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COUNTRY REPORT

Bulgaria

January 2002

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Bulgaria at a glance: 2002-03OVERVIEWThe coalition between the Simeon II National Movement (SNM) and theMovement for Rights and Freedoms (MRF) will have a comfortable enoughmajority to pass legislation, but will become increasingly divided. Policy in2002 will focus on maintaining good relations with the IMF after a fewminor slip-ups in 2001, and completing a number of delayed privatisations.There will also be lower taxation and supply-side improvements to thebusiness environment. Real GDP growth is forecast to accelerate to 4% in2002 and 4.5% in 2003. The Economist Intelligence Unit expects that alower current-account deficit than anticipated by the government will allowfor a slight easing of the tight budget deficit targets. Inflation shouldcontinue its downward trend.

Key changes from last monthPolitical outlook• Both the opposition Bulgarian Socialist Party (BSP) and the junior

coalition partner, the MRF, have emerged stronger and potentially moretroublesome for the government since the presidential election won bythe BSP’s Georgi Purvanov. The foundation of two new parties by formermembers of the Union of Democratic Forces (UDF) could presage a serioussplit in the party following its congress early in 2002.

Economic policy outlook• A second Eurobond issue, of up to €700m (US$670), planned for 2002

now looks set to be cancelled because of IMF objections.

Economic forecast• Latest industrial production data confirm the sharp slowdown to 3.5%

real GDP growth that we expect in 2001.

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Bulgaria 1

EIU Country Report January 2002 © The Economist Intelligence Unit Limited 2002

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2002-037 Political outlook8 Economic policy outlook9 Economic forecast

13 The political scene

17 Economic policy

23 The domestic economy25 Employment, wages and prices27 Sectoral trends30 Financial indicators

32 Foreign trade and payments

List of tables

9 International assumptions summary10 Gross domestic product by expenditure12 Forecast summary19 Consolidated state budget, 200122 Main economic policy indicators24 Gross domestic product25 Retail sales, 200126 Monthly wages by sector26 Labour indicators28 Real industrial production growth, 200128 Industrial domestic and export sales, 200129 Industrial output31 Main macroeconomic indicators33 Structure of imports by end-use, Jan-Sep34 Exports by end use, Jan-Sep35 Balance of payments36 Main external indicators

2 Bulgaria


List of figures

12 Gross domestic product12 Lev real exchange rates25 Prices27 Oil prices and consumer prices32 World trade and Bulgarian exports36 Financing requirement and inward FDI

Bulgaria 3


Summary

January 2002

The coalition between the Simeon II National Movement (SNM) and theMovement for Rights and Freedoms (MRF) will have a comfortable enoughmajority to pass legislation but will become increasingly divided. Policy in2002 will focus on maintaining good relations with the IMF after a few minorslip-ups in 2001, and completing a number of delayed privatisations. There willalso be lower taxation and supply-side improvements to the businessenvironment. Real GDP growth is forecast to accelerate to 4% in 2002 and4.5% in 2003. The Economist Intelligence Unit expects that a lower current-account deficit than anticipated by the government will allow for a slighteasing of the tight budget deficit targets. Inflation should continue itsdownward trend.

In the November presidential election the leader of the opposition BulgarianSocialist Party (BSP), Georgi Purvanov, defied opinion polls by beating theincumbent, Petur Stoyanov, who was backed at the last moment by the rulingSNM. The Union of Democratic Forces (UDF) appears to be disintegrating andthe government has published its “White Book”, accusing the previous UDF-led government of various misdeeds. NATO and EU relations are good butmembership of either is still a distant prospect.

A two-year IMF deal has been agreed, including tough budget deficit targetsand an abandonment of plans to issue a second Eurobond, but most of the taxcuts the government had hoped for were retained. Energy and railway reformis now on the IMF agenda.

Real GDP grew quite strongly to mid-year, but is vulnerable to a downturn inconstruction and public spending. Industrial output slowed sharply in the thirdquarter but private consumption growth looks likely to record an accelerationin this period. Unemployment and inflation rates have been falling, and wagegrowth accelerated in the third quarter. Bank credit is expanding.

The nine-month trade deficit expanded beyond US$1bn. Imports of consumerand investment goods were strong in the third quarter, whereas intermediategoods imports slacked. Exports of consumer and investment goods have alsorisen rapidly, and the EU has been a strong market. Foreign direct investment(FDI) inflows have been disappointing, and the balance-of-payments deficitwas met in the third quarter by a drawdown of the country’s US$3.1bn inforeign-exchange reserves.

Editors: Fiona Mullen (editor); Michael Taylor (consulting editor)Editorial closing date: December 15th 2001

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2002-03

The political scene

Economic policy

The domestic economy

Foreign trade andpayments

4 Bulgaria


Political structure

Republic of Bulgaria

Based on the constitution of July 1991

Unicameral National Assembly of 240 members, elected by proportional representation.The Simeon II National Movement is the largest coalition in the assembly, with 120deputies; the United Democratic Forces, led by the Union of Democratic Forces, rankssecond with 51 seats; the Alliance for Bulgaria, led by the Bulgarian Socialist Party, ranksthird with 48 seats; the Movements for Rights and Freedoms, has 21 seats

Universal direct suffrage from the age of 18

October-November 1996 (presidential) and June 17th 2001 (parliamentary); nextparliamentary election due in mid-2005; next presidential election due onNovember 11th 2001

Petur Stoyanov, elected president in November 1996

A coalition between the Simeon II National Movement (SNM) with 120 seats and theMovement for Rights and Freedoms (MRF) with 21 seats, plus two ministers originatingfrom the Bulgarian Socialist Party (BSP)

Simeon II National Movement (SNM—centred on the former king, Simeon Saxe-Coburg); Movement for Rights and Freedoms (MRF—formed mainly from the Turkishethnic minority); Union of Democratic Forces (UDF—alliance of anti-communist partiesand groups and leading member of the United Democratic Forces (UtdDF) alliance);People’s Union—a member of the UtdDF; Bulgarian Socialist Party (BSP—previouslyBulgarian Communist Party)

Prime minister Simeon Saxe-Coburg (SNM)Deputy prime minister & minister of the economy Nikolai Vasilev (SNM)Deputy prime minister & minister of regional development & public works Kostadin Paskalev (BSP but

technically independent)Deputy prime minister & minister of labour and social policy Lidiya Shuleva (SNM)

Agriculture & forestry Mehmed Dikme (MRF)Defence Nikolai Svinarov (SNM)Finance Milen Velchev (SNM)Foreign affairs Solomon Pasi (SNM)Interior Georgi Petkanov (SNM)Justice Anton Stankov (SNM)State administration Dimitur Kalchev (BSP but

technically independent)Transport & communications Plamen Petrov (SNM)Without portfolio in charge of emergencies Nedzheb Mollov (MRF)

Svetoslav Gavriisky

Official name

Legal system

National legislature

Electoral system

National elections

Head of state

National government

Main political parties andgroupings

Council of ministers

Key ministers

Central bank governor

Bulgaria 5


Economic structure

Annual indicators

1997 1998 1999 2000 2001a

GDP at market prices (Lv bn) 17.1 21.6 22.8 25.5 28.3

GDP (US$ bn) 10.1 12.3 12.4 12.0 13.0

Real GDP growth (%) –7.0 3.5 2.4 5.8 3.5

Consumer price inflation (av; %) 1,058.4 18.7 2.6 10.3 7.5

Population (m) 8.2 8.1 8.0 8.0 7.9

Exports of goods fob (US$ m) 4,809.0 4,193.5 4,006.4 4,824.6 4,605.2

Imports of goods fob (US$ m) 4,488.0 4,574.2 5,087.4 6,000.2 6,209.5

Current-account balance (US$ m) 1,046.2 –61.5 –651.7 –701.5 –811.3

Foreign-exchange reserves excl gold (US$ m) 2,249.0 2,831.0 3,083.0 3,342.0 3,293.2

Total external debt (US$ bn) 9.8 9.8 9.9 10.4a 10.2

Debt-service ratio, paid (%) 13.5 20.6 19.1 14.2a 19.1

Exchange rate (av) Lv:US$ 1.682 1.760 1.836 2.123 2.178

December 7th 2001 LV2.19:US$1; Lv1.95:€1

Origins of gross domestic product 2000 % of total Components of gross domestic product 2000 % of total

Agriculture 14.5 Private consumption 79.9

Industry 27.8 Government consumption 10.0

Services 57.7 Fixed investment 16.2

GDP at factor cost 100.0 Stockbuilding 0.4

Exports of goods & services 58.5

Imports of goods & services –64.1

Statistical discrepancy –0.8

GDP at market prices 100.0

Principal exports 2000 US$ m Principal imports 2000 US$ m

Textiles, clothing, footwear & furniture 1,122 Mineral products & fuels 2,037

Base metals & products 989 Machinery & transport equipment 1,792

Minerals & fuels 814 Textiles, clothing, footwear & furniture 921

Chemicals, plastics & rubber 627 Chemicals, plastics & rubber 731

Machinery & transport equipment 536 Base metals & products 391

Animal & vegetable products, food, drink & tobacco 490 Animal & vegetable products, food, drink & tobacco 349

Main destinations of exports 2000 % of total Main origins of imports 2000 % of total

Italy 14.2 Russia 24.4

Turkey 10.2 Germany 13.9

Germany 9.0 Italy 8.5

Greece 7.8 Greece 4.9

Yugoslavia (Serbia-Montenegro) 7.8 France 4.9

EU 51.0 EU 44.1

CEFTAb 4.0 CEFTAb 8.7

a EIU estimates. b Central European Free-Trade Agreement.

6 Bulgaria


Quarterly indicators

1999 2000 20014 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Consolidated government financea (Lv m)Revenue 2,587 2,473 2,720 2,600 3,269 2,813 3,223 2,699Expenditure 2,810 2,466 2,307 2,843 3,716 2,944 2,963 3,010Balance –223 7 413 –242 –447 –131 260 –311

Employment, wages and pricesEmployment (av; ‘000) 1,893 1,794 1,783 1,736 1,713 1,698 1,715 1,715 % change, year on year –6.9 –10.3 –9.7 –10.6 –9.5 –5.4 –3.8 –1.3Unemployment (av; ‘000) 590 689 715 690 680 709 680 637 % change, year on year 32.2 37.8 43.5 32.8 15.2 2.9 –4.8 –717Unemployment rate (% of the labour force) 15.4 18.0 18.7 18.0 17.8 18.5 17.8 16.7Average nominal monthly wages (Lv ‘000 ) 206 213 228 232 241 238 259 259 % change, year on year 14.2 13.4 15.8 13.9 16.9 12.6 13.3 11.5Consumer prices (Dec 1995=100) 3,234 3,367 3,343 3,463 3,615 3,666 3,666 3,681 % change, year on year 6.0 8.5 10.4 10.5 11.8 8.9 9.7 6.3Producer prices (Jan 1991=100) 39,432 41,818 42,163 43,342 46,125 46,590 46,513 45,702 % change, year on year 10.2 18.0 18.7 16.5 17.0 11.4 10.3 5.4

Financial indicatorsExchange rate Lv:US$ (av) 1.88 1.98 2.10 2.16 2.25 2.12 2.24 2.20 Lv:US$ (end-period) 1.95 2.05 2.05 2.23 2.10 2.21 2.31 2.14Interest rates (av; %) Deposit 3.2 3.1 3.1 3.1 3.1 3.0 2.8 n/a Lending 12.4 10.7 12.5 11.2 11.6 11.8 10.4 n/a Money market 2.9 1.8 3.5 3.3 3.4 2.0 3.8 n/aM1 (end-period; Lv bn) 2,997 2,877 2,886 3,273 3,632 3,555 3,834 n/a % change, year on year 8.7 19.9 26.7 27.2 21.2 23.5 32.8 n/aM2 (end-period; Lv bn) 6,914 7,116 7,226 8,012 8,906 9,204 9,372 n/a % change, year on year 11.9 21.2 25.2 27.9 28.8 29.4 29.7 n/a

Foreign trade & payments (US$ m)Exports fob 1,134 1,112 1,172 1,257 1,284 1,282 1,232 1,298Imports cif –1,571 –1,536 –1,527 –1,613 –1,826 –1,632 1,826 1,850Trade balance –437 –424 –355 –356 –542 –351 –594 –552

Balance of payments (US$ m)Merchandise trade balance fob-fob –315 –305 –235 –230 –405 –224 –451 –407Services balance –11 37 95 364 9 30 143 401Income balance 25 –136 –27 –143 –15 –136 –19 –171Net transfer payments 63 54 86 76 74 93 142 106Current-account balance –238 –350 –82 67 –337 –237 –185 –71Reserves excl gold (end-period) 3,083 2,715 3,014 2,870 3,342 2,980 2,980 2,953

a Includes local government budgets and social security.Sources: National Statistical Institute, Statistical News; Bulgarian National Bank, Monthly Bulletin; IMF, International Financial Statistics.

