## 1. Bulgaria’s ERM II Application

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### Context
- Key challenge: Translate recent robust growth into sustainable and inclusive medium-term income convergence; Bulgaria’s income level is still half of the EU average and income inequality is high among EU countries.
- Long-term constraints: Emigration and population aging; need better public goods provision in infrastructure, the judiciary, education, and healthcare.
- Maastricht criteria: Met all criteria except participation in ERM II for at least two years; achieved under the currency board arrangement in place since 1997.
- ERM II / banking union sequencing: ERM II participation and banking union accession to be simultaneous according to authorities and ERM II parties.
- Commitments and processes (as agreed with ERM II parties) include:
  - Entering into close cooperation with the ECB (joining the banking union as a non-euro area country).
  - Providing legislative basis for borrower-based macroprudential measures.
  - Enhancing supervision of the non-banking financial sector.
  - Identifying insolvency framework gaps and preparing a roadmap.
  - Strengthening AML framework: address transposition issues of the fourth EU AML directive and transpose the fifth AML directive.
  - Improving SOE governance by aligning legislation with the OECD Guidelines on Corporate Governance of SOEs.
  - ECB comprehensive assessment of six Bulgarian banks (AQR and stress test using 2018 data) with results expected in July 2019; positive assessment may still identify conditions to join the banking union.
  - ERM II parties called for thorough implementation of CVM-monitored reforms (judicial reform, fight against corruption and organized crime); CVM remains a separate process.
  - Authorities intend to maintain the currency board arrangement during ERM II participation (as Estonia did in 2004).

### Recent developments
- Economic performance:
  - GDP growth estimated at 3.2 percent in 2018; output gap assessed to have closed.
  - Private consumption and business confidence high; strong household consumption supported by rapid wage growth.
  - Public investment rose, offsetting lower export growth.
  - Unemployment declined to 4.7 percent (historical low); labor shortages widespread.
- Inflation:
  - Headline inflation peaked at 3.7 percent y/y in August 2018; slowed to 2.3 percent in December 2018.
  - Core inflation declined to 2.1 percent by December 2018.
  - HICP trimmed mean and median indicate moderation of underlying inflationary pressure.
- Credit and housing:
  - Housing prices averaged 7.5 percent y/y since 2016.
  - Credit to corporates reached 5.4 percent y/y in 2018, highest since 2013.
  - Non-financial corporate debt declined from 106 percent of GDP in 2008 to 80 percent of GDP in 2017.
  - Overall credit-to-GDP ratio remains below the historical trend and below the 2010 peak.
- External sector:
  - Current account surplus preliminary estimate: 4.6 percent of GDP in 2018 (smaller than in 2017).
  - External debt about 60 percent of GDP and assessed as sustainable.

### Outlook and risks
- Growth projections:
  - GDP growth projected: 2019 similar to 2018; medium-term growth projected at 2.8 percent.
  - Specific projections (Table): Real GDP 2019: 3.3; 2020: 3.0; 2021: 2.8; 2022: 2.8; 2023: 2.8; 2024: 2.8.
- Inflation forecast:
  - Average headline inflation forecast: 2.4 percent in 2019; HICP (average) 2019: 2.4; 2020–2024: 2.3 each year (Table 2).
- External position:
  - Staff assesses Bulgaria’s external position to be stronger than warranted by fundamentals and desirable policy settings, with large statistical and model uncertainty.
  - Annex I model result: Projected current account is 5.9 percent of GDP higher than the level consistent with fundamentals and desirable policy settings; implied valuation points to an undervaluation of 13 percent and estimates CA-Norm at -1.3 percent of GDP.
- Risks (Annex II highlights):
  - Downside risks dominate: weaker EU and Turkey growth; rising policy and geopolitical uncertainties including Brexit and protectionism; tightening global financial conditions.
  - Domestic downside risk: excessive wage growth could accelerate inflation and erode competitiveness.
  - Political uncertainty related to 2019 European parliament and municipal elections could delay policy implementation.
  - Upside risks: stronger private consumption and EU funds absorption, faster structural reform progress.
- Authorities’ view:
  - Authorities expect higher near-term and medium-term growth, stronger productivity growth, and lower unemployment over the medium term; concur that risks are tilted to the downside and note reservations on model specification and data revisions regarding external position assessment.

