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Country Report January 2004

Bulgaria

January 2004

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Bulgaria at a glance: 2004-05

OVERVIEWThe coalition between the Simeon II National Movement (SNM) and themainly ethnic Turkish Movement for Rights and Freedoms (MRF) is unpopularand suffers from serious internal divisions. The SNM performed poorly in therecent local elections, but the opposition Bulgarian Socialist Party (BSP) alsoattracted fewer votes than expected. This makes it less likely that the nextparliamentary election will be brought forward to 2004, from its scheduleddate of mid-2005. Policy will focus on EU accession requirements and oncompleting a number of major privatisations. The Economist Intelligence Unitexpects real GDP growth to slow slightly to 4.1% in 2004 but to rise again to4.5% in 2005 as external demand recovers. Inflation will rise a little, but themain concern is the current-account deficit, which widened sharply in 2003. Itis forecast to narrow gradually but will still be around 6% of GDP in 2005.

Key changes from last month

Political outlook• Although the dispute between the MRF and Milen Velchev, the minister of

finance, over subsidies to agriculture and the tobacco sector has now beensettled, it illustrates the continuing divisions within the government.

Economic policy outlook• As expected, the government and the IMF came to a compromise

agreement over the 2004 budget. The IMF relaxed its opposition to a deficittarget of 0.7% of GDP in 2004, but persuaded the government to balance the2003 budget rather than recording the originally planned 0.5% of GDP deficit.Off-budget investment spending in 2004 will go ahead only if the current-account deficit narrows.

Economic forecast• Surging food prices in November have led us to revise upwards our estimate

of inflation in 2003 and our forecast for 2004. We have also increased ourforecasts for inflows of foreign direct investment (FDI), following the strongFDI performance in the first nine months of 2003 and large upwardrevisions to the FDI figures for 2002.

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Bulgaria 1

Country Report January 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2004-057 Political outlook8 Economic policy outlook9 Economic forecast

12 The political scene

18 Economic policy

23 The domestic economy23 Output and demand24 Employment, wages and prices27 Financial indicators28 Sectoral trends

31 Foreign trade and payments

List of tables9 International assumptions summary10 Gross domestic product by expenditure12 Forecast summary18 Consolidated state budget, 200322 Main economic policy indicators23 Gross domestic product by expenditure24 Retail sales in 200325 Labour indicators26 Level and growth of monthly wages by sector27 Consumer prices, 200329 Gross value added30 Output and sales in industry, 200331 Main macroeconomic indicators32 Imports by end-use34 Exports by end-use34 Current account35 Balance of payments36 Main external indicators

2 Bulgaria


List of figures12 Gross domestic product12 Consumer price inflation28 Money supply and domestic credit30 Output and sales in industry

Bulgaria 3


Summary January 2004

The coalition between the Simeon II National Movement (SNM) and themainly ethnic Turkish Movement for Rights and Freedoms (MRF) is unpopularand suffers from serious internal divisions. The SNM performed poorly in therecent local elections, but the opposition Bulgarian Socialist Party (BSP) alsoattracted fewer votes than expected. This makes it less likely that the nextparliamentary election will be brought forward to 2004, from its scheduleddate of mid-2005. Policy will focus on EU accession requirements and oncompleting a number of major privatisations. The Economist Intelligence Unitexpects real GDP growth to slow slightly to 4.1% in 2004 but to rise again to4.5% in 2005 as external demand recovers. Inflation will rise a little, but themain concern is the current-account deficit, which widened sharply in 2003. Itis forecast to narrow gradually but will still be around 6% of GDP in 2005.

The local elections held at the end of October 2003, with a second round aweek later, produced a mixed set of results. Although the ruling SNM received alow share of the vote, it still managed to win two mayoral posts and its overallperformance was not quite as poor as had been expected. With the oppositionBSP attracting fewer votes than forecast, the results make an earlyparliamentary election less likely. The government coalition continues to besubject to serious internal divisions.

Despite calls for a lower deficit from the IMF, the government has proposed abudget with a deficit of 0.7% of GDP for 2004. The IMF agreed to the higherdeficit after the government agreed to run a balanced budget in 2003 and to goahead with promised off-budget spending in 2004 only if the current accountstarts to improve. Corporate taxes are to be cut to 19.5% in 2004, but there hasbeen little progress in privatisation in the past three months.

GDP rose by 4.3% year on year in the third quarter of 2003, with investmentagain growing quickly. Industrial output and sales both rose strongly. Inflationhas risen as the very dry summer has led to a surge in food prices.Unemployment has fallen sharply and the registered unemployment rate inOctober was just 12.9%, 4.5 percentage points lower than in October 2002.

Export growth has continued to lag well behind import growth. As a result,both the trade and current-account deficits have risen sharply, with the current-account deficit for the first nine months of 2003 only slightly lower than thedeficit for 2002 as a whole. However, a rise in inflows of foreign directinvestment (FDI) has allowed the deficit to be financed easily, and foreignreserves have increased further.

Editors: James Owen (editor); Joan Hoey (consulting editor)Editorial closing date: December 16th 2003

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2004-05

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Bulgaria


Political structure

Republic of Bulgaria

Based on the constitution of July 1991

Unicameral National Assembly of 240 members, elected by proportional representation.The Simeon II National Movement is the largest grouping in the assembly, with 109deputies; the United Democratic Forces, led by the Union of Democratic Forces, rankssecond with 50 seats; the Coalition for Bulgaria, led by the Bulgarian Socialist Party, ranksthird with 48 seats; the Movement for Rights and Freedoms has 20 seats; the recentlyformed National Idea for Unity has ten seats

Universal direct suffrage from the age of 18

November 11th 2001 (presidential) and June 17th 2001 (parliamentary); next parliamentaryelection due in mid-2005; next presidential election due in November 2006

Georgi Purvanov, elected president in November 2001

A coalition between the Simeon II National Movement (SNM) and the Movement forRights and Freedoms (MRF) plus one minister originating from the Bulgarian SocialistParty (BSP)

Simeon II National Movement (SNM, centred on the former king Simeon Saxe-Coburg);Movement for Rights and Freedoms (MRF, formed mainly from the Turkish ethnicminority); Union of Democratic Forces (UDF, an alliance of anti-communist parties andgroups and a leading member of the United Democratic Forces—UtdDF—alliance); People’sUnion (a member of the UtdDF); Bulgarian Socialist Party (BSP, previously the BulgarianCommunist Party)

Prime minister Simeon Saxe-Coburg (SNM)Deputy prime minister & minister of transport and communications Nikolai Vasilev (SNM)Deputy prime minister & minister of the economy Lidiya Shuleva (SNM)Deputy prime minister Plamen Panayotov (SNM)

Agriculture & forestry Mehmed Dikme (MRF)Defence Nikolai Svinarov (SNM)European integration Meglena Kuneva (SNM)Finance Milen Velchev (SNM)Foreign affairs Solomon Pasi (SNM)Interior Georgi Petkanov (SNM)Justice Anton Stankov (SNM)State administration Dimitur Kalchev (BSP, but

technically independent)Regional development & public works Valentin Tserovksi (SNM)Labour & social policy Hristina Hristova (SNM)

Ivan Iskrov

Official name

Legal system

National legislature

Electoral system

National government

Main political parties andgroupings

Head of state

National elections

Council of ministers

Central bank governor

Key ministers

Bulgaria 5


Economic structure

Annual indicators1999 a 2000 a 2001a 2002 a 2003 b

GDP at market prices (Lv bn) 23.8 26.8 29.7 32.3 35.0GDP (US$ m) 12,955.1 12,599.8 13,598.7 15,562.9 20,264.6

Real GDP growth (%) 2.3 5.4 4.1 4.8 4.4Consumer price inflation (av; %) 2.6 10.3 7.4 5.8 2.2Population (m) 8.0 7.9 7.9 7.8 7.8

Exports of goods fob (US$ m) 4,006.4 4,824.6 5,112.9 5,692.1 7,225.0Imports of goods fob (US$ m) 5,087.4 6,000.2 6,693.4 7,286.6 9,453.7

Current-account balance (US$ m) -651.7 -701.5 -842.3 -681.7 -1,495.5Foreign-exchange reserves excl gold (US$ m) 2,892.0 3,155.0 3,291.0 4,407.0 6,071.3Total external debt (US$ bn) 10.0 10.1 9.6 10.3 b 11.4

Debt-service ratio, paid (%) 19.0 16.2 17.2 14.2 b 10.2Exchange rate (av) Lv:US$ 1.836 2.123 2.185 2.077 1.728

a Actual. b Economist Intelligence Unit estimates.

Main origins of gross domestic product 2002 % of total Main components of gross domestic product 2002 % of totalAgriculture & forestry 12.5 Private consumption 77.3Industry 27.8 Public consumption 10.0

Services 59.7 Gross fixed investment 18.1Change in stocks 1.6

Exports of goods & services 53.1Imports of goods & services -59.7

Principal exports fob 2002 US$ m Principal imports cif 2002 US$ mClothing & footwear 1,179 Crude oil & natural gas 1,280

Other metals 442 Textiles 816Iron & steel 367 Machinery & equipment 760Chemicals, plastics & rubber 344 Chemicals, plastics & rubber 538

Main destinations of exports 2002 % of total Main origins of imports 2002 % of totalItaly 15.4 Russia 14.3Germany 9.5 Germany 14.3Greece 9.3 Italy 11.3

Turkey 9.1 France 6.0

6 Bulgaria


Quarterly indicators2001 2002 20034 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Consolidated government finance (Lv m)a

Revenue 3,133 2,782 3,282 3,116 3,344 3,221 3,610 3,481Expenditure 3,246 2,821 2,913 2,955 4,054 3,110 3,094 3,260Balance -114 -39 370 161 -710 111 516 221OutputGDP at current prices (US$ bn) 3.8 3.1 3.6 4.6 4.4 4.0 4.6 5.5GDP at constant prices (% change, year on year) 4.3 3.4 5.6 6.4 3.4 3.8 4.4 4.3

Employment, wages and pricesEmployment ('000) 1,898 1,884 1,905 1,919 1,916 1,980 2,063 2,079Employment (% change, year on year) 0.9 1.4 0.2 1.2 0.9 5.1 8.3 8.4Registered unemployment ('000) 652 680 670 649 624 613 529 481Unemployment rate (% of the labour force) 17.6 18.4 18.1 17.5 16.8 16.6 14.3 13.0Average nominal monthly wages (Lv) 259 256 265 268 275 272 283 282Average monthly wages (% change, year on year) 10.5 10.0 5.3 6.8 6.0 6.1 6.5 5.2Consumer prices (Dec 1995=100) 3,792 3,966 3,926 3,851 3,921 3,990 3,968 3,969Consumer prices (% change, year on year) 4.9 8.2 7.1 4.6 3.4 0.6 1.1 3.1Producer prices (2000=100) 103.1 103.1 104.5 105.3 107.2 111.3 108.0 109.6Producer prices (% change, year on year) -2.1 0.0 0.5 0.7 4.0 8.0 3.3 4.1Financial indicatorsExchange rate Lv:US$ (av) 2.18 2.23 2.13 1.99 1.96 1.82 1.72 1.74Exchange rate Lv:US$ (end-period) 2.22 2.24 1.96 1.98 1.89 1.80 1.71 1.68Deposit rate (av) 2.8 2.8 2.7 2.7 2.9 3.0 2.9 2.9Lending rate (av) 11.1 9.4 9.4 9.7 8.9 8.9 9.4 8.4Money market rate (av) 4.6 1.2 3.4 3.5 1.8 1.1 2.7 1.9M1 (end-period; Lv m) 4,883 4,593 4,401 4,803 5,542 5,087 5,583 6,061M1 (% change, year on year) 22.8 14.5 9.0 12.4 13.5 10.8 26.8 26.2M3 (end-period; Lv m) 12,401 12,330 12,103 12,815 13,857 13,662 14,328 15,243M3 (% change, year on year) 25.8 20.6 15.7 15.4 11.7 10.8 18.4 18.9

Foreign trade (US$ m)Exports fob 1,270 1,201 1,325 1,640 1,527 1,726 1,795 1,987Imports cif 1,937 1,575 1,884 2,019 2,426 2,203 2,720 2,712Trade balance -667 -374 -560 -379 -899 -477 -924 -724Balance of payments (US$ m)Merchandise trade balance fob-fob -515 -252 -413 -221 -709 -310 -714 -513Services balance -33 -4 154 500 -56 -60 154 576Income balance -14 -69 -28 -103 -30 -182 -171 -88Net transfer payments 147 88 138 155 168 137 142 197Current-account balance -415 -238 -149 331 -627 -415 -589 173Reserves excl gold (end-period) 3,290 2,924 3,707 3,960 4,407 4,435 5,148 5,505

a Includes local government budgets and social security.

