India - Bulgaria Economic and Commercial Relations

Bulgaria - Overview of the Economy

Background

Bulgaria switched over from a state controlled economy adopting the path towards a free market economy only in 1989 (after the fall of Todor Zhivkov). In 1991, Bulgaria chose the road to rapid and radical economic reforms and signed an agreement with the International Monetary Fund with the major objective of curbing inflation, arresting economic decline, achieving stability of the national currency as well as the macroeconomic indicators. However most of the reforms announced by the then Government were only paper reforms.

After registering growth of 2.5 per cent in 1995, the GDP dropped again in 1996. The main reasons for the decline were blockages of structural reforms, slow down of the privatization process and the loss of international market position for Bulgarian companies. The Government supported loss-making public sector enterprises and caused severe macro-economic imbalances. Following the collapse of the Bulgarian economy in 1996 widespread public demonstrations led to the fall of the Socialist Prime Minister Jean Videnov in late December 1996 and the Bulgarian Socialist Party (BSP) Government itself stood down in February 1997. The United Democratic Forces (UtdDF) which came into power in 1997 with a strong majority. During its regime till July 2001 it was able to bring macroeconomic stability; GDP which was -10% in 1996 grew at 5.8% in 2000 and inflation which had touched 331% mark in 1996 was 11.4% in 2000 and 5% in 2003. Similarly, foreign exchange reserve position also improved dramatically from US $ 790 million in 1996 to US $ 3.460 billion in 2000 and in 2001 it touched US $ 4 billion, whereas in 2003 it was US$ 10 billion. The UDF Government was also able to implement economic programme negotiated with the IMF and stabilized the local currency with the efforts of the Currency Board. The present Government led by the National Movement Simeon II (NMS II) coalition, which came into power in July 2001, in its economic programme, entitled "People are the Wealth of Bulgaria" outlined the priorities for 2002-2005 in October 2001. It promised economic growth of 5 to 7 per cent, low to zero budget deficit, creation of 150,000 jobs and attracting foreign investments (annually $ 1 to 1.2 billion).

Economy

It has been observed that two rather conflicting sets of signals characterize the economic situation in Bulgaria. A positive one comes from the international financial institutions and the exchanges at bilateral level. A negative one is emerging from the lack of progress of the economic reforms at home. In September 1998, the IMF approved a three-year Extended Fund Facility credit for Bulgaria of $864 million and disbursed it in 12 tranches till August 2001. The IMF in February 2002 has approved a loan of US$ 299 million for Bulgaria for a period of two years. In May 2002 the World Bank announced that the Bank would be extending credits totaling US$ 750 million over the next three-year period (2002-2004) under a lending programme for Bulgaria. The private sector now accounts for 75 to 80 per cent of the GDP; in 1998 the economy grew by 4.5 per cent but due to the Kosovo crisis, Bulgaria suffered heavy economic losses in 1999 because of disruption of trade routes to Central and Western Europe, which are its main export destinations. Despite such losses, Bulgaria registered 2.4 per cent growth in GDP and unemployment rate was 15.97 per cent during 1999. However, during 2000 because of economic reforms and financial assistance from EBRD, the World Bank, IMF etc., the GDP grew by 4.5 %. During 2001 Bulgaria's GDP grew by 4 per cent to US$13.557 billion or US$ 1705 per capita, inflation rate came down to 5 per cent (as compared to 11.4 per cent in 2000), but unemployment rate remained almost static, i.e. 17% to 18%. According to preliminary figures released by the Bulgarian Government, during 2002, GDP was 4.5%, inflation 5.8 per cent and unemployment rate was 16 to 17 percent.

During the course of 2003, Bulgarian PM Simeon Saxe-Coburg-Gotha has continued much of the economic reform program of his immediate predecessors. The result has been an economy growing by about 5 percent annually. However, economic growth in itself gives no information about the quality of the economy. The standard of living of the people has not improved substantially. Since Saxe-Coburg became PM, prices for electricity have jumped 49% while monthly salaries have risen by only 17% since 2001, and the salaries are still low at only 143 euro per month. Rate of unemployment has come down, though only marginally from 17.8 % in 2002 to 14.25%. Problems of corruption, particularly in the judicial system have persisted along with an increased crime rate. There has been inadequate development of social sectors like health and education.