Bulgaria 7


Outlook for 2002-03

Political outlook

The coalition between the Simeon II National Movement (SNM) and themainly ethnic Turkish Movement for Rights and Freedoms (MRF) that tookoffice in July has a comfortable enough majority to push legislation throughparliament. However, over the next two years the Economist Intelligence Unitexpects tensions to emerge as a result of some unpopular policies, such asincreases in energy prices and maintaining a low budget deficit. This could leadto a steady erosion of the SNM’s parliamentary power base via defections ofSNM ministers to recently founded parties.

The main opposition to the coalition, particularly over the tight fiscal policyagreed with the IMF, is now likely to come from the Bulgarian Socialist Party(BSP). The party has become more confident since its leader, Georgi Purvanov,unexpectedly won the presidential election in November, and its naturalconstituency lies with those who will be affected by a tight fiscal policy. It hastwo BSP members in the cabinet, albeit acting as independents: KostadinPaskalev, the deputy prime minister and minister of regional development andpublic works, and Dimitur Kalchev, the minister of state administration. Sinceexpenditure in these areas is likely to suffer as the government tries to meetbudget deficit targets, these ministers could be used by the BSP as a form ofinternal opposition that would be to its benefit.

The Union of Democratic Forces (UDF), which lost the parliamentary electionin June and appears to be disintegrating, will probably be less of a threat. Thegovernment “White Book” detailing corruption in the previous governmentwill probably reduce its standing further among voters, and after its congress inFebruary it could lose more MPs to the two parties recently founded by formerUDF heavyweights: the mayor of Sofia, Stefan Sofianski, and a former deputyprime minister, Evgenii Bakurdzhiev. This would be a particular risk for theUDF if these parties team up with another party founded by a former UDFdeputy, Bogomil Bonev. Whether or not these new centre-right groups co-operate with the SNM remains to be seen, but on balance they are more likelyto be supportive than the UDF, and this would benefit government stability.

However, loyalty within the SNM is unlikely to be strong, given that it wasfounded only in April 2001. It has already lost one MP, to Mr Sofianski’s Unionof Free Democrats, and could lose more to new parties as the impact ofmeeting tight budget deficit targets begins to be felt. Although the governmenthas managed to keep most of its planned tax cuts (see Fiscal policy), in return ithas had to agree to very small budget deficit targets in 2001 and 2002. Thegovernment is keen not to upset relations with the IMF, therefore expenditurewill probably be tightly controlled, which will cause disaffection among votersand MPs. The period of greatest tension in the coalition is likely to be towardsthe end of 2002, when the 2003 budget is being prepared.

Domestic politics

Coalition stability

8 Bulgaria


Another challenge to the government’s popularity could come with thedelayed verdict, due on December 22nd, in the trial in Libya of Bulgarianmedics accused of deliberately infecting children with HIV. If the accused arefound guilty they could be sentenced to death, although a long appeal is alsolikely. Diplomatic efforts have been made to plead the Bulgarian case,including talks on setting up an economic co-operation council between thetwo countries, but since Simeon is seen as having Arab connections andinfluence, he is likely to be blamed if the accused are found guilty.

As expected, the European Commission’s annual report on Bulgaria’s progresstowards accession was broadly favourable, although much work needs to bedone to align national legislation with the acquis communautaire (the body ofEU law) and establish the relevant supervisory authorities for implementing it.Thus, Bulgaria will not make enough progress to make it into the first wave ofnew entrants, which we assume will join the EU in 2005, slightly later thanscheduled. The telecommunications chapter of the acquis was provisionallyclosed in October, and the free movement of services chapter in November,bringing the number of chapters closed to 13 out of the 29 negotiable chapters,compared with 18 for the slowest of the ten front-runners, Poland and Malta.Bulgaria is seeking transitional periods for energy and regional policy, andfinancial and budgetary provisions. We believe that Bulgaria is unlikely tomeet the technical conditions for NATO membership in time to be invited tojoin at the Prague NATO summit in November 2002.

Economic policy outlook

Policy in 2002 will be dominated by maintaining good relations with the IMFafter a few minor slip-ups in 2001, which implies keeping a very low budgetdeficit and completing a number of delayed privatisations. The fixed-linetelecoms operator, BTC, which analysts a few years ago thought was worth asmuch as US$1bn, is now expected to be sold for a much lower price. Otherprivatisations due include those of Bulgartabac, Biochim bank and DSK, theformer State Savings Bank. A start will also be made on privatising thegeneration and distribution arms of the electricity network. Another policyfocus will be on reducing corruption both in business and in public admin-istration areas such as customs collection. However, the government’s keennessto investigate past privatisation deals (500 are currently under investigation,including some with foreign investors) could backfire if it deters foreigninvestors. In addition, reducing corruption will be a drawn-out process, owingto resistance from vested interests and possibly clashes among cabinetmembers. Two other emphases of policy will be on cutting taxes and containingthe budget deficit as part of a new credit agreement with the IMF. We expect thegovernment to overshoot its budget targets slightly in 2001 and 2002, butforecast that the consolidated budget deficit will remain well below 2% of GDP.

Tight consolidated budget deficit targets of 0.9% of GDP in 2001 and 0.8% in2002 (down from 1.1% of GDP in 2000) were agreed with the IMF in lateOctober. Since the budget also includes tax cuts, there is likely to be a sharp

International relations

Policy trends

Fiscal policy

Bulgaria 9


fall in public-sector capital investment. The government had to make onlysmall adjustments to its planned cuts in income and business taxation. Thus,corporate tax will drop to a standard rate of 25%, and income-tax thresholdswill rise. These cuts will be partly paid for by a 10% reduction in civil servicepersonnel, the 10% increase in energy and heating prices implemented inOctober 2001 (which will reduce state subsidies to energy companies), andheavy focus on reducing customs violations. The 2002 budget is based on aforecast for real GDP growth of 4% (in line with our own forecast), but a largerforecast current-account deficit (of over 5% of GDP), which we presume wasbased on a higher oil-price forecast than our own assumptions. The budgetdeficit target is thus quite restrictive, and we expect it to be overshot slightly asfears about the current-account deficit ease and requirements in areas such ashealthcare and municipal finance increase. An easier external environment inthe succeeding years will allow a slight increase in the budget deficit, but it islikely to remain comfortably below 2% of GDP.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2000 2001 2002 2003

Real GDP growthWorld 4.7 2.2 2.5 4.2Italy 2.9 1.6 1.6 2.5EU 3.3 1.5 1.3 2.6

Exchange rates (av)US$:€ 0.924 0.896 0.960 1.015US$:SDR 1.32 1.27 1.30 1.33

Financial indicators€ 3-month interbank rate 4.48 4.25 3.13 4.60US$ 3-month commercial paper rate 6.32 3.59 1.55 4.88

Commodity pricesOil (Brent; US$/b) 28.5 24.3 18.3 20.2Food, feedstuffs & beverages

(% change in US$ terms) –6.1 –1.0 11.9 13.4

Industrial raw materials (% change in US$ terms) 13.4 –9.7 1.3 14.8

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

After a sharp slowdown to an estimated 2.2% in 2001, world GDP growth atpurchasing power parity exchange rates will pick up only slowly, to 2.5% in2002, before a more rapid acceleration to 4.2% in 2003. The downwardrevision to our forecast for international oil prices has eased upward pressureon Bulgaria’s import prices. We now expect oversupply by both OPEC and non-OPEC countries to keep the average price of dated Brent Blend crude at onlyUS$18.3/barrel in 2002 and US$20.2 in 2003, which will be an importantfactor in keeping Bulgaria’s current-account deficit in check. In 2002international interest rates will be favourable for Bulgaria’s debt interestpayments, but they are expected to rise quickly in 2003. The two main risks toour global forecast are a prolonged recession in the US or a disorderly debt

International assumptions

10 Bulgaria


default or a devaluation in Argentina, which would hit financial institutions inthe US and the EU, thus reducing capacity to lend or fund other investments.

After a slowdown in growth to 3.5% in 2001, we forecast a gradual pick-up inboth domestic and external demand over the forecast period, which will helpto push real GDP growth to 4-4.5% per year in 2002-03. Private consumptiongrowth will be boosted from 2002 by a number of factors. Unemployment isexpected to fall now that many private enterprises have been through theirmajor restructuring programmes, and the rise in tax thresholds will boosthousehold incomes. The higher minimum wage due from October 2001 willhave a slightly milder impact on private consumption growth than might atfirst appear, because many companies may not increase the paid salaryaccordingly. Gross fixed investment, which has been holding up in 2001despite the slowdown in export growth, is expected to remain strong. Thebanking sector is beginning to expand lending to the private sector, andprivatisations that have already taken place or are due will create demand forcapital equipment. Reform of and investment in utilities, in particular energy,will also keep investment growth buoyant. We therefore forecast real growth ingross fixed investment of 12% per year in 2002-03.

Gross domestic product by expenditure(Lv m at constant 1996 prices; % change year on year in brackets unless otherwise indicated)

2000a 2001b 2002c 2003c

Private consumption 1,417.5 1,438.7 1,481.9 1,533.8(3.0) (1.5) (3.0) (3.5)

Public consumption 125.8 133.5 137.5 141.6(20.0) (6.1) (3.0) (3.0)

Gross fixed investment 326.9 371.0 415.6 465.4(8.2) (13.5) (12.0) (12.0)

Final domestic demand 1,870.2 1,943.3 2,035.0 2,140.8(4.9) (3.9) (4.7) (5.2)

Stockbuilding 70.0 80.0 80.0 80.0(–3.1) (0.5) (0.0) (0.0)

Total domestic demand 1,940.2 2,023.3 2,115.0 2,220.8(1.8) (4.3) (4.5) (5.0)

Exports of goods & services 1,195.9 1,261.7 1,343.7 1,505.0(24.2) (5.5) (6.5) (12.0)

Imports of goods & services –1,312.1 –1,397.4 –1,495.2 –1,674.6(14.6) (6.5) (7.0) (12.0)

Foreign balance –116.2 –135.7 –151.5 –169.7(3.8) (–1.1) (–0.8) (–0.9)

GDP incl statistical discrepancy 1,824.1 1,887.6 1,963.5 2,051.2

(5.8) (3.5) (4.0) (4.5)

a Actual. b EIU estimates. c EIU forecasts.

Assuming that the downturn in the US does not turn into a prolongedrecession, export growth is forecast to strengthen, particularly in 2003, whenreal appreciation is projected to ease, world trade growth to accelerate andTurkish demand for non-energy imports to revive. The bounceback in overall

Economic growth

Bulgaria 11


import demand in Turkey is not expected to have such a great impact onBulgaria as might be expected in 2002, given that Turkey has held up as anenergy market in 2001 and the baseline for export growth will therefore behigher. Import demand, which is to a large extent influenced by inputs forexports, will be boosted further by demand for consumer and capital goods,and net exports will therefore act as a mild drag on overall real GDP growthin 2002-03.

As the currency board arrangement puts strict limits on the money supply,the overall trend of inflation over the forecast period is expected to continuedownwards. Rises in the minimum wage and electricity prices pushed upprices slightly in October, and over the next two years some upward pressureon inflation will come from further increases in energy prices as well astobacco prices. Despite these factors, as in 2001, this will be more than offsetby a fall in both years, relative to 2001, of international oil prices, whichhave a heavy influence on the inflation rate. We therefore forecast a fall inthe annual average inflation rate from 7.5% in 2001 to 5.5% in 2002 and4.2% in 2003.

