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DFID/UNCTAD Joint Project "Supporting Developing Countries' Assessment of the Non-Agricultural Market Access Negotiations" Geneva, 2004


I. Introduction and overview of the country ________________________________ 3 Introduction _______________________________________________________________ 3 1. 2. Economic and trade environment _______________________________________ 3 Role of trade in Bulgarias economy ________________________________ 10

II. Trade liberalization and its economic impacts ___________________________ 12 1. 2. Trade liberalization process_______________________________________ 12 Economic impact_____________________________________________________ 18

III. Policy lessons and implications _______________________________________ 21 1. 2. Conclusions and Policy lessons ________________________________________ 21 Major country issues in current Doha negotiations____________________ 21

References Annexes: Tables

3 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 which trade liberalization and integration in the multilateral trading system were among top priorities as major elements of the reform strategy. The country is also pursuing its main current strategic goal to accede to the European Union (EU) by 1 January 2007. On this way, Bulgarias accession to the World Trade Organization in December 1996 was an important milestone. Thus, Bulgarias has a rather comprehensive and unique experience that may be of substantial interest to developing and other transition countries. This paper attempts to present, explain and analyze Bulgarias case in the context of the DFID/UNCTAD Joint Project "Supporting Developing Countries' Assessment of the Non-Agricultural Market Access Negotiations". 1. (i) Economic and trade environment Main features of the economy

Population The population of Bulgaria went on contracting in the beginning of the XXIst century. In 20011, some 7 932 984 people resided permanently in the country. The population of Bulgaria had decreased by 544 333 people relative to the previous census carried 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% (1 216 841 people) of the entire population. In contrast, the share of persons aged over 65 reached 17.4% of the population. In absolute terms, working age population contracted to 5 382 804 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 Bulgarian economy kept on growing between 1998 and 2003 by around 4% on average. Real GDP growth in 2003 was evaluated at 4.3%. Against this background, it is worth
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 460 000 people.

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

Trends in selected macroeconomic variables, 19892002

Index 1989=100a 120 110 100 90 80 70 60 50 40 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Real GDP a



Gross Fixed Capital Formation

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

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

In terms of real GDP per capita (in euro, PPS3), Bulgaria with euro 6 500 PPS (US$7,059) is reaching only 27.9% of the average per capita GDP in the EU. At market exchange 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 tradition in social sciences and management. 75.6% of young people aged 20 to 24 have attained at least upper secondary education attainment level. The main challenge in the education sector is to adjust the system to a declining school-age population following the general demographic decline and emigration, among whom many better educated and younger people. A further weakness is that the education system produces graduates with qualifications which do not always match the demand of the labour market. 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.

Purchasing Power Standard.

5 The government pursues a strategy to improve the efficiency of education spending without major increases in public expenditure by gradually decentralizing the management of resources and by increasing the low student-teacher ratio. However, between the school years 1997/98 and 2003/2004 the number of students and educational institutions decreased by 10% and the number of teachers by only 6%, meaning that the student-teacher ratio has dropped further from 12:4 to 11:8. Employment The employment rate of the working-age population fell from 54.5% in 1997 to 49.7% in 2001 but increased again to 52.5% in 2003. The unemployment rate in 2003 is back to its 1997 rate of 13.6%, after climbing to 19.2% in 2001. About two thirds of the unemployed are long-term unemployed. Unemployment rates for men have been slightly higher than for women, and unemployment among younger people is about double the average rate. The unfavourable unemployment dynamics, although improving in 2002-2003, is mostly associated with the restructuring of state-owned enterprises, labour market rigidity preventing laid-off workers from swiftly finding new jobs as well as with the existing environment for the development of the private sector. In 2001, the share of private sector employees reached 73.4% from below 50% in the mid1990s. The number of employed in the manufacturing industries has been constantly following a downward trend since the start of transition. On the other hand, as a result of the large-scale programme for restructuring of loss-making state-owned enterprises and employment optimization in the privatized firms implemented over the 1997-2000 period, the number of service sector employees exhibited a consistent upward trend. Savings and investment The saving rate in Bulgaria amounted to 14.2% of GDP in 2003, remaining below the euro areas average. This shows that Bulgaria is lagging behind in the structural adjustment process and technological and infrastructure innovation, while the gross domestic expenditure on R&D in % of GDP remains at a low level (0.7%). The fixed investment-to-GDP ratio has gradually increased, from 11% in 1997 to nearly 20% in 2003. Net inflows of foreign direct investment (FDI) had an important role in private capital formation and technology transfer, with an average of about 6% of GDP from 1998 to 2003. Sectoral distribution of GDP Over the transition years, the structure of economy has changed at a fast pace in terms of production, but much less so in terms of employment. The agricultural sectors share in gross value added has more than halved, from 26% in 1997 to 11% in 2003, which is due to both the negative developments in the agricultural sector and the positive developments in the non-agricultural sectors. While the share of

