The Bulgarian response to the pandemic: Throwing money away

Covid 19


Tales from the Region



Mila Kisjova

Mila Kisjova 200x250It appears that the country is coping well with the pandemic, the reality, however, is much scarier.

The general perception is that Bulgaria has put up solid resistance to the coronavirus from a health perspective. However, the same cannot be said of the economic response to the crisis. Yes, it seems that the country managed to avoid the worst of the consequences caused by the invisible enemy. But this is not mainly due to the government's anti-crisis program, rather it is Bulgarian business, which is accustomed to fighting and surviving all kinds of cataclysms, that should take the most credit.

Bulgaria's economy contracted by 10% in the second quarter of the year, according to the National Statistical Institute (NSI). The period April-June was the most difficult for the country in the course of the pandemic. On March 13, the government declared a state of emergency in an effort to curb the spread of the virus, blocking a number of businesses. It completely halted operations of all restaurants, large shopping malls. Tourist travel and vacations were banned, a number of services were suspended, theaters and cinemas, museums, concert and sports halls, fitness centers, and spa complexes were shut down. Transport services lost their passengers.

Bulgaria was one of the first countries in Europe to declare a state of emergency in the fight against the coronavirus. This continued until mid-May, when closed businesses gradually resumed operations, a process that took two or three weeks.

In the period April - June, the statistics showed deterioration of all macroeconomic indicators. Final consumption decreased by 2.1%, investments went down by 7.9%, exports of goods and services were reduced by 22.1% and imports by 20.4%.

Bulgaria, however, avoided a double-digit annual economic downturn - unlike many other European countries. Gross domestic product (GDP) in the second quarter, compared to the same quarter in 2019, decreased by 8.5%. - below the average decline of European economies, which was 14.1%, according to Eurotat data.

The biggest losers

First to take the hit from the ramifications of the COVID pandemic were the industries that work mainly for export and are highly dependent on the supply of raw materials and components from China. Problems first arose at the end of 2019 and intensified in the first months of 2020, when China completely cut off trade contacts.

The Bulgarian manufacturers of components for the automotive industry were severely affected. There are over 40 factories in Bulgaria that are subcontractors of European automotive industry giants. Due to the global plunge of car sales, many production plants in Europe halted operations, mostly in Germany, and this led to closing down most of their Bulgarian subcontractors for several weeks. Tens of thousands of workers were sent on paid or unpaid leave.

Many machine-building companies also stopped work temporarily - due to blocked deliveries to countries such as Russia and Italy, which also closed their borders in March and April. After that, the "green corridors", provided for international transport of goods in Europe, allowed the companies to start working relatively normally during the coronavirus outbreak.

Unemployment growth

The service sector was the most affected, and small businesses were hit the hardest. On March 13, in literally one hour, all the restaurants, hairdressers, gyms, theaters, cinemas, shopping malls in the country were shut down. This led to of 103,000 jobs lost in April and May. Unemployment in Bulgaria jumped to 9% - from 6.2% at the beginning of the year. Starting from June, with the shy opening of the summer tourist season, the unemployment rate started to decline and in August it reached 7.5%.

The strongly affected tourism sector has a huge "merit" for the growth of unemployment. At the end of March, hoteliers and travel agencies lost customers due to the discontinuation of airline flights and the closed borders of many countries. The sector could not count on Bulgarian tourists either, because after the state of emergency was declared, up until almost the end of May, travel throughout the country for tourism purposes was banned.

It was not until July that some of the flights resumed, carrying foreign tourists headed to Bulgaria's Black Sea coast. However, their numbers were lower by 80% and this lasted throughout the season. Traditional markets such as Great Britain, Russia, Israel, Germany were absent from the Bulgarian seaside this summer. Two thirds of hotels in the big resorts in Sunny Beach, Golden Sands and Albena did not open at all. The approved state subsidy of 35 euro for each foreigner arriving on a charter flight to Bulgaria was not successful. Only small hotels and guesthouses enjoyed good occupancy rates - mostly from Bulgarian tourists.

Sofia's anti-crisis plan

One week after declaring a state of emergency on March 13th, Bulgarian Prime Minister Boyko Borisov announced an anti-crisis set of measures worth 4.5 billion lev (2.25 billion euro). Five months later, a great share of these funds are still just promises made on paper.

One of the first measures was the provision of BGN 700m (EUR 350m) to the state-owned Bulgarian Development Bank, with which it is supposed to provide guarantee to commercial banks to approve cheap loans to affected companies and workers sent on unpaid leave.

Bugarskiot odgovor na pandemijata Frlanje pari vo praznoSource: dailysabah.com

The measure was heavily criticized by the business community and citizens, who expected grants instead of loans they would have repay later. Of the BGN 200 million (EUR 100 million) earmarked for interest-free loans for employees on unpaid leave as well as for people in the liberal professions who are facing difficulties in their work, only BGN 70.7m (EUR 35.4m) had been disbursed at the end of August, distributed among approximately 17,000 people. The maximum assistance under this program is 4,500 lev or 2,250 euro.

Support for small and medium-sized businesses with guaranteed loans from the state with low interest rates started only in July, and at the moment a very small amount of the funds has been allocated. With the budget update, BGN 1 billion (EUR 500 million) were allocated to save jobs in the private sector. To that end, perhaps the largest anti-crisis program has been launched, with the state covering 60% of a worker's salary.

