## 2. Productivity Growth by Sub-periods

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---

### Introduction and motivation
- Productivity growth in Bulgaria has slowed since the 2008-09 global financial crisis (GFC).
- Bulgaria’s post-GFC productivity growth has been in line with other EU new member states (NMS).
- Boosting productivity growth is presented as the primary channel to address long-term demographic challenges and achieve faster real convergence.

### Data and analytical framework
- Data:
  - Annual firm-level data from 2003 to 2015 from the Orbis database; non-financial corporates only.
  - Real variables constructed using 2-digit NACE industry-level deflators (or 1-digit NACE or GDP deflator if not available).
- Sample cleaning:
  - Removed duplicates; firms with negative total assets/employment/sales/tangible fixed assets; firms with >2 million employees; firm-years with missing/zero/negative values for costs of materials/operating revenue/total assets; firms without NACE codes.
  - Top and bottom 0.1 percent of key ratios filtered.
- Productivity measures:
  - Total factor productivity (TFP): derived from a Cobb-Douglas production function Ln Yit = α + β LnKit + (1-β) LnLit + uit; uit is log TFP. Estimation at 2-digit NACE industry level.
  - Labor productivity: value added divided by number of employees.
- Panel regression specification:
  - ∆Productivityit = α + β IAit-1 + δ Dit + γ Sit + uit
  - IAit-1: ratio of intangible fixed assets to total fixed assets (lagged). Seventy five percent of firms have zero intangible assets.
  - Dit: debt-related dummies:
    - Dummy for high debt: top 5 percentile of debt-to-asset ratio (equivalent to debt-to-asset ratio higher than 50 percent).
    - Dummy for low interest coverage ratio (ICR): ICR (EBITDA/interest) less than 2.
  - Sit: firm characteristics — size dummies (medium 50–250 employees, small 10–50, micro <10), lagged distance to industry frontier (top 1 percent leaders at NACE2), foreign firm dummy, SOE dummy, tradable sector dummy (mining, agriculture, manufacturing, ICT), firm age, sector and year dummies.

### Key descriptive statistics and sample composition
- Number of firms in sample (total): 42,245.
- Share of firm-size categories (for firms included in Column (1) of Table 1):
  - Medium-sized firms: 9% (24% of assets).
  - Small firms: 37% (23% of assets).
  - Micro firms: 53% (9% of assets).
  - Sum: 99% of firms and 56% of assets.
- Ownership of large firms (2005):
  - Foreign firms account for 6.6 percent of total firms; SOEs account for 1.4 percent.
- Bulgaria: Non-Financial Corporate Debt — time series plotted (components: Intra-company loans, bank loans, debt securities, other cross-border loans and total debt; data source Haver).

### Empirical results — determinants of productivity growth
- Financial health:
  - Firms with low interest coverage ratio (ICR<2) had lower TFP and labor productivity growth; coefficient significant at the 1 percent level in multiple specifications.
  - High indebtedness dummy (top 5 percentile, debt-to-asset > 50 percent) is negatively associated with TFP and labor productivity growth but not statistically significant in baseline regressions.
  - Policy implication: an efficient corporate debt restructuring framework could help reduce debt payment burden and potentially raise investment and productivity growth.
- Intangible assets and innovation:
  - A higher share of intangible fixed assets is positively associated with labor productivity growth; statistically significant in labor productivity regressions (Table 1b).
  - Intangible assets coefficients (selected from Table 1b): 0.126*** (Col (1)), 0.101*** (Col (2)), 0.200*** (Col (3)), 0.183*** (Col (4)), 0.165*** (Col (5)), 0.254*** (Col (6)).
  - Note: Seventy five percent of firms report zero intangible assets; direct R&D expenditure is not available in the dataset. Bulgaria’s R&D expenditure (share of GDP) was low in the EU; OECD (2017) reports Bulgaria has no expenditure-based R&D tax incentives. Recent proposal of tax relief for R&D by the Ministry of Economy is noted.
- Technological convergence to frontier firms:
  - Evidence of convergence for both TFP and labor productivity; coefficient statistically significant at the 1 percent level in all specifications.
  - Half-life of convergence: about four years for TFP and three years for labor productivity.
  - Lagged distance to frontier coefficients (examples):
    - Table 1a (TFP): 0.126*** (Col (1)), 0.128*** (Col (2)), 0.134*** (Col (3)).
    - Table 1b (Labor productivity): 0.173*** (Col (1)), 0.178*** (Col (2)), 0.170*** (Col (3)).
- Firm size, ownership, sector, and age:
  - Large firms generally exhibit higher productivity growth; medium, small, and micro firm dummies are typically negative relative to largest firms.
  - Foreign firms display higher productivity growth:
    - TFP regression foreign firm coefficients 0.020*** and 0.022*** (Table 1a).
    - Labor productivity foreign firm coefficients 0.124*** and 0.122*** (Table 1b).
  - Tradable sector firms generally had faster productivity growth in many specifications (TFP dummy for tradable sectors significant and positive in several columns of Table 1a), though results are mixed across specifications and sub-periods.
  - Firm age: younger firms tend to have higher productivity growth; firm age coefficients small in magnitude (e.g., Table 1a firm age -0.0001** in Col (5), Table 1b firm age -0.0003*** in Col (1)).
  - SOEs: some evidence of lower productivity growth for SOEs (e.g., Table 1b dummy for SOEs -0.024*** in Col (1)), though coefficients are not always statistically significant.
- Sub-period analysis (pre- and post-GFC, Table 2):
  - When all firms are included, technological convergence coefficients are larger in the post-GFC period than pre-GFC.
  - Limiting the post-GFC sample to the same firms present in the pre-GFC period, the speed of convergence appears to have slowed in the post-GFC period for both TFP and labor productivity.
  - Selected coefficients from Table 2:
    - Lagged distance to frontier: 0.102*** (TFP 2003-08 Col (1)), 0.169*** (Labor prod. 2003-08 Col (2)), 0.125*** (TFP same firms Col (3)), 0.072*** (Labor prod. same firms Col (4)), 0.182*** (TFP 2009-15 Col (5)), 0.135*** (Labor prod. 2009-15 Col (6)).
    - Intangible assets/total assets: not statistically significant in some pre/post splits for TFP but significant for labor productivity in post-GFC period (e.g., 0.200*** in Table 2 Col (5) and 0.157** in Col (6)).
    - Dummy for low ICR: -0.127*** (Labor prod. 2003-08 Col (2)), -0.006*** (TFP same firms Col (3)), -0.004* (Labor prod. same firms Col (4)), -0.155*** (TFP 2009-15 Col (5)), -0.105*** (Labor prod. 2009-15 Col (6)).
  - Interpretation: Some evidence that the pace of productivity convergence for incumbents slowed after the GFC, while the overall sample does not show a uniform slowdown (post-GFC sample includes many new firms).
- Robustness:
  - Results robust to using debt-to-equity instead of debt-to-asset, inclusion of lagged productivity growth, and estimation by Blundell-Bond system GMM (results broadly similar; available upon request).