6 industry has remained at between 28% and 30% over this period, services have expanded from 44% in 1997 to 59% in 2003. This sectoral shift was much less pronounced in terms of employment, with employment in agriculture increasing from 25% to 28% and in services from 43% to 45%, while there was a decrease in industrial employment from 32% to 28%.
Table A. Bulgaria - Selected Indicators of Economic Structure (2003) Population (average) GDP per head of EU-25 average Gross fixed capital formation Gross foreign debt of the whole economy Exports of goods and services Stock of foreign direct investment Employment rate Long-term unemployment rate Source: Eurostat Million PPS % % of GDP % of GDP % of GDP Million per head % of 25-64 age group % of labour force 7.82 6280 29.4 19.6 49.4 53.2 5583 695 52.5 8.9


Overview of recent economic developments

Following the severe economic crisis in 1996-97, the currency board arrangement (CBA) introduced in July 1997 and economic reforms have been crucial for stabilizing the economy on a continued growth path. The CBA has been underpinned by a conservative fiscal policy and a sharp acceleration of structural reforms that encompassed agriculture, energy, privatization, completing price and trade liberalization, reform of the social sectors and restructuring and financial discipline in the enterprise sector. Since then, substantial progress has been made in the restructuring of the economy. A large number of state-owned enterprises have been sold or liquidated, but several major enterprises still remain to be privatized. The financial sector is now basically completely in private hands and to a large extent foreign-owned. Conditions for business in Bulgaria have improved although substantial efforts are still required to enhance the efficiency of the public administration and judicial systems and the regulatory environment, and in particular to improve the prospects for small and medium-sized enterprises. The reforms implemented since 1997 have been ambitious by any standards, but there are visible signs of reform fatigue in the population. While there is a broad political consensus on the fundamentals of economic policies, such as maintaining the currency board arrangement and preparing for EU accession, there are diverging views between political parties about the affordability of alleviating the social consequences. Opinion polls suggest that many people in Bulgaria fail to see progress in their economic situation.

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 mainly due to the deterioration of the trade in goods deficit, indicative of the insufficient competitiveness of the economy. Although financed by net inflows of foreign direct investment in most years, the current account deficit has become a chronic factor, perhaps, reflecting the inadequate level of competitiveness of the Bulgarian economy. At its 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 only for the financing of the current account deficit but also for investment in up-to-date technologies and modern enterprise management. Over the 1991-2001, FDI in Bulgaria amounted to some USD 4 billion. About 60% of total FDI inflows had come from the EU countries. Germany, Greece, Belgium and Italy are currently the largest foreign investors in Bulgaria. In the 1990s, the bulk of FDI was directed to manufacturing, trade and the financial sector whereas telecommunications, agriculture and infrastructure attracted only a considerably smaller portion of FDI flows. The general government deficit has been below 1% of GDP in all years and was in balance or in surplus in some years. In 2003, the general government sector was running a cash surplus peaking at 2.8% of GDP in October, and a similar trend occurred in the first half of 2004 with a surplus of 2.3% of projected GDP.
Table B. Government Revenue Structure (in % of total revenues and grants) 1998 Tax revenues Income tax Profits tax Indirect taxes (VAT and excises) VAT Customs duties and levies Public social security receipts Other Non-tax revenues Grants Source: Bulgarian Ministry of Finance 1999 2000 2001 2002

