8.1 % for NFCs and 10.4 % for households. This could support higher private investment and spur potential growth. At the same time, mortgage loans grew strongly, by more than 14.8 % year-on-year in October, owing to the positive economic environment and higher disposable incomes( ). The access of companies to financial market funding, especially the use of listed shares and debt securities, remains very limited. Financial literacy attainment among households remains low, limiting capacity to make informed choices and to plan for retirement(). House prices continued to rise, albeit at a slower pace. House prices grew by 5.4% y-o-y in Q3 2019, a deceleration from 6.6% in 2018. The largest rises have been recorded in the second biggest city, Plovdiv (12.3%), while in the capital Sofia, prices increased by 6.8%. Mortgage credit has continued to grow at a fast pace, while the number of issued building permits declined in Q3 2019, after a period of buoyant growth, which warrants close monitoring of future developments. Strong mortgage growth has continued, signalling that credit could be fuelling the ongoing expansion of the real estate market. Meanwhile, construction investment as a percentage of GDP remained stable in 2018. Despite continued increases, housing prices are still in line with the fundamentals( ). The overvaluation gap is still negative and has narrowed from -14.5% in 2015 to -5.6% in 2018, suggesting that housing prices are still recovering from the post-crisis slump (see Graph 1.9). The price-to-income ratio is still below the historical averages but it is slowly edging up, while the price-to-rent ratio has aligned with its historic trends. Although there are no signs of overheating in the housing market yet, the recovery should be closely monitored, with special attention to regions that are recording the highest growth in prices. Table 1.1:Financial soundness indicators, all banks in Bulgaria Source: European Central Bank Graph 1.9:Overvaluation gap with respect to price/income, price/rent and fundamental model-based valuation gaps (1) Source: European Commission Public finances Fiscal performance in Bulgaria is robust. The general government surplus is expected to remain above 1% of GDP in 2019 exceeding government’s projections for a close to balance budget. Revenues continued increasing at a higher pace than budgetary projections, but in line with the macroeconomic developments and implemented measures. Expenditures expanded fast mainly due to double-digit wage increases, higher social spending and recovering public investment. In the medium term, the budget is set to remain in surplus and public debt to continue decreasing. Revenue collection is projected to stay strong, in line with macroeconomic and labour market developments. Total spending is set to accelerate as a result of public sector wage increases already announced for 2020 and further increases in public investment for both national and EU financed projects. As a result, the budget surplus is forecast to slightly decrease to 0.9% of GDP in 2020 and to remain at the same level in 2021. Public debt is expected to decrease in the medium term and reach levels below 20% of GDP in 2021. The pace of debt reduction is set to be contained as the government is planning to issue some debt and increase its fiscal reserves to pre-finance future debt. Sustainable Development Goals Bulgaria is making progress towards achieving the United Nations’ Sustainable Development Goals (SDGs). Bulgaria has fared well with labour market indicators in SDG 8 “Decent work and economic growth”, with employment rates on the rise and the shares of long term unemployed and young people neither in employment nor in education/training falling, both approaching the EU averages. In terms of levels, Bulgaria is one of the worst performers in the EU in SDG 1 “No poverty”, with some sub-indicators also recording concerning negative trends over the last 15 years (at risk of poverty in work and after social transfers). This is further exacerbated by adverse developments in SDG 10 “Reduced inequalities” and by a relatively weak performance in SDG 4 “Quality education”. Despite ongoing efforts, the challenges of quality and inclusion at all levels of the education and training system remain. In the environmental and climate dimension, Bulgaria is doing well with the share of renewables in gross final energy consumption, but more needs to be done to improve energy efficiency given that both the final and primary energy consumption have been moving away from their SDG objectives. Table 1.2:Key economic and financial indicators - Bulgaria Source: Eurostat and ECB as of 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for real GDP and HICP, Autumn forecast 2019 otherwise) 2. Progress with country-specific recommendations

Since the start of the European Semester in 2011, 72% of all country-specific recommendations addressed to Bulgaria have recorded at least ‘some progress’( ). ‘Limited progress’ has been made on 28% of these country-specific recommendations (see Graph 2.1). Graph 2.1:Overall multiannual implementation of 2011-

2019 country-specific recommendations to

date (1), (2), (3) Source: European Commission The labour market continues to perform strongly. The ongoing economic growth underpinned by recent policy reforms and measures contributed to a strong decline in unemployment and a steady increase in the activity rates. However, the decline in the working-age population and further labour market tightening may limit the scope for future employment increases and create labour shortages. While some progress has been made in strengthening the employability of the workforce through additional education and training opportunities, the inactivity rates of specific groups remain a challenge. Challenges related to healthcare, education and social inclusion remain. Access to healthcare services remains limited, especially for the poorest, and measures to address out-of-pocket payments and shortages of healthcare professionals have been inadequate. Bulgaria has made limited progress in the area of education and training, with the impact of recent measures to improve the quality and inclusiveness of education still to be seen. Key indicators have stagnated and educational challenges remain, in particular for Roma. The impact of measures undertaken to improve the labour market relevance of vocational education and training and tertiary education seems to be so far limited. New services have been introduced nation-wide to support the labour market integration of specific groups, such as family counselling or mobile labour offices, but there is limited progress with the provision of sustainable integrated support to disadvantaged groups. The postponement of entry into force of the law on social services has created additional uncertainty about the final impact of the new provisions. The adequacy and coverage of the heating allowance as part of the minimum income has slightly improved. Some progress has been made in addressing structural challenges in the area of public finances. Bulgaria continues its efforts to improve tax collection and reduce the extent of the informal economy. The government has adopted a framework law to improve the corporate governance framework for state-owned enterprises and it is now putting it into effect. Some progress has been achieved over 2015-2019 in strengthening banks and other financial sector undertakings and improving the financial sector supervision. Policy action and positive macroeconomic developments helped strengthen further the balance sheets and to reduce macro-financial risks stemming from the financial sector. The supervisory action plans have mostly been implemented, with some measures still underway. The full implementation of reforms to the supervision and governance of banks and other financial corporations is crucial to consolidate these positive developments. The authorities have taken steps to address the deficiencies of the insolvency framework. In 2018, Bulgaria requested technical support to advance the insolvency framework reform. This project produced a roadmap for addressing the identified gaps in the system. The government adopted the roadmap in June 2019 and commenced its implementation. It is important to keep up the reform momentum and to implement the roadmap in a comprehensive and a timely manner. Bulgaria has made some ( ) progress in addressing the 2019 country-specific recommendations. There has been substantial progress in upgrading the State-owned enterprise corporate governance framework, reinforcing the banking sector supervision, and effectively enforcing risk-based supervision in the non-banking financial sector. Some progress has been made in improving tax collection through targeted measures in areas such as fuel and labour taxes; promoting adequate valuation of assets in the banking sector and a secondary market for non-performing loans; enforcing the adopted valuation guidelines and group-level supervision in the non-banking financial sector; improving the business environment; strengthening employability by reinforcing skills and addressing social inclusion through more effective minimum income support. There has been limited progress with the enforcement of the anti-money laundering framework; reforming the insolvency framework; fostering the stability of the car insurance sector; improving access to integrated employment and social services; reforming education and healthcare sectors and focusing investment-related economic policy on research and innovation, transport, water, waste and energy infrastructure and energy efficiency. Upon request from a Member State, the Commission can provide tailor-made expertise via the Structural Reform Support Programme to help design and implement growth-enhancing reforms. Since 2016, such support has been provided to Bulgaria for 29 projects. In 2019, several projects were delivered on the ground. The Commission, for example, provided the authorities with an insolvency framework review and roadmap. Furthermore, support was provided to improve the governance of state-owned enterprises (SOEs). As a result, in September 2019, Bulgaria adopted a new law, based on the OECD Guidelines on Corporate Governance of SOEs. In 2019, work started on providing support for the Supreme Judicial Council with the aim of reforming the payment process, improving the capacity of the Inspectorate to the Supreme Judicial Council to perform integrity checks, supporting the reform of the public administration and implementing an e-health strategy.