Sources: National Statistical Institute (NSI), Statistical Journal; Bulgarian National Bank (BNB), Monthly Bulletin; IMF, International Financial Statistics.

Bulgaria 7


Outlook for 2004-05

Political outlook

The coalition between the Simeon II National Movement (SNM) and themainly ethnic Turkish Movement for Rights and Freedoms (MRF), which tookoffice in July 2001, still commands a majority in parliament but appearsincreasingly divided. The prime minister, Simeon Saxe-Coburg, carried out alimited reshuffle of the cabinet in July. However, the reshuffle had little effecton either the government’s popularity or its internal cohesion. Arguments overthe direction of economic policy between Milen Velchev, the finance minister,and other members of the government, especially those from the MRF, havecontinued. So far these issues have been resolved, but tensions over fiscalpolicy are likely to re-emerge later in 2004, when decisions are taken onwhether to go ahead with the MRF-supported idea of using some of the excessresources in the fiscal reserve to finance infrastructure projects.

Pressure from the European Commission has led to some progress in judicialreform, but a sequence of high-profile murders has eroded confidence in thecriminal justice system. The government’s continuing problems in pushingthrough major privatisation deals illustrate its difficulties in implementingcontroversial decisions. Two more SNM MPs left the party in September,following Mr Saxe-Coburg’s attempt to appoint Brigo Asparuhov, a communist-era intelligence chief, as an adviser. Although Mr Asparuhov eventuallydecided to withdraw his candidature, the episode has further weakenedMr Saxe-Coburg’s authority.

The municipal elections held on October 26th and November 2nd revealed theSNM’s loss of popular support—it attracted only around 7% of votes, comparedwith the 40% support that it received in the 2001 parliamentary election.Although the SNM’s performance was slightly stronger than generallyexpected, the local election results are likely to lead to further strains withinthe party, and will also lead to pressure from the MRF for a greater role in thegoverning coalition.

At least in principle, the general political approach of the centre-right UnitedDemocratic Forces (UtdDF) has much in common with the policies of thepresent ministerial team. However, the UtdDF has continued to attack the SNM,and an agreement between the two groups looks unlikely. Instead NadezhdaMihailova, the leader of the Union of Democratic Forces (UDF, the maincomponent of the UtdDF), has shown signs of rebuilding relations with StefanSofianski, who defected from the UDF in 2001. Mr Sofianski was re-elected asmayor of Sofia in November, with UDF support in the second round of theelection, after defeating Ms Mihailova in the first round. Although the UDF hascalled for an early parliamentary election, the party has serious internaldivisions and Ms Mihailova could yet face a challenge to her leadership.

As expected, the opposition Bulgarian Socialist Party (BSP) proved to be themost popular party in the local elections, although its level of support outside

Domestic politics

Election watch

8 Bulgaria


its traditional heartlands was lower than the party was hoping for. The BSP willtry to take advantage of the government’s weak position, but is likely toconcentrate its attacks on the SNM while being more friendly towards the MRF,seeing it as a potential future coalition partner.

The weakness of the SNM and the possibility of more serious disputes withinthe coalition mean that there is still a risk that the next parliamentary electionwill be brought forward to 2004. However, even though the government’sposition is likely to weaken further, the BSP will probably not push for an earlypoll, hoping that delay will help it to broaden its support. Whether the electiontakes place in 2004 or, as scheduled, in 2005, the BSP is likely to return to office,probably in coalition with the MRF. A BSP government would retain the currencyboard and the current government’s emphasis on joining the EU, but would belikely to increase the budget deficit and be less enthusiastic about structuralreform. It may also be less pro-US in its general foreign policy stance. However,the obligations of EU accession and worries about endangering the currencyboard—the previous BSP government presided over the 1996-97 currency crisis—would limit a BSP government’s room for manoeuvre in economic policy.

Bulgaria’s foreign policy will continue to be dominated by its pursuit of NATOand EU membership. There has been some tension between the two objectives,as Bulgaria’s support for the US over Iraq—it is contributing 450 troops to thePolish military zone—has been criticised by some EU members. Mr Asparuhov’sdecision to withdraw from being Mr Saxe-Coburg’s adviser has removed apotential problem in Bulgaria’s relations with NATO, and Bulgaria should jointhe alliance by the middle of 2004. The uncertain security situation in Iraqraises the risk of Bulgarian casualties, which could lead to further populardissatisfaction with the government.

Bulgaria received a generally favourable assessment in the EuropeanCommission’s annual report of its progress towards EU membership inNovember 2003. The target date for Bulgarian and Romanian entry to the EU is2007, but Romania’s slower progress is leading to worries that Bulgaria’saccession may be held back. In addition, the EU is likely to face difficulties inabsorbing the central and east European entrants from the first round ofenlargement in 2004. There is therefore a significant risk that Bulgarian entry tothe EU will be delayed beyond 2007.

Economic policy outlook

Economic policy over the forecast period will be driven by commitments to theIMF (the present stand-by arrangement with the Fund is likely to be replaced bya precautionary arrangement early in 2004) and the implementation ofmeasures required for EU entry. Political pressures for a looser fiscal policy arelikely to intensify. Court rulings over the disputed sale of the BTCtelecommunications firm are likely to force the government to sell to the US-backed Viva Ventures. Lobbying from the MRF in favour of the alternativeTurkish bidder has delayed the BTC sale, and may also make it difficult for thegovernment to proceed quickly with a new attempt to sell parts of theBulgartabac tobacco firm. Several foreign energy groups have expressed interest

Policy trends

International relations

Bulgaria 9


in the privatisation of the seven regional electricity distribution companies, butpolitical pressures are likely to lead to delays here as well.

The government budget benefited from strong revenue growth in 2003. Theconsolidated budget ran a surplus of Lv971m (US$577m) in the first ten monthsof the year. Although there will have been a big surge in discretionary spendingat the end of the year, and additional funding will have been needed to covershortfalls in local government and the health system, the government is likelyto have kept to its commitment to the IMF to balance the budget over 2003 as awhole. A deficit of 0.7% of GDP was originally planned for 2003.

The budget deficit target for 2004 is 0.7% of GDP, 0.2 percentage points higherthan the original target. After IMF criticism, the government’s plans forsignificant extra off-budget spending have been scaled back and thegovernment has agreed with the IMF that it will go ahead only if the current-account situation begins to improve. The government has pushed back theobjective of moving to a balanced budget from 2005 to 2006 and the electoraltimetable makes it unlikely that there will be a significant tightening in budgetpolicy in 2005, even if the macroeconomic situation requires it.

Under the currency board arrangement, the lev is tied to the euro, so that theBulgarian National Bank (BNB, the central bank) has little discretion in settingmonetary policy. Bank lending has been growing rapidly and this is expected tocontinue. This will support domestic demand, but the BNB is alreadyexpressing concern that credit growth is contributing to the rise in the current-account deficit. If fiscal policy is not tightened significantly, the central bankmight have to intervene via higher reserve requirements or direct controls onlending in order to restrain the growth in domestic demand.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2002 2003 2004 2005Real GDP growthWorld 2.9 3.4 4.1 4.1Italy 0.4 0.4 1.5 1.9EU 1.0 0.6 1.9 2.2Exchange rates¥:US$ 125.3 115.7 109.8 114.8US$:€ 0.945 1.132 1.230 1.185SDR:US$ 0.772 0.713 0.683 0.698

Financial indicators€ 3-month interbank rate 3.33 2.35 2.25 2.94US$ 3-month commercial paper rate 1.70 1.08 1.38 3.56

Commodity pricesOil (Brent; US$/b) 25.0 28.7 22.4 20.1Gold (US$/troy oz) 310.3 357.8 350.0 320.0Food, feedstuffs & beverages (% change in US$ terms) 12.7 5.5 3.2 11.1Industrial raw materials (% change in US$ terms) 2.2 9.5 5.2 4.8

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

International assumptions

Monetary policy

Fiscal policy

10 Bulgaria


Global economic conditions are improving. However, the recovery is fragile,and growth in the OECD is not expected to return to its trend rate until late2004. The resurgence is being led by the US, and, although the French andGerman economies returned to growth in the third quarter of 2003, the EUeconomies are likely to recover only slowly. The Economist Intelligence Unitexpects GDP in the EU to grow by 1.9% in 2004, only returning to trend (2.2%) in2005. However, Turkey, which is one of Bulgaria’s largest export markets, isexpected to fall back into recession in 2004 and, as a result, the overall growthof Bulgaria’s export markets is expected to be no faster in 2004 than in 2003.

Oil prices have remained high, as hopes for an early resumption of large-scaleoil deliveries from Iraq have proved overoptimistic. We estimate that oil pricesaveraged US$28.7/barrel in 2003 (US$3.7/b higher than their average level in2002) and expect them to fall back to US$22.4/b in 2004 and US$20.1/b in 2005,in response to increasing supply. The US dollar is expected to weaken further in2004, averaging around US$1.23:€1 (compared with US$1.13:€1 in 2003), beforestrengthening again in 2005. Global interest rates will rise only slightly in 2004but will increase more sharply in 2005, as the economic recovery becomesmore established. Low interest rates will reduce payments on Bulgaria’s foreigndebt, and the strengthening of the euro against the US dollar will also help toreduce debt as a proportion of GDP in 2004, as much of the debt is stilldenominated in the US currency. However, it will also reduce thecompetitiveness of Bulgarian exports to markets outside the euro zone.

Gross domestic product by expenditure(Lv m at constant 2000 prices; % change year on year in brackets unless otherwise indicated)

2002a 2003 a 2004b 2005b

Private consumption 22,483.4 23,838.8 24,974.4 25,972.1(3.9)c (6.0) (4.8) (4.0)

Public consumption 2,845.2 2,924.9 3,027.3 3,118.1(6.2)c (2.8) (3.5) (3.0)

Gross fixed investment 5,668.3 6,405.2 7,141.8 7,856.0(9.3)c (13.0) (11.5) (10.0)

Final domestic demand 30,996.9 33,168.9 35,143.5 36,946.2(5.1) (7.0) (6.0) (5.1)

Stockbuilding 414.1 380.0 420.0 440.0(-1.0)d (-0.1) d (0.1)d (0.1)d

Total domestic demand 31,411.0 33,548.9 35,563.5 37,386.2(4.0) (6.8) (6.0) (5.1)

Exports of goods & services 17,408.6 18,986.2 20,715.3 22,720.2(6.2)c (9.1) (9.1) (9.7)

Imports of goods & services -19,633.1 -22,078.4 -24,565.1 -26,955.4(4.7)c (12.5) (11.3) (9.7)

Foreign balance -2,224.5 -3,092.2 -3,849.8 -4,235.3(0.5)d (-3.0) d (-2.5)d (-1.2)d

GDP 29,186.5 30,456.7 31,713.6 33,150.9(4.8)c (4.4) (4.1) (4.5)

a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.d Contribution to real GDP growth.

Real GDP rose by a reported 4.2% in the first nine months of 2003, as domesticdemand, with private consumption and fixed investment in the lead, grew

Economic growth

Bulgaria 11


strongly. Gross fixed investment was up by 17% year on year in the first threequarters of 2003 and we expect capital spending to be sustained in 2004 byincreased lending to the private sector and the re-equipment of privatised firms.Private consumption rose by 6.1% over this period and, although we expect thepace to ease gradually, continuing growth in real wages and fallingunemployment will allow consumer spending to grow by nearly 5% in 2004and by 4% in 2005. Bulgarian exports will be prevented from growing morequickly in 2004 by the rise in the real value of the lev and the weakness of theTurkish market, but should grow a little more strongly in 2005. Sustainedgrowth in domestic demand and the stronger lev will continue to suck inimports. Overall, we expect the pace of GDP growth to have quickened a littlefurther in the final quarter of 2003, with real GDP rising by 4.4% in 2003 as awhole. Difficulties in key export markets and, perhaps, some central bankaction to restrain domestic demand should lead to a slight slowing in the rateof growth in 2004 (to 4.1%), whereas the weakening of the lev and strongerexternal conditions will allow GDP growth to quicken to 4.5% in 2005.