79.4 11.5 9.6 28.1 20.6 5.0 22.9 2.3 19.0 1.6

77.3 10.9 7.6 27.0 19.9 2.7 24.5 4.6 20.6 2.1

78.7 9.9 6.5 31.5 21.3 2.0 26.6 2.2 19.5 1.8

77.6 9.0 9.5 30.1 20.7 1.7 25.2 2.2 19.3 3.1

76.6 8.4 7.6 32.0 21.5 1.5 24.6 2.4 21.0 2.4

8 Revenues from customs duties have taken a steady downward trend to account for a decreasing relative share within tax and total budget revenues. A major reason behind the contraction in revenues is caused by the fact that Bulgaria has concluded free trade agreements 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% in 2003. The private sectors share in gross value added grew from 63.4% in 1997 to 73.3% in 2003. Between January 1993 and June 2004, 5,107 privatization deals were concluded. Bulgarias CPI-based real effective exchange rate (REER) has recently appreciated more rapidly than the currencies of other CEE countries whose exchange rates are not rigidly pegged to the euro. However, a comparison with the eurozone indicates 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 the services sector, while it has continued to increase in manufacturing, above the rate of real wage growth. However, low wages are also a reflection of Bulgarias apparent lag behind other CEE countries in qualitative productivity indicators, as suggested for example in the 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 a major factor of Bulgarias economic and trade environment. Trade with the EU According to the latest EU data, the share of the European Community in Bulgarias foreign trade has stabilized in 2003. Turnover in trade with the EU-15 in 2003 was 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 textiles and clothing, iron and steel. Bulgarias agricultural exports to the EU-15 were cereals, oil seeds and oleaginous fruit, and meat. In 2003, imports from the EU-15 were up 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 main agricultural imports from the EU-15 were meat, fats and oils, fruits and nuts. A new round of trade liberalization for agricultural products between the Community and Bulgaria was concluded at technical level in June 2004. The new Agreement incorporates existing CEFTA concessions between Bulgaria and the new

9 Member States into the Europe Agreement. However, the Agreement goes further, granting Bulgaria unlimited duty-free access to the EU25 market for non-sensitive products 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 between Bulgaria and Commission representatives. The main objective of the negotiations was to progressively prepare Bulgaria for accession to the EU. The new trade arrangements provide for the immediate or progressive abolition of import duties. In the case of sensitive products, if not excluded, duty- free quotas are provided, covering traditional trade. The two parties agreed to implement the new trade arrangements by autonomous measures 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 a PECA (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 be required to align its tariffs with those of the EC. Bulgarias applied tariffs in 2004 were on average of 12% (MFN Most Favoured Nation) on all products. Applied tariffs on agricultural products were 24.9% on average, while tariffs on fishery products and on 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 European Community to assist the applicant countries of Central and Eastern Europe with their pre-accession preparations: the Phare programme; SAPARD, which provides aid for agricultural and rural development; and ISPA, which finances infrastructure projects in the fields of environment and transport. The support provided by these programmes is focused on the Accession Partnership priorities, which are intended to help the candidate countries meet the criteria for membership. For the years 2000-2004, total financial assistance to Bulgaria amounts to around 178 million annually from Phare, 57.6 million from SAPARD, and between 93 and 127 million from ISPA. Status of accession In its first, 1997 Opinion on Bulgarias application for EU membership, the commission concluded: Bulgarias progress in the creation of a market economy has been 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 Union in 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