The currency board has succeeded in underpinning macroeconomic stabilityin Bulgaria, and we expect the lev to remain fixed to the euro at a rate ofLv1.95583:€1. We expect the euro to reach parity against the US dollar by theend of 2002. Thus, after weakening on average against the US dollar in 2001,we expect the euro-pegged lev to strengthen fairly sharply against theUS dollar over the next two years, particularly in 2002. The lev is thereforeforecast to appreciate in real terms (against a trade-weighted currency basketwith reference to consumer prices) by just over 6% in 2002. Lower inflationand a slower appreciation of the euro will lead to milder real appreciation of3.5% in 2003.

Since minerals, oils and fuel account for around 30% of Bulgaria’s imports, thefall in international oil prices will contribute to a reduction in the current-account deficit in 2002, to 4.9% of GDP. Other factors helping to reduce thecurrent-account deficit will be the beginnings of a recovery in world prices forbase metals, Bulgaria’s largest merchandise export, and a slight upturn inimport demand in Bulgaria’s main trading partners in the EU. Bulgaria willenjoy faster export growth in 2003, thanks largely to a recovery in Germanyand Italy, but strong demand for capital imports will lead to a higher current-account deficit, of around 5.3% of GDP.

We made a large upward revision to our estimate for the current-accountdeficit in 2001 in our December forecast, following reclassification of items inthe services account as well as weakening export income. In its release ofSeptember figures the Bulgarian National Bank (BNB, the central bank)reclassified its recording of the US$350m sale of the second global system formobile communications (GSM) licence as foreign direct investment (FDI),rather than services. We now expect the current-account deficit to reachUS$811m (6.3% of GDP), compared with around US$500m (4% of GDP) inour November forecast. However, as overall FDI inflows have been weak, we

Inflation

Exchange rates

External sector

12 Bulgaria


have revised downwards our forecast for FDI from US$700m to US$500m. Thisimplies a wider balance-of-payments gap than in our previous report, althoughforeign-exchange reserves have risen, and meeting the financing requirementhas been assisted by a successful debut Eurobond issue on November 12th for€250m (US$233m), which was fives times oversubscribed.

The IMF seems likely to prevent the government from issuing its plannedsecond Eurobond for up to €700m in 2002. Nevertheless, assuming that thedelayed privatisations of Bulgartabac, Biochim bank and BTC eventually takeplace in 2002, and that the sales of DSK and DZI (the State InsuranceInstitute) take place in 2003, most of the current-account deficit will becovered by inflows of FDI, which we expect to reach US$850m in 2002 andUS1$bn in 2003. FDI inflows will also be boosted by investment in newgeneration capacity at the two Maritsa Iztok thermal power plants.

Forecast summary(% unless otherwise indicated)

2000a 2001b 2002c 2003c

Real GDP growth 5.8 3.5 4.0 4.5

Industrial production growth 2.3 2.0 3.0 4.0

Unemployment rate (av) 18.1 17.5 15.8 15.3

Consumer price inflation Average 10.3 7.5 5.5 4.2 Year-end 11.3 5.2 4.4 3.9

Short-term interbank rate 11.5 11.8 11.3 11.8

Consolidated budget balance (% of GDP) –1.1 –0.9 –1.3 –1.6

Exports of goods fob (US$ bn) 4.8 4.6 5.0 5.9

Imports of goods fob (US$ bn) 6.0 6.2 6.6 7.7

Current-account balance (US$ bn) –0.7 –0.8 –0.7 –0.9 % of GDP –5.9 –6.3 –4.9 –5.3

External debt (year-end; US$ bn) 10.4b 10.1 10.5 10.5

Exchange rates Lv:US$ (av) 2.12 2.18 2.04 1.93 Lv:€ (av) 1.96 1.96 1.96 1.96

a Actual. b EIU estimates. c EIU forecasts.

Bulgaria 13


The political scene

The political scene in the past few months has been dominated by elections inNovember for Bulgaria’s non-executive (but not purely ceremonial) presidency,in which the incumbent, Petur Stoyanov, was surprisingly beaten by the leaderof the opposition Bulgarian Socialist Party (BSP), Georgi Purvanov. The run-upto the election caused some friction in the coalition that comprises theSimeon II National Movement (SNM) and the mainly ethnic TurkishMovement for Rights and Freedoms (MRF). First, because the SNM’s decisionon which candidate to back was taken—in what is now a characteristic of theSNM—at nearly the last possible moment after a month of deliberation.Second, because the decision to back Mr Stoyanov implicitly admitted thatneither the SNM nor the MRF had anyone (except Simeon himself) who wouldstand a chance against Mr Stoyanov. Third, because it meant that the leadingcoalition party supported a candidate who was backed by the party it haddefeated in the June parliamentary election, namely the Union of DemocraticForces (UDF). The SNM’s late decision to support Mr Stoyanov was not backedby its coalition ally, the MRF. Nor was Mr Stoyanov backed by the BSP, whichhas two ministers in the cabinet, albeit acting as independents. Both the MRFand the BSP had wanted to put forward a vice-presidential candidate each.

Six presidential pairs competed in the election. Mr Stoyanov ran with the UDFdeputy minister, Neli Kutskova. The BSP and its allies, which lost patienceearlier with negotiations over a joint candidate with the SNM, put forward theBSP leader, Mr Purvanov, with a retired general, Angel Marin, as vice-presidential candidate. Mr Marin had gained prominence (and secured earlyretirement) in 1999 by objecting loudly to the way in which NATO-inspiredforce restructuring was being implemented. He had also stood as a candidatefor the MRF in the June parliamentary election, so his selection may have beenseen as conciliatory towards the MRF and its voters, many of whom remainwary of the BSP because of the forced assimilation of Turks in communisttimes. The other serious contender apart from Mr Stoyanov was BogomilBonev, who was also originally considered by the SNM. He had been thecharismatic and tough police minister in a UDF government between 1997 and1999, but once sacked he had made damaging accusations about the thenprime minister, Ivan Kostov.

As for candidates with less of a chance, the MRF backed Reneta Indzhova, whowas briefly caretaker prime minister in late 1994. Georges Ganchev, the formerleader of the Bulgarian Business Bloc, ran alone, as did Petur Beron, one of thefounders of the UDF and briefly its leader until he resigned amid allegationsthat he had collaborated with the communist-era secret police.

As well as the result, another unexpected development was the tone of thecampaign, which became quite malicious. Candidates blamed Mr Stoyanov forthe failures of the previous, UDF-led government, somewhat unfairly since hehad quite often acted as a robust check on it. As in the parliamentary election,the issue of corruption was raised, although tentative suggestions ofimpropriety on Mr Stoyanov’s part were not credible. Mr Bonev claimed that

Presidential election resultis surprising

Only three seriouscontenders stand

The campaign gets nastytowards the end

14 Bulgaria


Mr Stoyanov had ignored him when he brought corruption issues toMr Stoyanov’s attention. Mr Stoyanov countered angrily in a televised debatewith Mr Bonev, brandishing a secret report which, he said, had shownMr Bonev as the corrupt party, with links to a Russian Israeli, Michael Chorny,who was banned from Bulgaria in 2000. However, this ploy seems to havebackfired, as it undermined the president’s image as being above the politicalfray. Mr Purvanov led a more restrained campaign, no doubt remembering thatBulgarian voters do not appreciate negative campaigning.

Mr Stoyanov had enjoyed consistently high approval ratings throughout hisincumbency, and opinion polls indicated that he would win in a secondround. However, perhaps because most polls were conducted before theacrimonious debate in the final week of campaigning, the pollsters turned outto be wrong. As predicted, turnout was low, at 41.5%, but with 36.3% of thevote in the first round, Mr Purvanov not only exceeded all expectations, butalso exceeded Mr Stoyanov’s share of 34.9%.

Mr Bonev and the MRF backed Mr Purvanov in the second round, and, despitethe expectation that UDF and Stoyanov supporters would turn up in greaternumbers to vote in the second round, Mr Purvanov won with 54.1% of thevote, compared with 45.9% for Mr Stoyanov. Although most UDF supportersdid remain loyal to Mr Stoyanov, this was not sufficient to swing the vote: 51%of declared SNM supporters voted for Mr Purvanov in the second round.Mr Purvanov also won the second-round votes of 73% of MRF supporters, 65%of those who voted for Mr Bonev in the first round, and 63% of those whovoted for other candidates.

Interpreting the result is a little uncertain. The ouster of the UDF-backedcandidate could be seen as further “punishment” for the UDF after the Juneparliamentary defeat. However, because this candidate was also backed by theSNM, support for the SNM could be in trouble. One opinion poll has suggestedthat approval ratings for the SNM have fallen sharply since the election. Thevoters rejected established politicians in June and rejected an establishedpolitician in November. This raises a more worrying question, namely that ifvoters become disillusioned with established parties they could opt forextremist parties in the 2005 election. However, for the time being no suchparty exists, and Bulgaria does not have a history of support for extremistparties. It is also possible that the victory of Mr Purvanov is a vindication of thecentre-leftist and inclusive line pursued by the BSP in recent years, and thatholding the presidency and indirect participation in government via two BSPcabinet ministers will give back to the BSP the legitimacy it lost after theeconomic crisis of late 1996. The election outcome has certainly left the BSPbuoyed up. There has been an abrupt end to the feeling that the SNM hascornered the “protest vote” so conspicuously denied to the BSP in the Juneparliamentary election.

Mr Purvanov has already been active. Although going out of his way to stressthat movement towards NATO and the EU are still priority issues, he has alsoemphasised the need to revive relations with “Russia, Ukraine and other

Opinion polls are provedwrong

Interpretations of theresults differ

Mr Purvanov hastens toassert himself

Bulgaria 15


strategic partners”. This is part of what he calls the “economisation” of foreignpolicy—an acknowledgement that policy is partly a question of regaining lostmarkets. More effective policies in the Balkans and improved relations withArab countries are also on his agenda, although it is not clear how much hecan do given the comparatively limited powers of the presidency. At home, keytasks listed have included “intensification of relations between president andparliament in law-making”, which suggests more active use of—or threateningto use—the presidential veto to delay legislation. In a pre-election debate hesaid that he would criticise the government’s social and tax policies—a promiseconsistent with concerns about poverty and unemployment. This is anemphasis that the public seems to share, even though the stress in pastpresidencies has been on foreign and security policies, and on objections tolaws on grounds of legality or coherence more than substance.

Mr Purvanov has also been insistent that his powers of appointment to certainpositions should not be pre-empted in the two-month period between theelection on November 18th and his inauguration on January 22nd 2002. Thushe objected to what he claimed were plans to install 15 new ambassadors inthis period, and also argued successfully for the appointment of an acting headof the National Security Service after the Stoyanovist chief resigned.

A BSP congress elected Sergei Stanishev as a new chairman on December 15th,although the chosen candidate will be subject to a fairly swift challenge, sincea congress is scheduled for May or June 2002. Several names had beenmentioned, among them that of Rumen Ovcharov—former energy minister,ambiguous in his commitment to the Purvanov line, and the man who hadbeen thought most likely to inherit if Mr Purvanov had stumbled. There weretwo front-runners, both close to Mr Purvanov. Rumen Petkov was his chiefcampaign chief, who as mayor of Pleven has been working in localgovernment, the sphere that has given the BSP its most notable successes inrecent years, as well as the two BSP members in the present cabinet, bothformer mayors. The eventual winner, Mr Stanishev is the young, Westernisedhead of the party’s international department and fluent in English. Talking tojournalists after saying farewell to leadership colleagues early in December,Mr Purvanov spoke of a successor “several years younger” than him.

The BSP’s attitude towards the government is likely to become more sharplycritical now that the SNM’s vulnerability has been shown and now that thegovernment is faced with starker policy choices than it had hoped. Forexample, the BSP’s parliamentary contingent voted against the 2002 budget.This may be because the ministry responsible for infrastructural works andregional development, whose minister is a BSP member acting as anindependent, Kostadin Paskalev, seems to be the one hit most by cutbacks incapital spending to meet stringent IMF budget requirements. Both BSPministers have formally resigned their mayoral posts as the maximum sixmonths leave of absence has elapsed, so it appears that neither intends to quitethe government soon.

