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Bulgaria continues to meet the conditions specified in Article 1 of the Agreement Establishing the Bank. Bulgaria’s accession to the EU is an important landmark, rewarding a decade of coherent and prudent economic policies and structural reforms under the currency board framework. The hard and disciplined work of past years is paying off with sustained growth rates, falling inflation, declining unemployment and robust foreign investment inflows.
Economic conditions
The economy is performing well and the right conditions are in place for it to continue to flourish: competitive pressures will further stimulate competition; membership to the EU has contributed to lowering the perceived risk associated with the economy thus making it a more attractive proposition for investors; and the availability of EU funds can potentially ease some of the existing bottlenecks to growth, in particular through regional development and upgrading of infrastructure.
EU membership is however not in itself a guarantee that economic conditions will continue to improve and that the country will attract sufficient investment levels to enable it to further stimulate productivity growth. The continuation of the current prudent economic policies and reform agenda are essential conditions for Bulgaria to make full use of the accession opportunities. Accession, on the other hand, has highlighted areas of concern and market gaps which were present before 2007, but which now are becoming more visible due to single market competitive pressures. The Bank will support Bulgaria to address these areas by focusing on projects, sectors and products in which the Bank has a leading innovative role and for which it remains additional.
Strategic priorities
Following its Assessment of Transition Challenges, the Bank had identified similar challenges in 2005 to those present in a much more binding way today, and had taken a clear position to concentrate its strategic priorities in those areas where progress towards a well functioning market economy was lagging behind. Its attitude for example was that of diminishing its attention to the already competitive and sound banking sector, albeit preserving the right to intervene with its investments in areas where transition gaps remained. As of December 2007, the Bank had made cumulative commitments of €1.546 billion to 118 projects helping to mobilise €5.908 billion for Bulgaria.
The following key areas must be addressed to eliminate remaining obstacles to competition and structural bottlenecks which would otherwise limit the competitiveness and growth potential of the country:
- Post-accession challenges include preserving a stable macroeconomic environment. The large external imbalance does not represent an immediate threat, being completely financed by large FDI inflows. At the same time, there has been very rapid property price inflation and the real estate sector may be vulnerable to changes in sentiment, including from foreign capital. The current emphasis on a tight fiscal policy should help manage the consequences of an unexpected external shock. Attracting private funding to address some of the major infrastructure bottlenecks would be very welcome in this context to provide some relief to fiscal policy, the one policy instrument left to the authorities within the currency board regime.
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Single market pressures and competition from Asian markets are forcing the economy towards some important structural changes: production will inevitably have to shift towards higher value added productions and provision of more sophisticated services. At the same time, however, large migration flows experienced in the recent past are depriving the country of higher skilled labour. Significant challenges lay ahead in the field of education and training and in the short term within the realm of income policies, to ensure that wage growth does not exceed productivity growth. Rural areas still lag behind, with particularly limited access to finance and technology.
The EBRD can help address these problems by providing finance to locally owned medium-to-large sized companies facing considerable investment needs across many sectors including services and technology. While bank credit is available on a reasonable scale to local corporates, there is a lack of equity capital, due to the relatively low level of development of capital markets. Support for local enterprises will be a priority with a special focus on enhancing local business competitiveness and investment in modernisation to allow the local private sector to cope better with enhanced competition following accession. The Bank will diversify its range of products to include more high-risk instruments such as equity, mezzanine, and structured debt. Financial tools, such as dedicated credit lines utilising EU post accession funds, will be tailored to help local businesses to meet EU environmental standards and to improve their energy efficiency. Promoting investment and supporting productivity increases will be key in particular through projects that assist in the development of less advanced regions or stimulate cross-border trade and investment.
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National infrastructure needs to be upgraded, in particular in the transport sector to ensure a more even distribution of productive resources and facilitation of regional trade and investment flows, however, funding for this upgrade cannot rely entirely on public finances. In this context, the Bank will seek to mobilise greater private sector involvement through government supported PPP structures in the modernisation of key transport infrastructure, particularly in the roads and motorways sector, to address physical bottlenecks and promote regional links in line with the Government’s National Strategy for Infrastructure. Investment in municipalities’ infrastructure needs to be addressed in the context of their limited capacity to raise the required funding and their implementation capacity.
The Bank will support the upgrading of municipal infrastructure throughout the country. Although fiscal decentralisation has not yet been completed, the Bank will be able to help mobilise EU structural and cohesion funds via innovative structures (for example, the establishment of a vehicle by the Government and the Bank to provide co-finance for EU post accession funds to smaller, less creditworthy municipalities). This will allow the Bank to provide financial support to a wider range of municipalities. Through policy dialogue the Bank will seek to stimulate devolution of ownership of municipal services. Further opportunities for public-private partnerships in the water and municipal sectors will be explored. The Bank’s main focus will be on water and waste water, solid waste, energy efficiency and urban transport.
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High energy intensity issues need to be addressed. The energy service market is yet to develop, though some companies are implementing energy efficiency measures. Much remains to be done in the household sector. The Bank will invest with the private and public sector in both energy generation, and enhanced transmission and distribution in conjunction with appropriate regulatory and institutional reform. Close collaboration will be maintained with the donor community of the Kozloduy International Decommissioning Support Fund. As part of the Bank’s Sustainable Energy Initiative, projects promoting renewable energy sources and energy efficiency will be a priority together with projects supporting improved regional integration and interconnectivity in the energy field, with the aim of helping enhance Bulgaria’s energy security and its position as a regional energy hub.
Investment climate
The business environment in Bulgaria has improved since the last strategy as recognised by the World Bank’s Doing Business 2008 report. To further enhance the investment climate the authorities have acknowledged that improvements in the functioning of the judiciary and in tackling the presence of corruption and organised crime remain at the forefront of their efforts to ensure that Bulgaria remains an attractive investment destination in the global environment.
The Bank will continue regular policy dialogue and its support to the authorities and market partners in improving the business environment in Bulgaria, where much remains to be done. It will continue to ensure that all EBRD operations in Bulgaria are subject to the Bank’s Environmental Procedures and incorporate, where appropriate, Environmental Action Plans. The Bank will continue to be a major catalyst in mobilising commercial and public co-financing, and will co-ordinate its strategy with the EU in order to achieve maximum impact.
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