Bulgaria: from stabilisation to growth

Ivan Kostov
Prime Minister

Few analysts are likely to believe that within a year alone, in the transition to market economy and preparation for membership of the European Union (EU) and the North Atlantic Treaty Organisation (NATO), the Bulgarian anti crisis model of transition to market economy would place the country in the group of the 'new excellent performers' in Central and Eastern Europe. The foundation of the country's sustained financial, economic and political stabilisation has been laid. On that basis, the Government will place emphasis on the promotion of economic growth.

The new trend

The intensive domestic public dialogue in the past year set the clear cut national, political and economic development priorities that enable the efficient mobilisation of all public 'assets' in the fulfillment of Bulgaria's strategic task. This is to accelerate adjustment and consolidate the country's presence in global and regional economic, political and social integration processes. The structural reform and the building of a modern market economy based on private property and free competition are the main trend of the Government's economic policy. European and Euro-Atlantic orientation is the clearest publicly accepted national priority in Bulgaria's foreign policy. The success scored and the confidence gained for the Bulgarian reform within the EU, the USA and the leading international banking and financial institutions, give the public and the Government reasons to hope that the intense acceleration of the reform will take Bulgaria to the van of integration processes in Europe on the eve of the 21st century.

EU membership

Bulgaria's EU membership is a key national priority. Citizens of the EU and EFTA countries, as well as leading investor countries, enjoy a visa free regime when they visit Bulgaria.

The Government is doing its utmost to promote relations with countries in Western Europe, the USA and Canada, to attract the interest of the business quarters of those countries investing and trading with Bulgaria. Traditional relations with Russia, the Ukraine, the Commonwealth Institute of States (CIS) countries and the ex-socialist countries will continue to develop along the lines of equality and mutual advantage.


Financial stabilisation was the most acute and pressing problem that the Government has solved. The choice of a stabilisation programme that includes a Currency Board Arrangement was pre-determined by the processes of currency substitution, uncontrollable hyperinflation and complete loss of confidence in financial institutions. Real results of the first six months with a Currency Board showed that the economic system chosen was successful. The Bulgarian Lev was pegged to the DM, the exchange rate being fixed at one DM for 1000 BGL and approximating the free market one. Confidence in Bulgarian banks and their liquidity was quickly restored. The annual interest rate, which was 160 per cent in April 1997, went down to five to six per cent in the autumn.

The new standby agreement with the International Monetary Fund (IMF) was a direct result of the Currency Board introduction in Bulgaria. An agreement on a US$50 million loan from the Export-Import Bank of Japan was finalised. The structural reform progress was further proven by the World Bank's $100 million FESAL to Bulgaria. A long-term frame agreement was reached with the European Investment Bank and thus substantially increased the financial resource to the country. The European Bank for Reconstruction and Development (EBRD) intensified its operation in Bulgaria. The International Finance Corporation started its activity under several large-scale investment projects. In November 1997 the EU provided 250 million European Currency Unit (ECU) to support the Bulgarian reform.

As a result of the successfully performing Currency Board Arrangement and the Government's measures to tighten financial discipline at the end of 1997, the Bulgarian National Bank (BNB) had an official reserve of 4.2 billion DM, the largest ever in past decades. That stable reserve, supplemented with expected external financing, guarantees the country's foreign debt payments this year.

In the context of the acute crisis of the Asian markets and the destabilisation of financial markets in Central and Eastern Europe, the Currency Board Arrangement proved that Bulgaria had made the right choice.

The financial and monetary stabilisation achieved enabled us to pass over to long-term planning and forms of cooperation with the IMF and the World Bank. Bulgaria's 1998 budget projects four per cent GDP growth in 1998 and six per cent GDP growth in 1999. Annual average inflation for the next year is projected at 16.4 per cent. Our Government took a commitment with the IMF to reduce the budget deficit to two per cent of the GDP in 1998, and to achieve zero budget deficit in 1999.

In the short period since it took office, the Government submitted required amendments to existing laws to Parliament. Parliament approved these amendments, while passing new laws to provide the legal framework for the forthcoming growth stage in the development of the economy. The package of business laws encompassing taxation, privatisation, foreign investment and capital markets, plus the administration reform, outlined the new Bulgarian reform.