### Fiscal policy — recent outcomes and plans
- 2018 fiscal outcomes:
  - Fiscal balance recorded a small cash surplus of 0.1 percent of GDP in 2018, exceeding the budgeted deficit of 1 percent of GDP.
  - Budget surplus on an accrual basis amounted to 1.8 percent of GDP. (Difference reflects BGN1.3 billion (1.2 percent of GDP) allocation in December for highway construction expected to start in 2019.)
- 2019–21 fiscal plans:
  - Authorities aim at a small cash deficit in 2019 and a balanced budget in subsequent years.
  - 2019 budget envisages increased capital expenditure, higher spending on education and health.
  - Budget introduces a 10 percent increase in the wage bill while eliminating 1,600 redundant jobs (somewhat less than 2 percent of total government employees). Wage bill includes a previously announced 20-percent increase in teachers’ wages.
  - 2019 budget envisages a deficit of 0.5 percent of GDP.
  - Public debt projected to decline from 20.5 percent of GDP in 2018 to 17.1 percent of GDP in 2021.
- Assessment and recommendations:
  - Government’s fiscal plan broadly appropriate; 2019 fiscal impulse is temporary and reflects delayed capital spending and education and health expenditures with medium-term payoffs.
  - Staff recommends a comprehensive functional review of public sector employment and wages.
  - Medium-term targets consistent with preserving buffers given volatile external demand and the currency board arrangement.
- Revenue mobilization:
  - MTBF envisages increasing tax collection by combating tax fraud and evasion; SNS 2015−17 extended in 2018 to tackle the shadow economy.
  - Staff advises TA using the Tax Administration Diagnostic Assessment Tool to assess revenue administration capacity and develop a comprehensive strategy.
  - Particular focus: reduce sizable VAT compliance gap. VAT revenue amounted to almost half of total tax revenue in 2018 given flat 10 percent personal and corporate income tax rates.
- Contingent liabilities and long-term fiscal risks:
  - SOE debt was 8.1 percent of GDP at end-2016; MTBF projects it to decline.
  - Staff suggests establishing a fiscal risk management unit to monitor SOE fiscal risks.
  - 2015 pension reforms increased social security contribution rate and statutory retirement age; retirement age envisaged to be raised further based on life expectancy after it reaches 65 by 2037.
  - Social security system’s annual deficit projected to rise from 3.6 percent of GDP in 2018 to about 6 percent of GDP by 2050.

### Structural challenges, public goods, and growth drivers
- Key structural constraints: shrinking labor force, slowing productivity growth, persistent net emigration, and population aging.
- Labor productivity: growth declined after the global financial crisis; firms with higher innovative assets and lower debt distress had relatively higher productivity growth.
- Recommended sustained reforms:
  - Improve quality of institutions, including government efficiency and legal systems.
  - Upgrade infrastructure quality and public investment management.
  - Increase quality of education and healthcare.
  - Increase labor force participation and address skill mismatches.
- Public investment management and infrastructure recommendations:
  - Establish guidelines for project appraisal and selection criteria for nationally funded investment projects.
  - Develop an action plan to improve public investment management institutions.
  - Better planning and earlier pipeline development to avoid heavy back-loading.
  - Adoption of an E-procurement system to increase transparency and strengthen procurement.
- Education and human capital measures:
  - Ensure equal access to quality education; reduce early leavers from education and training.
  - Update curricula in general and vocational education; enhance extracurricular STEM activities.
  - Double teachers’ salaries over 2017-21 to attract young people and rejuvenate the teacher body; introduce special teacher training and retraining programs.
- Health care:
  - Need to improve spending efficiency and quality of services; high out-of-pocket payments and high cost of healthcare relative to outcomes.
  - Government measures: plan to optimize medicine spending and establish an E-healthcare system.
  - Staff sees need for reforms to strengthen primary and preventive (outpatient) care.
- SOE governance:
  - Align SOE legislation with OECD guidelines; recommend unified ownership policy, appointing well-qualified board members, and high-quality accounting and disclosure standards.

