Consumption registers higher increase compared to gross domestic product growth, indicating clearly a need for intensified economic growth able to finance the propensity to consume. The balance of payments for 2004 and 2005 has been revised using new methodologies and new information. A comparisonof pre- and post-revision data shows that for both years the revised current account deficit and its ratio to GDP is notably lower compared to pre-revision data, whereas the decline in deficit’s deterioration between the two years is more negligible.

For 2005, the ratio of the current account deficit on the balance of payments to GDP was 14.9 per cent before and 11.9 per cent after the revision. The improved methodology revealed that Bulgaria’s indebtedness on current foreign payments is actually lower.

Accelerated growth in exports in early 2006 is attributable to Bulgaria’s anticipated accession to the EU, to the fact that legal business gradually ousts the grey sector (in particular in the light industry), and to the renovation of enterprises and their placing on a higher echnological level. It is, without doubt, a result of the high prices of raw materials (ferrous and nonferrous metals) and oil products at international markets, yet part of it represents real growth (for example, in the exports of investment goods: machines and equipment, transport vehicles,mainly ships and wagons, and spares). The increasing trade deficit is attributable to a higher value of the imports of energy resources conditioned by the high crude oil and oil product prices.

Foreign investors are still attracted by the comparatively lower production costs in Bulgaria and by country’s anticipated EU membership. According to preliminary data, in the first two months of 2006 foreign investments in Bulgaria amount to EUR 271.2 m going more than 50 per cent up on the same period of 2005. Attracted "green-field" investments are expected to preserve an upward trend. FDI are expected to remain at last year levels (EUR 2.2.-2.3 b).

In the beginning of 2006, the increase in consumer prices by 0.8 per cent in January, 3 per cent in February and 0.3 per cent in March resulted in accumulated inflation of up to 4.1 per cent (March on December of last year) and a rise of consumer prices by 8.0 per cent year over year (March on March of last year).

Again the foodstuffs subgroup has the highest contribution in the rise of prices. In February the increase in food product prices was attributable mainly to a jump of sugar prices (46.24 per cent) which register an upward trend internationally since November 2005. In the administratively regulated prices the higher excise on alcohol was felt as early as in the January data which show a rise of prices by 8.34 per cent, and the increase of tobacco prices by 63.3 per cent was felt in the inflation data for February. Notable in NSI’s business surveys for the first three months of 2006 is the fact that while January and February do not register higher inflation expectations except for the anticipations for higher inflation in construction for January, in March only industry sale prices are expected to preserve their levels. Increase in sale prices is expected in retail trade and services and the inflation anticipations for construction are now significant.

In the past quarter the credit portfolio of banks registered delayed growth. The credit expansion was tamed as a result of the November amendments to Ordinance 21 and Ordinance 9 of BNB. The positive effect of this regulation is seen in the stabilization of all monetary indicators. We expect that the regulation will have a temporary effect and after a short slack the credit expansion will restore its pace.

For another quarter at a run, the capital market does not register significant changes. On the one hand, this is conditioned by the absence of special investor’s interest and, on the other hand, by the yet few attractive new issues of securities. While new institutional investors appear, in particular contractual funds and pension funds with improved investment opportunities, they cannot invest successfully their accumulated assets because of the limited offering of quality securities.

Amendments to mandatory insurance regulations, which started at the end of 2005 with the approval of the Insurance Code, are continuing. They are yielding results already. Insurance companies began to publish their financial results for the past year which indicate 35 – 40 per cent growth in the premium income of the insurance sector. In the first quarter of 2006, FSC issued licenses for the set up of new insurance companies in Bulgaria to international banking institutions.

In the beginning of 2006 public finance development is characterized by the persistence of major trends set in previous years. Among these is the increase in the actual quota of reallocation through the budget, the overblown chronic budget surpluses and the increased role of the state in the Bulgarian economy.

