2005 Index of Economic Freedom: Bulgaria Sofia_News_Agency - 2005/1/5
A Heritage Foundation Survey
Now that Bulgaria is a member of NATO, the focus of public policy debate has shifted to the country's economic future. Prime Minister Simeon Saxe-Coburg-Gotha's coalition government lost its majority in March 2004 and then survived an immediate challenge by winning a confidence vote. Yet Saxe-Coburg continues to pursue unpopular policies. The Economist Intelligence Unit predicts that if a strong right-of-center alliance fails to emerge, the Bulgarian Socialist Party will return to power, setting back structural reforms. Despite these political distractions, Bulgaria's economic policy continues to reflect commitments to International Monetary Fund guidelines and European Union entry requirements. Fiscal policy has generally remained conservative, keeping spending in check and allowing for cuts in income and corporate profit taxes and capital gains taxes on securities. The government's record on privatization remains mixed; according to the U.S. Department of State, over 50 percent of state-owned assets have been privatized. Bulgaria's ineffective judicial system continues to allow organized crime and corruption to hamper investment. Bulgaria's fiscal burden of government score is 0.6 point worse this year; however, its trade policy and monetary policy scores are 2 points better. As a result, its overall score is 0.24 point better this year.
Based on data from the Ministry of Finance, Bulgaria's weighted average tariff rate in 2002 was 1.5 percent (based on import duties as a percentage of total imports), down from the 10.9 percent for 2001 reported in the 2004 Index. As a result, Bulgaria's trade policy score is 2 points better this year. The main non-tariff barrier is customs regulations, which the U.S. Department of Commerce describes as "cumbersome, arbitrary and inconsistent." The most common problems cited are excessive documentation requirements, slow processing of shipments, and corruption.
Bulgaria's top income tax rate is 29 percent. The top corporate tax rate is 19.5 percent, up from the 15 percent reported in the 2004 Index. In 2002, based on data from the International Monetary Fund, government expenditures as a share of GDP declined 0.9 percentage point to 33.5 percent, compared to a 3.5 percentage point decline in 2001. On net, Bulgaria's fiscal burden of government score is 0.6 point worse this year.
The World Bank reports that the government consumed 18 percent of GDP in 2002. In 2003, based on data from the International Monetary Fund, Bulgaria received 8.81 percent of its total revenues from state-owned enterprises and government ownership of property.
From 1994 to 2003, Bulgaria's weighted average annual rate of inflation was 5.53 percent, down from the 11.33 percent from 1993 to 2002 reported in the 2004 Index. As a result, Bulgaria's monetary policy score is 2 points better this year.
The law mandates equal treatment for foreign investors, guarantees compensation if assets are expropriated, and allows investors to repatriate 100 percent of profits. Non-residents may not purchase or own land, and non-residents inheriting land must dispose of it within three years, but ownership of buildings and the leasing of land are permitted. Bulgaria maintains some restrictions on foreign investment in armament companies, banking and insurance, development and exploration of natural resources, and real estate purchases in certain geographical areas. According to the U.S. Department of Commerce, "The problems most often cited by foreign investors in Bulgaria are: government bureaucracy; poor infrastructure; frequent changes in the legal framework; low domestic purchasing power; a banking system adverse to lending; the protracted privatization process; and corruption." The International Monetary Fund reports that residents may hold foreign exchange accounts subject to some restrictions; non-residents may hold foreign exchange accounts without restriction on transactions less than lev 20,000. Prior registration with the central bank is required for most capital transactions.
Banking and Finance
Bulgaria's banking system has undergone major reform since 1997. With the possibility of bailouts eliminated under the currency board, banks have had to focus instead on sound banking practices. There are 34 commercial banks, six of which are foreign. The U.S. Department of Commerce reports that foreigners account for approximately 73 percent of total banking capital. The government has given up all ownership in the banking sector. The insurance sector has been open to foreign firms since 1997; however, majority foreign ownership joint ventures in Bulgarian banks and insurance companies are subject to government approval.
Wages and Prices
The market determines most wages and prices. According to the U.S. Department of Commerce, "Price supports and subsidies are being stripped away. The 1997 Amendment to the Regulation for Implementing the Law on Prices substantially decreased the number of items subject to limited price control. The products affected are primarily basic necessities." Bulgaria maintains a minimum wage.
Bulgaria's constitution provides for an independent judiciary. However, reports the U.S. Department of Commerce, "ineffective rule of law, especially in the judicial system, limits investor confidence in the ability of the courts to enforce contracts, ownership and shareholders rights, and intellectual property rights. There is also a perception that it is difficult to have judicial decisions enforced." According to Coalition 2000's 2003 Corruption Assessment Report, the judiciary continues to be one of the institutions in which corruption is most pervasive.
The U.S. Department of Commerce reports that "an abundance of licensing and regulatory regimes, their sometimes arbitrary interpretation and enforcement by the bureaucracy, and the incentives thus created for corruption, have long been seen as an impediment to investment." According to the Economist Intelligence Unit, labor laws are still rigid and the government made the registration of labor contracts compulsory in 2003. Corruption in the bureaucracy is a very serious problem. "Although the Bulgarian government has achieved some successes in the fight against organized crime and corruption," reports the U.S. Department of Commerce, "many observers believe that corruption and political influence in business decision-making continue to be significant problems in Bulgaria's investment climate."
Transparency International's 2003 score for Bulgaria is 3.9. Therefore, Bulgaria's informal market score is 3.5 this year.