### Institutions, corruption, and rule of law
- CVM and governance:
  - Latest CVM report indicates progress on judicial independence and control of corruption, but Bulgaria remains perceived among the worst in the EU on these measures.
  - 2017 Eurobarometer: 62 percent of respondents considered corruption a problem when doing business in Bulgaria.
  - Government advances: unified anti-corruption commission; strengthened independence of judges and prosecutors in the Supreme Judicial Council.
  - Pending recommendations: implement newly-adopted anti-corruption framework and improve public reporting of national anti-corruption strategy implementation and corruption cases.
  - Staff: steadfast implementation should further improve governance and the business environment.

### Financial sector: supervision and stability
- BNB progress:
  - Strengthened legislation for related-party lending.
  - Formalized SREP; calibration of bank-specific Pillar II capital add-on expected to be finalized by March 2019.
  - Operationalized new governance framework; countercyclical capital buffer to be raised from 0 to 0.5 percent as of October 2019.
  - Legal framework for borrower-based macroprudential measures established.
  - Work to strengthen AML framework, including transposing the fifth AML directive.
- Banking sector performance:
  - Profitability and asset quality improved; profitability highest since the global financial crisis.
  - Share of foreign currency lending declined from 64 percent in 2011 to 34 percent in 2018.
  - NPLs declined from 16.9 percent of total loans in 2013 to 8.7 percent in 2018Q3.
- Continued actions needed:
  - BNB should maintain vigilance on NPLs; ensure banks with high NPLs have sufficient capital buffers via SREP.
  - Improve insolvency framework and develop an NPL market; review insolvency proceedings publication and identify inefficiency/weaknesses.
  - Support ECB comprehensive assessment of the banking sector as part of ERM II and banking union accession.

### External position and competitiveness (Annex I)
- Staff assessment: external position in 2018 stronger than fundamentals and desirable policies, but subject to substantial statistical and model uncertainty.
- Competitiveness concerns:
  - Real wage growth has persistently outpaced productivity growth since 2008.
  - ULC-based REER deteriorated significantly over the past decade; CPI-based REER remained broadly in line with NMS median.
- REER model (EBA-Lite) result:
  - 2018 CPI-based REER estimated to be virtually at its norm, pointing to a slight overvaluation of 1.1 percent in 2018.
- Current account model:
  - Model result: projected current account is 5.9 percent of GDP higher than consistent with fundamentals; implies 13 percent undervaluation and CA-Norm at -1.3 percent of GDP.
  - Only 35 percent of the 5.9 percent CA-gap (2.1 percent of GDP) is explained by policy deviation; the residual is large and reflects structural factors and distortions not captured by the model.
- Statistical uncertainty:
  - Errors and omissions large and variable (e.g., -1.8 percent of GDP in 2018; -3.4 percent of GDP in 2017); frequent substantial revisions to balance of payments.
- Reserves and NIIP:
  - Reserves coverage ratio (end-November 2018) exceeded 113 percent.
  - Reserves accounted for 289 percent of short term debt and 284 percent of foreign exchange deposit of the population.
  - NIIP improved from -92 percent of GDP in 2010 to -35 percent of GDP in 2018 and projected to reach -11percent of GDP by 2024.
- Policy implication:
  - Maintain a current account surplus over the medium term to further improve NIIP and maintain adequate official reserves in the context of capital outflows and a currency board arrangement.