The government has failed in curbing the negative macroeconomic trend of capital flowing out of the country. With the foreign debt payments standing at USD 1.2 billion, lack of investments and insignificant privatization proceeds (the total financial effect of the deals closed between July 24, 2001 - when the current government took office - and August 31, 2003 was only US $ 718 million) these parameters about Bulgarian economy indicate that not all is well on the economic front. Almost 44% of the Bulgarian exports is raw materials, such as metals, timber wool and leather, while in the developed European and Asiatic countries this figure does not exceed 10%. The Credit resource extended to the industrial sector comprises only 19% of GDP. In the EU this same indicator exceeds 150%, in the Asiatic tigers it stands at 200%.

The growth of GDP is among the highest in Europe - almost 5%. Inflation has remained low - 3% - and macroeconomic stability has continued. In fact, the same three components were to be found under the previous government - the effect of the currency board. The difference is in the unemployment rate - it rose under Ivan Kostov's governance due to the closure of enterprises, whereas under the present government, it dropped by 7%. This decline, however, was to a large extent achieved by skillful use of the effect of the 'From social assistance towards employment' programme. Under this programme, unemployment benefits are not paid directly. 'From social assistance towards employment' is a social and not an economic programme. It cannot, nor is it intended to, revive the economy to such an extent that it will have a sustainable impact on the labour force market.

Foreign Investment

Bulgaria itself is a capital starved country and is trying to attract foreign investments. Bulgaria already burdened with heavy debt service (with external debt of over US $ 8 billion), is critically dependent on the IMF, the World Bank and the EBRD for financial assistance to support its Balance of Payment (BoP) position. With a view to attracting foreign investment, the Bulgarian Government in April 1995 established a Foreign Investment Agency as a one-stop shop for foreign investors, principally to coordinate activities of State institutions in the field of foreign investments and for promotion of foreign investments in the country and also to assist the companies in getting legal advice, searching for suitable Bulgarian partners, etc. Bulgaria is a signatory to bilateral treaties on promotion and mutual protection of foreign investment with many countries, including India, and as per the local law foreign investors are entitled to perform economic activity in the country under the same provisions applicable to Bulgarian investors. According to the Central Bank data, Foreign Direct Investment (FDI) in Bulgaria in the year 2003 amounted to US $ 1.273 billion as against US $ 873.7 million in 2002. The growth was 65 % in 2003 as compared to 2002. This comprised of investment in the Privatization which was US $ 363.9 million in 2003 as against US $ 142.2 million in 2002. In the other sectors including Capital Market, the investment in the year 2003 was US $ 908.7 million as against US $ 731.5 million in 2002. Hungary was the largest investor in 2003 with US $ 366.5 million followed by Greece with US$ 206.2 million and Switzerland with US$ 193.4 million. Overall Greece has been the largest investor since 1992 with US $ 1 billion followed by Germany by US $ 676.6 million. Italy comes third with US $ 607 million.

Privatization Process

Privatization process which started in Bulgaria in 1993 with establishment of Privatisation Agency (PA) completed 78 per cent of the State assets during 1993-2002 in banking, insurance, energy, telecommunications, tourism and industry sectors. The objective of the Privatisation programme of the new Government in the year 2003 is to complete the privatisation in industry, construction, transport, agriculture and services sectors and to speed up the privatization of the energy, water supply and sewerage systems as suggested by the IMF and the World Bank. By 2005, the process of privatization would be complete. Energy sector Is one of the sectors in which privatization is yet to take place. Investment in the Privatization was US $ 363.9 million in 2003 as against US $ 142.2 million in 2002.

Trade

Bulgaria liberalized its domestic trade in 1998 with the result that now only eight commodities such as electricity, heating power, telephone service, postal services, tobacco products, coal, briquettes and natural gas have government-regulated prices. The year 1998 also saw changes in Bulgaria's foreign trade regulations that brought liberalization in line with the country's World Trade Organization membership, agreements with the European Union and the Central European Free Trade Agreements and commitments to the International Monetary Fund and the World Bank. The number of goods subject to export tax has been reduced and the tax itself has been cut by 40 per cent. At present there are no quantity restrictions on export of Bulgarian goods. The license regime for import and/or export is applied only to a very restricted number of goods, in compliance with the WTO regulations.

