Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Bulgaria and delivering a Council opinion on the 2017 Convergence Programme of Bulgaria
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: Bulgaria, budget deficit, economic policy, economic reform, educational reform, health care system, labour market, stability programme, tax collection

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   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 502 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Bulgaria   and delivering a Council opinion on the 2017 Convergence Programme of Bulgaria  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Bulgaria  

and delivering a Council opinion on the 2017 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 
policies,1 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 
imbalances,2 and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission,3 
Having regard to the resolutions of the European Parliament,4 

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  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,5 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,6  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(2017) 502 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 

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(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

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The  2017  country  report  for  Bulgaria7  was  published  on  22 February  2017.  It 
assessed  Bulgaria’s  progress  in  addressing  the  country-specific  recommendations 
adopted by the Council on 12 July 2016, the follow-up given to the recommendations 
adopted in previous years and Bulgaria’s progress towards its national Europe 2020 
targets.  It  also  included  an  in-depth  review  under  Article 5  of  Regulation  (EU) 
No 1176/2011, the results of which were also published on 22 February 2017.8 The 
Commission’s  analysis  leads  it  to  conclude  that  Bulgaria  is  experiencing  excessive 
macroeconomic 
to  experience 
imbalances.  In  particular,  Bulgaria  continues 
imbalances linked to remaining fragilities in the financial sector and high corporate 
indebtedness in a context of the high long-term unemployment.  

Bulgaria  did  not  submit  its  2017 National  Reform  Programme  and  its  2017 
Convergence Programme by the deadline. 

The relevant country-specific recommendations have been taken into account in the 
Member States’ programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,9 where it is necessary to support the implementation of relevant country-
specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.10 

Bulgaria  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact.  The 
government did not submit its 2017 Convergence Programme by the deadline set by 
Regulation (EC) No 1466/97.  

On 12 July 2016, for 2017 the Council recommended Bulgaria to achieve an annual 
fiscal  adjustment  of  0.5%  of  GDP  towards  the  medium-term  budgetary  objective. 
Outturn  data  indicate  that  Bulgaria  already  reached  its  medium-term  budgetary 
objective  in  2016.  Based  on  the  Commission  2017  spring  forecast,  the  structural 
balance is forecast to deteriorate from a surplus of 0.1% of GDP in 2016 to a deficit 
of 0.4% of GDP in 2017 and of 0.3% of GDP in 2018 on a no-policy-change basis. 
In spite of this deterioration, the structural balance is projected to remain above the 
medium-term  budgetary  objective  in  both  years.  Overall,  the  Council  is  of  the 
opinion that Bulgaria is projected to comply with the provisions of the Stability and 
Growth Pact in 2017 and 2018. 

Efforts to improve tax collection are ongoing. Despite improvements, tax compliance 
remains a challenge. The shadow economy and undeclared work are still high. The 
tax-related  administrative  burden  is  significant.  Measures  to  cut  red  tape  appear  to 
have  produced  limited  results  so  far  and  there  are  no  indications  of  major 
improvements in voluntary tax compliance. Under these circumstances, enforcing the 
rules appears to be key not only for implementing controls but also for strengthening 

SWD(2017) 68 final/3. 
COM(2017) 90 final. 
Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 
COM(2014) 494 final. 

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(9) 

(10) 

the  prevention  of  tax  non-compliance.  The  Action  Plan  to  the  2015-2017  Single 
National  Strategy  for  improving  tax  collection,  tackling  the  shadow  economy  and 
reducing compliance costs appears to be a useful tool, especially for evaluating and 
improving  the  coordination  and  efficiency  of  a  number  of  administrative  bodies 
working in the tax field. An ex post analysis of the impacts of the specific measures 
could  contribute  to  the  proper  assessment,  planning  and  targeting  of  future  tax 
compliance  measures.  These  measures  will  replace  the  current  strategy,  which 
expires at the end of 2017.   