### Debt Sustainability Analysis (DSA) — external and public
- External DSA:
  - External debt declined from slightly above 100 percent of GDP in 2009 to about 60 percent of GDP in 2018.
  - Baseline projection: gross external debt projected to continue declining, reaching 44 percent of GDP in 2024.
  - Current account excluding interest projected to decline from 2.9 percent of GDP in 2019 to 0.7 percent of GDP in 2024 and remain above the debt stabilizing level (-4.4 percent of GDP).
  - Real depreciation shock: a 30 percent real depreciation in 2018 would increase external debt to 82½ percent of GDP in 2020, declining to 66 percent of GDP by end of projection period.
- Public DSA — baseline:
  - Nominal gross public debt (percent of GDP): 2017: 19.0; 2018: 23.3; 2019: 20.5; 2020: 19.3; 2021: 18.2; 2022: 17.1; 2023: 16.2; 2024: 15.3; final projection entry: 14.5.
  - Public gross financing needs (percent of GDP): 2019 projection: 1.3.
  - Key macro assumptions (selected): Real GDP growth 2019–2024 includes 3.3, 3.0, 2.8, 2.8, 2.8, 2.8; Effective interest rate 2019–2024: 2.9–3.5 range final projection 3.5.
  - Change in gross public sector debt (percent of GDP) 2019: -2.8; cumulative change through projection: -6.0.
- Fiscal ceiling and projections:
  - Draft budget law: total government debt should not surpass BGN 22.2 billion at end-2019.
  - Authorities have no plan to issue new external bonds in 2019.
  - Assuming FRA balance unchanged from projected 2021 level, staff projects decline in debt-to-GDP from 20.5 percent in 2018 to 14.5 percent in 2024.
  - Stress tests: public debt likely to remain below 25 percent of GDP under various shocks; gross financing needs remain well below 5 percent of GDP under shocks.

### Updated estimates (revisions) and immediate finding
- Revised GDP growth:
  - 2018 growth revised to 3.1 percent, 0.1 percentage point lower than previously estimated.
  - Revised staff projections: Real GDP 2018: 3.1 (revised); 2019: 3.3; 2020: 3.0; 2021–2024: 2.8 each year.
  - Revised gross external debt (percent of GDP): 2018: 59.3; 2019: 55.9; 2020: 52.7; 2021: 49.9; 2022: 47.2; 2023: 44.4; 2024: 41.5.
- Key immediate finding:
  - 2018 growth was 3.1 percent; preliminary data confirm 2018 growth driven by domestic demand; negative contribution from net exports more moderate than previously estimated; little impact on 2019 outlook and policy advice.

### Staff appraisal: outlook, risks, and policy priorities
- Current assessment:
  - Economy robust: unemployment at historical lows, output gap closed, credit growth upward.
  - Growth expected to remain similar in 2019 and inflation to remain stable.
  - External position assessed stronger than warranted by fundamentals and desirable policy settings, with substantial uncertainty.
- Main risks:
  - Growth slowdown of trading partners, rising protectionism and retreat from multilateralism, and fast wage growth.
- Policy priorities and recommendations:
  - Maintain conservative fiscal policy to preserve buffers; allow automatic stabilizers to operate in downturns.
  - Implement broad-based structural reforms to improve public goods provision and bolster growth: education and training, labor market policies, healthcare, government spending and revenue administration efficiency, stronger public investment management, and enhanced SOE oversight and performance.
  - Continue preparations for ERM II and banking union membership; macroeconomic impact of ERM II likely minimal given plan to maintain currency board arrangement.
  - Maintain reform momentum to strengthen governance: implement anti-corruption framework, improve governance in public resource utilization, SOE management, and AML framework.
  - Continue strengthening financial supervision; BNB should remain vigilant on NPLs and ensure banks with high NPLs have sufficient capital buffers.

### Key numeric highlights
- 2018 GDP growth (revised): 3.1 percent.
- 2018 preliminary current account surplus: 4.6 percent of GDP.
- Unemployment: 4.7 percent (historical low).
- Headline inflation peak: 3.7 percent y/y in August 2018; December 2018: 2.3 percent.
- NPLs: 8.7 percent of total loans in 2018Q3 (down from 16.9 percent in 2013).
- External debt: about 60 percent of GDP (2018); revised gross external debt 2018: 59.3 percent of GDP.
- Public debt: 2018 estimate 20.5 percent of GDP; projected to decline to 14.5 percent of GDP in 2024.
- Draft government debt ceiling end-2019: BGN 22.2 billion.
- Public gross financing needs (2019 projection): 1.3 percent of GDP.
- EMBIG: 149 basis points; 5Y CDS: 79 basis points.
- Countercyclical capital buffer: increase from 0 to 0.5 percent as of October 2019.
- Currency board peg: lev fixed to the euro at BGN 1.95583 per euro since January 1, 1999.

