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Bulgaria

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REFERENCES

Commission Opinion [COM(97) 2008 final - Not published in the Official Journal]
Commission Report [COM(98) 707 final - Not published in the Official Journal]
Commission Report [COM(1999) 501 final - Not published in the Official Journal]
Commission Report [COM(2000) 701 final - Not published in the Official Journal]
Commission Report [COM(2001) 700 final - SEC(2001) 1744 final - Not published in the Official Journal]
Commission Report [COM(2002) 700 final - SEC(2002) 1400 final - Not published in the Official Journal]
Commission Report [COM(2003)676 final - SEC(2003) 1210 - Not published in the Official Journal]
Commission Report [COM(2004)657 final - SEC(2004) 1199 - Not published in the Official Journal]
Treaty of Accession to the European Union [Official Journal L 157 of 21.06.05]

SUMMARY

In its Opinion of July 1997, the Commission took the view that it was too early to decide on Bulgaria's participation in the euro area immediately upon its accession.
The November 1998 Report did not differ significantly from the previous report. However, it did note that Bulgaria had made some progress in its preparations for participation in economic and monetary union (EMU).
In its October 1999 Report the Commission noted that, although Bulgaria had stated its intention of accepting the EMU acquis and complying with it fully, scant progress had been made in this respect.
The November 2000 Report noted that no significant measure had been taken since the last report but found that Bulgaria had made considerable progress in implementing the acquis in this area.
In the November 2001 Report the Commission noted that no legislative progress had been made in this area, as did the October 2002 Report.
The November 2003 Report noted some progress as regards the prohibition on privileged access by public authorities to financial institutions.
The November 2004 Report notes that, although initial progress was slow, major steps forward have been made these last three years. Bulgaria has gradually achieved a high degree of alignment with the EMU acquis. However, it must now redouble its efforts to complete the transposition of the acquis, notably as regards the independence of the Central Bank.
The Treaty of Accession was signed on 25 April 2005 and accession took place on 1 January 2007.

COMMUNITY ACQUIS

The third stage of EMU began on 1 January 1999. That date entailed far-reaching changes for all Member States, even those not taking part in the euro area from the outset.

In the economic sphere, the keystone is the coordination of national policies (national convergence programmes, general economic guidelines, multilateral surveillance and excessive-deficit procedure). All countries are required to comply with the stability and growth pact, to refrain from direct financing of the government deficit by the central bank, to prohibit privileged access by public authorities to financial institutions and to liberalise capital movements.

Member States not taking part in the euro area conduct an independent monetary policy and participate in the European System of Central Banks (ESCB) under certain conditions. Central banks must be independent and must have price stability as their primary objective. Lastly, exchange-rate policy is regarded as a matter of common interest by all Member States, who must be in a position to participate in the new exchange-rate mechanism.

Even though accession entails acceptance of the objective of EMU, compliance with the convergence criteria is not a precondition. However, since those criteria are indicative of a macroeconomic policy geared to achieving stability, all Member States must, in due course, comply with them on a permanent basis.

EVALUATION

Bulgaria began its transition to a market economy later than the other transition countries and in unfavourable conditions following a severe economic crisis generated by external shocks. Ambitious beginnings came to an abrupt halt in the absence of clear political support for structural reforms: six years were virtually lost. However, the 2002 Report took the view that Bulgaria had a functioning market economy which should be able to cope with competitive pressures and market forces in the Union in the medium term, provided that it continued to implement its reform programme with a view to overcoming certain persistent difficulties. The 2003 Report noted that average per capita income (measured in terms of purchasing power) was low and amounted to only 25% of the EU average.
In August 2003 the Bulgarian authorities presented their last pre-accession economic programme. This programme, which was drawn up by the Ministry of Finance, confirms the Government's determination to pursue a prudent budgetary policy.