### Policy implications and recommendations
- Support R&D and innovation:
  - Increasing intangible assets through R&D support and innovation policies could raise labor productivity growth. Bulgaria’s R&D spending lags other EU countries.
  - The recent proposal of tax relief for R&D activity by the Ministry of Economy is noted as welcome.
- Improve corporate financial health:
  - Policies to reduce interest payment burdens — for example, an efficient corporate debt restructuring framework — could help firms invest more and raise productivity.
- Improve business environment and governance:
  - Strengthening governance and upgrading infrastructure could improve corporate profitability, financial health, investment, and FDI attraction — all conducive to higher productivity growth.

### Main conclusions
- Firms with a higher share of innovative assets and lower financial distress had higher productivity growth, with the intangible-assets correlation stronger and statistically significant for labor productivity.
- Foreign, larger, and younger firms and firms in tradable sectors generally had faster productivity growth.
- Productivity catch-up (convergence to frontier firms) appears to have slowed after the GFC for existing firms, though not for the whole post-GFC sample.
- Policy levers highlighted: support R&D and innovation, reduce debt service burdens, and improve business environment and institutions to foster productivity growth.

*Source: Bulgaria — Corporate Productivity in Bulgaria (2003–2015) — IMF staff analysis (Tables and figures as presented in the source).*

### 2. Productivity Growth by Sub-periods _______________________________________________ 12

### 2. Productivity Growth by Sub-periods

### Introduction and motivation
- Productivity growth in Bulgaria has slowed since the 2008-09 global financial crisis (GFC).  
- Bulgaria’s post-GFC productivity growth has been in line with other EU new member states (NMS).  
- Boosting productivity growth is presented as the primary channel to address long-term demographic challenges and achieve faster real convergence.

### Data and analytical framework
- Data: annual firm-level data from 2003 to 2015 from the Orbis database; non-financial corporates only.  
- Real variables constructed using 2-digit NACE industry-level deflators (or 1-digit NACE or GDP deflator if not available).  
- Sample cleaning: duplicates, firms with negative total assets/employment/sales/tangible fixed assets, firms with >2 million employees, firm-years with missing/zero/negative values for costs of materials/operating revenue/total assets, and firms without NACE codes removed. Top and bottom 0.1 percent of key ratios filtered.  
- Productivity measures:
  - Total factor productivity (TFP): derived from a Cobb-Douglas production function Ln Yit = α + β LnKit + (1-β) LnLit + uit; uit is log TFP. Estimation at 2-digit NACE industry level.
  - Labor productivity: value added divided by number of employees.
- Key explanatory variables in panel regressions (∆Productivityit = α + β IAit-1 + δ Dit + γ Sit + uit):
  - IAit-1: ratio of intangible fixed assets to total fixed assets (lagged). Seventy five percent of firms have zero intangible assets.
  - Dit: debt-related dummies:
    - Dummy for high debt: top 5 percentile of debt-to-asset ratio (equivalent to debt-to-asset ratio higher than 50 percent).
    - Dummy for low interest coverage ratio (ICR): ICR (EBITDA/interest) less than 2.
  - Sit: firm characteristics — size dummies (medium 50–250 employees, small 10–50, micro <10), lagged distance to industry frontier (top 1 percent leaders at NACE2), foreign firm dummy, SOE dummy, tradable sector dummy (mining, agriculture, manufacturing, ICT), firm age, sector and year dummies.

