A post-COVID economy

However, the negative impact also came with some relatively good news. Bulgaria's results were not that bad compared to what other parts of Europe reported. Moreover, since then economic activity has been recovering, albeit slowly. In the third quarter, GDP recorded growth of 4.3% on a quarterly basis.

Currently, economic forecasts for Bulgaria and Europe point to a significant decline in GDP for 2020 and a more visible recovery starting in 2021. The Ministry of Finance is expecting a moderate GDP decrease of 3% for 2020 and growth of 2.5% this year. On the other hand, in September the Bulgarian National Bank (BNB) projected a decline of 5.5% in 2020 and an increase of 4% in 2021, without taking into account the effects of a second COVID-19 wave in Bulgaria and Europe.

Unemployment - not a major problem now

The labor market was the first to register the magnitude of the negative repercussions of the lockdown on the real economy. In just two months, the total number of newly registered unemployed reached 131,500 compared to a little over 41,000 in the same period of 2019. By May, unemployment had risen to 9% from around 6% at the beginning of the year, representing a little over 295,000 people registered with employment offices across the country. Unsurprisingly, the most significant lay-offs came from sectors like manufacturing, trade, food and accommodation enterprises, transportation, and entertainment.

The good news is that, since then, the labor market has been recovering. Despite a small uptick at the beginning of the second phase of (milder) restrictions in the fall, the labor market has continued to improve. The unemployment rate went back to 6.7% in November. Most experts say that the decrease is the result of the government's so-called 60/40 job retention measure, in which the state pays 60% of the employee's salary. The employer pays the remaining 40%, plus social contributions.

That said, the longer-term effects of COVID on unemployment should become visible in the second half of 2021, when government support programs fade out and sectors like tourism and hospitality as well as SMEs reveal the real damage to the economy.

Deferred loans top 9 billion levs

As the coronavirus pandemic spread, the BNB approved the implementation of a credit moratorium deferring repayment of consumer, business and mortgage loans for six months. In other words, banks continue to accrue interest, but do not charge delayed interest and penalties during that period. Since then, the moratorium has been extended twice, with the most recent deadline now being 31 March 2021. By the end of September, over 9 billion levs (4.6 billion euro) worth of loans had received approval for deferral under the moratorium.

So far, the option for deferral has been preventing the increase in bad loans that is traditionally associated with an economic crisis. According to data from the BNB, the sum of non-performing loans increased from around 8.8% at the beginning of the year to 9% in May. However, there is a risk of deterioration of banks' portfolios following the expiration of the grace period when customers will have to resume servicing their loans.

Queueing for the euro in the middle of a pandemic

On 10 July 2020 Bulgaria, along with Croatia, joined the EU's Banking Union and the Exchange Rate Mechanism (ERM II) - the training grounds for Eurozone membership. Formally speaking, this means that a procedure was initialized to peg the Bulgarian lev to the euro in preperation for the adoption of the single currency. However, taking into account that Bulgaria is operating a currency board system introduced back in 1997, the country unilaterally committed to join ERM II with its existing fixed exchange rate of 1.95583 levs per euro. Also, starting from 1 October 2020, the European Central Bank is in charge of the direct supervision of Bulgarian "significant" and "less significant" banking institutions. The ECB will carry out an assessment to determine which banks fulfil the classification criteria.

Bulgaria's participation in ERM II is important for decreasing transaction costs for both businesses and households and for sending a positive message for investors. Successful participation in ERM II for at least two years is considered a confirmation of a country's stability. Also, the prior two years of institutional strengthening have already been noted by rating agencies. Moody's upgraded Bulgaria's long-term ratings to Baa1 in October, assuming that following the general elections expected in March 2021 the next government will remain committed to joining the euro area and will continue to implement necessary reforms.

Cut VAT!