The authorities,  in consultation and cooperation with  the relevant European  bodies, 
conducted asset quality reviews and stress tests of the banking and insurance sectors, 
and  a  review  of  private  pension  funds’  assets.  While  the  results  confirmed  the 
robustness  of  the  sectors  on  aggregate,  pockets  of  vulnerabilities  were  confirmed, 
including  in  some  systemically-important  institutions.  As  the  follow-up  measures 
have  not  yet  been  fully  implemented,  the  source  of  the  vulnerability  remains. 
Furthermore, some issues, including valuing illiquid financial instruments and assets 
as well as related-party exposures, were not fully tackled by the three reviews. The 
supervisors  could  take  a  more  conservative  approach  to  address  these  issues. 
Outstanding  issues  in  the  insurance  sector  also  include  the  treatment  of  certain 
reinsurance contracts, some insurance receivables and group-level supervision. 

To  tackle  the  possibility  of  similar  imbalances  re-emerging  in  the  future,  the 
measures to improve banking supervision need to be finalised and further efforts to 
improve  non-banking  supervision  are  required.  Tackling  hard-to-value  assets  and 
unsound  business  practices,  including  related-party  and  connected  lending,  remain 
key challenges for the authorities. The Bulgarian National Bank has launched a plan 
to  restructure  and  develop  banking  supervision,  based  also  on  the  findings  of  the 
World Bank and the IMF. This plan is now being implemented, but may need to be 
amended in light of the findings of the Financial Sector Assessment Programme. The 
shortcomings  in  supervision  evidenced  by  the  insurance  and  pension  fund  reviews 
highlight  the  need  for  the  Financial  Supervision  Commission  to  develop  and 
implement a comprehensive plan to strengthen supervision, including by improving 
its own internal governance and functioning. To ensure full credibility, such a plan 
should  draw  on  international  best  practices  in  the  area  and  should  be  prepared  and 
implemented  in  close  cooperation  with  European  bodies,  incorporating  input  from 
third-party service providers as needed.   

Corporate debt remains high (well above that of peer countries), placing a burden on 
companies’  balance  sheets  and  potentially  constraining  credit  demand  and 
investment  over  the  medium  term.  To  reduce  the  still-high  level  of  corporate  non-
performing loans, the authorities should facilitate the workout process for banks by 
drawing  on  a  comprehensive  set  of  tools.  For  instance,  speeding  up  the  insolvency 
framework  reform  would  improve  the  legal  environment  for  dealing  with  bad  debt 
and  provide  opportunities  for  out-of-court  restructuring.  Beyond  the  insolvency 
framework, the toolkit could include supervisory guidance to banks with particularly 
high  levels  of  non-performing  loans  levels.  This  would  make  data  on  asset  quality 
more transparent and help to deepen the secondary market for non-performing loans.   

(11) 

Recent  labour  market  developments  have  been  positive,  but  structural  problems 
remain. The labour force continues to shrink because of population ageing combined 
with emigration. As the economy is undergoing structural changes, it is essential to 
tap into the unused labour potential. Currently, the labour market is characterised by 
high  long-term  unemployment  and  inactivity,  limited  inclusion  of  young  people  in 

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(12) 

(13) 

(14) 

(15) 

the labour market and skills shortages and mismatches. While the unemployment rate 
fell below the EU average in 2016, the share of long-term unemployment and the rate 
of young people not in employment, education or training and the low employment 
rate of low-skilled people are still major challenges. In the face of these challenges, 
active  labour  market  policies  are  insufficiently  targeted  towards  disadvantaged 
groups  and  their  needs,  which  hinders  their  employability.  In  addition,  the 
insufficient  integration  of  employment  and  social  services  for  recipients  of  social 
benefits can limit their labour market participation. 

