Cause and Effect in European Politics and Law

Bulgaria's Development Will Depend Mainly on Public Investments

Adelina Marini, November 9, 2012

Bulgaria registers weak growth for an emerging economy in the EU. This trend will continue, judging from the economic forecast of the European Commission. This year the gross domestic product growth decelerated below 1% on an annual basis in the first two quarters of the year, compared to 1.7% in 2011. The expectations are growth of the GDP in 2012 to be 0.8%, 1.4% in 2013 and 2 per cent in 2014. This is near to the expectations of the International Monetary Fund, which in the beginning of October announced its forecast growth in 2013 to be 1.5%. Given the spring expectations of the Commission, these data are disappointing. In February, when the Commission presented its interim forecast, it was expected the Bulgarian economy to grow by 1.4% in 2012. Then the Commission noted that the main driver of growth in 2012 would be domestic demand. It was expected also the investments to be mainly driven by public projects because of weak activity of the private sector, overwhelmed by debt. In terms of growth, these expectations did not come true, but regarding its drivers the predictions were precise.

According to the Commission autumn forecast, presented on November 7th, the initial phase of economic recovery in 2010-211, characterised by strong exports but weak domestic demand, has turned upside down and in the first half of the year the domestic demand was the main driver of growth, while the net exports are already negative. For three years, the investment activity was dramatically contracted, but in the first semester of 2012 it is showing signs of some recovery, although this is mainly due to public projects and some recovery of foreign direct investments, mainly in the energy sector, is said in the outlook. The Commission expects this trend to continue - the net exports to continue to drag growth down, which is expected to improve in 2014.

The forecast for Bulgaria and especially the conclusion that public investments will be the main driver of growth, are entirely in support of the thesis of the "Friends of Cohesion" group that without the EU structural funds, the catching-up countries in the EU are exposed to great risks because of the weak foreign direct investments. In the spring, the Commission noted that after an exceptionally slow start in absorption of the European structural funds in the previous years, a significant rise of absorption is planned in 2012. In the beginning of the autumn, the government of Bulgaria presented for the first time an econometric model to measure the real economic impact from EU funds. According to SIBILA, 65% of the economic growth in 2011 was due to the EU funds.

Bad news for unemployment

In its outlook, the Commission points out that the level of employment declined by 4.2% in 2011, although the real gross domestic product turned positive the same year. An additional decline of 2% is expected in 2012, a stabilisation in 2013 and a return to slight growth in 2014. But according to the Commission analysis, declining employment is impacted by the strong reduction of the working force due to negative demographic trends. Unemployment is expected to increase from 11.3% in 2011 to 12.7% in 2012 and to remain almost unchanged until 2014. It is possible a continued weakness of the labour market to lead to an increase of the long-term unemployment, accompanied by structural skills mismatches.

Unemployment is a huge problem for the entire EU, as growth of unemployed is registered in 17 EU member states, including Bulgaria. The country is among those where youth unemployment has a significant share of 29.4 per cent.

The fiscal position

The government's pride - fiscal discipline - is reflected accordingly in the Commission forecast. There it is written that the general government deficit is expected to contract from 2% of GDP in 2011 to 1.5% in 2012. It is noted that in the first six months of the year, there was a very strong revenue collection, mainly VAT because of the strong domestic demand and imports. As a positive effect for the good revenue collection, the forecast points the decision of the government to link all retailers'
cash registers online to the National Revenue Agency as of April 2012. It is also noted that such measures are envisaged to increase tax compliance in terms of excise and import taxes.

The fiscal deficit is expected to remain 1.5% in 2013 as well, and to reach 1 per cent of GDP in 2014. In spite of the good news for revenue collection, however, the forecast foresees a significant increase of spending in 2013. The forecast has taken into account the measures included in the draft budget for 2013. Public debt is expected to grow from 16.5% of GDP in 2011 to 18.5% in 2014. In the draft budget it is pointed out that this growth of the debt is still "much below the 60% of GDP" - the ceiling set in the Stability and Growth Pact of the EU. The largest contribution to the increased spending will have the planned increase of pensions by 9.3% as of 1st of April 2013, the forecast says.

The Ministry of Finance hails the Commission expectations as good and points out that the Commission corrected "upward its expectations for the growth in Bulgaria in 2012 - from 0.5% in the spring to 0.8% now". According to a press release [in Bulgarian language] on the Ministry's website, these numbers are much lower than the forecast of the Ministry itself for growth in the two years covered by the outlook - 2012-2014. The reason, according to the Ministry, is the Commission's expectations for stable domestic economy and relatively strong public finances. The press release also says that the measure to link retailers' cash registers is described as "excellent" by the Commission, which is not the case. In the forecast it is written that the government took "an important step forward in improving tax compliance".

The Ministry has also chosen another focus in terms of investments, saying that in its forecast the Commission noted stabilisation of investments, "thanks to private projects and some recovery of foreign direct investments, especially in the energy sector". It is not mentioned that most of the investments are public.