THE BULGARIAN ECONOMY – APRIL 2006 - OVERVIEW

Economic growth
The slow-down of economic growth to 5.5 per cent in 2005 against 5.7 per cent in 2004 is a direct consequence of a deteriorating business climate since mid 2005. Its slight improvement in early 2006 is rather stabilization at a little above the minimum registered at the end of last year. In the first quarter of 2006 the business climate in Bulgaria remains highly unfavorable compared to the past two years. This gives us grounds to project that in the review period the growth total for the economy will be lower compared to the first quarter of 2005, when it was 5.5 per cent, and will probably approach 2004 Q1 values (4.6 per cent). Indicative of delayed current growth is also NSI’s consumer confidence indicator which in January 2006 deteriorated (year over year) to 6.2 points below its January 2005 level.

On the supply side, the delayed growth total for the economy in 2005 is attributable to a significant drop of the value added in agriculture (down 8.6 per cent), given that the value added in industry and services registers higher growth against 2004.

Value added by economic sectors, real growth over the respective quarter of the preceding year, % Notable is the fact that the higher value added dynamics in Industry for 2005 against the pervious year is accompanied by delayed growth in industrial production and still more notable slow-down of growth in industrial sales. The lower growth in sales against the increase of production indicates problems with sales in industry and partly explains the jump of the share of stocks in GDP. The higher value added dynamics in industry is attributable to an increased growth in construction and, perhaps, to a higher value added growth against the increase of intermediate consumption in industry. The industrial sectors which traditionally register higher share of value added in output, have more significant contribution in the 2005 growth in industry.

The delayed growth in the value added of the private sector in 2005 is totally attributable to a significant decline in agriculture. Despite that, the productivity of the persons employed in the private sector is higher than that of public sector employees and is registering improvement.

On the demand side, the delayed growth total for the economy is entirely attributable to a slow down of growth in the export of goods and services to 7.2 per cent against 13 per cent for 2004. All other demand components register accelerated growth in 2005. Notable is the accelerated growth in individual consumption (up from 4.9 to 7.4 per cent) and the increased share of stocks in GDP (up from 2.6 to 4.2 per cent).

The increased pace of consumption compared to GDP growth clearly indicates a need for accelerated economic growth able to finance the propensity to consume in a more balanced way. The most unfavorable characteristics of the 2005 economic growth total include decreased value added in agriculture and a slow-down of growth in the export of goods and services.

Revival of the agrarian sector and accelerated exports are the main tools for achieving sustainable growth in 2006, with wellbalanced production and consumption.

Inflation
In 2005, the increase in consumer prices is higher than expected as a result of an accelerated rise of international fuel prices, a stronger effect of the administrative adjustment of thermal energy prices, and the impact of summer floods and credit expansion. In our opinion, the growth and restructuring of consumer demand, accompanied, of course, by growth in real incomes, does not exert as yet significant pro-inflationary pressure. In the beginning of 2006, the increase in consumer prices by 0.8 per cent in January, 3 per cent in February and 0.3 per cent in March resulted in accumulated inflation of up to 4.1 per cent (March on December of last year) and 8.0 per cent increase in consumer prices year over year (March on March of last year). Market inflation dynamics remained within normal variation limits. The most significant contribution to the rise of prices in this group comes from the subgroup of food products.

In February, the jump of sugar prices (46.24 per cent up), which have been rising internationally since November, had the highest contribution to the increase in food prices. In the administratively regulated prices the higher excise on alcohol was felt as early as in the January data, which register a rise of prices by 8.34 per cent; the increase of tobacco prices by 63.3 per cent was reflected in the inflation data for February. Contribution of price change by groups of goods and services to market inflation,percentage points

In 2005, producer prices in industry for the domestic market are 9.62 per cent up, December on December. Till September 2005, the month-by-month changes in producer prices were mostly influenced by the price change in the group of energy products and since October prices of intermediary products and the contribution of this size class to the general index register sharp increase, which is still felt. Notable in NSI’s business surveys for the first three months of 2006 is the fact that while January and February do not register higher inflation expectations except for the anticipations of higher inflation in construction for January, in March only industry sale prices are expected to preserve their levels. Higher sale prices are expected in retail trade and services and the inflation anticipations for construction are now significant.