Improving educational outcomes and strengthening the provision of quality inclusive 
mainstream education remains a challenge, with potential consequences for poverty. 
While  the  risk  of  poverty  or  social  exclusion  for  children  has  slightly  decreased,  it 
remains one of the highest in the EU and is strongly linked to the educational level of 
the  parents.  Achievement  in  basic  skills  as  measured  by  PISA  2015  show  that  the 
proportion  of  under-achievers  in  reading,  mathematics  and  science  remains  one  of 
highest in the EU. The planned methodology to improve school financing has yet to 
be developed. This aims to support more equitable outcomes by providing additional 
support 
lower 
socioeconomic  status,  particularly  Roma  families,  do  not  enjoy  equal  educational 
opportunities,  including  in  early  childhood.  Vocational  education  and  training  is 
being reformed, but its quality and the cooperation with business and social partners 
are  insufficient.  Dual  education  continues  to  be  rolled  out.  In  higher  education, 
performance-based funding seeks to improve quality and labour market relevance. 

low-performing  schools.  Children 

families  with 

from 

to 

Limited accessibility, low funding, the emigration of professionals and weak health 
outcomes  continue  to  be  key  challenges  in  the  healthcare  system.  Low  health 
insurance coverage, including the low public coverage of outpatient medical services 
and  high  out-of-pocket  payments,  make  it  difficult  for  some  people  to  access 
healthcare. Recent measures, such as selective contracting of hospital services based 
on the National Health Map, have the potential to improve access to healthcare and 
equity if implemented fully. 

Bulgaria’s  minimum  wage  level,  while  still  the  lowest  in  the  EU,  has  increased 
significantly  since  2011.  Limited  progress  has  been  achieved  in  setting  up  an 
objective  mechanism,  despite  employers  and  trade  unions  agreeing  on  the  criteria. 
The  absence  of  a  transparent  mechanism,  which  takes  into  account  economic  and 
social  criteria,  the  labour  market  conditions,  and  the  institutional  aspect  of  their 
application,  may  jeopardise  a  proper  balance  between  the  objectives  of  supporting 
employment  and  competitiveness  and  safeguarding  labour  income.  Despite  some 
tensions among the social partners during the failed negotiations for minimum social 
security thresholds for 2017, social dialogue in the country remains in place. 

The high share of people living at risk of poverty or social exclusion remains a major 
economic and social challenge. Bulgaria is still the poorest Member State in the EU, 
with disadvantaged groups, such as Roma, children, the elderly, and people in rural 
areas,  being  disproportionately  affected.  After  several  years  of  sustained 
improvements,  the  at-risk-of-poverty  rate  for  the  elderly  deteriorated  substantially. 
Elderly women are at particularly high risk of poverty or social exclusion given their 
typically shorter pension contribution period. While the relative poverty situation of 
children  has  improved,  poverty  levels  among  this  group  remain  very  high.  The 
deinstitutionalisation  of children is  keeping its momentum  with  the  adoption  of the 
new action plan. However, the process is still lagging behind  for adults and people 
with  disabilities.  Income  inequality  represents  a  significant  and  growing  problem. 

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The ratio of the income of the richest 20 % of households to that of the poorest 20 % 
rose from 6.1 in 2012 to 7.1 in 2015 and is among the highest in the EU. In Bulgaria, 
the difference between income inequality before and after taxes and social transfers 
is among the smallest in the EU. The social protection system, including the general 
minimum  income  scheme  (consisting  of  monthly  social  assistance  benefits  and 
heating benefits), does not provide adequate levels of support. Coverage of people on 
social benefits remains low, driven by very restrictive entry requirements. The level 
of minimum income remains low and has not been updated since 2009 and does not 
have a transparent adjustment mechanism. 

