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The municipalities in the Burgas region suffered the heaviest blow in the country as a result of the COVID-19 pandemic and the restrictive measures to contain it. The disappearance of a large number of tourists managed to "erase" years of economic growth in the Black Sea municipalities, and the local labor markets experienced a significant decrease in employment, especially in Nessebar and Sozopol. The poor performance of the local education system does not paint a rosy future for the structure and qualification of the workforce, but positive migration provides grounds for moderate optimism.

The Impact of the Crisis

The municipal economies of the Burgas region were among the hardest hit by the crisis and the restrictive measures in 2020. While industrial centers recovered relatively quickly after the lifting of restrictions and the resumption of international trade, the tourist cities - and the region concentrates more than half of the summer seaside tourism in Bulgaria - suffered from a strong contraction in the flow of foreign tourists. The COVID-19 crisis led to the sharpest decline in tourist flow in the region, with the number of visitors decreasing from 500,000-600,000 per month during the summer months to under 300,000. The decline among foreigners is particularly significant, with only 1/5 of the usual number of foreign tourists visiting the region during the crisis year.

The largest municipal economy is that of the regional center, Burgas, with BGN 1.46 billion in value added at factor cost in 2020. The economic activity is relatively high in Nessebar (BGN 184 million), Karnobat (BGN 157 million), and Pomorie (BGN 92 million) as well. However, the leading economies in the region suffered significant damage during the crisis year, with the value added in the regional center contracting by 31% compared to 2019. The decline in Nessebar is most pronounced, where the outflow of tourists led to a 56% reduction in value-added compared to the achieved BGN 417 million in 2019. Sensible declines are also observed in Sozopol (-20%), Primorsko (-20%), Tsarevo (-18%), and Pomorie (-17%), which are dependent on the hotel and restaurant industry. While before the crisis, Nessebar was leading in terms of value added per capita with nearly BGN 15,000 per person, in 2020, Burgas took the first place in the region with BGN 7,100 per person, followed by Karnobat with BGN 6,800 per person.

The effect of the crisis on the Regional Economy of Burgas is also evident in the gross domestic product (GDP) per capita for the region as a whole – in 2020, it decreased by 17% compared to 2019. This strong negative trend managed to "erase" a significant part of the long-term development of the region, as compared to 2000, it is the only region with growth below 200%; for comparison, GDP per capita in the capital increased by almost 600%, and in Plovdiv by over 400%.

Concentrated Investments

Similar to the overall economic activity, investments are predominantly concentrated in the regional center. This is particularly evident in the distribution of foreign direct investments, with 89% of their total value accumulated by the end of 2020 - 2.1 out of 2.38 billion euros - being in the municipality of Burgas. Most of the remaining foreign investments in the region are in Sozopol (77 million euros), Nessebar (108 million euros), and Karnobat (37 million euros). The largest foreign investor in Burgas is the Lukoil refinery, and in recent years, significant investments have been directed toward both the regional center and Karnobat in the automotive sector. In relative terms, the municipality of Burgas is again a leader among foreign investors, with 10.2 thousand euros per capita, placing it in the top ten in the country as a whole, not far behind the capital municipality, where the value of per capita investments reaches 10.6 thousand euros by the end of 2020. Foreign investments are also relatively high in Sozopol (5.7 thousand euros per capita) and Nessebar (3.7 thousand euros per capita).

Similarly, but with even greater concentration, the distribution of expenditures for the acquisition of long-term tangible assets is also observed. During the pandemic year of 2020, 566 million leva were spent on machinery, land, and buildings in the regional center of Burgas, 96 million leva in Nessebar, while in the other municipalities, the volume of investments in long-term tangible assets is below 50 million leva. The slowdown in investment spending by companies in 2020 reflects mainly the expectations of weaker activity during the tourist season and the slowdown in construction in the region.

The Labor Market Collapse

The economic problems of 2020 inevitably affected the labor market in the Burgas municipalities. Since there is no extensive data on employment at the municipal level, we use the share of employees under labor and employment contracts from the entire population aged 15 and over. The largest decline in 2020 compared to the previous year was observed in the municipality of Nessebar, where the share of employees in the population over 15 years of age decreased by a significant 28 percentage points. There is also a significant deterioration in this indicator in Sozopol (-6.5 points) and Primorsko (-9.8 points), where employers did not hire a significant part of their seasonal workforce. The only positive trend in 2020 is observed in Ruen and Aytos, whose local economies are least dependent on the tourism sector, and the decline in the share of employees in the regional center is 1.7 percentage points.

Despite the sharp deterioration, Nessebar remains the most active local labor market in 2020, with a share of employees of 42%, compared to 39% in the municipality of Burgas and only 16% in Aytos, which performs the weakest in this indicator. Municipalities in the Burgas region also have relatively low unemployment rates, as of the end of 2021. According to the data from the Employment Agency, unemployment in the regional center was 2.6%, and in Nessebar - 5.1%. Exceptions are Sredets (11% unemployment) and Malko Tarnovo (8%), whose labor market problems are the result of trends and factors that developed long before the events of 2020.