Bulgaria joined WTO in December 1996. Since 1995 Bulgaria is an Associated Member of the EU and is aspiring to join the Union by 2007 or so. Under the European Agreement for associating Bulgaria to the EU, since the beginning of 1998 all Bulgarian industrial products are exported to the EU countries with no import duties and without quantity restrictions. The trade of agricultural goods between Bulgaria and the EU is carried out on the basis of mutual concessions within the tariff quotas at lowered prices.

Bulgaria joined the Central European Free Trade Agreement (CEFTA) (Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia, Slovenia) and the European Free Trade Association (EFTA)(Iceland, Liechtenstein, Norway and Switzerland) in 1998; signed free trade agreement with Turkey in June 1998 and has initiated discussions on such agreements with Baltic States, namely, Lithuania, Latvia and Estonia.

Main items in Bulgaria's global exports consist mainly of ferrous metals and articles made of cast iron, iron and steel, copper and articles made of copper and other non-ferrous metals. Another major group of exports consist of different kinds of machines, devices and mechanisms, electrical appliances, recording devices, chemical products, mineral fuels and lubricants, knitted goods, fertilizers, pharmaceuticals, tobacco and wine products. The main competitive advantages of Bulgaria consist of certain branches of industry with natural resources, cheap labour force and good transport conditions.

Bulgaria's global trade during 2002 amounted to US $ 13.6 billion which included exports of US$ 5.7 billion and imports of US $ 7.28 billion, with trade deficit of US$ 1.58 billion. Main factors for the large trade gap were external: political instability and strife which has engulfed the Balkan region, i.e. crises in Kosovo and Macedonia, as well as the dollar exchange rate, international petrol prices, customs policies and global economic trends as also the crisis in domestic production. During 2003, Bulgaria's global trade was US $ 16.49 billion, which includes exports of US $ 6.82 billion and imports of US$ 9.67 billion, with a trade deficit of US$ 2.85 billion. The main countries to which Bulgaria exported were Italy with US $ 9.7 million which was 14.24 % of the Bulgaria's total exports. The next important country was Germany with US$ 7.3 million, it was 10.85 % of the Bulgarian total exports. Among the countries from which Bulgaria imported, principal was Germany with US$ 1.3 billion, 14.18% of the total imports, next important country was Russia with US $ 1.2 billion, comprising 12.96 % of the total imports.

Due to Bulgaria's orientation towards EU and Western countries, European Union member states are Bulgaria's principal trading partners, accounting for 58 to 71% of the total trade with EU (Germany, Italy, Spain, Greece etc), 20% with the Balkans, 15% with Russia, Ukraine and ex-Soviet republics. Its share of global trade with Asia is less than 4 per cent. For example, during 2002 out of total trade of US$ 13.6 billion, its trade with a group of 31 countries in Asia was only US $ 553.00 million. (India ranked seventh with US $ 22 million after Indonesia (106 million), China (96 million), Japan (89 million) , Israel (50 million), Taiwan (38 million) and South Korea (36 million). For example, during 2003 out of total trade of US$ 16.49 billion, its trade with a group of 31 countries in Asia was only US $ 553.00 million. (India ranked seventh with US $ 27.7 million after Indonesia (106 million), China (96 million), Japan (89 million), Israel (50 million), Taiwan (38 million) and South Korea (36 million).

Bulgaria's export list was topped by clothes, chemicals, ferrous and non-ferrous metals, agricultural commodities, and food items. The main import items were raw materials for the chemical industry, ready chemicals, machines and household appliances, cars, textiles, knitwear and food products.

The strong point of Bulgaria's economy has been its agriculture industry including horticulture. Major crops are corn, barely, maize, wheat, rice, tobacco, sunflower, sugar-beet, tomato, apples and grapes. The main industries are machine building, chemical industry and fertilizers, food processing, electronic items, equipment for mining industry and iron and steel. Mineral deposits though not of high quality are lignite lead, zinc, iron and manganese; non-metal deposits being mined include kolin, quartz, sand, marble, chromium and tin.

Bilateral Trade Relations India and Bulgaria

The first Trade and Rupee payment agreement between India and Bulgaria was signed in 1956. The two-way trade was switched from Rupee Trade to Freely Convertible Currency trade in January 1979 resulting in significant downfall in our bilateral trade with Bulgaria.