Balance of payments
In the beginning of 2006 the balance of payments data for 2004 and 2005 were revised using new methodologies and new information (see Annex 1). The most significant changes for both years include increase in the trade deficit (FOB/FOB) and a reversed Net Income item from negative into positive, which contributed to a lower current account deficit.

A comparison of pre- and post-revision data shows that for both years the revised current account deficit and its ratio to GDP is notably lower compared to pre-revision data, whereas the decline in deficit’s deterioration between the two years is more negligible. The improved methodology revealed that Bulgaria’s indebtedness on current foreign payments is in fact lower. For 2005, the ratio of the current account deficit on the balance of payments to GDP was 14.9 per cent, down to 11.9 per cent after the revision. In the first two months of 2006 the current account deficit was up to EUR 661.1 m, accounting for 2.8 per cent of GDP1 against a deficit of 1.7 per cent of GDP for the same period of 2005.

The current account deficit has deteriorated by EUR 290.9 m against the deficit for the first two months of 2005 as a result of the negative contribution of the trade deficit (EUR 177.6 m), the balance of services (EUR 74.9 m) and the balance of income (EUR 38.9 m). Only transfers do not deteriorate the current account. Growth in foreign direct investments in Bulgaria to EUR 271.2 m (1.1 per cent of GDP) in the first two months of 2006 against EUR 180.2 m (0.8 per cent of GDP) for the same period of 2005 does not improve the ratio to the current account deficit. Because of the more significant deficit deterioration this ratio also worsens to 41 per cent for the first two months of 2006 against a backing of 48.7 per cent for the period January – February 2005.

The accelerated growth in exports in late 2005 and early 2006 is attributable to Bulgaria’s anticipated accession to the EU, to the fact that legal business gradually ousts the grey sector (in particular in the light industry), and to the renovation of enterprises and their placing on a higher technological level. It is, without doubt, a result of the high prices of primary products (ferrous and non-ferrous metals) and oil products at international markets, yet part of it represents real growth (for example, in the exports of investment goods: machines and equipment, transport vehicles, mainly marine vessels and carriages, and spares). The growing trade deficit up to 20 per cent of GDP after data were revised is mostly attributable to a notable increase (more than two times over the same period of 2005) in value of the imports of energy resources conditioned by the high crude oil and oil product prices.

Their share in total imports jumped from 17.2 per cent to 27.6 per cent, whereas all other commodity groups register decrease in their relative shares. This is true in particular for the group of investment goods which, with an insufficient increase of 10.7 per cent, registered a decrease of its relative share in imports, down from 27.7 per cent in January – February 2005 to 22.9 per cent for the same period of 2006. Given the fact that the matter concerns value and the prices of investment goods do not follow the upswing trend observed on the market of primary products and fuels, we do not think that the share of investment goods in total imports has decreased in real terms. Import of furniture and household goods registers the biggest increase among consumer goods, which is directly attributable to lending development and the expansion in construction. The group of primary products registers almost double increase in the import of ores and non-ferrous metals which is mostly attributable to the rise of prices on international markets.

The projections for improved economic growth of the EU countries and the continuing high rates of imports attributable to the large volume of direct investments give us grounds to believe that the current trade deficit (while not decreasing in the near future) does not represent serious risk for the Bulgarian economy.

