Draft Study Bulgaria

8/6/2019 Draft Study Bulgaria

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DRAFT/7 December 2004

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

BULGARIA: EXPERIENCE IN SYSTEMIC TRANSITIONAND REFORMS

CASE STUDY

DFID/UNCTAD Joint Project "Supporting Developing Countries' Assessment of the Non-Agricultural Market Access Negotiations"

Geneva, 2004


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TABLE OF CONTENTS

I. Introduction and overview of the country ________________________________ 3

Introduction _______________________________________________________________ 3

1. Economic and trade environment _______________________________________ 3

2. Role of trade in Bulgarias economy________________________________ 10

II. Trade liberalization and its economic impacts ___________________________ 12

1. Trade liberalization process_______________________________________ 12

2. Economic impact _____________________________________________________ 18

III. Policy lessons and implications _______________________________________ 21

1. Conclusions and Policy lessons ________________________________________ 21

2. Major country issues in current Doha negotiations____________________ 21

References

Annexes: Tables


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I. Introduction and overview of the country

Introduction

Bulgaria has been undergoing almost 15 years of profound reforms in the process

of transition to a market economy from a previously centrally-planned system, in whichtrade liberalization and integration in the multilateral trading system were among toppriorities as major elements of the reform strategy. The country is also pursuing its maincurrent strategic goal to accede to the European Union (EU) by 1 January 2007. On thisway, Bulgarias accession to the World Trade Organization in December 1996 was animportant milestone. Thus, Bulgarias has a rather comprehensive and unique experiencethat may be of substantial interest to developing and other transition countries.

This paper attempts to present, explain and analyze Bulgarias case in the contextof the DFID/UNCTAD Joint Project "Supporting Developing Countries' Assessment of the Non-Agricultural Market Access Negotiations".

1. Economic and trade environment

(i) Main features of the economy

Population

The population of Bulgaria went on contracting in the beginning of the XXI st century. In 2001 1, some 7 932 984 people resided permanently in the country. Thepopulation of Bulgaria had decreased by 544 333 people relative to the previous censuscarried out on 4 December 1992. The population decrease - the most dramatic since the

Second World War was the second in a row monitored since the 1980s.2

The ageing of Bulgarias population has been persisting as a result of the

unfavourable trends of development of demographic processes in the last three decades.In 2001, the share of population aged under 15 years declined to 15.2% (1 216 841people) of the entire population. In contrast, the share of persons aged over 65 reached17.4% of the population. In absolute terms, working age population contracted to5 382 804 persons since 1992, but its relative share rose by 1.1 percentage point to 67.4%of the population total.

GDP growth and per capita

Following negative real GDP growth in 1996 and 1997, the Bulgarianeconomy kept on growing between 1998 and 2003 by around 4% on average. RealGDP growth in 2003 was evaluated at 4.3%. Against this background, it is worth

1 The latest official census was carried out by NSI on 1 March 2001. According to NSI estimates,Bulgarias population amounted to 7 973 671 people as of 31 December 2001.2 The first intercensal population decrease was reported in the period 1986-1992 amounting to some 460000 people.


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mentioning that in the earlier stage of transition, GDP fell almost steadily through 1997, whenit was 40 percent below its 1990 level.

40

50

60

70

80

90

100

110

120

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Real GDP Employment Consumption Gross Fixed Capital Formation

Trends in selected macroeconomic variables, 1989-2002

a

Source:

Indices, 1989=100 for all variables except gross fixed capital formation where 1990=100.

UNECE Common Database; 2001 and 2002 data based on projections from AEAF (2003).

Index 1989=100 a

In terms of real GDP per capita (in euro, PPS 3), Bulgaria with euro 6 500 PPS(US$7,059) is reaching only 27.9% of the average per capita GDP in the EU. At marketexchange rate, GDP per capita was US$1,986 in 2002.

Education

One of Bulgarias main assets is a relatively well-educated and trained workforce,in particular regarding engineering and natural sciences, while there is less of a traditionin social sciences and management. 75.6% of young people aged 20 to 24 haveattained at least upper secondary education attainment level. The main challenge in theeducation sector is to adjust the system to a declining school-age population

following the general demographic decline and emigration, among whom many bettereducated and younger people. A further weakness is that the education system producesgraduates with qualifications which do not always match the demand of the labourmarket. Education spending increased from a crisis-related low of 2.6% in 1997 to 3.7%of GDP in 2001, which is still a fairly low rate by international comparison.

3 Purchasing Power Standard.


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industry has remained at between 28% and 30% over this period, services haveexpanded from 44% in 1997 to 59% in 2003. This sectoral shift was much lesspronounced in terms of employment, with employment in agriculture increasingfrom 25% to 28% and in services from 43% to 45%, while there was a decrease inindustrial employment from 32% to 28%.

Table A. Bulgaria - Selected Indicators of Economic Structure (2003)

Population (average) Million 7.82 GDP per headof EU-25 average

PPS%

628029.4

Gross fixed capital formation % of GDP 19.6Gross foreign debt of the whole economy % of GDP 49.4Exports of goods and services % of GDP 53.2Stock of foreign direct investment Million

per head 5583695

Employment rate % of 25-64 age group 52.5Long-term unemployment rate % of labour force 8.9Source: Eurostat

(ii) Overview of recent economic developments

Following the severe economic crisis in 1996-97, the currency boardarrangement (CBA) introduced in July 1997 and economic reforms have been crucialfor stabilizing the economy on a continued growth path. The CBA has been underpinnedby a conservative fiscal policy and a sharp acceleration of structural reforms thatencompassed agriculture, energy, privatization, completing price and trade liberalization,

reform of the social sectors and restructuring and financial discipline in the enterprisesector.