The trade statistics are compiled by the Bulgarian authorities on quarterly and annual basis. The following table shows Bulgaria's trade with India during the last few years:

In 1999 Bulgaria registered a favourable balance of trade of US$18.812 as our imports from Bulgaria increased by 551% (from $4.663 million in 1998 to $30.374 million) mainly because of import of wheat worth around $24 million. The decrease in our exports to Bulgaria is attributed mainly to considerable downfall in our exports of Tobacco, i.e., from US $9.719 million in 1998 to US $2.723 million during 1999 due to import duty levied by Bulgarian authorities.

According to trade statistics released by the Bulgarian Ministry of Economy, bilateral trade between Bulgaria and India amounted to US $ 30.067 million during 2001, which included India's exports of US $ 19.063 million and imports of US$ 11.003 million with trade balance of US $ 8.06 million in India's favour. During 2002, bilateral trade between India and Bulgaria was US$ 22.778 million (India's exports to Bulgaria amounted to US$ 16.162 million and India's imports stood at US$ 6.616 million) with US$ 9.546 million in India's favour. Due to Bulgaria's orientation towards EU and Western countries, during 2002 EU-member states (Germany, Italy, Spain, Greece etc. ) were Bulgaria's principal trading partners, accounting for 58 to 71% of the total trade; 20% with the Balkans, 15% with Russia, Ukraine and ex-Soviet Republics. During 2002, Bulgaria's trade with Asia was less than 4 per cent. Out of total trade of US$ 13.6 billion, its trade with a group of 31 countries in Asia was US $ 553 million as compared to US $ 510 million in 2001. India ranked seventh with US $22 million after Indonesia (106 million), China (96 million), Japan (89 million) , Israel (50 million), Taiwan (38 million) and South Korea (36 million). Efforts are being made on consistent basis to widen the basket especially by introducing non-traditional items. Main items of exports from India to Bulgaria include tobacco, pharmaceuticals, medical and surgical equipment, leather garments, transport equipment, cotton yarn, textiles, etc., whereas main items of our imports from Bulgaria include inorganic chemicals, non-ferrous metals, aluminium, synthetic fibers and cables etc. According to trade statistics released by the Bulgarian Ministry of Economy, bilateral trade between Bulgaria and India amounted to US $ 27.7 million during 2003, which included India's exports of US $ 20.2 million and imports of US$ 7.7 million with trade balance of US $ 12.5 million in India's favour.

Bilateral Economic Relations between India and Bulgaria

Apart from trade, Bulgaria has shown interest in investments from Indian companies in some of its enterprises, setting up of joint ventures, participation in the privatization process. Due to strenuous efforts made by the Embassy some of the Indian companies such as Ispat Group of Industries, Indo-Gulf Fertilizers & Chemicals Corporation Ltd., BPL, RITES, CIMMCO Birla, BHEL etc. had shown interest in privatization programme, investment and participation in the global tenders floated by some of the Bulgarian state-owned enterprises. But there has not been any worthwhile economic linkage between any Indian and Bulgarian enterprise. Most of the projects in Bulgaria are funded by the World Bank and EBRD and it has been noted while awarding contract, preference is given to European or American companies and thus our companies' efforts have been thwarted by this "one-sided policy" adopted by the financial institutions extending project credits to Bulgaria. Also the focus of the powers that be in Bulgaria are totally Western oriented.

Bilateral Institutional Arrangements between India and Bulgaria

In order to enhance trade and economic cooperation between both the countries, bilateral institutional arrangements like Joint Business Council and Joint Commission on Economic, Scientific and Technical Cooperation and Working Group on Electronics and Information Technology have been set up at non-Government and Government level and have been meeting regularly.

Joint Business Council(JBC)

The Indo-Bulgarian Joint Business Council was set up in 1976 at non-Government level between the Federation of Indian Chambers of Commerce and Industry(FICCI) and the Bulgarian Chamber of Commerce and Industry. Ten meetings of the JBC have so far been held alternately in India and Bulgaria and the last such meeting was held in New Delhi in October 1998 which coincided with the visit of the Bulgarian President to India. Next meeting of the JBC is scheduled to be held in Sofiain 2004-5.