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


Role of trade in Bulgarias economy

Trade plays an important role in Bulgarias economy. As a small country with a relatively open trade regime Bulgaria is highly dependent on foreign trade and this is reflected in the high share of imports and exports of goods and services in the GDP (over 80% in the recent years). Total external trade increased by 40.1% in the period 19962002. Export growth, which averaged 12.5% over 2000-02, was the main contributor to growth in GDP in 2000 and 2001 and the second largest contributor in 2002 after domestic 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. Other preferential 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% in imports. In the pre-transition period Bulgaria was a major exporter of capital goods and processed food to the CMEA, it is currently a net importer of these products and is proving competitive in exports of footwear, textiles, and apparel. In general, the evolution of 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. The collapse of the CMEA led to a drastic fall in the value and volume of exports, such that by 1992, total exports were estimated at US$3.9 billion. Since the beginning of transition reforms in 1991, export values have in general fluctuated in accordance with the performance of the economy. In 1992-94, they averaged around US$3.9 billion; after a rise to some US$5 billion in 1995, they fell back to US$4 billion in 1999. Recent estimates show a rising trend: in 2001 exports were estimated at US$5.1 billion and in 2002 at US$5.7 billion. Similarly, the value of total imports has fluctuated considerably since the pretransition period. In 1989, the total value of imports was about US$9 billion, of which US$4.6 billion from the CMEA. By 1992, total imports had fallen to US$ 4.5 billion, mainly due to the drastic fall in real incomes that occurred during the early transition period. Imports rose to US$5.3 billion in 1995; however, as with exports, this trend was curtailed by the 1996/97 economic crisis and imports fell to about US$ 4.9 billion in 1997. Since the resumption of economic growth, imports have resumed their rising trend.

11 In 2001 and 2002 total imports were estimated at US$7.3 billion and US$7.9 billion respectively. Trade in agriculture Food and agriculture have historically been major components of Bulgaria's foreign trade, contributing up to a quarter of total exports. The value of agricultural exports fell between 1990 and 1997 by two thirds and continued to decline up to 2000. In 2001, Bulgarias agricultural and food exports were estimated at US$504 million, an increase of 3% over 2000 but still only one-quarter of their 1990 value. The main agricultural export products were cereals; tobacco and processed tobacco substitutes; non-alcoholic and alcoholic beverages (mainly wine) and vinegar; meat and offal for consumption; oilseeds and fruits, and animal feed. Trade in manufactures Export performance of the manufacturing sector has been the major vehicle of trade growth and contributes now up to 54% of total export earnings. The main manufactured exports include clothing, man-made fibres, basic metals, metal products, and, to a lesser extent, machinery and equipment. Services Bulgaria has recorded a positive balance on its services account since 1994. In 2002, this amounted to US$598 million. Tourism is the main services sector which is contributing to the positive balance of services trade.

12 II. Trade liberalization and its economic impacts 1. Trade liberalization process

Background Previously, the Bulgarian economy, like other former socialist countries, had been dominated by state ownership and governed by centralized planning. The central planning body determined and fixed the quantities and prices of commodities and services produced. Monetary flows in the economy were merely a consequence of the preset commodity flows and did not play the role of an adjustment in investment and output. A large part of Bulgarias GDP was created and realized in the framework of the Council for Mutual Economic Assistance (CMEA). Following its de facto disintegration in 1989-1990, the countrys export revenues drastically declined and in March 1990 the government 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, these enterprises were considered to be efficient producers, able to exploit economies of scale as 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 economic policy priorities at both macro- and micro-level resulting in a stop-and-go transformation towards a market economy. The result was that in 1990-1997, GDP shrank by 40% in real 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 in late 1996-early 1997, at the peak of a major banking and exchange rate crisis. This, in turn, led to the collapse in real incomes and wealth, as well as to growth of poverty levels Thus, Bulgarias transition started and initially proceeded under more difficult and even dramatic circumstances than in most other central and eastern European (CEE) countries, reflecting a legacy of stricter central planning, higher exposure to CMEA trade, and a larger external debt burden. Political factors such as the national consensus on the reform policies were also less favourable. Some positive elements of transition in the first half of 1990s had mainly to do with some foreign policy and foreign economic developments. In 1990, the country joined the IMF and concluded its first stand-by agreement that provided some resources to start-up of the reform process. At the end of 1993, Bulgaria signed the Europe Agreement with EU Member States, a preferential trade agreement, which was probably the most important initial catalyst for trade policy reforms. However, the asymmetric liberalization 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 the fact that Bulgarias exports, particularly of agricultural products, was in the group of socalled sensitive goods in the EU and thus strongly protected. The crisis triggered a change not only in government, but also a switch to a new policy strategy focused on a currency board arrangement (CBA), tight fiscal and incomes