In 1997, as soon as the Government assumed office, it quickened the pace of privatisation, selling 329 enterprises by 31 December 1997 and making 262 deals to sell unbundled parts of other state-owned enterprises. Companies with a reputation on world markets were privatised, like Sodi-Devnya, Pirdop Copper Smelting Plant, Devnya-Cement. The United Bulgarian Bank was the first bank that was privatised. Another 1502 privatisation deals are planned for 1998 and are expected to generate proceeds of 1.2 billion DM.

The Government's privatisation programme envisages to divest about 73 per cent of the state assets, worth approximately 16 billion DM, by the end of 1999.

Well-known consulting companies and investment banks will be contracted to find strategic investors for large Bulgarian enterprises. The USAID and the EU SARA Program help them. Barents Group is expected to start with a project to privatise three large chemical and pharmaceutical companies. TOB Speedwing has been selected to privatise the Balkan Bulgarian Airlines. Deutsche Morgan Grenfell is the financial consultant for the privatisation of the Bulgarian Telecommunications Company. Arthur Andersen will be the agent in the privatisation of four Bulgarian enterprises, one of which is Neftochim Bourgas, the largest oil refinery in south-east Europe.

The Government has already approved a list of 63 enterprises, placed into groups or pools to be privatised on a sectoral basis. Bulgartabac Holding and the holdings Balkancar and Incoms Telecom are among them. The pools will be sold to big investment banks and the tenders for agents will be announced in January 1998.

The Government is investing a lot of effort in re-structuring and rehabilitation. Subsequently, this means the privatisation of loss-making state-owned enterprises, the plan being to eliminate 30 per cent of public sector enterprise losses. One of the methods by which this may be done includes the winding-up and liquidation of loss-making enterprises that are unlikely to be privatised. By 2001, enterprises that are now generating 90 per cent of the losses in the non-financial state sector of the economy will be wound-up or privatised.

A special fast-track debt equity swap programme is being drawn up as a special form of divestiture. New more liberal regulations on using the Bulgarian Government foreign debt securities to pay in privatisation have been approved. Today, discount bonds (DISCs) may be used to pay up to 50 per cent of the privatisation deal, while front loaded interest reduction bonds (FLIRBs) may pay up to 75 per cent of the privatisation deal. Analysis shows that the Bulgarian Brady bonds price rises faster than in other countries that issue such bonds. JP Morgan data shows that during the past year, the price of the Bulgarian Brady bonds increased by 50 per cent, whereas last November alone the increase was 9.7 per cent.

Stock exchange transacting that started in 1997 and the development of the corporate securities market provide conditions for faster foreign investment inflows and a speedier privatisation process. Assets traded on the Bulgarian Stock Exchange are expected to reach $15-20 million monthly by the end of the year. Packages of shares of the Bulgarian Telecommunications Company, the National Electric Company, Bulgartabac Holding and a number of other large attractive Bulgarian companies will be placed on the stock exchange.

The Government will continue the voucher privatisation. A new voucher issue will be released in 1998 and will give each citizen of age 250,000 BGL. The vouchers will be bearer non-transferable means of payment and may be used without restriction in all privatisation deals, either separately or together with leva and other moneys.

The Government is planning the fast-track privatisation of the banking sector, as the most radical way to overcome the lack of sufficient capital in commercial banks. Bulbank is planned to be sold by October 1998 at the latest. The Post Bank, Hebrosbank and Expressbank are to be privatised even more quickly, by mid-1998.

The Government has accepted the end of 1998 as the target date for final and irreversible agricultural land restitution. This will create pre-conditions for a real land market development in the country and for investment in agriculture, including the attraction of foreign investment. The amendments to the Land Act and the Foreign Investment Act allow Bulgarian legal entities with foreign participation to buy and own agricultural land.

Favourable investment climate

Adequate investment policy is a condition for long-term sustainable growth, modernisation of production and higher international competitiveness. The Government will encourage each investor and promote any investment that injects real money into the Bulgarian economy, creating jobs and leading to economic growth. The decapitalisation of the Bulgarian economy and the need for fresh resource, technology and management know how push the role and position of foreign investment in the Bulgarian reform to the foreground. The recently passed Foreign Investment Act, which provides extremely favourable conditions for free capital investment in the country, transfer of profit and equality with all other local and foreign investors and economic actors in one area or another, is an encouraging step in that direction.