Since then, substantial progress has been made in the restructuring of theeconomy. A large number of state-owned enterprises have been sold or liquidated,but several major enterprises still remain to be privatized. The financial sector isnow basically completely in private hands and to a large extent foreign-owned.Conditions for business in Bulgaria have improved although substantial efforts arestill required to enhance the efficiency of the public administration and judicial systemsand the regulatory environment, and in particular to improve the prospects for smalland medium-sized enterprises.

The reforms implemented since 1997 have been ambitious by any standards, butthere are visible signs of reform fatigue in the population. While there is a broadpolitical consensus on the fundamentals of economic policies, such as maintaining thecurrency board arrangement and preparing for EU accession, there are diverging viewsbetween political parties about the affordability of alleviating the social consequences.Opinion polls suggest that many people in Bulgaria fail to see progress in their economicsituation.


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The recovery of the economy after 1997 was accompanied by an increase of the

BoP current account deficit. In 2001, the current account deficit had risen to 6.2% of GDP (i.e. close to the levels at the start of transition) from 0.5% of GDP in 1998 mainlydue to the deterioration of the trade in goods deficit, indicative of the insufficientcompetitiveness of the economy. Although financed by net inflows of foreign directinvestment in most years, the current account deficit has become a chronic factor,perhaps, reflecting the inadequate level of competitiveness of the Bulgarian economy. Atits heart is the high trade deficit (12.5% of GDP in 2003).

Total foreign debt, which is to a large extent a public debt, declined from 100% of GDP in 1997 to below 60% of GDP at the end of 2003.

Bulgaria heavily relies on the volume of foreign direct investment (FDI) not onlyfor the financing of the current account deficit but also for investment in up-to-datetechnologies and modern enterprise management. Over the 1991-2001, FDI in Bulgariaamounted to some USD 4 billion. About 60% of total FDI inflows had come from the EUcountries. Germany, Greece, Belgium and Italy are currently the largest foreign investorsin Bulgaria. In the 1990s, the bulk of FDI was directed to manufacturing, trade and thefinancial sector whereas telecommunications, agriculture and infrastructure attracted onlya considerably smaller portion of FDI flows.

The general government deficit has been below 1% of GDP in all years and was inbalance or in surplus in some years. In 2003, the general government sector was running acash surplus peaking at 2.8% of GDP in October, and a similar trend occurred in the firsthalf of 2004 with a surplus of 2.3% of projected GDP.

Table B. Government Revenue Structure (in % of total revenues and grants)

1998 1999 2000 2001 2002

Tax revenues 79.4 77.3 78.7 77.6 76.6

Income tax 11.5 10.9 9.9 9.0 8.4

Profits tax 9.6 7.6 6.5 9.5 7.6

Indirect taxes (VAT and excises) 28.1 27.0 31.5 30.1 32.0

VAT 20.6 19.9 21.3 20.7 21.5

Customs duties and levies 5.0 2.7 2.0 1.7 1.5

Public social security receipts 22.9 24.5 26.6 25.2 24.6 Other 2.3 4.6 2.2 2.2 2.4

Non-tax revenues 19.0 20.6 19.5 19.3 21.0

Grants 1.6 2.1 1.8 3.1 2.4

Source: Bulgarian Ministry of Finance


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Revenues from customs duties have taken a steady downward trend to account fora decreasing relative share within tax and total budget revenues. A major reason behindthe contraction in revenues is caused by the fact that Bulgaria has concluded free tradeagreements with about 70% of the importers of Bulgarian goods.

Private ownership has become predominant in the economy. The share of employees working in the private sector increased from 46% in 1999 to 73.4% in2003. The private sectors share in gross value added grew from 63.4% in 1997 to73.3% in 2003. Between January 1993 and June 2004, 5,107 privatization deals wereconcluded.

Bulgarias CPI-based real effective exchange rate (REER) has recentlyappreciated more rapidly than the currencies of other CEE countries whose exchangerates are not rigidly pegged to the euro. However, a comparison with the eurozoneindicates that unit labour costs (ULCs) in manufacturing have declined strongly. Also,ULCs in manufacturing decreased, while the manufacturing producer price index (PPI)

increased, suggesting increasing profitability of Bulgarian producers of tradables.While economy-wide productivity growth turned negative in 2003, this partly

reflected government-sponsored employment creation. Productivity declined only in theservices sector, while it has continued to increase in manufacturing, above the rate of realwage growth. However, low wages are also a reflection of Bulgarias apparent lag behindother CEE countries in qualitative productivity indicators, as suggested for example inthe recent Lisbon review of competitiveness.

(iii) Accession to the European Union (EU)

Negotiations on accession to the EU were opened in February 2000 and became amajor factor of Bulgarias economic and trade environment.

Trade with the EU

According to the latest EU data, the share of the European Community inBulgarias foreign trade has stabilized in 2003. Turnover in trade with the EU-15 in 2003was 7.0% up on 2002 and accounted for 52.4% of Bulgarias overall trade. In 2003,exports to the EU-15 were 3.1% up on 2002, accounting for 56.5% (3.61 billion) of Bulgarias total export sales. Its main industrial exports to the EU-15 were textilesand clothing, iron and steel. Bulgarias agricultural exports to the EU-15 werecereals, oil seeds and oleaginous fruit, and meat. In 2003, imports from the EU-15 wereup by 10.5% on 2002, accounting for 49.6% (4.7 billion) of Bulgarias total imports.Its main industrial imports from the EU-15 were textiles and clothing. Its mainagricultural imports from the EU-15 were meat, fats and oils, fruits and nuts.