13 policies, comprehensive structural reforms and trade liberalization, particularly at the regional level as described below. This strategy succeeded in restoring macroeconomic stability and growth. The National Economic Development Plan of the Republic of Bulgaria for 20002006 (NEDP) was the first document drafted after the onset of the transition to a market economy, addressing a number of longer-term issues of Bulgarias socio-economic development, including further trade liberalization. The plan, which was updated between September 2002 and April 2003, also sets a vision of the countrys future development in line with the laid down national priorities, the progress achieved in the negotiations with the 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 preaccession funds. In addition to trade liberalization, the improvement of competitiveness of the national economy is set as a key national priority by the NEDP to attain sustainable and balanced growth and development. Tariff policy During the transition process, Bulgaria's overall trade policy objective was geared to the gradual liberalization of its trade regime. This was pursued at multilateral, regional, and bilateral levels. However, its main trade liberalization efforts have been implemented through a network of regional and bilateral agreements (FTAs). Bulgaria acceded to the WTO on 1 December 1996 on rather balanced terms. However, in contrast with FTAs, Bulgaria managed to negotiate ceiling bindings as its tariff concessions, both in agriculture and industrial goods (i.e. WTO bound tariff levels were generally higher than the 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-reorient trade principally towards the EU, EFTA and CEE countries. Secondly, ceiling bindings on MFN tariffs achieved in the WTO accession were considered as convenient safety nets for the future (in case urgent protection was required), but also to serve two important trade policy objectives: to make transition to the EU tariff levels (as part of the EU accession process) as smooth as possible and also to ensure that Bulgaria has an adequate negotiating basis for the eventual multilateral trade liberalization on a reciprocal basis with its MFN trading partners (in contrast to the WTO accession negotiations which are conducted on a strictly unilateral basis market access commitments are undertaken only by acceding countries). On accession to the WTO, Bulgaria bound all its MFN tariffs under GATT 1994. Since Bulgarias WTO accession, trade liberalization has been much faster for industrial products 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): applied simple average MFN rate amounted to 21.7% for agricultural products and 8.6% for industrial products. Applied duties range from 0% to maxima of 40% in industrial and

14 80% in agricultural products. Bulgaria applied ad valorem duties for all the industrial products with the exception of one tariff line with a specific rate and for 83.9% of the agricultural products (Tables C and D). Average applied MFN tariff rates are well above preferential rates; the average preferential rates for all products range between 2.5% to 5.9% depending on the agreement (see below). Since 1999, zero duty rates have been introduced on an autonomous basis for almost 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 Industrial Classification (ISIC), the tariff structure shows escalation; the first and semi-processed stage of manufacturing attract average rates of 7.8% and 8.8% respectively and fully processed products attract an average tariff of 13.4%. Tariff escalation appears to be relatively 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 N of tariff lines Unweighted average Minimum Maximum By stage of processing: - Stage 1 (raw materials) 10,606 28.2 0.0 200.0 Average Minimum Maximum Average Minimum Maximum Average Minimum Maximum Average Minimum Maximum Average Minimum Maximum 29.1 0.0 200.0 21.6 0.0 128.0 31.4 0.0 200.0 47.6 0.0 200.0 22.7 0.0 128.0 Applied 10,6 06 11.6 0.0 80.0 9.6 0.0 80.0 8.8 0.0 50.0 13.4 0.0 74.0 21.7 0.0 80.0 8.6 0.0 40.0

- Stage 2 (semimanufactures) - Stage 3 (finished products)

By HS Chapter: HS 01-24

HS 25-97

Source: WTO Secretariat calculations.

