Bulgaria

The newly elected government takes office at a time of stark economic challenges. The outfall of the global economic crisis threatens to undo many of the achievements... Show More + of the recent past, derail convergence with the European Union (EU), and heighten social vulnerability. The election of a strong government offers a timely opportunity to restore and broaden the economic reform agenda which had been initiated before EU accession and but lost some momentum since 2007. Decisive action could shorten the length and reduce the depth of the crisis by restoring market confidence and improving economic prospects. Restoring the health of the economy and returning to the convergence path requires concerted policy actions to unwind economic imbalances and advance much needed structural reforms. The two-way policy response would aim to: 1) bring about fiscal consolidation and restructure public finances, strengthen financial stability, and mitigate the social impact of the crisis in the short-run; 2) and step up structural reform to address deep seated economic problems which both magnify the impact of the international crisis and hamper longer-term convergence prospects in the medium-run. The World Bank stands ready to support the structural transformation of Bulgaria. The Government is strongly committed to maintaining the currency board with the euro adoption as an exit strategy. Yet, a continued worsening in private and public sector balance sheets could trigger a loss of confidence in the currency board. As international investors take a closer look at the vulnerabilities of emerging economies, there is a large premium on strong domestic policies. While financial markets may have under-priced the risks relative to the fundamentals in Bulgaria and other countries in the region prior to the crisis, this under-pricing has now disappeared. The pendulum is now likely to swing into the opposite direction. Show Less -

This report describes developments in the banking sector. The banking sector has remained stable throughout the ongoing financial crisis, although profitability is declining.... Show More + Indicators suggest that banks are generally sound. It next describes the state of funding of bank operations, including wholesale bank funding. In response to financial stress, The Bulgarian National Bank's (BNB) actions have helped to ensure financial stability in the banking sector. In order to boost confidence, deposit insurance has increased. External funding dynamics are generally good. Foreign currency mismatches are substantial, and the corporate sector has high direct foreign currency exposure, mostly in euros. Short-term external debt (deposits and borrowings) of banks almost doubled within a year in 2008, and account for close to 80 percent of banks' external debt. Regarding recent trends in credit to the enterprise sector, going forward, demand for banking credit, and especially investment finance, will fall, in line with the economic downturn. In equity market developments, Bulgaria's stock market plunged, with adverse consequences for pension funds. Global deleveraging by foreign institutional investors led to a withdrawal of their holdings from the Sofia stock exchange, leading to a collapse of stock market prices. The report concludes with several policy recommendations. Show Less -

Municipalities play a large role in the Bulgarian public sector. They provide primary and secondary education. They own and operate about one-third of the hospitals... Show More + in the country. Until 2003, they administered all the major social assistance programs (except pensions and unemployment insurance). The municipalities of larger cities own (wholly or partially) the water companies operating within their territories. Throughout the 1990's and into the first years of the present decade, problems in the structure of intergovernmental relations undermined efforts to achieve efficiency in public service provision and generate savings for investment in public utilities. Persistent deficits and bailouts undermined fiscal stability at both the central and local levels. A fundamental reform in intergovernmental fiscal relations went into effect in 2003. This has addressed many, although not all, of these problems. This report evaluates the reform, identifies major remaining issues, and recommends means to resolve them. The report is structured as follows: After the Introduction, which discusses existing government boundaries, functions, regulation, and revenues, Section 1 parses the issues regarding unfounded mandates, arrears, and fiscal autonomy; incentives to overstaffing; arbitrary disparities in per capita revenues; and infrastructure decline. Section 2 analyzes the 2003 Reform. Section 3 examines what remains to be done immediately and in the long-term. Show Less -