Table 2.1:Assessment of 2019 CSR implementation (Continued on the next page) Table(continued) Source: European Commission Box 2.1: EU funds and programmes to address the structural challenges and to foster growth and competitiveness in Bulgaria Bulgaria is one of the countries that benefits most from the EU support. The financial allocation from the EU Cohesion policy funds ( I ) for Bulgaria amounts €8.7 billion in the current Multiannual Financial Framework 2014-2020, equivalent to around 2.4% of GDP. By the end of 2019, some €7.4 billion (around 85% of the total amount planned) was allocated to projects, while €3.6 billion was reported as spent by the selected projects ( II ) with implementation levels in line with the EU average. EU Cohesion policy funding significantly supports structural challenges in Bulgaria. The Cohesion Policy programmes for Bulgaria have allocated EU funding of €1.1 billion for smart growth, €4.1 billion for sustainable growth and sustainable transport and €1.9 billion for inclusive growth. In 2019 following a performance review ( III ) €386 million have been made available for Bulgaria within performing priorities. In addition €126 million (including national co-financing) have to be reprogrammed by the authorities within the above priority areas. EU Cohesion policy funding is contributing to important transformations of the Bulgarian economy by investing, among other things, in research, technological development and innovation, competitiveness of enterprises, sustainable transport, education, employment and social inclusion. The estimated effect of ESI Funds boosted GDP by 5.5% and helped create 200,000 new jobs by 2019. ESI Funds alone are responsible for almost 77% of GDP growth in the country ( IV ). Investments driven by EU Funds are helping to modernise 439 km of roads by end 2019, both at regional level and in connection with the TEN-T network. Almost 5,000 enterprises have already benefited from support. Private operators have signed contracts that should deliver more than €50 million of fresh private capital to the research system. Investments in 237 emergency care facilities are giving access to faster and more modern medical aid, including those in remote regions. ESF has so far supported over 600,000 people get a job, to receive training or a stage, be included in a social service or get counselling and guidance for better educational results. and overcoming learning gaps. Agricultural and fisheries funds and other EU programmes also contribute to addressing the investment needs. The European Agricultural Fund for Rural Development (EARDF) makes available a total of €2.9 billion, and the European Maritime and Fisheries Fund (EMFF) a total of €104 million (including the national co-financing for both). Bulgaria also benefits from other EU programmes such as the Connecting Europe Facility, which allocated EU funding of €415 million to specific projects on strategic transport networks, and Horizon 2020, which allocated EU funding of €111 million (including about €24 million to73 SMEs). EU funding helps mobilise significant private investment. European Structural and Investment funds ( V ) supported programmes mobilise additional capital by allocating more than €700 million in the form of loans, guarantees and equity. This is expected to leverage additional investment at the level of financial intermediaries exceeding €1 billion. At the end of 2018, 14.1% of the European Structural and Investment funds was paid in the form of financial instrument (based on ESIF Annual Implementation Reports 2018). EU funds already invest substantial amounts on actions in line with the Sustainable Development Goals (SDGs). In Bulgaria the European Structural and Investment Funds support 13 of the 17 SDGs and up to 96% of the expenditure is contributing to those. 3. Summary of the main findings from the MIP in-depth review The 2020 Alert Mechanism Report concluded that a new in-depth review should be undertaken for Bulgaria to assess the persistence or unwinding of the imbalances (European Commission, 2019d). In spring 2019, Bulgaria was identified as having macroeconomic imbalances (European Commission, 2019a). They related in particular to vulnerabilities in the financial sector coupled with high indebtedness and non-performing loans in the corporate sector. This chapter summarises the findings of the analyses carried out as part of the macroeconomic imbalances procedure in-depth review that is contained in this report ( ). 3.1.Imbalances and their gravity

The banking sector is sound overall, but further steps are necessary concerning individual banks. Capital and liquidity ratios in the banking sector remained strong, supported by economic growth. Banking supervision has been strengthened, and business practices in banks have improved following the 2016 asset quality review and stress test conducted by the Bulgarian National Bank. The comprehensive assessment of six banks by the ECB in the first half of 2019 revealed capital shortfalls in two banks (First Investment Bank and Investbank), which have been asked to implement capital plans by April 2020. Insurance companies improved their financial results and the supervision framework has been strengthened, while further measures on outstanding issues are envisaged.. Remaining challenges point to the need for implementing strong risk-based supervision and addressing the challenges faced by the insurance sector. These include the adequacy of technical provisions, the appropriateness of the valuation of non-listed assets and the effectiveness of governance. Other challenges in the motor third-party liability segment include the financial stability of the ‘Green Card’ system, poor pricing policies and uncertainty around compensation of victims of car accidents. Group-level supervision might become relevant for one particular insurance group, depending on the outcome of the restructuring process. For pension funds, regulation has broadened the definition of related parties. Proper implementation will be key. Non-performing loans (NPL) and private sector debt continued to decline but remain high. The share of non-performing loans dropped further in Q2 2019 to 6.9% overall (11.1% for non-financial corporations), but still remains one of the highest in the EU. In domestically owned banks the NPL ratio for loans to corporations is even higher (19.4%). In spite of positive credit flows, private sector deleveraging continues, facilitated by strong economic growth. Most of these liabilities are held by non-financial corporations and stood at 72% of GDP in 2018, below the prudential benchmark but above levels suggested by fundamentals. Although growth in household debt increased due to intensified mortgage lending, it still remains among the lowest in the EU. The ineffectiveness of the insolvency framework is slowing the reduction in private sector indebtedness and the work-out of non-performing loans. 