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Analysis On Bulgaria

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.. rry out economic and other activities to satisfy their interests, by mutual aid and co-operation. A co-operative is a legal entity and is deemed a merchant under the Commerce Act.

Co-operative members can only be individuals, at least 7 in number. To participate in a co-operative, foreign person should have permanent residence in Bulgaria. Sole Trader – any capable individual, residing in the country, can register as a sole trader. State Companies – they exist under the forms of one-member private limited or joint-stock companies where the quotas/shares are solely owned by the State. These forms of business are established to facilitate the process of privatization of the state companies through the sale of their shares to private persons. Municipal Companies – the above mentioned in respect of the State and the its fully or partially owned companies is accordingly relevant to the municipalities and their companies.

Taxes. Bulgaria has signed agreements for avoiding double taxation with 41 countries. A company is resident in Bulgaria for tax purposes if it is registered in Bulgaria. Companies resident in Bulgaria are subject to tax on their worldwide income. Foreign entities are subject to tax on their Bulgarian-source income, but their Bulgarian branches are considered Bulgarian resident companies for tax purposes. Corporate income tax Under the Corporate Income Tax Act (CITA) states that all companies and partnerships are liable to corporate income tax.

Tax on insurance and re-insurance premiums Insurance companies pay one-time final tax on insurance premiums and on any other kind of income and are not obliged to pay corporate income taxes separately for their activities other than insurance or re-insurance. The rate of the special tax for insurance companies is 7%, except for life insurance companies whose income will be taxed at 2%. Entertainment and representative expenses and business gifts, that do not bear the trademark or the business name of the company, as well as donations and sponsorships, which are not accounted for as expenses, are subject to a final 25% tax. Social expenses representing fringe benefits in kind, as well as expenses for maintenance, repair and exploitation of cars are subject to a final 20% tax. Capital gains are included in the corporate income and taxed at the full corporate tax rate. Foreign income.

Income, derived outside Bulgaria by resident entities and branches of non-residents, is included in the taxable base for corporate income tax purposes. Resident entities utilize tax credit for the foreign source income, which is taxed abroad. The tax credit is limited to the amount of the Bulgarian tax obligation, which would have been levied if the profit or income had originated from Bulgaria. Loses are carried forward over the following five years (ten years – for banks). Carry-forward of foreign source losses is restricted. Loss carry-back is not permitted.

Tax Exemptions. Entities, investing in regions with a high unemployment, enjoy a reduction of the corporate income tax if the investment is in the form of acquisition, modernization or reconstruction of tangible fixed assets such as buildings, equipment, transmitters, electricity transmitters, and telecommunication lines. The fund for the investment is generated from the contributions made by shareholders for acquisition of new shares (including on incorporation) in the company making the investment. If the requirements for the tax reduction are met the corporate tax is reduced by an amount representing 10% of the amount of the share contributions used in the above manner. The sum for the reduction is accounted for as reserves and if greater than the corporate tax in the respective year it can be used to reduce the corporate tax in the following five years. Violations and Fines.

A fine of at least BGN 100, but not exceeding BGN 500, shall be imposed on any person under an obligation pursuant to the Commerce Law which does not apply for registration within the prescribed time periods or does not present documents or signatures provided for in this Law. If, after a fine has been imposed, the person under an obligation does not apply for registration or does not present the documents or signatures within the time period determined by the court, further fines shall be imposed upon such person until the acts are performed. Fines shall also be imposed upon officials who, when they are obliged to do so: have not informed officially the respective district court of the occurrence of a circumstance which is subject to registration, and do not undertake the necessary action for registration. The statements for establishing the violations shall be drawn up by the mayors of communities, and the penal orders shall be issued by the mayors of municipalities or persons designated by them.