After falling appreciably in the first few years of the transition, economic growth picked up slightly in 1994 before collapsing in 1996, when GDP fell by 10.1%. Despite attempts to stabilise the situation, 1997 was also a year of deep recession in Bulgaria (-7% GDP). Not until 1999 was real economic growth recorded, with an increase of 2.4% in GDP. The Russian financial crisis and the war in Kosovo had a direct impact on Bulgarian industry although exports minimised the effects. Since then growth has resumed and the figure for the first half of 2000 was 5.2%. In 2002 real GDP grew by 4.8%. The 2003 Report noted that, in spite of the global economic slowdown, the Bulgarian economy had continued to benefit from high growth and a high degree of stability owing in particular to the strength of domestic demand. Despite general stagnation in the EU, real GDP growth was provisionally estimated at 4.3% for 2003. During the first half of 2004 it reached 5.3%.

The Government applied a tough, prudent and responsible policy to public finances. The general government deficit was kept under 1% of GDP during the years in question and there was even a surplus in 1998 and 1999. In 2002 the deficit came to 0.6% of GDP. In 2003 the general government sector showed a cash surplus which peaked in October at 2.8% of GDP. This trend continued into the first half of 2004, with a surplus of 2.3% of expected GDP.
Small deficits and strong growth in nominal GDP helped to reduce the public debt from over 100% of GDP in 1997 to 66.4% at end-2001 and to 53.0% by end-2002. Under a new law, the Government may no longer enter into new debts if its total debt exceeds 60% of GDP. Thanks to the steady primary budget surplus, active management and the depreciation of the dollar against the euro, the public debt amounted to 46% of GDP in 2003. At the end of July of that year, the consolidated budget had a cash surplus of 1.8% of projected GDP.
At the end of July 2004 the Government used part of the budget reserve to reduce external debt by repurchasing bonds. This helped to reduce the external debt and public debt ratios by almost three points. A budget reserve account containing more than 10% of GDP was set up at the Central Bank partly to strengthen the country's capacity to honour its external debt commitments.

Following the rise in prices that occurred in the wake of liberalisation, inflation followed an erratic but generally downward trend until 1996. The collapse of the exchange rate in May 1996 led to a period of hyperinflation in 1997. Then the situation improved and inflation dropped to 2.6% in 1999. The introduction of the currency board arrangement helped to bring inflation under control. Measured by the harmonised index of consumer prices (HICP) as an annual average, inflation fell to 7.4% in 2001. Headline inflation of administered prices was brought down to 23.3% in May 2002. Administered prices apart, inflation amounted to 10% in 2000 and 2001 and 2.7% in May 2002. On the whole, progress has been made with price liberalisation.
The 2003 Report noted that at end-2002 inflation was up 3.8% on the corresponding month of the previous year. In the first half of 2003 it fell below the 2% mark. The inflation rate then increased during the second half of the year because of higher food prices and energy price regulation. Inflation excluding administered prices reached 4.8% at end-2003. In 2004 Bulgaria experienced a speeding-up of inflation following an increase in excise duty rates and energy prices. Consumer price inflation reached 6.7% in the first half of 2004, compared with an average of 2.3% in 2003.

With regard to the exchange rate, the euro replaced the German mark as the peg currency on 1 January 1999. The euro depreciation has had an impact on debt servicing, budgetary reserves and foreign trade. Because Bulgaria has been more inflation-prone than the rest of the euro area, the Bulgarian lev has appreciated in real terms by almost 40% against the single currency since the introduction of the currency board arrangement in July 1997. Over the same period, the real effective exchange rate, based on consumer prices, has appreciated by 22%.
According to the 2003 Report, the international competitiveness of the Bulgarian economy has been boosted by productivity gains in spite of this strong real exchange-rate appreciation. In fact, Bulgaria's external competitiveness has not really suffered as far as commercial products are concerned. Available analyses show that, having started out undervalued when the currency board arrangement was introduced, the Bulgarian currency's exchange rate is now close to equilibrium.

The current-account deficit, which stood at 5.3% of GDP in 1999, was not absorbed in 2000. The value of energy imports, which had virtually doubled in a year, had a negative impact on the current-account balance. The current-account deficit remained significant in 2002. In the first half of 2003, after narrowing for some time, it increased to 8.5% of annual GDP, considerably up on the figure for the corresponding period the previous year. For the first six months of 2004, the current-account deficit amounted to 4.8% of projected GDP, against 5.3% for the same period in 2003.
The trade deficit also gave cause for concern in 2003 (12.5% of GDP) and the trend seems set to continue in 2004. Between January and June imports increased by 17% and exports by 11% compared with the same period in 2003. This increase translates into a 38% worsening of the trade gap.

