Over the last two years, Bulgarian politics has manifested chronic instability, extreme fractiousness and scarce capacity for reform. Nevertheless, in the immediate aftermath of the second wave of lockdowns in 2020, the economy underwent a steady recovery. In fact, GDP recovered its 2019 level by late 2020 thanks to tourism’s partial rebound and lenient epidemiological restrictions. Moreover, the general perception of the economic climate improved, with business confidence soaring by 50% between December 2020 and May 2021.
However, Bulgarian politicians failed twice to form a government last year, leading to three consecutive elections. Together with international instability and supply-chain disruption, the political stalemate has slowly consumed the positive thrust of early 2021. Namely, businesses lost most of their renewed confidence since August 2021 and consumers’ expectations are the bleakest since 2020Q2.
All in all, Bulgarians finally have a government — albeit the cabinet is less than stable and evidently incohesive. Meanwhile, longstanding challenges remain unsolved and issues emerging from both inside and outside the country fuel discontent and constraint social development.
State budget and minimum salary
The main, old problem for the new Bulgarian government, is approve the State budget for 2022. Namely, previous hung parliaments left the country without a politically legitimate government — reducing the room for discretionary spending. In fact, according to Bulgaria’s constitution, failure to form a government leads to the Presidential appointment of a caretaker government. Thus, the executive lacked a parliamentary majority to approve any legislation — even if minimal in its reach and scope. Moreover, the President must dissolve the National Assembly and call for new elections in case of a hung parliament. Hence, even if the caretaker executive had found a majority, the parliament had its powers curtailed until new elections. Thus, the parliament failed to approve a budget for 2022 by the end of the previous year.
In January 2022, the new, prevalently neoliberal cabinet announced that the budget will include financing for several key measures. Notably, these policies fulfil the requests and the promises of one or another of the four parties sustaining the government. First, raising the minimum wage realises the main electoral promise of the second largest coalition partner, the Bulgarian Socialist Party. However, the raise looks more like a PR stunt given that it will be worth just €360 per year. Namely, the poorest workers’ salary may pass from €325 (BGN 650) to €355 (BGN 710), still the lowest in the EU. Moreover, most other countries in the region, both inside and outside the EU have carried out more substantive raises. In fact, the minimum salary is higher in two non-EU neighbours too: Serbia and North Macedonia (Figure 1).
Meanwhile, the largest party in the coalition reserved for itself the right to revise the budget later on. Namely, finance minister Asen Vasilev indicated that the revision will “include some of the main reforms that the government envisages.”
Inflation
Official forecasts put inflation at five percent in 2022, more than double the central bank’s target of about two percent. True, the estimate is 2.8% lower than the national statistical institute’s reported figures for 2021. Yet, it is not clear whether what the inflation outlook really is. Therefore, inappropriate assessments of the effect of discretionary economic policy and misjudgement of exogenous challenges could drive inflation up.
For a start, even if inflation expectation float around five percent, the nominal minimum income will increase by about nine percent. Hence, a loaf of bread that costed 50 euro-cents in 2021, will cost 52.5 cents in 2022. Meanwhile, the minimum salary could buy 650 loafs last year and will buy as many as 676 loafs this year. Thus, the poorest workers’ purchasing power should increase in real terms by about four percentage points. Moreover, there is no serious appreciation of pandemic-induced, forced savings’ effect on aggregate demand in the short run. Paradoxically, even if the minimum salary’s raise is contained, this situation could generate an inflationary price-wage spiral by overstimulating demand.
Meanwhile, mid- and long-term public investments and other incentives to actually increase supply appear quite limited. Indeed, there are indications that the government is constraining supply rather than increasing it. For instance, the government recently introduced a covid passport (zelen sertifikat or green pass) for all workers. Even though a rapid test suffices to meet these requirements, the pass may end up reducing available manpower — and production. In addition, it will increase labour cost because workers ought to pay for their own tests. In addition, the government made access to entertainment and catering venues contingent on possess of the same pass. Collaterally, this and other epidemiological restrictions will limit demand for services and force people to shift on goods. After all, this mechanism is clearly on display in the US.
Energy prices
Potentially, the greatest challenge for Bulgaria lies in the precipitous rise in energy prices for both businesses and consumers. The situation is so critical, that some municipalities decided to limit the illumination of public roads. As of now, the relative weights of the various causes of this spike are somewhat unclear. Nevertheless, the government rushed in to approve a risky moratorium fixing energy prices for the next three months. According to the chair of the parliamentary commission of energy, this decision could lead to a 15% appreciation after March.
Yet, it could have been more effective, and almost surely no more expensive, to halve VAT rates on energy supplies. Meanwhile, the budget the earmarked most of the end users’ compensations for November’s and December’s bills. Hence, in January, retail and business users will have to bear a much higher final invoice.
Where to now?
Against this background, there is no room for reckless optimism. On the contrary, the government ought to plan for the worse: spiralling inflation, worsening energy poverty and delaying some reforms. In particular, the current, neoliberal cabinet may need to review its promise not to raise tax rates. Moreover, as the economic situation worsen, the tetrapartite coalition agreement supporting the government may collapse abruptly, leading to new elections. Furthermore, internal contradictions may become unmanageable should Bulgaria lift the veto on North Macedonia starting accession negotiations with the EU. As tensions escalate on NATO’s eastern flank, political instability in Bulgaria and uncertainty in the EU cannot be overlooked.