Year-on-year inflation rose sharply to 5.1% in November 2003, pushed up bysurging food prices. However, although domestic demand continues to risestrongly, underlying price pressures are still limited, and the forecaststrengthening of the euro (and thus the lev) against the US dollar and theexpected fall in oil prices will help to restrain inflation in 2004. We estimatethat low inflation early in the year kept the annual average rate for 2003 as awhole to 2.2%, but we expect inflation to rise to 3.8% in 2004, before fallingback to 3.4% in 2005.

The currency board arrangement is expected to remain in place over theforecast period, with the lev staying fixed to the euro at the current rate ofLv1.95583:€1. The forecast strengthening of the euro will lead to a sharp rise inthe nominal effective exchange rate of the lev in 2004, which will be onlypartly reversed in 2005. We estimate that the real effective exchange rate—basedon the consumer price index—rose by 7% in 2003 and expect this to be followedby a further rise of nearly 8% in 2004. This will damage the competitiveness ofBulgarian producers relative to competitors from outside the euro zone.

Imports, pulled in by the strength of domestic demand, rose much morequickly than exports in the first ten months of 2003, leading to a large increasein the deficit on goods trade. The gap between export and import growthshould gradually narrow over the forecast period, but the trade deficit willwiden further in 2004 before broadly stabilising in 2005. The deficit oninvestment income was boosted by one-off factors in 2003, and it should fallback in 2004, before rising again in 2005 as international interest rates aregradually increased. The increased deficit on goods trade is expected to bepartly offset by an increase in transfers from the EU and from Bulgariansworking overseas. We estimate that the current-account deficit rose sharply toaround 7.4% of GDP in 2003. It should fall back to around 6.4% of GDP in 2004and to 6.1% of GDP in 2005. Inflows of foreign direct investment (FDI) are likelyto have set a new record in 2003, despite the slow progress in privatisation, and

Inflation

Exchange rates

External sector

12 Bulgaria


continuing FDI inflows should mean that Bulgaria will face few problems infinancing its external deficit in 2004-05.

Forecast summary(% unless otherwise indicated)

2002a 2003 b 2004c 2005c

Real GDP growth 4.8 4.4 4.1 4.5

Industrial production growth 2.9 5.0 4.0 5.2Gross agricultural production growth 5.1 0.2 1.5 1.5

Unemployment rate (av)d 17.7 14.0 13.1 12.4Consumer price inflation (av) 5.8 2.2 3.8 3.4

Consumer price inflation (year-end) 3.8 4.2 3.6 3.2Short-term interbank rate 9.3 9.0 8.8 9.5Consolidated budget balance (% of GDP) -0.7 0.0 -0.7 -0.9

Exports of goods fob (US$ bn) 5.7 7.2 8.4 9.4Imports of goods fob (US$ bn) 7.3 9.5 10.9 11.9

Current-account balance (US$ bn) -0.7 -1.5 -1.6 -1.6Current-account balance (% of GDP) -4.4 -7.4 -6.4 -6.1External debt (year-end; US$ bn) 10.3b 11.4 12.0 12.1

Exchange rate Lv:US$ (av) 2.08 1.73 1.59 1.65Exchange rate Lv:€ (av) 1.96 1.96 1.96 1.96

Exchange rate SDR:Lv (year-end) 0.390 0.426 0.425 0.421

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

The political scene

The political scene has been dominated by the local elections held throughoutthe country at the end of October and the start of November. Although theresults, on balance, weakened the government—and strengthened the hand ofthe Movement for Rights and Freedoms (MRF), the junior partner within thecoalition—the poorer than expected performance of the leading oppositionparty has left the government more likely than before to survive its termin office.

Before the local elections, both the Simeon II National Movement (SNM), themain party in the governing coalition, and the right-wing opposition Union of

Local elections make earlyparliamentary poll unlikely

Bulgaria 13


Democratic Forces (UDF) were hit by damaging news stories. Those afflictingthe SNM were predictable or self-inflicted. The 800th day since the SNM-ledgovernment had taken power was in early October and, not surprisingly, thisled to much comment on how much progress the government had made inmeeting prime minister Simeon Saxe-Coburg’s pledge in April 2001 to“transform” the lives of citizens within 800 days. Mr Saxe-Coburg and hisministers duly catalogued the government’s achievements—the most notable ofwhich is the sharp fall in unemployment—and pointed out how thepopulation’s excessive expectations had not corresponded to the SNM’s actualpromises. However, this did little to change the popular mood: the "800 day"pledge had helped the fledgling SNM to achieve a surprise victory in the June2001 parliamentary election; the SNM’s record in office was always going to bejudged with a severity that reflected the excessive hopes that had been investedin the new movement

Although the hostile comment on the “800 days” was inevitable, the disputeover the prime minister’s appointment of retired general Brigo Asparuhov ashis adviser on intelligence matters could have been avoided. Mr Saxe-Coburgmade the appointment, despite clear indications that Mr Asparuhov—a careerstate security official under the former communist regime—was persona nongrata with Bulgaria’s NATO allies. For several weeks Mr Saxe-Coburg stuck tohis decision in the face of increasingly open criticism from the US, the UK andother NATO members. It became clear that Mr Asparuhov would not be givenaccess to NATO’s classified material if he took up the job, and it was evenhinted that the country’s NATO accession prospects could be harmed. In mid-October Mr Asparuhov himself broke the impasse by declining to take up thejob. Much damage had been done to the prime minister, however. Normallyseen as a vacillating figure, he had used up more of his shrinking stock ofpolitical capital in persisting to the end with an ill-judged appointment, forwhich he alone bore responsibility

The scandal that hit the UDF was hardly accidental in its timing. In mid-October—just a fortnight before the first round of local elections—an Israeli-Russian businessman, Michael Chorny, went public with allegations that, in2001, the then prime minister, Ivan Kostov, had extorted US$200,000 from himas a donation to the Demokratsiya foundation, a UDF-affiliated think-tankchaired by Mr Kostov. According to the businessman, an intermediary hadapproached him on Mr Kostov’s behalf and suggested that if he did not makethe donation he might find it difficult to sell Mobiltel, a mobile telephonecompany of which he was trying to dispose at the time. The payment had,accordingly, been made through an offshore company belonging to him. Theallegations were damaging: Mr Chorny had been banned from enteringBulgaria by the Kostov government on the grounds that he was a threat tonational security—a contentious decision that has recently been overturned bythe Bulgarian courts. Mr Kostov and his colleagues denied the allegations,saying that the company that had made the donation had been vetted by theBulgarian financial investigation services. However, by the end of October thefoundation found itself the subject of a Ministry of Finance investigation intoits finances. The UDF leader, Nadezhda Mihailova, also seemed to

Prime minister damaged byintelligence dispute

Corruption scandal hits UDFjust before polling day

14 Bulgaria


acknowledge that there was a case to answer, resigning from the foundation’sgoverning body and promising loudly that, if the money turned out to havecome from Mr Chorny, it would be returned. The outcome of the investigationis still unclear, but it is likely that the allegations had some effect on voting inthe local elections.

Such was the background against which local elections took place. The firstround, for both municipal councillors and mayors, was held on October 26th.The second round, for those mayoral contests where no clear winner hademerged in the first vote, took place on November 2nd. As usual in localelections, the results were complex with no simple uniform trend. However,some conclusions can be drawn. First, turnout was low. Only 48% of thoseeligible to vote actually did so in the first round, down from the 57% turnout inthe previous local elections in 1999. This confirms the widespread populardisillusion with politics and politicians in general—indeed, this disillusion hadplayed a major role in the success of the SNM in the parliamentary election of2001. However, it also shows that discontent with the government is morepassive than active, and is unlikely to bring large numbers of citizens on to thestreets. The low turnout also makes it even more difficult than usual to use thelocal election results as a guide to the next parliamentary election, as thosevoting for the major political parties will have been drawn largely from theircore electorates. However, even on the headline results, it seems clear that thedominance of the major parties is eroding: for the first time for any post-communist election, the share of the vote of the Bulgarian Socialist Party (BSP)and the UDF combined fell under 50%. The support of less committed voters,many of whom voted for independents—46% of votes were for councillorsbacked by none of the major parties—or did not vote at all is likely to play akey role in a parliamentary election.

Secondly, the results of voting for municipal council seats—perhaps the aspectof the local elections that is most similar to national parliamentary polls—showthe BSP in a strong position, but not as strong as pre-election talk of a “left-wingwave” had led its supporters to hope. Nationwide, BSP-backed candidatesreceived rather less than one-third of seats and under 24% of the vote. This gavethe BSP the largest number of councillors but was not the sort of performancelikely to secure it a majority in a parliamentary election, especially as itsrelatively disciplined core electorate gives the BSP a disproportionate advantagewhere turnout is low. The results also show the BSP’s old adversary, the UDF, inslightly better shape than expected. It won over 20% of all council seats and14% of the vote. This was low in comparison to its performance in 1999, but theUDF was still well ahead of its main rival for the right of the political spectrum,the SNM, which won around 10% of seats and just 6.7% of the vote. However,even the SNM could draw some comfort from the results. Its showing inmunicipal council elections was poor—and in sharp contrast to itsparliamentary performance in 2001, where it won almost 43% of the vote—butit unexpectedly won mayoral posts in second-round contests in Kyustendil andDobrich, both medium-sized towns and regional centres.

Low turnout in the localelections

BSP did not perform as well asit had hoped

Bulgaria 15


Even if the BSP was the overall victor, it experienced several setbacks inmayoral contests, mostly at the hands of the UDF. The UDF, for instance, won aresounding 72% of the vote on the first round in Ruse, which had been a modelBSP mayoralty until Dimitur Kalchev departed for a ministerial post in 2001(the successful UDF-backed candidate, Eleonora Nikolova, had first won thepost in the resultant by-election). UDF-backed candidates also won run-offshandsomely in Yambol and narrowly in Pernik, both traditionally BSP territory.The BSP also suffered two defeats at the hands of independents in Sliven,where the BSP incumbents lost to former football star Yordan Lechkov, and inthe “red” bastion of Vratsa. One of the two SNM victories (in Kyustendil) alsoinvolved the defeat of a BSP incumbent. The BSP won only two newmayoralties in regional centres, by contrast, in Pazardzhik and Smolyan. Both,however, involved the defeat of UDF-backed incumbents, emphasising thepoint that, if there was no left-wing wave, there was no surge in support for theUDF either.

The clearest result from the local elections was the strong performance of the(mainly ethnic Turkish) MRF. Its share of the total vote for municipal councillorswas 9.4% (compared with 7.5% in the 2001 parliamentary elections). And itregained the mayoral seat of Kurdzhali, the centre of one of its core areas ofsupport. None of this was very surprising. The MRF lost Kurdzhali in 1999 asthe result of unusual tactical anti-Turkish manoeuvres by the other politicalparties. The MRF is generally assumed to have the most loyal electorate, so thatit will perform most strongly when turnout is low. Indeed, it made strenuousefforts to ensure that its supporters voted—in Kurdzhali it reportedly bussed inethnic Turks who had emigrated to Turkey in the early 1990s but still retainedBulgarian citizenship. Overall, the results have strengthened further the MRF’sposition at national level.

The centrepiece of the local elections, however, was the mayoral contest inSofia. The capital had returned UDF mayors in every election since the fall ofcommunism, the incumbent Stefan Sofianski having been elected on a UDFticket in 1995 and 1999. Mr Sofianski broke with the UDF in 2001, however, andwas running formally as the candidate of the Union of Free Democrats (UFD)—a party that he had himself established and which so far has little substanceaside from its leader. However, in practice, his campaign was based on hispersonal popularity and his record as mayor and also as caretaker primeminister during the economic and political crisis of 1997. The UDF leader,Ms Mihailova, took the gamble of pitting herself against Mr Sofianski. In theevent, she lost in the first round, not just to Mr Sofianski but also to the BSP-backed candidate, the non-party former finance minister Stoyan Aleksandrov.Mr Aleksandrov surprised many by winning just 3,000 votes less thanMr Sofianski in the first round, with 28.7% of the vote against Mr Sofianski's29.9%. Ms Mihailova received just 22.5%, with polls suggesting that she hadslipped behind Mr Aleksandrov only after the Chorny scandal broke. The SNMdid even worse: its candidate, sports minister and confectionery magnate VasilIvanov, won just 6% of the vote. This was less even than the 8% achieved by thecurious alliance between the People’s Union (junior partners of the UDF inparliament) and former TV satirist Lyuben Dilov.