### Key descriptive statistics and sample composition
- Number of firms in sample (total): 42,245 (breakdown by sector shown in source).  
- Share of firm-size categories (for firms included in Column (1) of Table 1): Medium-sized firms: 9% (24% of assets); Small firms: 37% (23% of assets); Micro firms: 53% (9% of assets); Sum: 99% of firms and 56% of assets.  
- Ownership of large firms (2005): SOE, Domestic non-SOE, Foreign (figure shown in source). Foreign firms account for 6.6 percent of total firms; SOEs account for 1.4 percent.  
- Bulgaria: Non-Financial Corporate Debt (time series shown in source). Intra-company loans, bank loans, debt securities, other cross-border loans and total debt plotted (data source Haver).

### Empirical results — determinants of productivity growth
- Financial health:
  - Firms with low interest coverage ratio (ICR<2) had lower TFP and labor productivity growth; coefficient significant at the 1 percent level in multiple specifications.
  - High indebtedness dummy (top 5 percentile, debt-to-asset > 50 percent) is negatively associated with TFP and labor productivity growth but not statistically significant in baseline regressions.
  - Policy implication highlighted: an efficient corporate debt restructuring framework could help reduce debt payment burden and potentially raise investment and productivity growth.
- Intangible assets and innovation:
  - A higher share of intangible fixed assets is positively associated with labor productivity growth; statistically significant in labor productivity regressions (Table 1b).
  - Intangible assets coefficients (selected from Table 1b): 0.126*** (Col (1)), 0.101*** (Col (2)), 0.200*** (Col (3)), 0.183*** (Col (4)), 0.165*** (Col (5)), 0.254*** (Col (6)). Standard errors reported in source.
  - Note: Seventy five percent of firms report zero intangible assets; direct R&D expenditure is not available in the dataset. Bulgaria’s R&D expenditure (share of GDP) was low in the EU; OECD (2017) reports Bulgaria has no expenditure-based R&D tax incentives. Recent proposal of tax relief for R&D by the Ministry of Economy is noted in the source.
- Technological convergence to frontier firms:
  - Evidence of convergence for both TFP and labor productivity; coefficient statistically significant at the 1 percent level in all specifications.
  - Half-life of convergence: about four years for TFP and three years for labor productivity.
  - Lagged distance to frontier coefficients (examples):
    - Table 1a (TFP): 0.126*** (Col (1)), 0.128*** (Col (2)), 0.134*** (Col (3)), etc.
    - Table 1b (Labor productivity): 0.173*** (Col (1)), 0.178*** (Col (2)), 0.170*** (Col (3)), etc.
- Firm size, ownership, sector, and age:
  - Large firms generally exhibit higher productivity growth; medium, small, and micro firm dummies are typically negative relative to largest firms in regressions.
  - Foreign firms display higher productivity growth: TFP regression foreign firm coefficients 0.020*** and 0.022*** (Table 1a); labor productivity foreign firm coefficients 0.124*** and 0.122*** (Table 1b).
  - Tradable sector firms generally had faster productivity growth in many specifications (TFP dummy for tradable sectors significant and positive in several columns of Table 1a), though results are mixed across specifications and sub-periods.
  - Firm age: younger firms tend to have higher productivity growth; firm age coefficients small in magnitude (e.g., Table 1a firm age -0.0001** in Col (5), Table 1b firm age -0.0003*** in Col (1)).
  - SOEs: some evidence of lower productivity growth for SOEs (e.g., Table 1b dummy for SOEs -0.024*** in Col (1)), though coefficients are not always statistically significant.
- Sub-period analysis (pre- and post-GFC, Table 2):
  - When all firms are included, technological convergence coefficients are larger in the post-GFC period than pre-GFC.
  - Limiting the post-GFC sample to the same firms present in the pre-GFC period, the speed of convergence appears to have slowed in the post-GFC period for both TFP and labor productivity.
  - Selected coefficients from Table 2:
    - Lagged distance to frontier: 0.102*** (TFP 2003-08 Col (1)), 0.169*** (Labor prod. 2003-08 Col (2)), 0.125*** (TFP same firms Col (3)), 0.072*** (Labor prod. same firms Col (4)), 0.182*** (TFP 2009-15 Col (5)), 0.135*** (Labor prod. 2009-15 Col (6)).
    - Intangible assets/total assets: not statistically significant in some pre/post splits for TFP but significant for labor productivity in post-GFC period (e.g., 0.200*** in Table 2 Col (5) and 0.157** in Col (6)).
    - Dummy for low ICR: -0.127*** (Labor prod. 2003-08 Col (2)), -0.006*** (TFP same firms Col (3)), -0.004* (Labor prod. same firms Col (4)), -0.155*** (TFP 2009-15 Col (5)), -0.105*** (Labor prod. 2009-15 Col (6)).
  - Interpretation: Some evidence that the pace of productivity convergence for incumbents slowed after the GFC, while the overall sample does not show a uniform slowdown (post-GFC sample includes many new firms).
- Robustness:
  - Results robust to using debt-to-equity instead of debt-to-asset, inclusion of lagged productivity growth, and estimation by Blundell-Bond system GMM (results broadly similar; not reported in source but stated as available upon request).

