Title page
Contents
Executive summary 10
1. Key Policy Insights 17
The COVID-19 crisis has hit the economy 18
The economy requires continued macroeconomic policy support 21
Considerable uncertainty surrounds the recovery 25
Fiscal space permits a large pandemic response 26
Ensuring access to health care is a priority during the pandemic 27
A wage subsidy scheme has prevented a large rise in unemployment 28
Long-term public finances are sound but subject to uncertainties from ageing 31
The currency board is a cornerstone for macroeconomic stability 34
The financial sector has been fortified, but non-performing loans remain high 36
Strengthening the recovery 39
Making the most of the export sector 39
Public investment should be increased 41
Removing barriers to competition 42
Decarbonising the economy 45
Ageing demographics will influence future growth 47
Ensuring equal opportunities for all 49
Improving labour market policies for higher participation and better jobs 51
Making the tax and benefit system work for all 54
Promoting public integrity and succeeding in the fight against corruption 59
References 63
2. Structural reforms to raise productivity and boost convergence 67
Income convergence needs to accelerate 68
Improving the regulatory framework for enterprise activity 72
Reducing regulatory barriers to competition 72
Decreasing the red tape required to set up a firm 75
Facilitating firm exit and rehabilitation for viable enterprises 75
Improving corporate governance of SOEs 79
Continuing regulatory efforts to support competition 79
Creating a level playing field for public contracting 81
Increasing skills and innovation 82
Increasing the availability of skilled workers is a key priority for enterprises 82
Basic education is not providing a firm foundation for skills 84
Vocational education and training could better meet labour market demands 86
Adult learning is low 86
Fostering return migration and skilled immigration 88
Promoting innovation 88
Supporting growth of the digital economy 90
References 94
3. Reducing regional disparities for inclusive growth 97
Cities are driving growth, while lagging regions are depopulating fast 98
Supporting living standards in lagging regions 100
Including the Roma population in the economy 101
Ensuring equal access to public services 103
Enabling reallocation and fostering regional growth 109
Better infrastructure and housing to support mobility 109
Realising the potential of the agricultural sector 115
Reviving tourism for future regional growth 118
References 124
Table 1. The recovery will be gradual 11
Table 1.1. Macroeconomic indicators and projections 25
Table 1.2. Low probability vulnerabilities 26
Table 1.3. Illustrative GDP impact of recommended reforms 44
Table 1.4. Illustrative fiscal impact of post-recovery recommended reforms 44
Table 1.5. Tax allowances in flat tax countries 56
Table 1.6. Spending on social protection benefits is low 57
Table 1.7. Recommendations on macroeconomic and selected structural policies 62
Table 2.1. Recent labour productivity growth exceeds the OECD, catching up with CEEC peers 69
Table 2.2. Recommendations 93
Table 3.1. Recommendations 123
Figure 1. GDP growth abruptly interrupted 11
Figure 2. Convergence had increased 12
Figure 3. PISA education scores are low 12
Figure 4. Relative poverty is high 13
Figure 5. Depopulation and urbanisation 13
Figure 1.1. Income convergence had increased from 2014 18
Figure 1.2. The economy was doing well before the COVID-19 pandemic 23
Figure 1.3. After a low initial outbreak, COVID-19 infections began to increase in October 2020 24
Figure 1.4. Sound public finances leave room for fiscal stimulus 27
Figure 1.5. Access to general practitioners is unequal across regions 28
Figure 1.6. Employment situation of the young most negatively affected 29
Figure 1.7. The informal economy amounts to almost one-third of (official) GDP 30
Figure 1.8. Ageing-related spending pressures could push up public debt 31
Figure 1.9. Revenues are low and rely on indirect taxation 33
Figure 1.10. Inflation was stabilising prior to the COVID-19 shock 34
Figure 1.11. Current account surpluses have been driven by a reduction in the trade deficit 35
Figure 1.12. Net international investment has fallen substantially 35
Figure 1.13. Credit growth had picked up 36
Figure 1.14. Financial sector health had improved 37
Figure 1.15. Household indebtedness is low, while non-financial corporation debt had been falling 38
Figure 1.16. Exports by destination and commodity 40
