Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Bulgaria and delivering a Council opinion on the 2016 convergence programme of Bulgaria
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Bulgaria, budget deficit, economic policy, economic reform, educational system, job creation, labour market, stability programme

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 323 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Bulgaria  and delivering a Council opinion on the 2016 convergence programme of Bulgaria  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Bulgaria 

and delivering a Council opinion on the 2016 convergence programme of Bulgaria 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 9(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  26  November  2015,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18  March  2016.  On  26  November  2015,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report6,  in  which  it 
identified Bulgaria as one of the Member States for which an in-depth review would 
be carried out.   

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2016) 323 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 

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The  2016  country  report  for  Bulgaria7  was  published  on  26  February  2016.  It 
assessed  Bulgaria’s  progress  in  addressing  the  country-specific  recommendations 
adopted by the Council on 14 July 2015 and Bulgaria's progress towards its national 
Europe  2020  targets.  It  also  included  the  in-depth  review  under  Article  5  of 
Regulation  (EU)  No  1176/2011.  On  8  March  2016,  the  Commission  adopted  a 
Communication8  presenting  the  results  of  the  in-depth  review.  The  Commission’s 
analysis leads it to conclude that Bulgaria is experiencing excessive macroeconomic 
imbalances. In particular, the economy is characterised by remaining fragilities in the 
financial sector and high corporate indebtedness in a context of high unemployment.  

On  15  April  2016,  Bulgaria  submitted  its  2016  national  reform  programme  and  its 
2016  convergence  programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

recommendations  have  been  addressed 

Relevant  country-specific 
the 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application  of  the  measures  linking  effectiveness  of  the  European  Structural  and 
Investment Funds to sound economic governance9. 

in 

Bulgaria  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact.  In  its 
2016 convergence programme, the government plans a gradual improvement of the 
headline balance to -1.9% of GDP in 2016 and -0.2% of GDP in 2019. The medium-
term budgetary objective — a structural deficit of 1 % of GDP — is planned to be 
achieved  as  of  2017.  According  to  the  convergence  programme,  the  government 
debt-to-GDP ratio is expected to peak at 31.8% in 2018 and to decline to 30.8% in 
2019.  The  macroeconomic  scenario  underpinning  these  budgetary  projections  is 
slightly  favourable.  The  measures  needed  to  support  the  planned  deficit  targets 
starting  with  2017  onwards  have  not  been  sufficiently  specified.  Based  on  the 
Commission  2016  spring  forecast,  there  is  a  risk  of  some  deviation  from  the 
adjustment path towards the medium-term budgetary objective in 2016 as well as in 
2017,  under  unchanged  policies.  Based  on  its  assessment  of  the  convergence 
programme  and  taking  into  account  the  Commission  2016  spring  forecast,  the 
Council  is  of  the  opinion  that  Bulgaria  is  expected  to  broadly  comply  with  the 
provisions of the Stability  and Growth Pact. Nevertheless, further measures  will be 
needed to ensure compliance in both 2016 and 2017.  

Bulgaria made some progress in addressing last year's recommendation to  make its 
healthcare spending more efficient, particularly by producing a national health map 
that  will  enable  medical  expenditure  to  be  planned  in  accordance  with  territorial 
criteria  and  the  needs  of  the  population.  The  Bulgarian  health  system  faces  major 
challenges, including limited access, low funding and poor health outcomes.  In spite 
of recent efforts to improve tax collection, the shadow economy remains a significant 
challenge  affecting  public  revenues.  Undeclared  work,  including  under-reported 

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SWD(2016) 72 final. 
COM(2016) 95 final. 
COM(2014) 494 final. 

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remuneration and evasion of social security contributions, distorts the labour market 
and reduces fiscal revenue. 

Cases  of  imprudent  business  practices  across  the  financial  sector,  coupled  with 
inefficient  supervision,  have  created  an  environment  for  imbalances  to  accumulate. 
The completion, in a transparent way and according to best international practices, of 
the recently launched reviews of the banking, insurance and pension fund sectors and 
taking  the  necessary  follow-up  actions  will  strengthen  confidence  in  the  financial 
sector.  Moreover,  continued  efforts  to  improve  financial  supervision,  in  both  the 
banking  and  non-banking  sectors,  will  play  an  important  role  in  strengthening  the 
financial system and positioning it to support the nascent macroeconomic recovery.  