With regard to structural reform, privatisation in the banking sector has continued slowly. Several measures have been taken to strengthen and improve the efficiency of banking supervision and to enhance the role of banks as financial intermediaries. Generally speaking, the Bulgarian banking system is sound and highly capitalised. Almost 98% of commercial banks' total assets are now in private hands and more than 75% are foreign-owned. Bank loans to private businesses and households have increased steadily, to 26% of GDP in 2003. Deposits doubled to 40% of GDP in 2003. The stock exchange reopened in October 1997, but capital markets are still small: their turnover is still very low despite the large number of companies quoted. Nevertheless, the market capitalisation of the companies increased from 5.8% of GDP in 1999 to 7.9% in 2003. Total turnover at the Bulgarian stock exchange relative to market capitalisation at the end of 2003 was 12.5%.
With regard to liberalisation of capital movements, Bulgaria adopted new currency legislation in September 1999, which came into force in 2000. Liberal arrangements are in force for capital inflows. Under current legislation, foreign and domestic investments are treated on an equal footing. However, Bulgaria still applies an authorisation procedure for most outward capital transactions. Good progress was made with price liberalisation in 2002 and 2003, particularly in the energy and telecommunications sectors. In July 2004 the final step in a schedule designed to bring energy prices gradually to cost-recovery levels was made by increasing electricity and district heating prices by an average of 10%.
Progress has also been made on private property, but implementation of the privatisation programme has been less rapid than planned. The 2002 Report noted that considerable progress had been made in restructuring the economy and privatisation. New privatisation procedures were put in place in 2002. In its 2003 Report the Commission noted that progress had been made, albeit not without difficulty. According to the 2004 Report, the privatisation process is coming to an end. In March 2004 64% of employees worked in the private sector. In June of that year the percentage of privatised assets was 86%. The financial sector is almost completely privately owned and, to a large extent, in foreign hands.
In order to speed up insolvency proceedings, the Commercial Code has been amended. Henceforth, a company which fails to make an outstanding payment within 60 days after the date the payment was due will be considered insolvent. The revised code also provides for the setting-up of special legal chambers to deal exclusively with bankruptcy cases. In this connection, a new Bank Bankruptcy Law has been adopted which increases transparency and speeds up procedures.

The independence of the Central Bank vis-à-vis the Government and public institutions was guaranteed by the introduction of the currency board arrangement in 1997. This means that direct financing of the public sector by the Central Bank is prohibited. The 2001 Report called on the Government to take measures to make the Bulgarian Central Bank fully independent. Direct financing of the public sector should be ruled out. The 2002 Report called for further efforts to align the situation with the acquis with regard to the independence of the institutions as such and of its employees. Legislation prohibiting special access by the public sector to financial institutions as well as direct financing of the public sector should be aligned with the acquis. The 2003 Report noted that no progress had been made on guaranteeing the independence of the Central Bank. However, Bulgaria has moved forward by adopting new laws prohibiting privileged access by public authorities to financial institutions.
At the beginning of 2003 a new Commission for Financial Supervision, created by merging three different commissions for supervision of the non-banking sector, started work. The Central Bank has now tightened up certain rules in order to improve the monitoring of risks arising from the high credit growth.

With regard to progress in the negotiations on its participation in EMU, Bulgaria has stated its intention of accepting the Community acquis and complying with it fully. The administrative structures necessary for implementing the acquis will be put in place. Following publication of the opinion, progress was slow at first but great strides have been made in recent years. Bulgaria has thus reached a high level of alignment with the acquis in relation to EMU. Negotiations on these chapters have been suspended for the time being. No transitional arrangements have been requested. Overall, the 2004 Report notes that Bulgaria is meeting its commitments and satisfies the requirements stemming from the accession negotiations in this area.

This summary is for information only and is not designed to interpret or replace the reference document.

Last updated: 22.12.2005
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