3.2.Evolution, prospects and policy responses Banking supervision and resolution have improved in terms of resources, governance and tools. Several measures aligning banking supervision with good international practices include legislation for supervising related-party exposures and a framework for implementing borrower-based measures. Provisioning policies were also enhanced and credit-granting practices have improved. Work on resolution plans has advanced and the cycle is expected to be closed in early 2020. The full impact of the measures adopted will depend on their complete implementation, regular monitoring and update where necessary. The Bulgarian National Bank received technical assistance from the IMF in the preparation of the 2018 Supervisory Review and Evaluation Process (SREP) manual (IMF, 2019). Further recommendations are that loans granted as a result of unsound banking practices should be dealt with more robustly than other loans and that business model frameworks of some banks need upgrading. The prospect of close cooperation with the ECB and the adoption of best practices will contribute to the quality and stability of the regulatory environment. Addressing the capital shortfalls identified in the context of the ECB’s comprehensive assessment will be key for ensuring the soundness of the sector. Furthermore, the application of harmonised procedures and the application common decision process as part of the participation in the Single Supervisory Mechanism will be beneficial to the sector as a whole. Important new regulatory guidelines based on best practices were introduced in 2019. The Bulgarian National Bank adopted the European Banking Authority guidelines on banks’ internal governance rules and the management of non-performing and forborne exposures. The supervision framework in the non-banking financial sector has been improved, while further actions in the insurance sector are planned. Positive developments include establishing a proper risk-based forward-looking supervisory process and legal and regulatory provisions to improve supervisory effectiveness and practices over valuation methods for the insurance and pension funds sectors, and related-parties transactions for the pension funds sector. Notwithstanding the progress achieved, further supervisory measures by the Financial Supervision Commission will be necessary to fully address the remaining issues in the insurance sector. To improve pricing policies in the car insurance sector, the government plans to introduce a bonus-malus system in the first half of 2020. Close monitoring of the new system will be key. The government also plans to adopt a methodology for compensation of victims of car accidents, aiming to reduce uncertainty in court rulings and facilitate pricing and provisioning. The problems afflicting the Bulgarian Green Card Bureau are still to be fully addressed. The failure of one Bulgarian insurer to settle in time the cross-border claims from motor third-party liability insurance, has put in question the financial stability of the Bulgarian Green Card system, leading to monitoring by the international Council of Bureaux. One of the requirements of the Council was that the sector signs a sector-wide reinsurance contract, but the conclusion has been delayed and is still pending. The private sector continues to deleverage despite positive credit flows. Consolidated private sector debt decreased from 99% of GDP in 2017 to 95% in 2018, while the debt held by non-financial corporations declined from 76.4% to 72%. A favourable economic cycle, low interest rates, increased lending activity and a more dynamic secondary market contributed to a decline in the non-performing loans. High liquidity and the entrance of large international players in the market have also bolstered demand for NPL portfolios and collateral sales. The authorities have started to implement the roadmap to strengthen the insolvency framework. Gaps in the insolvency framework have been identified in cooperation with the European Commission, and a roadmap listing the steps that will address these gaps has been approved. The authorities are now preparing a follow-up, including legislative changes and continued capacity building necessary to secure a positive outcome of the reform. 3.3.Overall assessment Further policy measures were introduced to address the identified imbalances, while tackling some outstanding issues is still under way. Reforms in banking and non-banking supervision continued, including the adoption and implementation of manuals and rules based on best practices. Existing gaps in the insolvency framework were identified and future steps were outlined. The authorities’ firm commitment to complete the measures prior to Bulgaria’s application to ERM II provides further impetus to reforms in important economic areas. Positive effects from the new policies, their follow-up and possible improvement and fine-tuning are expected..



Table 3.1:MIP assessment matrix (Continued on the next page) Table (continued) Source: European Commission 4. Reform priorities 4.1.Public finances and taxation

4.1.1.Tax policy The Bulgarian tax system remains growth-friendly, though with a limited redistributive impact. The tax burden is relatively low (29.9% of GDP in 2018). The breakdown of tax revenues for 2018 as a share of GDP shows that indirect taxes amount to 15.2% of GDP, direct taxes to 6% of GDP and social contributions to 8.7% of GDP. The burden is thus mainly on indirect taxes. The breakdown of revenue per type of tax shows a bigger share coming from personal income taxes (PIT), while the share of corporate tax revenue is lower. As for the revenue from consumption taxes, the largest portion comes from value added taxes (VAT). Bulgaria is one of the few EU member states with a very broad VAT base, with only one reduced VAT rate (on tourist services). The tax system is effectively regressive. The Tax Policy in the EU Survey 2020 shows that the largest burden of PIT and social contributions is on low-income earners, especially when considering the whole tax-benefit picture. The effective average tax rates on corporate income are among the lowest of all EU Member States and the tax system structure does not promote redistribution. At the same time, the relatively low tax revenue limits the government’s ability to fund basic public services (healthcare, public education, infrastructure, etc.), which could help reduce social inequality. Improving tax compliance could also boost public revenue and improve tax fairness. A number of surveys and estimates point to a relatively high share of foregone tax revenue in Bulgaria relative to other EU countries, due to the shadow economy and lack of compliance with tax obligations (see for example CASE, 2019). The situation seems to be challenging for the collection of both consumption and income taxes. The VAT gap, which had been decreasing since 2015 (see CASE, 2019), is projected to increase in 2018 to 13% from 12.8% in the previous year. At the same time, revenues from other consumption taxes, including excise duties, are shrinking both as a percentage of GDP and as a percentage of private consumption. It is also worrisome that estimates on wealth held offshore show a 50% increase between 2015 and 2016 (latest available years)(ECOPA and CASE, 2019). Improving tax compliance is a priority for the tax authorities. The National Revenue Agency (NRA) is implementing a comprehensive risk-based compliance programme focusing on taxpayers with higher compliance risks, such as fuel traders, employers in construction, restaurants, retail and tourism and those involved in e-commerce. The key priority of the programme is to encourage voluntary compliance by means of awareness campaigns and direct communication with taxpayers. According to the authorities, timely collection of liabilities is increasing, and the size of tax losses in certain categories of taxes such as income taxes and social contributions has been contained. At the same time, the Customs Service has promoted a number of legislative changes to improve collection of excise duties, with an emphasis on fuel products. As a result, revenues from excise duties are improving, but are still lagging behind nominal consumption growth. Apart from voluntary compliance