A new round of trade liberalization for agricultural products between theCommunity and Bulgaria was concluded at technical level in June 2004. The newAgreement incorporates existing CEFTA concessions between Bulgaria and the new


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Member States into the Europe Agreement. However, the Agreement goes further,granting Bulgaria unlimited duty-free access to the EU25 market for non-sensitiveproducts and covering traditional, and in some cases potential, Bulgarian exports of sensitive products, such as live bovines, dairy and cereals, within duty-free tariff quotas. In March 2004, trade negotiations for a double zero agreement in the

sector of processed agricultural products were concluded at technical level betweenBulgaria and Commission representatives. The main objective of the negotiations was toprogressively prepare Bulgaria for accession to the EU. The new trade arrangementsprovide for the immediate or progressive abolition of import duties. In the case of sensitive products, if not excluded, duty- free quotas are provided, covering traditionaltrade. The two parties agreed to implement the new trade arrangements by autonomousmeasures before the end of 2004.

On the basis of a Council Decision of May 1997, modified in September 2002,the Commission was mandated to open formal negotiations with Bulgaria on aPECA (Protocol to the Europe Agreement on Conformity Assessment and

Acceptance of Industrial Products). Such negotiations are still continuing.

As regards the common commercial policy, upon accession Bulgaria will berequired to align its tariffs with those of the EC. Bulgarias applied tariffs in 2004 wereon average of 12% (MFN Most Favoured Nation) on all products. Applied tariffs onagricultural products were 24.9% on average, while tariffs on fishery products andon industrial products remained stable at 11.7% and 8.7% respectively. By comparison,EC tariffs currently stand at 6.3% on all products, 16.2% on agricultural products, 12.4%on fishery products and 3.6% on industrial products.

EU Assistance

Three pre-accession instruments have been financed by the EuropeanCommunity to assist the applicant countries of Central and Eastern Europe with theirpre-accession preparations: the Phare programme; SAPARD , which provides aid foragricultural and rural development; and ISPA , which finances infrastructure projectsin the fields of environment and transport. The support provided by these programmes isfocused on the Accession Partnership priorities, which are intended to help the candidatecountries meet the criteria for membership. For the years 2000-2004, total financialassistance to Bulgaria amounts to around 178 million annually from Phare, 57.6million from SAPARD, and between 93 and 127 million from ISPA.

Status of accession

In its first, 1997 Opinion on Bulgarias application for EU membership, thecommission concluded: Bulgarias progress in the creation of a market economy hasbeen limited by the absence of a commitment to market-oriented economic policies; it would not be able to cope with competitive pressure and market forces within the Unionin the medium term. However, in its 2003 Regular Report the Commission found that:Bulgaria is a functioning market economy. It should be able to cope with


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competitive pressure and market forces within the Union in the near term, provided that it continues implementing its reform programme to remove remainingdifficulties.

2. Role of trade in Bulgarias economy

Trade plays an important role in Bulgarias economy. As a small country with arelatively open trade regime Bulgaria is highly dependent on foreign trade and this isreflected in the high share of imports and exports of goods and services in the GDP (over80% in the recent years). Total external trade increased by 40.1% in the period 1996-2002. Export growth, which averaged 12.5% over 2000-02, was the main contributor togrowth in GDP in 2000 and 2001 and the second largest contributor in 2002 afterdomestic consumption. Annual import growth averaged 12.8% over the same period.

Bulgaria has undergone a rather dramatic re-orientation of its trade. Before the

transition, over half of Bulgaria's foreign trade was with members of the CMEA. In 2003,the EU accounted for 52.4% of Bulgaria's total trade up from 38.5% in 1995. Otherpreferential partners (EFTA, CEFTA, and Turkey) accounted together for some 16.5% of exports and 13.6% of imports in 2002. The Russian Federation accounted for 1.6% of exports and 14.5% of imports. The United States share was 4.7% in exports and 2.2% inimports.

In the pre-transition period Bulgaria was a major exporter of capital goods andprocessed food to the CMEA, it is currently a net importer of these products and isproving competitive in exports of footwear, textiles, and apparel. In general, the evolutionof Bulgaria's trade structure reveals a movement in comparative advantage towards

labour- and resource-intensive manufacturing products.

In 1989, before the transition, Bulgaria's exports were estimated at US$8.3 billion,of which $5.1 billion went to the CMEA and about US$3.2 billion to other countries. Thecollapse of the CMEA led to a drastic fall in the value and volume of exports, such thatby 1992, total exports were estimated at US$3.9 billion. Since the beginning of transitionreforms in 1991, export values have in general fluctuated in accordance with theperformance of the economy. In 1992-94, they averaged around US$3.9 billion; after arise to some US$5 billion in 1995, they fell back to US$4 billion in 1999. Recentestimates show a rising trend: in 2001 exports were estimated at US$5.1 billion and in2002 at US$5.7 billion.