The establishment of the violations, the issuing, appeal and enforcement of the penal orders shall be done pursuant to the Law on Administrative Violations and Penalties. Bulgarian intellectual property legislation has been strengthened recently, and now includes modern patent and copyright laws and criminal penalties for copyright infringement. Bulgarian legislation in this area is considered to be among the most modern in Central and Eastern Europe. Infringement of trademarks is a problem in Bulgaria for many U.S. manufacturers. While the law allows for confiscation of offending products, infringement is deemed a misdemeanor under the Penal Code and subject to a nominal fine that does not act as a deterrent to illegal activities.

However, the competition law provides for fines of up to BGN 500,000 for companies, which use misleading packaging, trademarks or other signs, which injure the interest of competitors. Bulgaria made the most difficult part of the transition. The Stability Pact, a comprehensive regional plan for economic development, democratization and security, will lead to new and expanded trade and investment opportunities in Bulgaria over the long term. The U.S. Government vigorously supports efforts to bring Stability Pact benefits to Bulgaria.

The Bulgarian Government will create conditions for opening of new jobs, for elimination of the bureaucratic obstacles and difficulties in business, for tax burden alleviation, for easier and quicker access to financial and material resources for development of production and trade. POLITICAL SYSTEM/ GOVERNMENT Having fought on the losing side in both World Wars, Bulgaria fell within the Soviet sphere of influence and become a People’s Republic in 1946. Communist domination ended in 1991 within the dissolution of the USSR, and Bulgaria began the contentious process of moving toward political democracy and a market economy while combating inflation, unemployment, corruption, and crime. Today, reforms and democratization keep Bulgaria on a path toward eventual integration into the EU and NATO.

Besides that, Bulgaria has the following active international organization participation: ACCT, BIS, BSEC, CCC, EBRD, EU (applicant), FAO, IAEA, IBRD, ICAO, ICFTU, Inmarset, Intelsat (non-signatory user), Interpol, NAM (quest), WEU (associate partner). Ambassador Snezhana Botusharova carries the diplomatic representation of Bulgaria in U.S. The Bulgarian flag has three equal horizontal bands of white (top), green, and red; the national emblem formerly on the hoist side of the white stripe has been removed. It contained a rampant lion within a wreath of wheatears below a red five-pointed star and above a ribbon bearing the dates 681 (first Bulgarian state established) and 1944 (liberation from Nazi control). POLITICAL RCONOMY-OVERVIEW In April 1997, the current ruling Union of Democratic Forces (UDF) government won pre-term parliamentary elections and introduced an IMF currency board system which succeeded in stabilizing the economy. The triple digit inflation of 1996 and 1997 has given way to an official consumer price increase of 6,2% in 1999.

Following declines in GDP in both 1996 and 1997, the economy grew an officially estimated 3,5% in 1998 and 2,5% in 1999. In September 1998, the IMF approved a three year Extended Fund Facility that provides credits worth approximately $900 million, designed to support Bulgaria’s reform efforts. In 1999, an unfavorable international environment- primarily caused by the Kosovo conflict- and structural reforms slowed economic growth, but forecasters are predicting accelerated growth over the next several years. The government’s structural reform program includes: (a) privatization and, where appropriate, liquidation of state-owned enterprises (SOEs); (b) liberalization of agricultural policies, including creating conditions for the development of a land market; (c) reform of the country’s social insurance programs; and (d) reforms to strengthen contract enforcement. THE GOVERNMENT We begin this section with the extract from the Chapter 1 Fundamental Principles, Article1: “(1) Bulgaria is a republic with a parliamentary form of government. (2) The entire power of the state shall derive from the people.

The people shall exercise this power directly and through the bodies established by this Constitution. (3) No part of the people, no political party nor any other organization, state institution, or individual shall usurp the expression of the popular sovereignty.” Bulgaria is a Parliamentary Republic and the Legislature is the basic power within the country. The National Assembly is vested with the legislative power and exercises parliamentary control. Its mandate is for a term of four years. The Council of Ministers is the principal body of the executive branch.