Figure 1.17. Integration in global value chains is high 40
Figure 1.18. Foreign direct investment is close to the CEEC average 41
Figure 1.19. Public investment has fallen below CEEC peers 42
Figure 1.20. Barriers to competition are high 43
Figure 1.21. Energy intensity and reliance on coal remain high 46
Figure 1.22. The working-age population is shrinking and ageing quickly 48
Figure 1.23. Higher educated people work more and longer 48
Figure 1.24. A large proportion of Bulgarian nationals are living abroad 49
Figure 1.25. Income inequality and poverty are high 50
Figure 1.26. Income inequality has risen fast because growth mainly benefitted top incomes 50
Figure 1.27. Poverty has remained at a high level, notably among children and elderly 51
Figure 1.28. Labour market participation is low for youth and Roma 52
Figure 1.29. Use of active labour market policies is low 53
Figure 1.30. No basic tax allowance results in tax rates for low incomes close to the OECD average 55
Figure 1.31. Taxes and transfers do little to reduce high market income inequality 56
Figure 1.32. Minimum-income benefits are low 58
Figure 1.33. Corruption is perceived as high 60
Figure 2.1. Bulgaria's income growth has lagged behind other CEEC countries 68
Figure 2.2. Intangible capital needs to be boosted to increase growth 70
Figure 2.3. The working-age population is shrinking and ageing quickly 70
Figure 2.4. Informality and inadequate skills are the top two constraints for businesses 72
Figure 2.5. Bulgaria stands out for its high barriers to competition 74
Figure 2.6. Insolvency is relatively lengthy and results in a low recovery of assets for creditors 76
Figure 2.7. Activity related to confronting cartels and monopoly/dominant positions has declined 80
Figure 2.8. Too high a share of public procurement occurs without a call for bids 81
Figure 2.9. Shortages are for medium- and higher-skilled employees 82
Figure 2.10. Large shortages exist for complex and non-routine competencies 83
Figure 2.11. PISA education scores lag behind the OECD and CEEC 84
Figure 2.12. A growing share of 15-years olds lack basic proficiency and few perform at a high level 85
Figure 2.13. Participation in lifelong learning is low 87
Figure 2.14. R&D intensity is low and relies on the business sector 89
Figure 2.15. The ICT sector is responsible for a high share of value-added activity 91
Figure 2.16. A priority is to increase digital skills 92
Figure 2.17. Firms have a low share of e-sales 92
Figure 3.1. Unemployment rates vary much across regions, also after the COVID-19 outbreak 98
Figure 3.2. The population is moving to metro regions with higher output and growth 99
Figure 3.3. Regional disparities are larger than in most OECD countries 100
Figure 3.4. The Roma population is large and concentrated in some regions 101
Figure 3.5. Living conditions of Roma lag far behind 102
Figure 3.6. Municipalities collect little revenue and account for a low share of public spending 106
Figure 3.7. Access to general practitioners is unequal across regions 107
Figure 3.8. Demand for hospital services is high but supply of nurses is low 108
Figure 3.9. Motorway construction is improving but upgrading is far from complete 110
Figure 3.10. Roads are in bad condition and internet access is lagging in many regions 111
Figure 3.11. Housing supply is vast but poorly utilised 112
Figure 3.12. Regional differences in housing stock and housing prices have increased 112
Figure 3.13. Most Bulgarians are outright homeowners 113
Figure 3.14. Taxation of household savings differs across asset types and has no progressivity 114
Figure 3.15. Regions with high agricultural employment have the lowest incomes 115
Figure 3.16. The primary sector employs many workers and suffers from weak productivity growth 116
Figure 3.17. The farm structure has become extremely polarised 116
Figure 3.18. The coronavirus outbreak has hit the growing tourism industry hard 118
Figure 3.19. The tourism industry's direct contribution to the economy is moderate 119
Figure 3.20. Tourism was strongly concentrated in a few regions and during summer months 120
Boxes
Box 1.1. Fiscal policy responses to the COVID-19 pandemic 20
Box 1.2. From the currency board to adopting the euro 22
Box 1.3. The informal economy is sizeable 30
Box 1.4. Composition of government revenues 33
Box 1.5. Quantifying the impact of selected policy recommendations 44
Box 2.1. Bulgaria's Insolvency Reform Roadmap, 2019-2022 78
Box 3.1. Subnational government organisation 104
Box 3.2. The 2019 Social Services Act 105