Strong vote for the MRF

Sofianski relies on UDFsupport to stay mayor of Sofia

16 Bulgaria


The first-round results were followed quickly by an open alliance betweenMr Sofianski and Ms Mihailova. The latter urged UDF supporters to vote for theincumbent on the grounds that he was preferable to a mayor backed by what,according to her, was a still unreformed communist party. The SNM andMr Dilov, who had spent much of the election campaign attacking Mr Sofianskifor sleaze, also backed Mr Sofianski in the second round. The various centre-right groups cemented this arrangement by agreeing on the post-electoraldistribution of municipal posts. Aside from the BSP, Mr Aleksandrov receivedsecond-round support from the MRF, which had already shown itsindependence from the SNM in the first round by putting up its own candidate.Given that MRF support in Sofia is minimal, however, the gesture was moresymbolic than real. Unsurprisingly, the result in the second round was a victoryfor Mr Sofianski, who won 53.7% of the vote in the run-off. This was a clearvictory for the centre-right over the BSP, although, according to the MBMDpolling agency, around one-third of UDF supporters stayed at home rather thanvote for Mr Sofianski—and 8% of those who voted even opted forMr Aleksandrov.

The BSP’s weaker than expected performance in the local elections and theperception that political stability will be important in concluding the EUnegotiations by the end of 2004 have reinforced the cautious approach of most,although not quite all, of the party leadership to an early parliamentaryelection. The party is now engaged in a prolonged process of putting togetherits policies, with a view to being ready to govern when the time comes—on theapparent assumption that this will probably not be before the scheduledelection date of mid-2005. In the meantime, the BSP continues to harry thegovernment over its policies on the Kozlodui nuclear power plant, the budgetand organised crime.

The election results have not resolved the divisions within the UDF.Ms Mihailova has survived as party leader, despite her poor performance in theSofia mayoral contest. A meeting of the top party council in late November didnot raise the issue of her leadership and noted that a coalition of right-wingforces—her favoured strategy—was the way forward for the UDF. However,Ms Mihailova seems no nearer than before to consolidating her position withinthe party. Hardline elements are unhappy at her compromises withMr Sofianski, and Mr Kostov, a former UDF prime minister, is becomingincreasingly active. In a long television interview in early December he notonly defended himself on the Chorny question and made a wide-rangingattack on government policies, but also criticised his own party—andMs Mihailova—for offering no clear alternative.

Reaction to the local election results within the SNM has been limited so far,probably because the party’s poor performance had been discounted inadvance. There have been demands for a new round of government changes,with Valentin Tserovski, the regional development minister who was also incharge of the party’s local election campaign, the leading candidate for removal.The right-leaning New Time (Novoto Vreme) faction within the SNM has beenespecially vocal in its discontent, backing UDF demands that the interior

BSP is not pressing actively forearly election

UDF is still suffering fromserious internal divisions

Tensions within thegovernment continue

Bulgaria 17


minister, Georgi Petkanov, should be sacked for his inability to control crime.One New Time MP has suggested even more radical changes, withMr Sofianski taking over as prime minister in a right-of-centre coalition, but thishas so far found little response within the SNM, or indeed from Mr Sofianskihimself. The MRF, boosted by its strong performance, has also demandedcabinet changes. Its pressure has forced some changes in the 2004 budget (seeEconomic policy) but Mr Saxe-Coburg has so far resisted all demands forpersonnel changes.

If the government’s existence is not immediately threatened, however, it is stillunder severe pressure. There are increasing popular concerns about organisedcrime, fuelled by a wave of high-profile killings in what is assumed to be anunderworld turf war—the latest being the assassination in Amsterdam in earlyDecember of suspected “drug lord” Konstantin Dimitrov (alias “SamokovKosyo”). This concern is not confined to Bulgarians: the US ambassador madean outspoken attack on the authorities’ ineffectiveness in early December. Thegovernment is also contending with the effects on food prices of a poor grainharvest. Mehmed Dikme, the MRF-aligned agriculture minister, has beencriticised for poor management of sales from the state grain reserves

Finally, there is the issue of the Kozlodui nuclear power plant, which becametopical again with the EU “peer review” mission in mid-November. This reviewhad been promised in September 2002 in return for the government’s(domestically unpopular) commitment to the EU to shut Units 3 and 4 of thenuclear power station by 2006. A definitive report is not expected for somemonths but, once the EU experts had left, the government had to startpreparing Bulgarians for the fact that even the most favourable results of thepeer review would not be likely to change the EU’s insistence on closure. Theprime minister, along with the foreign minister, Solomon Pasi, and the ministerfor European integration, Meglena Kuneva, therefore talked loudly of thecatastrophic results for EU accession of reopening negotiations on the issue andthe need to focus on the question of compensation. A barrage of attacks fromthe opposition (especially the BSP) and the country’s powerful nuclear lobbyfollowed. Caught between commitments to the EU and domestic publicopinion, the government is in a difficult position.

The government has achieved some successes on the foreign policy front. TheEuropean Commission’s annual report in November on Bulgarian progress inmeeting the requirements of EU membership was generally positive. However,the local media focussed mainly on worries that the prospects for Bulgarianentry to the EU would be held back by Romania’s slow progress. Bulgaria'shopes that it might be allowed to join the EU ahead of Romania are likely tobe disappointed.

Bulgarian relations with the US are also generally good, boosted by thepresence of Bulgarian troops in Iraq. Consultations are starting on the possiblesiting of US military bases in Bulgaria. Whether the arrival of US bases wouldprove to be an asset or a liability in domestic political terms is unclear. Publicopinion is divided on the issue, since many fear that a permanent US presencewould increase the risk of Bulgaria's becoming a terrorist target (a risk

Closure of Kozlodui remains adifficult problem

18 Bulgaria


dramatised by the November bombings in Istanbul). In addition, although theBulgarian force in Iraq has not yet sustained any major casualties, it remains tobe seen how public opinion would react if Bulgarians were to be killed there.

Economic policy

At a headline level, the government’s fiscal performance has continued to bevery impressive. At the end of October 2003 the consolidated governmentbudget showed a surplus of almost Lv971m (US$577m), 50% higher than thesurplus recorded in the first ten months of 2002, which had itself been seen asa remarkable achievement. The surplus was very much larger than the modestsurplus that had been agreed with the IMF.

The unexpectedly strong fiscal position seems to be attributable to a muchmore rapid than expected growth of revenue rather than any significanttightening in control over public spending. Nominal government expenditurerose by a brisk 9.7% year on year in the first ten months of the year—faster thanthe estimated growth in nominal GDP—and a somewhat greater proportion ofprojected annual expenditure (1.4 percentage points) had been committed bythe end of October 2003 than in the same period of 2002. By contrast, nominalrevenue rose by over 12% over this period, and the revenue figure for the firstten months of 2003 represented 3.4 percentage points more of the annual targetthan in the corresponding period of 2002.

Among revenue categories, the various levies collected by the customs servicehave shown the strongest increases. These represent value-added tax (VAT) andexcise duty on imports, collected at the point of import rather than on sale, aswell as customs duties, fees and fines, which, with tariff rates falling, accountfor a relatively small proportion of the total. The strong rise in custom revenueis the result of two factors: an underlying rise in imports and an improvementin the revenue collection rate as a result of the ongoing customs reformprogramme—which may also have led to recorded imports rising more quicklythan actual imports.

Consolidated state budget, 2003(Lv million, unless stated otherwise)

Jan-Aug Jan-Sep Jan-Oct 2003 planJan-Oct

(% of plan)Total revenue 9,159 10,311 11,573 13,374 86.5

Total expenditure 8,430 9,464 10,602 13,637 77.7Balance 729 848 971 -263 -

Source: Ministry of Finance.

As the government planned to run a consolidated deficit of Lv263m for 2003 asa whole, the original budget plans would have given the government scope fora huge increase in spending at the end of the year. With the current-accountdeficit rising fast (see Foreign trade and payments), the IMF was worried thatsuch an increase in public spending at the end of 2003 would give a furtherboost to domestic demand and push up the current-account deficit even more.As a result, in its negotiations with the government in November, the IMF

Strong revenue growth leadsto huge budget surplus

Bulgaria 19


pressed for the government to agree to a balanced budget for 2003 rather thanthe original deficit.

Surprisingly, in the light of the local election results, the government agreed tothe IMF’s demands. This partly reflects the sympathy of the fiscally orthodoxfinance minister, Milen Velchev, with the IMF’s views. However, it also reflectsthe pressure within the government to secure IMF approval for a more relaxedfiscal approach in 2004. Despite IMF pressure for a cut in the planned deficit for2004 from 0.7% of GDP (as proposed in the government’s draft budget) to 0.5%of GDP, the government eventually secured IMF acceptance for the higher 2004deficit target.

The draft budget for 2004 was submitted to parliament in early Novemberbefore the IMF had given its blessing to the higher deficit. It envisaged nominalincreases of 7.8% in both spending and revenue relative to the original targetsfor 2003 (although growth relative to the actual outturn for 2003 will be ratherlower, especially on the revenue side). Total revenue was projected atLv14,416m, total expenditure at Lv14,701m. A nominal increase of nearly 8%represents substantial real growth, given that the government is projectinginflation in 2004 of just 4%. Moreover, with the official forecast for real GDPgrowth at 5.3%, both spending and revenue fall only slightly as a share of GDP(to 38.7% and 38% of projected GDP, respectively). The government has clearlyabandoned its previous objective of bringing down both shares by around1 percentage point per year.

On the expenditure side, the budget seems to represent a shift towards moresocial spending. Healthcare spending is scheduled to increase by 15.1% innominal terms, rising from 4% of GDP in the 2003 budget to 4.3% of GDP in2004. In the case of education, the nominal rise was even higher, at 16.3%,with the GDP share increasing from 3.9% to 4.2%. An additional Lv350m was tobe distributed in pensions, although not in an entirely even manner, sinceLv150m of this was the result of raising the ceiling on state pensions fromLv200 to Lv420, a measure benefiting the relatively small percentage ofpensioners who retired on high salaries. Some flexibility was given by the fallin expected interest payments on the foreign debt, from the 2.4% of GDPprojected in the 2003 budget to 2.1% of GDP in 2004, a function partly of theUS dollar:euro exchange rate and partly of the low forecast levels forinternational interest rates.

Changes on the revenue side have already proved to be more controversial.Following long-established trends, the share of revenue raised from indirecttaxes is to rise further. The excise duty levied on tobacco products was doubled,in line with a general policy of raising such duties gradually to EU levels. Theexcise duty on petrol was also increased by 12.5%, prompting taxi- and truck-drivers to protest by blocking the traffic outside parliament. However, directtaxes, particularly on business, are to be cut again.

In this area, Mr Velchev seems to have made two concessions to pressure fromministerial colleagues. In May 2003 he had promised to cut the lowest rate ofincome tax from 15% to 12% in 2004, and to increase the threshold at which it

Shift to higher social spendingin 2004 budget

Higher excise duties but cuts indirect taxes in 2004

20 Bulgaria


began to operate from Lv110 per month to Lv120. However, Mr Velchevbacktracked on this pledge in initial versions of the 2004 budget, proposinginstead to keep both figures at 2003 levels. This provoked opposition from thejunior coalition member, the Movement for Rights and Freedoms (MRF), whichinsisted that the original promise be included, and Mr Velchev was forced toconcede. Lidiya Shuleva, the deputy prime minister and minister for theeconomy (and a frequent antagonist of Mr Velchev) held Mr Velchev to anotherpledge. The finance minister had, since August, been advocating a cut in thecorporate income-tax rate from 23.5% to 22%, rather than to the 20% that thegovernment’s tax strategy had originally pencilled in for 2004. Ms Shuleva,backed by local business groups, insisted on retaining the commitment to the20% rate. To general surprise, shortly before the budget draft was finalised,Mr Velchev finally proposed a corporate tax rate of 19.5%. Local observerssuspect that the extra 0.5-percentage-point reduction was deliberately intendedby Mr Velchev to upstage Ms Shuleva.