Similarly, the value of total imports has fluctuated considerably since the pre-transition period. In 1989, the total value of imports was about US$9 billion, of whichUS$4.6 billion from the CMEA. By 1992, total imports had fallen to US$ 4.5 billion,mainly due to the drastic fall in real incomes that occurred during the early transitionperiod. Imports rose to US$5.3 billion in 1995; however, as with exports, this trend wascurtailed by the 1996/97 economic crisis and imports fell to about US$ 4.9 billion in1997. Since the resumption of economic growth, imports have resumed their rising trend.


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In 2001 and 2002 total imports were estimated at US$7.3 billion and US$7.9 billionrespectively.

Trade in agriculture

Food and agriculture have historically been major components of Bulgaria'sforeign trade, contributing up to a quarter of total exports. The value of agriculturalexports fell between 1990 and 1997 by two thirds and continued to decline up to 2000. In2001, Bulgarias agricultural and food exports were estimated at US$504 million, anincrease of 3% over 2000 but still only one-quarter of their 1990 value. The mainagricultural export products were cereals; tobacco and processed tobacco substitutes;non-alcoholic and alcoholic beverages (mainly wine) and vinegar; meat and offal forconsumption; oilseeds and fruits, and animal feed.

Trade in manufactures

Export performance of the manufacturing sector has been the major vehicle of tradegrowth and contributes now up to 54% of total export earnings. The main manufacturedexports include clothing, man-made fibres, basic metals, metal products, and, to a lesserextent, machinery and equipment.

Services

Bulgaria has recorded a positive balance on its services account since 1994. In2002, this amounted to US$598 million. Tourism is the main services sector which iscontributing to the positive balance of services trade.


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II. Trade liberalization and its economic impacts

1. Trade liberalization process

Background

Previously, the Bulgarian economy, like other former socialist countries, had beendominated by state ownership and governed by centralized planning. The centralplanning body determined and fixed the quantities and prices of commodities andservices produced. Monetary flows in the economy were merely a consequence of thepreset commodity flows and did not play the role of an adjustment in investment andoutput. A large part of Bulgarias GDP was created and realized in the framework of theCouncil for Mutual Economic Assistance (CMEA). Following its de facto disintegrationin 1989-1990, the countrys export revenues drastically declined and in March 1990 thegovernment declared a unilateral moratorium on external debt service payments. Most of Bulgarias large enterprises were specialized exporters to the CMEA regional market and,mainly, to the market of the former USSR. According to regional standards, theseenterprises were considered to be efficient producers, able to exploit economies of scaleas they also managed to sell part of their products on the world market.

In 1990-1997, there was no political consensus in the country on the economicpolicy priorities at both macro- and micro-level resulting in a stop-and-go transformationtowards a market economy. The result was that in 1990-1997, GDP shrank by 40% inreal terms, while in 1997 consumer prices soared almost 20 times relative to 1990.Inflation averaged 233 percent per year during 1990-97, and turned into hyperinflation inlate 1996-early 1997, at the peak of a major banking and exchange rate crisis. This, inturn, led to the collapse in real incomes and wealth, as well as to growth of poverty levelsThus, Bulgarias transition started and initially proceeded under more difficult and evendramatic circumstances than in most other central and eastern European (CEE) countries,reflecting a legacy of stricter central planning, higher exposure to CMEA trade, and alarger external debt burden. Political factors such as the national consensus on the reformpolicies were also less favourable.

Some positive elements of transition in the first half of 1990s had mainly to dowith some foreign policy and foreign economic developments. In 1990, the country

joined the IMF and concluded its first stand-by agreement that provided some resourcesto start-up of the reform process. At the end of 1993, Bulgaria signed the EuropeAgreement with EU Member States, a preferential trade agreement, which was probablythe most important initial catalyst for trade policy reforms. However, the asymmetricliberalization of trade regimes under this Agreement appeared to be, at least initially,insufficient for expanding Bulgarian exports to the EU. This was mainly caused by thefact that Bulgarias exports, particularly of agricultural products, was in the group of so-called sensitive goods in the EU and thus strongly protected.

The crisis triggered a change not only in government, but also a switch to a newpolicy strategy focused on a currency board arrangement (CBA), tight fiscal and incomes


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policies, comprehensive structural reforms and trade liberalization, particularly at theregional level as described below. This strategy succeeded in restoring macroeconomicstability and growth.

The National Economic Development Plan of the Republic of Bulgaria for 2000-

2006 (NEDP) was the first document drafted after the onset of the transition to a marketeconomy, addressing a number of longer-term issues of Bulgarias socio-economicdevelopment, including further trade liberalization. The plan, which was updated betweenSeptember 2002 and April 2003, also sets a vision of the countrys future development inline with the laid down national priorities, the progress achieved in the negotiations withthe EU and the changes in the economic and external environment since 1999. Alongside,the NEDP is the basis of multi-annual programming of assistance under the EU pre-accession funds. In addition to trade liberalization, the improvement of competitivenessof the national economy is set as a key national priority by the NEDP to attain sustainableand balanced growth and development.

Tariff policy

During the transition process, Bulgaria's overall trade policy objective was gearedto the gradual liberalization of its trade regime. This was pursued at multilateral, regional,and bilateral levels. However, its main trade liberalization efforts have been implementedthrough a network of regional and bilateral agreements (FTAs). Bulgaria acceded to theWTO on 1 December 1996 on rather balanced terms. However, in contrast with FTAs,Bulgaria managed to negotiate ceiling bindings as its tariff concessions, both inagriculture and industrial goods (i.e. WTO bound tariff levels were generally higher thanthe applied levels).