### Policy implications and recommendations
- Support R&D and innovation:
  - Increasing intangible assets through R&D support and innovation policies could raise labor productivity growth. Bulgaria’s R&D spending lags other EU countries.
  - The source notes the recent proposal of tax relief for R&D activity by the Ministry of Economy as welcome.
- Improve corporate financial health:
  - Policies to reduce interest payment burdens — for example, an efficient corporate debt restructuring framework — could help firms invest more and raise productivity.
- Improve business environment and governance:
  - Strengthening governance and upgrading infrastructure could improve corporate profitability, financial health, investment, and FDI attraction — all conducive to higher productivity growth.

### Main conclusions
- Firms with a higher share of innovative assets and lower financial distress had higher productivity growth, with the intangible-assets correlation stronger and statistically significant for labor productivity.  
- Foreign, larger, and younger firms and firms in tradable sectors generally had faster productivity growth.  
- Productivity catch-up (convergence to frontier firms) appears to have slowed after the GFC for existing firms, though not for the whole post-GFC sample.  
- Policy levers highlighted: support R&D and innovation, reduce debt service burdens, and improve business environment and institutions to foster productivity growth.

*Source: Bulgaria — Corporate Productivity in Bulgaria (2003–2015) — IMF staff analysis (Tables and figures as presented in the source).*

### References

### 1bgrea2019002 - References

### References cited
- Adler, Gustavo, Romain Duval, Davide Furceri, Sinem Kiliç Çelik, Ksenia Koloskova, and Marcos Poplawski-Ribeiro, 2017, “Gone with the Headwinds: Global Productivity,” IMF Staff Discussion Note SDN/17/04.  
- Andrews, Dan, Chiara Criscuolo, and Peter Gal, 2015, “Frontier Firms, Technology Diffusion and Public Policy: Micro Evidence from OECD Countries,” OECD: The Future of Productivity: Main Background Papers.  
- Díez, Federico J., Jiayue Fan, and Carolina Sanchez-Villegas, 2018, “Orbis Dataset: Cleaning Procedure and TFP Estimation,” mimeo.  
- IMF, 2016, “Central, Eastern, and Southeastern Europe: How to Get Back on the Fast Track,” Regional Economic Issues.  
- IMF, 2018, “Labor Productivity in the Czech Republic: Stocking and Policies,” IMF Country Report No. 18/188 (Selected Issues Paper).  
- Klein, Nir, 2016, “Firm-Level Productivity And Its Determinants: The Irish Case,” IMF Country Report No 16/257 (Selected Issues Paper).  
- OECD, 2018, “OECD review of National R&D Tax Incentives and Estimates of R&D Tax Subsidy Rates, 2017.”  
- Shabunina, Anna, 2018, “Understanding Productivity Growth in Belgium: Sectoral and Firm-Level Analysis,” IMF Country Report No 18/71 (Selected Issues Paper).

### Governance for Growth — framing and evidence
- Effective institutions are critical to promoting economic growth and development; this insight dates to Adam Smith.  
- Theoretical and empirical research reaffirm institutions’ central role:
  - Hall and Jones (1999): differences in institutions and government policies (“social infrastructure”) largely explain variation in capital accumulation, productivity and output per worker.  
  - Acemoglu, Johnson and Robinson (2001): economic institutions, represented by protection from expropriation risk, are the fundamental cause of differences in economic development.  
  - Rodrik, Subramanian and Trebbi (2002): quality of institutions has the largest explanatory power in determining income levels compared to trade and geography.

### CESEE relevance and channels to growth
- Strengthening governance in CESEE can stimulate productivity, investment and labor:
  - Productivity: judicial reform and protection of property rights may significantly increase productivity and help narrow income gaps with advanced EU economies (IMF, 2016a).  
  - Investment: improving public investment institutions can boost public investment (IMF, 2016b); strong institutions improve the business environment and promote private investment, especially FDI (Daude and Stein, 2007).  
  - Labor: weak governance is a push factor for labor migration, especially high-skilled labor (Cooray and Schneider, 2016; Atoyan et al, 2016). Weak governance also deters high-skilled immigration (Ariu and Squicciarini, 2013).

- Bulgaria-specific potential gain:
  - Improving the quality of Bulgaria’s institutions—through promoting independence of the judicial system, impartiality of courts, and protection of property rights—to the EU-15 average could bring about efficiency gains of almost 20 percent (IMF 2016a).
  - Given unfavorable demographic developments (aging and declining population) and relatively low private investment, institutional reforms are a key priority to boost inclusive long-term growth and promote real convergence for Bulgaria.