The BSP looks for a newleader

BSP could become criticalof the government

16 Bulgaria


The MRF appears strengthened, despite the fact that its initial candidate faredbadly in the presidential election. The MRF leader, Ahmed Dogan, is the mainbeneficiary of the strengthening of that party’s position vis-à-vis its discomfitedcoalition partner, having been demonstratively greeted by Mr Purvanov onelection night. The MRF could do well out of the president’s powers ofappointment in the spheres of security and foreign affairs.

The election seems to have accelerated the process of realignment among theUDF and its partners. Anastasia Mozer, leader of the agrarian faction within thePeople’s Union, the UDF’s junior coalition partner in the United DemocraticForces (UtdDF), has hinted that the agrarians could break away from the UtdDFcoalition in parliament. The popular mayor of Sofia, Stefan Sofianski, brokewith the UDF in early November, a few days before the presidential elections,to found a party called the Union of Free Democrats. Mr Sofianski had madehimself unpopular among his UDF colleagues in June by openly pushing for acoalition with the SNM and calling for Ivan Kostov’s resignation as partyleader. The Union of Free Democrats shares an aspiration increasingly commonin Bulgarian politics, that of joining the centre-right European People’s Party—membership of which is at present confined to the UDF, although it is covetedby the SNM. Some prominent names have already joined, including DilyanaGrozdanova, an SNM parliamentarian, although no heavyweight UDFparliamentarians have joined and some have questioned how much supportthis new party can attract outside Sofia. The party’s aim is to contest localelections in two years’ time and the parliamentary election in 2005—althoughMr Sofianski hinted at readiness to enter government before that if required.

Evgenii Bakurdzhiev has also founded a new movement. He was the UDF’schief organisation man until 1997, and was then deputy prime minister andregional development minister, until he was sacked in December 1999. Hecalled for the UDF leadership’s resignation on the night of Mr Stoyanov’sdefeat, and was expelled from the UDF in late November. His new party was tohave been based on the UDF-affiliated Agrarian Democratic Union (ADU), oneof many splinter groups claiming descent from Bulgaria’s pre-communistAgrarian movement, but insufficient backing at an ADU conference in earlyDecember led him to create a new formation on the basis of like-minded ADUmembers. This was called the Bulgarian Democratic Union (Radicals), andMr Bakurdzhiev stressed its affinities with the party Mr Sofianski was about toform, and with Bogomil Bonev’s Civic Party for Bulgaria. However,Mr Bakurdzhiev’s movement has so far carried no UDF parliamentarians withit, and substantial politicians other than Mr Bakurdzhiev himself were hardlyin evidence. Some defections could follow after the UDF congress in February2002, when a Kostov loyalist is likely to be appointed to the leadership.

Preparations are under way to transform the SNM into a party rather than thead hoc coalition created to meet the May 2001 pre-electoral registrationdeadline. The party will be “centre-rightist”, and latest indications are that itwill still bear Simeon’s name and a reference to his royal past, which hadearlier been ruled out. Possible signs of tussles within the SNM still exist. Thereare rumours of a feud between the present foreign minister, Solomon Pasi, and

The MRF has emergedstronger

Fragmentation in the UDF

SNM prepares to transformitself into a party

Bulgaria 17


a former holder of the post, Stoyan Ganev, Simeon’s chef de cabinet—andeminence grise. SNM parliamentarian Emil Koshlukov, a student leader in 1989,among the founders of the UDF, and more recently a prominent Stoyanovsceptic—has also been increasingly vocal, proposing revisions to tax-lawamendments in the 2002 budget.

The “White Book” on the subject of abuses by Mr Kostov’s government waspublished in December. After some speculation that it would be toned down, itwas uncompromising. It accused the Kostov cabinet of “unscrupulous plunder”and said that the State Fund for Agriculture had been drained; thatprivatisation had been sluggish, corrupt and productive of absurdly lowrevenue; and that spending decisions unbacked by revenue had createdsubstantial hidden deficits. If the implications in the book are carried throughto their logical conclusion—a matter for prosecutors rather than governments,the cabinet insists—the result could be an all-out assault on the core of theUDF, for the impression increasingly being conveyed is that Mr Kostov’s circlewas not the centre of resistance against corrupt elements but itself the source ofthose elements. Handled rightly, that could give the disillusioned electorate thescapegoats it needs, as well as putting the blame for current ills on thegovernment’s predecessors. Whether it does not also make the SNM still moredependent on the left and the MRF remains to be seen.

Bulgaria’s relations with NATO remain positive, although lack of militarypreparedness is likely to prevent Bulgaria from being invited to join NATO atthe alliance’s next summit in November 2002. However, General JosephRalston, NATO’s Supreme Allied Commander in Europe, said in December thathe would present a positive report to the US Senate on Bulgaria’s contributionto peacekeeping, as well as the fact that it has temporarily handed over Burgasairfield to the US to assist in its military operations in Afghanistan. The US alsoapproves of the government’s plan to destroy a large number of missiles datingfrom the cold war. Bulgaria also received a positive assessment from theEuropean Commission in its annual report, although it is also unlikely to beinvited to join the EU in the first wave when the decision is made at the end ofDecember 2002.

Economic policy

After an apparently unpromising start in September, a deal was clinched withthe IMF in December to replace the extended fund facility (EFF) that expiredearlier in 2001, although the agreement will not be fully approved by the IMF’sgoverning board before February. Expectations had originally run to a one-yearagreement worth US$150m, but this was expanded to a two-year yearagreement involving a total of US$300m. In view of the tough externalenvironment, early ambiguities as to whether the government would draw onthe credit available have now disappeared.

Corruption issue is pushedhard

An IMF deal is clinched

NATO and EU relations aregood

18 Bulgaria


One related condition was the delay of a second Eurobond issue originallyplanned for 2002. A debut issue of €250m (US$233m), which was initiallyexpanded from €100m, was snapped up by investors in late October, and thegovernment planned to make another issue in 2002 of up to €700m. Thegovernment’s intention is to restructure debt into a less burdensome form bybuying back Brady bond debt and issuing new debt, but the IMF hasconsistently urged caution in respect of any measure likely to raise the alreadyhigh volume of foreign debt (total external debt is currently at above 60% ofGDP). It is also possible that the IMF is concerned that if the governmentcontinues to have easy access to international capital markets, this willencourage it to spend more. Although finance ministry officials were stilltalking of a Eurobond in late November, on December 11th they announcedthat it would be dispensed with if an IMF deal was reached. A condition of thedeal is no increase in Bulgaria’s external debt.

With budget and tax issues tackled in October, with some key concessions onthe Bulgarian side (see below), the focus in December was on energy and therailways. These are both areas in which state subsidies were seen as an issueand a more market-oriented approach as necessary. In energy, the IMF hadbeen emphasising that household electricity was still severely underpriced. Inwhat could be an extremely unpopular move, in late October—even after the10% rise implemented at the beginning of the month—the IMF’s residentrepresentative, Piritta Sorsa, indicated that another increase of 20.2% wasneeded, although Fund officials admitted that price rises had to be gradual. TheIMF’s priority appears to be independent regulation, privatisation in the area ofdistribution and fast liberalisation in the form of freely concluded supplycontracts between large consumers and producers of electricity. The IMF is alsoopposed to subsidies to district heating companies.

The government has generally been keen on energy liberalisation. Directcontracts between large consumers and suppliers are already due to start at thebeginning of 2002 (accounting for 10% of the market at first), andprivatisation of distribution companies is already scheduled for 2002. Giventhe social and political sensitivity of energy prices, the pace at which they areraised—and the extent of subsidy involved—is presumably a key issue. Thelink with privatisation is another: IMF officials have seemed to indicate thatsuitable prices and a clear position for investors must be in place before anyprivatisation can take place in the distribution sphere. This implies promptaction if privatisation is to proceed as planned. The situation has also beencomplicated by a challenge to the 10% price rise already put into effect inOctober: the Supreme Administrative Court ruled this invalid, on the groundsthat, being a decision that affected the standard of living, it should have beendiscussed with the country’s tripartite council (comprising employers, tradeunions and government representatives) before it was enacted. As the tradeunions are increasingly hostile to government policies, they are unlikely totake part in such a discussion, and the energy rise looks likely to stay.

Railways were also discussed with the IMF. Restructuring into two separatecompanies—one for infrastructure, one for operating—is projected for next

The IMF objected to asecond Eurobond

Energy reform is pressed

Railways are a hot topic

Bulgaria 19


year, but planned subsidies of Lv70m (US$32m) are clearly inadequate to coverthe anticipated losses of the operating company. Finances have been creatingtrouble in 2001. As of early December, October wages had not been paid toemployees, and government promises to ensure payment by March did notsatisfy unions, which initially threatened to strike if wages were not paid by theend of the year. This threat has so far been averted, but IMF opposition tobudget subsidies and its demands for cost-reduction in the form of closure oflossmaking routes may make a politically difficult situation worse, given thatthe railways are one of the few sectors in Bulgaria in which concerted industrialaction might be both feasible and effective.

One suggestion of the IMF that was conceded at quite an early stage was atightening of the 2001 budget in the light of global uncertainties—especiallyafter the September 11th terrorist attacks on the US—and Bulgaria’s growingcurrent-account deficit in 2001. The consolidated budget deficit target wasrevised from the original 1.5% of GDP to 0.9%, or Lv228m. A fall in the deficitbetween end-September and end-October, from Lv182m to Lv40m, wasencouraging in this respect, and officials were able to report to the IMF that thetarget was likely to be met. This has been achieved by foregoing certaincustomary expenditure, however. The year-end “thirteenth month bonus” ofLv20 for pensioners has been retained, but similar payments will not be madeto employees in the budget financed sector (who have seen strong wagegrowth this year). Ministers are also keen to stress that the fiscal position is notas strong as their predecessors had claimed. Instead, the Lv130m budgetsurplus reported when the government stood down had actually maskeddelayed interest payments of Lv300m, and there were budget deficits forhospitals (Lv100m) and municipalities (Lv181m). It was also claimed thatextraordinary spending of Lv178m had occurred in the month before theelection in an attempt to buy votes, which have already shown up in GDPfigures (see The domestic economy). The finance minister, Milen Velchev, saidthat the Lv200m required to finance the lost “thirteenth month” was close tothe amount spent on the pre-electoral gestures of the Union of DemocraticForces (UDF).

Consolidated state budget, 2001(year-to-date; end-period; Lv m unless otherwise indicated)

Oct outturn/Sep Oct 2001 targeta 2001 target (%)

Consolidated state revenue 8,735 9,701 11,612 83.5

Consolidated state expenditure 8,917 9,741 11,840 73.8

Consolidate state balance –182 –40 –228 17.5

a Revised target as agreed with the IMF.Source: Ministry of Finance, cited by Reuters.

The budget deficit target for 2002 is set at 0.8% of GDP. The IMF seems to havebeen satisfied that the planned revenue growth could be achievedsimultaneously with most of the tax cuts advertised by the Simeon II NationalMovement (SNM) in August. However, the IMF objected to a zero-rated

Modified 2001 budgettarget will be met

Most planned tax cuts goahead

20 Bulgaria


corporate tax on reinvested profits and the government backed down swiftly.The government will try to reintroduce it in 2003, but it seems that the IMFdisagreed with the tax on principle and not just for revenue-raising reasons.Other tax cuts that did go through were substantial. The standard rate ofcorporate tax fell from 20% to 15%. This is equivalent to 23.5% rather than28% overall, given that municipal profit tax is levied at a rate of 10% on whatis left. The concessionary rate for small firms, which was previously already at15%, has been abolished.

The government also honoured the UDF’s pledge to raise value-added tax (VAT)on tourist services sold as packages abroad. This was no surprise, for the IMFhad been insistent and the UDF’s promise to comply had even been enshrinedin VAT law for 2002. Some compromise was extracted, however, in terms of arefund arrangement that lowered the effective rate to 7% rather than thestandard 20%. An anomalous position for software exporters in respect of VATwas also remedied to their advantage, and the general VAT refund period waslowered from four months to three, in a bid to ease firms’ working capitalposition. However, some experts were sceptical of the tax authorities’ technicalcapability to implement this.