_Source: IMF staff report — "1. Bulgaria’s ERM II Application."_

### 1. Bulgaria’s ERM II Application ___________________________________________________________________ 5

### 1. Bulgaria’s ERM II Application

### Context
- Translating robust recent growth into sustainable and inclusive medium-term income convergence is the key policy challenge. Bulgaria’s income level is still half of the EU average and income inequality is high among EU countries.
- Long-term challenges include emigration and population aging; addressing these requires better public goods provision in infrastructure, the judiciary, education, and healthcare.
- Preparation for entry into ERM II and the banking union is a key 2019 priority. Bulgaria has met the Maastricht criteria to join the euro area other than participating in ERM II for at least two years; this was achieved under the currency board arrangement in place since 1997.
- ERM II participation and banking union accession are to be simultaneous according to authorities and ERM II parties.

Box 1 — Commitments and Processes (as agreed with ERM II parties)
- Entering into close cooperation with the ECB (namely joining the banking union as a non-euro area country).
- Providing the legislative basis for borrower-based macroprudential measures.
- Enhancing the supervision of the non-banking financial sector.
- Identifying gaps in the insolvency framework and preparing a roadmap to address them.
- Strengthening the anti-money laundering (AML) framework by addressing any issues identified in the transposition into national legislation of the fourth EU AML directive and transposing the fifth AML directive into national legislation.
- Improving the SOE governance by aligning legislation with the OECD Guidelines on Corporate Governance of SOEs.
- The ECB is undertaking a comprehensive assessment of six Bulgarian banks (three largest banks—all foreign—and three large domestic banks), involving an asset quality review (AQR) and a stress test using 2018 data, with results expected to be published in July 2019. A positive assessment may still identify conditions to be met to join the banking union.
- ERM II parties called on Bulgarian authorities to thoroughly implement reforms monitored under the Cooperation and Verification Mechanism (CVM) in judicial reform and the fight against corruption and organized crime; CVM remains a separate process.
- Authorities intend to maintain the currency board arrangement during ERM II participation (as Estonia did in 2004); ERM II transition is expected to be smooth and to enhance market confidence.

### Recent Developments
- Economic performance:
  - GDP growth estimated at 3.2 percent in 2018; output gap assessed to have closed.
  - Consumption and business confidence high; strong household consumption supported by continued rapid wage growth.
  - Public investment rose, offsetting lower export growth.
  - Unemployment declined to 4.7 percent (historical low); labor shortages widespread.
- Inflation:
  - Inflation peaked at 3.7 percent y/y in August 2018, driven by rising wages, tourism-related prices (accommodation), and commodity prices.
  - Headline inflation slowed to 2.3 percent in December 2018.
  - Core inflation declined to 2.1 percent by December 2018.
  - HICP trimmed mean and median indicate moderation of underlying inflationary pressure.
- Credit and housing:
  - Consumer and mortgage loan growth buoyant; housing prices averaged 7.5 percent y/y since 2016.
  - Credit to corporates reached 5.4 percent y/y in 2018, the highest since 2013.
  - Non-financial corporate debt declined from 106 percent of GDP in 2008 to 80 percent of GDP in 2017 but remains high among new member states (NMS).
  - Overall credit-to-GDP ratio remains below the historical trend and below the 2010 peak.
- External sector:
  - Current account surplus preliminary estimate: 4.6 percent of GDP in 2018 (smaller than in 2017), affected by weaker export performance due to maintenance at the main oil refinery and weaker demand from Turkey.
  - Financial account driven by large net portfolio outflows reflecting net acquisition of foreign debt securities and repayment of maturing sovereign and private external bonds.
  - External debt about 60 percent of GDP and assessed as sustainable (Annex IV).