Joint Commission on Economic, Scientific and Technical Cooperation(JCM)

The Indo-Bulgarian Joint Commission on Economic, Scientific and Technical Cooperation has been set up at Government level. The Ministry of Agriculture is the nodal Ministry for coordinating activities of the Joint Commission, meetings of which are held every two years alternately in India and Bulgaria at Ministerial level. Fourteen such meetings have already taken place and the last meeting was held in Sofia in July 2002 and the next 15th meeting of the JCM is scheduled to be held in New Delhi in 2004.

Bilateral Agreements between India and Bulgaria

India and Bulgaria have concluded the following bilateral agreements
for smoothly conducting various aspects of diplomatic and economic activities:

(1) Agreement on Trade and Economic Cooperation
(2) Agreement for Cooperation in the area of Quarantine and Plant Protection
(3) Agreement for Cooperation in the field of Veterinary and Sanitary
(4) Agreement on Tourism
(5) Agreement on Avoidance of Double Taxation
(6) Agreement on Combating Organized Crime, International Terrorism and Illicit Trafficking in      Drugs and cultural and Historical Values
(7) Protocol on Consultation and Cooperation between the Foreign Offices of the two      countries
(8) Bilateral Investment Promotion and Protection Agreement
(9) Agreement for Cooperation in the field of Science, Education and Culture
(10) Science and Technology
(11) Agriculture
(12) Treaty on Extradition,
(13) Agreement in the field of Youth and Sports,
(14) MoU for cooperation between the Bulgarian association for the Information Technologies and the Committee for the Indian Council for promoting exports of Electronics and Software Products

Scope and Impediments in Promotion of Bilateral Trade and Economic Relations with Bulgaria

Although there are expectations for investment from Indian companies in some of the enterprises; setting up of joint ventures; participation in the privatization process; etc., Indian companies have not been forthcoming in investing in Bulgaria. Besides India not being primarily a capital exporting country, Indian entrepreneurs do not consider Bulgaria to be an attractive market due to various reasons: the non-existence of prosperous Indian community and Indian companies in Bulgaria; long distance and non-existence of any direct air and shipping link between India and Bulgaria; lack of transparency in rules and regulations; and non-existence of any mechanism which could provide details about creditworthiness or otherwise about Bulgarian enterprises. The language and red-tapism further contribute in making the Bulgarian market unattractive to the Indian entrepreneurs. The difficulties faced by Indian businessmen in getting visa for Bulgaria is another hindrance which has hampered the growth in bilateral trade and economic relations.

Bulgaria is at present in a transitional phase and is not yet experienced in the ways of an established market economy. Information available regarding business opportunities is rather limited.

Following factors have been cited as barriers for foreign businessmen and investors in the country:

1. Unhelpful bureaucracy;
2. Limited purchasing power;
3. Corruption;
4. High Taxes;
5. Lack of infrastructure;
7. Lack of managerial personnel;
8. High investment risk;
9. Criminality;
10. Limited Financing;
11. Technological backwardness.

At the same time, the reasons which could attract the foreign businessmen/investors to Bulgaria are

1. Experienced labour with labour cost lower than that of Europe average;
2. Low production costs;
3. Stable political environment;
4. Emerging market;
5. Strategic geographical location, natural gateway to the large markets of CIS, Asia and North Africa.
6. Prospects for EU-membership;
7. Competitive tax regime-corporate profit tax and VAT among the lowest in Central and Eastern Europe.

2. The substantial part of the Indian exports to Bulgaria consists of tobacco, pharmaceutical raw materials and substances, cotton yarn, leather, etc. These items do not portray the real industrial prowess of India and there is need for diversifying our basket of exports to this market. While, there is need for advertising and marketing campaign for Indian products in Bulgaria by private business, there is no interest in participation in trade fairs by Indian Companies.

3. Since the business is now gradually shifting from state sector to private sector, it is essential for Indian business enterprises to establish linkages with their Bulgarian counterparts especially for value added and consumer products. The Chinese, Taiwanese, Lebanese, Syrians and Turkish enterprises have been very aggressive in marketing their consumer goods in Bulgaria not only through bulk supplies but also by setting up their warehouses and sales outlets at various places. Bulgaria is an associate member of the European Union and thus its industrial products are entitled to duty free imports into EU member countries. Indian manufactures/exporters, especially those, who have already established presence of their products in EU member countries, would be well advised to take advantage of the status of Bulgaria by establishing their industrial units in this country for exporting the end-products to EU member countries.

Source : Indian High Commission, Bulgeria