Bulgaria was predominantly agricultural, with virtually no heavy industry. In Communist Bulgaria following World War II (1939-1945), all industrial enterprises were nationalized and operated under a series of five-year economic plans, modeled after the Soviet system, with financial aid from the USSR. Heavy industry was the government’s highest priority. Bulgaria enjoyed one of the most prosperous economies of the Soviet bloc. In 1990 Bulgaria began converting from a socialist to a market economy, which was expected to result in a positive economic reversal. The reversal did not happen, however, leading to popular dissatisfaction with the social effects of the reforms. Consequently, the legislature did not enact laws that would have resulted in mass privatization, and the major industrial sectors remained under state control. Some reforms and privatization had begun, however, and in 1994 more than twice as many state-owned enterprises were privatized than in 1993.
The main sources of revenue under the socialist system were the turnover tax and deductions made from the profits produced by public enterprises. The turnover tax, a form of value-added tax, was based on a fixed rate and went immediately into the budget after the sale of products by state enterprises. In this way the state budget received a regular and uniform source of revenue to finance the undertakings called for in the economic plan. The turnover tax was dependent on the size, variety, and sale of manufactured products; ultimately it was passed on to the consumer. The profit deduction tax from state enterprises, unlike the turnover tax, was not at a fixed rate. It came from each enterprise's net income after deduction of the turnover tax. The profit shown by an enterprise was the difference between income and maintenance expenses. The advent of privatization in the early 1990s has made the future of the old taxation system uncertain.
Bulgaria, a former communist country struggling to enter the European market economy, suffered a major economic downturn in 1996 and 1997, with triple digit inflation and GDP contraction of 10.6% and 6.9%. The current government - which took office in May 1997 after pre-term parliamentary elections - stabilized the economy and promoted growth by implementing a currency board, practicing sound financial policies, invigorating privatization, and pursuing structural reforms. Additionally, strong assistance from international financial institutions - most notably the IMF which approved a three-year Extended Fund Facility worth approximately $900 million in September 1998 - played a critical role in turning the economy around. After several years of tumult, Bulgaria's economy has stabilized. Its better-than-expected economic performance in 1999 - despite the impact of the Kosovo conflict, the 1998 Russian financial crisis, and structural reforms - and strong growth in 2000 portends solid growth over the next few years; this assumes continued fiscal restraint, additional structural reforms, aid from abroad, and prosperous times in the EU economy.