The business community was not thrilled. The companies whose activity was blocked by the restrictive measures could not afford to pay a single lev to keep their employees. It is significant that, so far, only 20% of the budget has been used for this type of support. In September, the scheme, which became popularly known as "60-to-40", became "80-to-20", i.e. the state will provide more support, but only for two of the most affected sectors - tourism and bus transport.

The ruling coalition comprising GERB and United Patriots has made another controversial anti-crisis measure - VAT cuts on restaurant services from 20% to 9%. Bulgaria was one of the few countries in the EU with a flat VAT rate (of 20% on all goods and services, with the sole exception of tourist accommodation, taxed at 9%. The government explained that by reducing the rate for food and soft drinks, restaurants would be able to generate higher earnings and this would offset the losses from not working for two months during the state of emergency.

A large part of society, including many economists and financiers, were revolted by the state's reverence for this sector, which is known as one of the grayest in the Bulgarian economy. Even the Finance Minister said he did not support the measure, but it was passed by Parliamentary majority and will be valid until the end of 2021.

As a result, sale of books, baby food and diapers, services in fitness centers, swimming pools and all kinds of sports facilities also got a reduced VAT rate. As expected, tax cuts did not lead to lower prices, but it remains to be seen how this will affect budget revenues.

Deferring the repayment of bank loans - the most effective measure?

A moratorium on loan repayments was introduced in April, for a duration of 6 months. By September, companies and households had deferred liabilities to banks by BNG 9.061 billion (EUR 4.5 billion). More than 14,100 companies have deferred payments of almost BGN 7 billion (19% of all loans provided to companies by banks). Just over 93,000 individuals have deferred installments in the amount of BGN 2 billion, which is 8.3% of all loans given by banks to households.

At the same time, the expected grants from various European programs are drastically delayed. It took the government several months to divert unused funds from European programs approved years ago, to measures designed specifically for the coronavirus. As early as May, 27,000 micro and small companies applied for grants of up to BGN 10,000 (EUR 5,000), but applications from some of them are still in the "review process". Grants for medium-sized enterprises are also late - their application for a distribution of BGN 200 million begin started in August.

The approved scheme of vouchers for support of tourism could not start all summer. This was a measure according to which the state subsidizes a one-week vacation in Bulgaria with 210 lev (105 euro). The government severely limited the scope of this measure and made it meaningless in practice. Vouchers are only available to healthcare professionals, police officers and other personnel involved in the frontlines of the fight against COVID-19. In addition, they will be able to choose from only in a small number of state resorts.

Political turbulence

In the meanwhile, Bulgaria has been shaken by political protests that have not subsided for three months. Since the beginning of July, thousands of disgruntled citizens have been protesting and marching in Sofia and other major cities every evening, demanding the resignation of Prime Minister Boyko Borisov and Chief Public Prosecutor Ivan Geshev. Under pressure from protests and demands for resignations, Borisov's cabinet resorted to generous additional transfers of hundreds of millions lev to state structures, municipalities and various groups of taxpayers. Often, these considerable expenses are justified by the coronavirus crisis, but it is clear to everyone that the principal reason is gaining sympathy and time.

Surprisingly, the government decided to increase the salaries of more than 33,000 employees in the state administration by 30%. It was decided to award an allowance of 50 lev for three consecutive months - August, September and October to the largest social group in Bulgaria - pensioners, a group that comprises over 2.1 million people.

With the new school year, the government has also increased the amount of assistance for parents of children up to the age of 14 who have to study at home due to quarantine. If these parents are forced to leave on unpaid leave to care for their young children and help them with distance learning, they will receive 610 lev (305 euro) per month - the same as the minimum monthly salary in Bulgaria, or 915 lev (457 euro) if they have two or more children. In April and May, this support amounted to 375 lev and almost 2,000 families used it.

So far, thanks to the inflow of money for salaries, allowances and pensions, domestic consumption as a whole remains almost at last year’s level and it supports the better part of the formation of the gross domestic product. It seems that the government's buffers have started to run out, when it comes to taking out an external loan. On September 15, the government issued bonds in foreign markets for 2.5 billion euro.

Buying political trust

The government's tactic for dealing with the problems is provoking more and more criticism. The NGO Institute for Market Economics (IPE) warns of dangerous rushing to "the deceptive understanding that Bulgaria can recover from the crisis and move towards rapid economic growth only through measures to fiscally stimulate domestic demand".

"A feast in times of plague", is how the Bulgarian Chamber of Commerce and Industry (BTIK) depicted the increased salaries of state administration employees from August 1st. "It is clear to everyone that the ruling coalition wants to win more votes in the upcoming elections. However, burdening the budget with additional costs, including the illegal increase of salaries of employees in the bloated state administration, without the existence of e-government and without curtailing the administrative apparatus, endangers the entire state budget in conditions of declining economy, shut down companies and shrinking international markets" BTIK warned.

The situation seems alarming. And there are clear signals that the economic winter will be long and hard - not only for Bulgaria or Europe, but for the entire world. This requires reform. The question is whether there are political forces in Bulgaria that can make reforms happen.


This blog is published as part of the regional blogging initiative “Tales from the Region”, led by Res Publica in partnership with Analiziraj.ba (BiH), Sbunker (Kosovo) Ne Davimo Beograd (Serbia), PCNEN (Montenegro), Prlija (Croatia), ABCnews.al (Albania) and SEGA (Bulgaria).

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