Personal income-tax rates have fallen substantially, as promised in August,especially for high earners. The top rate, levied on incomes of over Lv1,000monthly, fell from 38% to 29%, the lowest was cut from 20% to 18% and thethreshold rose from Lv100 (US$46) to Lv110. Intervening rates were 24% (onLv140 and upwards) and 28% (on Lv400 and upwards). This, it was claimed,brought about a decrease in the average income-tax burden of around 2.4%,although the fall would have been very unevenly distributed.

At the same time certain tax rates rose in such a way as to claw back some ofthe cuts, sometimes from the businesses that SNM purported to be helping.Probably with a longer-term eye on EU requirements, excises were imposed, orraised, on beer, cigarettes, coffee, and the propane-butane gas used to powermany taxis. The flat-rate patent tax levied on small artisan-type businesses wasalso raised, although a scheme to increase it by 10% for each new personemployed by an eligible business was ruled out on the grounds that itdiscouraged employment. The imposition of VAT on domestically producedmedicines, although a predictable rationalising measure, also increased theprices to consumers of an important product.

The privatisation programme for 2002 was promulgated at the same time asthe budget. Of the 349 fairly substantial objects of privatisation, 238 consistedof majority stakes, 21 of minority stakes left over from the mass privatisationprocess, and 90 of “self-contained parts” of enterprises. Residual stakes in 315privatised companies were also to be offered for sale. Price expectations seemencouragingly modest. For example, the national fixed-line telecommun-ications monopoly, BTC, was expected to fetch just Lv200m (mainly becauseits monopoly expires at the end of 2002), whereas all other privatisation dealscombined were expected to raise just Lv418.5m. More than half of that(Lv229m) was to result from the sale of trade companies, with the proceedsfrom some fairly important energy sector sales taking up only a part of the rest.

Tax rises are alsointroduced

Privatisation programme isannounced

Bulgaria 21


Important individual deals still await finalisation on strategy. The strategy forBTC is expected in February 2002, after which the privatisation adviserDeutsche Bank assumes a six- or seven-month wait for a final sale.Bulgartabac’s strategy is also awaited, although agreement was reached inOctober that the holding should be sold as a whole rather than broken downinto parts—an option that might have increased interest and prices, but whichwould have been unwelcome to the Movement for Rights and Freedoms(MRF), the junior partner in government.

With relatively few deals actually clinched in the last few months, much of thegood news has been concentrated in the realm of large-scale intentions, andespecially in energy. According to Nikolai Vasilev, the deputy prime ministerand economy minister, who visited both France and Italy in late 2001, firmsfrom both countries are interested in all of Bulgaria’s eight electricitydistribution companies, which are to be privatised this year. Electricité deFrance was prominent among interested French companies, and itscompatriots at Société Nationale d’Electricité et de Thermique (SNET) areinterested in rehabilitating thermal generating capacity at Ruse, Varna andespecially Bobov Dol power stations. Possible investment figures of betweenUS$100m and US$300m were mentioned for SNET, whose choice of powerstations would steal some of the limelight from the huge US investmentsplanned at two thermal power stations in the Maritsa Iztok coalfield. Theprocess of finalising the latter is making progress, although Bulgarian officialsstill make periodic statements that indicate some dissatisfaction with thepurchase prices agreed with the previous government, led by Ivan Kostov.Japan’s Chubu Power is reportedly intending to take over an unfinished steamheat plant in Dobrich and turn it into an electricity production plant: a figureof US$200m has been mentioned in this connection.

Italy’s Enel Hydro is tipped as front-runner to take over the role of strategicinvestor left vacant by the financial troubles of Turkey’s Ceylan holding in theGorna Arda hydroelectric project, although the Turkish firm Gama isreportedly being lined up by the Turkish government to replace it ascontractor. By way of simplification, it now seems likely that construction ofthe Maritsa highway will be taken out of the deal. The ultimate simplificationof abandoning Gorna Arda altogether is unlikely: it would probably make sensein economic terms, but government figures are still keen to implement thescheme, partly no doubt because of MRF interest in the jobs that will becreated by the project in one of the MRF’s key areas. In the first deal involvingactual production of natural gas, a subsidiary of the UK-based Melroseresources has signed a gas purchase agreement with Bulgargaz, for extraction inthe offshore Galata field off Varna.

Other utilities seem to be popular. For instance, five companies—only one ofthem Bulgarian—are showing interest in the Varna and Shumen water supplyconcessions. In industry, a possibility emerging from Mr Vasilev’s trip to Parisdrew much attention: that of attracting Peugeot-Citroen investment in afactory for production of a new model of car. Peugeot-Citroen would say littlemore than that they appreciated Bulgaria’s efforts and that the plant would

French interest in energy

Other utilities are popular

22 Bulgaria


indeed be built somewhere in east-central Europe. Mr Vasilev admitted that theprobability of landing this deal was quite small: nevertheless, he thought, theworking group created for the sake of the project would prove useful for thepurpose of other opportunities, even if this particular scheme did notmaterialise. As to more modest projects, the saga of cosmetics maker Alen Makmay be coming to an end, after five year’s worth of frustrated efforts toprivatise it: several bidders coming above the authorities’ reserve price ofUS$3.95m for the 57% stake on offer, with Efekten & Finanz—nominally atleast a local company—offering US$5.5m, an encouraging sum for a firmwhose Russian markets have suffered so badly in the past few years. TheUS$15m acquisition of a ball-bearing plant at the VMZ defence works bySweden’s SKF, the subject of a preliminary agreement in the last days of theKostov government, is making slow progress, however, given unresolvedproblems over its environmental assessment. Finally, a new offering of theinsolvent Varna Shipyard is to be made in February 2002, the old one havingbeen frustrated by factors beyond Bulgaria’s control—the insolvency of thewould-be buyer, Britain’s Cammell Laird, whose rehabilitation plan for theyard was therefore rejected by the local court.

Main economic policy indicators

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Consolidated budget revenue (Lv m)1999 654.8 601.8 835.1 877.8 778.5 642.0 736.9 760.1 972.2 931.8 810.5 1,042.82000 742.1 771.9 958.7 996.3 817.0 907.1 819.0 981.8 799.6 988.8 988.4 1,291.32001 993.0 660.0 1,160.0 1,158.0 1,109.0 956.0 978.0 929.0 792.0 966.0 – –

Consolidated budget expenditure (Lv m)1999 685.2 585.7 828.6 712.4 799.5 711.2 889.1 730.3 1,055.7 811.1 792.8 1,267.92000 872.7 766.1 826.7 745.5 712.3 849.3 1,168.5 920.9 753.2 845.8 1,034.9 1,834.82001 1,230.0 767.0 947.0 1,028.0 926.0 1,009.0 1,185.0 979.0 846.0 824.0 – –

Consolidated budget balance (Lv m)1999 –30.4 16.1 6.5 165.4 –21.0 –69.2 –152.2 29.8 –83.5 120.7 17.7 –225.12000 –130.6 5.8 132.0 250.8 104.7 57.8 –349.5 60.9 46.4 143.0 –46.5 –543.52001 –237.0 –107.0 213.0 130.0 183.0 –53.0 –207.0 –50.0 –54.0 142.0 – –

Exchange rate (av; Lv:US$)1999 1.685 1.745 1.797 1.829 1.844 1.885 1.890 1.845 1.864 1.827 1.892 1.9352000 1.930 1.989 2.028 2.068 2.160 2.061 2.082 2.164 2.247 2.287 2.284 2.1812001 2.085 2.122 2.151 2.192 2.234 2.293 2.273 2.173 2.141 2.159 – –

Real effective exchange-rate index (CPI-based; 1997=100)1999 117.9 115.6 113.1 111.1 109.7 108.0 111.4 112.9 114.0 116.0 115.0 115.32000 118.1 117.6 115.8 113.6 111.9 113.6 113.7 115.3 115.6 116.3 116.9 119.52001 122.0 121.1 120.1 118.5 117.3 115.7 116.1 118.4 120.5 – – –

Real effective exchange-rate index (PPI-based; 1997=100)1999 122.0 120.6 119.1 117.3 119.4 115.0 116.3 121.6 125.1 126.4 126.8 126.12000 131.4 128.4 129.6 127.0 127.5 124.1 124.3 125.2 129.2 130.5 130.5 130.82001 136.1 133.2 133.5 133.4 133.1 127.3 126.8 130.9 136.1 – – –

M2 (Lv m)1999 5,851 5,975 5,872 5,891 5,844 5,770 5,877 6,088 6,263 6,270 6,570 6,9142000 6,954 7,041 7,116 7,299 7,212 7,226 7,699 7,944 8,012 8,815 8,704 8,9062001 9,027 9,124 9,204 8,864 9,129 9,372 – – – – – –

continued

Bulgaria 23



M2 (% change, year on year)1999 7.8 9.9 7.9 7.5 8.2 4.3 3.9 5.1 11.5 13.0 14.3 11.92000 18.8 17.8 21.2 23.9 23.4 25.2 31.0 30.5 27.9 40.6 32.5 28.82001 29.8 29.6 29.4 21.4 26.6 29.7 – – – – – –

Commercial bank lending rate (av; %)1999 13.6 12.9 13.7 13.0 12.6 13.0 11.7 13.0 12.8 12.6 12.7 11.82000 11.8 11.3 9.1 12.8 13.0 11.9 10.4 12.0 11.2 12.6 10.7 11.52001 13.4 11.9 10.1 9.3 10.2 11.6 11.1 11.4 – – – –

Commercial bank deposit rate (av; %)1999 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.22000 3.2 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.0 3.1 3.1 3.12001 3.1 3.0 3.0 2.8 2.8 2.8 2.8 2.9 – – – –

Sources: National Statistical Institute; Bulgarian National Bank; IMF, International Financial Statistics; Reuters.

The domestic economy

Real GDP grew quite strongly to mid-year, by 4.5% in the first quarter and by5.1% in the second. In the first half of the year real GDP grew by 4.8% andgross value added by 5.4%. On a gross value-added (GVA) basis, these figuresreflected a moderating decline in agriculture, but respectable growth in bothindustry and services. Although there are worsening problems in animalhusbandry, there was some boost in the second quarter from early crops in ayear that has seen a better harvest than in 2000.

Growth in industry on a value-added basis was still fairly brisk in the secondquarter, at 6.9% year on year, but it slowed compared both with the previousquarter and with the same period of the previous year. Moreover, grossindustrial output figures suggest that it was boosted by a remarkable year-on-year surge in construction, which is vulnerable to cyclical downturns.Construction grew year on year by 62% in real terms in the second quarter,compared with gross industrial output growth excluding construction of just1.6%. Around 40% of this growth appears to have come from public-sectorinvestment projects. Given that budgetary constraints are looming and capitalexpenditure cuts seem to be the new government’s way of dealing with them,this suggests that growth in industry on a GVA basis will be much slower in thethird and fourth quarters of 2001.

The 8.2% growth of services claimed in the second quarter needs to be treatedwith caution. A good deal of the rise seems to have corresponded to the“collective consumption” item in the breakdown of GDP. This is defined as “thefinal consumption expenditure of government on collective services provided tosociety as a whole”, for “maintenance of settlements, fundamental science andpart of scientific services, government administration, defence and security.” Itis, in other words, a service item that is heavily dependent on governmentdecisions and expenditure. This subcategory rose by 18.9% in the second quarterof 2001. As with construction, this suggests that growth in services is vulnerableand is likely to have slackened off after the election in June.

Public-sector constructionboosts industry

Government expenditureboosts services

24 Bulgaria


Gross domestic product(real % change, year on year)

2000 20011 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Jan-Jun

Individual consumption 2.5 0.6 2.2 6.1 –1.6 2.1 0.2

Collective consumption 28.8 10.2 18.9 22.0 –0.5 18.9 8.7

Gross fixed investment 18.0 12.1 4.6 5.2 11.9 24.7 20.0

Exports of goods & services 28.7 26.5 19.0 24.4 15.9 11.1 15.5

Imports of goods & services 21.2 11.5 8.0 18.5 7.4 15.4 11.9

GDP 4.5 5.7 6.1 6.5 4.5 5.1 4.8 Agriculture –10.1 –7.2 –12.2 –8.7 –14.8 –3.7 –8.1 Industry 6.2 8.8 21.1 24.6 11.6 6.9 9.2 Services 6.4 11.1 10.3 5.7 3.6 8.2 6.0

Gross value added 4.5 6.8 6.8 8.1 4.4 6.3 5.4

Source: National Statistical Institute (NSI) website.

