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Business in Bulgaria

Political and Economic Environment

ECONOMIC ENVIRONMENT

Since taking power in July 2001, the government of Prime Minister Simeon Saxe-Coburg has maintained its predecessor's focus on macroeconomic stability, while keeping a political eye on continued high (albeit declining) unemployment and low incomes. In addition to pursuing macroeconomic stability as its first priority, the Government is taking further steps to attract foreign investment and stimulate growth.

The Bulgarian Government has delivered strong, steady GDP growth in real terms. Bulgaria’s economic expansion has accelerated in 2004 with estimated real GDP growth surging to 5.3 percent. This pace of growth makes Bulgaria one of the fastest growing economies in Europe. Official statistics underreport economic activity, with an unofficial market possibly representing an additional 20 to 30 percent of the official GDP. Economic growth, however, particularly in Bulgaria’s private sector, has not been rapid enough to drastically reduce unemployment. Registered unemployment has declined due to fewer lay-offs and to the Bulgarian Government’s job creation programs, but remains high at 12.67 percent for 2004. The GOB has taken steps to improve Bulgaria's business environment, moving forward on structural reforms, privatization, and enterprise restructuring, while maintaining a tight fiscal policy.

The Currency Board provides fiscal discipline, while balance of payments support from international donors help Bulgaria fund transitional costs of economic reform and public investment. Thanks to the Currency Board Agreement and its associated IMF programs, inflation was cut from nearly 600 percent in 1997 to only one percent in 1998 – and for 2004 was 3.9%. Bulgaria's balance of payments situation is currently stable, but its future sustainability depends on new foreign direct investment and a lower trade deficit. Domestic demand has substantially increased, sustained by a credit boom. Continued fiscal discipline and GOB measures to encourage slower credit growth should limit future current account deficits.

With national elections coming in June, the main area of concern about Bulgaria’s economic outlook is restraining extra-budgetary expenditures. Other issues include structural reforms in subsidized sectors (notably health, education, energy, and railroads), and allocation of larger sums to public investment to meet EU infrastructure standards, such as in transportation, environmental protection, and water treatment. Main potential risks to achieving budgetary goals are an unfavorable international environment and huge trade deficits. The 2005 budget conforms to the GOB’s three-year macroeconomic framework agreed with the IMF, which envisages a general government deficit limited to 0.5 percent of GDP, real GDP growth of 5-5.6 percent and moderate inflation of 3.6 percent. In August 2004 the IMF approved a new 25-month precautionary Stand-by Arrangement in the amount of about USD 146 million to support the GOB’s economic program for 2004-06, which is viewed as “a seal of approval” for GOB economic policy in the run-up to EU membership.

In November 2003, the GOB and the U.S. exchanged diplomatic notes, revising the U.S.-Bulgaria Bilateral Investment Treaty to address issues that have arisen in the course of Bulgaria’s EU accession process.

POLITICAL ENVIRONMENT

Major Political Issues Affecting the Business Climate

The National Movement Simeon II, political vehicle of the former exiled Tsar Simeon Saxe-Coburg, in 2001, won 120 seats (half of the 240 seats in Parliament) and formed a coalition government with the Movement for Rights and Freedoms, which is generally seen as representing Bulgaria's ethnic Turkish minority. The Saxe-Coburg government has continued the reform policies initiated by the preceding government, which lead Bulgaria out of the 1996-97 economic crisis; however, reforms have not born fruit as quickly as many had hoped.

Organized crime and corruption are a concern of both the government and the ordinary citizen, and are significant domestic issues. Many organized crime killings have gone unsolved in the past years and judicial corruption is reputedly widespread. Government procurement and privatization procedures remain susceptible to corruption. Violent crime against persons is very low although property crime - car theft, pick pocketing and burglary - remains widespread.

All major political parties support membership in Western institutions, including NATO and the European Union (EU). Bulgaria is expected to sign a EU accession treaty in April 2005 with a view toward joining the Union in January 2007. The Bulgarian Government has cooperated closely with the U.S. as a non-permanent member of the UN Security Council in 2002-2003 and as Chairman in Office of the Organization for Security and Cooperation in Europe (OSCE) in 2004. Bulgaria has also supported U.S. and NATO positions during the Kosovo Crisis and in the War on Terrorism after September 11, 2001. Bulgaria has deployed troops to Bosnia (EUFOR), Kosovo (KFOR), and Afghanistan (ISAF and OEF). A Bulgarian battalion is currently deployed in Iraq as part of the multinational coalition forces there. The government hopes that membership in NATO and the EU will encourage foreign investment and promote greater confidence in Bulgaria’s political and economic institutions.

Political System, Schedule for Elections, and Orientation of Major Political Parties

Following the removal of long time communist leader Todor Zhivkov in 1989, Bulgaria has been a parliamentary republic ruled by a democratically elected government. A new constitution was enacted in 1991, which lays out the basic rights and obligations of citizens and is the basis for Bulgaria’s legal system. The constitution guarantees freedom of association including the right to form political parties.

The constitution provides for the separation of powers amongst the executive, judicial and legislative branches and a system of checks and balances. The President is the head of state. The presidency is empowered to conclude international treaties and to schedule parliamentary (i.e., National Assembly) elections. The President is also the commander-in-chief of the armed forces. The National Assembly is a unicameral legislative body that consists of 240 members who are elected for a term of four years.

Georgi Purvanov of the Bulgarian Socialist Party (BSP) won an upset victory over incumbent Petur Stoyanov of the UDF in the November 2001 presidential election. He assumed the presidency in January 2002 for a five-year term. Presidential elections are expected in November 2006.

Simeon Saxe-Coburg Gotha, the former Tsar (Simeon II) who had lived most of his life in exile in Madrid since leaving Bulgaria as a boy after World War II, became Prime Minister on July 24,2001. His Government includes representatives of the National Movement Simeon II (NDSV) and the mainly ethnic-Turkish Movement for Rights and Freedoms (MRF). The UDF and the BSP are the main opposition forces. The next major test for the political parties will be the general elections due in June 2005.  


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