As Bulgaria is entering the final stage of preparation of the national economy for accession to the EU and an increasing amount of capital (local and foreign) is invested in competitive productions, the export potential of the country will improve but the true result of these investments will be felt in 1-2 years. Foreign investors are still attracted by the comparatively lower production costs in Bulgaria and by the country’s anticipated EU membership. According to preliminary data, in the first two months of 2006 foreign direct investments in Bulgaria amount to EUR 271.2 m, increasing by more than 50 per cent over the same period of 2005. Attracted "green-field" investments are expected to preserve an upward trend in 2006. Along with the entry of new investors, some big enterprises with foreign participation established in Bulgaria will focus on building new processing capacities. They will contribute to an expanded and enlarged product range which will have a double effect: first, exports will go up; second, the domestic market will be supplied and imports will decrease. FDI are expected to remain at their last-year levels (EUR 2.2.-2.3 b).

Employment
In 2005, the number of economically active people (employed and unemployed) decreased by 7.8 thousand persons owing to a rise in the number of employed by 57.8 thousand persons. Unfortunately, the labor force survey does not explain what happened to those 65.6 thousand people who had been but are no longer unemployed – how many of them have been employed, how many are no longer in the labor force and for what reasons. The survey does not explain, either, the previous status of those new 57.8 thousand employed people – how many had been unemployed, how many had not been in the national labor force and for what reasons.

The slow-down in the value added total for the economy (from 5.4 per cent in 2004 to 5.1 per cent in 2005) was accompanied by a delayed growth in the number of employed (from 3.1 per cent to 2 per cent year over year). The faster decrease in employment has lead to accelerated productivity growth in the economy from 2.3 per cent in 2004 to 3.1 per cent in 2005.

In the second half of 2005, however, productivity growth was again slower than growth in employment and will probably keep this trend in 2006 as well. Value added, persons employed and productivity, total for the economy – growth over the same period of the preceding year (%)

According to the labor force survey methodology, in 2005 the annual average number of people who report themselves as unemployed is 334.2 thousand persons, going down by 65.6 thousand persons against 2004, and the unemployment coefficient dropped by 1.9 percentage points to 10.1 per cent. According to the Employment Agency’s monthly data on registered unemployment, the annual average number of registered unemployed is down by 44.8 thousand persons to 424.4 thousand persons. This could mean that about 90 thousand persons on average were registered as unemployed in the past year while at the same time - temporarily employed, whereas in 2004 this assumption concerned 69 thousand people.

Unemployment coefficient dynamics based on LFS, %

Public finance and fiscal policy
The 2006 State Budget Act envisages a quota for reallocation through the budget of 40 per cent of GDP, with balanced revenues and expenditure. Despite that, the fiscal program agreed with the IMF provides for a budget surplus of 3 per cent of GDP. This means that in 2006 the real taking away through the budget will exceed 43 per cent of GDP and Bulgaria will stand high in the ranking of European countries according to this indicator.

The budget surplus is justified officially with the alarming increase of the current account deficit on the balance of payments which totaled 15 per cent of GDP at the time of the agreement. With the new, more precise statistical methodology of the balance of payments the current account deficit dropped to 11.9 per cent, which, however, has not yet lead to revising the planned budget surplus and its adjusting downwards. One should not forget that the accumulation of budget surplus is a favourite practice of any government because it is an excellent opportunity for unsanctioned expenditure of large amounts of public funds by party politicians and clerks. The practice proves that in the Bulgarian post-socialist environment this scenario works perfectly despite the (recent) restrictions of the International Monetary Fund. By the way, the IMF’s policy becomes a comfortable screen behind which the government overburdens businesses and individuals with taxes. Another source of sought uncontrolled expenditure is the fiscal reserve and that in a way explains the lack of concept and legal framework for its use. Even though now the budget surplus is not available for spending and shall be directed to the fiscal reserve, at the beginning of each government’s mandate this is not a problem because by the end of the mandate mechanisms for "unlocking" the reserve may be found. Still, the fact that the Ministry of Finance uses the fiscal reserve to pay the government foreign debt represents a positive aspect of public finance management.