15 Bulgaria also provides more favourable market access under the Generalized System 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 rate of 70% of the MFN duty rate and for imported goods originating in LDCs - zero duty rates. FTAs The Europe Agreement establishing an Association between the European Union and its members States (EAA) and the Republic of Bulgaria was signed in March 1993 and entered into force on 1 February 1995. The Interim Agreement on Trade and Trade Related Matters covering trade components came into force on 31 December 1993. In accordance with the trade provisions of the EAA, the imports into the EU of industrial products 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 restrictions regarding trade in industrial goods are also completely abolished. However, trade in agriculture is liberalized selectively. Bulgaria has also a free trade agreement with the member states of EFTA and has also acceded to CEFTA as of 1 January 1999. Bilateral free trade agreements have been concluded with Turkey, FYR of Macedonia, Israel, Lithuania, Latvia and Estonia. The latter three countries are now EU members. In 2001, Bulgaria signed a Memorandum of Understanding on Trade Liberalization and Facilitation between countries in SouthEastern Europe within the framework of the Stability Pact. Hence in accordance with its obligations, Bulgaria finalized the negotiations on conclusion of free trade agreements with Serbia and Montenegro, and Bosnia and Herzegovina. The FTA with Albania was signed on 26 March 2003 and its entry into force is pending. Likewise, in all FTAs, trade in industrial goods is duty-free, while agricultural trade is liberalized partially.
Table D. Structure of MFN tariffs in Bulgaria (Per cent) 1998 1. Bound tariff lines (% of all tariff lines) 2. Duty-free tariff lines (% of all tariff lines) 3. Non-ad valorem tariffs (% of all tariff lines) 4. Tariff quotas (% of all tariff lines) 5. Non-ad valorem tariffs with no AVEs (% of all tariff lines) 6. Domestic tariff "spikes" (% of all tariff lines)a 7. International tariff "peaks" (% of all tariff lines)b 8. Overall standard deviation 9. "Nuisance" applied rates (% of all tariff lines)c 100.0 5.2 3.6 2.4 3.6 0.7 39.7 11.7 0.4 2002 100.0 15.0 3.6 2.2 3.6 5.1 25.3 10.9 0.7 2003 100.0 14.6 3.7 2.1 3.7 5.1 25.3 11.0 0.7

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

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, including imports. Excise duties are levied on a limited number of products for mainly health and environmental reasons. Since 1 January 1997, the customs clearance fee of 1% ad valorem has been eliminated. On 1 July 1998, the temporary import surcharge introduced for balance of payments purposes was reduced and on 1 January 1999 it was completely eliminated, ahead of schedule and in spite of a negative trade balance. Bulgaria's import licensing regime has been liberalized. It currently does not apply any automatic licences on imports. Remaining non-automatic licences are maintained in conformity with Bulgaria's commitments under various international agreements 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 automatic licences, and the reduction of non-automatic licences and import and export prohibitions to a minimum, in most cases in accordance with Bulgaria's obligations under international agreements, for safety and environmental concerns.
Table E. Goods requiring non-automatic licences Bulgarian Customs Tariff Description of products No. 1 2 3 4 5 6 2524, ex. 6811, 6812, ex 6813 ex. 490700, ex. 4911 from Chapter 36, ex.290420001 ex. 9013 ex 930400000 ex 9303, ex 930400000, ex 9305, ex 9306 and ex 95069990 Nuclear materials, radioactive substances and other sources of ionizing radiation Asbestos, asbestos products and asbestos containing materials and products Polygraph production for public supply, which can be used as securities Powder, explosive and pyrotechnical materials and products thereof of civil application, Trinitrotoluene (TNT) Telescopic sights and laser targets, gas spray Smooth-barrel weapons, weapons using only ammunition with peripheral inflammation and pneumatic weapons for hunting and sports purposes and unadjusted to fully automated fire, gas- and signalguns and revolvers and ammunition for these. Medicaments for human medicine Products for plant protection

