IMF Executive Board Concludes 2013 Article IV Consultation with Bulgaria

Press Release No. 14/30
January 30, 2014

On January 24, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Bulgaria.1

In the aftermath of the global financial crisis growth has remained low and unemployment high. Real GDP growth is projected at about 0.5 percent in 2013 as domestic uncertainties undermined demand but exports are performing well. Domestic demand is projected to recover gradually, and exports and foreign direct investment (FDI) will benefit from recovery in Europe, allowing real GDP growth to rise to about 1.6 percent in 2014. The current account of the balance of payments is expected to be in surplus in 2013 but return to a modest deficit in the medium term, financed by FDI. Inflation is projected to be subdued in the short term, rising only from 0.4 percent in 2013 to 0.8 percent in 2014. With employment beginning to grow, unemployment is projected to decline slightly in 2014 but remain high.

Strong macroeconomic and financial sector policies have mitigated vulnerabilities arising from the difficult external and domestic environment. The fiscal deficit fell to 0.5 percent of GDP in 2012 and public debt remained the second lowest in the EU. The reduction in banks’ foreign liabilities has been gradual and is largely driven by plentiful bank liquidity, resulting in a positive net foreign asset position for the first time since 2006, and capitalization of the financial sector is high. Although nonperforming loans (NPLs)—a legacy from the boom period and subsequent crisis—amounted to 17.2 percent of loans in September, coverage by provisions is comfortable at 72.7 percent.

Convergence to EU income levels over the coming decades will require accelerated growth. Bulgaria ranks favorably versus comparators on macro-policy outcomes but less so on other dimensions critical to the well functioning of the economy. Bulgaria is comparable to good performers in central Europe and the Baltics on fiscal and country risk, and the income tax system is also seen as favorable in competitiveness rankings. However, Bulgaria ranks much lower on measures such as enforcing contracts, resolving insolvencies, and some areas of red tape. More generally, the judicial system is viewed as problematic, and corruption and cronyism as widespread. These shortcomings will need to be addressed for Bulgaria to unlock its growth potential.

Executive Board Assessment2

Executive Directors commended the authorities for maintaining macroeconomic and financial stability despite external and internal challenges. Nevertheless, growth remains weak and unemployment is high. Directors emphasized the need to complement continued prudent policies with accelerated and decisive efforts to address structural impediments to higher growth, job creation, and a faster pace of income convergence with the European Union.

Directors generally agreed that the structural fiscal stance under the 2014 budget, which sets the deficit close to national limits under the fiscal rule, strikes an appropriate balance. While the strong fiscal position provides some room to support growth, they underscored the importance of maintaining credibility in the context of the currency board by observing national and EU deficit rules. Fiscal buffers should be rebuilt over time by targeting a balanced structural budget. In the event revenues fall short in the coming year, the authorities should be prepared to adjust spending to achieve the deficit target. While welcoming the intended increase in capital spending, Directors stressed the importance of appropriate project selection and monitoring procedures under the new public investment fund. They encouraged the authorities to improve the targeting and efficiency of social spending, including on healthcare; to reinstate the needed pension reforms; and to address risks associated with some state-owned enterprises.

Directors noted that the financial system is stable, well capitalized, and liquid, but that profitability is low. They encouraged further steps to reduce nonperforming loans through asset disposal in order to reduce asset price uncertainty in the market and support future investment. Directors supported the efforts to preserve the conservative supervisory approach under the new European framework.

Directors emphasized that bold structural reforms are needed to lift growth, create jobs, and enhance productivity. Policies should focus on improving the business climate and the judicial system as well as anti-corruption and anti-monopoly regimes. Active labor market policies, including further improvements in education and training will be important to reduce labor market rigidities. Directors also encouraged continued efforts to ensure the rapid and efficient absorption of EU funds.

Bulgaria: Selected Economic and Social Indicators, 2009–14
  2009 2010 2011 2012 2013 2014
        Est. Proj. Proj.

Output, prices, and labor market (percent change, unless otherwise indicated)


Real GDP

-5.5 0.4 1.8 0.8 0.5 1.6

Real domestic demand

-12.8 -5.1 0.3 3.5 -0.9 1.5

Consumer price index (HICP, average)

2.5 3.0 3.4 2.4 0.4 0.8

Consumer price index (HICP, end of period)

1.6 4.4 2.0 2.8 -0.5 1.5


-3.1 -6.1 -2.8 -1.1 0.1 0.8

Unemployment rate (percent of labor force)

6.9 10.3 11.3 12.4 12.4 11.9

Nominal wages (national accounts definition)

9.4 11.2 8.6 5.6 4.5 5.0

General government finances (percent of GDP)



35.3 32.7 32.4 34.2 36.3 36.5


36.2 36.7 34.4 34.6 38.3 38.3

Balance (net lending/borrowing on cash basis)

-0.9 -4.0 -2.0 -0.5 -2.0 -1.8

External financing 1/

0.9 0.2 0.2 2.6 -0.7 3.7

Domestic financing (incl. fiscal reserve)

0.0 3.8 1.8 -2.2 2.7 -1.9

Gross public debt

15.6 14.9 15.4 17.6 17.5 21.2

Money and credit (percent change)


Broad money (M3)

4.2 6.4 12.2 8.4 8.7 5.9

Domestic private credit

3.8 1.3 3.8 2.8 0.3 3.6

Interest rates (percent)


Interbank rate, 3-month SOFIBOR

5.7 4.1 3.8 2.3

Lending rate

11.3 11.1 10.6 9.7

Balance of payments (percent of GDP, unless otherwise indicated)


Current account balance

-8.9 -1.5 0.1 -1.3 0.4 -0.9

Capital and financial account balance

4.8 -1.1 -1.3 7.0 -3.2 4.7

o/w: Foreign direct investment balance

7.2 2.7 3.1 3.3 2.8 3.5

International investment position

-102 -95 -86 -81 -79 -78

o/w: Gross external debt

108 103 94 95 93 93

o/w: Gross official reserves

37 36 35 39 36 39

Exchange rates


Leva per euro

Currency board peg to euro at lev 1.95583 per euro

Leva per U.S. dollar (end of period)

1.34 1.48 1.45 1.47

Real effective exchange rate (percent change)

4.4 -3.9 2.7 -2.1

Social indicators (reference year in parentheses):


Per capita GNI (2011): US$ 6,550; income distribution (Gini index, 2007): 28.2; poverty rate (2007): 10.6 percent.

Primary education completion rate (2009): 95.5.


Births per woman (2010): 1.5; mortality under 5 (per 1,000) (2011): 12.1; life expectancy at birth (2010): 73.5 yrs


Sources: Bulgarian authorities; World Development Indicators; and IMF staff estimates.

1/ Reflects €950 million Eurobond issued in 2012 and another assumed in 2014.

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.

2 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. An explanation of any qualifiers used in summings up can be found here:


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