Bulgaria/Transnational issues

Bulgaria's economy contracted dramatically after 1989 with the collapse of the COMECON system and the loss of the Soviet market, to which the Bulgarian economy had been closely tied. The standard of living fell by about 40%. In addition, UN sanctions against Serbia (1992-95) and Iraq took a heavy toll on the Bulgarian economy. First signs of recovery emerged when GDP grew 1.4% in 1994 for the first time since 1988, and 2.5% in 1995. Inflation, which surged in 1994 to 122%, fell to 32.9% in 1995. During 1996, however, the economy collapsed due to the BSP's go-slow, mismanaged economic reforms, its disastrous agricultural policy, and an unstable and decapitalized banking system, which led to inflation of 311% and the collapse of the lev. When pro-reform forces come into power in spring 1997, an ambitious economic reform package, including introduction of a currency board regime, was agreed with the IMF and the World Bank, and the economy began to stabilize.

Since 1990, the bulk of Bulgarian trade has shifted from former COMECON countries primarily to the European Union, although Russian oil exports to Bulgaria make it Bulgaria's largest single trading partner. In December 1996, Bulgaria joined the World Trade Organization. Bulgaria's slow pace of cash privatization, contradictory government tax and investment policies, and bureaucratic red tape have kept foreign investment among the lowest in the region. Total direct foreign investment from 1991 through 1996 was $831 million. Germany was the largest investor.

The BSP promised to move forward on cash and mass privatization upon taking office in January 1995 but was slow to act. The first round of mass privatization finally began in January 1996, and auctions began toward the end of that year. The second and third rounds were conducted in spring 1997 under a new government. In July 1998, the UDF-led government and the IMF reached agreement on a 3-year loan worth about $800 million, which replaced the 14-month stand-by agreement that expired in June 1998. The loan will be used to develop financial markets, improve social safety net programs, strengthen the tax system, reform agricultural and energy sectors, and further liberalize trade.

Illicit drugs: major European transshipment point for Southwest Asian heroin and, to a lesser degree, South American cocaine for the European market; limited producer of precursor chemicals