The  labour  market  has  experienced  a  modest  recovery  but  remaining  weaknesses 
continue to hinder growth and limit the adjustment capacity of the economy. Labour 
market adjustment is hampered by the structural nature of long-term unemployment, 
a  shrinking  and  ageing  labour  force,  low  labour  market  participation  and  skills 
mismatches.  While  unemployment  is  gradually  improving,  there  are  still  important 
challenges, for example as regards the long-term unemployed and young people not 
in  employment,  education  or  training.  Active  labour  market  policies  could  play  a 
stronger role in helping these groups to access the labour market. The activation of 
people on social benefits is hindered by the fragmentation of, and limited cooperation 
between,  different  agencies  delivering  benefits  and  labour  market  integration 
services. Dedicated centres for employment and social assistance, which combine the 
services  of  the  Employment  Agency  and  the  Social  Assistance  Agency,  have  been 
developed in a pilot project but no decision has been taken yet to roll out the project 
on a larger scale after it ends in December 2016.  

Although  Bulgaria’s  minimum  wage  is  still  the  lowest  in  the  EU,  it  has  increased 
substantially since 2011 and the lack of objective criteria for minimum wage setting 
creates uncertainty. Despite work of the government and social partners in this area, 
Bulgaria  still  has  no  clear  guidelines  or  transparent  criteria  for  minimum  wage 
setting  that  take  into  account  its  impact  on  job  creation,  social  conditions  and 
competitiveness.   

Very  high  'at-risk-of-poverty  or  social  exclusion'  and  inequality  levels  remain  in 
Bulgaria.  Progress  in  addressing  poverty  and  social  exclusion  is  hindered  by 
continuing  challenges  over  integrating  Roma  into  the  labour  force,  facilitating 
school-to-work  transitions,  and  improving  the  coverage  and  effectiveness  of  social, 
health  and  labour  market  policies.  The  general  minimum  income  scheme  provides 
very limited levels of support and outreach to the population. The allowance level is 
below the poverty line and  has not been increased in line with average and minimum 
wage developments of recent years. Estimates on coverage indicate that a large part 
of the intended beneficiaries do not receive benefits. A better outreach to the target 
groups, while maintaining fiscal responsibility, would help to alleviate poverty. 

The  education  system  has  limited  capacity  to  include  vulnerable  groups  and  equip 
learners with relevant skills. Vulnerable groups such as Roma and pupils from poor 
families continue to face significant obstacles in accessing and completing education. 
The level of enrolment among Roma at all levels of education is significantly lower 
than  for  non-Roma.  The  early  school  leaving  rate  continues  to  increase  and  is 
particularly high in rural areas and less developed regions. Removing barriers to the 
participation  in  early  childhood  education  of  disadvantaged  children  is  essential  to 
increase educational outcomes and  prevent dropouts. A new Pre-school and School 

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Education  Act  adopted  by  the  parliament  in  September  2015  is  an  important  step 
towards  a  comprehensive  reform  of  the  school  system.  The  implementation  of  this 
legislation,  together  with  targeted  measures  to  overcome  non-legislative  barriers  to 
the  full  participation  of  disadvantaged  groups  in  education,  should  contribute  to 
improving the Bulgarian economy's growth potential and social cohesiveness in the 
long  term.  Enrolment  and  graduation  rates  in  tertiary  education  are  on  the  rise  and 
the  employment  rate  of  recent  graduates  is  recovering  slowly,  although  it  remains 
significantly below the EU average. 

Risks  stemming  from  high  corporate  debt  and  barriers  to  deleveraging  remain 
significant. The existing insolvency framework provides little scope for an effective 
debt  workout  process  and  does  little  to  address  the  high  level  of  corporate 
indebtedness.  Reforms  to  facilitate  corporate  insolvency  procedures  could  improve 
deleveraging and lead the way to new lending and investment.  