In fact, such dichotomy was foreseen by the trade policy strategy for two reasons.First, regional and bilateral trade liberalization was reciprocal and aimed to re-reorienttrade principally towards the EU, EFTA and CEE countries. Secondly, ceiling bindingson MFN tariffs achieved in the WTO accession were considered as convenient safetynets for the future (in case urgent protection was required), but also to serve twoimportant trade policy objectives: to make transition to the EU tariff levels (as part of theEU accession process) as smooth as possible and also to ensure that Bulgaria has anadequate negotiating basis for the eventual multilateral trade liberalization on a reciprocalbasis with its MFN trading partners (in contrast to the WTO accession negotiations whichare conducted on a strictly unilateral basis market access commitments are undertakenonly by acceding countries).

On accession to the WTO, Bulgaria bound all its MFN tariffs under GATT 1994. SinceBulgarias WTO accession, trade liberalization has been much faster for industrialproducts than for agricultural goods Simple average on agricultural products is 47.6%,while on non-agricultural items simple average is 22.7%. However, Applied MFN tariff rates were reduced to a simple average of less than 12% in 2003 (17.2% in 1996): appliedsimple average MFN rate amounted to 21.7% for agricultural products and 8.6% forindustrial products. Applied duties range from 0% to maxima of 40% in industrial and


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80% in agricultural products. Bulgaria applied ad valorem duties for all the industrialproducts with the exception of one tariff line with a specific rate and for 83.9% of theagricultural products (Tables C and D). Average applied MFN tariff rates are well abovepreferential rates; the average preferential rates for all products range between 2.5% to5.9% depending on the agreement (see below).

Since 1999, zero duty rates have been introduced on an autonomous basis foralmost the whole range of goods covered by the Information Technology Agreement(ITA) and since the formal adoption by Bulgaria of this Agreement on 1 January 2002 -zero duties for all covered products.

Tariff escalation: on the basis of the International Standard IndustrialClassification (ISIC), the tariff structure shows escalation; the first and semi-processedstage of manufacturing attract average rates of 7.8% and 8.8% respectively and fullyprocessed products attract an average tariff of 13.4%. Tariff escalation appears to berelatively marked in the food, beverage and tobacco, textile and leather, wood and

furniture, and chemicals sectors.In comparison, on services, upon WTO accession, Bulgaria made commitments

across all major service sectors and in more than 90 out of 155 sub-sectors.

Table C. Bulgaria: bound and applied tariffs, 2003

Bound Applied

N of tariff lines 10,606 10,606

Unweighted average 28.2 11.6

Minimum 0.0 0.0Maximum 200.0 80.0By stage of processing:

- Stage 1 (raw materials) AverageMinimumMaximum

29.10.0

200.0

9.60.0

80.0- Stage 2 (semi-

manufactures)AverageMinimumMaximum

21.60.0

128.0

8.80.0

50.0- Stage 3 (finished products) Average

MinimumMaximum

31.40.0

200.0

13.40.0

74.0

By HS Chapter:HS 01-24 Average

MinimumMaximum

47.60.0

200.0

21.70.0

80.0HS 25-97 Average

MinimumMaximum

22.70.0

128.0

8.60.0

40.0

Source: WTO Secretariat calculations.


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Bulgaria also provides more favourable market access under the GeneralizedSystem of Preferences to 118 developing and least developed countries. For a large list of goods originating in developing countries Bulgaria applies preferential duties at the rateof 70% of the MFN duty rate and for imported goods originating in LDCs - zero dutyrates.

FTAs

The Europe Agreement establishing an Association between the European Unionand its members States (EAA) and the Republic of Bulgaria was signed in March 1993and entered into force on 1 February 1995. The Interim Agreement on Trade and TradeRelated Matters covering trade components came into force on 31 December 1993. Inaccordance with the trade provisions of the EAA, the imports into the EU of industrialproducts originating in Bulgaria (since 1 January 1998) and the imports into Bulgaria of industrial products originating in the EU (since 1 January 2002) is completely liberalized.The measures having equivalent effect to customs duties and non-tariff restrictionsregarding trade in industrial goods are also completely abolished. However, trade inagriculture is liberalized selectively.

Bulgaria has also a free trade agreement with the member states of EFTA and hasalso acceded to CEFTA as of 1 January 1999. Bilateral free trade agreements have beenconcluded with Turkey, FYR of Macedonia, Israel, Lithuania, Latvia and Estonia. Thelatter three countries are now EU members. In 2001, Bulgaria signed a Memorandum of Understanding on Trade Liberalization and Facilitation between countries in South-Eastern Europe within the framework of the Stability Pact. Hence in accordance with itsobligations, Bulgaria finalized the negotiations on conclusion of free trade agreementswith Serbia and Montenegro, and Bosnia and Herzegovina. The FTA with Albania wassigned on 26 March 2003 and its entry into force is pending. Likewise, in all FTAs, tradein industrial goods is duty-free, while agricultural trade is liberalized partially.

Table D. Structure of MFN tariffs in Bulgaria(Per cent)

1998 2002 2003

1. Bound tariff lines (% of all tariff lines) 100.0 100.0 100.02. Duty-free tariff lines (% of all tariff lines) 5.2 15.0 14.63. Non- ad valorem tariffs (% of all tariff lines) 3.6 3.6 3.74. Tariff quotas (% of all tariff lines) 2.4 2.2 2.15. Non- ad valorem tariffs with no AVEs (% of alltariff lines)

3.6 3.6 3.7

6. Domestic tariff "spikes" (% of all tariff lines) a 0.7 5.1 5.17. International tariff "peaks" (% of all tariff lines) b 39.7 25.3 25.38. Overall standard deviation 11.7 10.9 11.09. "Nuisance" applied rates (% of all tariff lines) c 0.4 0.7 0.7

a Domestic tariff spikes are defined as those exceeding three times the overall simple averageapplied rate.b International tariff peaks are defined as those exceeding 15%.


