IMF Executive Board Concludes 2008 Article IV Consultation with Bulgaria

Public Information Notice (PIN) No. 09/34
March 17, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2008 Article IV Consultation with Bulgaria is also available.

On March 4, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria.1


Bulgaria has been hit by the global financial crisis, with clear signs that the country’s capital-inflows driven boom has come to an end and that the real economy is slowing down.

Since agreement was reached on EU accession in 2004, Bulgaria experienced a surge in capital inflows and a credit boom. Inflows were driven by expectations of rapid convergence with the EU, and were further boosted by the confidence-enhancing effect of the currency board and a strong fiscal policy. By 2008, net inflows had increased to about 27 percent of GDP. Boosted by capital inflows, credit to the private sector rose rapidly, and the credit-to-GDP ratio climbed from 36 percent in 2004 to 67 percent in 2007. The surge in inflows generated strong GDP growth, but also a sharp widening of external and internal imbalances. GDP grew by more than 6 percent annually, leading to a significant narrowing of the income gap with Western Europe. Growth remained strong in 2008—at 6 percent, Bulgaria was one of the fastest growing countries in Europe.

As the growth of domestic demand outpaced GDP growth, the current account deficit widened from 5 percent of GDP in 2003 to an estimated 25 percent of GDP in 2008. As unemployment dropped and the labor market tightened, wage growth accelerated to 25 percent in June 2008. The overheating of the economy, together with rising food and oil prices, resulted in a surge of inflation, which peaked at 14.7 percent in June 2008. Competitiveness deteriorated, and the unit labor cost -based real effective exchange rate appreciated 27 percent in the two years ending in mid-2008.

The global financial market turmoil has had a severe impact on financial asset prices in Bulgaria. Foreign parent banks have reduced new financing to their local subsidiaries and credit growth to the non-government sector has slowed sharply.

Executive Board Assessment

Executive Directors commended the Bulgarian authorities for their prudent policies that have built strong balance sheets in the public sector including large foreign reserves, low public debt, and a substantial Fiscal Reserve Account. They noted that there are substantial buffers in the banking system. At the same time, large capital inflows contributed to an investment and consumption boom, creating a large current account deficit and increasing private sector debt, while heavy reliance on foreign capital is a source of vulnerability. Looking forward, Directors considered that economic growth would slow sharply with the downturn in partner countries and only modest net capital inflows. Moreover, as risks are predominantly on the downside, the authorities were advised to monitor developments closely and adapt policies, as warranted.

Directors considered that the currency board arrangement has served Bulgaria well as an anchor for macroeconomic stability. They took note of the staff assessment that the real effective exchange rate is somewhat overvalued, but that determining its extent is a difficult question. The authorities were encouraged to avoid any further erosion in international competitiveness as a result of real wage increases exceeding productivity gains.

Directors considered that the most immediate policy challenge will be to maintain confidence in the currency board arrangement and in the banking system. While the banking sector remains well capitalized, liquid, and highly profitable, a severe recession could cause nonperforming loans to increase and bank capital to erode. Directors welcomed steps to improve depositors’ confidence, increase capital cushions by curtailing most banks’ dividend payout, and to secure commitments from parent banks to provide adequate liquidity and capital to their subsidiaries. They observed that the substantial Fiscal Reserve Account allowed a major lender-of-last-resort capacity. They supported the authorities’ efforts to improve Bulgaria’s crisis management capacity by intensifying the monitoring of liquidity and credit risks, further strengthening the stress testing capacity, and cooperating more closely with foreign supervisors.

Executive Directors welcomed the authorities’ commitment to maintaining prudent fiscal policies, which will provide crucial support for the currency board arrangement. They concurred with the authorities’ intention to maintain a fiscal surplus of 2 percent of GDP in 2009, in part by containing public spending. They cautioned, however, that were growth to slow more than expected, additional expenditure cuts will be necessary to achieve the targeted surplus. They viewed the rule to restrict spending to 90 percent of the amount budgeted as an effective short-term tool, but emphasized that prioritization and further spending restraint will be needed to sustain appropriate fiscal surpluses over the medium term.

Directors noted that further structural reforms will be key to a smooth and speedy economic recovery and achievement of convergence with the European Union. They welcomed the recent education and labor market reforms to raise productivity and labor market participation rates, and the progress made in reducing administrative burdens for businesses.

Bulgaria: Selected Economic Indicators, 2003-08

  2003 2004 2005 2006 2007 2008 1/

Output, prices, and labor market


Real GDP

5.0 6.6 6.2 6.3 6.2 6.0

Consumer price index (average)

3.0 4.0 6.0 7.4 7.6 12.0

Consumer price index (end of period)

5.6 4.0 7.4 6.1 11.6 7.2


3.0 2.6 2.7 2.4 2.6 3.1

Public Finance


General government overall balance

-0.2 1.7 2.3 3.5 3.5 3.0

Gross public debt

48.1 40.1 31.3 24.6 19.8 16.8

Financial net worth

  8.8 9.3 11.7 13.7 14.7

Money and credit


Broad money (M3)

19.6 23.1 23.9 26.9 31.2 8.8

Credit claims on non-government sector

48.3 48.6 32.4 24.6 62.5 32.0

Balance of payments


Merchandise trade balance

-13.7 -14.9 -20.2 -22.0 -25.3 -29.2

Current account balance

-5.5 -6.6 -12.4 -17.8 -21.8 -24.8

Gross international reserves

30.5 34.5 33.7 35.4 41.3 37.4

Exchange rates


Exchange rate regime

  Currency board arrangement  

Leva per euro

  Lev 1.956 per Euro  

Sources: Bulgarian authorities; and IMF staff estimates.
1/ Projections.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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