(16)  Measures to improve the public procurement system have been put in place, but their 
concrete  added  value  still  remains 
to  be  seen.  Appropriate  and  efficient 
implementation  of  the  new  risk-based  ex  ante  control  system  needs  to  be  ensured. 
Enacting  the  recommendations  made  in  the  review  of  the  appeal  system  remains  a 
challenge since efficient remedies are key to implementing important projects. Once 
assessed, the administrative capacity of the Public Procurement Agency would have 
to  be  adjusted  to  reflect  the  Agency’s  functions.  Furthermore,  the  administrative 
capacity of the contracting authorities should be enhanced, including by drawing on 
support  provided  by  the  Public  Procurement  Agency  and  the  Central  Purchasing 
Bodies  for  the  central  administration,  the  municipalities  and  the  health  sector.  The 
work  to  introduce  e-procurement  in  order  to  boost  the  transparency  of  public 
procurement  still  needs  to  be  finalised.  Safeguarding  the  impartiality  of  public 
tenders  and  preventing  possible  conflicts  of  interest  continue  to  be  important 
concerns. Despite the recent reforms aimed at modernising the public administration, 
the  effectiveness  and  efficiency  of  public  institutions  remain  limited.  A  number  of 
legal  amendments  were  finalised  in  2016  to  put  in  place  the  appropriate  legal 
framework, but enforcing and implementing them in an efficient and systematic way 
is challenging. 

(17) 

In  2016,  Bulgaria  adopted  significant  reforms  to  address  continued  concerns  about 
the independence and quality of its judicial system. However, as these reforms have 
been  adopted  only  recently,  it  is  too  early  to  assess  their  impact.  Further  steps  are 
needed in a number of areas. Corruption also remains a major challenge in Bulgaria 
and continues to weigh on investment, both at national and local level. In 2015, the 
authorities  presented  an  ambitious  strategy  to  fight  against  corruption,  but  its 
implementation is still in its early stages. Bulgaria’s anti-corruption policy continues 
to  be  hampered  by  weak  and  fragmented  institutions,  a  weak  track  record  in  the 
prosecution  of  high-level  cases,  and  faltering  parliamentary  backing  for  reform. 
receives 
the  Cooperation  and  Verification  Mechanism,  Bulgaria 
Under 
recommendations in the areas of judicial reform and the fight against corruption and 
organised  crime.  These  areas  are  therefore  not  covered  in  the  country-specific 
recommendations for Bulgaria. 

(18) 

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 2017 
country  report.  It  has  also  assessed  the  follow-up  given  to  the  recommendations 
addressed to Bulgaria in previous years.  

(19) 

In the light of this assessment, the Council is of the opinion that Bulgaria is expected 
to comply with the Stability and Growth Pact. 

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(20) 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
recommendations  made  under  Article  6  of  Regulation  (EU)  No 1176/2011  are 
reflected in recommendations 2 and 3 below, 

HEREBY RECOMMENDS that Bulgaria take action in 2017 and 2018 to: 

1. 

2. 

3. 

improve 

through  a 
Further 
comprehensive  set  of  measures  beyond  2017.  Step  up  enforcement  of  measures  to 
reduce the extent of the informal economy, in particular undeclared work. 

tax  collection  and 

tax  compliance, 

including 

Improve  banking  and  non-banking 

Take  follow-up  measures  on  the  financial  sector  reviews,  in  particular  concerning 
reinsurance  contracts,  group-level  oversight,  hard-to-value  assets  and  related-party 
exposures. 
the 
implementation  of comprehensive action plans, in close cooperation with European 
bodies.  Facilitate  the  reduction  of  still  high  corporate  non-performing  loans,  by 
drawing on a comprehensive set of tools, including by accelerating the reform of the 
insolvency  framework  and  by  promoting  a  functioning  secondary  market  for  non-
performing loans.   

supervision 

through 

Improve  the  targeting  of  active  labour  market  policies  and  the  integration  between 
employment and social services for disadvantaged groups. Increase the provision of 
quality  mainstream  education,  in  particular  for  Roma.  Increase  health  insurance 
coverage,  reduce  out-of-pocket  payments  and  address  shortages  of  healthcare 
professionals. In consultation with social partners, establish a transparent mechanism 
for setting the minimum wage. Improve the coverage and adequacy of the minimum 
income. 

4. 

Ensure  efficient  implementation  of  the  2014-2020  National  Public  Procurement 
Strategy.  

Done at Brussels, 

For the Council 
The President 

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