### Overview of governance in Bulgaria — comparative strengths and weaknesses
- Measurement caveats:
  - Cross-country comparisons use quantitative and perception-based indicators; both have limitations (e.g., corruption concealment, “emotional bias” in perceptions).
- Fiscal transparency strengths:
  - PIT: Bulgaria has levied a flat PIT rate of 10 percent since 2008. Bulgaria’s PIT efficiency—measured by the ratio of actual PIT to the PIT rate times GDP—was above the averages of the EU and the new member states (NMS) during 2013-15.
  - VAT: During 2012-16, the average C-efficiency ratio in Bulgaria was 63 percent, higher than the average of 55 percent among European countries. C-efficiency is defined as the ratio of actual VAT to potential VAT if all final consumption were taxed at the current standard rate without an exemption.
  - Revenue administration practices (RA-FIT self-reported data): use of external auditor, e-services for taxpayers, automated risk profiling, and a formal approach for identifying, assessing, and prioritizing risk align with other EU countries.
  - Budget transparency: substantial improvement since 2006; sufficient budget information is publicly available (Open Budget Survey 2017). Pre-budget statement available at least four months in advance; in-year reports published every month and within one month of the period covered.
- Weaknesses: public procurement and SOE governance
  - Public procurement assessment (World Bank and IMF): covers quality, adequacy, transparency of information to bidders; regulatory framework and procedures for bid opening and evaluation; procedures for supplier payments during contract execution; and PPP preparation, procurement, contract management, and unsolicited proposals.
  - SOE governance (OECD product market regulation index; IMF SOE Governance Survey forthcoming): SOEs are highly represented in network industries (healthcare, energy, water, transport). Key governance challenges include an ownership policy, SOE management and oversight, and publication of key reports.

### AML/CFT and judicial capacity — assessments and gaps
- AML/CFT:
  - Based on 2003 FATF recommendations, Bulgaria performs relatively well on entity transparency, criminal justice, and international cooperation, but not on preventive measures.
  - MONEYVAL 2013 follow-up: legal definition of money laundering broadly in line with the Vienna Convention; international cooperation by FID-SANS and law enforcement agencies is effective and more advanced than FATF minimums.
  - Preventive measures need strengthening: expand coverage of predicate offences to include all categories of piracy, market manipulation, insider trading, and cover all aspects of terrorism financing; improve capacity and awareness in non-financial institutions.
- Judicial capacity and public communication:
  - 2018 EU Justice Scoreboard: during 2010-2016 Bulgaria provided comprehensive online judicial information and an electronic platform to submit and monitor claims (among a few countries including Italy and Lithuania).
  - Bulgaria had one of the highest numbers of judges per 100,000 inhabitants among the EU and a high proportion of female judges at Supreme Courts.
  - Positive indicators: time needed to resolve certain cases, average length of first instance court cases dealing with money laundering, average length of judicial review cases against decisions of national regulatory authorities applying EU law on electronic communication and consumer protection.
  - Constraint: rate of resolving cases lagged, resulting in backlogs; authorities requested EU support under the Structural Reform Support Program (SRSP).

### Key governance issues and reform priorities
- Four subsectors highlighted for challenges and reforms:
  - Judicial system and the fight against corruption and organized crime.
  - Public procurement process.
  - SOE governance.
  - AML/CFT.
- CVM and judicial reform progress:
  - 2018 CVM assessment (EC): acknowledged steady progress; indicated possible conclusion of the CVM in 2019. Three out of six benchmarks—judicial independence, legislative framework, and the fight against organized crime—could be considered provisionally closed; if progress continues, CVM could conclude before the end of the Commission’s mandate in 2019.
- Reforms undertaken to enhance judicial independence and efficiency:
  - Election of new Supreme Judicial Council (SJC) in 2017 by magistracy and National Assembly; subsequent appointments viewed as open and transparent (EC 2017).
  - Competitive court appointments (e.g., Supreme Court of Cassation preparations noted in EC 2018).
  - Constitutional amendments created an independent judicial inspectorate to the SJC to monitor integrity (conflicts of interest, financial disclosures).
  - Separation of two chambers for prosecutors and judges within the SJC to prevent prosecutors from participating in personnel decisions for judges.
  - Legislative amendments (criminal and civil procedure codes) to accelerate processes and allow distribution of cases to address workload.
  - Judicial budget: CEPEJ noted Bulgaria’s budget to the judiciary was the largest share of GDP among EU countries in 2014.
  - Public communication: Ministry of Justice publishes semiannual reports on Implementation of the Updated Strategy for Continuing the Reform of the Judiciary System; procedures for parliamentary hearings and publication of Council of Ministers minutes and agendas related to judicial reforms.