By the beginning of summer 2020, another surprise was brewing, this time for one of the pillars of the country's tax policy - a cut in the flat Value Added Tax (VAT) rate of 20% for some businesses. Following a meeting with restaurant owners, Prime Minister Boyko Borissov singlehandedly decided to lower the VAT rate for restaurant services to 9% starting in July. Until then, only hotel services benefited from that preferential tax rate. The decision came as a shock. Firstly, the cut in VAT for restaurants will cost the budget 150 million levs in lost revenue annually. Second, the tax relief was granted to one of the biggest tax-evaders in the Bulgarian economy: according to the National Revenue Agency, nearly 80% of food and entertainment establishments avoid paying taxes.But most of all, the government has time and again told the public that major tax policies will not change during its term in office.VAT has regularly been under fire but has withstood with a common 20% rate, because once an exception is made for one branch, others will ask for the same. So it came as no surprise that subsequently books, baby food and diapers, gyms and tour operators were also included in the exceptions.

Upcoming elections and their effects on fiscal policy

After a year of political turbulence and protests against the government, Bulgaria will elect its next parliament and president this year - two processes that spell another year of insecurity. The government is increasingly inclined to dish out money to each voice of discontent. The upcoming elections already seem to be weighing down on this year's budget.

In January, in addition to the regular annual pension increase due in July, the minimum pension was raised to 300 levs (153 euro), which will cost the 2021 budget 474 million levs. Retirees number over 2 million people, accounting for about 38% of eligible voters. On top of the pension increase, retirees will also receive a monthly supplement of 50 levs through March (the earliest possible month of the parliamentary election).

Also, the 2021 budget is weighed down by a 10% rise in the wages of 400,000 public sector workers that comes with no measures to increase efficiency in the sector. Police was granted a higher wage increase than other public sector employees after several days of protests. Considering the shaky ground under the current government's feet, one can only expect this trend to intensify as March approaches.

Working from home

In 2020, EU countries on average moved more than a third of their economies online, according to a Eurofound study. In Bulgaria, the share of respondents stating that they have started working from home as a result of the pandemic is close to 30% a shift that could otherwise have taken a much longer time. According to experts, it will permanently change the way people live and work. The pandemic and the mass transition to online working has shown the negatives of office life to both businesses and households: time lost travelling to and from the office, paying high rents to live in cities near places of work, moving far away from family, or 'facetime' to stay in the office just because the boss is there. Although it is doubtful that the share of people working from home will remain as high as it has been during the pandemic, companies now have processes in place for that to happen. Some may switch to smaller "in-person" workforce, while others may offer more flexible working arrangements to their employees.

The debt to come

Bulgaria rarely makes it to the top in EU statistics in terms of positive indicators but debt data is an exception. With its 24 billion levs (12.3 billion euro) in government debt, equivalent to about 20% of GDP in 2019, the country has been among the top three least indebted member states for years along with Luxembourg and Estonia. The government's plans to raise the debt by 67% or over 15 billion levs by 2023 may not fundamentally change the rankings in the EU but it will decrease the country's ability to manoeuvre when necessary in the future.

2021: The return of inflation?

Inflation in Bulgaria has been steadily decreasing for months - from a high of about 4.1% year-on-year in January to 0.4% in November on an annualised basis. The estimates are based on the Bulgarian methodology for calculating the consumer price index, which gives a higher share of food purchases in consumer spending (30%), compared to the European methodology (22.7%), taking into account the higher disposable income of the population in other EU member states.

The mild increase in average consumer prices across the country was led by some foods. However, lower transportation and energy prices driven by the drop in international oil prices have been a deflationary factor since March. According to the central bank's economic outlook, inflation is bound to accelerate to around 2% in 2021 on the back of oil and food price dynamics in international markets. Another determinant of the price level would be the growth rate of average wages, which have already recovered from the pandemic's adverse economic effects and hovered around a 10% increase on an annualised basis in the third quarter of 2020.

Vaccines and the light at the end of the tunnel

Last year ended with positive news of the beginning of vaccination campaigns around the world, which offered a glimmer of hope for a faster recovery of the global economy. While waiting for vaccine supply to increase, managing the pandemic will still hinder economic activity. But vaccination campaigns, concerted health policies and government financial support are expected to lift global GDP by 4.2% in 2021 after an estimated fall of 4.2% this year, according to the latest OECD economic outlook report from December 2020.

"An economic contraction of 4.1% is expected in 2020, to be followed by a recovery, with growth of 3.3% in 2021 and 3.7% in 2022, driven by rising domestic demand and a moderate rebound in exports," the OECD said about Bulgaria, which is an improvement, compared to the decline of 7.1% in 2020 and 2.4% growth in 2021 projected in their June report.