Mr Velchev, although unable to stop the MRF’s amendment on personalincome taxes, did not accepted the MRF’s success with such good grace. As partof his efforts to plug the Lv70m hole left in the budget by the personal income-tax changes, he proposed to cut Lv25m from state subsidies to farming extendedvia the State Tobacco Fund and the State Agriculture Fund. This would hit thematerial interests of the MRF’s main supporters—primarily agrarian ethnicTurks—and also represent a bureaucratic defeat for the MRF’s senior cabinetmember, the agriculture minister, Mehmed Dikme. Although Mr Velchev andMr Dikme agreed a compromise in early December, involving a smaller cut insubsidies on agriculture and tobacco, the episode re-emphasises the continuingdisagreements within the government.

The trade off agreed with the IMF on the formal budget—a balanced budget in2003 against a slightly higher deficit in 2004—is not likely to have a majormacroeconomic impact. However, decisions surrounding the spending of someof the fiscal reserve could have a much greater effect on the economy in 2004.These issues appear to have been the main topics of debate between thegovernment and the IMF, with the government—and especially the MRF—pressing for the ability to spend some of the fiscal reserve on capital projects. InSeptember 2003 the fiscal reserve stood at Lv4.4bn, around twice the intendedlevel of one year’s debt payments.

The additional spending plans involved the earmarking of Lv775m forinfrastructure projects of a sort especially likely to provide work for the MRF’sunderemployed rural supporters. Of this amount, Lv500m was to go to theconstruction of highways, via capitalisation of the state-owned companyAvtomagistrali, Lv100m was to be allocated to the State Agriculture Fund, andLv44m was to go to the National Forests Company. Initially, both Mr Velchevand the IMF reacted negatively to the idea of mobilising almost 10% of thefiscal reserve to finance road-building.

By late November it seemed that both had overcome most of their reservations.The IMF, however, has insisted that spending financed from the fiscal reserve,which could amount to 2% of GDP, should be classified as expenditure (and so

IMF clears spending fromfiscal reserve—on conditions

Bulgaria 21


subject to parliamentary control) rather than as “financing of the deficit” (whichcan be spent at the discretion of the finance minister). Of the Lv500m to beallocated to Avtomagistrali, Lv200m was to be financed from savings from the2003 budget, the rest by drawing on the fiscal reserve. More controversially, theIMF and the government have agreed that these plans will be postponed untillate 2004 and will be implemented then only if the current-account deficit hasbegun to narrow. This is likely to lead to further arguments between the IMF,Mr Velchev and the MRF in the second half of 2004.

The IMF also expressed concern about the rapid growth of bank lending to theprivate sector (see The domestic economy: Financial indicators). The IMF andthe Bulgarian National Bank (BNB, the central bank) have agreed a package oftechnical measures designed to improve the supervision of the banking system,rather than acting directly to curb credit growth.

In all, the IMF continues to be pleased with Bulgaria’s overall performance.The final review mission for the current two-year stand-by agreement leftBulgaria at the end of November declaring that it would be recommendingdisbursement of the final tranche early in 2004, and IMF officials are talkingin sanguine terms about an agreement to follow the stand-by agreement.Given Bulgaria’s strong recent economic performance and its improved abilityto raise capital on international markets, the next agreement is likely to bea “precautionary” one, involving the disbursement of IMF funds only if theyare needed.

Meanwhile, neither of the two major privatisations that have dragged onembarrassingly is yet drawing to a close, although there has been some limitedprogress. In the case of the national telecommunications company, BTC, somemeasure of legal clarity, at least, has been reached. Judicial decisions in lateSeptember and early October confirmed the claims of the consortium led bythe US fund Advent and rejected the government’s attempts to choose thealternative bidder, a Turkish consortium comprising Koc Holding and the state-owned Turk Telekom. However, the Privatisation Agency has not yet followedthe courts’ instructions to sign the deal with Advent—the result, most localobservers believe, of behind-the-scenes lobbying from the MRF in favour of theTurkish consortium. There were unconfirmed press reports in mid-Decemberthat the MRF was prepared to concede by accepting Advent as the purchaser ofBTC in early 2004 but, given recent experience, it would be premature toassume that the deal will go ahead without further problems.

There has been more progress on the privatisation of the national tobaccoholding, Bulgartabac. After the failure of attempts to sell Bulgartabac as a singleentity, the government has drawn up a new sale strategy involving theseparate sale of individual units of the company. This represents a change ofposition from the MRF and should increase the chances of a successfulprivatisation, as some Bulgartabac subsidiaries, such as the Sofia andBlagoevgrad cigarette factories, are profitable. There have been open orreported declarations of interest from major companies including Philip Morris(US), B.A.T, Gallaher (both UK), and Japan Tobacco. The implication is that theless attractive units of Bulgartabac will be closed or sold for a nominal price

IMF likely to pay final trancheof stand-by arrangement

Progress in privatisationcontinues to be slow

22 Bulgaria


with some of the proceeds from the sale of the profitable units used toimprove the financial conditions of the weaker subsidiaries and to financesocial programmes to deal with the consequences of closure. In any case, thepace of asset sales is likely to be slow. Mr Dikme has mentioned mid-2005 as alikely end-date, although this would conflict with the EU’s requirement tocomplete the process by the end of 2004.

It is not yet clear how smooth the progress of energy privatisation will be. Thefirst two tenders for regional licences to develop gas distribution yielded mixedresults: both produced only one contender on the first attempt in October,prompting an extension of deadlines by a month. The Plovdiv-based Trakiyaregion attracted no further bids, but the northern region of Miziya receivedanother two. The tenders for privatisation of Bulgaria’s eight regional electricitydistribution companies (grouped in three packages) have also been delayed,and the original deadline (December 5th) for the purchase of tender documentswas extended by a week. Eight companies have so far purchased tenderdocuments and public statements make it likely that at least Italy’s Enel,Greece’s PPC, the Czech firm CEZ, and Russia’s UES are likely to submit bids.Interestingly, despite the slow pace of privatisation, recent statistics for foreigndirect investment (FDI) indicate that FDI inflows in 2002 were much higherthan previously assumed, and FDI inflows in 2003 are set to have risen to anew record level (see Foreign trade and payments).

Main economic policy indicatorsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Consolidated budget revenue (Lv m)2001 852 753 1,171 1,242 1,089 955 1,004 831 808 1,004 909 1,2202002 889 817 1,076 1,259 1,115 908 1,183 947 986 1,132 1,003 1,2102003 1,029 921 1,271 1,411 1,182 1,017 1,224 1,105 1,153 1,262 – –Consolidated budget expenditure (Lv m)2001 1,092 877 928 1,004 988 1,007 1,221 863 868 862 912 1,4722002 1,020 838 963 1,108 888 917 1,110 934 911 978 1,122 1,9542003 1,131 967 1,013 1,112 974 1,008 1,199 1,027 1,034 1,139 – –Consolidated budget balance (Lv m)2001 -240 -124 242 238 102 -52 -217 -32 -60 141 -3 -2522002 -131 -20 113 151 227 -9 73 13 75 153 -119 -7442003 -101 -46 258 299 209 9 24 78 119 123 – –

Exchange rate (av; Lv:US$)2001 2.08 2.12 2.15 2.19 2.23 2.29 2.27 2.17 2.14 2.16 2.20 2.192002 2.21 2.25 2.23 2.21 2.13 2.05 1.97 2.00 2.00 1.99 1.95 1.922003 1.84 1.82 1.81 1.80 1.68 1.68 1.72 1.76 1.75 1.67 1.67 –Real effective exchange-rate index (CPI-based; 1997=100)2001 122.5 121.6 120.6 118.9 117.7 116.1 116.6 119.0 121.0 122.5 122.0 122.82002 125.3 126.4 126.9 126.6 125.8 125.4 127.3 125.6 126.4 127.5 129.4 130.42003 133.3 133.5 133.3 133.7 136.5 133.2 133.4 133.2 134.2 – – –

Real effective exchange-rate index (PPI-based; 1997=100)2001 121.1 122.7 122.7 121.4 120.8 119.9 121.1 123.7 125.7 125.1 124.0 122.52002 122.1 122.8 123.5 124.7 125.8 127.0 129.1 129.0 130.2 130.6 132.1 133.52003 136.4 137.8 138.0 134.8 137.2 138.2 137.6 137.4 138.5 141.4 – –M3 (Lv m)2001 10,010 10,106 10,225 9,915 10,193 10,464 10,796 10,903 11,102 11,149 11,436 12,4012002 12,298 12,310 12,330 12,401 12,150 12,103 12,446 12,736 12,815 12,950 13,140 13,8572003 13,612 13,789 13,662 13,901 13,926 14,328 14,788 15,246 15,243 15,878 – –

Bulgaria 23


Main economic policy indicatorsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

M3 (% change, year on year)2001 34.1 33.1 32.6 28.7 34.8 37.2 26.9 24.2 25.4 15.8 19.0 25.82002 22.9 21.8 20.6 25.1 19.2 15.7 15.3 16.8 15.4 16.2 14.9 11.72003 10.7 12.0 10.8 12.1 14.6 18.4 18.8 19.7 18.9 22.6 – –Commercial bank lending rate (av; %)2001 13.4 11.9 10.1 9.3 10.2 11.6 11.1 11.4 11.2 9.4 11.3 12.52002 9.6 9.4 9.3 9.7 9.2 9.3 9.8 9.5 9.7 8.4 8.7 9.82003 8.5 9.4 8.7 8.4 10.0 9.7 8.3 7.5 9.3 – – –

Commercial bank deposit rate (av; %)2001 3.0 3.0 3.0 2.8 2.8 2.8 2.8 2.9 2.8 2.9 2.8 2.82002 2.8 2.7 2.7 2.7 2.8 2.7 2.7 2.7 2.7 2.9 3.0 2.82003 3.0 3.0 3.0 2.8 2.9 2.9 2.9 2.9 2.8 – – –

Sources: National Statistical Institute; Bulgarian National Bank; IMF, International Financial Statistics.

The domestic economy

Output and demand

The National Statistical Institute (NSI) published GDP figures for the thirdquarter of 2003 in mid-December. The pace of year-on-year GDP growthslowed marginally from 4.4% in the second quarter to 4.3% in the third quarter,taking the GDP growth rate for the first nine months of the year to 4.2%. Theslowdown in the rate of growth between the second and third quarters is toosmall to be significant, and, judging by the subsequent revisions to the initialquarterly national accounts figures for 2002, it could well disappear when thefull figures for 2003 as a whole are published in April 2004.

Gross domestic product by expenditure(real % change, year on year unless otherwise indicated)

2002 20034 Qtr 1 Qtr 2 Qtr 3 Qtr

Private consumption 7.1 7.1 7.3 4.3

Collective consumption 8.5 -4.0 5.7 5.1Total consumption 7.3 5.9 7.1 4.3

Gross fixed capital formation 14.7 15.8 19.6 16.0Stockbuilding (% of GDP) 1.0 0.5 0.9 3.3

Exports of goods and services 9.3 13.6 11.7 4.0Imports of good and services 10.3 13.9 18.4 13.0GDP 3.4 3.8 4.4 4.3

Source: National Statistical Institute.

The likelihood that the figures will be significantly revised is increased by somesurprising features of the expenditure breakdown of the third-quarter GDPfigures. Although separate figures from the NSI showed retail sales acceleratingagain in the third quarter, with the year-on-year growth in the volume of retailsales rising from 3.8% in the second quarter to 5.2% in the third, the GDPbreakdown suggests that the growth rate of consumer spending slowed from7.3% in the second quarter to just 4.3% in the third.

Growth in consumer spendingslowed in the third quarter

24 Bulgaria


Retail sales in 2003(real % change, year on year)

1 Qtr 2 Qtr 3 Qtr 1-3 QtrTotal 2.1 3.8 5.2 3.8 Food, beverages & tobacco 3.1 5.2 6.7 5.1 Non-food goods 1.5 3.0 4.3 3.0


The apparent slowdown in consumer spending also appears odd in the light ofthe improving labour market situation and the rapid growth in consumer credit.The very large contribution of stockbuilding—stockbuilding is reported to haverisen to 3.3% of GDP in the third quarter, contributing 2 percentage points of the4.3% year-on-year rise in GDP—is also surprising, and, when the GDP figures arerevised in 2004, some of the apparent rise in stockbuilding may be reallocatedto consumer spending.

Movements in the other components of demand were less surprising. Spendingon fixed investment continued to grow strongly, and was 16% higher than in thesame period of 2002. Year-on-year growth in collective consumption was againabove 5%, reflecting a limited relaxation in the tight control over publicspending after the first quarter, once it became clear that tax receipts weregrowing ahead of plan. Finally, the weak growth of exports of goods andservices and the large rise in imports reflects the clear trend in the balance ofpayments, with another strong tourist season unable to compensate for a surgein goods imports and the weakening trend in goods exports. As a result, thedeteriorating foreign balance pulled down the rate of GDP growth in the thirdquarter by 4 percentage points, outweighing the boost to the growth rate fromthe large reported rise in stockbuilding.