measures, improved tax and customs audits could also help meet the target of better tax collection. The audits seem to lack clear targeting, monitoring and follow-up of their outcome. Bulgarian authorities have been undertaking a number of actions to reduce the tax compliance burden. These include the possibility of automatic VAT registration for companies, cashless payments of tax liabilities and social security contributions, new e-services, as well as the upcoming (in 2020) pre-filled personal income tax returns (for the financial year 2019). However, the positive trend (between 2007 and 2012) has reversed, and since 2017 the time needed to comply with tax obligations has increased. Based on the latest available data, a Bulgarian medium-sized enterprise needs the highest number of hours (441) in the EU to comply with tax obligations (EU average 171.5; EU lowest Estonia at 50) (see Graph 4.1.1). Survey evidence indicates that most of the time is spent on VAT compliance and VAT refunds (CASE, 2019). Graph 4.1.1:Number of hours needed to comply with taxes per year for a medium-sized company, 2018 data Source: World Bank, Doing Business 2020 Bulgaria has a relatively large share of environmental taxation as a share of total tax revenue. This is mainly due to high consumption of energy, rather than a strict environmental tax policy and an appropriate level of taxation. Bulgaria is the most energy- and greenhouse gas-intensive economy in EU, with coal being the main source of energy. The country lacks a clear environmental tax policy orientation, with the relevant taxes being considered purely as revenue generators rather than also as tools to influence incentives for firms and individuals. The implicit tax rate on energy is the second lowest in EU. Adjustments in tax policy could introduce incentives against environmentally damaging actions, while encouraging smart and green investment (European Commission, 2020: Taxation Trends Report 2020; 2017 data). 4.1.2.Fiscal framework Bulgaria’s fiscal performance reflects also a strong institutional framework. This includes mainly the constraints of the currency board arrangement and a complex set of applicable numerical rules. Based on the Commission’s Fiscal Governance Database, Bulgaria has in place the highest number of numerical constraints (nine). One third of those concern the subnational and two-thirds the general government level. At the general government level, four rules are based on a Maastricht criteria (on an accrual basis), while the other two follow national accounting concepts (on a cash basis). Some recent revisions of the design features of the rules sought to improve further the compliance with EU fiscal framework. Based on compliance information in the Commission’s database over the period 2015-2017, there has been a clearly improving trend as Bulgaria met eight out of its nine rules in 2017. However, the overall high number and differing accounting standards of the rules would warrant some streamlining. 4.1.3.State-Owned Enterprises The performance of state-owned enterprises in Bulgaria remains a source of concern. The state-owned enterprises (SOEs) under the central government — about 220 entities out of more than 900 state-owned entities countrywide — represent around 90% of the total state-owned entities’ assets. They account for more than 5% of employment and their turnover is more than 10% of GDP. Their liabilities-to-GDP ratio increased to 20.5% in 2018 from 18.7% in 2017, and their total profits decreased in the same period (Ministry of Finance). About half of liabilities belong to loss-making enterprises. Although the amount of liabilities guaranteed by the state is very limited, very often the state offers support to SOEs in order to overcome financial strains. State-owned enterprises dominate in the systematically loss-making and highly indebted utilities sector. Despite the severe economic situation of some major SOEs, at this stage, there are no plans with the target to improve their financial and operational performance. Corporate governance framework of SOEs in Bulgaria is subject to vulnerabilities in a broad set of areas, including: weak ownership coordination and monitoring; management boards that are not always independent, qualified and transparently nominated; limited disclosure of information at the level of enterprises and of the state; instances of lack of level playing field with the private sector (see OECD, 2019a). Bulgaria is implementing a major reform of the corporate governance framework of SOEs. The initiative was part of the government’s action plan to prepare for applying to the Exchange Rate Mechanism II (ERM II). For this purpose, a technical assistance project with the European Commission and the Organisation for Economic Cooperation and Development (OECD) was launched in August 2018. The reform so far has included (i) a review and assessment of the legal, regulatory and operational framework for SOEs and (ii) a revision and alignment of Bulgaria’s legislation with the OECD guidelines on corporate governance of SOEs. The law overhauling the framework and the principles for SOE corporate governance was adopted in October 2019, but the reform will only be de facto completed when the implementing acts of the law are prepared and put into effect. The Bulgarian Development Bank was the only SOE exempted from the law. This exemption was introduced in Parliament late in the process, and was questioned by some experts involved in the project. The position of the legislators who introduced this provision was that the Bank is subject to regulations and supervisory rules governing financial institutions. Ensuring high quality management and corporate governance rules in the Bank is of critical importance due to its role in promoting investment, both as a financing mechanism for national projects and as a potential implementing partner in the context of InvestEU. The new law prescribes the next steps and the timeline for completion of the reform. The first immediate step is to put in place the necessary rules of procedure for the newly established Agency for Public Enterprise and Control. Under the law, these rules must be adopted by the Council of Ministers by January 2020 (3 months from the promulgation of the law). By April 2020 the agency will have to prepare and the Council of Ministers will adopt the necessary secondary legislation (implementing acts). By October 2020 (one year from the promulgation of the law) the composition of the managements and control bodies of the SOEs should comply with the provisions of the law. 4.2. Financial sector In July 2018, Bulgaria announced its intention to join simultaneously the Exchange Rate Mechanism (ERM II) and the Banking Union. Bulgaria announced at the same time a set of commitments to improve the economy’s resilience in areas of high relevance for smooth participation in ERM II, including strengthening the banking and non-banking financial sectors and the insolvency framework (Ministry of Finance, 2018). 4.2.1.Banking sector The banking sector has continued to strengthen its capital and liquidity ratios, while follow-up measures are expected. Overall, banks are profitable and well capitalised, and the ratio of non-performing loans has been on a downward path. Nonetheless, Bulgaria continues to be among the EU countries with the highest rates of non-performing loans, especially for non-financial corporations (see Section 1, Economic Outlook) and the comprehensive assessment conducted by the European Central Bank (ECB) of six banks in Bulgaria revealed the need to increase capital in two banks (see below).