_Italic: Source: 1bgrea2019002 - References (PDF chapter/section)._

### 18. Reforms on the fight against corruption and organized crime have advanced. A new

### 18. Reforms on the fight against corruption and organized crime have advanced. A new

### Anti-corruption framework and implementation
- A new anti-corruption law was adopted in 2018 and a new unified anti-corruption agency, “The Commission for Counteracting Corruption and for Seizure of Illegally Acquired Property,” has become fully operational. The head of the Commission was elected and the board members were appointed in a transparent and competitive procedure (EC 2018).
- Legal and institutional updates:
  - Expanded powers of internal inspectorates of the State administration to verify asset declarations for public employees.
  - Additional staff allocated and inspector qualifications strengthened.
  - Reform of the public procurement system has been strengthened.
  - New sectoral anti-corruption plans implemented by relevant ministries under guidelines set by the National Anti-Corruption Policy Council.
  - Sectoral plans cover risk areas such as management of public funds and procurement and provide mitigating measures including training of personnel and introduction of electronic services.
- Reporting obligations and public communication:
  - The National Anti-Corruption Policy Council has published progress on implementing the anti-corruption strategy and summary information related to corruption cases gathered from prosecution and courts.
  - Representatives of relevant non-governmental organizations and business representatives are actively involved in Council meetings.
  - Under the new anti-corruption law, the Commission shall report to the National Assembly on its activities annually by March 31. The report shall also be submitted to the President of the Republic and the Council of Ministers, and published on the Commission’s website.

### Fight against organized crime
- The EC acknowledged progress and considered the benchmark provisionally closed.
- Past reforms and outcomes:
  - Established track record of final convictions in serious organized crime cases by the specialized court and prosecution office.
  - Amendments to legislation on asset forfeiture to ensure overall effectiveness of the system for seizure and confiscation of illicit assets.

### CVM report recommendations and outstanding judicial reforms
- The latest CVM report recommended steady implementation, establishment of a track record of concrete results, and monitoring.
- Remaining judicial reform recommendations include:
  - Publishing a report for public consultation on the progress of the reform and remaining steps.
  - Agreeing on a roadmap for the reform of the judicial map and e-justice development.
  - Establishing roadmaps for the implementation of reform of the prosecutor’s office and investigation of crime in Bulgaria.
- For anti-corruption and organized crime: effectively managing the new unified anti-corruption agency, building a track record, and transparent reporting of corruption cases are important.
  - Managing the unified agency could be a challenge because its broad mandate covers promoting corruption prevention, verifying and investigating corruption cases, and forfeiting assets.
  - A track record should be built through stronger enforcement and inspection.
  - A mechanism for public reporting of implementation of the national anti-corruption strategy and corruption cases to the wider public should be established.

### Public perception vs. reform progress
- Indicators of perception and experience:
  - Based on the Global Competitiveness Reports during 2007-2017, Bulgaria’s judicial independence is perceived to be lower than the averages of NMS and the EU.
  - 2018 Eurobarometer: only 30 percent of respondents from both the general public and companies think courts and judges are independent (EU averages: 56 and 48 percent, respectively).
  - Corruption identified as one of the most problematic factors for doing business in Bulgaria (2017 Executive Opinion Survey, and 2017 Eurobarometer).
  - Almost 90 percent of respondents believe there is corruption in national public institutions and agree that bribery and connections often make it easier to obtain public services.
  - Based on experience-based indicators, corruption improved during EU accession and shortly after, but deteriorated after 2010 and remained high.
  - 2017 Special Eurobarometer on Corruption: 12 percent of Bulgarians have experienced or witnessed corruption (among the highest in the EU).
- Factors explaining dissonance between reforms and perception:
  - Reforms often improve efficiency but public perception focuses on qualitative aspects—impartiality and confidence—that are harder to change and measure.
  - Time lags for reforms to affect perception; scandals can immediately damage perception.
  - Strong legal frameworks are necessary but changes in perception also depend on strong implementation and continued commitment.

### Public procurement: framework, performance, and gaps
- Legal and institutional framework:
  - Public Procurement Law (PPL) designates open tender as default; thresholds and methods defined.
  - Based on Public Procurement Portal data, around 95 percent of procurement underwent an open tender during 2017-2018H1.
  - 2016 Public Procurement Act and subsequent revisions aimed at clarifying procedures, addressing delays from complaints, and aligning with EU directives.
  - Key oversight agencies: Public Procurement Agency (PPA), Commission for the Protection of Competition (CPC), and National Audit Office.
- Reforms and transparency initiatives:
  - National Strategy for the Development of the Procurement Sector 2014-20 aims to simplify the framework, strengthen preventive measures, and develop an e-procurement system.
  - 2018 Public Procurement Act restricts appeals to stakeholders with a material interest to address delays from complaints.
  - Ex-ante and ex-post controls strengthened to curb corruption.
  - International Bank for Reconstruction and Development conducting a comprehensive assessment of the public procurement system including the PPA; review expected to be completed in early 2019.
- Implementation gaps and irregularities:
  - Procurement in practice faces procedural errors by contracting authorities, violation of procurement criteria, misevaluation of tenders, and errors during contract execution.
  - 2017 State Financial Inspection Agency reported more than 10 percent of awarded contracts were not compliant with the PPL.
  - Almost a quarter of the audited sample of the EU Operational Programs during July 2016 and June 2017 was subject to financial penalties due to noncompliance.
- Recommended improvements:
  - Publish a list of tenders in a public procurement plan and adopt an upcoming E-Procurement allowing electronic bid submission to increase efficiency and transparency.
  - Improve communication of frequent legal and regulatory changes to reduce uncertainty and noncompliance risk.
  - Strengthen capacity and resources of contracting authorities at all levels; PPA faces insufficient staff and difficulty retaining qualified personnel.
  - Many projects lack procurement-specific staff outside EU Operational Programs; frequent staff turnover at municipal level undermines administrative capacity.