Chaired by the Prime Minister, it heads and implements the domestic and the foreign policy of the state, ensures the public order and the national security, exercises the overall guidance over the state administration and the Armed Forces. The Prime Minister designate is nominated by the largest parliamentary group and is given a mandate by the President to form a cabinet. The proposed Council of Ministers is elected by the national Assembly. The activity of the Council of Ministers is under the direct control of the National Assembly.

Individual ministers and the Prime Minister are obligated to answer questions and interpellations addressed by members of the National Assembly. The statute and the competence of the local bodies of the executive branch depend on the territorial division of the Republic of Bulgaria. The municipality is the basic administrative territorial unit at the level of which self-government is exercised. The region is an administrative territorial unit where the state authority is decentralized for the purpose of pursuing an effective regional policy. A regional governor, appointed by the Council of Ministers, performs the government of the region. The Supreme Legislative body in the country is the National Assembly, which exercises parliamentary control over the government.

The judiciary is independent but continued to struggle with structural and staffing problems. Most citizens have little confidence in their legal system. HUMAN RIGHTS PRACTICES IN BULGARIA Most security services are the responsibility of the Ministry of the Interior, which controls the police, the National Security Service (civilian intelligence), internal security troops, border guards, and Special Forces. A number of persons known to be involved in repressive activities during the communist regime returned to senior-level positions in the security services in 1995. Some members of the police force committed serious human rights abuses. The post-communist economy remains heavily dependent on state enterprises.

Most people are employed in the industrials and service sectors; key industries include food processing, chemical and oil processing, metallurgy, and energy. Principal exports are agricultural products, cigarettes and tobacco, chemicals, and metal products. Continued political and social resistance has retarded the transformation of the economy into a market-oriented system. Privatization of the large communist-era state enterprises has been very slow and is the main reason for Bulgaria’s economic stagnation. The government is now developing a mass privatization program, which (if successfully implemented) would partially address this problem.

The service and consumer goods sectors in private hands continued to be the most vibrant. Although all indicators point to a reviving economy this year (2001), the last several years’ decline has affected the employment of people from ethnic minorities disproportionately. The annual per capita Gross Domestic Product of $1.300 provides a low standard of living. The government generally respected the human rights of its citizens, but problems remained in some areas. Constitutional restrictions on political parties formed on ethnic, racial, or religious lines effectively limit participation.

There were several reports that police used unwarranted lethal force against suspects and minorities, and security forces beat suspects and inmates. Human rights observers charged that the security forces are not sufficiently accountable to Parliament or to society and that the resultant climate of impunity is a major obstacle to ending police abuses. Prison conditions are harsh, and pretrial detention is often prolonged. Mistreatment of ethnic minorities by the population at large is a serious problem, and both the government and the private citizens continued to obstruct the activities of some non-Eastern Orthodox religious groups.

Discrimination and violence against women and Roma are serious problems. SPECIAL ECONOMIC CIRCUMSTANCES Bulgaria is still a largely cash economy. Visitors should exchange cash at banks or Change Bureaus. Some Change Bureaus charge commissions on both cash and travelers’ check transactions, which are not clearly posted. People on the street who offer high rates of exchange are confidence tricksters intent on swindling the unwary traveler. Old, dirty or very worn denomination bank notes are often not accepted at banks or Change Bureaus.

Major branches of the following Bulgarian banks will cash travelers’ checks on the spot for Leva, the Bulgarian currency: Bulbank, Bulgarian Postbank, Biochim, First Investment Bank and United Bulgarian Bank (UBB). UBB also serves as a Western Union agent and provides direct transfer of money to travelers in need. ATM cash machines are increasing in numbers in Sofia and other major cities. Most shops, hotels, and restaurants, with the exception of major hotels, still do not accept travelers’ checks or credit cards. Due to the potential of fraud and other criminal activity credit cards and ATM’s should be used with caution.