Several important new regulatory guidelines were introduced in 2019. The Bulgarian National Bank adopted a number of European Banking Authority (EBA) guidelines, e.g. on banks’ internal governance rules (BNB, 2019) and the management of non-performing and forborne exposures (EBA, 2018). The Bulgarian National Bank has already communicated to the banks its general supervisory expectations regarding the implementation of the EBA Guidelines for the management of non-performing and restructured exposures, which entered into force on 30 June 2019. Individual compliance will be assessed during the forthcoming Supervisory Review and Evaluation Process cycle ( ). Follow-up action on already adopted acts will further strengthen the regulatory environment. In Ordinance 37 on the internal exposures of banks, from July 2018, the BNB laid down the internal rules and procedures for forming, calculating, monitoring and reporting internal exposures for banks. Banks implemented the internal rules and procedures within a six-month period. Follow-up steps encompass evaluation of the effectiveness of the amended framework and the reporting requirements for related parties, including further fine-tuning of the framework and the reporting forms. Continuous follow-up and assessment of banks’ implementation of the adopted regulatory acts will remain key. Progress is expected in the coming months in insolvency and resolution procedures. The application of the definition of default ( ) and the alignment of its definition with the Single Supervisory Mechanism’s approach will require amendments to BNB Regulation 7 on banks’ risk management process. Work on resolution plans has advanced, in particular regarding the analysis of critical functions, feasibility and credibility of insolvency proceedings and the public interest test, and the identification of preferred strategy and resolution tools. Formal resolution plans are being prepared in several waves until early 2020, based on banks’ total assets and strategy. While not yet binding, the minimum requirement for own funds and eligible liabilities (MREL) is calculated and communicated to banks in order to assist their preparation and future business decisions ( ). Looking ahead, the relatively shallow capital markets in Bulgaria may render issuing MREL compliant liabilities more difficult. The application of the International Financial Reporting Standard (IFRS 9) led to changes in the banks’ loan-loss provisioning model and capital ratios. The existing credit risk framework was enhanced with models for exposure at default and loss given default, estimation of present value of the expected credit losses and taking into account the predefined macroeconomic scenarios. The transition to IFRS 9 resulted in a limited initial CET1 ratio reduction at the aggregate level, as some banks decided to apply the new standard gradually. At the same time, the IFRS 9 implementation coincides with a cyclical upturn, which could result in underestimation of the risk from new unfavourable economic developments. The comprehensive assessment of the banking sector by the ECB confirmed that further steps are necessary to ensure the soundness of individual players. As part of Bulgaria’s commitments ahead of applying for Exchange Rate Mechanism (ERM II), the authorities formally notified their intention to establish close cooperation with the Single Supervisory Mechanism on 18 July 2018. The ECB conducted a comprehensive assessment — comprising an asset quality review (AQR) and a stress test — of six banks in Bulgaria. According to the results published on 26 July 2019 ( ), based on end-2018 data, four of the six banks faced no capital shortfalls ( ). Capital needs on the basis of the maximum shortfalls in the various components of the exercise amounted to € 262.9 million for First Investment Bank and € 51.8 million for Investbank ( ). These two banks are required to implement their capital plans by April 2020. The balance sheets of the two banks were reviewed in the context of the AQR/stress test conducted by the BNB in 2016, after which their capital adequacy ratios fell significantly after balance sheet corrections, but remained above regulatory levels (BNB, 2016). Some uncertainties remain over the valuation of collateral. Despite efforts and progress, a range of hard-to-value assets, such as real estate collateral still exist in the balance sheets of banks. Conditions for harmonisation in valuation practices have been put in place since June 2018, when national standards became mandatory for external independent collateral valuers, in accordance with the Independent Valuers Act ( ). The countercyclical capital buffer was set to 0.5% as of October 2019 and its further increases are forthcoming. According to several subsequent BNB decisions, the countercyclical capital buffer will increase to 1% from April 2020 and further to 1.5% from January 2021. The value of the reference indicator (deviation of the credit-to-GDP ratio from the long-term trend) would have corresponded to maintaining the buffer at zero, but the decision to introduce a positive value of the countercyclical capital buffer constituted an important signalling tool to the banking system. The aim of the buffer is to safeguard the banking system against potential losses during periods of excessive credit growth, frequently associated with the gradual accumulation of cyclical risks. These could materialise as borrowers’ debt servicing capacity declines in an economic downturn and/or an increase in lending rates. Although not actively employed at the moment, borrower-based measures, which complement existing capital-based measures, were introduced recently as part of the macro-prudential toolkit. In October 2019, the BNB identified eight banks as other systemically important institutions (O-SIIs) and confirmed higher buffer rates from the beginning of 2020 as a last stage of the gradual phase-in of O-SII buffer, initiated in 2016. The aim of the measure is to safeguard the stability of the banking sector by strengthening the capacity of O-SIIs to absorb losses and accordingly to limit the contagion risks stemming from potential stress event in a systemically important bank to other credit institutions or the banking system as a whole. The fintech sector offers both opportunities and challenges for the banking system. According to a recent report (Bulgarian Fintech Association, 2019) (Bulgarian Fintech Association, 2019), there are 65 fintech companies in Bulgaria, making the country a leader in the South-eastern Europe region. Approximately a third of Bulgarian fintech companies operate in the field of payments. Another third specialise in personal finance and capital markets. Banks in Bulgaria are already cooperating with fintech companies, which could help with cost reduction and increase efficiency. 