Gross fixed investment increased by a healthy 24.7% on the second quarter. Asnoted above, however, public-sector investment will have accounted for a largepart of this investment growth, although import figures (see Foreign trade andpayments) suggest that other forms of capital investment have also been quitestrong. Moderate year-on-year growth of just 2.1% in private consumption wasregistered in the second quarter, reflecting slow growth in retail sales, althougha surge in consumer goods imports in the third quarter suggests that growth inprivate consumption accelerated in the second half of the year.

Reflecting the slowdown in exports of intermediate goods, real growth inexports of goods and services slowed in the second quarter to 11.1% year onyear, a much lower growth rate than the 15.4% recorded for imports. It is likelythat exports of goods and services in the first quarter will be revisedsubstantially when the third-quarter national accounts figures are published. InSeptember the Bulgarian National Bank (BNB, the central bank) moved itsrecording of the US$350m sale of the second global system for mobilecommunications (GSM) licence (which was recorded in January) to foreigndirect investment (FDI) rather than services. Previous revisions to BNB datahave been reflected precisely in national accounts figures. For example, theBNB’s revisions to first-quarter exports and imports of goods were exactlyreflected in the revisions to first-quarter exports and imports of goods andservices produced by the National Statistical Institute (NSI). Thus growth inexports of goods and services is likely to be much lower than that implied byfirst-half figures, even when a slowdown in the second half is anticipated. It isnot certain how the GSM licence will be reclassified in the national accounts.It is possible that it will be recorded as gross fixed investment on an expend-iture basis, and either as a service or in a residual line in the GVA figures.

Retail turnover statistics are issued more sparingly than in the past and are stillsubject to substantial revision, so third-quarter growth figures must be inferredfrom preliminary six-month and nine-month totals. There was a downwardrevision of around Lv21m (US$9.6m) in the second quarter and this suggeststhat the revised real growth rate in the first half of the year was around 1.8%

Construction is reflected infixed investment growth

First-half export figuresmay be revised

Retail sales accelerate inthe third quarter

Bulgaria 25


year on year, rather than the 2.3% originally reported. Growth in the thirdquarter must therefore have been around 5.2% in order to explain the 2.5% realyear-on-year growth reported for January-September. A further problem withretail sales figures is the fairly large grey economy. However, strong imports ofconsumer goods in the third quarter (see Foreign trade and payments) underpinour inference that there was brisk growth in the third quarter.

Retail sales, 2001

1 Qtr 2 Qtra 2 Qtrb Jan-Junb Jan-Sepb

Total (Lv m) 1,911 2,123 2,102 4,034 6,401

Real % change, year on yearTotal 2.2 2.4 1.5 2.3 2.5 Food goods 2.5 3.6 2.2 3.0 3.4 Non-food goods 2.0 1.8 1.1 1.9 1.9

a Original second-quarter leva figure derived, and original second-quarter growth rates estimated, by the Economist Intelligence Unit from first-half and first-quarter figures as originally reported. b Latest second-quarter figures taken from Statistical News. Some revision of second-quarterfigures has taken place but no revised first-quarter figures are available. Jan-Sep figures are therefore not strictly comparable with Jan-Jun figures.Source: NSI website; NSI, Statistical News 2001/2.

Employment, wages and prices

In view of widespread underreporting, wage data need to be treated withcaution. Nevertheless, it is clear that wages continue to recover. Average wagesrose by 11.6% year on year in the third quarter, a real increase of 5.3%, withwages in the budget-financed sector rising by 23.7%, a real rise of 17.4%. Thisis a slight deceleration compared with the second quarter, but still reflects thesharp increase in budget-financed sector salaries on April 1st as the thengovernment tried to win support in the forthcoming election. Since there wasalso a 15.1% year-on-year fall in the numbers working in that sector, thissuggests that the average wage per person rose by even more. The increase inthe minimum wage in October will probably boost the official recording ofwages at commercial enterprises in the fourth quarter.

Real wages accelerate inthe first half of the year

26 Bulgaria


Monthly wages by sector(Lv; av)

2000 20011 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Total wages 213 228 232 241 238 259 259 Budgeta 183 206 207 221 217 260 256 Commercialb 226 237 242 248 245 258 259

Public-sector total 230 251 256 266 261 292 293

Public-sector commercialc 289 308 315 324 314 323 328

Private-sector total 195 204 210 217 217 230 231

a Budget organisations & state fund administrations. b Commercial partnerships, enterprises and organisations with income from economicactivity. c Public-sector commercial partnerships, enterprises and organisations with income from economic activity.Source: NSI website.

Registered unemployment as reported by the National Employment Service(NES) reached its lowest level since the end of 1999 in September, at 629,400(16.48%), before rising by around 7,500 to 16.67% in October. The overalltrend is probably downwards, as the rise in October reflects seasonal trends inconstruction, farming and tourism. The NSI now conducts labour force surveysevery three months. The total number of unemployed reported for September,at 632,400, was little different from the NES registered total of just under630,000 that month. In the past these figures have differed by more than100,000, but the differences have been narrowing during 2001. Some of thereason for this is a less inclusive definition by the NSI of “people outside theworkforce”, which could be related to lower population estimates resultingfrom the 2001 census. Similarly, there appears to be a less stringent definitionof those “actively seeking work”: the numbers of those excluded from thelabour force because they were studying, for health reasons or because offamily or personal responsibilities were all significantly lower in March andJune 2001 (the only months for which detailed results have been published sofar) than in 2000. The same is true for the number of “discouraged”—thosewanting work but not actively seeking it because they did not think any wasavailable—a non-workforce category which increased strikingly in the thirdand fourth quarters of 2000.

Labour indicators(‘000 unless otherwise indicated)

2000 2001Mar Jun Sep Dec Mar Jun Sep

Total workforce 3,356 3,431 3,386 3,272 3,367 3,413 3,407 Employed 2,734 2,872 2,837 2,736 2,641 2,752 2,774 Unemployed (NSI) 622 559 549 537 726 661 632 Unemployment rate (% of workforce) 18.5 16.3 16.2 16.4 21.6 19 18.6

Persons outside workforce 3,534 3,459 3,504 3,618 3,394 3,356 3,386

Population of working age & above 6,890 6,890 6,890 6,890 6,761 6,769 6,792

Economic activity ratea 48.7 49.8 49.1 47.5 49.8 50.4 50.2

Employment ratea 39.7 41.7 41.2 39.7 39.1 40.6 40.8

continued

Unemployment is probablytrending downwards

Bulgaria 27


2000 2001Mar Jun Sep Dec Mar Jun Sep

Memorandum itemsRegistered unemployed (NES) 717 697 680 683 705 654 630Registered unemployment rate (%) 18.8 18.2 17.8 17.9 18.4 17.1 16.5

a % of total population of working age and above.Sources: NSI website; Reuters.

Consumer price inflation picked up in September and October, bringing therise over the first ten months of the year to 4%. The rise in September wasmostly explained by a seasonal rise in food prices, whereas the rise in Octoberreflected increases in state-regulated utilities. Household energy prices wereraised by 10% on October 1st. With external inflationary pressures falling withoil prices, year-end inflation is still likely to be significantly lower than the11.3% recorded in 2000.

The index expressed in the NSI’s “small consumer basket” of 20 basic goodsand services rose more in both September (1.8%) and October (4.6%) than themain basket. This implies that low-income households—to whom the smallbasket is more relevant—were more affected than others by rising prices ofbasics such as energy and food, and may therefore explain some of fall-off inthe government’s popularity since it came to power. Weakening oil prices havealso helped year-on-year producer price inflation to fall below consumer priceinflation—a rare situation in recent years.

Sectoral trends

After lacklustre growth in the first half of the year, real industrial outputgrowth in the third quarter was quite brisk, reaching 6.8% year on year in Julyand topping 10% in August, although it slowed to 2.7% in September. Thisbrought the year-to-date growth figure from 1.7% in June to 2.2% inSeptember. Industrial sales growth lagged behind production growth in thethird quarter, and fell year on year in August and September. However, sinceyear-to-date sales growth remained higher than production growth at the end

Inflation picks up inSeptember and October

Industrial sales growth haslagged behind production

28 Bulgaria


of the third quarter, and, according to national accounts figures, stockbuildingwas moderate in the first half of the year, it is possible that production wascatching up with sales, after some destocking.

Real industrial production growth, 2001

Mar Apr May Jun Jul Aug Sep

% change, month on monthExtraction –4.7 –2.0 4.7 –2.7 5.0 3.2 1.6Manufacturing 18.1 –9.1 6.2 9.1 2.6 3.2 5.5Electricity, gas & water –9.9 –18.4 –7.6 –1.2 7.2 15.2 –13.0Total industry excl construction 11.1 –10.1 3.6 6.3 3.6 5.3 1.9

% change, year on yearExtraction –17.6 –7.2 –1.3 1.9 –3.0 –9.1 –3.4Manufacturing 3.2 3.5 1.3 –2.2 5.9 10.0 3.5Electricity, gas & water 7.4 –2.3 18.3 9.5 15.6 21.5 2.5Total industry excl construction 2.1 1.6 4 0.2 6.8 10.3 2.7

Year to date, % change, year on yearExtraction –15.4 –11.9 –10.5 –8.7 –7.8 –8.1 –7.6Manufacturing 2.7 3.2 2.5 1.4 1.5 2.1 1.7Electricity, gas & water 10.6 9.7 8.2 8.1 8.8 10.4 9.4Total industry excl construction 2.5 3.0 2.4 1.7 2.0 2.6 2.2

Source: NSI, Tekushta stopanska konyunktura.

Nevertheless, the slowdown in industrial output growth noted for Septemberseems set to continue. First, the decline in industrial export sales acceleratedthroughout the third quarter, and this situation is unlikely to improve quickly,given the slowdown in export markets. Second, domestic sales, which grew formost of the year, also declined year on year in August and September.Although there may be an element of production catching up with sales, asmentioned above, the question also arises of why domestic demand forindustrial products was so buoyant in the first half of the year when it did notshow up in strong retail sales or (via industrial inputs for exports) in strongindustrial exports.

Industrial domestic and export sales, 2001

Jan Feb Mar Apr May Jun Jul Aug Sept

% change, year on yearExport sales 7.1 14.8a –3.8 5.0 –3.6 –8.8 –2.5 –3.8 –5.9Domestic sales –3.8 7.0a 3.1 5.8 11.8 5.7 6.8 –0.1 –3.5Total sales 1.8 10.2 1.1 5.5 5.6 –0.8 3.4 –0.5 –3.2

Year-to-date, % change, year on yearExport sales 7.1 18.0a 8.4 7.4 5.0 3.3 2.4 1.7 0.7Domestic sales –3.8 10.7a 1.8 2.6 4.4 4.0 4.5 4.3 3.2Total sales 1.8 13.9 5.1 5.0 5.1 4.0 3.9 3.6 2.7

a Figures as given in source: note some problems of consistency with those reported for January and March.Source: NSI, Tekushta stopanska konyunktura.

Some export branches have been doing well, however. For example, electricity,gas and water output has grown strongly, mainly owing to demand from bothGreece and Turkey (where drought problems have affected hydro capacity).

Growth is dependent onthe domestic market

Some export branches dowell

Bulgaria 29


Output of clothing and leather goods, also mostly export-oriented, enjoyednine-month growth rates in the high teens. Radio, television andtelecommunications equipment, and machines, equipment and domesticappliances grew strongly, probably partly owing to investment activity withinBulgaria. A modest year-on-year recovery took place in the mainly export-oriented branch of metals and metal-casting, partly offsetting the decline inthe first six months: this went counter to a US-dollar decline in third-quarterexports, but may accurately reflect somewhat increased volumes at sharplyreduced world market prices.