Shortage in Education

Against the backdrop of the not particularly good achievements of the local labor market and the slowdown in the local economy, education in Burgas also does not provide much reason for optimism. Of great concern is the high percentage of early school dropouts in smaller municipalities, exceeding 5% of all students in Pomorie, Malko Tarnovo, Kameno, Sredets, and Sungurlare. These are young people who will face particular difficulties in integrating into the workforce, as it becomes increasingly difficult to employ individuals with primary and lower education.

Significant differences are also observed in the achievements of students in the region in various external evaluations and matriculation exams. While the municipality of Burgas reports some of the highest results in external evaluations after seventh grade, both in mathematics (average score of 47/100) and Bulgarian language (63/100), the surrounding municipalities perform significantly weaker, especially in mathematics. Similar patterns are seen in the results of matriculation exams, with students in the municipality of Burgas achieving an average grade of "Good" (4.41) in Bulgarian language and literature, which is significantly above the national average, while the others fall within the range of 3-3.50. The significant problem of a high dropout rate combined with the poor achievements of graduating students creates a risk of a serious shortage of skilled workforce soon.

Positive Migration

The year of the pandemic brought about significant (and varied) changes in demographic trends, and the municipalities in the Burgas region are no exception. Unlike almost all other parts of the country, most municipalities in Burgas have been attracting population over the past five years, but the positive migration processes intensified in 2020. The regional center, however, is an exception, where the natural population growth rate becomes negative at -0.9‰. This, however, is characteristic of most major cities, including Sofia, Plovdiv, and Varna. On the other hand, within the year, the population of Kameno increased by 13‰, and Sozopol saw an increase of 7.7‰.

Despite the positive net migration, all Burgas municipalities experience pronounced negative natural processes, with none of them having a birth rate exceeding the mortality rate. Seven of them have a negative natural population growth rate exceeding -10‰, and in the regional center, it reaches -5.1‰. For this reason, it is not surprising that all Burgas municipalities are witnessing significant aging processes. Nevertheless, the influx of population from other parts of the country and even from abroad may create opportunities for the development of the local economy.

Author: Adrian Nikolov

In March 2022, the Institute for Market Economics released a film called ”2% in your municipality”, which presents the concept of financial decentralization and investing a fifth of income tax revenues in local economies. A key theme in the film is interregional inequalities and opportunities for compensating those in the proposed new model. Given that the Parliament has finally managed to pass the budget for 2022, one can focus once again on finding long-term solutions to issues in local finances. The big concern regarding financial decentralization, which needs addressing, is the problem of regional disparities.

The proposed local finances model has two main aspects, which are crucial for the regional development of the country. On the one hand, there is the redistribution of a fifth of income tax revenues toward the municipalities (a sum of around 850 million leva in 2021), which would incentivize significantly regional development and would also boost the potential of economic centers throughout the whole country. On the other, there is the reform in the compensatory subsidy (330 million leva in 2020), which would redirect funds from the larger and more prosperous municipalities towards the smaller and less wealthy ones. The increased financial autonomy of municipalities would allow for a genuine reduction of regional inequality.

IME’s paper analyses the effects of existing compensatory mechanisms in the budget relationships between the municipalities and the central government and outlines a clear path towards reforming the compensatory subsidy in the model, which would feature sharing income tax revenues. Calculations show that at least seventy municipalities would not need a compensatory subsidy, should the new model be introduced, as they would collect higher revenues based on their own resources. These include most municipalities with populations above 30 000 people, as well as some smaller ones with higher concentration of economic activity.

For the remaining municipalities, where funds from the subsidy would exceed those received under the reform, additional 115 million leva would be needed to close the gap. This sum would ensure that smaller municipalities with declining populations would receive just as much funding as they do under the current model. In fact, with around a third of the current subsidy, the poorest municipalities could be given the same level of support as they do now. In the paper, the Institute also presents a simplified model, which aims to show that the money saved from the subsidy could be targeted toward closing regional disparities.

An additional proposal is a balancing mechanism, fitted within the reform. It would redistribute up to 20% of revenues gained from the reform towards smaller and poorer municipalities. This balancing mechanism could supplement or partially replace the compensatory subsidy by providing resources for equalizing transfers directly from the sharing of income tax revenues. Such mechanisms exist in other countries in Central and Eastern Europe with experience in decentralizing tax revenues and could boost the financial autonomy of local governments in Bulgaria.

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The economic disruptions caused by the Covid-19 restrictions have affected the various parts of the country in different ways. Data about regional GDP in Bulgaria for 2020 allow for assessing the effects of the pandemic through a single indicator. While most districts remained largely unaffected, those specialized in tourism marked a setback worth many years of growth.