4.2.2.Combating money laundering Bulgaria has taken steps to strengthen the anti-money laundering framework. Bulgaria notified transposition measures for the 4th Anti-money Laundering Directive in April 2018, December 2018 and May 2019, but several gaps have been identified. A new law adopted in November 2019 aims to address these shortcomings and to transpose the 5th Anti-money Laundering Directive. The national risk assessment was completed in January 2020 and highlights a number of significant threats. The national risk assessment points to several systemic risks connected to Bulgaria’s geographical position (part of the ‘Balkan route’ for criminals), significant shadow economy and high levels of corruption. The presence of organised crime groups, professional money laundries and significant cross-border financial crimes (tax evasion, VAT fraud) play a role in exposing Bulgaria to significant money laundering risks. The use of financial intelligence remains limited. As of November 2019, there was still no common database to identify and monitor politically exposed persons, despite their high risk exposure to money laundering. The number of suspicious transaction reports has increased, filed largely by banks. Based on the 2,777 suspicious transaction reports received in 2018, the Financial Intelligence Unit initiated 1,264 operative files which resulted in only 16 transactions being stopped ( ), while 772 were used for analytical purposes. The limited use of financial investigation and financial profiling hinders effective asset recovery in organised crime and corruption cases ( ). The Bulgarian financial institutions supervisors still need to take steps to implement risk-based supervision, building on the national risk assessment. The high risk of involvement in money laundering schemes by professionals providing company services (e.g. accountants, tax advisers) points to the need to carry out adequate employee screening, in line with obligations under the EU AML provisions, and more effective supervision. The risk of corruption still needs to be better addressed, as it is a predicate offence to money laundering. A significant number of investigations into high-level corruption are ongoing, with high-ranking officials charged or brought to court. Several cases have progressed through the trial phase, some resulting in convictions. Despite sentences imposed at first instance, very few final convictions have been adopted and enforced (European Commission, 2019f). There are risks linked to the ‘Citizenship by investment’ scheme. The scheme does not require that an individual spend a significant amount of time in Bulgaria to obtain Bulgarian citizenship. As such, the new citizen might not become a tax resident and their income would not be taxable in Bulgaria. This creates potential for misuse, as personal identification documents issued by Bulgaria can be used to avoid reporting assets held abroad. Bulgaria’s government approved on 2 October 2019 draft amendments to the Bulgarian Citizenship Act aiming to eliminate the possibility for foreigners who have acquired permanent residence status in Bulgaria for short-term investments of subsequently obtaining citizenship under significantly facilitated conditions. As it stands, these amendments were adopted by the Cabinet, but discussions in the Parliament were postponed due to ongoing investigations into cases of unlawful granting of Bulgarian citizenship. Given the inherent money laundering risks of such schemes (European Commission, 2019g), an adequate understanding of the risks Bulgaria faces and the adoption of appropriate mitigating measures, remain a challenge. 4.2.3.Non-banking sector Supervision has been enhanced in several respects, while further measures are expected. The risk-based supervision guidelines in the insurance and pension insurance sectors became applicable as of 1 January 2019. The new rules may be reviewed in 2020 based on experience and new data available. Further improvements to the new approach may be necessary to reap the full benefits of the measure. Notwithstanding the progress achieved, there are still weaknesses concerning the adequacy of technical provisions, appropriateness of the valuation of non-listed assets, and governance practices in the insurance sector. Further supervisory measures by the Financial Supervision Commission (FSC) will be necessary to fully address the issues outlined above. The legal and regulatory framework has improved. The government amended the Financial Supervision Commission Act and the Social Insurance Code to increase the regulator’s independence, decision-making process and effectiveness, as well as the framework applicable to the pension funds, including in terms of the definition of related parties. The Financial Supervision Commission adopted important amendments to two regulations in the field of insurance and pension insurance: Ordinance 53 on the requirements for accountability, valuation of assets and liabilities and formation of technical reserves of insurers, reinsurers and the Guarantee Fund, and Ordinance 9 laying down detailed rules for valuation of the assets and liabilities of the supplementary pension funds and the pension insurance company. Group-level supervision might become relevant for one particular insurance group, depending on the outcome of the restructuring process. The Financial Supervision Commission, the European Insurance and Occupational Pensions Authority (EIOPA) and a particular insurance group have sought an agreement on the kind of group-level supervision that should apply to that entity. The group is currently taking steps to acquire a major company active outside the non-banking sector and may undergo restructuring. If this process is completed successfully, a new procedure of identification of the group will start, which will result in the group being identified either as an insurance holding company (which involves full group supervision) or a mixed holding company (which involves a more limited supervision). Motor third-party liability (MTPL) insurance warrants attention. MTPL represents a high share in the portfolio of all Bulgarian insurers. Its profitability had remained insufficient for a long time due to strong price competition in the sector. After insurance premiums increased substantially in 2018, the financial results of the MTPL line of business have improved. The solvency of some players relies on the validity of the assumptions underlying the valuation of their assets and liabilities. The impact of the introduction of the announced bonus-malus system, the adoption of a forthcoming methodology for compensation of victims of car accidents and the situation of the Bulgarian Green Card Bureau will need to be monitored. The government plans to introduce a bonus-malus system in the first half of 2020. A first draft of the bonus-malus system was proposed for public consultation in November 2018. Although it was more robust than the current version, it was rejected by the different stakeholders for fairness considerations and for deviating from common practices. The new draft envisages that both the owner and the registered drivers of the vehicle are separately evaluated under the bonus-malus system. The main drivers of the system will be the relevant traffic offences. Insurers would remain free to adapt the basic premium on the basis of other characteristics of the policyholder, such as the history of claims. Close monitoring of the system will be necessary to identify and swiftly address any potential shortcomings.