The tax policy which shall accomplish the goals of Budget 2006 consists in reduction of the social insurance burden by about 6 per cent, increase in the indirect taxes, increase of the non-taxable minimum of the personal income tax, and raise of the real estates tax assessments. The first tax reform of the new government obviously does not bring simplification to the tax system, something that otherwise the Minister of Finance and his team have supported. A simplified and logical tax system can be established only if based on clear economic principles instead of following the rule "everybody will get something."

Social policy
Subsidized employment in all its forms remains a major employment promotion instrument. Achieving sustainable growth of economic activity and employment and approaching the parameters of the Lisbon Agenda are among the most difficult tasks of the government. In the first quarter, income regulations were subjected to active regulatory changes. The latter failed, however, in bringing about notable increase in disposable income. Significant progress was achieved in the line of poverty methodology. Social insurance measures are targeted at stabilizing the revenue part of the social insurance budget and at offsetting the deficit generated by cutting the size of pension insurance contributions. The investment regime for supplementary pension insurance funds has been liberalized. The healthcare reform has not registered progress on the most important and acute problems – the structural reform and the insufficient financing of hospitals.

Business climate
In early 2006, the Estat index of business climate in Bulgaria reached its highest January value since 2002. Another positive finding from the January survey is the record-low share of companies reporting problems due to working capital deficit. The negative attitude towards institutions persists, augmented by a high level of skepticism about the efficiency of the courts. The percentage of respondents, who think that when a business dispute reaches the court it may well be fairly settled, has never been that low. The share of company managers who find intellectual property protection effective has also moved down to an unprecedented bottom value. Besides, the Estat index still registers symptoms of increasing euroscepticism. According to the NSI’s business surveys, since January the economic conjuncture in Bulgaria registers slight improvement, having reached in the last months of 2005 the minimum in the month-by-month deterioration observed in the second half of the year.

Some measures for improving the business environment continued in early 2006. They are aimed at promoting innovations and creating clusters, at legislative amendments in the filed of commercial registration and public procurement.

Economic restructuring registers a lag – delayed structural reforms may have negative effect on attracting foreign investments. Bulgarian and foreign analysts point out to an existent risk of delayed economic growth and unnecessary burdening of the state budget with losses generated by state-owned companies.

Enterprise policy
Some measures to improve the business environment of companies continued in early 2006. They are aimed at promoting innovations and creating clusters, at legislative amendments in the filed of commercial registration and public procurement. Notable is the increase of initiatives to counteract corruption and introduce changes in the judicial system. This increased activity is largely related to European Commission’s criticism of Bulgaria and the need to implement trenchant measures in these areas. However, the efforts made fail, as yet, to produce significant effect.

In early 2006 the Minister of Economy and Energy announced his intention for setting up of a state investment company incorporating minority shares of already privatized companies in the economy and the energy sector. The objective of this company will be to invest the attracted capital in infrastructure.

The idea is unworkable for a couple of reasons. First, the spending of public funds outside the budget arouses suspicion of non-transparency and lack of control. IMF’s criticism of the Public Investment Company set up by the previous government pointed to budget circumvention and illegal spending of public funds.

Second, this will distort the public-private partnership idea – an uncontrollable state company will take the place of the state and its participation through the budget or European funds. Last but not least, the idea is disputable as regards the opportunity to attract more funds by selling minority shares through off-exchange mechanisms.

Environmental policy
Environmental policy’s influence on the economy consists in amendments to the legislative regulations concerning the procedures of the Environmental Impact Assessment of investment proposals. Amendments to normative acts regulating the implementation of two basic instruments for environmental control on the bodies of the executive and private business representatives (EIA and the environmental assessment of plans and programs) aim to facilitate the administrative procedures of their implementation and to establish clear criteria and action time limits for the implementing bodies. The second problem lies in the conflict between the bodies of the Executive, i.e. MEW, and the business regarding waste management and recovery, including packaging waste. At this stage the dispute is on the administrative law level. Besides, the situation arising is also indicative of public administration’s capacity to fulfill the environmental commitments to the EU by implementing at national level the most successful European policies and practices.