Employment, wages and prices

Registered unemployment has continued on its downward trend, though itremains high relative to most of Bulgaria's neighbours. The number of peopleregistered as unemployed fell for the eighth month in a row in September, to472,614 (12.76%), the lowest total since December 1998, before rising slightly to476,326 in October. The rise in October is a normal seasonal effect reflecting theend of casual summer jobs in agriculture and tourism and the usual decline inconstruction activity in the autumn. The year-on-year fall in registeredjoblessness has quickened in recent months, with unemployment in August,September and October around 170,000 lower than a year earlier—thecomparable figures for April and June were 127,000 and 155,000 respectively.

The drop in unemployment is confirmed by the NSI’s household survey, whichmeasures unemployment on the internationally accepted International LabourOrganisation (ILO) definition. On the survey figures, unemployment in thethird quarter was 426,000, over 160,000 lower than in September 2002 (thesurvey switched from being held in March, June, September and December to acontinuous survey with figures reported on a quarterly basis at the beginningof 2003). The survey also suggests that employment is growing strongly—the

Unemployment is still on adeclining trend

Investment grows strongly butimports surge

Bulgaria 25


broad ILO measure of employment in the third quarter was 2.93m, nearly130,000 higher than in September 2002. With GDP rising by 4-5% over thisperiod, this implies that productivity growth over the past 12 months has beenaround zero for the economy as whole.

However, some serious labour market problems remain. The household surveystill finds that of the 515,000 people who want to work but are not looking foremployment, over 400,000 are not looking because they do not think that theywill find a job. In addition, long-term unemployment remains a majorproblem: almost 260,000 of the registered unemployed in October had beenon the register for more than one year—75,000 lower than in October 2002 butstill a very high number.

Labour indicators(‘000 unless otherwise indicated)

2002 2003Jun Sep Dec 1 Qtr 2 Qtr 3 Qtr

Total labour force 3,400 3,388 3,249 3,204 3,333 3,359Employed 2,801 2,804 2,704 2,704 2,876 2,933Unemployed 599 585 544 500 457 426Unemployment rate (% of labour force) 17.6 17.3 16.8 15.6 13.7 12.7

Persons outside labour force 3,360 3,322 3,461 3,472 3,345 3,320 Would like to work but not available or not seeking work 532 502 568 663 553 515

Population of working age & above 6,760 6,710 6,710 6,676 6,678 6,680Economic activity ratea 50.3 50.5 48.4 48.0 49.9 50.3Employment ratea 41.4 41.8 40.3 40.5 43.1 43.9

Memorandum itemsb

Registered unemployedc 670 649 631 613 529 481Registered unemployment rate (%)d 18.1 17.5 16.8 16.6 14.3 13.0Employed with labour contract 1,905 1,919 1,916 1,980 2,063 2,079

Note. Timing of NSI labour force survey changed from last month of quarter to average over quarter at beginning of 2003.

a % of population of working age and above. b Average over quarter. c National Employment Service (NES) figures. d On basis of NES estimate ofthe labour force of 3.7m in March 2001.

Sources: National Statistical Institute; National Employment Service.

How much further the drop in unemployment will go is unclear. Some of thefall in unemployment is attributable to jobs on government-supportedemployment programmes. These programmes were expanded from late 2002and are now being scaled back. With inflows to unemployment continuing at arelatively high level, the key to further falls in unemployment will lie in theeconomy’s success in generating more jobs in the private sector. Keeping joblesslevels relatively low is, in its way, as much of an achievement as getting themlow in the first place. However, it remains to be seen whether the economy willhave the momentum next year to continue to create jobs at recent rates.

According to the NSI’s figures, average nominal wages rose by just over 5% yearon year in the third quarter of 2003, with wages growing by similar rates in thepublic and private sectors. The rate of growth was lower than in the first orsecond quarters, so that, with inflation rising in the third quarter, the pace ofreal wage growth slowed sharply from over 5% to around 2%.

Government job schemes havebecome less important

Wage growth slows in thethird quarter

26 Bulgaria


As in the second quarter, the moderate growth of the public-sector averagemasks a combination of a low rise in the budget-financed sector and a sharperone for those working in commercial but publicly owned enterprises. However,the low rate of wage growth in the budget sector may reflect compositionalchanges rather than a slow rate of earnings growth for particular jobs. Thus,between September 2002 and September 2003, the numbers of those in thebudget-financed sector rose from 388,200 to 445,600, presumably reflecting theincrease in the number of (low-paid) beneficiaries of state employmentschemes. Those working in state-sector healthcare and education, which areless affected by special employment schemes, received substantial year-on-yearincreases of 20.5% and 12.1%, respectively.

As always, the greatest degree of uncertainty surrounds the NSI’s private-sectorfigures. Reported wages in the private sector are subject to distortion andunderreporting as a means of avoiding social security contributions, but, to theextent that they can be taken seriously, average salary growth seems to bemoderate. Unfortunately, the lev’s link to the strongly appreciating euro meansthat wage growth in the traded sector will have to be very slow—orproductivity growth very rapid—in order to maintain the competitiveness ofBulgarian products.

Level and growth of monthly wages by sector2002 20032 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Level of monthly wages (lev)Public sector 309 317 324 310 328 334Private sector 236 238 243 248 254 251Total 265 268 275 272 283 282Nominal wage growth (%, year on year)Public sector 5.8 8.1 8.5 6.5 6.1 5.6Private sector 5.8 6.9 4.7 6.9 7.6 5.5Total 5.3 6.8 6.0 6.1 6.5 5.2Real wage growth (%, year on year)Public sector -1.2 3.3 4.9 5.9 5.0 2.5Private sector -1.2 2.2 1.3 6.3 6.5 2.3Total -1.7 2.0 2.5 5.5 5.4 2.1


Consumer price inflation has picked up significantly since mid-2003. Themonth-on-month growth of consumer prices was between 0.7% and 0.9% ineach of the months from July to October, and this pushed up year-on-yearinflation from a mere 1.2% in June to around 3.5% in August; it remained nearthis level in September and October. Prices then rose much more quickly inNovember, rising by 1.8% month on month, driving the year-on-year rate up to5.1%. The main reason for the sharp rise in prices in November was a surge infood prices after the poor 2003 harvest. Food prices rose by over 3% month onmonth in November alone.

There is little evidence so far that other domestic inflationary pressures haveincreased significantly. Net inflation, which excludes the prices of food andtransport fuel, was on a gradually rising trend until October but then fell backto 4% in November. Producer price inflation in industry has been more stable,

Inflation rises as food pricessurge

Bulgaria 27


running at around 4% year on year since June, with the overall total boostedby faster growth in mining and the electricity, gas and water industries. Mostmanufacturing branches have recorded growth in producer prices of 3% orlower. However, a few branches, including clothing, office equipment andcomputers, medical and optical instruments; and motor vehicles areapparently increasing their prices at double-digit rates. The rapid growth ofprices in the computer industry is particularly surprising in the light of theinternational trend for prices to fall steadily and the very weak performanceof the branch. There is therefore a big question-mark over the reliability ofsome of these figures, but, if the price trends in these branches were to beeven approximately accurate, they suggest that Bulgaria’s competitive positionin some important sectors is at risk of being eroded if the lev and euroremain near their present levels.

Consumer prices, 2003(% change, year on year)

Jul Aug Sep Oct NovFood products & non-alcoholic beverages -1.0 1.7 2.4 1.7 6.9

Alcoholic beverages & tobacco products 0.5 0.7 0.8 0.9 1.5Clothing & footwear -2.9 -2.9 -2.6 -1.9 -1.4

Housing, water, electricity, gas & other fuels 10.9 11.3 11.2 10.9 9.3Household furnishings, domestic appliances &

household maintenance -0.8 -0.7 -1.0 -0.9 -1.5Healthcare 4.7 5.1 4.9 5.1 5.3

Transport -0.1 2.5 1.0 -0.2 0.2Communications -1.1 -1.2 -1.2 -1.3 -1.3Free time, leisure & cultural recreation 3.0 3.6 5.0 4.9 3.7

Education 5.9 5.9 4.4 5.3 5.5Restaurants & hotels 4.2 3.9 3.6 3.4 3.9

Miscellaneous goods & services 0.6 3.2 3.4 3.7 3.7Total 2.0 3.5 3.6 3.3 5.1 Total excluding food 4.0 4.5 4.3 4.2 3.5 Total excluding food & transport 4.5 4.7 4.7 4.8 4.0

Source: National Statistical Institute, Economist Intelligence Unit.

Financial indicators

The rate of money supply growth has quickened further and is now beginningto become an issue of concern to the authorities and the IMF. Broad money(M3) was growing at 12-13% year on year in early 2003 but its growth rate roseto nearly 20% in the third quarter and was 23% in October. Provisionalinformation suggests that the growth rate slowed slightly in November but wasstill above 20%. Rapid growth in bank lending to households has been themain counterpart of the rise in the money supply. At the end of October thestock of loans to households was 74% higher than a year earlier, a sharpacceleration from the year-on-year growth of 40-50% recorded at the end of2002 and in the first months of 2003. Lending to firms is also rising rapidly,although its rate of growth has remained relatively steady at around 45% yearon year. By contrast, lending to the government continues to have a dampeningeffect on the money supply, as the rising budget surplus reduces government’s

Lending to households jumpsby nearly 75%

28 Bulgaria


overall obligations to the banks. In late November the government was a netcreditor to the banking system, although it is likely to have returned to being anet debtor by the end of the year.

With foreign reserves continuing to rise strongly, despite the higher current-account deficit, the money supply is likely to continue to grow rapidly unlessthe Bulgarian National Bank (BNB, the central bank) takes action to restrict thecommercial banks’ lending activity.

The basic interest rate of the BNB—which, under the currency boardarrangement, is determined by yields set in the monthly Treasury-bill auctionsrather than by the BNB itself—has been virtually unchanged at or just under2.6% since the end of August. However, the basic rate has only a weakrelationship with the interest rates charged on bank lending. According to thecentral bank, the average interest rate on short-term lev credits to enterpriseswas 7.8% in August and rose sharply in September but then fell back to 8.1% inOctober. Interest rates charged on loans in euro were more stable, averagingaround 6.8% over this period. By contrast, rates on US dollar loans have fallenfrom 10.3% in August to just 6% in October. The very large monthly variationin these reported rates seems mainly to reflect shifts in the composition of theloan stock between different types of borrower rather than movements incredit conditions.

Sectoral trends

The sectoral breakdown of the national accounts figures again shows theindustrial sector recording the strongest performance. Gross value added (GVA)in industry, which, in contrast to the monthly gross output figures reportedbelow, includes the construction sector, was 8.4% higher than a year earlier inthe third quarter. This follows year-on-year growth of 6.6% in the first quarterand 6.8% in the second. However, the GVA growth rates for industry are againsignificantly lower than the double-digit rates recorded in the NSI’s monthlyfigures for industrial sales and output.

Interest rates fluctuate sharply

Industrial output continues tosurge ahead

Bulgaria 29


Agricultural GVA in the third quarter was 2.7% lower than in the same period of2003, reflecting a poor harvest after the very dry summer. Year-on-year growthof GVA in services quickened again to 4.2%, but is still lower than the growthrate of 6.6% recorded in the third quarter of 2002. The good tourist season inthe summer will have played an important role in boosting output in theservices sector in the third quarter of 2003.

Gross value added(real % change, year on year)

2002 20034 Qtr 1 Qtr 2 Qtr 3 Qtr

Agriculture 4.0 -1.8 0.1 -2.7Industry (incl construction) 3.1 6.6 6.8 8.4Services 3.1 3.3 3.8 4.2

Private sector 5.7 6.7 8.9 6.1Public sector -3.0 -2.3 -6.4 -2.9Total gross value added 3.2 4.0 4.4 4.0


The NSI's separate monthly series for industrial sales and output show bothproduction measures continuing to rise at double-digit year-on-year rates in thethird quarter, with the growth rates increasing further in October. These figuresappear to be distorted by the use of US dollar values as a proxy deflator forexport production and sales. At a time when the US dollar has fallen by around12% year on year against the euro and the lev, this will give a significantartificial boost to the figures for industrial output and sales.

