Global Crisis May Boost Bulgaria's Shadow Economy - Think-Tank

A deterioration of the economic environment in the country would increase the production of home-made goods for personal consumption by the poorest members of the society, heap pressure on the companies and households' incomes and lead to relaxed control, CSD said in a study. Companies would become more dependent on government decisions, including in regard to public procurement and concession contracts, which can result in the disbursement of public money through political ties, higher unemployment and value-added tax siphoning.

Bulgaria, despite its balanced public finances with low public debt, budgets surpluses and sound financial system, remains highly vulnerable to external shocks, the think-tank said, adding that the main risks lie in institutional instability, curruption and crime.

However, the country has the capacity to resist the crisis if it keeps the currency board firm, maintains prudent fiscal policy, searches for alternative solutions to support and restructure the economy, and ensures the efficiency of the controlling and law-enforcement authorities.

CSD said the number of Bulgarian companies and individuals hiding their incomes in order to avoid paying tax and social contrubitions has shrunk significantly in recent years. The think-tank's Hidden Economy Index 2008 measuring Bulgaria's shadow economy has fallen 40% since its launch in 2002.

Since July 1997 Bulgaria has been operating an IMF-prescribed currency board system, a tight monetary arrangement that ties the level of cash in circulation to the amount of central bank reserves. The fixed exchange rate of the Bulgarian lev under this system is 1.95583 per euro.