The government plans to adopt a methodology for compensation of victims of car accidents. The heterogeneous court practices defining compensation of victims of car accidents and their families present challenges to non-life insurers who need consistency and stability to be able to correctly estimate their technical provisions and determine their premiums. After the National Assembly imposed temporary ceilings on the amounts of compensation in November 2018, a working party was established which drafted a methodology to serve as guidance for judges assessing the amounts of damages. The Insurance Code envisages that the methodology should be by December 2019, but the proposed ordinance has not been adopted yet. The current version borrows some elements from the Spanish and French systems of quantification of damages, but has been customised to accommodate Bulgarian specificities. The Bulgarian Green Card Bureau is still under monitoring and the sectoral reinsurance cover is yet to be underwritten. One Bulgarian insurer has not been paying the correspondents/claims-handling entities in time for cross-border MTPL claims, creating pressure on the financial stability of the Bulgarian Green Card system. The number of claims to the Bulgarian Green Card Bureau spiked from 354 in 2017 to 5 710 in 2018, reaching €19.6 million, or 70% of total claims in the system. The number of guarantee calls in 2019 decreased to 5 058, reaching €18.3 million. Out of them 27% (€4.2 million) are related to the Cyprus-based Olympic Insurance branch. In 2019 guarantee calls for an amount of €4.3 million were unpaid. In December 2018, the international Council of Bureaux increased the bank guarantee required from the Bulgarian Green Card Bureau, put it under monitoring and requested sectoral reinsurance cover. In September 2019, the General Assembly of the bureaux decided to retroactively impose ongoing fines on the Bulgarian Bureau as of 15 May 2019. Meanwhile, the competition authority considered that concluding a general reinsurance would not lead to a breach of competition law. The agreement on contributions of individual insurers to the scheme will be key for the sustainability of the sector. Some undertakings may face higher reinsurance prices under the new conditions, as they have kept their reinsurance costs low by contracting with reinsurers with subpar ratings(). The liquidation of the Cyprus-based Olympic Insurance is ongoing. The official liquidation procedure started on 13 July 2019. The Cypriot court designated two liquidators. All creditors, including in Bulgaria, were invited to submit their claims. The initial report of the liquidator should provide more clarity on the amount of claims submitted by the creditors and the amount of available assets. Discussions on the interpretation of the existing convention between the guarantee funds of the two countries are ongoing, with a possibility of using an arbitration procedure to resolve the issues before any intervention for claims incurred in Bulgaria. 4.2.4.Private indebtedness The private sector continues to deleverage despite positive credit flows. Consolidated private sector debt fell from 99% of GDP in 2017 to 95% in 2018, supported by strong economic growth. The majority of debt liabilities continues to be on the books of non-financial corporations (NFCs). Their indebtedness went from 76.4% of GDP in 2017 to 72% in 2018. This is below the prudential benchmark, but still well above the fundamentals (see Graph 4.2.1) ( ). Household debt grew more rapidly due to intensified mortgage lending, but still remains among the lowest in the EU. Graph 4.2.1:Fundamental-based and prudential benchmarks and NFC debt (1) Source: European Commission The largest contribution to the decline of NFC debt came from real growth. A modest increase in inflation as well as valuation changes and write-offs also helped alleviate the debt burden (see Graph 4.2.2). At the same time, in October 2019 loans to NFCs increased by 8.1% year-on-year, decelerating the deleveraging process (). Graph 4.2.2:Breakdown of annual changes in debt-to-GDP ratios of NFC (1) Source: European Commission Non-performing loans (NPLs) remain relatively high, but are on a downward path. The share of NPLs dropped further in Q2 2019 to 6.9%, but still remains one of the highest in the EU (see Section 1). The current stock represents mainly the legacy of the credit boom before the 2009 recession. The quality of assets remains rather disparate across institutions, depending on their business model and practices ( ). Increased lending activity with reduced new stock contributed to the NPL decline, amidst favourable cyclical and low interest rate conditions. This development has been supported also by a more dynamic secondary market for NPLs, notably for retail loans, with some improvement in the NFC segment as well. Ample liquidity is generating demand for NPL portfolios and collateral sales, with large international companies also having entered the market. 4.2.5.Insolvency framework Bulgarian authorities have been working in close collaboration with the Commission under the Structural Reform Support Programme (SRSP) on the reform of the insolvency framework. The aim was to identify the existing gaps in the insolvency framework and to prepare a roadmap listing the steps that will address these gaps ( ). This measure is also part of the commitments that the Bulgarian authorities announced in view of their intention to apply for ERM II accession. T The government adopted the insolvency framework roadmap on 19 June 2019 and established a dedicated steering body, the ‘Coordinating Council’, which will be in charge of the overall management and coordination of the roadmap’s implementation. Efforts to implement the insolvency framework roadmap have already started. The Ministry of Justice has set up a working group to draft the necessary legislative amendments by the end of June 2020. This group will have wide stakeholder participation with representatives of the government, the judiciary, law professionals and academia. In addition, the Ministry of Justice has requested technical assistance from the SRSP for the establishment of an early warning tool to detect a deteriorating business situation, as envisaged in the roadmap. The process for conducting the technical feasibility assessment of the Commercial Registry is also underway. The roadmap will also facilitate the transposition of Directive 2019/1023 on Restructuring and Discharge of Debt, for which the transposition period of 2 years started to run on 16 July 2019. In addition to legislative changes, capacity building activities are also included in the roadmap. A session dedicated to training the trainers of insolvency practitioners took place in July 2019, and six more pilot training sessions have been finalised in the second half of 2019. The authorities have clarified that the outcomes of these training sessions will be taken into account when preparing future education programmes and materials. 4.3. Labour market, education and social policies 4.3.1.labour market Labour market developments remain positive, though labour shortages and the steady decrease in the working-age population pose challenges. The employment rate has been increasing steadily in the past 5 years, reaching 72.4% in 2018, and leading to progress on SDG 8 ‘Decent work and economic growth’. The unemployment rate kept falling and reached 3.8 % in Q4-2019, which is significantly lower compared to its peak level after the crisis (13.0% in 2013). Long-term unemployment also went down (2.3% in Q3 2019) and is slightly below EU average (2.4%) At the same time, some groups (e.g. NEETs, Roma) still have high levels of inactivity, and labour shortages remain a key challenge, against the backdrop of a steadily decreasing working-age population. Labour market outcomes differ significantly across regions. In 2018, the employment rate in the capital city region of South-West (at 78.3%) was considerably above the national average (72.4%), while it was barely 63.6% in North-West and 69.1% in North-Central. Regional disparities do not seem to have been narrowing in this regard ( ). While the share of long-term unemployment as a percentage of total unemployment stood at 58.4% nationwide in 2018, in the North-West region it was 76.8%. Wages are increasing fast across the country, while disparities remain high. Although some regions are catching-up (North-Central, North-East), the average wage in South-West grew faster than the country average in the last year () and is about 58% higher than in North-West, which has the lowest average wage. Demographic developments strongly affect the labour market, and may constrain future economic growth. The population decreased by 50,000 in 2018. Bulgaria’s labour force is expected to decrease by 10% by 2030 ( ). The age cohort 25-49 (average labour market participation of 86%) is expected to decline the most (by 26.7% by 2030). Such a reduction might jeopardise sustainable future growth. Measures aimed at reducing the outflow of working-age population (15-64 years), helping people find jobs and fostering the upskilling and productivity of workforce, could bear positive results. Graph 4.3.1:Population change and migration balances, 2013-18 Source: European Commission, National Statistical Institute Labour shortages are on the rise, though trends vary significantly across sectors. Shortages increased rapidly in the building and services sectors, while they stalled and even slightly decreased in furniture, repair and installation of machinery and wood manufacturing sectors in the first three quarters of 2019 (see Graph 4.3.2). Regarding future shortages, current predictions point to the education and healthcare sectors as the most problematic in 15 years’ time (), in particular in small localities, where the provision of basic social services could become increasingly challenging.