The strengths of the Bulgarian investment market stand out against the background of developments in Central and Eastern Europe:

  • favourable geographic location with a special multiplier effect on infrastructure projects;
  • liberal legislation and absence of restrictions to participate in the privatisation and investment process;
  • special institutional support regime which drastically decreases the administrative costs share in the start-up costs of investment making;
  • natural resources, most of which have yet to be explored and developed ;
  • low production costs;
  • highly skilled and cheap human resources;
  • growth potential of the domestic and external market;
  • high investment returns;
  • dynamically developing investment infrastructure.

The listed advantages are determined by our deepening participation in integration processes in the EU and membership in the World Trade Organisation (WTO). Bulgaria is soon expected to become a full CEFTA member, giving our manufacturers access to a 100 million consumer market. It has reached agreements on the avoidance of double taxation with 29 countries and agreements on the mutual protection of investment with 28 countries. Furthermore, it is taking an active part in the final stage of negotiations on the Multilateral Investment Agreement of the Organisation for Economic Co-operation and Development.

In 1997 Bulgaria made a great stride towards integration into the higher levels of international capital markets, when Merrill Lynch and JP Morgan were mandated to lead manage the Bulgarian Eurobond issue, whose face value will be $200 million. Among other things, we are expecting the support of the two investment banks to improve the country's credit rating, which, at the end of 1997, went up to B2 as a result of the effort of the new Government.

Infrastructure projects

Bulgaria's strategic location gives prominence to advantages that are related to the implementation of large-scale infrastructure projects in the energy sector, telecommunications and transport. The country's investment prospects in relation to the development of the global infrastructure between Caspian oil and gas and the West European and other world energy consumers, and the expected revival of investment and business contacts along the Silk Route, are even more significant.

The Government will aspire to use potentials for investment in the form of concessions. The use of concession legislation for BOT, BOO or BOL projects in conditions of openness and transparency is a pre-requisite for the sustainable and long-term nature of 'incoming' investment interest. This gives us reason to expect that the country will not experience a substantial post-privatisation investment decline, and that there will be a steadier economic growth trend based on the implementation of large-scale infrastructure projects.

The Government's withdrawal from ownership in the economy and the adoption of the common European budget, fiscal and accountancy standards provide opportunities for the Government's participation in large-scale investment schemes in infrastructure of the investment partner and project guarantor type. The key priorities of the four year national investment programme are related to the development of the country's energy, transport and communications infrastructure, as well as its further integration into European infrastructure corridors that go via Bulgaria. These corridors cover reconstruction and construction of oil and gas pipelines, airports, harbours, roads, electric power stations, electrification of railways, opening new cross-border checkpoints, etc. The Government is placing special emphasis on the development of Corridor 8, which connects Europe with Central Asia via the Trans-Caucasus.

Foreign trade and international economic co-operation

Trade and investment are the two keys to the success of the reform in Bulgaria. As a small country with an open type economy, Bulgaria would gain if the world trade system were strengthened and liberalised. The promotion of European and regional integration processes lend particular prominence to the issue of the Bulgarian economy's fast adjustment and ability to take advantage of a larger integration medium - market, capital, resources, in a comparable measure with the other Central and Eastern European countries. A key priority of the Government is to promote trade and economic co-operation with neighbouring countries, in parallel with the promotion of trade relations with our principal trading partners, Germany and Russia. The establishment of free trade zones and the expansion of transborder co-operation with them will help strengthen economic stability in the region.

European integration is Bulgaria's strategic priority in multilateral economic co-operation. With 40 per cent of the total foreign trade, the EU is our principal trading and economic partner. Strict abidance by the European Association Agreement, in the area of trade too, will help achieve full EU membership. WTO membership will ease the access of Bulgarian goods and enhance the prestige of Bulgarian companies on external markets. Bulgaria will start concrete negotiations for membership to the Organisation for Economic Co-operation and Development.


Bulgaria's course is difficult, since the radical economic reforms in the country are seven years behind the other countries in transition. The objective is clearly defined and we have the political will, determination and capacity to follow that difficult course - for we have the support of the people. The Bulgarians want and are able to build the country that they cherish in their dreams.

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