Press Release No. 07/240

Press Release: Statement by the IMF mission to Bulgaria

October 23, 2007

An International Monetary Fund (IMF) mission visited Sofia during October 4-16, 2007 to conduct the regular annual Article IV consultation with Bulgaria. The mission issued the following statement at the conclusion of its work on October 16:

"Economic growth is performing well, while unemployment has dropped sharply. But some disquieting developments raise challenges for policy makers and other social partners: the persistent gap between Bulgaria's aggregate spending and income is reflected in a widening of the external current account deficit; inflationary pressures are on the rise, partly reflecting one-off shocks, but also steadily accelerating private sector wage increases as labor market conditions have tightened; difficult structural reforms that require strong political will to implement have been put on the backburner, including reforms needed to raise the low efficiency of the public sector; and since July, the external environment has taken a turn for the worse, reflecting credit tensions in mature economies.

"Given the need to contain and eventually reverse economic imbalances in a difficult external environment, the mission sees the following broad policy requirements:

• Fiscal policy should continue to broadly maintain the current stance (around 3 percent of GDP surplus), with the public sector's real wage growth roughly tied to labor productivity trends. Spending and tax levers should be used to accelerate real convergence and productivity growth, including through the efficient absorption of EU funds. We see maintaining significant fiscal surpluses as a key ingredient of a sustainable policy framework. An immediate challenge for the government and its social partners is to avoid excessive wage hikes in the public sector. Such wage hikes would exacerbate domestic overheating and drive up real wages to levels well above those justified by productivity growth. This would undermine external competitiveness, leading to a potentially unsustainable external situation.

• Safeguarding financial stability requires continued close monitoring of banks' risk management and capacity to absorb adverse shocks. Further measures to develop capital markets could help to diversify risks away from the banking system and strengthen financial intermediation.

• The scope for raising living standards and real wages in a sustainable manner depends ultimately on raising the efficiency of available human and real resources while providing incentives to add to available resources. From this angle, substantial progress on structural reforms is essential for accelerating real convergence. Raising public sector efficiency, activating labor supply, and improving the business climate remain key priorities."