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Bulgaria - Economy

International Monetary Fund (IMF) in November 2015 projected moderate growth for 2015, broadly in line with last year’s level of 1.7 percent, supported by exports and absorption of European Union (EU) funds. Risks to this outlook are tilted toward the upside and strengthening domestic demand is likely to lift growth modestly in 2016. While unemployment has fallen with increasing economic activity, it was projected to remain high. Deflation is set to bottom out as commodity prices stabilize.

Bulgaria is predominantly a host state to EU banking groups. While most banks in Bulgaria are locally incorporated, as of 2015 less than a quarter of the market share, 23 percent, was held by domestic banks and 73 percent is held by subsidiaries with EU parents. Approximately a quarter of the market share, 24 percent, was held by Greek-owned subsidiary banks.

On 01 December 2013, Russia scrapped the South Stream pipeline project to supply gas to southern Europe, without crossing Ukraine, citing EU objections, and instead named Turkey as its preferred partner for an alternative pipeline. Speaking in the Bulgarian parliament 13 January 2016, Bulgarian Prime Minister Boyko Borissov said the defunct project of bringing Russian gas across the Black Sea to the EU known as ‘South Stream’ should be transformed into ‘Bulgarian Stream’, with 100% Bulgarian ownership over the pipes.

The banking sector weathered the global financial crisis, but stress emerged in June 2014 with two bank failures. Following runs on deposits, the BNB put two banks into conservatorship. Soon after this intervention, a third domestic bank suffered a depositor run and was supported by emergency liquidity (state aid approved by the EC).

Bulgaria's economy contracted dramatically after 1989 with the collapse of the COMECON system and the loss of the Soviet market, to which the Bulgarian economy had been closely tied. The standard of living fell by about 40%. In addition, UN sanctions against Yugoslavia and Iraq took a heavy toll on the Bulgarian economy. The first signs of recovery emerged when GDP grew in 1994 for the first time since 1988, by 1.4% and then by 2.5% in 1995. Inflation, which surged in 1994 to 122%, fell to 32.9% in 1995. During 1996, however, the economy collapsed due to shortsighted economic reforms and an unstable and de-capitalized banking system.

Under the leadership of former Prime Minister Ivan Kostov (UDF), who came to power in 1997, an ambitious set of reforms was launched, including introduction of a currency board regime, bringing growth and stability to the Bulgarian economy. The currency board contained inflationary pressures and the three-digit inflation in 1997 was cut to only 1% in 1998. Following declines in GDP in both 1996 and 1997, the Bulgarian Government delivered strong, steady GDP growth in real terms in recent years. Prime Minister Simeon Saxe-Coburg's economic team of young, Western-educated financiers continued to implement measures that helped sustain stable economic growth and curb unemployment. Measures introduced by the government were targeted at reducing corporate and individual taxes, curtailing corruption, and attracting foreign investment. The government also restructured the country's foreign debt, revived the local stock market, and moved ahead with long-delayed privatization of some major state monopolies. As a result of this progress, in October 2002 the European Commission declared Bulgaria had a "functioning market economy."

Successive governments continued these reforms, and in 2007 the country joined the European Union. According to the World Bank, in 2006 Bulgaria attracted the highest levels of foreign direct investment, as a share of GDP, among Eastern European countries. In early 2007, to attract additional foreign investment, the Bulgarian Government lowered corporate tax rates to 10%, reportedly the lowest rate in Europe. A flat-tax rate of 10% for personal income, in place as of January 1, 2008, has helped to bring down domestic labor costs and reduce the share of the "gray" economy. In response to local governments' demand for financial independence in 2006, parliament passed fiscal decentralization of municipalities, granting them authority over collection and administration of some taxes, thus further enhancing local economic stability.

The 2007-2009 global financial and economic crisis erased many of the gains attributed to conservative fiscal policies and tax reforms. After 10 years of steady growth, Bulgaria's economy fell into recession in the fourth quarter of 2008, causing an increase in both unemployment and household debt. After years of relatively low inflation, domestic prices, particularly of food and energy, increased in 2010. The government was slow implementing some of its planned anti-crisis measures, and resorted to tapping into the fiscal reserve to tackle short-term spending problems. The government also committed itself to strengthening control over EU funds and fighting organized crime and corruption.

The global financial crisis significantly reduced the flow of new investments, which previously supported strong economic growth. Domestic consumption remained weak, and in 2011 export growth recovery slowed, reflecting signs of recession in Bulgaria’s major EU trading partners. Faced with tough budget decisions, the government continues to maintain fiscal discipline and a policy of budget deficit reduction by planning a deficit of 1.3% of GDP in 2012. In contrast to some Euro-zone states, Bulgaria’s public finances are not overwhelmed by huge international debt, and its level of government debt (12% as of November 2011) remains one of the lowest within the EU.

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