Bulgaria capitals

IMF Concludes 2022 Article IV Consultation with Bulgaria

Washington D.C.:

On Friday, June 17, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria and reviewed and approved the staff assessment without a meeting.[1]

The Bulgarian economy has shown resilience during the pandemic. Thanks to political support, the economy rebounded in 2021 despite the health crisis and prolonged political uncertainty that weighed on investment. GDP exceeded its pre-crisis level in the middle of last year and growth reached 4.2% in 2021, thanks to strong consumption supported by strong fiscal support and sustained wage growth, thanks to a strong recovery in the labor market. However, as in many other countries, inflation has picked up significantly, driven by rising commodity prices, disruptions to global supply chains, rising labor costs and the strong domestic demand. It hit double digits in March 2022 and was broad-based.

Board assessment[2]

In concluding the Article IV consultation with Bulgaria, Directors approved the staff assessment as follows:

The war in Ukraine has clouded the outlook, heightened uncertainty and heightened downside risks. As the economic recovery from the COVID-19 crisis gained momentum, the war is stunting growth and accelerating inflation. The heavy energy dependence on Russia is a significant vulnerability. With events unfolding rapidly, uncertainty is high. Key risks include stronger fallout from the war, including energy supply disruptions, a resurgence of COVID-19, prolonged supply chain disruptions and a faster-than-expected tightening of global financing conditions .

Fiscal policy needs to be flexible given the great uncertainty. The 2022 budget adopted in February strikes a reasonable balance between supporting the recovery, which is still incomplete and facing the headwinds of war, and not fueling inflation further. The planned mid-year budget review should be approached with flexibility, as new needs and priorities may emerge, justifying a new prioritization of spending and, if activity is significantly disappointing, possibly also a more flexible budget stance.

A review of the composition of public expenditure is necessary as of this year. The fiscal reorientation of spending towards more public investment is welcome. However, the magnitude of the planned increase may run counter to absorptive capacity and necessitate a gradual introduction of new projects. Conversely, the nominal wage bill freeze is no longer desirable with high inflation. The mid-year budget review should also take into account new needs emerging from the war, such as aid to refugees. To help the economy and the population cope with high energy prices, existing business subsidies and price caps should be gradually replaced by direct support to vulnerable households. Furthermore, the reduction in VAT rates should be discontinued, as the measure is regressive and no longer necessary.

The planned medium-term fiscal consolidation is broadly appropriate and should be accompanied by expenditure and revenue management reforms. An aging and shrinking population, the currency board system and the need to maintain reserves in the uncertain external environment call for fiscal prudence. Fiscal space to meet long-term social and investment needs could be expanded by increasing the efficiency of public spending and revising taxation to increase revenue and redistribution. These reforms would strengthen physical and human capital and promote higher and more inclusive growth. In addition, a comprehensive review of the pension system would help design reforms aimed at both its sustainability and an adequate level of pensions.

The authorities should continue to monitor possible increases in credit risk. Macroprudential measures taken during the pandemic have strengthened banks’ balance sheets and helped maintain credit flows. Moreover, given the acceleration in the growth of credit to households, the authorities have recently, rightly, tightened their macroprudential policy. Overall, the banking sector remains well capitalized and liquid, and the financial sector has very little direct exposure to Russia or Ukraine. Therefore, systemic risks appear low. However, credit risk may increase due to the impact of soaring commodity prices and supply chain disruptions on businesses, rising interest rates, the lagged impact of withdrawal of support related to COVID-19 or the emergence of imbalances in the housing market. Therefore, authorities should continue to monitor asset quality and ensure that banks proactively manage risk and maintain strong capital positions.

Accelerating structural reforms is crucial to raising living standards and promoting a more competitive, inclusive and green economy. With eurozone membership in sight, policies that help foster income convergence with EU partners are even more important. The government’s emphasis on strengthening governance and fighting corruption is welcome. Continued efforts to improve the efficiency of judicial and anti-corruption systems are essential to strengthen the rule of law. Continuous efforts to harness digital technologies and foster innovation are needed to increase productivity. The effective implementation of planned investments in renewable energy and energy efficiency will enhance energy security and reduce the carbon footprint. When energy prices fall, green transition incentives could usefully be supported by a price-based mechanism and fiscal tools. NGEU funds have a key role to play in supporting efforts in these areas.


[1]Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with its members, usually annually. A team of staff normally visits the country, collects economic and financial information and discusses with officials the country’s economic developments and policies. Back at headquarters, staff draft a report that serves as the basis for Board discussions. In this case, the discussions took place from the headquarters by videoconference.

[2]The Board makes decisions under its no-objection procedure when it agrees that a proposal can be considered without convening formal discussions.

Table 1. Bulgaria: Main economic indicators, 2018-22

(Annual percentage change, unless otherwise indicated)

2018

2019

2020

2021

2022

Project.

Real GDP

2.7

4.0

-4.4

4.2

2.8

Real domestic demand

5.5

4.9

0.1

6.0

3.6

Public consumption

5.4

2.0

8.3

4.0

6.2

Private consumption

3.7

6.0

-0.4

8.0

2.6

Gross capital formation

10.9

4.1

-5.0

2.0

4.5

Private investment

-2.3

3.6

6.7

-5.5

-1.7

Public investment

36.8

7.2

-16.6

-30.5

37.1

Storage 1/

1.2

0.0

-1.2

2.7

0.1

Net exports 1/

-2.7

-0.9

-4.5

-2.2

-1.1

Exports of goods and services

1.7

4.0

-12.1

9.9

3.9

Imports of goods and services

5.8

5.2

-5.4

12.2

5.0

Resource Usage

Potential GDP

3.0

4.1

-1.4

2.3

2.0

Output gap (percent of potential GDP)

0.1

0.2

-3.1

-1.2

-0.5

Unemployment rate (percent of labor force)

5.3

4.3

5.2

5.3

5.1

Price

GDP deflator

4.2

5.2

4.2

6.2

13.9

Consumer price index (HICP, average)

2.6

2.5

1.2

2.8

12.2

Consumer price index (HICP, end of period)

2.3

3.1

0.0

6.6

11.6

Fiscal indicators (percent of GDP)

General government borrowing capacity/borrowing (cash basis)

0.1

-1.0

-2.9

-2.9

-2.8

General government primary balance

0.7

-0.4

-2.4

-2.5

-2.4

Cyclically-adjusted overall balance (percent of potential GDP)

0.1

-1.0

-1.7

-2.4

-2.6

General government gross debt

20.1

18.3

23.3

23.8

23.1

Monetary aggregates

Broad Money

8.8

9.9

10.9

10.7

16.6

Domestic private credit

8.9

9.7

4.5

8.8

15.8

Exchange rate regime

Leva per US dollar (end of period)

1.7

1.8

1.6

1.7

Nominal effective rate

3.3

-0.1

2.8

1.6

External sector (percent of GDP)

Current account balance

0.9

1.9

-0.1

-0.4

-1.3

of which: Merchandise trade balance

-4.8

-4.7

-3.2

-4.9

-6.1

Net international investment position

-37.0

-30.2

-27.1

-19.7

-16.3

Sources: Bulgarian authorities; and IMF staff estimates.

1/ Contribution to GDP growth.

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