On July 5 1999, the Lev was re-denominated at a rate of 1,000 old Leva to one new Lev. BULGARIA AND NATO: LETTING NATO FORCES USE BULGARIAN TERRITORY In Sofia (March 29, 2001), Bulgarian Foreign Minister Nadezhda Mikhailova said on Thursday an agreement with NATO now before parliament would allow alliance forces to use Bulgarian territory in the event on a Balkan crisis. The government has asked parliament to ratify the agreement, which was signed in Brussels last week. Ratification is expected on Friday or early next week. The text of the agreement and an accompanying note from the government say Bulgaria would allow NATO forces taking part in operations to secure peace in the Balkans to use its land, air and sea space.

Western diplomats say that quick expansion of NATO is unlikely, adding that states like Bulgaria has first to reform their armies and prove themselves in regional cooperation. THE BALKAN PROBLEM IN BULGARIA Bulgaria’s President Peter Stoyanov said on March 31, 2001 that recasting Balkan borders along ethic lines would be disastrous for the volatile region.” Redrawing borders in the Balkans in search of an identity for newly formed States based on ethnic or religious homogeneity threatens to destroy the very foundation of European civilization”, Stoyanov told at a conference in Sofia. His comments came after respected Balkans watchdog the International Crisis Group said that the West should stop trying to prevent the break-up of what remains of the former Yugoslavia. Western powers fear the break-up of federal Yugoslavia could fuel ethnic violence and trigger demands for more border changes in the region where a large ethnics Albanian community straddles several internal and international frontiers.

Stoyanov said ethnic Albans in Yugoslavia had a right to live under a democratic system. He said the West should support promotion of civil societies in the Balkans to foster ethnic tolerance and help the region shed its image as Europe’s trouble spot. Bulgaria suffered economic losses but remained untouched during a decade of wars accompanying the break-up of the former Yugoslavia. It allowed NATO to use its airspace during the 1999 bombing of Yugoslav forces, which drove them out of Kosovo. But concerns have been raised in Bulgaria by the recent fighting between neighboring Macedonia and ethnic Albanian guerrillas along the Macedonia-Kosovo border. BULGARIA SETS STAGE FOR PARLIAMENTARY POLL Bulgarian president peter Stoyanov on March 29, 2001 set June 17 as the date of a parliamentary elections, expected to be a tight race in which exiled King Simeon II has emerged as a possible wild-card candidate.

The parliamentary poll is also sure to be overshadowed by the crisis in neighboring Macedonia which has unnerved politicians, scared citizens and further underscored investor wariness over the Balkan region. The government of Ivan Kostov (he leads UDF, the center-right party), is the first in the Balkan state to serve a full four-year mandate since the end of one-party rule in 1989. The government’s popularity has waned due to falling living standards, painful market reforms and a series of public scandals involving some top UDF officials. Opinion polls show that the public is desperate for an alternative and the King has emerged as a potentially welcome third force. IMF APPROVES $66 MLN LOAN INSTALLMENT FOR BULGARIA The International Monetary Fund said it had approved a $66 million loan to Bulgaria, the final disbursement under a three-year deal which helped the Balkan country’s recovery from a 1997 financial crisis.

The Washington-based lending agency said its decision to disburse the funds came after the completion of a review of Bulgaria’s economic performance under a lending agreement approved in September 1998. The IMF said Bulgaria had maid significant progress in its transition to a full market economy. In a written statement, the IMF official praised government leaders in Sofia for keeping inflation and the current account deficit under control. The IMF acting chairman, Fischer, said Bulgaria’s economic growth was expected to remain strong. However, Fischer warned there were still some areas that bear watching. Fischer said: “A strict incomes policy for state enterprises and steps to improve labor market flexibility and the business environment will help enhance competitiveness.” ECONOMIC ENVIRONMENT IN BULGARIA In Bulgaria 2000 passed to confirm the financial stabilization in the country, supported by the currency board arrangement, which was introduced in mid-1999.