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c Nuisance rates are those greater than zero, but less than or equal to 2%.Source: WTO Secretariat calculations, based on data provided by the Bulgarian authorities.

Other trade policy measures

Imports

Bulgaria applies a 20% value-added tax on most goods and services, includingimports. Excise duties are levied on a limited number of products for mainly health andenvironmental reasons. Since 1 January 1997, the customs clearance fee of 1% advalorem has been eliminated. On 1 July 1998, the temporary import surcharge introducedfor balance of payments purposes was reduced and on 1 January 1999 it was completelyeliminated, ahead of schedule and in spite of a negative trade balance.

Bulgaria's import licensing regime has been liberalized. It currently does notapply any automatic licences on imports. Remaining non-automatic licences aremaintained in conformity with Bulgaria's commitments under various internationalagreements related to trade in arms, and protection of human, animal, and plant life.Liberalization of other non-tariff measures includes the abolition of the use of automaticlicences, and the reduction of non-automatic licences and import and export prohibitionsto a minimum, in most cases in accordance with Bulgaria's obligations underinternational agreements, for safety and environmental concerns.

Table E. Goods requiring non-automatic licences

Bulgarian Customs Tariff No. Description of products

1 Nuclear materials, radioactive substances and other sources of ionizing

radiation2 2524, ex. 6811,

6812, ex 6813Asbestos, asbestos products and asbestos containing materials andproducts

3 ex. 490700,ex. 4911

Polygraph production for public supply, which can be used assecurities

4 from Chapter 36,ex.290420001

Powder, explosive and pyrotechnical materials and products thereof of civil application, Trinitrotoluene (TNT)

5 ex. 9013ex 930400000

Telescopic sights and laser targets, gas spray

6 ex 9303,ex 930400000, ex 9305, ex9306 and ex 95069990

Smooth-barrel weapons, weapons using only ammunition withperipheral inflammation and pneumatic weapons for hunting andsports purposes and unadjusted to fully automated fire, gas- and signal-

guns and revolvers and ammunition for these.7 Medicaments for human medicine8 from Chapter 28

from Chapter 29ex 3808

Products for plant protection

9 Veterinary-medical products10 Live game and its genetic material11 Wild flora and fauna species included in the Washington Convention


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Bulgarian Customs Tariff No. Description of products

on International Trade in Endangered Species of Wild Fauna and Flora(CITES), including live or dead species as well as parts and productsthereof.

12 Alien flora and fauna species designated for propagation and breeding(except for some parrot species)13 Military and special production and products and technologies of

possible dual (civil and military) use14 Narcotic and psychotropic substances15 Chemical substances under control used for the production of narcotic

and psychotropic substances16 Goods the importation of which is regulated by intergovernmental

agreements and protocols and generates budget expenditure17 Certain types of wastes according to the Basel Convention on

hazardous wastes18 Ozone-depleting substances, according to the obligations of Bulgaria

under the Montreal and Kyoto Protocols, implemented under Councilof Ministers Regulation No 254 of 1999

Source: Bulgarian Ministry of Economy.

During the process of its accession to the WTO, Bulgaria introduced new anti-dumping, countervailing and safeguard legislation, in conformity with WTO disciplines.Bulgaria has not introduced any countervailing measure. It has so far initiated one anti-dumping action, and six safeguard investigations, two of which have resulted in increasedduties.

Bulgaria is gradually harmonizing its national standards with international andregional standards, in particular those of the EU. Some 2% of standards in force aremandatory technical regulations. In 2002, 52% of Bulgaria's standards were harmonizedwith those of the EU and it intends to achieve 80% harmonization by 2004-2005.

Exports

Bulgaria no longer imposes any duties, taxes or other charges on exported goods.At the time of its WTO accession in 1996, Bulgaria applied a range of export taxes forthe purpose of preventing or relieving critical shortages of foodstuffs and other essentialproducts. However, it undertook commitments to minimize the use of such measuresupon accession. In 1998, export taxes on 24 products, including wheat, barley, and maize

were eliminated; export taxes on live cattle, skins, wool, paper waste, metal scrap andmetal products were eliminated in 1999; and the remaining export taxes, on unprocessedwood products, were abolished in January 2000.

Since January 2000, Bulgaria has liberalized its export licensing procedures.Currently, non-automatic export licenses are required in a limited number of cases suchas fulfillment of international treaties and conventions to which Bulgaria is a signatory;protecting public morals; maintaining public order and national security; and


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safeguarding national artistic, historical, and architectural masterpieces. Automaticlicensing (registration) is applied to precious metals and unsown timber exports.

In 2003-2004, quantitative export restrictions remained only on exports of textileand apparel products under quotas in the United States and Canada. Export restraints onBulgarian clothing, under the Agreement on Textiles and Clothing (ATC), covered sixcategories in Canada (coats and jackets; winter outerwear; mens suits, jackets andblazers; ladies jackets/blazers, dresses and skirts; sweaters; and combed wool fabric),and six in the United States (woven wool or man-made-fibre fabric containing more than15% wool, with a sub-limit for fabric containing over 36% wool; mens and boys suit-type coats; womens and girls coats; womens and girls suits with over 23% wool,womens woollen skirts; and womens and girls trousers, breeches, and shorts). Allthese QRs are to disappear completely after the termination of the ATC as from 1 January2005.