7 8

from Chapter 28 from Chapter 29 ex 3808

9 10 11

Veterinary-medical products Live game and its genetic material Wild flora and fauna species included in the Washington Convention


Bulgarian Customs Tariff Description of products No. on International Trade in Endangered Species of Wild Fauna and Flora (CITES), including live or dead species as well as parts and products thereof. Alien flora and fauna species designated for propagation and breeding (except for some parrot species) Military and special production and products and technologies of possible dual (civil and military) use Narcotic and psychotropic substances Chemical substances under control used for the production of narcotic and psychotropic substances Goods the importation of which is regulated by intergovernmental agreements and protocols and generates budget expenditure Certain types of wastes according to the Basel Convention on hazardous wastes Ozone-depleting substances, according to the obligations of Bulgaria under the Montreal and Kyoto Protocols, implemented under Council of Ministers Regulation No 254 of 1999

12 13 14 15 16 17 18

Source: Bulgarian Ministry of Economy.

During the process of its accession to the WTO, Bulgaria introduced new antidumping, countervailing and safeguard legislation, in conformity with WTO disciplines. Bulgaria has not introduced any countervailing measure. It has so far initiated one antidumping action, and six safeguard investigations, two of which have resulted in increased duties. Bulgaria is gradually harmonizing its national standards with international and regional standards, in particular those of the EU. Some 2% of standards in force are mandatory technical regulations. In 2002, 52% of Bulgaria's standards were harmonized with 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 for the purpose of preventing or relieving critical shortages of foodstuffs and other essential products. However, it undertook commitments to minimize the use of such measures upon 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 and metal products were eliminated in 1999; and the remaining export taxes, on unprocessed wood 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 such as fulfillment of international treaties and conventions to which Bulgaria is a signatory; protecting public morals; maintaining public order and national security; and

18 safeguarding national artistic, historical, and architectural masterpieces. Automatic licensing (registration) is applied to precious metals and unsown timber exports. In 2003-2004, quantitative export restrictions remained only on exports of textile and apparel products under quotas in the United States and Canada. Export restraints on Bulgarian clothing, under the Agreement on Textiles and Clothing (ATC), covered six categories in Canada (coats and jackets; winter outerwear; mens suits, jackets and blazers; 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 than 15% wool, with a sub-limit for fabric containing over 36% wool; mens and boys suittype coats; womens and girls coats; womens and girls suits with over 23% wool, womens woollen skirts; and womens and girls trousers, breeches, and shorts). All these QRs are to disappear completely after the termination of the ATC as from 1 January 2005. Bulgaria does not apply any export subsidies. In line with the Government's conservative fiscal stance, the amount of state aid offered has declined both in absolute and relative levels in recent years. As a percentage of GDP, state aid declined from 3.3 in 1999 to 0.7% in 2001. Similarly, direct subsidies have declined, from 2.5% of GDP to 0.6% 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 structural transformation. Trade liberalization and privatization reforms have led to significant changes in resource allocation, and consequent effects on the dynamics of trade specialization. Most significant is the dramatic reduction in exports of machines and equipment, from about half of Bulgaria's exports in 1989 to less than 14% in 2003. The share of consumer goods in exports rose from around 10% in 1989 to some 27% in 1995 and 36.6% in 2003; this increase is largely being driven by rapid export growth in clothing 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 balance has 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, the current 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 still low by all standards and has grown into an important factor for the current account deficit. Other reasons behind the low saving rate have to do with low incomes and the

19 absence of diversified financial instruments for the mobilization of local and foreign savings. The persistent current account deficit represents a major challenge and also reflects 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 the Bulgarian energy intensive economy. Furthermore, potential accession to the EU in 2007 is 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 also contribute to a more competitive economy. 3. Development impact