### Outlook and Risks
- Growth projections:
  - GDP growth in 2019 projected to remain similar to 2018; medium-term growth projected at 2.8 percent.
  - Near-term support from pickup in EU-funded capital expenditure, recovery of petroleum product production and exports, strong wage increases, and still-low interest rates.
  - Medium-term constraints include a declining labor force despite ongoing reform efforts.
- Inflation forecast:
  - Average headline inflation forecast to moderate to 2.4 percent in 2019 with lower energy and food price growth.
- External position:
  - Staff assesses Bulgaria’s external position to be stronger than warranted by fundamentals and desirable policy settings, with large statistical and model uncertainty (Annex I).
- Risks (Annex II):
  - Downside risks dominate: weaker EU and Turkey growth; rising policy and geopolitical uncertainties including Brexit and protectionism; tightening global financial conditions.
  - Domestic downside risk: excessive wage growth could accelerate inflation and erode competitiveness.
  - Political uncertainty related to 2019 European parliament and municipal elections could delay policy implementation.
  - Upside risks: stronger private consumption and EU funds absorption, faster structural reform progress.
- Authorities’ views:
  - Authorities expect higher near-term and medium-term growth, stronger productivity growth, and lower unemployment over the medium term.
  - Authorities concur that risks are tilted to the downside, mainly external, and note reservations on model specification and potential data revisions regarding external position assessment.

### Policy Discussions — Fiscal Policy
- 2018 fiscal outcomes:
  - Fiscal balance recorded a small surplus of 0.1 percent of GDP in 2018, exceeding the budgeted deficit of 1 percent of GDP due to revenue overperformance and underspending of EU-funded capital projects.
  - The budget surplus on an accrual basis amounted to 1.8 percent of GDP. (Footnote: difference between cash and accrual balances mainly reflects BGN1.3 billion (1.2 percent of GDP) allocation in December for highway construction expected to start in 2019.)
- 2019–21 fiscal plans and projections:
  - Authorities aim at a small cash deficit in 2019 and a balanced budget in subsequent years.
  - 2019 budget envisages increased capital expenditure reflecting higher EU funds absorption, and higher spending on education and health.
  - Budget introduces a 10 percent increase in the wage bill while eliminating 1,600 redundant jobs (somewhat less than 2 percent of total government employees). The wage bill includes a previously announced 20-percent increase in teachers’ wages.
  - 2019 budget envisages a deficit of 0.5 percent of GDP, consistent with the previous MTBF.
  - Public debt projected to decline from 20.5 percent of GDP in 2018 to 17.1 percent of GDP in 2021.
- Assessment and recommendations:
  - The government’s fiscal plan is broadly appropriate; 2019 fiscal impulse is temporary and reflects delayed capital spending and education and health expenditures with medium-term payoffs.
  - The government wage increase is to be performance-based and applies to all ministries, helping narrow the negative public-wage premium.
  - Staff recommends a comprehensive functional review of public sector employment and wages to improve public employment management.
  - Medium-term targets are consistent with preserving buffers given volatile external demand and the currency board arrangement. Bulgaria’s low public debt provides space for automatic stabilizers to operate.
- Revenue mobilization:
  - MTBF envisages increasing tax collection through combating tax fraud and evasion; Single National Strategy (SNS) 2015−17 extended in 2018 to tackle the shadow economy.
  - Staff advises technical assistance using the Tax Administration Diagnostic Assessment Tool to assess revenue administration capacity and develop a comprehensive strategy to improve efficiency.
  - Particular focus: reduce sizable VAT compliance gap. VAT revenue amounted to almost half of total tax revenue in 2018 given flat 10 percent personal and corporate income tax rates.
- Contingent liabilities and long-term fiscal risks:
  - SOE debt was 8.1 percent of GDP at end-2016, lower than EU average; MTBF projects it to decline. Several SOEs, notably in energy and transport, have significant debt; the bulk of liabilities are with loss-making SOEs.
  - Staff suggests establishing a fiscal risk management unit to monitor SOE fiscal risks.
  - 2015 pension reforms increased social security contribution rate and statutory retirement age; retirement age envisaged to be raised further based on life expectancy after it reaches 65 by 2037.
  - Despite reforms, social security system’s annual deficit projected to rise from 3.6 percent of GDP in 2018 to about 6 percent of GDP by 2050, implying further pension-related reforms will eventually be needed.
  - 2015 reforms introduced unlimited transfers between Pillar I and Pillar II, though transfers have been small so far (1.3 percent of eligible insured persons).

