2009 Index of Economic Freedom

Quick Facts

Population:

• 7.7 million

GDP (PPP):

• $79.0 billion
• 6.3% growth
• 5.7% 5-year compound annual growth
• $10274 per capita

Unemployment:

• 7.7%

Inflation (CPI):

• 7.6%

FDI Inflow:

• $5.2 billion

Bulgaria's economic freedom score is 64.6, making its economy the 56th freest in the 2009 Index. Its overall score is 0.9 point higher than last year, primarily as a result of improved business and fiscal freedom. Bulgaria is ranked 26th freest among the 43 countries in the Europe region, and its overall score is well above the world average.

Overcoming initial delays in the transition to a market-oriented economy, Bulgaria has pursued comprehensive economic reform and trade liberalization. Six of Bulgaria's economic freedoms are well above the global average. The country's private sector, which accounts for about 75 percent of the economy, benefits from low taxation and a sensible regulatory environment. Bulgaria's fiscal freedom has been further enhanced by the implementation of a flat income tax rate of 10 percent, which is one of the lowest rates in the world. Licensing, opening, and closing a business are all relatively efficient.

Some institutional weaknesses remain. Bulgaria still needs a more independent judicial system. Weak property rights, lingering corruption, and inefficient bureaucracy hold down the country's overall economic freedom. Government spending remains high and can crowd out private-sector activity.

Background Back to the top

In 1990, Bulgaria held its first multi-party election since World War II, ending four and a half decades of Communist rule. The country joined the European Union in January 2007. Agriculture and tourism are growing. Natural resource exports and the processing of coal, copper, and zinc play an important role in the economy. In 2005, Sergei Stanishev of the Bulgarian Socialist Party (BSP) took over from ex-king Simeon Saxe-Coburg-Gotha, who in 2001 had become the first former monarch in post-Communist Eastern Europe to be elected a prime minister. Relations between the ruling BSP and its main coalition partner, the National Movement for Stability and Progress (NMSP), have been troublesome.

Business Freedom 73.5 Back to the top

The overall freedom to start, operate, and close a business is relatively well protected under Bulgaria's regulatory environment. Starting a business takes an average of 49 days, compared to the world average of 38 days. Obtaining a business license takes less than the world average of 225 days.

Trade Freedom 85.8 Back to the top

Bulgaria's trade policy is the same as that of other members of the European Union. The common EU weighted average tariff rate was 2.1 percent in 2006. Non-tariff barriers reflected in EU and Bulgarian policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some service sectors, non-transparent and restrictive regulations and standards, restrictive pharmaceuticals regulations, and inconsistent customs administration across EU members. Enforcement of intellectual property rights also remains problematic. Ten points were deducted from Bulgaria's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 86.2 Back to the top

Bulgaria has low tax rates. The flat corporate tax rate was reduced to 10 percent from 15 percent as of January 1, 2007, and a flat income tax rate of 10 percent was implemented one year later. Other taxes include a value-added tax (VAT), an estate tax, and a vehicle tax. In the most recent year, overall tax revenue as a percentage of GDP was 34.4 percent.

Government Size 58.7 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 37.1 percent of GDP. A new fiscal policy program is intended mainly to keep public expenditures below 40 percent of GDP.

Monetary Freedom72.8 Back to the top

Inflation is relatively high, averaging 7.4 percent between 2005 and 2007. Privatization of state-owned firms has progressed, and the market determines most prices, but the regulatory regime affects the prices of electricity, water, natural gas, and pharmaceuticals. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. Ten points were deducted from Bulgaria's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom60.0 Back to the top

The Investment Promotion Act, last amended in May 2007, stipulates equal treatment of foreign and domestic investors. Government approval is required for majority foreign ownership in some sectors. Many sub-federal authorities also provide incentives, but bureaucracy, frequent changes in the legal framework, and corruption impede foreign investment. Residents may hold foreign exchange accounts subject to some restrictions; non-residents may hold them without restriction. A few capital transactions require prior registration with the central bank. Foreign ownership of land is permitted if the owners are from EU countries or countries with an international agreement permitting such purchases. Expropriation is possible, provided that the owner is adequately compensated.

Financial Freedom60.0 Back to the top

Bulgaria's financial system is not fully developed, but banking has become more efficient and competitive. Since introduction of a currency board, stronger supervision, and tighter prudential rules in 1997, the banking system has recovered from its 1996 crisis. A long-awaited consolidation finally began in 2004, and EU accession in 2007 has solidified external interest. There are 33 commercial banks, and the three largest account for about 34 percent of assets. Foreign banks hold more than 70 percent of the domestic credit market. Credit is generally allocated on market terms. The insurance market, with strong foreign participation, is now fully private and expanding rapidly. The stock market is small, but because of new financial instruments and streamlining, capitalization doubled in 2005 and rose further in 2006 to more than 30 percent of GDP. More transparency and legal refinements are needed to ensure growth.

Property Rights30.0 Back to the top

Bulgaria's judicial system does not solve commercial disputes, register businesses, or enforce court judgments effectively. The constitution provides for an independent judiciary, but ineffective rule of law limits investor confidence in the ability of the courts to enforce contracts, ownership and shareholders rights, and intellectual property rights.

Freedom From Corruption41.0 Back to the top

Corruption is perceived as widespread. Bulgaria ranks 64th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Substantial organized crime and government and judicial corruption persist. Corruption's threat to the security of the common border is a matter of great concern to the EU.

Labor Freedom78.4 Back to the top

Bulgaria's relatively flexible labor regulations could be improved to enhance employment and productivity growth. The non-salary cost of employing a worker is high, but dismissing a redundant employee is costless.