Cause and Effect in European Politics and Law

Bulgaria Is Not Catching Up With EU Peers on Income Convergence

Adelina Marini, February 23, 2017

In ten years of EU membership Bulgaria has shown no progress in income convergence with the rest of the member states. Bulgaria remains at the same relative position regarding its peers. This is the toughest conclusion in the annual economic in-depth analysis of the European Commission, published on Wednesday (February 22) within the European semester. Furthermore, there is no light seen at the end of the tunnel. According to the report, Bulgaria has low growth potential, which limits the perspective about income convergence. In addition, a rapid growth in income inequality is reported, which is currently “at very high levels”. There are more bad news in the report, making the good news pale in comparison.

What are the good news? 

We are talking about provisionally good news, for they are good in the short term with no lasting effect of improving the nation’s welfare. The econom

y is growing and the gross domestic product has risen by 3.6% in 2015. The expected growth for 2016 is 3.3%. Despite boasting a serious exports growth and expectations for it to continue to grow during this year too, its contribution to the total growth is expected to drop considerably due to the increase in imports, due to an increase of domestic demand. 

More good news is that the fiscal consolidation is advancing faster than expected. Budget deficit is expected to drop to 0.3% of GDP for the year 2016 and continue dropping during this year and next. Structural deficit is expected to remain below 0.5% of GDP during the entire 2016-2018 period. The biggest risk for this forecast is state-owned enterprises’ liabilities. Otherwise, a drop in public debt is expected starting this year. There are short-term good news at the labour market, where the EC acknowledges an improvement in conditions and a drop of unemployment to 7.1% (down from 7.7% last year), which is below the EU average. More good news is that so far the rapid growth in salaries has no adversary effect on competitiveness. 

Bad news are long-term

By (not)implementing the EU country-specific recommendations several governments in a row have laid an entire minefield for the future. The situation is most tragic in the educational system, which the EC finds incapable of providing students with skills, which are adequate to demand. Access to quality education is unequal. The share of children, who are struggling with reading, mathematics, and sciences, according to the PISA standards, is the highest in the EU. Children coming from lower social layers and Roma especially don’t have equal educational possibilities as the rest, including in early childhood. “This has longer-term implications for their social inclusion and employability”, is said in the report. It is acknowledged that a large-scale reform is started with the implementation of the Pre-School and School Education Act. 

There are mines in healthcare as well – limited accessibility, low funding, professionals emigrating and weak health outcomes. Data is shocking – the number of emigrating doctors every year is equal to almost 90% of medical school graduates. The shortage of nurses is considerable. 

There is no progress regarding the fight against informal economy, whose share remains high, and at the same time the administrative burden, linked to taxes, is high. Measures for improving the tax administration are still limited, reports the EC. Corporate sector indebtedness continues to be a problem in Bulgaria. According to the report, high corporate debt could have a negative impact over mid-term growth perspectives. This problem cannot be solved until the necessary insolvency legislation is passed. 

"Despite some improvements, challenges in the business environment continue to weigh on investment. The perception of corruption, weak institutions and an unstable legal framework remains a cause of concern in this regard. The low trust in the judicial system and public institutions hinders private investment", says in the report (you can find more on the subject of corruption here). It also acknowledges that the access to financing for small and mid-size enterprises (SMEs) is inadequate.

Bulgaria is suffering from excessive economic imbalances

The country is in the group of states, which are suffering excessive economic imbalances and are placed under special supervision. It is in the company of France, Croatia, Portugal, Italy, and Cyprus. Implementation of the four country-specific recommendations from last year is low. The first recommendation for Bulgaria has been to achieve annual fiscal adjustment of 0.5% of GDP in order to achieve the mid-term budgetary objective in 2016 and 2017. The EC further recommended improvement in tax collection rates and making efforts to reduce the shadow economy. The EC recognises “certain progress” regarding the improvement of tax collection rates and the lowering of the shadow economy.

The second recommendation was: "By the end of 2016, finalise the asset quality review and stress test of the banks. By the end of 2016, complete the balance-sheet review and stress test of the insurance companies and the review of private pension funds’ assets. Take, as necessary, follow-up actions in all three sectors and continue to improve banking and non-banking supervision". This recommendation is of special importance, as well as the previous one, for addressing macroeconomic imbalances. Implementation, however, is unsatisfactory on all three accounts, with progress on follow-up measures even described as “limited”, which is another name for no progress. The EC continues to report deficiencies regarding supervision in the financial sector, regardless of the steps taken. 

The third recommendation is linked to social measures and the labour market. Bulgaria was expected to integrate the social benefits, different social services, and labour market oriented policies, especially regarding the long-term unemployed and the youngsters who are neither in education, nor in training, nor employed. It was also expected that the quality of education will be improved, especially for vulnerable groups, Roma people especially. On this recommendation implementation is the worst on all points, including the improvement of access to healthcare, establishing criteria for setting the minimum wage, and increasing the coverage and adequacy of the minimum income scheme.

The fourth and last recommendation encompasses the reform of the insolvency framework, the capacity of courts to rule on insolvency procedures, increasing the capacity of the Public Procurement Agency, and implementing the strategy for development of the public procurement sector. Progress here is also very limited and this set of recommendations is also linked to solving the problem of economic imbalances. 

Translated by Stanimir Stoev