Bulgaria's economy contracted dramatically after 1989 with the collapse of the COMECON system and the loss of the Soviet market, to which the Bulgarian economy had been closely tied. The standard of living fell by about 40%. In addition, UN sanctions against Yugoslavia and Iraq took a heavy toll on the Bulgarian economy. The first signs of recovery emerged when GDP grew in 1994 for the first time since 1988, by 1.4% and then by 2.5% in 1995. Inflation, which surged in 1994 to 122%, fell to 32.9% in 1995. During 1996, however, the economy collapsed due to shortsighted economic reforms and an unstable and de-capitalized banking system.

Under the leadership of former Prime Minister Ivan Kostov (UDF), who came to power in 1997, an ambitious set of reforms were launched, including introduction of a currency board regime, bringing growth and stability to the Bulgarian economy. The currency board contained inflationary pressures and the three-digit inflation in 1997 was cut to only 1% in 1998. Following declines in GDP in both 1996 and 1997, the Bulgarian government delivered strong, steady GDP growth in real terms (4.0% in 1998, 2.3 % in 1999, 5.4% in 2000 and 4.0% in 2001).

In spite of the transition to a new government in July 2001, Bulgaria remained committed to the market reforms undertaken in 1997. The government's economic team of young, Western-educated financiers continued to implement measures that helped sustain stable economic growth and curb unemployment. The government was expecting a GDP growth of 5% in 2003, following a 4.8% growth in 2002. As a result of these moves, in October 2002 the European Commission declared Bulgaria had a "Functioning Market Economy." Recent measures introduced by Simeon Saxe-Coburg's government seek to reduce corporate taxes, curtail corruption, and attract foreign investment. The government also implemented a set of measures that helped restructure the country's foreign debt and revive the local stock market. It also vowed to move ahead with long-delayed privatization of major state monopolies. But while macroeconomic data reveal private sector growth, a double-digit increase in exports and imports and higher foreign investment, incomes remain low and the government still needs to act on its pledges for securing higher living standards.