*Source: IMF staff report — "1. Bulgaria’s ERM II Application."*

### 15.      The authorities reiterated their commitment to fiscal discipline. They noted that a

### 1bgrea2019001 - 15.      The authorities reiterated their commitment to fiscal discipline. They noted that a

### Fiscal policy and public finances
- Authorities reiterate commitment to fiscal discipline, preferring a balance or small surplus on the government account.
- Automatic stabilizers to operate in the event of weak growth.
- Implementation of the SNS has led to some progress in improving tax compliance and collection; some decline in the VAT gap in recent years.
- Authorities welcome further IMF technical assistance to improve revenue administration.
- Authorities acknowledge that further reforms may be needed to ensure long-term stability of the public pension system but indicate no near-term changes are envisaged for the 2015 reforms.
- Staff appraisal:
  - Fiscal policy remains conservative, preserving buffers against downside risks.
  - Fiscal outturn better than budgeted in 2018, reflecting revenue overperformance and capital underspending.
  - With public debt low, automatic stabilizers should be allowed to operate fully in the event of a negative shock.
  - Contingent pension liabilities from aging will likely call for further reforms in the future.

### Structural challenges and growth drivers
- Key structural constraints: shrinking labor force, slowing productivity growth, persistent net emigration, and population aging.
- Labor productivity growth declined after the global financial crisis; firms with higher innovative assets and lower debt distress had relatively higher productivity growth.
- Sustained and broad-based reforms recommended to address emigration and productivity slowdown:
  - (i) improve quality of institutions, including government efficiency and legal systems;
  - (ii) upgrade infrastructure quality;
  - (iii) increase quality of education and healthcare;
  - (iv) increase labor force participation.
- Bulgaria shows significant gaps relative to NMS and EU averages in institutions and governance, infrastructure quality, education and health, and labor market.

### Public investment management and infrastructure
- Bulgaria’s infrastructure assessed below average in quality despite comparable size to peers; greater investment efficiency needed.
- Recommendations:
  - Establish guidelines for project appraisal and selection criteria for nationally funded investment projects to increase efficiency and reduce corruption vulnerability.
  - Develop an action plan to improve public investment management institutions.
  - Better planning and earlier pipeline development to avoid heavy back-loading in the next funding cycle.
  - Adoption of an E-procurement system welcomed to increase transparency and strengthen procurement.

### State-owned enterprises (SOEs) and governance
- Efforts to strengthen SOE governance are welcome, particularly in network industries (railways, energy).
- Forthcoming alignment of SOE legislation with OECD guidelines and ERM II commitment would help strengthen SOE governance.
- OECD-aligned guidelines recommend: unified ownership policy, appointing well-qualified board members, and adopting high-quality accounting and disclosure standards.
- Sound implementation of new standards critical to improving SOE performance and containing fiscal risks.

### Institutions, corruption, and rule of law
- Latest CVM report indicates progress on judicial independence and control of corruption, but Bulgaria remains perceived among the worst in the EU on these measures.
- 2017 Eurobarometer: 62 percent of respondents considered corruption a problem when doing business in Bulgaria.
- Government advances under CVM include establishing a unified anti-corruption commission and strengthening independence of judges and prosecutors in the Supreme Judicial Council.
- Pending recommendations: implement newly-adopted anti-corruption framework and improve public reporting of national anti-corruption strategy implementation and corruption cases.
- Staff: steadfast implementation should further improve governance and the business environment.

### Education, labor market, and human capital
- Government spending on education relatively low in the EU; fiscal space exists to increase resources to close gaps in educational outcomes.
- Supported reforms (reflected in the MTBF):
  - Ensure equal access to quality education.
  - Reduce the high rate of early leavers from education and training (already beginning to bear fruit).
  - Update curricula in general and vocational education to reflect key competencies and evolving work demand.
  - Enhance extracurricular STEM activities.
  - Double teachers’ salaries over 2017-21 to attract young people, address low teacher-student ratio, and rejuvenate aging teacher body.
  - Introduce special teacher training and retraining programs.
- Labor market policies and programs:
  - Efforts to bring back overseas Bulgarians and worker import agreements with neighboring countries.
  - Youth Guarantee program supports NEET population but coverage needs to increase to reduce high unemployment for the less-educated.
  - Training programs introduced for sectors with skilled-labor shortages: information and communications technology, teaching, health, and engineering.
  - Recommendation to deepen collaboration between educational institutions and businesses to reduce skill mismatches.