### State-Owned Enterprise (SOE) governance
- ERM II commitments: authorities plan to modernize SOE management to align legislation with the OECD Guidelines on Corporate Governance of SOEs.
- OECD recommendations:
  - Develop an ownership policy (SOE framework law or ownership policy document) identifying rationale for state ownership, role of the state, implementation mechanisms, and responsibilities; subject to regular reviews and disclosure to the public.
  - Establish a centralized entity to exercise the ownership function to ensure transparency, consistency, separation of ownership and policy functions, and pooled expertise on financial reporting and board nomination.
- Current Bulgaria situation:
  - Objectives of SOEs: support national economic and strategic interests, supply public goods and services, and operate in natural monopoly situations.
  - No ownership policy and a coverage gap for a list of SOEs at the subnational level.
  - SOEs report to line ministries or sub-national governments with no separation of ownership and policy functions.
- Disclosure, auditing, and board composition:
  - Recommendation: large and listed SOEs should follow high-quality accounting, disclosure, compliance, and auditing standards equal to listed companies; all SOEs should disclose financial and non-financial information including objectives, financial and operating results, governance structure, remuneration, board qualifications and selection process, risks and mitigating measures, state assistance and guarantees, and significant transactions.
  - Annual financial statements should be subject to independent, high-quality external audit; OECD recommends an annual aggregate report on SOEs and web-based public communications.
  - Current practice: line ministries approve SOE financial plans and endorse quarterly and annual performance reports; no aggregate report on the financial performance of the SOE sector.
  - Boards should have authority, competencies, and objectivity; selection process should be centralized, transparent, and merit-based with market-reflective remuneration.
  - Bulgaria has no legislation requiring a minimum percentage of independent board members; board members typically nominated by line ministries through General Shareholder Meetings and often include political appointees regardless of professional expertise.
  - SOE executives and audit committee members are appointed by line ministries with no requirement to include independent or external experts except for public-interest entities.

### AML/CFT framework and reforms
- Assessment history:
  - Bulgaria’s AML/CFT regime was found largely compliant with the previous FATF standard (update in 2013) though not recently assessed for effectiveness.
  - Bulgaria is a member of MONEYVAL. The 2013 assessment found legal frameworks (LMML, criminalization of money laundering, confiscation regime) generally in line with international standards and institutional framework largely compliant regarding FIU, law enforcement, supervisors, resources, national co-operation and statistics.
  - The regime has not been formally assessed against revised FATF standards focusing on effectiveness; the last assessment may not reflect the current regime.
- Legislative improvements:
  - Transposed the 4th EU Anti-Money Laundering Directive (AMLD4) into national law via the Measures Against Money Laundering Directive Act effective in March 2018.
  - Key improvement: obligation to gather and maintain accurate information on ultimate beneficial owners (UBOs) and require businesses to identify and provide such information to the Commercial Register and Register for Non-Profit Legal Entities or the BULSTAT Register no later than February 1, 2019.
  - Other improvements: (i) enhanced customer due diligence including identification of origin of funds and risk-based simplified customer due diligence; (ii) a lower cash payment threshold; (iii) expansion of definition of politically exposed persons and a new definition for shell bank; (iv) inclusion of the entire gambling sector other than casinos.
- ERM II commitment and AMLD5:
  - Authorities plan to approve a draft law transposing the 5th Anti-Money Laundering Directive (AMLD5) into Bulgaria’s legislation by March 2019.
  - The EC’s AMLD5 was adopted by the European Parliament and entered into force in July 2018; member states must incorporate rules into national law by January 2020.
  - AMLD5 aims include: (i) increasing transparency on real owners of companies and trusts; (ii) improving FIU access to information through centralized bank account registers; (iii) eliminating anonymity on electronic money products (virtual currencies and pre-paid instruments); (iv) strengthening cooperation between anti-money laundering supervisors and the European Central Bank; (v) broadening criteria for assessing high-risk third countries.