The Government of Bulgaria (GOB) was able to achieve most of the preliminary set indicator, co-coordinated with the IMF and the World Bank for the development of the country. Tight constraints on fiscal and monetary policy yielded remarkably low inflation at just 1%, budget surplus and moderate current account deficit. The GDP is finally on a rise after a long series of collapse, now estimated to have grown by 3.5%. Improved legislation and supervision in the banking sector has constructed more prudence and eventually ease in the crediting policies to support revival in the real sector. However, the needed real sector restructuring was again delayed, which could turn into a major obstacle for the possibility of future growth and the ability of maintaining economic stability over the medium term. Privatisation of the major enterprises from the banking and real sector is still pending, and unpopular measures for the liquidation of loss-accumulating units will still have to be taken, thus testing the political will and decisiveness of the government in the eve of coming elections.

Economic figures announced by the authorities are strongly encouraging for the country’s potential, though testing times still lie ahead. Growth opportunities in the short run may turn strongly vulnerable to outside effects and rapid measures for recovery of the real sector will be vital. New laws to support pension reform and capital market activities are already in the pipeline. Source: Monthly Bulletins CURRENCY The peg of the Bulgarian lev to the Deutsche mark at an exchange rate of BGL 1,000 per 1 DEM proved its efficiency as an important factor for the financial stabilisation in the country.

The turmoil of early 1999 quickly faded away and activities were brought to normal pace. Eventually, a draft for denomination of the national currency was introduced, envisaging a new currency to be put in circulation with three zeros less than the present. Thus as of 5 July, 2001 one new Bulgarian lev equals one Deutsche mark. A significant step made by the authorities has been the acceptation of the obligations of Article VIII, Sections 2,3, and 4 of the IMF Articles of Agreement, with effect as of 24 September 2000.

No restrictions are now imposed on making of payments and transfers for current international transactions. Despite the existing pressure for upward adjustment of the anchor level, the general opinion is that there is enough political will to defend the peg at the current position of BGL 1,000 per DEM. As of January 2001, the introduction of the European currency brought to a fixed rate to the Euro at 1997.83 levs. INFLATION Anchoring of the Bulgarian lev to the German mark allowed the continuous and uncontrollable depreciation of the national currency to be ceased. This was to help subdue inflation in the country, which had skyrocketed to the cumulative 578.6% in 1999. In 2000 y-o-y CPI was down to 1%, remarkably outperforming the projected annual 16.4% by the government.

In this aspect the country was the best performer among the countries in transition. Inflation moves, however, were not flat within the year, oscillating between the steep 3% of September and negative 1.9% in June computed on a monthly basis. Such slides in inflation were not regarded as a positive trend as they revealed weaker purchasing power of the population and contraction in the domestic consumption. A major influence had the corporate cost cutting in the state sector, stemming from the necessity to rehabilitate or close the highly indebted and unprofitable enterprises. External deflationary forces also occurred as the national currency strengthened against the dollar and dragged on lower import prices and weaker export opportunities. Source: Monthly Bulletins WAGES AND UNEMPLOYMENT The CPI-adjusted increase in the wages was 22.4% in 2000, reaching USD 111.4 vs the average of USD 78.2 in 1999.

Pensions also grew, noting an increase of 36.3%, and now accounting for USD 35 on average. In view of the modest GDP per capita, no vigorous increases are expected to occur in 2001. The government has already set a 10% limit for the budget sector, and 100 major state-owned companies faced salary restrictions to the amounts reported as at the end of the past September. The labour productivity was estimated only modest according to preliminary figures. Rate of unemployment was also reduced to less than 12% in the second half of the year pushing away the turmoil of five years ago, when initial stages of restructuring brought about unemployment rate of over 15%.

Significant monthly fluctuations are, however, a fact as employment base is the country is estimated to just slightly over 2 million persons. GDP (Growth Domestic Product). The GDP is on a rise, expected to note the peak acceleration of the 90’saccording to preliminary data. Government estimates point on growth of 3.5% on annual basis. The value of Bulgaria’s GDP now amounts to around BGL 22,4297 trillion according to preliminary data, which equals about USD 12.6 billion.

