# **Institutional challenges**

Both the improvement of the budgeting process and the optimization of public expenditures are closely related to the absorption capacity of the recipient country, i.e. on the extent to which a member-state is capable of spending the structural fund resources allocated to it in an efficient and effective way. Preliminary discussions seem to reveal an institutional capacity that varies tremendously among the Bulgarian line ministries. If these structures do not invest in upgrading the skills of their personnel, the absorption of funds might suffer.

Administrative problems such as lack of monitoring and management skills, which do not allow the region to direct all incoming funds to productive investment is another institutional constraint which might affect the utilization of structural resources from the EU. Kalman (2002) adds that these problems can never disappear completely, but can be reduced if administrative capacity is improved and if the flow of funds is predictable. Indeed, recent UNDP _Assessment of the Municipal and District Capacities for Absorption of the EU Structural and Cohesion Funds_ (2004) specifies four problematic aspects of the EU funds absorption at the municipal level in Bulgaria. These are namely weaknesses in:

- (i) **Organizational Capacity** : while administrative structures for the formulation and implementation of projects at the municipal level have been established, there is need of an establishment of problem-oriented interactive mechanisms of communication and transparency, particularly on sensitive issues such as project selection.

- (ii) **Project Capacity** : there is a risk that the EU funds rather than contributing to the alleviation of regional disparities may actually contribute to exactly the opposite: large and wealthier municipalities with experience in projects and capacities continue to be more successful in accessing EU funds at the expense of small and poorer municipalities with less project experience and capacities.

- (iii) **Planning Capacity** : municipal plans prove to be more presentational documents rather than operational. The municipal planning is still perceived as a closed process, without vision for vertical and horizontal links within the overall national planning process. Therefore, further clarification of processes, meaning and function of the planning documents and procedures are needed.

- (iv) **Training Needs** : Capacity varies considerably across municipalities and regions. Although a large number of training programs have been implemented, a relatively small number of municipal representatives have been trained.

# **Macroeconomic challenges**

The net balance of payments effect for the country presented in Table 3 suggests sizable inflows of funds to the country. If there is no fiscal adjustment, the budget position would be expansionary. Higher capital inflows and fiscal expenditures would in turn put inflationary pressure on domestic prices. A real appreciation of the local currency would largely lower the competitiveness of Bulgarian exports.<sup>21</sup> Another way to deal with high inflows of funds from abroad is to sterilize them by selling government bonds at the local security market. This would also have negative consequences as it would increase domestic interest rates and discourage foreign investors.

The Bulgarian Balance of payments’ positions might be additionally aggravated by two other macroeconomic implications of the EU accession. First, the capital base in Bulgaria is low, so the 21 The Bulgarian economy is functioning under a Currency Board Arrangement and the Bulgarian lev is pegged to the euro. Hence domestic inflation translates directly into a real exchange rate appreciation.

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