European Commission on Bulgaria: Unwarranted optimism on economic recovery, lack of reforms

European Commission on Bulgaria: Unwarranted optimism on economic recovery, lack of reforms

 

By Clive Leviev-Sawyer of the Sofia Globe

A report by the European Commission on Bulgaria, coincidentally released just after a year of the Bulgarian Socialist Party government, has found unwarrated optimism about reviving the economy, a lack of reform of several key sectors and a lack of progress in combating corruption.

These are the main findings of the European Commission (EC) on the national reform program and convergence program of the government for 2014

The report, released on June 2 2014, made six recommendations on the basis of serious shortcomings identified. These recommendations cover tax policy, the pension system, the labour market, education, energy and improving the business environment. Most of the recommendations have been made in previous reports by the EC, but no progress has been seen and in some areas, there has actually been a reverse.

Bulgaria’s forecast economic growth of 2.1 per cent this year and 2.6 per cent next year exceeds the forecast by Brussels, whose data are for growth of 1.7 per cent in 2014 and two per cent in 2015.

Tax compliance and the quality of the tax administration remain central challenges in Bulgaria, the EC report said.

“Available estimates point to a considerable size of the shadow economy, confirmed by data for undeclared work in Bulgaria.”

The administrative costs of revenue collection and the compliance costs of paying taxes are relatively high.

“Despite several measures taken to respond to these challenges, Bulgaria still lacks a fully-fledged tax compliance strategy, which would cover the work of all tax collection authorities and include a prior analysis of the most significant risks to tax collection as well as an evaluation of the measures already in place, including simplification measures as well as improved controls.”

In 2013, Bulgaria took a step back from past commitments in the area of pension reform, the EC report found.

Additional early retirement schemes were introduced and the planned annual increase in the statutory retirement age was postponed.

No progress was made with regard to harmonising the retirement age for men and women and no steps were taken to tighten eligibility criteria and controls to limit abuse in the allocation of invalidity pensions.

“Bulgaria has one of the most rapidly ageing populations in the EU, which has negative implications for the labour market, for growth potential in the economy and for the financing of its pension system. Bulgaria therefore needs to continue the reform of its pension system.”

 

Bulgaria also faces “important challenges” in the rationalisation and management of the hospital sector, including a lack of transparency in hospital financing and insufficiently developed services for outpatient care.

Furthermore, the high level of “formal and informal” payments borne directly by the patient effectively excludes certain segments of the population from access to health-care.

Health status indicators are weak in comparison with other EU countries, indicating that structurally higher public expenditure on health may be required in the future.

Bulgaria’s labour market has been underperforming in recent years, thus limiting the adjustment capacity of the economy and undermining its growth potential, the EC report said.

“Unemployment levelled off in 2013, but the number of young and long-term unemployed has continued to rise,” the report said.

“Bulgaria faces one of the highest proportions of young people who are neither in employment, education nor training, implying a severe underutilisation and underdevelopment of human capital.”

There has been only very limited progress in strengthening the capacity of the Employment Agency.

There is also a need to extend the coverage and efficiency of active labour market policies, the report said.

“Bulgaria lacks effective measures to target the non-registered young people, including Roma, in line with the objectives of a youth guarantee.”

Significant proportions of the unemployed are not covered by the standard safety nets (unemployment benefits and social assistance) but rely instead on family solidarity or informal work.

“Bulgarians experience one of the highest risks of poverty and social exclusion in the EU,” the report said.

Minimum thresholds for the payment of social insurance contributions could prevent the low-skilled from participating fully in the formal economy.

“Some analyses have been carried out to assess the possible impact and these need to be assessed and followed up with appropriate policy action.”

There are no clear guidelines for transparent minimum wage setting in Bulgaria, the EC report found.

“Statutory minimum wages have been increased substantially in 2013 which may have a negative impact on employment and should, therefore, be monitored.”

Bulgaria has still not adopted the School Education Act providing a framework for implementation of the necessary comprehensive reforms of the school system, including the modernisation of curricula and the improved training for teachers.

There is a need to enhance the quality of vocational education and training in Bulgaria and to integrate it better into the general educational structures so as to allow for flexible pathways, reduce early school leaving and improve access to lifelong learning.

Higher education, in turn, faces “persisting challenges” in responding better to labour market needs.

The low standard of quality certification contributes to poor performance. A new strategy on higher education is being discussed, calling for the restructuring of university management through the direct involvement of interested stakeholders such as businesses and students, the consolidation of

universities, and a performance-based approach to better align educational outputs with the demands of the labour market.

A continuing challenge concerns the access to education for disadvantaged children, in particular Roma children, the EC report said.

