Immediate impact: January - July 2020

In Bulgaria, the first wave of COVID-19 was modest compared to other countries. Widespread restrictions were imposed for two-and-a-half months, beginning in mid-March. Face-to-face and travel-related businesses were severely affected, except for supermarkets and pharmacies.

The monthly unemployment rate has been in the range of 5–10% for 2020. While the trend is upward, the changes have not been dramatic since March. Government policies have justifiably focused on the most vulnerable and on avoiding job destruction. Given the traditionally low rate of necessitydriven Total early-stage Entrepreneurial Activity (TEA) in Bulgaria, a major shift in entrepreneurial activity related to the slight increase in unemployment statistics is unlikely. There is limited representative primary data to draw reliable conclusions about the impact of the restrictions on entrepreneurship ecosystems, but some observations can be made. Ordinance H-18 introduced rules for recording payments with fiscal devices, causing confusion and negative impact. It was suspended for six months.

In April 2020, the government redirected funds worth 870 million Bulgarian lev (BGN) from EU operational programs (in support of businesses and innovation) to cope with the socioeconomic aspects of COVID-19. Businesses have continued to operate despite movement between towns being restricted. In addition, the closure of all schools and kindergartens has forced many parents to facilitate distance learning. The Bulgarian Startup Association has argued that startups are severely affected and should be supported since they are at their most volatile stage. The government has not yet proposed a workable model to support startups. However, private organizations and entrepreneurial communities are continuing to network and to provide support initiatives to help orient fledgling companies. Any plans and initiatives by businesses that involved growth and partnership building in the global entrepreneurial ecosystems have been put on hold. The innovation-driven startups that have adapted best have been those that are agile and pivoted towards deliveries or solutions that improve the quality of digital services, home offices and homeschooling. COVID-19 has represented a sizeable growth opportunity for such businesses. Several textile companies have managed to adapt their production lines to make face masks for Bulgarian or European demand.

In a matter of days, educators had to switch to remote teaching, with varying degrees of success due to uneven levels of IT resources and experience in using online resources and in online engagement. But many successful practices and approaches have been developed, thanks in part to the widespread sharing of knowledge. Positive and negative effects are correlated with specific sectors. Businesses in digital services have expanded while those in, for example, tourism have faced significant challenges. An unexpected positive effect has been the overwhelming increase in donor support to hospitals, communities and social enterprises.

Immediate policy interventions: January  - July 2020

The Bulgarian government introduced a 60:40 scheme in March 2020 to reduce the economic impact of the pandemic. Through the scheme, the government covers 60% of an employee’s salary and mandatory social security and health care contributions, while employers cover the rest. Since the start of the scheme, it has assisted companies in keeping 150,000 people employed at a cost of BGN 130 million. On 1 July 2020, the government extended the duration of its 60:40 employment aid scheme until the end of September 2020, while expanding the qualification criteria for government assistance. Changes to these criteria will allow companies in previously excluded sectors to apply for government grants, while the reach is further expanded by dropping the requirement that firms are up to date on their tax and mandatory contribution payments. This is expected to double the aid scheme’s reach to 300,000 employees. The government’s cost estimate for the 60:40 scheme remains unchanged at about BGN 1 billion, or €510 million.

Separately, companies in the tourism, hospitality and transportation sectors can apply for funding under the 60:40 scheme, in addition to the separate wage-support measure targeting those sectors, approved by the Cabinet. The cumulative impact of two schemes on those sectors means that employers would only have to provide about 20% of an employee’s salary and mandatory contribution payments, as the rest would be covered by government grants. Furthermore, the government has allocated BGN 160 million in grants for companies hiring unemployed people, including BGN 50 million targeting the tourism and hospitality sectors. Under this scheme, the government covers the minimum salary and social security payments of new hires, which can be full-time or part-time, for a period of up to three months.

Another program has been launched to support those businesses with a 20%+ decline in turnover compared to 2019. A pan-European aid package worth hundreds of billions of euros aimed at supporting national economies and entrepreneurs could help the situation, provided the money is allocated based on data-driven analysis, impact assessment and transparency. At the end of June 2020, policymakers were dealing with the aftermath of the lockdown and a new surge in infections. A Fund of Funds manages BGN 1.2 billion under four operational programs and is responsible for launching instruments in support of businesses. The Fund’s main activity is the structuring and management of financial instruments co-financed by the European Structural and Investment Funds during the 2014–20 programming period. Financial instruments are an alternative means of grant financing and are acquiring an increasingly important role in the European Union budget. Targeting projects that could potentially begin self-sustaining, they provide investment support through loans, guarantees or equity investments. In this way, business and public institutions are supported for economic development. Financial instruments allow for the return (recycling) of funds that can be reused.

Future economic / policy outlook

According to McKinsey, the Bulgarian economy will require three years to recover in the least optimistic scenario and manufacturing and tourism will take even longer. The duration of the crisis will determine the mid- and long-term consequences. If there is success in managing the global crisis in the midterm, and the almost 4% GDP growth rate is achieved in 2021 as per World Bank forecasts, then the effect on entrepreneurial dynamics in Bulgaria will probably be very small.

A particular area of interest will be those Bulgarians currently living abroad who return home to start enterprises with their savings. Bulgaria has one of the lowest TEA and entrepreneurship intention rates globally, but it is also characterized by the relatively strong resilience of existing businesses. These specificities will probably help entrepreneurship in Bulgaria to be relatively stable compared to other countries. Similarly, the well-developed entrepreneurial ecosystems around the IT sector present opportunities for a large number of digitally based startups in Sofia. Vulnerability in terms of entrepreneurial finance will most likely be the biggest challenge for these ventures.