BULGARIA – ECONOMIC PROSPECTS PLAMEN ORESHARSKI MINISTER OF FINANCE December 13, 2006 Kempinski Hotel Zografski

2006 – ECONOMIC INDICATORS : High economic growth - around 6% Dropping unemployment rate Financial stability and high level of confidence Prudent fiscal policy Government debt below 30% of GDP FDI cover more than 100% of the current account deficit Moderate inflation

ECONOMIC GROWTH Most dynamic economic sector is industry (real growth of 9% for the first half of 2006) Growth is driven by domestic demand High investment activity due to the highly rated business environment and the positive expectations Higher domestic demand

HIGHER THAN THE AVERAGE FOR EU GROWTH RATES

INFLATION The expected for 2006 inflation is around 6%, the average for the last three years being 5.4%. Almost half of the annual inflation is due to the changes in the administrative prices. The rising of excise duty on tobacco products in 2006 forms 2.7 percentage points of the price increase during the year. The inflation of market prices (80% of CPI) stayed low – 2.8% for 2006.

FOREIGN DIRECT INVESTMENT The prospect of EU accession is an important factor for attracting FDI The economic and political stability are a guarantee for the interests of foreign investors The annual average FDI growth rate in the period 2007-2009 is expected to be 8-10%

BALANCE OF PAYMENTS AND CURRENT ACCOUNT Foreign trade is the reason for the high current account deficit High imports are due to the growing sales of Bulgarian companies and the investment activity in the country High FDI and European funds inflow will foster imports in the short term Exports are expected to reverse the current account flows in the coming years

ENHACING ECONOMIC INTEGRATION The share of Bulgarian exports in the overall [external to] EU imports doubled from 0.47% in 1999 to 0.87% in 2006. Increasing the share of EU25 in the overall Bulgarian exports from around 42% in 1995 to 57% in 2005; Over 80% of FDI in 2005 are from EU Member States

LABOR MARKET (1) Improvement of the labor market as a result of the stable economic growth. Private sector of the economy – as a source of higher employment and income of the population growth. Employment rose by around 4% in the period January – September 2006. Unemployment rate registered its lowest level since 2000 (9.1%).

LABOR MARKET (2) Sustainably dropping unemployment rate from over 18% in 2001 down to around 10% in 2005

INCOME AND LABOR PRODUCTIVITY The income of the population continues to rise, but do not exceed labor productivity growth. For the period 2003-2005 labor productivity registered 7.9% growth, while real average wage - 4.9% Since the beginning of 2006 real average wage has grown by 10.4% in nominal terms and by 2.4% in real terms.

BUDGET EXECUTION High economic growth and good tax collection ensure good revenue performance Tight fiscal discipline as regards expenditures The surplus counteracts the current account imbalances too

GOVERNMENT DEBT Prudent fiscal policy ensured the smooth government debt reduction Considerably lower service costs

MEDIUM TERM FISCAL POLICY Main objectives: to help maintain economic stability and sustainable economic growth Medium term fiscal policy will stick to the Stability and Growth Pact budget balance within the Maastricht criteria, while maintaining budget surplus avoidance of pro-cyclic policy Focus on the quality of public finance and EU Funds absorption Medium term fiscal policy aims are set forth in the convergency program of the country for the period 2007-2009

MONETARY POLICY TRENDS AND STABILITY OF THE CURRENCY BOARD ARRANGEMENT Committing to shortly join the Euro Area and introduce the Euro, while meeting the criteria Maintaining the Currency Board Arrangement stable until joining the Euro Area and keeping the current exchange rate Despite the negative impact of some external factors the BNB FX reserves sufficiently cover the money base Sources: BNB, AEAF

BANKING SECTOR: DEVELOPMENT AND MAJOR CHALLENGES Enhancing financial intermediation Regulation of commercial banks’ operations in line with the Basel II requirements Curbing credit growth as a result of the BNB administrative restrictions and maintaining good quality of bank credit portfolios Cancelling the Central Bank’s credit measures as from the beginning of 2007 Strengthening the competition in the sector due to the integration of the banking system into the common European financial market Dynamics of Credit Portfolio Sources: BNB, AEAF

FISCAL STANCE – BUDGET SURPLUSES Source: Eurostat

FISCAL STANCE – DROPPING PUBLIC DEBT LEVELS

CONVERGENCE OF LONG TERM INTEREST RATES

INFLATION CRITERION *tradable goods and market services Source: Eurostat

PREPAREDNESS FOR EUROPEAN FUNDS ABSORPTION Programming - National Strategic Reference Framework – 2007-2013 and 7 Operational Programs - National Strategic Plan and Rural Development Program – 2007-2013 - National Strategic Plan and Fisheries and Aquaculture OP – 2007-2013 Institutional and administrative capacity Systems for audit, internal control and transparency of funds management

STRATEGIC DOCUMENTS Community Strategic Guidelines National Strategic Documents National Strategic Plan for Fisheries and Aquaculture National Strategic Reference Framework National Strategic Plan for Rural Development Operational Programmes Regional Development Development of the competitiveness of Bulgarian economy Human Resources Development Environment Transport Administrative Capacity Technical Assistance

PROGRAMMING OF THE STRUCTURAL AND THE COHESION FUNDS (1) NSRF – Vision and midterm objectives As of 2015 Bulgaria will have become a competitive EU Member State with high quality of life, income and a socially sensitive society Enhancing the competitiveness of the economy so as to achieve high and sustainable growth; Human capital development to ensure higher employment, income and social integration.

PROGRAMMING OF THE STRUCTURAL AND THE COHESION FUNDS (2) To attain the midterm objectives, the SF and CF interventions will focus on four strategic priorities – three thematic and one territorial : improving basic infrastructure; raising the quality of human capital with focus on employment; promoting entrepreneurship, favorable business environment and sound governance; maintaining balanced regional development.

INSTITUTIONAL FRAMEWORK FOR STRUCTURAL INSTRUMENTS MANAGEMENT Certifying Authority Central Coordinating Unit NSRF Monitoring Committee Managing Authority OP OP Monitoring Committee Audit Authority Intermediate Body Internal Control Final Beneficiary

PLAMEN ORESHARSKI MINISTER OF FINANCE THANK YOU! PLAMEN ORESHARSKI MINISTER OF FINANCE