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Bulgaria was once firmly allied with the USSR, but is now seeking to reform its economy. The economy was based on supplying Soviet markets and is now changing to free-market policies. Bulgaria has a large foreign debt and 17% unemployment. Privatisation and a banking system are being slowly introduced. Even by communist standards Bulgaria did not have a productive economy, and output has fallen 50% since 1990.

Economic policy in Romania and Bulgaria is to a large extent driven by the need to meet conditions contained in International Monetary Fund letters of intent. Economic policy has also been changed by the emergence of reformist coalition governments in both countries. The success of economic reforms in Romania and Bulgaria depends on the countries attracting more foreign direct investment and on rapid progress in the privatisation programmes.

Bulgaria was experiencing considerable economic and political difficulties until the beginning of 1997, but there are now signs that a new mood is beginning to emerge. The new government has worked closely with international financial institutions, and it has been possible to introduce a currency board financial system. It has been possible to eliminate hyperinflation, and there has been a significant rise in hard currency reserves and therefore the domestic money supply. However, Bulgaria still faces serious problems, including high levels of poverty and foreign debt.

Bulgaria's economy has been steadily improving since the beginning of 1997. The recovery has mainly been fuelled by exports, although retail sales rose by 6% in Jul 1997. The budget deficit now looks set to be less than 4% of GDP, compared with predictions of 6.2%. Higher than expected tax receipts have had a positive impact on public finances, and privatization receipts have also been higher than anticipated. There has been a rise in foreign investment in a number of sectors.

Bulgaria's banking system is under pressure with 14 banks collapsing from a total of 44 due to an increase in bad debts. Five state banks have collapsed from a total of 11 and the government plans to privatize those that remain by selling them directly to foreign institutions. The banks that cannot be sold will be managed by Bulbank, the largest Bulgarian commercial bank, or by foreign banks, prior to a later sale. Hebros Bank and Express bank are seen as the most likely to attract foreign buyers.

The Bulgarian economy reached crisis level in January 1997 due to the lack of economic reform which resulted from the country's ongoing political turmoil. The value of the Bulgarian lev has declined drastically, but its credibility would be restored if the Government introduced a currency board monetary system supported by the International Monetary Fund. Annual inflation is continuing to exceed 300%. The main opposition party refuses to co-operate with the socialist government and insists on an early general election.

The Bulgarian Government aims to sell shares in profitable state-owned firms in order to raise immediate funds. Twenty two of the best-performing state companies will be made available to foreign investors, together with banks, engineering factories, shipyards, chemical facilities, and copper mines. Twenty-five percent of Bulgarian telecommunications firm BTC will be offered for sale. Industrial gas, ammonia and urea fertiliser producer Chimco will also be sold off, together with soda ash producer Sodi Devnya.

The Bulgarian tourist industry has great untapped potential, according to analysts from western countries. There was a drop in foreign tourists of 13% in 1995 compared with 1994, with UK tourists down by 20%. The private sector sees the government as seeking to take too much control of this sector, rather than encouraging non-state initiatives. There is also a lack of national promotion, and there has been little foreign investment in the Bulgarian tourist industry.

The Bulgarian banking industry was hit by a crisis in early 1996, when some loss-making banks were closed or taken over by the country's central bank. Implementation of a plan to restructure the banking industry has been postponed. The weak state of the banking industry hinders Bulgaria's economic development. Banks that have performed well have tended to locate profitable niches. There are 11 state-owned banks which account for some 70% of the sector's bad debts.

The Bulgarian economy has benefited from an increase in world trade which helped boost economic growth to 2.5% in 1995. Bulgaria was severely hit by the end of Comecon, since it was the most closely tied of formers Soviet satellite economies. The former Comecon area still accounts for over 40%of imports due to dependency on oil and gas from Russia. The government is carrying out a mass privatization program and other measures designed to promote a market economy.

Burgas and Varna are two Black Sea ports in Bulgaria which are undergoing economic recovery. The two ports have been affected by neglect and lack of maintenance for their infrastructure. Wages are low, unemployment is high, and petty crime is a problem in Varna, but there is also evidence of recovery as traffic through the port increases. Burgas is the main port for the petroleum industry in Varna, and benefits from an increase in exports of steel and chemicals.

Bulgaria's economic growth prospects are now improving, with important structural changes taking place including the move to new export markets in the west, and the growth in the number of new private firms and self-employed workers. Output and incomes fell in 1989-93, but in 1994 GDP is forecast to be stable, followed by a slight rise in 1995. However, the economy still has its problems, including high inflation and the slow pace of privatisation. Growth prospects have however been boosted by the debt rescheduling and reduction agreements concluded in 1994.