I. GENERAL PROFILE
Area: 110,994 sq km
Population: 7.97 mln
Population density: 71.8 per sq km
Capital: Sofia

GDP (2000): $ 11,334 mln
GDP (2000) per capita: $ 1,422
2000 GDP growth: 4.5%
Budget deficit as % of GDP: 2.1%
CP Index Change (2000): 10.4%
Foreign debt: $ 10.364 bln

Government: Democratic Republic since 1990. Head of State: President Petar Stojanov since 1996. Head of Government: Prime Minister Simeon Borisov Sakskoburggotski since 2001.

Religion: The majority of the population are Christian, the main denomination being Bulgarian Orthodox Church. There is also a significant Muslim minority (9%) and small Roman Catholic and Jewish communities.

Bulgaria is bounded to the north by the River Danube and Romania, to the east by the Black Sea, to the south by Turkey and Greece and to the west by Serbia and FYROM. The Balkan Mountains cross the country reaching to the edge of the Black Sea and its golden beaches.

Bulgaria has suffered the usual problems experienced by centrally-planned economies adjusting to market conditions. Since 1997 economic reform has been speeded up, most of industry and agriculture privatised, trade liberalised and reforms of the fiscal and banking system instituted. In 1997 a Currency Board was established and the Bulgarian Lev was pegged to the DEM, and now to the Euro. The major Bulgarian trade partner is the European Union (about 60%), followed by Russia, Germany, Italy and Greece. From Russia Bulgaria imports mainly crude oil and natural gas. Since the late 1990s, the trading relations of Bulgaria with the countries of the European Union have been noticeably intensified, in accordance with the country's political orientation.

II. DEFENCE BUDGETS - OVERVIEW (1999-2001)

Defence/GDP proportion. It has been reported that the nominal growths of GDP for 2000 and 2001 are 12,34% and 10,25% (estimated respectively). Meanwhile, the nominal growths of total budgetary revenues run up to13,72% and 22,17%. It is clear that the nominal growth rate of budgetary revenues is higher than the nominal growth rate of GDP. In comparison with this, the growths of defence expenses figure out at 7,07% and 14,88% respectively. In 2001, the growth rate of defence costs exceeds the growth rate of GDP, which accounts for the relative increase of defence expenditure as a percentage of GDP, from 2,54% to 2,65% (See Chart 1). However, the increase in defence spending drops behind the increase rate of government budget revenues. It is generally due to higher expenditure for the social sector.

It follows that a setting of the defence budget volume as a fixed percentage of the GDP will probably lead to a relative shrinkage of the defence component of the national budget.Recently the fiscal effect of the positive difference between the growth rates of the national budget and GDP has been to the benefit of the social sphere, where structural reforms are being implemented.


Chart 1. Total defence expenditures as percentage of GDP (1999-2001)

Total defence expenditures. Military spending is on an upward trend. It will be equivalent to USD 367 million in 2001, which represents a 7% rise compared to 2000 (See Table 1 and Chart 2). With an eye on the increasing resource needs of the defence reform agenda, and the limitation of the defence budget growth rate to the growth rate of GDP, it is necessary to make use of the possibilities granted by internal restructuring of defence budget expenses.




Chart 2. Total defence expenditure (1999-2001)



Analysis of the structure of defence spending 1999-2001 gives an idea, first, of the transitory structure, and second, of the implementation of "Plan - 2004" and its impact on the defence budget.
Operating costs. (See Chart3). There are some interesting dynamics in the structure of operating costs, although the component groups of personnel costs and operation and maintenance costs do not shift drastically. In 2001 personnel costs amount to 69,92% of the defence budget in comparison with 72,62% in 1999. In 2000 they reached the highest level for the period, and there were usually low operations and maintenance costs (13% only). In most cases operations and maintenance costs 'adjust' to personnel costs, because the alter are very hard to alter. The O&M costs are distinguished by greater flexibility. They can be cut to meet the most essential needs only. This, of course, can affect the efficiency of the national defence, and the long-term sustainable support of capabilities.


Chart 3. Structure of the operating costs (1999-2001)


Chart 4. Structure of the procurement and construction costs (1999-2001)

Procurement and construction costs. (See Chart 4.) Investment costs reflect the pattern of armed forces' modernization.
In 1999, the construction expenses took 85% of the total amount of defence investment. In 2000, they accounted for only 3%, while in 2001 their portion rises again to 19% of capital spending.
Purchases of electronic and communications equipment represented 66% of the total value of military procurement in 1999, 85% in 2000 and 79% in 2001.

Research and development costs. Research and development costs were negligible in 1999 and 2000, but in 2001 took 1,2% of total defence expenditures. The portion of R&D outlays in the defence budget will remain small but their significance for the technological changes in the defence sector will grow in the future. (See chart 5).

Looking at spending from an 'output' perspective, the defence forces costs comprise five structural components:

• Land forces expenses
  
• Naval expenses
  
• Airforce expenses
  
• Administration and command expenses
  
• Central support expenses
  

Their shares in total expenditures 1999-2001, and their outlays, are shown in Chart 6.

Land forces expenditures. Land forces traditionally consume the biggest part of the defence budget. In 1999 their expenses came to 22% of the total defence expenditures, but accounted for 48% in 2000 and 42% in 2001. The rise of their relative portion is mostly due to the growth of operating costs. In 2001 the army consumes 45% of total operating costs. This fact defines its resource needs as predominant.

Naval forces expenditures. Naval costs are small in comparison. Although showing a certain relative growth, their share of the defence budget remains modest: 3,6% in 1999; 5,3% in 2000; and 8,4% in 2001. The positive growth of naval costs is due to increased spending on military personnel and petroleum products.

Airforce expenditures. The airforce was allocated 24% of the defence budget in 2001, 20% in 2000, and 15% in 1999. There is a three-year positive shift of the airforce expenses. In 2000 and 2001 the airforce procurement shows a substantial rise, which contrasts to its "zero" level in 1999.



Administration and command expenditures. The admhinistration and command expenses are mainly composed of personnel costs. They register a straight positive 1999-2001 trend. In 2001 they account for about 5% of total defence expenditure.

Central support expenditures. In 2000 the category central support expenses consisted only of personnel costs and operations and maintenance costs, but in 2001 the $ 6 million spent on national military construction for central support represents 12% of central support costs and a third major component.

III. ESTIMATED TRENDS OF DEFENCE EXPENDITURE 2001-2005

Defence/GDP proportion. According to the estimations of the Bulgarian Ministry of Defence the volume of total defence expenditure (till 2006) will be defined as a percentage of the GDP (2,7% - 2,8%) as depicted in Chart 7. The expected trend is in relation to the program approaches adopted in the planning of the Bulgarian defence budget. The setting of the budgetary dimensions is complemented by an internal formula that defines the inner structure of defence expenditures and represents a useful tool for resource allocation.

Chart 7. Total defence expenditure as % of GDP (1999-2005)

Development of the defence budget. Some new tendencies of the defence costs structure development started in year 2000 with the start of "Plan 2004" implementation. According to the estimations of the Ministry of Defence, the running costs will decrease relatively a driven by the shrinkage of personnel costs, while operating and maintenance costs will keep their current relative share of total defence expenditure. Investment expenses (procurement and construction) will certainly raise their share. The motive force of their positive trend will continue to be the procurement of electronic and communications equipment. For details see Table 4.