Growth rates, as usual, vary radically between branches, and some branchesalso showed substantial monthly variation. Sales of metal ores, notably, fell byaround 20% year-on-year in July and August, then rose by as much inSeptember before dropping again in October. However, an impressive numberof branches have seen their output and sales grow strongly. In the first tenmonths of the year growth in output and sales was strongest in pulp and paperproducts, textiles, rubber and plastic products, basic metals and furnituremanufacturing. Output in the coal industry also rose strongly in the thirdquarter. Demand for coal has been boosted by a combination of briskelectricity exports and the decommissioning of the first two units of theKozlodui nuclear power station in December 2002.

Only a limited number of industrial branches have recorded low or negativegrowth rates. However, the apparent sharp falls in output and sales in theproduction of office equipment and computers (down by 30-40% year on yearin the first ten months) look questionable. Although the branch certainly has itsdifficulties, it looks as though problems in the price deflator used may beleading to the real level of output in the sector being underestimated.

Exporting branches againenjoy the biggest output rises

30 Bulgaria


Output and sales in industry, 2003(real % change, year on year)

Output SalesAug Sep Oct Jan-Oct Aug Sep Oct Jan-Oct

Industry total 10.3 15.9 17.8 14.6 11.5 16.3 21.2 17.3Mining and quarrying 9.8 1.7 8.3 4.7 3.5 11.8 -0.3 4.4Manufacturing industry 12.7 19.9 24.2 20.2 13.4 18.0 25.6 20.7 Food products and beverages 18.0 20.9 34.7 19.7 19.5 20.1 33.4 20.3 Tobacco products 36.2 23.2 10.9 13.7 5.5 6.6 -12.1 15.7 Textiles 57.1 52.5 51.0 47.4 40.7 35.7 45.3 37.5 Clothing 14.9 25.9 19.9 24.9 14.6 24.9 22.7 25.4 Footwear & leather goods 21.1 31.1 46.1 19.1 19.1 27.8 39.9 14.0 Wood products 4.4 25.8 16.9 27.9 20.7 30.6 10.1 32.3 Pulp & paper products 31.2 46.5 39.2 43.5 47.3 30.4 58.3 52.3 Publishing & printing -6.2 15.5 49.1 5.1 -11.1 17.8 40.3 2.7 Chemicals and chemical products 15.7 22.7 1.7 11.3 6.2 16.6 9.8 12.6 Rubber and plastic products 47.5 72.4 60.4 42.2 58.4 53.7 61.3 39.8 Other non-metallic mineral products 16.7 23.4 16.3 15.8 25.7 30.8 21.6 21.2 Basic metals 12.1 23.2 30.1 30.1 19.7 20.4 23.6 31.1 Fabricated metal products 0.9 25.8 22.4 13.1 7.8 24.2 25.2 9.6 Machinery and equipment nie 3.2 4.4 6.6 11.8 11.6 17.0 28.1 18.6 Office machinery and computers -32.9 -26.4 -53.0 -41.7 -31.1 -23.3 -47.0 -35.9 Electrical machinery and apparatus nie 22.6 37.7 46.2 29.0 26.8 43.6 50.8 29.4 Radio, TV and communication equipment 3.5 -23.4 103.9 26.0 9.2 -16.1 64.9 25.8 Medical & precision instruments -26.6 -13.9 5.4 8.8 -34.2 -13.1 4.4 2.9 Motor vehicles 35.1 27.5 25.1 17.8 16.2 15.0 28.8 21.0 Other transport equipment -46.7 34.8 -19.4 3.3 -50.7 37.4 -20.2 2.0 Furniture, other manufacturing 22.1 51.3 43.1 45.4 31.0 53.7 34.8 42.4Electricity, gas and water supply 3.5 8.5 3.2 2.8 2.5 8.2 4.6 3.1


Bulgaria 31


Main macroeconomic indicatorsJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Unemployment ('000)2001 709 714 705 708 679 654 644 638 630 637 657 6622002 688 684 669 679 674 659 653 650 645 644 625 6032003 647 612 581 552 529 506 489 481 473 476 – –Unemployment rate (%)2001 19.1 19.3 19.0 19.1 18.3 17.7 17.4 17.2 17.0 17.2 17.7 17.92002 18.6 18.5 18.1 18.3 18.2 17.8 17.6 17.5 17.4 17.4 16.9 16.32003 17.5 16.5 15.7 14.9 14.3 13.7 13.2 13.0 12.8 12.9 – –Consumer prices (% change, month on month)2001 0.6 0.3 0.0 -0.2 0.1 -0.1 -0.2 0.3 1.3 1.7 0.2 0.62002 2.7 1.6 0.8 -0.1 -2.1 -1.7 0.1 -0.7 0.8 1.0 0.2 1.22003 0.6 0.1 0.4 0.3 -0.6 -2.2 0.9 0.8 0.9 0.7 1.8 –Consumer prices (% change, year on year)2001 9.3 8.5 8.9 9.8 9.7 9.4 8.5 5.7 4.7 5.2 4.6 4.82002 7.0 8.4 9.2 9.2 6.9 5.2 5.5 4.5 4.0 3.2 3.2 3.82003 1.7 0.2 -0.2 0.2 1.7 1.2 2.0 3.5 3.6 3.3 5.1 –Producer prices (% change, month on month)2001 -1.5 1.6 0.3 -0.1 0.4 0.1 -0.2 0.3 1.0 -1.1 -0.6 -1.82002 0.4 1.1 1.0 1.0 -0.6 -0.5 0.4 0.7 1.2 0.6 -0.5 1.42003 1.8 1.4 1.0 -3.6 -1.1 1.1 0.4 0.7 0.7 0.9 – –Producer prices (% change, year on year)2001 8.9 9.9 7.2 7.7 5.6 5.9 3.6 3.6 0.0 -2.5 -2.0 -1.82002 0.1 -0.4 0.3 1.4 0.4 -0.2 0.4 0.8 1.0 2.8 2.9 6.32003 7.7 8.1 8.1 3.1 2.6 4.2 4.2 4.3 3.8 4.1 – –Average gross monthly wage (% change, year on year)2001 16.1 12.3 10.1 13.8 12.9 13.9 11.7 11.7 8.9 12.9 9.0 9.82002 8.7 10.5 10.9 5.6 5.9 4.3 7.2 6.9 6.3 7.1 6.7 4.42003 7.6 5.2 5.7 6.9 6.7 6.0 4.5 4.5 6.6 – – –Average gross monthly wage (real % change, year on year)2001 6.2 3.5 1.2 3.6 2.9 4.1 2.9 5.7 4.1 7.4 4.2 4.72002 1.6 2.0 1.6 -3.3 -0.9 -0.8 1.6 2.3 2.2 3.8 3.4 0.62003 5.7 4.9 5.8 6.6 4.9 4.7 2.4 1.0 2.9 – – –Average gross monthly wage (US$)2001 110.8 107.4 111.1 113.1 113.7 110.8 109.5 114.1 119.6 117.2 115.8 123.22002 113.3 112.1 118.6 118.6 126.2 129.4 135.4 132.5 136.3 135.9 139.3 146.52003 146.6 146.0 154.7 155.2 170.5 167.5 162.2 157.7 166.1 – – –

Sources: National Statistical Institute; National Employment Service; Bulgarian National Bank; IMF, International Financial Statistics; Reuters.

Foreign trade and payments

Preliminary trade figures for the third quarter put goods exports at US$1,987m(up 21% on the same period of 2002) and imports (fob) at US$2,500m—up yearon year by 34%. The gap between the growth rates for exports and imports inthe third quarter was wider than in the second quarter and, given that theabsolute level of imports is much higher than that of exports, the deficit ingoods trade widened sharply, more than doubling year on year in the thirdquarter in US dollar terms. As the trade deficit for the first half of 2003 wasover US$1bn, the deficit on goods trade for the first nine months of the yearwas a record US$1.5bn, only US$60m short of the figure for 2002 as a whole.

The fall in the value of the US dollar against the lev and the euro boosts thesefigures, but even in euro terms the trade deficit nearly doubled between the

Trade gap increases sharply asimports rise and exports slow

32 Bulgaria


third quarter of 2002 and the same period of 2003. Some of the increase inimports may be artificial, as measures to improve the efficiency of thegovernment’s Customs Agency may mean that a higher proportion of importsare now captured by the official trade statistics. However, the pace of exportgrowth, which is unlikely to be affected by these changes, has slowedsignificantly as 2003 has progressed. Preliminary figures for October (no detailson end-use or country of origin or destination are yet available) show the tradedeficit continuing to increase, although there were signs of exports growingmore quickly and the pace of import growth slowing a little.

Consumer goods were the fastest growing category of imports in the thirdquarter, increasing by 42% year in US dollar terms. This is a worrying contrast tothe first half of the year, when both raw materials and investment goodsimports grew more quickly than imports of consumer goods. By implication,Bulgaria’s increasing consumer demand is being met disproportionately byimports rather than from domestic production. Import growth seems to havebeen strong almost across all types of consumer goods, including fast-movingconsumer goods, household durables and big-ticket items such as cars. The oneexception is medicines and cosmetics, where year-on-year import growthslowed to 16% in the third quarter.

Imports by end-use(US$ m unless otherwise indicated; cif)

Jul-Sep US$ change, % change, Jan-Sep US$ change, % change,2002 2003 year on year year on year 2002 2003 year on year year on year

Consumer goods 366.9 520.0 153.1 41.7 1,044.5 1,473.9 429.4 41.1 Food, drinks & tobacco 58.2 84.5 26.3 45.2 169.6 235.7 66.1 39.0 Furniture & household appliances 59.9 94.3 34.4 57.4 160.5 244.0 83.5 52.0 Medicines & cosmetics 70.8 82.1 11.3 16.0 194.6 249.2 54.6 28.1 Clothing & footwear 78.1 115.1 37.0 47.4 240.5 352.0 111.5 46.4 Automobiles 50.3 73.7 23.4 46.5 131.9 191.4 59.5 45.1Raw materials 702.6 967.3 264.7 37.7 1,920.6 2,739.4 818.8 42.6 Ores 51.0 77.2 26.2 51.4 100.5 234.1 133.6 132.9 Textiles 184.8 252.0 67.2 36.4 572.5 789.1 216.6 37.8 Wood products & paper 48.6 60.5 11.9 24.5 132.3 166.7 34.4 26.0 Chemicals 49.4 65.4 16.0 32.4 148.8 190.0 41.2 27.7 Plastics & rubber 96.5 132.7 36.2 37.5 239.5 347.9 108.4 45.3 Raw materials for the food industry 42.1 56.7 14.6 34.7 122.0 142.6 20.6 16.9Investment goods 536.0 707.7 171.7 32.0 1,371.4 1,919.3 547.9 40.0

Mineral fuels, oils & electricity 388.7 486.9 98.2 25.3 1,076.7 1,413.6 336.9 31.3 Fuels 363.6 434.2 70.6 19.4 1,017.1 1,292.7 275.6 27.1Other importsa 24.3 29.9 5.6 23.0 64.6 88.4 23.8 36.8

Total imports 2,018.5 2,711.8 693.3 34.3 5,477.8 7,634.5 2,156.7 39.4

a Duty-free imports. New customs declarations do not provide the information necessary to classify by use.

Source: Bulgarian National Bank.

The third-quarter rise of almost 38% in raw material imports (which includessemi-finished goods) is to be expected, given the strong growth in industrialoutput and the heavy dependence of Bulgarian industry on imported inputs.The rate of growth of imports of investment goods was still strong in the thirdquarter (32% in US dollar terms) but was significantly slower than in the firsthalf of 2003. Within the figure for investment goods, imports of vehicles and ofspares (54% and 44.6% respectively) grew most quickly, so that the overall

Surge in imports of consumergoods

Bulgaria 33


growth rate may exaggerate new industrial investment. Finally, mineral fuels,oils and electricity imports—in practice just mineral fuels and oils, since Bulgariaimports no electricity—was the category with the slowest growth in the thirdquarter, growing by little more than 25% in US dollar terms. In this category,coal imports have risen strongly as local production proved insufficient for thegrowing needs of Bulgaria’s electricity industry, and higher imports ofpetroleum products may reflect stockbuilding ahead of the temporaryshutdown (for upgrading) of the Neftochim refinery in the fourth quarter.