Thus the increase in the dollar value of the output reached over 20% compared to the 1999 achievements. Official statistics for the period January-September reported a rise of 4.3% in the real GDP. Monthly Bulletins, BNB, press releases Traditionally, the major contributor to the country’s GDP was the services sector, with a share of approximately 50%. Estimates for the nine months of the year, provided by the National Statistics Institute, report a robust advance in the sector, which had already outperformed its total 1999 results on the basis of non-deflated prices. Industry and agricultural sector accounted for 30 and 20% respectively, generally in line with the proceeding years’ structure.

For 1999 the authorities projected a further boost of 3.7% in the country’s GDP. CURRENT ACOUNT AND TRADE BALANCE In line with all expectations, in 2001 the country’s current account shifted into a deficit, estimated to USD 272.7 million. The decline of around $700 million from the 1999 result was dragged by substantial deterioration in the trade balance, now reported to deficit of USD 329.5 million. Source: Bulgarian National Bank Exports fell by 13.1% on annual basis, triggered by the low competitiveness of Bulgarian goods and shrinking international demand for basic commodities as a result of the crisis at the Russian and Asian markets. The negative trend was intensified in the second half of the year, when semi-annual exports dropped by 17.4% compared to the corresponding period of the preceding year.

Most severe was the decrease in the export of chemicals and fuel, shrinking by 29.8 and 32.5% respectively. Growth was noted only in the group of textiles, leather, apparel and footwear, which increased exports by 7 .8% over the 1999 year-end, revealing the positive results of the faster privatisation in the sector. Imports; On the other hand, imports grew – albeit slightly, exceeding the preceding year’s figure by 1.4% and by December amounting to USD 4,623.5 million. The value of the imported consumer goods noted a leap of 41.8% for the year, which is not surprising for a country with a currency board and anchored national currency. This, however, was strongly unfavourable for the weak domestic production, as retail consumption grew by merely 5.1% within the year. Sovereign Debt: Country’s gross foreign debt bounced to over $10 billion from the end-1999 level of $9.68 billion, now heading to reach in dollar value the figures of 2000 and 1999.

A major increase faced the long-term public debt from $8.5 billion at the end of 1999 to over $9 billion, reflecting loans extended by the IMF and the World Bank. For 2001 Bulgaria has scheduled foreign debt servicing to the total of USD 882.6 million, half of which stands for interest payments, mostly on its Brady bonds. Reforming: Privatisation in the banking sector continued with the sale of many banks in Bulgaria such as, Bulgarian Post Bank, which ranks among the seven biggest financial institutions in Bulgaria. CONCLUSION In conclusion, the economy in Bulgaria in getting better little by little. The GDP is finally on a rise after a long series of collapse, now estimate to have grown by 3.5%. A draft for denomination of the national currency was introduced, envisaging a new currency to be put in circulation with three zeros less than the present.

Thus as of 5 July 2001 one new Bulgarian equals one Deutsche mark. The CPI adjusted increase in the wages was 22.4% in 2000, reaching USD 111.4 vs the average of USD78.20in 1999. The GDP is increasing, expected to note the peak acceleration of the 90’s according to the preliminary data. Government estimates point on growth of 3.55on annual basis.

However, Exports fell by 13.1% on annual basis, triggered by the low competitiveness of Bulgarian goods and shrinking international demand for basic commodities as a result of the crisis in the Russian and Asian markets. On the other hand, Imports grew slightly, exceeding the preceding year’s figure by 1.4%. Bulgaria is also facing bank privatization. For an investor Bulgaria offers many opportunities.

At the time, investing in the country could be a little bit risky, but most the forecasts indicate that the country’s resources and key geographical position can be heavily utilized in the near future without such a high risk of potential loss. Business Reports.

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