The two-year obligatory pre-school is a key measure going in the right direction and should be strictly implemented, together with measures to prevent early school leaving. There is a need to scale up existing initiatives to improve the training of teachers and reduce de facto segregation in schools. The rules linking the child allowance with participation in education are not yet effectively implemented.

“Broader efforts to modernise the public administration have had a limited impact due to a fragmented approach and insufficient commitment to in-depth reforms,” the report said.

“Bulgaria needs a coordinated strategy for public administrative reform to enhance the professionalism and independence of the public administration and of its regulatory agencies, including a merit-based system of appointments and career development for civil servants and effective structures to address the risk of corruption.”

Continued efforts are needed to improve the general business environment, the EC report said.

Challenges include the procedures for obtaining permits and registering businesses

Resolving insolvencies takes over three years on average and the recovery rate is low. New

rules on late payments were adopted in 2013 and need to be implemented, the report said.

“The development of e-government has stalled, and coordination to ensure interoperability of systems and creating a single point of contact is insufficient, thus limiting the efforts to increase transparency and reduce administrative burdens.

“In the area of public procurement a simple and codified legal framework is lacking, resulting in a complicated legal and regulatory landscape which creates uncertainty for operators.”

The independence of the judiciary also remains a major concern affecting the business environment in Bulgaria, the report said.

Bulgaria has taken some steps to address corruption, but overall progress has been limited and remains fragile, calling for more consistent checks and dissuasive sanctions for conflicts of interest.

There is also a need to ensure better co-ordination among anti-corruption institutions and shield them from political influence.

Competition in the electricity and gas sectors remains limited, the EC report said.

Areas of particular concern for improving the functioning of the energy markets include the lack of electricity and gas exchanges and the absence of a transparent wholesale market.

The free market in electricity is dominated by a sole supplier and its limited size means that competition cannot fulfil its function of ensuring cost efficiency.

“The independence and effectiveness of the national regulator remains limited.”

Dependency on imports from a limited number of suppliers and lack of infrastructure development create a risk of supply shocks.

A comprehensive package of measures to improve energy efficiency has been proposed for EU financing in the new programming period 2014-2020.

The report’s recommendations included:

* Reinforce the budgetary measures for 2014 in the light of the emerging gap relative to the Stability and Growth Pact requirements. In 2015, strengthen the budgetary strategy to ensure reaching the medium-term objective and remain at it thereafter. Ensure the capacity of the new fiscal council to fulfil its mandate. Implement a comprehensive tax strategy to strengthen tax collection, tackle the shadow economy and reduce compliance costs.

* Adopt a long-term strategy for the pension system, proceeding with the planned annual increase in the statutory retirement age and setting out a mechanism to link the statutory retirement age to life expectancy in the long term, while phasing out early retirement options and equalising the statutory retirement age for men and women. Tighten eligibility criteria and procedures for the allocation of invalidity pensions, for example by taking better account of the remaining work capacity of

applicants. Ensure efficient provision of healthcare including by improving transparency in hospital financing, optimising the hospital network and developing out-patient care.

 

* Monitoring system and better targeting the most vulnerable, such as low-skilled and elderly workers, the long-term unemployed and Roma. Extend the coverage and effectiveness of active labour market policies to match the profiles of job-seekers, and reach out to non-registered young people who are neither in employment, education or training, in line with the objectives of a youth guarantee. Improve the effective coverage of unemployment benefits and social assistance and their links with activation measures. Take forward the comprehensive review of minimum thresholds for social security contributions so as to make sure that the system does not price the low-skilled out of the labour market.

* Adopt the School Education Act and pursue the reforms of vocational and higher education in order to increase the level and relevance of skills acquired at all levels, while fostering partnerships between educational institutions and business with a view to better aligning outcomes to labour market needs. Strengthen the quality of vocational education and training institutions and improve access to life-long learning. Step up efforts to improve access to quality inclusive pre-school and school education of disadvantaged children, in particular Roma, and implement strictly the rules linking the payment of child allowance to participation in education.

* Continue to improve the business environment, in particular for SMEs, by cutting red tape, promoting e-government, streamlining insolvency procedures and implementing the legislation on late payments. Improve the public procurement system by enhancing administrative capacity, strengthening the ex-ante checks performed by the Public Procurement Agency and taking concrete steps for the implementation of e-procurement. Enhance the quality and independence of the judiciary and step up the fight against corruption.

* Scale up the reform of the energy sector in order to increase competition, market efficiency and transparency, and energy efficiency, in particular by removing market barriers, reducing the weight of the regulated segment, stepping up efforts for the creation of a transparent wholesale market for electricity and gas, phasing out quotas, and strengthening the independence and administrative capacity of the energy regulator. Accelerate interconnector projects with neighbouring member states and candidate countries and enhance the capacity to cope with disruptions.