The geographical structure of imports in the third quarter held few surprises.Imports from the EU rose by less than the overall average, whereas those from“other OECD” countries, largely Turkey and the US, increased sharply. This mayreflect the effect of the rising euro on cost competitiveness. Imports from theCentral European Free-Trade Agreement (CEFTA) countries grew more quicklythan the average, reflecting recent trends for greater regional integration. Importsfrom Russia grew especially rapidly, balancing a fall in imports from the residual“other countries” group. These changes probably reflect a shift back to Russia(and away from the Middle East) as a source of crude oil.

Consumer goods were also the fastest growing category of exports, rising byover 30% higher year on year, with food products, furniture and appliances,and clothing and footwear all growing strongly. Clothing and footwear nowaccounts for well over half of consumer goods exports. By contrast, thetraditionally strong export lines of beverages (mainly wines) and tobaccoshowed a lacklustre performance. Raw materials exports grew by a lessdynamic 15.2%, although the average was dragged down somewhat by declinesin the sales of fertilisers, raw materials for the food industry, and raw tobacco.The last two reflect a poor agricultural year. Exports of other raw materialsincreased at rates varying from 25% (plastics and rubber) to 54% (iron and steel),indicating that Bulgarian heavy industry is, for the moment, fairly competitive.

Investment goods exports grew by over 22%—a respectable rise but less spec-tacular than that of nearly 50% recorded in the first half of 2003. The electricalmachinery industry was again the leading sector. The impressive first-halfincrease of “other” investment goods exports—largely defence-related—seems tohave been a one-off, however: third-quarter growth was just 14%. Finally,mineral fuels, oils and electricity exports registered the lowest US dollar growth,at 10%. The 11.9% growth in oil product exports can be ascribed mainly to pricemovements rather than volume changes. The 6.2% increase in the “other” sub-category—which in practice consists of electricity—was an achievement, giventhe suspension of electricity exports to Turkey. Bulgaria’s power industry foundalternative buyers in several neighbouring states and electricity exportsbenefited from the hot summer, which boosted air conditioner use and reducedwater levels in most rivers, leading to a fall in hydro-power output and forcingone nuclear power station in Romania to close for want of cooling water.

Exports to the EU, central Europe and—more surprisingly in the light of the sus-pension of electricity exports—Turkey, increased more quickly than the average.However, reflecting long-established trends, exports to the Commonwealth ofIndependent States (CIS) and, in particular, Russia were weak.

Exports of clothing andfurniture rise rapidly

34 Bulgaria


Exports by end-use(US$ m unless otherwise indicated; fob)

Jul-Sep US$ change, % change, Jan-Sep US$ change, % change,2002 2003 year on year year on year 2002 2003 year on year year on year

Consumer goods 570.2 749.5 179.3 31.4 1,470.1 2,005.7 535.6 36.4 Food, drinks & tobacco 90.7 120.1 29.4 32.4 222.3 300.9 78.6 35.4 Clothing & footwear 341.3 453.3 112.0 32.8 888.4 1,223.9 335.5 37.8 Medicines & cosmetics 38.2 46.0 7.8 20.4 112.7 134.0 21.3 18.9 Furniture & household appliances 55.4 74.4 19.0 34.3 140.1 197.4 57.3 40.9Raw materials 687.2 792.5 105.3 15.3 1,730.3 2,253.9 523.6 30.3 Iron & steel 96.5 148.4 51.9 53.8 261.4 457.4 196.0 75.0 Other metals 129.1 163.0 33.9 26.3 318.5 419.7 101.2 31.8 Chemicals 52.4 70.4 18.0 34.4 157.2 197.1 39.9 25.4 Plastics & rubber 41.3 51.7 10.4 25.2 113.2 144.7 31.5 27.8 Textiles 59.6 80.5 20.9 35.1 165.4 228.1 62.7 37.9 Raw materials for the food industry 97.8 74.1 -23.7 -24.2 187.3 176.6 -10.7 -5.7 Wood & paper 44.3 61.4 17.1 38.6 108.4 161.5 53.1 49.0Investment goods 201.9 246.8 44.9 22.2 535.9 740.1 204.2 38.1Mineral fuels, oils & electricity 180.6 198.6 18.0 10.0 429.1 508.6 79.5 18.5 Petroleum products 120.8 135.2 14.4 11.9 266.3 381.4 115.1 43.2 Others 59.8 63.5 3.7 6.2 162.8 127.3 -35.5 -21.8Total exports 1,640.0 1,987.4 347.4 21.2 4,165.5 5,508.3 1,342.8 32.2


The year-on-year rise in the merchandise trade deficit in the third quarter waspartly offset by improvements in non-trade items of the current account, butnot by enough to prevent a large year-on-year fall in the overall current-accountsurplus in the third quarter. The services balance improved by US$76m year onyear, with the surplus for the third quarter rising to US$576m on the back of agood summer tourist season. The increased tourism surplus, in turn, was largeenough to offset a deterioration in the balance on transport and other services.

Current account(US$ m)

2002 20033 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Exports of goods 1,640.0 1,526.7 1,725.7 1,795.2 1,987.4Import of goods 1,860.6 2,236.0 2,035.8 2,508.9 2,500.3Balance on goods trade -220.7 -709.3 -310.0 -713.7 -512.9Balance on services trade 499.7 -55.5 -59.7 154.1 576.0 Transportation 45.4 -87.4 -59.1 -55.4 29.6 Travel 459.4 41.6 35.7 236.0 562.4 Other services -5.2 -9.7 -36.3 -26.6 -16.0Balance on income -102.7 -30.1 -182.1 -171.3 -87.8 Compensation of employees 14.8 13.1 12.4 15.0 12.4 Direct investment -82.6 -49.3 -56.1 -196.2 -53.3 Portfolio investment -56.0 2.9 -158.6 4.6 -73.2 Other investment 21.1 3.2 20.1 5.3 26.3Balance on transfers 154.8 168.4 137.3 142.4 197.1Current-account balance 331.1 -626.4 -414.6 -588.6 172.4


The income balance improved somewhat, with the deficit on this item fallingfrom US$103m in the third quarter of 2002 to US$88m in the third quarter of

Balances on services, incomeand transfers all improve

Bulgaria 35


2003. However, despite the low level of international interest rates, the deficiton investment income for the first nine months of the year is still well up inyear-on-year terms. The higher deficit largely reflects a large payment of incomeon foreign direct investment (FDI) in the second quarter of 2003. This may wellbe a one-off financial transaction rather than a sign that foreign investors arealready earning very large profits on their Bulgarian operations. The surplus oncurrent transfers continued to increase. This is in line with trends noted inprevious reports: Bulgarians working abroad are becoming increasingly affluentand are also choosing to send more funds home via the banking system, whichis now perceived as being much more stable and reliable; at the same time,transfers from the EU are increasing.

Together, these non-trade items outweighed the US$513m third-quarter tradedeficit sufficiently to produce a current-account surplus of US$172m in the thirdquarter. However, this surplus was little more than half the total achieved in2002, even in US dollar terms. The trend in the current-account deficit is evenclearer over a slightly longer period of comparison: a deficit of US$55m in thefirst three quarters of 2002 has widened to one of US$831m this year. With thefourth quarter traditionally a time of heavy deficits, a record current-accountdeficit is to be expected for the year as a whole.

Despite the increase in the current-account deficit, the overall balance ofpayments again showed a healthy surplus in the third quarter as Bulgaria hadno problem attracting external finance. FDI is flowing more strongly into thecountry: Bulgaria attracted net FDI of nearly US$200m in the third quarter of2002—four times the figure for the same period of 2002 (all FDI figures for 2002have been significantly revised upwards)—taking the total for the first ninemonths of the year to nearly US$850m. With the sale of DSK bank (for aroundUS$350m) only likely to be included in the balance-of-payments figures forOctober, the net FDI inflow for 2003 as a whole could rise to US$1.4bn, arecord level. The only caveat to this strong performance is the fact that most ofthe FDI in the first nine months of 2003 was in the form of intra-companyloans rather than equity investment or the reinvestment of profits.

Balance of payments(US$ m)

2002 20033 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Current-account balance 331.1 -626.4 -414.6 -588.6 172.4Capital-account balance 0.0 0.0 0.0 0.0 0.0Direct investment, net 47.3 236.2 263.4 387.8 197.6Portfolio investment, net -46.5 66.4 -62.2 89.6 -209.6Other investment, net 4.4 315.5 -20.4 416.8 -32.9Financial balance 5.1 618.1 180.8 894.2 -44.9Net errors and omissions -57.6 302.9 61.3 42.2 65.2

Overall balance 278.6 294.6 -172.4 347.9 192.5Reserves and related items -278.6 -294.6 172.4 -347.9 -192.5 BNB foreign-exchange reserves -289.9 -250.7 164.0 -506.2 -252.8 Use of IMF credit, net 11.2 -43.8 8.4 -5.6 60.2 Exceptional financing, net 0.0 0.0 0.0 164.0 0.0


Current-account deficit widenssharply

Foreign direct investment risesstrongly

36 Bulgaria


Elsewhere on the financial account, there was a large outflow on portfolioassets and liabilities (as always, reflecting debt rather than equity transactions).and a smaller outflow on “other investment” assets and liabilities in the thirdquarter. With errors and omissions again showing a net positive contribution tothe balance of payments (for the fourth quarter in a row), the overall balanceshowed a surplus of US$192m in the third quarter. Over the first nine monthsof 2003 the overall balance was a surplus of US$370m, compared with asurplus of US$420m in the same period of 2002.

With further inflows from loans from the World Bank (classed as anexceptional item in the balance of payments) and the IMF also tending toincrease the country’s foreign reserves, flows through the overall balance ofpayments led to an increase in foreign reserves of US$595m between December2002 and the end of September 2003—compared with an increase of justUS$336m in the same period a year earlier. Valuation effects have boostedreserves further—separate data from the central bank show the total stock offoreign reserves rising from US$4.7bn in December 2002 to US$5.9bn inSeptember 2003 and to US$6.5bn at the end of November 2003. As a result,despite the sharp rise in imports, total reserves are still at a comfortable level—they are equivalent to more than seven months of goods imports.

Main external indicators(US$ m)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecExports fob2001 397.2 429.4 455.7 412.5 391.8 429.2 454.3 447.9 424.6 454.7 451.7 363.82002 383.8 408.8 408.1 425.5 402.9 496.4 586.3 525.8 527.8 520.5 527.8 478.42003 544.2 538.6 642.9 570.4 568.0 656.8 717.6 618.1 651.7 677.0 – –Imports cif2001 516.6 514.4 601.5 576.1 603.2 649.9 714.8 597.4 550.2 686.4 667.5 582.82002 505.5 524.9 544.4 622.6 643.1 618.7 725.5 631.6 661.4 753.8 800.2 871.72003 665.6 713.9 823.2 907.0 927.3 885.3 1,002.8 841.1 867.9 1,004.3 – –Current-account balance2001 -136.4 -38.6 -46.1 -77.8 -89.7 -1.6 -74.8 84.0 -46.0 -114.1 -155.6 -145.52002 -130.5 -51.9 -55.2 -137.4 -104.2 92.8 120.3 160.6 50.2 -141.7 -183.3 -301.52003 -165.4 -155.9 -93.4 -388.1 -223.8 23.3 32.3 152.4 -12.2 – – –Foreign reserves2001 2,968 2,921 2,790 2,869 2,730 2,761 2,758 2,831 2,820 2,933 3,212 3,2912002 2,972 2,977 2,924 3,126 3,314 3,707 3,698 3,816 3,960 4,090 4,204 4,4072003 4,271 4,318 4,435 4,890 5,244 5,148 5,137 5,117 5,505 5,807 6,081 -Gold2001 305 304 290 296 278 279 288 301 300 297 292 2902002 284 284 286 295 308 327 321 322 323 323 325 3402003 355 353 357 365 387 374 371 358 382 381 393 -International reserves2001 3,273 3,225 3,080 3,165 3,008 3,040 3,046 3,132 3,120 3,230 3,504 3,5812002 3,256 3,261 3,210 3,421 3,622 4,033 4,019 4,138 4,283 4,413 4,529 4,7472003 4,626 4,671 4,792 5,255 5,631 5,522 5,508 5,475 5,887 6,188 6,474 -

Sources: National Statistical Institute; Bulgarian National Bank; IMF, International Financial Statistics; Reuters.

Foreign reserves rise evenmore quickly than in 2002

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