Transition Report 2013 Stuck in transition?

Country assessments


Main macroeconomic indicators %
  2009 2010 2011 2012
GDP growth -5.5 0.4 1.8 0.8 0.4
Inflation (end-year) 1.6 4.4 2.0 2.8 0.8
Government balance/GDP -0.9 -4.0 -2.0 -0.5 -1.8
Current account balance/GDP -8.9 -1.5 0.1 -1.3 1.2
Net FDI (in million US$) 9143 3479 1374 1676 1378
External debt/GDP 113.5 102.3 89.1 97.2 n.a.
Gross reserves/GDP 34.2 32.2 30.6 35.1 n.a.
Credit to private sector/GDP 71.7 75.5 74.1 72.0 n.a.

2013 sector transition indicators





Source: EBRD.
Note: Water – Water and wastewater; IAOFS – Insurance and other financial services; PE – Private equity.


  • Macroeconomic stability has been preserved in a difficult economic and political environment. Fiscal deficits are very low by European Union (EU) standards and the public debt is among the lowest in the EU, although pressure to increase spending and reduce regulated prices has increased.
  • Energy sector reforms have reversed. The regulator has reduced electricity prices to even further below cost recovery levels, and public distribution companies are facing significant losses. These developments will have negative consequences for investment in the sector.
  • Financial sector stability remains strong, with favourable capital and liquidity buffers. Strong deposit growth is more than compensating for the reduction in banks’ foreign liabilities, but non-performing loans (NPLs) are still relatively high, at around 17 per cent of total loans.

Key priorities for 2014

  • Fiscal discipline has served Bulgaria well, and this should continue. Recent political developments have increased the demand for greater fiscal loosening, but these pressures should be resisted in order to preserve the country’s hard-won reputation for fiscal soundness.
  • Regulatory independence in the energy sector needs to be strengthened. The regulator’s recent actions have raised doubts about this independence, and have jeopardised prospects for much-needed investment in the sector.
  • Measures to improve the business environment should be intensified. Recent measures to reduce red tape are welcome, but more work is needed to create a favourable investment environment.

Macroeconomic performance

The economy has proven more resilient to external developments than those of Bulgaria’s EU peers. Despite the continued fiscal retrenchment and considerable weakening in external demand due to the eurozone crisis, the economy continued to grow in 2012, albeit at a slower rate compared with 2011, rising by 0.8 per cent, mainly on account of resilient domestic demand. In the first half of 2013 the economy slowed further, despite a continuing good export performance. Household demand has remained sluggish, although public investment has been boosted by an increased pace of absorption of EU structural and cohesion funds. Annual inflation has been declining since October 2012, and became negative in August 2013, reaching minus 1.5 per cent (based on the Harmonised Index of Consumer Prices) in September 2013.

The government has maintained a prudent fiscal policy. Fiscal tightening continued in 2012, with the deficit declining to just 0.8 per cent of GDP on an accrual basis, which was even lower than the target for the year (1.3 per cent on a cash and accrual basis). Bulgaria’s recent history of sound fiscal policy and demonstrated commitment to fiscal consolidation paved the way for the country’s exit from the EU Excessive Deficit Procedure in June 2012, while Bulgaria has one of the lowest levels of public debt relative to GDP in the EU. However, following recent social tension and the subsequent resignation of the government, some loosening of fiscal policy has taken place in 2013. Under the 2013 revised budget, which was first passed by parliament in July 2013, and then again in August 2013, overriding a presidential veto, the deficit will increase to 2 per cent of GDP, which is the maximum allowed under the Public Finances Law.

Weak growth is expected in the short term. The outlook is constrained by developments in the eurozone, given the close trade, financial and investment links. Economic growth this year is expected to be positive, but slightly lower than in 2012 because of weak internal demand. However, Bulgaria’s medium-term growth potential remains good: GDP per capita (adjusted for purchasing power standards) is estimated by Eurostat to be less than half of the EU average, so the scope for convergence is still quite high, provided that structural reforms are pursued.

Major structural reform developments

In its latest assessment of Bulgaria’s national reform programme, the European Commission noted that limited progress had been made on pressing structural challenges. The Commission stressed the need for: (i) labour market reforms to address the high levels of unemployment, particularly among young people; (ii) education reforms to improve quality and adjust to the needs of the labour market; and (iii) healthcare reforms to improve the transparency and quality of public sector expenditures in this area and to better target the most vulnerable segments of society. The Commission also emphasised the need for improved energy and resource efficiency in light of the country’s high dependence on imported energy. It also highlighted the need for further improvements in the business environment, particularly in the areas of tax administration, insolvency procedures and contract enforcement. Judicial reform also remains an important challenge.  

Absorption of EU structural and cohesion funds has accelerated from a low level. The rate of absorption of the funds allocated for Bulgaria under the 2007-13 budget rose from just 26.7 per cent at the beginning of 2013, to 45.4 per cent by the end of August 2013. Weak administrative capacity and lack of experience, especially at the municipal level, had been key obstacles to effective utilisation of these funds, but the introduction of simpler requirements and improved administration have contributed to the improved performance in 2013.

Private distribution companies have been negatively impacted by regulatory changes. Following widespread protests over the perceived high cost of utility bills in the early part of 2013, the Bulgarian energy regulator decided to reduce end-user electricity prices. In March 2013 tariffs were reduced by 7 per cent, followed by a further cut of 5 per cent in August 2013. Electricity tariffs in Bulgaria are not cost-reflective, and were already the lowest in the EU prior to the implementation of these measures. This further reduction in prices has added to the difficulties of the three public distribution companies, which have been adversely affected by changes in the mechanism through which they were compensated for their obligatory purchases of renewable energy. These difficulties are reflected in the EBRD’s downgrading of the power sector’s transition gap assessment.  

Problems persist in the business environment. In the World Bank 2014 Doing Business report, Bulgaria’s overall ranking for ease of doing business dropped one place, from fifty-seventh to fifty-eighth, of 189 countries, although there was a marginal improvement (by 0.25 points) in the distance to frontier measure. The main problems identified in the report continue to be dealing with construction permits and getting electricity. The government has developed a programme for reducing the regulatory burden on businesses and consumers. The first package of 24 measures was adopted in August 2013, and is aimed at cutting red tape, reducing or eliminating fees for certain certificates and speeding up the process for the registration of a new entity in the Trade Register.

Many challenges persist in the railways sector. The sector has been unbundled, but companies continue to operate inefficiently, and are still heavily reliant on state funding. Reforms aimed at effective commercialisation have been quite limited, and the planned privatisation of the incumbent freight operator, BDZ Cargo, was cancelled this year.

The financial system is liquid and well-capitalised, but non-performing loans (NPLs) are high. Over the past five years, banks in Bulgaria have coped well with the economic downturn, without the need for public support or to impose losses on private creditors. The financial system is largely foreign-owned, but the continued reduction in banks’ foreign liabilities has been more than offset by the strong growth in deposits. Consequently, the sector has remained stable and liquid. Credit growth has remained subdued, constrained mainly by weak domestic demand. Although NPLs, at 17 per cent of total loans, remain a key challenge, they are well-provisioned for, and the pace of growth in NPLs has decreased during 2013.