Statement by the IMF Staff Mission to Bulgaria

Press Release No. 06/230
October 25, 2006

The following statement was issued today in Sofia by the International Monetary Fund's mission to Bulgaria on the conclusion of discussions with the authorities:

"An IMF mission visited Bulgaria during October 18-25, 2006 for discussions on economic policies and prospects for the remainder of this year and 2007. The purpose of the visit was to lay the ground for the fourth and final review under the precautionary Stand-by Arrangement. The mission discussed in detail with the authorities the draft budget for 2007, and reviewed financial sector developments and progress on the structural reform agenda.

"Economic performance in 2006 has been strong. Real GDP growth is expected to increase to 6 percent—still driven mostly by buoyant domestic demand, especially investment—and end-year inflation is projected to fall to 4.8 percent. However, the external current account deficit remains high and is likely to widen to over 14 percent of GDP. This widening is attributable to strong private domestic demand, which, looking forward, could be exacerbated by an eventual significant fiscal relaxation or a substantial resurgence of bank credit growth. These broad macroeconomic trends are projected to continue in 2007, with growth accelerating and the external current account widening further.

"The authorities have appropriately maintained a tight fiscal policy stance—the budget surplus for 2006 is now projected to reach around 3.3 percent of GDP—which has helped contain the risks associated with the external imbalances. However, progress in implementing the structural reforms under the program has been uneven.

"Given the outlook, prudent economic policies are required to contain vulnerabilities. In this context, we see substantial risks from a sizeable and untimely pro-cyclical fiscal impulse in 2007. We have encouraged the authorities to maintain the trend toward lower inflation while sustaining strong growth and containing the current account deficit. In particular, the mission believes that the following policies would contribute to achieving these objectives: (a) aim for a minimum budget surplus of 2 percent of GDP in 2007 based on realistic budget projections and without relying on within-year conditional caps on discretionary spending; (b) implement a moderate wage increase in the public sector to secure an affordable wage bill; and (c) address forcefully slippages in implementation of structural measures in the remainder of this year.

"We thank the authorities for their hospitality and look forward to continuing our close dialogue."



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