The Bulgarian IT industry in 2023: The wind of change and the recurring stumbling block

2023 was a record year in terms of revenue and employment the Bulgarian software industry, plus it brought winds of change to this sector. On the one hand, there is the slowdown of the global economy and the end of easy money - factors that directly impact on the sector, which relies on exports for 85% of its sales turnover. On the other hand, the issue of artificial intelligence, which is changing the industry and the way of working, cannot be ignored.

This year, the Bulgarian software industry is expected to generate a little over EUR 4 billion in revenue, which is an eightfold increase compared to 2011. The sector has been enjoying rapid growth for years. In 2021, for example, against the background of rapid digitalization after the pandemic, its sales turnover increased by 26.5% on an annual basis. Now, however, it is expected to grow by 12.1%, and the reason for this lies in the slowdown of the economy in the second half of the year.

Still, the share of the software sector in the Bulgarian GDP continues to increase and is expected to reach 4.5% from 4.3% in 2022. In addition, as of last year, the sector employed 58,300 people (an increase of 8,310 jobs compared to the previous year), with each workplace generating taxes and fees for the country’s treasury approximately 3 times more than the national average.

Our industry is structure-determining, because the digitization of all other sectors depends on us", emphasized Dobroslav Dimitrov, the chairman of the Bulgarian Association of Software Companies (BASSCOM), at the presentation of the "BASSCOM Barometer" 2023, prepared annually by CBN – Pannoff, Stoytcheff & Co.

Despite the expected slowdown in growth, dictated by the global economic situation, the data unequivocally confirms the key role of the software industry in the Bulgarian economy. But as per tradition, once again another issue popped up to dim the shine of the news…

...the Maximum Taxable Earnings Limit

Yes, we are talking about the raising of the maximum retirement benefits income (MOD). In Bulgaria’s 2024 budget, the cap is set to increase it from BGN 3,400 to BGN 3,750. About 10% of the employed in the country, or a little more than 284 thousand people, are insured above the current limit. Not all of them are in the IT field, but this sector is traditionally the most vocal on this topic. And as its representatives explain, this is not because they are against raising the MOD.

We are not against this increase. Nothing lasts forever and such limits also need to be updated. But this must be done with negotiations and with a clear framework for why it is being done, what the goal is and above all - not to do it at the last second," explained Dobroslav Dimitrov.

He reminded the government that the budgets of the IT companies are drafted in August or September. And it is especially difficult to have to explain to foreign companies with Bulgarian subsidiaries why they have to make changes in December once again. Therefore, at least a conversation about raising the MOD should have been held in June-July.

The IT industry is alone in this debate because the focus of most employers, let alone trade unions, is on the minimum wage in Bulgaria.

The elephant in the room is the practically bankrupt social security system in Bulgaria. We cannot pretend that we do not see it and that EUR 100-150 (of increased monthly contributions per person) will solve this," pointed out Georgi Brashnarov from BASSCOM.

Ilia Krastev from the Association for Innovation, Business Services and Technologies (AIBEST) noted that raising the MOD is only part of an otherwise larger conversation, stating that its increase over the next three years is expected to bring a total of about EUR 600 million to the treasury. He also drew attention to the entry into force of the 15 percent global minimum corporate tax, which will affect about 600 companies in Bulgaria - a large part of them working in the IT sector.

The question is what these businesses get for the payment of this money, which is managed by the Bulgarian state.

Because an investor wants to know what this market and this economy give him in order to decide whether he wants to stay in it," said Krastev.

He added that Bulgaria, for example, is one of the two countries in the EU that does not offer tax breaks for research and development activities.

Our message to them is: we are raising your taxes, our educational sphere is abysmal, our infrastructure is not perfect, we are not entering the Schengen area, and we have challenges regarding admission to the Eurozone.

According to Krastev, there is no assuring communication policy and no strategy for what the state is doing to develop an economy with high added value – something which politicians love to talk about, however.

The challenges

If until a few years ago it was best for the state to do nothing regarding the IT industry, now we are in a different situation, because of the changes in geopolitics and the global economy," notes Iliya Krastev from AIBEST.

These nuances can also be seen in the rate of growth in the sector. Many of the software companies’ clients had to optimize their expenses, accordingly, the revenues slowed down. In Bulgaria, as it turned out, their growth is falling to just over 12% in 2023, after years of regular 20-25% rates. The traditionally high rates of wage growth will also simmer down, although wage cuts are out of the question, the industry assures.

The "end of free money era" is another factor. The rise in interest rates in the US and Europe ends a long period of about 15 years during which raising capital was a breeze. This created an entire generation of startups that focused on growth rather than profitability.

"These companies needed an awful lot of work done, so this work came to us," noted Dobroslav Dimitrov, commenting on the market tightening.

We are a global industry, not a local one. The lack of investments in the United States and Europe reflects directly on us."

There is no way to ignore the issue of personnel shortages either. A year ago, the procedure for issuing a Blue Card (a permit that grants the right to work in Bulgaria to employees from non-EU countries) was eased, but it is still significantly slower than in other countries. If in Poland it takes a few weeks, here we are talking about a few months. In 2022, people employed through this measure increased by only about 1,000. Meanwhile, in neighbouring Serbia, about 30,000 Russian citizens who fled their country had been employed.

We may have the most accessible Blue Card, but if we are not a good brand, no one will come. Convincing thousands of people to move their families and come here is much bigger and more important goal," points out Dobroslav Dimitrov.

The Bulgarian IT sector forecast for 2025:

• Revenues: EUR 6+ billion.
• Exports: EUR 5+ billion
• Number of employees: 72,500
• Over 14,000 new jobs
• Taxes and social security to be paid: over EUR 1.5 billion.

AI & I

The massive penetration of artificial intelligence into people's work environments has had a particularly strong impact on the IT sector. "Today we celebrate one year of the Fifth Industrial Revolution," commented Dobroslav Dimitrov, referring to the launch of ChatGPT on 30 November 2022. He often talks about the impact of algorithms on the way we do work.

This is a new way to communicate with machines and do our work in general. Being a software industry, it reached us first, but it is very quickly entering other areas as well. This is a huge challenge for us."

However, according to him, for the first time Bulgaria has the chance to enter the economic race on an equal footing with the others - given that AI is a novelty for everyone. In this context, he highlighted the importance of education and BASSCOM's idea of establishing at least ten new high-technology schools in the country.

Translated by Tzvetozar Vincent Iolov