Bulgaria does not apply any export subsidies. In line with the Government'sconservative fiscal stance, the amount of state aid offered has declined both in absoluteand relative levels in recent years. As a percentage of GDP, state aid declined from 3.3 in1999 to 0.7% in 2001. Similarly, direct subsidies have declined, from 2.5% of GDP to0.6% in 2002. The mining and transport sectors have benefited the most from state aid;with assistance for the production of coal (29.5%) and provision of transport services(29.0%) accounted for almost 60% of the total in 2001.

2. Economic impact

As a result of reforms, Bulgaria's industries have undergone significant structuraltransformation. Trade liberalization and privatization reforms have led to significantchanges in resource allocation, and consequent effects on the dynamics of tradespecialization. Most significant is the dramatic reduction in exports of machines andequipment, from about half of Bulgaria's exports in 1989 to less than 14% in 2003. Theshare of consumer goods in exports rose from around 10% in 1989 to some 27% in 1995and 36.6% in 2003; this increase is largely being driven by rapid export growth inclothing and footwear, whose value increased five fold from US$313 million (6.3% of exports) in 1995 to US$1.6 billion (21.9% of exports) in 2003. Among other exports,metals accounted for some 16.1% and chemicals for around 3.4%.

With improved economic performance in recent years, Bulgarias trade balancehas fallen from a surplus of US$321 million in 1997 to a deficit of US$2.5billion in 2003.In relation to GDP, its share has moved from +3.1% to 13.1%. Correspondingly, thecurrent account of the balance of payments steadily deteriorated from a surplus of US$1.046 billion in 1997 (10.1% of the GDP) to a deficit of US$1.648 billion in 2003(8.7% of the GDP). Although the savings rate rose up to 14.5% of GDP in 2001, it is stilllow by all standards and has grown into an important factor for the current accountdeficit. Other reasons behind the low saving rate have to do with low incomes and the


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absence of diversified financial instruments for the mobilization of local and foreignsavings. The persistent current account deficit represents a major challenge and alsoreflects the insufficient competitiveness of the Bulgarian economy.

The leading role of trade in spurring growth in the Bulgarian economy is expected

to continue. On the other hand, the rise in the oil prices will have a negative effect to theBulgarian energy intensive economy. Furthermore, potential accession to the EU in 2007is likely to attract further FDI, with expected positive impacts on competitiveness of Bulgarias productive sectors and their ability to access new markets. The trend of higher growth rate of labour productivity compared to average wages will alsocontribute to a more competitive economy.

3. Development impact

Despite recent positive trends, real GDP and consumption were in 2002 stillbelow their pre-transition (1989) levels by 17% and 13% respectively. The level of

inflation has been brought under control from high levels of double digits (11-16%) in1998-2000 to moderate single digits (3-6%) in 2003-2004.

The transition process and more open economy resulted in a high and persistentlevel of unemployment and high share of long-term unemployed. On the other hand, inthe last three years unemployment was decreasing, but still stood at a high rate of 14.3%at the end of 2003. Unemployment among young people, ethnic minorities and otherdisadvantaged groups remains high. Among other challenges are: insufficient level of education and lack of resources to preserve the current high accessibility of highereducation; relatively low standard of living and poverty; and broadening of regionaldisproportions in the development of human resources.

The living standard in Bulgaria remains the lowest in comparison to the other EUnew member or applicant States. Per capita income (purchasing power parity) in Bulgariain 2001 was estimated at 24% and 28% of the EU average per capita income in 2000 andin 2001 respectively 4, or average incomes are ten times lower than EU averages andtwice as low as EU new members or other acceding countries. 5 At the same time,unemployment in Bulgaria is estimated as being twice as high as that of the EU average.The low level of real incomes is a key social problem predetermining the large number of people in need of social protection and assistance, and the relative and absolute povertylevels and, respectively, the share of the population living close to the poverty line inBulgaria. 6

4 See Real Convergence in Candidate Countries Past Performance and Scenarios in the Pre-accessionEconomic Programmes, ECFIN/708/01 EN, November 2001.5 See Millennium Development Goals: Bulgaria 2003, UNDP, Sofia, 2003.6 See Integrated Study of Bulgarian Households, carried out by the World Bank and NSI in 1995, 1997,and 2001.


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Poverty and Inequality Trends 7

1995 1997 2001Measure of poverty

Level 5.5 36.0 12.8Difference 1.7 11.4 4.2Sharpness 0.8 5.3 1.9

Average consumption per capita(June 1997, BGN) 117 208 62 804 99 035

Gini coefficient 27.1 31.4 29.6

Sources: World Bank, 2002

Over the years of transition and reforms, the poverty indicators have deterioratedin terms of average monthly incomes, proportion of the poor (with incomes under 60%of the average monthly income) and poverty threshold (60% of the average monthlyincome). However, income inequality in Bulgaria is lower than in the EU and even lowerthan in most other transition economies, although the Gini coefficient grew slightly overthe last ten years. 8

The current national targets to reduce poverty between 2001 and 2015 include:

(a) raising the average monthly income from euro 91 to euro 280; and (b) raising thepoverty threshold from euro 54.6 to euro 170, while keeping the proportion of peoplewith incomes lower than poverty threshold to no more than 15%; (c) reducing youthunemployment from 35.34% to 25%; and (d) reducing long-term unemployment from9.59% to 7%.