In 2020, Sofia continues to generate almost half of the country’s GDP – 51,3 billion leva, followed by Plovdiv (9,7 billion leva) and Varna (7,4 billion leva). The smallest regional economic centers – Vidin and Silistra – mark outputs of 726 million leva and 892 million leva, respectively. In per capita terms, Sofia is again on top of the list with 38,9 thousand leva per person, which is twice the output per person of Sofia District (17,2 thousand leva) and Vratsa (15,6 thousand leva).

The long-term trend of regional GDP shows that in the past 20 years growth in the country occurred at different speeds. Expectedly, the capital city leads once more with an increase in GDP per capita of 557% between 2000 and 2020. Growth of 410-420% can be seen in Plovdiv, Sofia Province, and Kardzhali, where GDP rises due to local industry. While output in the first two provinces grows smoothly over time, Karzdzhali’s economy expanded rapidly in the past couple of years, driven by the newly opened gold mine in Krumovgrad. In most provinces GDP per capita grows more modestly – within the range of 250% to 350% for the last two decades. The effect of the 2020 crisis is the most pronounced in the long-term trend of Burgas, the economy of which marked the slowest growth up to 2020 – only 159%. This underwhelming performance is solely a result of the Covid-19 setback.

In 2020 most districts enjoy a mild increase in output per person. The common negative trend is driven by Burgas and Varna, which attract most of the tourists in the country during the summer. The annual decrease in Burgas amounts to 17%, while in Varna it is 5%. The more extreme contraction in Burgas is due to the higher intensity of tourism in the province in the years before the Pandemic. Moreover, the economy of Varna is more diversified, including other prominent sectors like manufacturing. Blagoevgrad, where winter tourism suffered from the first wave of restrictions, shows no change in GDP from 2019 to 2020.

One should mention that current GDP per capita data do not reflect the anticipated changes from the census from the end of 2021. Accounting for them would result in a convergence between provincial figures for GDP per capita. The lead of the capital will narrow down after updating the data on its population. Nevertheless, the conclusions from the 2020 data would not change much – the economies of the tourist regions carry the heaviest burden from the Covid-19 downturn, while those of the other provinces continue to grow, albeit more slowly.

Fiscal decentralization is still a far-off concept in Bulgaria, despite the support from all major political parties for transferring tax revenues directly to the municipalities. 

The Institute for Market Economics stands behind the idea of “keeping” 2% of income tax in the municipality of residence of the taxpayer (see http://dvenasto.bg/). According to IME’s calculations, based on the number of employed people and the wage level in each municipality, this small share of tax revenue would amount to 850 million leva in 2021 ( you may find figures for each municipality in the appendix). 

Our observations throughout the years, the many regional analyses we have published (https://www.regionalprofiles.bg/), and the data we have collected (https://265obshtini.bg/) show that due to their specific regional attributes, some municipalities manage to attract people and investors, whereas others remain stuck on their path to development. There are also those municipalities that possess all prerequisites to grow but lack the required resources. Our proposal for fiscal decentralization has several benefits - we present the broader ones here [1].

Decentralization boosts economic growth

Research conducted by the OECD outlines a clear positive relationship between decentralization of revenues and growth. The results show that a 10% increase in tax revenues for the municipalities results in a 0.1% faster growth. 

Decentralization lowers inequality

One of the main motivations behind decentralization is that it reflects the needs and wants of local communities better. Therefore, it is no surprise that decentralization is linked to the improved efficiency of municipal services. Furthermore, decentralizing could yield additional social capital in the form of higher trust in local authorities, resulting from efficiency gains, increased transparency, and the more active participation of the municipality in the distribution of public funds.

Decentralization increases life expectancy

Research shows that healthcare costs fall, and life expectancy rises in the presence of moderate decentralization. However, the trend reverses when decentralization becomes excessive.

Decentralization boosts academic achievements

When it comes to education, data shows that a 10% increase in local tax revenues increases PISA results by 6%, which equals going six places up in the rank list. A similar but weaker connection is observed in the presence of other measures for decentralizing education, like increasing the autonomy of schools.

Decentralization allows for better tending to local needs by boosting competition, convergence, and investment

Higher local fiscal autonomy allows for shaping public services on a local level so that they are more in line with the preferences of communities. Moreover, higher levels of autonomy in municipal budgets allow for higher interregional competition in social services.

Decentralization is also linked to higher public investment – a 10% increase in decentralization (measured through local expenses and the ratio of local revenues to total state revenue) “boosts the share of public investment in total state expenses from 3% to more than 4% on average”. Investment incentivized by decentralization targets human capital, measured through education. This relationship is explained by pressures from interregional competition, which stimulates productive investment since regions strive to draw more workers and firms. 

[1] Source -  Fiscal Federalism 2022 MAKING DECENTRALISATION WORK by the OECD, December 20^th 2022

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