The waste management related problems, which both the business and the municipal authorities face are rooted in the ambiguous and conflicting legislative regulation in the sector, augmented by the implementation of weak economic instruments with low degree of public trust in their efficiency.

Financial sector
The banking system continues to dominate the financial sector and financial mediation in this country. In the past quarter the credit portfolio of banks registered again delayed growth. The credit expansion was tamed as a result of the November amendments to Ordinance 21 and Ordinance 9 of BNB. The positive effect of this regulation is seen in the stabilization of all monetary indicators. We expect that the regulation will have a temporary effect and after a short slack the credit expansion will restore its pace. Work on the implementation of European banking standards intensified in the past quarter with a view to Bulgaria’s accession to the European Union.

For another quarter at a run, the capital market does not register significant changes. On one hand, this is conditioned by the absence of special investor’s interest and, on the other hand, by the yet few attractive new issues of securities. While new institutional investors appear, in particular contractual funds and pension funds with improved investment opportunities, they cannot invest successfully their accumulated assets because of the limited offering of acceptable securities. The management of Bulgarian Stock Exchange and the investment community analyzed the situation and a Bulgarian capital market development program for 2006 was launched. It focuses on engaging new, attractive issuers to fill in the deficit of quality share offering.

The Financial Supervision Commission and the other regulatory bodies continued the amendments to mandatory insurance regulations, launched at the end of 2005 with the passing of the Insurance Code. These amendments are yielding results already. Insurance companies began to publish their financial results for the past year which indicate 35 – 40 per cent growth in the premium income of the insurance sector. In the first quarter of 2006, FSC issued licenses for the set up of new insurance companies in Bulgaria to international banking institutions.

Energy sector
The past winter season proved again the importance of reliable energy supplies and efficient use of energy resources for the European economy. In that light, the European Commission presented the Green Paper – a long-term strategic document for energy sector development to be approved in 2007.

Bulgaria on its part will revise its operational energy strategy in light of national energy sector development and the measures laid down in the Green Paper. The priorities, which the Ministry of Energy and Energy Resources has announced, include pipeline projects such as NABUCO, AMBO (Burgas – Vljora), Burgas – Alexandroupolis, and the construction of new energy capacities in Belene and Mariza Iztok 1. The privatization of Varna Thermal Power Plant entered the final phase with the decision for sale of 100 per cent of the CP to the Czech company CEZ. The privatization of Bobov Dol Thermal Power Plant remains in a standstill after the Supreme Administrative Court confirmed the appeal of the Greek candidate company PPC.

The long-delayed modernization and rehabilitation of capacities in the Mariza Iztok complex is gaining pace. The operational capacities in the complex will play an important role for a stable national energy balance when units 3 and 4 of Kozolduy NPP are decommissioned. Restructuring models for NEC and Bulgargas were presented in the past quarter although that the real liberalization of the gas and electricity markets is still a long way off. For another quarter at a run the State Energy and Water Regulatory Commission raised gas prices (by 2.11 per cent). The energy regulatory body announced also that by the end of 2006 the 75 kWh of electricity at preferential prices (BGN 0.098/kWh, VAT included) for household consumers will be eliminated.

