The economy of Bulgaria declined dramatically during the 1990s 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%, and only recently regained pre-1989 levels in June of 2004. In addition, UN sanctions against Serbia (1992-95) and Iraq took a heavy toll on the Bulgarian economy. The first signs of recovery emerged when GDP grew 1.4% in 1994 for the first time since 1988, and 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 the BSP’s, slow and mismanaged economic reforms, its disastrous agricultural policy, and an unstable and decentralized banking system, which led to an inflation rate of 311% and the collapse of the Lev. When pro-reform forces came into power in the spring 1997, an ambitious economic reform package, including introduction of a currency board regime, was agreed to with the IMF and the World Bank, and the economy began to stabilize. As of 2007 the economy is growing at a steady pace of above 5% a year with budget surpluses and shaky inflation. Future prospects are tied to the country’s increasingly important integration with the European Union Member States. The country is expected to join the Eurozone between 2010 and 2012.
| Agriculture and industry in Burgas Province source |
External trade & Investment
Since 1990, the bulk of Bulgarian trade has shifted from former COMECON countries primarily to the European Union, although Russian petroleum exports to Bulgaria make it Bulgaria’s single largest trading partner. In December 1996, Bulgaria joined the World Trade Organization. In the early 90’s Bulgaria’s slow pace of privatization, contradictory government tax and investment policies, and bureaucratic red tape kept foreign investment among the lowest in the region. Total direct foreign investment from 1991 through 1996 was $831 million. In the years since 1997, however, Bulgaria has begun to attract substantial foreign investment. In 2004 alone over 2.72 billion euros (3.47 billion US dollars) were invested by foreign companies. In 2005 economists observed a slowdown to about 1.8 billion euros (2.3 billion US dollars) in FDI which is attributed mainly to the end of the privatization of the major state owned companies.
In the European Union
On 1 January 2007 Bulgaria entered the European Union. This led to some immediate international trade liberalization, but there was no shock to the economy. The government is running annual surpluses of above 3%. This fact, together with annual GDP growth of above 5%, has brought the government indebtedness to 22.8% of GDP in 2006 from 67.3% five years earlier. This is to be contrasted with enormous current account deficits. Low interest rates guarantee the availability of funds for investment and consumption. For example, a boom in the real estate market started around 2003 and has not subsided yet. At the same time annual inflation in the economy is variable and during the last five years (2003-2007) has seen a low of 2.3% and high of 7.3%. Most importantly, this poses a threat to the country’s accession to the Eurozone. The Bulgarian government plans for the Euro to replace the Lev in 2010. However, experts predict that this might happen as late as in 2012. From a political point of view, there is a trade-off between Bulgaria’s economic growth and the stability required for early accession to the monetary union. Bulgaria’s per-capita PPP GDP is still only about a third of the EU25 average, while the country’s nominal GDP per capita is about 13% of the EU25 average.
As of 1 January, 2008 the income tax for all citizens is set to a flat rate of 10%. This flat tax is one of the lowest income rates in the world and the lowest income rate in the European Union. The reform was done in hope for higher GDP growth and greater tax collection rates. Some called it a "revolution" in taxation, but the changes were only met with mild discussions and some protests by affected working classes. The proposal was modified to allow for compensating the perceived loses from the changes in the tax formula. The corporate income tax is also 10% as of 1 January, 2007 which is also among the lowest.