### Comparative performance and concluding observations
- Comparative analysis highlights relative strengths and weaknesses:
  - Bulgaria outperforms NMS and EU averages in most areas of AML/CFT, revenue outcomes, budget transparency, and some judicial aspects.
  - Indicators point to room for improvement in overall anti-corruption framework, public procurement system, SOE governance, and preventive AML/CFT measures.
- Recent progress and outlook:
  - Authorities have advanced reforms in anti-corruption framework and the judiciary, public procurement, SOE governance, and AML/CFT.
  - EC support under the CVM acknowledged steady progress and indicated a possible conclusion of the mechanism in 2019.
  - Remaining reform aspects based on the 2018 CVM report include establishing roadmaps for reforming the prosecutor’s office and investigation of crime, agreeing on a roadmap for e-justice development, and improving public reporting on judicial reform, anti-corruption strategy, and progress in corruption-related cases.
  - Public procurement reforms are advancing through an external review expected to recommend concrete measures, and ERM II commitments include aligning SOE legislation to OECD guidelines and transposing AMLD5 into national law.

*International Monetary Fund — Bulgaria Country Report excerpts*

### References

### References

### Academic articles and books
- Acemoglu, D., Johnson, S., and J. Robinson, 2001, The Colonial Origins of Comparative Development: An Empirical Investigation." American Economic Review, 91 (5), 1369-1401. 
- Ariu, A., Docquier, F., and M. Squicciarini, 2016, Governance Quality and Net Migration Flows, Regional Science and Urban Economics, 60, 238-248. 
- Cooray, A., and F. Schneider, 2016, Does corruption promote emigration? An empirical examination, Journal of Population Economics, 29 (1), 293-310. 
- Daude, C., and E. Stein, 2007, The Quality of Institutions and Foreign Direct Investment, Economics and Politics, 19 (3), 317-344. 
- Hall R., and C. Jones, 1999, Why do some countries produce so much more output per worker than others?, The Quarterly Journal of Economics, 114 (1), 83-116. 
- Rodrik, D., Subramanian, A., and F. Trebbi, 2004, Institutions Rule: The Primacy Of Institutions Over Geography And Integration In Economic Development, Journal of Economic Growth, 9 (2), 131-165. 
- Smith, A., 2000, The Wealth of Nations / Adam Smith, Introduction by Robert Reich ; Edited, with Notes, Marginal Summary, and Enlarged Index by Edwin Cannan. New York. 

### IMF publications and working papers
- Atoyan, R., Christiansen, L., Dizioli A., Ebeke, C., Ilahi, N., Ilyina, A., Mehrez, G., Qu, H., Raei, F., Rhee, A., and D. Zakharova, 2016, Emigration and Its Economic Impact on Eastern Europe, IMF Staff Discussion Note 16/07, International Monetary Fund, Washington, DC. 
- ______, 2016a, Regional Economic Issues: Central, Eastern, and Southeastern Europe, Washington, DC, May 
- ______, 2016b, Regional Economic Issues: Central, Eastern, and Southeastern Europe, Washington, DC, November. 
- ———, 2016c, Bulgaria: State-Owned Enterprises in a Regional Perspective, Selected Issues Paper.” IMF Country Report No. 16/345, Washington, DC. 
- ______, 2017a, Reforming the Judiciary: Learning from the Experience of Central, Eastern and Southeastern Europe, IMF Regional Economic Outlook, Europe, November. 
- ———, 2017b. The Role of the Fund in Governance Issues— Review of the Guidance Note— Preliminary Considerations. Washington, DC. 
- ———, Forthcoming, Reassessing the Role of State-Owned Enterprises in CESEE, Washington, DC. 

### European Commission and EU reports
- European Commission, 2006, Monitoring report on the state of preparedness for EU membership of Bulgaria and Romania.  
- ———, 2017, Report from the Commission to the European Parliament and the Council: On Progress in Bulgaria under the Co-operation and Verification Mechanism. 
- ———, 2017, Special Eurobarometer 470: Corruption. 
- ———, 2018, The 2018 EU Justice Scoreboard, Luxembourg. 
- ———, 2018, Report from the Commission to the European Parliament and the Council: On Progress in Bulgaria under the Co-operation and Verification Mechanism. 

### International organizations, surveys, and reports
- American Bar Association, 2013, Judicial Reform Index for Bulgaria. 
- International Budget Partnership, 2017, Open Budget Survey 2006-17: Bulgaria.  
- Koske, I., et al., 2015, The 2013 update of the OECD's database on product market regulation: Policy insights for OECD and non-OECD countries, OECD Economics Department Working Papers, No. 1200, OECD Publishing, Paris. 
- MONEYVAL, 2013, Report on Fourth Assessment Visit Anti-Money Laundering and Combating the Financing of Terrorism: Bulgaria, Strasbourg. 
- OECD, 2015, OECD Guidelines on Corporate Governance of State-Owned Enterprises, 2015 Edition, OECD Publishing, Paris. 
- World Bank, 2017, Benchmarking Public-Private Partnerships Procurement, Washington, DC. 
- _______. 2017, Benchmarking Public Procurement, Washington, DC. 
- World Economic Forum, 2018, The Executive Opinion Survey: The Voice of the Business Community”, The Global Competitiveness Report 2017-18. 

*Source: 1bgrea2019002 - References*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1bgrea2019002.pdf_