Transport
A review of the road infrastructure condition showed that after the winter season 70 per cent of the roads need repair or rehabilitation. The European Union provides EUR 900 m in total in the next five years, which, however, are insufficient to bring the road network in line with the European standards. The necessary project co-financing will be sought through loans from international financial institutions or funds from the state budget. The Ministry of Transport (MT) is ready with its long-term program for transport infrastructure development. The program covers a period of 10 years and envisages concessions for Trakia, Mariza, Struma and Cherno More highways. Trakia Highway has the best chances to be completed first despite that previous government’s decision for the appointment of a concessionary is being appealed again and MT has requested reassessment of the financial parameters. Concessions for railroad infrastructure sections which are not part of the European transport corridors are envisaged in the area of railway transport. However, real market liberalization will start only after licensed railway carriers from EU countries are admitted to provide transport services in Bulgaria. The state companies BDZ EAD (Bulgarian State Railways) and National Railroad Infrastructure Company continue to operate on the survival line. The analysis of the rehabilitation programs for the two companies shows that they could not manage without support from the state. The Government priorities in the air transport sector include settlement of the litigation on the concessions of the two seaside airports in Varna and Burgas and starting the privatization procedure of Bulgaria Air. In 2005 the national air carrier registered lower profits. The deteriorating financial result, the need to renovate the air park and the poor competitiveness of the company make it increasingly unattractive on the verge of Bulgaria’s accession to the free European market.

Construction
According to 2005 data, the real estate market shows signs of balancing and is characterized by slower growth. After the record- breaking 2004 when growth in the number of issued licenses was 34.6 per cent on an annualized basis, in 2005 it dropped to 9.4 per cent. This tendency is associated with a decreasing profit margin in construction conditioned by the stronger competition and increasing costs of construction companies. The business and industrial construction segment remains attractive for investment. The increased foreign interest towards this branch is attributable to Bulgarian construction market development, to the higher comparative yield of investments in the sector and the opportunity to invest in the branch via the capital markets. The so-called Real Estate Investment Trusts (REIT) enjoyed rapid development. The shares of 18 REITs with total capital of about BGN 95 m are now traded on BSE.

A couple of regulatory amendments were prepared in the past quarter. The most important and most discussed one is the bill on the central occupational register of physical and legal persons engaged in construction which introduces registration regime for building companies. The bill aims to bring order and to guarantee the quality of construction services by delegating the control of such services to the branch association in the construction industry.

High technology and communications
In early 2006 the high technology and communications sector witnessed some developments which are expected to have a positive effect on the sector as well as on the Bulgarian economy in general. A new association under the name ICT Cluster Community was set up; the plans for a Hewlett-Packard Global Center in Bulgaria were confirmed and last but not least, the eeducation initiative, which is expected to contribute to the introduction and expansion of ICT use in the Bulgarian educational institutions, was launched.

Tourism
In 2005 revenues from tourism reached EUR 1.8 b, going 8.7 per cent up on 2004. Net revenues amount to EUR 1.061 b, increasing by 11.9 over the preceding year. The conventional barrier of EUR 1 b was exceeded in September 2005. The aggregate picture of Bulgarian tourism in late 2005 and early 2006 calls for the conclusion that in the past year the sector registers more moderate growth compared to previous years. Some important changes, which may prove symptomatic for Bulgarian tourism, have been registered – growth in the numbers of tourists from tourist markets of key importance for Bulgaria such as Germany and Greece has slowed down. In our opinion, Bulgarian tourism reached its zenith in the past two or three years and, unfortunately, is getting on a downturn. Such unfavorable conclusions are also supported by World Tourism Organization forecasts which project for Bulgaria 6.3 per cent growth in 2006 and 4.3 per cent annual average growth in the period 2007-2016. Projections contain a significant dose of pessimism given the growth figures of 18 per cent in 2003 and 13.6 per cent in 2004.

Similar conclusions were also made during one of the most important events in the area of tourism – the conference Bulgaria – A Dream Land organized annually at the beginning of the year. It was pointed out that the state must seriously address the problems of tourism along several lines – improving the road infrastructure, personnel education and training, and advertis- ing; regulating the construction in big resort complexes and implementing a comprehensive and consistent tourism policy. Unfortunately, such policy seems to be lacking for the present – Bulgaria does not have in place a national tourism development strategy, which has unfavorable effect on the sector.