Among branches that have performed badly, the lacklustre performance ofextractive industries derives mainly from steep declines in coal output: mostlyused to feed domestic generation capacity, this has fallen because ofrestructuring and increasing reliance on nuclear power. One subcategory nowunreported but highly significant—that of oil-refining—seems likely to havedeclined, to judge from the direction of exports.

Industrial output(real % change, year on year)

Jan Feb Mar Apr May Jun Jul Aug Sep Jan-Sep

Coal & peat –23.3 –13.6 –16.2 –15.8 –17.7 –2.6 –18.2 –18.0 –10.3 –13.5

Uranium & thorium ores & concentrates –34.5 110.8 n/a n/a n/a n/a n/a n/a n/a n/a

Metallic ores –33.5 –9.8 –25.5 1.4 –12.5 1.9 6.4 –0.8 –1.9 –6.3

Non-metallic materials & raw materials 55.7 32.9 –5.1 –8.9 10.3 26.6 18.5 –3.4 24.0 10.7

Total extraction –20.3 –6.4 –17.6 –7.2 –11.9 1.9 –3.0 –9.1 –3.4 –7.6

Food products & beverages 18.9 4.1 0.4 –2.8 1.9 –12.5 –1.4 –6.4 6.5 –1.1

Tobacco products 20.9 –8.6 –38.3 –5.8 –13.2 –3.4 –8.6 15.1 –3.1 –6.9

Textiles & articles, excl clothing 15.3 –5.3 –7.4 –8.1 –0.5 –2.7 4.9 –0.6 –2.6 2.1

Clothing incl furs & leather processing 44.8 32.6 29.6 12.7 25.7 –1.2 17.5 23.8 12.7 19.8

Leather accessories, travel goods, saddlery & footwear 43.1 14.6 5.4 24.9 16.4 23.5 16.5 8.7 21.2 17.4

Wood products excl furniture 6.4 –17.4 1.8 0.0 –1.3 12.1 –1.3 –7.5 –8.0 –0.5

Pulp, paper & cardboard 52.7 –8.1 –12.2 –16.7 –2.1 2.6 –9.7 –11.7 –0.6 –8.5

Publishing & printing, audio, video & computer media 27.0 7.9 –21.4 –37.3 –10.0 –27.1 0.9 28.4 –26.6 –10.5

Chemicals 15.0 181.4 21.8 9.3 12.6 –7.9 12.4 –11.4 –17.1 3.3

Rubber & plastics 72.3 –16.5 –1.0 2.4 4.7 –11.6 –0.3 –3.2 9.5 1.0

Non-metallic mineral raw materials products 22.6 –9.3 5.7 10.0 4.8 –1.5 4.2 –4.2 –9.9 0.3

Metals and metal-casting –4.2 7.8 –19.7 –25.9 –7.6 12.2 2.9 2.9 12.9 –2.5

Metal articles, excl machines & equipment 9.3 12.7 3.1 18.5 9.0 12.8 –4.0 –0.2 –15.7 –0.1

Machines, equipment & domestic appliances 41.9 8.2 –11.4 3.4 –3.0 –19.2 19.9 85.1 24.3 2.3

Office & electronic computing equipment –55.1 –38.5 –41.6 –55.6 –46.9 –51.8 –15.7 –14.2 –6.3 –39.8

Electrical machines & apparatus 3.1 6.9 –5.2 –10.5 –5.9 25.8 25.6 22.1 2.1 –0.6

continued

30 Bulgaria


Jan Feb Mar Apr May Jun Jul Aug Sep Jan-Sep

Radio, TV & telecommunications equipment 26.1 84.4 34.5 17.2 11.4 –1.6 186.8 16.1 77.0 32.4

Medical equipment, precision apparatus & instruments –9.2 –2.7 11.2 20.5 0.0 –10.2 –16.9 –19.9 6.1 –6.8

Motor vehicles, trailers & semi-trailers 32.5 24.1 78.1 –12.0 11.2 37.8 –43.7 26.6 –28.0 –0.7

Transport equipment, excl motor vehicles 3.9 35.0 –13.6 116.7 22.4 –6.8 –35.8 –20.4 5.3 6.7

Furniture & other industrial products 57.0 8.5 11.6 34.9 11.8 –7.6 9.6 1.3 45.2 6.4

Waste recycling –40.1 –81.1 n/a n/a n/a n/a n/a n/a n/a n/a

Total manufacturing 7.5 27.6 3.2 3.5 3.2 –2.2 5.9 10.0 3.5 1.7

Electricity, gaseous fuels & thermal power 22.0 50.3 8.2 –2.8 10.1 10.1 16.1 23.3 2.9 9.8

Distribution & supply of water 10.6 9.5 –2.2 3.9 4.9 2.4 9.3 0.2 –3.1 4.1

Total electricity, gas & water 7.1 47.2 7.4 –2.3 9.7 9.5 15.6 21.5 2.5 9.4

Total industry –6.5 28.0 2.1 1.6 3.0 0.2 6.8 10.3 2.7 2.2

Source: NSI website.

Financial indicators

Domestic credit volumes have continued to trend upwards. The bankingsystem’s total claims on the non-governmental sector rose from a low ofLv4,142m (US$1.9bn) at end-March to Lv4,872m in late November. This was ayear-on-year rise of 17.6%, although higher year-on-year growth rates wereachieved by claims on households, which grew by 42% to Lv866m. Claims onprivate firms rose more moderately, by 12.2%, to Lv3,650m, although most ofthis growth was achieved between June and November, a period in whichclaims on households slowed, coming to just 8.2%.

Money supply has also expanded rapidly since June, with M2 rising fromLv9,372m to Lv10,272m in late November (9.6% in five months). Of itselements, currency outside banks rose by 8.8% (from Lv2,427m to Lv2,640m),the deposits of private firms by a brisker 16.4% (from Lv1,629m to Lv1,896m),and household deposits by 10.3% (from Lv4,178m to Lv4,610m).

New long-term loans have continued to run at levels considerably higher thanin 2000, with totals in the range of Lv116m-146m in four of the five monthsbetween June and November. New local-currency consumer credit volumes arestill high, running at above Lv20m per month since February.

Overall, loans are still predominantly in local currency, although there is atendency for the share of euro loans to creep up. Interest rates on loans arehigh and rising. In October and November enterprises have had to pay onaverage effective annual interest rates of more than 13.5% for new leva loans(rates had dipped significantly below this during mid-2001), and local-currencyconsumer loans have been at over 17% throughout the year. Euro rates forbusinesses have generally been 1-1.5 percentage points below leva rates,although far above rates in the euro zone itself, suggesting that business risk

Credit volumes trendupwards

Bulgaria 31


still looms much larger in bankers’ calculations than real or imagined currencyrisk associated with the euro-linked lev.

Main macroeconomic indicators


Retail sales (% change, month on month)1999 –22.7 1.3 4.5 2.9 –0.4 4.9 2.4 7.5 8.1 3.0 3.3 4.82000 –30.2 3.1 4.8 –1.9 –1.5 2.7 7.0 5.7 6.8 2.3 2.7 5.52001 – – – – – – – – – – – –

Retail sales (% change, year on year)1999 6.0 9.3 10.0 10.1– 10.0 10.8 11.8 12.5 15.1 15.3 15.6 16.62000 5.4 7.2 7.6 2.6 1.4 –0.7 3.7 2.0 0.8 0.1 –0.5 0.22001 – – – – – – – – – – – –

Unemployment (‘000)1999 492 505 504 507 499 488 497 520 543 563 597 6112000 657 694 717 726 721 697 701 690 680 680 677 6832001 709 714 705 708 679 654 644 638 630 637 – –

Unemployment rate (%)1999 12.9 13.2 13.2 13.3 13.0 12.8 13.0 13.6 14.2 14.7 15.6 16.02000 17.2 18.1 18.8 19.0 18.9 18.2 18.3 18.0 17.8 17.8 17.7 17.92001 18.5 18.7 18.4 18.5 17.8 17.1 16.8 16.7 16.5 16.7 – –

Consumer prices (% change, month on month)1999 2.4 –0.7 –1.0 –0.6 –0.9 –0.9 3.4 0.7 1.5 1.1 0.5 1.32000 2.4 1.1 –0.3 –1.0 0.1 0.2 0.6 3.0 2.2 1.2 0.8 0.42001 0.6 0.3 0.0 –0.2 0.1 –0.1 –0.2 0.3 1.3 2.5 – –

Consumer prices (% change, year on year)1999 1.9 –0.1 –1.2 –2.2 –1.5 1.2 5.4 5.8 4.1 4.9 6.0 7.02000 7.0 8.9 9.6 9.2 10.3 11.6 8.6 11.0 11.8 11.9 12.3 11.32001 9.3 8.5 8.9 9.8 9.8 9.4 8.5 5.7 4.7 6.0 – –

Producer prices (% change, month on month)1999 0.5 –0.2 –0.1 –0.4 2.5 –2.9 1.8 4.2 3.8 0.5 2.0 0.42000 4.7 –0.5 2.3 –1.1 2.8 –3.6 0.9 2.2 5.9 2.3 0.0 –1.62001 3.2 –1.8 0.5 0.8 0.8 –3.6 –1.5 1.3 3.3 – – –

Producer prices (% change, year on year)1999 1.7 –0.3 0.7 –1.2 1.1 –1.6 1.1 4.2 7.0 7.8 10.1 12.62000 17.3 16.9 19.7 18.8 19.1 18.2 17.2 14.9 17.2 19.3 17.0 14.72001 13.0 11.6 9.6 11.8 9.6 9.6 7.0 6.0 3.4 – – –

Average gross monthly wage (% change, year on year)1999 19.0 17.9 16.7 13.6 18.9 12.7 –26.7 15.2 15.7 12.7 14.8 15.02000 11.3 13.8 15.0 16.4 14.8 16.2 14.1 13.4 14.3 13.9 16.9 19.62001 15.7 12.0 10.4 12.9 13.0 14.0 12.3 12.8 9.5 – – –

Average gross monthly wage (real % change, year on year)1999 16.8 18.0 18.2 16.2 20.6 11.3 –30.5 8.8 11.1 7.4 8.3 7.52000 4.0 4.5 4.8 6.6 4.1 4.1 5.0 2.2 2.2 1.8 4.1 7.52001 5.8 3.3 1.4 2.9 2.9 4.2 3.5 6.7 4.6 – – –

Average gross monthly wage (US$)1999 108.8 104.7 107.4 105.2 109.1 104.5 105.7 108.5 113.2 110.6 108.5 109.32000 105.7 104.6 109.4 108.3 107.0 111.1 109.5 104.9 107.3 100.6 105.1 116.02001 113.2 109.8 113.9 115.4 116.8 113.8 112.6 117.8 123.3 – – –

Sources: NSI; Bulgarian National Bank; IMF, International Financial Statistics; Reuters.

32 Bulgaria


Foreign trade and payments

Preliminary figures published by the Bulgarian National Bank (BNB, the centralbank) record a US dollar rise in imports in the third quarter of 2001 of 14.7%year on year, compared with a rise of just 3.3% for exports in the same period.This brought the nine-month trade deficit to US$1,082m in advance of what istraditionally the most import-intensive quarter of the year. Upwardadjustments of preliminary export figures have tended to be more substantialthan those of imports recently, but an annual deficit considerably higher thanthe revised total of US$1,176m in 2000 now looks certain.

On the import side, mineral fuels, oil and energy registered a rise in US dollarterms of just 2.8% year on year, as the year-on-year drop in oil prices offsetrising natural gas prices. The largest percentage rise in the third quarter wasrecorded by consumer goods (33.7%), no doubt the result of a year-on-yearacceleration in real wage growth and household credit. Within the consumergoods category, clothing and footwear, medicine and cosmetics, andautomobiles registered rises of more than 40%, and food, beverages andtobacco was the only subcategory that recorded less than 27% growth. Turkeyappeared to benefit most from this demand, as there was a 59.8% year-on-yearrise in consumer goods imports from Turkey, no doubt related to pricecompetitiveness born of the devaluation of the Turkish lira earlier in 2001.