Despite recent positive trends, real GDP and consumption were in 2002 still below 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%) in 1998-2000 to moderate single digits (3-6%) in 2003-2004. The transition process and more open economy resulted in a high and persistent level of unemployment and high share of long-term unemployed. On the other hand, in the 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 other disadvantaged groups remains high. Among other challenges are: insufficient level of education and lack of resources to preserve the current high accessibility of higher education; relatively low standard of living and poverty; and broadening of regional disproportions in the development of human resources. The living standard in Bulgaria remains the lowest in comparison to the other EU new member or applicant States. Per capita income (purchasing power parity) in Bulgaria in 2001 was estimated at 24% and 28% of the EU average per capita income in 2000 and in 2001 respectively4, or average incomes are ten times lower than EU averages and twice 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 poverty levels and, respectively, the share of the population living close to the poverty line in Bulgaria.6

See Real Convergence in Candidate Countries Past Performance and Scenarios in the Pre-accession Economic 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.

20 Poverty and Inequality Trends7

Measure of poverty Level Difference Sharpness Average consumption per capita (June 1997, BGN) Gini coefficient Sources: World Bank, 2002

1997 36.0 11.4 5.3 62 804 31.4

2001 12.8 4.2 1.9 99 035 29.6

5.5 1.7 0.8 117 208 27.1

Over the years of transition and reforms, the poverty indicators have deteriorated in 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 monthly income). However, income inequality in Bulgaria is lower than in the EU and even lower than in most other transition economies, although the Gini coefficient grew slightly over the 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 the poverty threshold from euro 54.6 to euro 170, while keeping the proportion of people with incomes lower than poverty threshold to no more than 15%; (c) reducing youth unemployment from 35.34% to 25%; and (d) reducing long-term unemployment from 9.59% to 7%.

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

21 III. Policy lessons and implications


Conclusions and Policy lessons

Significant macroeconomic and structural reforms implemented in Bulgaria since 1997, membership in the WTO (1996) and the process of accession to the EU had all contributed to the transition process. Major reforms implemented included trade and investment liberalization and wide scale privatization. These had contributed to rather high rates of economic growth in the past five years. However, problems of widespread poverty and high levels of unemployment remained to be major challenges, although there were recent signs of improvement in social indicators. Another important challenge is the persistent current account and trade deficits, which reflect the relatively low level of 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 regional basis. Furthermore, this process, through disbursement of the EU funds (representing annually in 2000-2004 up to 2% of Bulgarian GDP, served as an important safety net for trade liberalization and structural adjustment of the national economy. Bulgaria has been pursuing a rather interesting experience in its trade liberalization strategy, which has been carried out predominantly at the regional and bilateral 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. On the multilateral level, in the process of accession to the WTO, Bulgaria proceeded in a rather cautious manner. Its market access commitments in goods are kept at ceiling bindings 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 trade liberalization policies and also were needed for future multilateral trade negotiations as bargaining chips, as well as for a smoother adaptation to the EU bound tariffs, which are substantially lower on both industrial and agricultural products. Such strategy would also allow to minimize compensation negotiations with other WTO members after Bulgarias accession to the EU, when Bulgarias tariffs will be replaced by the EU Common External Tariff (CET). On the national level, Bulgaria is pursuing the strategy of encouraging innovative manufacturing and improvement of competitiveness of industrial enterprises that will allow them to achieve sustainable growth and cope with competitive pressures on the free European market. 2. Major country issues in the current Doha negotiations

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

22 negotiations. The areas of a greater importance for Bulgaria in the Doha negotiations are the agricultural issues, improvement of market access for agricultural and nonagricultural products, further enhancement of trade in services, and extension of the protection of geographical indications under the TRIPS Agreement. Bulgaria also attaches 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 a small trading partner, is aligning its positions with those of the EU.


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-Term Program EngagementStaff Reports; Staff Statement; and Public Information Notice on the 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 a Country Assistance Strategy of the World Bank Group for Bulgaria, Report No. 23927BUL, 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 Forecasting Agency 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 for Economic Analysis and Forecasting, Sofia, 2003. Stefan Stefanov, The competitiveness of the Bulgarian economy, South-East Europe Review, 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.