Agriculture
The unfavorable weather conditions in 2005 and early 2006 will slow down the development of agriculture and will further shrink the share of this sector in the Bulgarian economy. In the first quarter of 2006 the share of agriculture in GDP and GVA is not expected to exceed 4 and 5 per cent respectively. At the same time, 2006 will be a year of urgent reforms in the sector to bring it in line with European requirements. Approval and amendment of laws is going on, elaboration of the necessary secondary legislation is in progress, but the lack of developed mechanisms to apply the regulatory framework prevents the practical implementation of laws and by-laws. It is even more difficult for farmers to adjust to such dynamically changing regulatory framework.

Farming emerges as one of the most problematic areas in terms of the country’s preparedness to join the EU in the beginning of 2007. The implementation of the remaining three measures: land plots identification system, building veterinary border inspection points and reaching the new hygiene standards for processing of animal products, will require long technological time, considerable financial resources and available administrative and expert potential. In the period till the end of the year efforts will be focused on completing the necessary regulations as well as on streamlining the mechanisms for their implementation. The testing of some Common Agricultural Policy measures will aim to prepare farmers for the environment in which they will have to operate in a couple of months and to build the capacity for absorption of the money envisaged for agricultural support.

Regional policy in the context of EU accession
European Commission’s statement on Bulgaria’s preparedness for full EU membership came to light in early 2006. The preparation of the latest monitoring report brought some conclusions about the progress of reforms in Bulgaria which are not optimistic and arouse doubts and concerns about country’s accession to the EU in due time.

The report is of critical importance since it will specify the conditions for our EU membership – whether this will happen on 1 January 2007 or the membership will be postponed, whether Bulgaria will be accepted with some precautionary clause possibly in some area of concern. In the past few months EC representatives visited Bulgaria and their assessments outline Bulgaria’s delay compared to Romania in some areas where our northern neighbour has made serious efforts and achieved particular results. This is true in particular for the area of justice and internal order and the spread of corruption.

Bulgaria’s progress in achieving economic growth and attracting foreign investments has been noted. On the other hand, problems are pointed out in agriculture and the domestic market, border management and intellectual property protection. According to the EU experts, further efforts are needed with respect to the judicial reform and clear results have to be achieved in the fight against corruption. Bulgaria is taking due steps to accelerate the reforms in these areas in order to join the EU on 1 January 2007 with no safety clauses enabled.

Discussion, improvement and coordination of NDP 2007 – 2013 and its operational programs, which were basically developed at the end of 2005, is going on. Another important document is near finalization – the National Strategic Reference Framework. Based on an analysis of the strengths and weaknesses of Bulgaria’s economic development, the framework outlines the strategy chosen to accomplish the goals of convergence, competitiveness, employment and regional cooperation formulated by EC in July 2005. The framework has to prove that Bulgaria will use the funds in accordance with the new strategic lines of the Community and the national reform priorities, as well as in line with the Lisbon Agenda. NDP and its operational programs provide the elaboration basis for the framework.

Debates on the allocation of the money from European funds continued in early 2006 – whether the money should be allocated evenly among the regions or support should be provided with priority to the more developed regions to make them "the engines" that will pull the underdeveloped ones. Most of the municipal representatives think that until now the government regional policy has been rather inadequate which is proven by the concentration of many people in a couple of big cities and the depopulation of large territories with many years of history, rich past, economy and strategic location. A lot of mayors think that there is a need to develop equally all regions in order to avoid demographic collapse in separate regions.

Legislation
A couple of legislative amendments were passed in the first quarter of 2006 towards finalizing the harmonization of national legislation with the acquis and successful completion of the judicial reform as a condition for our full EU membership as of 1 January 2007. The most important one is the third amendment to the democratic Constitution of the Republic of Bulgaria of 1991. This amendment specifies the constitutional parameters of the judicial reform and improves the mechanisms for mutual control and balance of the three powers. Notable are also the regulations concerning the activity of the new National Revenue Agency, banks, lending, fiscal devices in commercial outlets, consumer protection, setting up internal audit units in administrative structures.

Center for Economic Development