7 Poverty level means the percentage of population under the poverty line, poverty difference denotesthe average distance from the poverty line, and sharpness or depth of poverty is the square of averageconsumption deficit as a percentage of the poverty line and is more sensitive to the inequality among thepoor.8 See Millennium Development Goals: Bulgaria 2003, UNDP, Sofia, 2003.


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III. Policy lessons and implications

1. Conclusions and Policy lessons

Significant macroeconomic and structural reforms implemented in Bulgaria since1997, membership in the WTO (1996) and the process of accession to the EU had allcontributed to the transition process. Major reforms implemented included trade andinvestment liberalization and wide scale privatization. These had contributed to ratherhigh rates of economic growth in the past five years. However, problems of widespreadpoverty and high levels of unemployment remained to be major challenges, althoughthere were recent signs of improvement in social indicators. Another important challengeis the persistent current account and trade deficits, which reflect the relatively low levelof competitiveness.

The process of accession to the EU has contributed to improving the

competitiveness of the economy and its recovery, including increased trade on a regionalbasis. Furthermore, this process, through disbursement of the EU funds (representingannually in 2000-2004 up to 2% of Bulgarian GDP, served as an important safety net fortrade liberalization and structural adjustment of the national economy.

Bulgaria has been pursuing a rather interesting experience in its tradeliberalization strategy, which has been carried out predominantly at the regional andbilateral levels through preferential FTAs on reciprocal basis. As a result, more than 70%of Bulgarian trade is now with FTA partners, including the EU, EFTA and CEFTA. Onthe multilateral level, in the process of accession to the WTO, Bulgaria proceeded in arather cautious manner. Its market access commitments in goods are kept at ceilingbindings levels which are substantially above applied tariff levels. In view of Bulgaria,such terms of accession represented an additional safety net for the conduct of tradeliberalization policies and also were needed for future multilateral trade negotiations asbargaining chips, as well as for a smoother adaptation to the EU bound tariffs, which aresubstantially lower on both industrial and agricultural products. Such strategy would alsoallow to minimize compensation negotiations with other WTO members after Bulgariasaccession to the EU, when Bulgarias tariffs will be replaced by the EU CommonExternal Tariff (CET).

On the national level, Bulgaria is pursuing the strategy of encouraging innovativemanufacturing and improvement of competitiveness of industrial enterprises that willallow them to achieve sustainable growth and cope with competitive pressures on the freeEuropean market.

2. Major country issues in the current Doha negotiations

As a recently acceded member, Bulgaria undertook considerable commitmentsunder all WTO Agreements upon its accession to the WTO in 1996. NeverthelessBulgaria, in line with the EU position, strongly supported the launch of the Doha


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negotiations. The areas of a greater importance for Bulgaria in the Doha negotiations arethe agricultural issues, improvement of market access for agricultural and non-agricultural products, further enhancement of trade in services, and extension of theprotection of geographical indications under the TRIPS Agreement. Bulgaria alsoattaches importance to the reduction of high tariffs for industrial products and elimination

of non-tariff barriers. Basically, as a country in accession to the EU, Bulgaria, being asmall trading partner, is aligning its positions with those of the EU.


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REFERENCES

2002-2004 Regular Reports on Bulgarias progress towards accession , EU Commission,Brussels, 2002-2004.

Bulgaria: 2004 Article IV Consultation and Ex Post Assessment of Longer-TermProgram Engagement Staff Reports; Staff Statement; and Public Information Notice onthe Executive Board Discussion, June 2004, IMF Country Report No. 04/176.

Bulgaria: The Dual Challenge of Transition and Accession, World Bank, 2001.

Economic Survey of Europe, No.1-2, 2004, Economic Commission for Europe, Geneva,2004.

Georgi Pirinski, Bulgarias Experience with WTO Accession and the First Years of Membership in: WTO Accessions and Development policies, UNCTAD/DITC/TNCD/11,New York and Geneva, 2001.

Memorandum of the President of the International Bank For Reconstruction and Development and the International Finance Corporation to the Executive Directors on aCountry Assistance Strategy of the World Bank Group for Bulgaria , Report No. 23927-BUL, World Bank, 2002.

Millennium Development Goals: Bulgaria 2003 , UNDP, Sofia, 2003.

National Economic Development Plan of the Republic of Bulgaria over the 2000-2006 Period (Update, June 2003), Bulgarian Agency for Economic Analysis and ForecastingAgency for Economic Analysis and Forecasting, Sofia, June 2003.

OECD Economic Surveys - 1996-97, Bulgaria , Paris, 1997.

Pre-Accession Economic Programme over the 2003 2006 Period , Bulgarian Agency forEconomic Analysis and Forecasting, Sofia, 2003.

Stefan Stefanov , The competitiveness of the Bulgarian economy , South-East EuropeReview, 3/2001.

WTO Trade Policy Review of Bulgaria , Report by the Government, WT/TPR/G/121,WTO, 15 September 2003.

WTO Trade Policy Review of Bulgaria , Report by the Secretariat, WT/TPR/S/121, WTO,15 September 2003.

WTO Trade Policy Review of Bulgaria , Minutes of Meeting, WT/TPR/M/121 and Add.1,WTO, 20 November 2003.

Documents

Draft Study Bulgaria