Investment goods rose year on year by 19.2% in US dollar, terms to a recordUS$497m. This is encouraging, as it suggests some continuation of the stronginvestment growth evident in second-quarter GDP figures (see The domesticeconomy). There was strong growth in imports of electrical machines, whereasfor most other categories the rise in the third quarter was evenly distributed.For example, there was no disproportionately high growth of vehicle importssuch as might have concealed a surge in vehicles intended for personal use andmisclassified for tax purposes.

The slowdown in industrial output was reflected in a below-average rise of12.6% for industrial inputs. (This is somewhat erroneously described by the

The trade deficit widens inthe third quarter

Consumer and investmentgoods rise quickly

Imports for industrialinputs slow

Bulgaria 33


BNB as raw materials, since some are semi-fabricates.) Production of non-ferrous metals, food industry raw materials and raw tobacco droppedsignificantly year on year, and that of ferrous metals and of wood products andpaper stagnated. Imports of most other subcategories rose year on year by10-21% in US dollar terms.

Structure of imports by end-use, Jan-Sep(US$ unless otherwise indicated)

3 Qtr 3 Qtr % change, Jan-Sep Jan-Sep % change,2000 2001 year on year 2000 2001 year on year

Consumer goods 225.5 301.3 33.7 713.3 894.1 25.3 Food, drink & tobacco 41.0 44.6 8.8 125.6 138.8 10.5 Furniture & household appliances 34.5 45.4 31.6 98.8 129.1 30.7 Medicines & cosmetics 37.5 54.6 45.5 142.7 183.4 28.5 Clothing & footwear 41.5 60.2 45.0 137.8 185.6 34.7 Automobiles 36.6 52.9 44.6 104.3 131.2 25.7

Raw materials 551.5 620.9 12.6 1,558.6 1,887.4 21.1 Ores 48.7 70.6 45.0 146.7 203.4 38.7 Iron and steel 39.5 39.8 0.7 95.0 108.8 14.6 Other metals 20.6 18.9 –8.6 44.2 61.3 38.9 Textiles 136.0 151.6 11.5 421.3 528.7 25.5 Wood products, paper & paperboard 40.6 41.3 1.7 114.1 125.5 10.0 Chemicals 40.5 45.7 12.7 129.5 142.5 10.1 Plastics & rubber 63.8 74.5 16.7 172.0 207.7 20.7 Raw materials for the food industry 38.4 34.3 –10.6 98.7 104.7 6.1 Raw skins 13.8 16.6 20.8 39.5 57.2 45.0 Raw tobacco 7.7 5.4 –30.2 24.0 20.7 –13.6

Investment goods 416.7 496.6 19.2 1,180.8 1,297.5 9.9 Machinery & equipment 151.5 181.3 19.7 431.2 466.6 8.2 Electrical machines 45.8 78.6 71.8 145.8 229.3 57.3 Vehicles 109.4 129.6 18.5 236.0 276.3 17.1 Spare parts & equipment 52.6 62.7 19.2 152.8 173.8 13.8 Other 57.3 44.3 –22.8 215.1 151.5 –29.6

Mineral fuels, oils & electricity 419.3 431.0 2.8 1,223.1 1,229.1 0.5 Crude oil & natural gas 325.1 296.8 –8.7 969.3 911.2 –6.0

Total imports cif, incl others 1,612.9 1,849.8 14.7 4,675.7 5,308.1 13.5

Source: Bulgarian National Bank website.

Exports of consumer and investment goods rose briskly in the third quarter,and consumer goods displaced raw materials as Bulgaria’s main export to theEU. Total consumer goods exports rose by 23.5%, and the highest rates wereregistered by the largest categories, namely clothing and footwear, and food,although because of contract production exports of clothes can be vulnerableto shifts in price competitiveness. The strong rise in exports of foods productsis probably the result of a low baseline in 2000, when there was a poor harvest.In fact there was a drop in most other exports dependent on farm-sectorperformance. Exports of investment goods rose in US dollar terms by 22.5%year on year. This, together with the fact that there was a higher than averagerise in investment goods exports to the EU, suggests that Bulgaria is beginningto compete in higher value-added products.

Consumer and investmentgoods exports are up

34 Bulgaria


Exports fell quite sharply in all categories of industrial inputs (or “rawmaterials”) except for textiles. The most significant declines were recorded bynon-ferrous metals and fertilisers, which were depressed by low world prices fornon-ferrous metals, steel products, copper, zinc and urea prices. There was agentle drop of 3.6% year on year in exports of mineral fuels, oil and energycategory, partly as a result of low prices for oil products. However, the overallfall in energy exports masked a 65.9% rise in the “other” subcategory, which isdominated by electricity, where strong demand from both Greece and Turkeythis year despite the latter’s economic crisis has offset a fall in demand fromYugoslavia (Serbia-Montenegro).

Exports by end use, Jan-Sep(US$ m unless otherwise indicated)

3 Qtr 3 Qtr % change, Jan-Sep 2000 Jan-Sep 2001 % change2000 2001 year on year 2000 2001 year on year

Consumer goods 375.5 463.6 23.5 1,062.6 1,265.2 19.1 Food 38.8 52.8 36.3 110.8 139.9 26.3 Tobacco 5.2 2.9 –45.4 20.3 10.4 –48.7 Beverages 18.7 17.0 –9.2 56.7 48.4 –14.6 Clothing and footwear 222.7 288.0 29.3 593.5 769.0 29.6 Medicines and cosmetics 35.4 37.0 4.4 120.2 116.0 –3.4 Furniture and household appliances 27.5 33.6 22.3 78.3 95.6 22.1

Raw materials 570.8 500.1 –12.4 1,589.2 1,559.7 –1.9 Iron and steel 88 83.5 –5.0 293.4 266.5 –9.2 Other metals 123.8 92.4 –25.4 371.3 340.7 –8.3 Chemicals 51 46.1 –9.6 149.7 154.8 3.4 Plastics and rubber 29.7 25.7 –13.4 97.5 97.8 0.3 Fertilisers 34.1 20.9 –38.6 69.2 67.4 –2.5 Textiles 39.3 46.0 17.2 103.5 136.6 32.0 Raw materials for the food industry 59.4 54.2 –8.7 95.0 95.0 –0.1 Wood products, paper and paperboard 37.1 30.5 –17.7 101.1 96.2 –4.8 Cement 9.1 7.8 –14.6 28.4 21.3 –25.3 Raw tobacco 6.8 5.9 –13.3 24.3 22.5 –7.2

Investment goods 132.4 162.3 22.5 415.2 462.2 11.3 Machines and equipment 54.4 56.6 4.2 162.4 173.2 6.6 Electrical machines 15.4 17.7 15.2 45.8 52.3 14.2 Vehicles 4 6.3 57.3 19.2 24.5 27.7 Spare parts and equipment 25.3 35.5 40.4 82.2 104.4 26.9 Others 33.4 46.1 38.1 105.6 107.9 2.2

Mineral fuels, oils & electricity 178.3 171.9 –3.6 473.7 524.3 10.7 Petroleum products 140.1 108.3 –22.6 377.9 355.9 –5.8 Other minerals, fuels, oils & electricity 38.3 63.5 65.9 95.9 168.4 75.7

Total exports fob 1,257.00 1,297.9 3.3 3,540.7 3,811.4 7.6

Source: Bulgarian National Bank website.

Helped by a buoyant tourist season, the surplus on the non-trade elements ofthe current account increased from US$297m to US$335m in the third quarterand from US$406m to US$589m in the first nine months as a whole. However,the rise was not enough to offset the growth in the trade deficit (fob-fob), andthe January-September current-account deficit rose from US$364m in 2000 toUS$493m in 2001. Only part of this can be explained by the reclassification ofitems in the services account. In September the BNB moved the US$350m sale

Industrial inputs andenergy exports fall

Current-account deficitwidens

Bulgaria 35


of the second global system for mobile communications (GSM) licence(recorded in January figures) from services exports to foreign directinvestment (FDI). However, the overall deterioration in the current accountwas concentrated in the third quarter rather than the first.

Balance of payments(US$ m)

3 Qtr Jan-Sep 2000 2001 2000 2001

Goods: credit 1,257.0 1,297.9 3,540.7 3,811.4

Goods: debit –1,487.2 –1,704.7 –4,311.1 –4,893.5

Trade balance –230.2 –406.8 –770.4 –1,082.1

Services balance 364.3 401.1 496.3 573.4

Income balance –142.9 –171.3 –305.9 –325.8

Current transfers balance 76.0 105.5 215.6 341.2

Current-account balance 67.2 –71.5 –364.4 –493.2

Direct investment abroad 5.0 –5.9 3.2 –9.1

Direct investment in Bulgaria 221.9 108.9 507.7 486.2

Portfolio investment assets –14.8 –89.8 –115.5 –146.8 of which: debt securities –13.2 –58.9 –114.5 –111.2

Portfolio investment liabilities 11.8 –40.0 –18.8 –63.0

Other investment assets –327.6 197.8 –337.3 96.1 of which: currency and deposits –366.5 89.9 –542.6 –145.8

Other investment liabilities 24.0 –31.4 88.1 26.8

Financial account balance –79.7 139.7 127.4 390.2

Capital account balance 0.0 0.0 25.0 –0.1

Net errors and omissions –90.6 –116.4 57.4 –103.6

Overall balance –103.1 –48.3 –154.5 –206.7

Movement of reservesa 103.1 48.3 154.5 206.7

a Minus sign indicates increase.Source: Bulgarian National Bank.

FDI has been disappointing in 2001, and the authorities have had to draw onthe US$3.1bn of foreign-exchange reserves to plug the balance-of-paymentsgap. The GSM licence sale accounts for most of the US$486m of inflows in thefirst nine months of the year, and, with significant privatisations delayed bythe elections that took place in mid-2001, total FDI inflows are likely to bemuch lower in 2001 than the US$1bn recorded in 2000.

An overall balance-of-payments deficit would be a concern if foreign-exchangereserves were lower. However, in October central bank foreign-exchangereserves were US$3.1bn, enough for about five months of import cover.Moreover, Bulgaria’s access to international capital markets to plug the gap hasimproved with the successful launch in November of a €250m (US$233m)debut Eurobond issue. Another Eurobond issue of up to €700m planned for2002 may not now go ahead because of IMF objections.

FDI continues to disappoint

36 Bulgaria


Main external indicators(US$ m unless otherwise indicated)


Exports fob1999 – – – – – – – – – – – –2000 312.8 385.7 413.1 355.8 373.7 442.6 405.0 432.4 419.6 424.9 463.3 395.82001 397.1 429.0 455.5 412.2 391.1 428.6 452.8 447.1 397.9 – – –

Imports cif1999 – – – – – – – – – – – –2000 517.3 536.3 482.4 438.6 521.1 567.1 547.0 515.6 550.2 638.4 598.3 589.12001 516.8 514.4 601.1 575.3 601.9 648.9 713.7 595.8 540.2 – – –

Current-account balance1999 – – – – – – – – – – – –2000 –245.1 –102.3 –2.6 –36.4 –72.4 27.2 –28.5 122.7 –27.0 –134.2 –66.9 –136.12001 –140.6 –42.8 –53.5 –80.7 –93.5 –10.5 –81.0 76.1 –66.6 – – –

Foreign reserves1999 2,623 2,629 2,599 2,575 2,539 2,581 2,454 2,572 2,689 2,690 2,709 3,0832000 2,827 2,772 2,715 2,800 2,785 3,014 2,748 2,696 2,870 2,976 3,142 3,3422001 3,112 3,037 2,980 3,036 2,895 2,980 2,938 2,974 2,953 3,086 – –

Gold1999 294 291 283 279 276 272 264 264 281 276 266 2652000 258 256 252 240 245 252 244 235 231 222 229 2452001 245 244 233 238 224 224 231 241 241 238 – –

International reserves1999 2,917 2,920 2,882 2,854 2,815 2,853 2,718 2,836 2,970 2,966 2,975 3,3482000 3,085 3,028 2,967 3,040 3,030 3,266 2,992 2,931 3,101 3,198 3,371 3,5872001 3,357 3,281 3,213 3,274 3,119 3,204 3,169 3,215 3,194 3,324 – –

Sources: National Statistical Institute; Bulgarian National Bank; IMF, International Financial Statistics; Reuters.

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