The  public  procurement  system  in  Bulgaria  continues  to  suffer  from  structural 
weaknesses,  including  systematic  irregularities  in  procurement  procedures,  lack  of 
administrative capacity and deficient control mechanisms, combined with systematic 
court  appeals  that  often  delay  works  on  the  ground.  The  transition  to  full  e-
procurement  has  made  only  limited  progress.  The  shortcomings  of  the  Bulgarian 
public  procurement  system  have  led  to  interruption  of  payments  and  financial 
corrections  in  EU  funding  programmes  and  also  affect  the  wider  business 
environment. 

Unstable  policies  and  lack  of  trust  in  key  public  institutions,  such  as  the  judiciary, 
constitute  significant  deterrents  to  investment  in  the  Bulgarian  economy.  The  slow 
implementation of public administration reforms and reforms in specific sectors such 
as  research,  innovation  and  energy  hamper  progress  in  improving  the  investment 
climate.  Although  Bulgaria  has  adopted  a  strategic  framework  to  reform  and 
modernise  its  public  administration,  progress  is  slow  and  implementation  often 
postponed. New legislation is not subject to systematic impact assessment, although 
there have been some efforts to change this. Frequent changes to the legal framework 
create  uncertainty  and  affect  the  businesses  environment.  Corruption  remains  a 
significant concern and the national authorities' response to this problem continues to 
be  hampered  by  weak  and  fragmented  institutions.  Under  the  Cooperation  and 
Verification Mechanism, Bulgaria receives recommendations on judicial reform and 
the  fight  against  corruption  and  organised  crime.  While  these  areas  are  of  crucial 
importance  for  the  overall  business  environment,  they  are  therefore  not  covered  in 
the country-specific recommendations for Bulgaria. 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive analysis of Bulgaria’s economic policy and published it in the 2016 
country  report.  It  has  also  assessed  the  convergence  programme  and  the  national 
reform  programme  and  the  follow-up  given  to  the  recommendations  addressed  to 
Bulgaria  in  previous  years.  It  has  taken  into  account  not  only  their  relevance  for 
sustainable  fiscal  and  socioeconomic  policy  in  Bulgaria  but  also  their  compliance 
with EU rules and guidance, given the need to strengthen the EU's overall economic 
governance  by  providing  EU-level  input  into  future  national  decisions.  The 
recommendations under the European Semester are reflected in recommendations 1 
to 4 below. 

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In  the  light  of  this  assessment,  the  Council  has  examined  the  convergence 
programme, and its opinion10 is reflected in particular in recommendation 1 below. 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has  examined  the  national  reform  programme  and  the  convergence  programme.  Its 
recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in 
recommendations 1 to 4 below.  

HEREBY RECOMMENDS that Bulgaria take action in 2016 and 2017 to: 

1. 

2. 

3. 

4.  

Achieve  an  annual  fiscal  adjustment  of  0.5%  of  GDP  towards  the  medium-term 
budgetary  objective  in  2016  and  in  2017.  Further  improve  tax  collection  and  take 
measures to reduce the extent of the informal economy, including undeclared work.  

By the end of 2016, finalise the asset quality review and stress test of the banks. By 
the end of 2016, complete the balance-sheet review and stress  test of the insurance 
companies  and  the  review  of  private  pension  funds'  assets.  Take  the  necessary 
follow-up  actions  in  all  three  sectors  and  continue  to  improve  banking  and  non-
banking supervision.  

Reinforce  and  integrate  social  services  and  active  labour  market  policies,  in 
particular  for  the  long-term  unemployed  and  young  people  not  in  employment, 
education or training. Increase the provision of quality education for disadvantaged 
groups, including Roma. Improve the efficiency of the health system by improving 
access  and  funding,  and  health  outcomes.  In  consultation  with  social  partners 
establish guidelines and criteria for setting the minimum wage. Increase the coverage 
and adequacy of the minimum income scheme. 

Reform the  insolvency  framework  to accelerate recovery and resolution procedures 
and improve their effectiveness and transparency. Increase the capacity of the courts 
regarding insolvency procedures. Strengthen the capacity of the Public Procurement 
Agency  and  contracting  authorities  and  improve  the  design  and  control  of  public 
tendering procedures. Speed up the introduction of e-procurement. 

Done at Brussels, 

For the Council 
The President 

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Under Article 9(2) of Council Regulation (EC) No 1466/97. 

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