Upskilling measures can be instrumental in preparing the workforce to changes in labour market needs. The low skilled represent 17.4% of the working-age population (or 677,000 people), which is twice the number of jobs available that require only basic skills (357,000). Compared to the overall employment rate (72.4%), the employment rate (20-64) of the low-skilled ( ) stood at a much lower level (46.0% in 2018). Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights is designed as a compass for a renewed process of upward convergence towards better working and living conditions in the European Union. It sets out twenty essential principles and rights in the areas of equal opportunities and access to the labour market, fair working conditions and social protection and inclusion. The Social Scoreboard supporting the European Pillar of Social Rights points to a number of employment and social challenges in Bulgaria. Steady economic g rowth has contributed to improved labour market outcomes. The employment rate has continued to increase and the gender employment gap is at the EU average. The long-term unemployment rate is now close to the EU average. Labour market participation of certa in groups remains a challenge, however. The shares of young people neither in employment nor in education or training (NEET) and of early school leavers remain high (at 19.1% and 12.7%, respectively, in 2018). The level of digital skills is low, with only 29% of the population (16-74) reporting basic or above basic levels of digital skills, compared to 57% in the EU. The share of people at risk of poverty or social exclusion remains high. Low incomes, particularly for those on the lowest incomes (e.g., the elderly, the low skilled, people with disabilities and Roma) contribute to the still high, though decreasing, income inequality, with strong regional disparities. The capacity of social transfers (excluding pensions) to reduce poverty is limited. More positively, the gross disposable household income (GDHI) per capita keeps increasing, with a growth rate among the best in the EU. There is scope for greater coverage of early childhood education and care in Bulgaria. Good quality early childhood education and care plays a key role in creating equal opportunities, improving cognitive skills and reducing early school leaving and the risk of under-achievement at later stage. In Bulgaria, the enrolment rate of children aged less than 3 years of age in formal care is much lower than the EU average (16.2%; EU average 33.2%), particularly in some regions and among vulnerable children. The lack of facilities is limiting participation, particularly in big cities. The Bulgarian authorities have taken measures to improve the adequacy and the coverage of the heating allowance as part of minimum income support. In 2019, changes in the access criteria and the 24.5% increase in the allowance led to almost 250,000 applications being submitted by the end of October 2019, an 18% increase on 2018. Graph 4.3.2:Labour shortage index (1) Source: European Commission Meanwhile, the employment rate of recent graduates with medium (ISCED 3-4) and high (ISCED 5-8) skills was 67.8% and 84.5%, respectively. Despite the need for substantial upskilling and reskilling of the population in the view of expected labour market changes caused by digitalisation and climate change adaptation (European Commission, 2019a), only 2.5% of adults (25-64) have had a learning experience in the preceding 4 weeks, based on the Labour Force Survey (much lower than the EU average of 11.1%). Consolidating the outcomes of existing surveys and projection tools could prove beneficial to anticipate the future skills needs of the labour market ( ). The labour market integration of vulnerable groups remains low. The overall inactivity rate in Bulgaria decreased to the EU average of 25.8% in Q3-2019, but young people aged 20-24, Roma and people living in rural areas show much higher levels of inactivity. While the overall unemployment rate of Roma is 55%, it is even higher (65%) for young Roma aged 16-24 (). The employment rate of people with disabilities remains one of the lowest in the EU (39.5%; EU average 50.7%), with a very high gap relative to people without disabilities (34.2 pps; EU average 24.2 pps)(). Several measures are being implemented to reach out to these vulnerable groups, including the ‘youth mediators’ and ‘Roma mediators’ services, as well as the ‘mobile labour offices’ for rural and remote areas. Employment quotas have been set to boost employment of people with disabilities, and dedicated support is being provided through ESF co-financed operations ( ). Although decreasing, the number of people not in education, employment or training (NEET) is still high. In 2018, the NEET rate for young people aged 15-24 was 15.0%, well above the EU rate of 10.5%. Almost half (47.0%) of those leaving the Youth Guarantee scheme in 2018 were either in employment or training within the target of 4 months. However, as approximately 80% of NEETs are inactive, only 1 in 10 (10.6%) is covered by the Youth Guarantee. According to a recent study ( ), 73% of NEETs aged 15-34 live in small towns and rural areas, 57% have lower secondary education or below, 55% are women and 38% of them are Roma. The region with the largest share of NEETs is the North-West, although in absolute figures the South Central region has the highest number. There is still room for improvement in the effectiveness of active labour market policies. Despite the need to strengthen the labour market participation of some groups and support skills acquisition in the workforce, expenditure on active labour market policies has stagnated in recent years and still relies strongly on external funding, in particular the ESF. Current monitoring and evaluation methods of these policies seem mostly quantitative, and do not usually include a follow-up of participants after conclusion of the programmes. Better coordination between public employment services and other institutions working with the unemployed (e.g. social workers, health institutions and non-governmental organisations) could contribute to further improvement of the effectiveness of these efforts. Since 2019, new services are provided for the unemployed and the inactive, such as ‘family labour adviser’, ‘mobile labour office’ and ‘post-employment counselling and mentoring’, and they are being extended to all labour offices nation-wide. Strong wage growth continues, although in some occupations, even if demand is high, salaries did not increase accordingly. Nominal compensation per employee increased by 9.7% in 2018 and is estimated to have increased by 7.8% in 2019. Public sector wages increased (10.9%) more rapidly than those in the private sector (4.2%) in 2018 (). In both 2018 and 2019, real wages grew faster than labour productivity. However, in some low skilled occupations low wages appear to be a major cause of shortages. In some industries where there is a reportedly severe shortage of skilled workers —such as metal product manufacture, electrical appliances, machinery and equipment — average wages do not seem to offer a discernible premium compared to the ongoing rate of pay in the overall economy. Meanwhile, on 01 January 2020 the Government increased the minimum wage by administrative decision to BGN 610 (€312), from BGN 560 (€287) in 2019. The involvement of the social partners in policy development has improved, but there is still scope for further strengthening of cooperation. In recent years, the social partners and civil society organisations have participated in the formulation and discussion of national policies in relevant economic and social areas in Bulgaria, such as the ‘Persons with Disabilities Act’, the new Act on ‘Social Services’ or the design of policies to tackle the informal economy ( ). However, there is still scope for more active engagement in consultations within the working groups fo