### Health care
- Scope to improve public health system in spending efficiency and quality of services.
- High out-of-pocket payments and high cost of healthcare relative to outcomes.
- Contributing factors: relatively low public health spending, high cost of pharmaceuticals and medical goods, high share of inpatient care from a hospital-centered system.
- Government measures: plan to optimize medicine spending and establish an E-healthcare system.
- Staff sees need for further reforms to strengthen primary and preventive (outpatient) care.

### Financial sector: supervision and stability
- BNB progress in strengthening banking sector supervision:
  - Strengthened legislation for related-party lending.
  - Formalized Supervisory Review and Evaluation Process (SREP); calibration of bank-specific Pillar II capital add-on expected to be finalized by March 2019.
  - Operationalized new governance framework vesting decision-making on banking supervision and payments in the Governing Council.
  - Countercyclical capital buffer to be raised from 0 to 0.5 percent as of October 2019.
- Banking sector performance:
  - Profitability and asset quality improved; profitability highest since the global financial crisis.
  - Mergers and acquisitions could improve efficiency if accompanied by operational streamlining and cost reduction.
  - Share of foreign currency lending declined from 64 percent in 2011 to 34 percent in 2018.
  - Non-performing loans (NPLs) declined from 16.9 percent of total loans in 2013 to 8.7 percent in 2018Q3.
- Continued actions needed:
  - BNB should maintain vigilance on NPLs; ensure banks with high NPLs have sufficient capital buffers via SREP.
  - BNB intends to comply with EBA guidelines on NPLs, which will enter into force in mid-2019.
  - Improve insolvency framework and develop an NPL market; review insolvency proceedings publication and identify inefficiency/weakness in the insolvency process.
- Other financial sector reforms and progress:
  - Support for ECB’s comprehensive assessment of the banking sector as part of ERM II preparations and banking union accession.
  - Amendments to BNB Act to align central bank independence provisions with EU legislation.
  - Legal framework for borrower-based macroprudential measures established.
  - Work to strengthen AML framework, including transposing the fifth AML directive into national legislation.
  - Progress in nonbank financial sector: risk-based supervisory system for insurers and pension funds; adoption of guidelines for asset and liability valuation.

### Authorities’ views (selected)
- Authorities agree with objectives to improve public sector efficiency, quality of institutions, and human capital through structural reforms.
- They will conduct internal discussions on public investment management recommendations.
- Authorities note limitations of public perceptions as gauges of governance and that perceptions change slowly.
- Authorities concur that labor shortages and skill mismatches are key short- and medium-term challenges and that deep-rooted reforms in education, healthcare, and labor markets are necessary for sustainable growth and faster convergence.
- Authorities broadly agree with staff views on the financial sector, noting sizable recent decline in NPLs and that SREP capital add-on will help address NPL stock.
- Some authorities view a rise in interest rates as a potential credit risk given loans issued under very low interest rates.

### Staff appraisal: outlook, risks, and policy priorities
- Current assessment:
  - Economy remains robust: unemployment at historical lows, output gap closed, credit growth upward.
  - Growth expected to remain similar in 2019 and inflation to remain stable.
  - External position assessed stronger than warranted by fundamentals and desirable policy settings, with substantial uncertainty.
- Main risks to the outlook:
  - Growth slowdown of trading partners, rising protectionism and retreat from multilateralism, and fast wage growth.
- Policy priorities and recommendations:
  - Maintain conservative fiscal policy to preserve buffers; allow automatic stabilizers to operate in downturns.
  - Implement broad-based structural reforms to improve public goods provision and bolster growth prospects: education and training, labor market policies, healthcare, government spending and revenue administration efficiency, stronger public investment management, and enhanced SOE oversight and performance.
  - Continue preparations for ERM II and banking union membership to strengthen institutions and financial supervision; macroeconomic impact of ERM II likely minimal given plan to maintain currency board arrangement.
  - Maintain reform momentum to strengthen governance: implement anti-corruption framework, improve governance in public resource utilization, SOE management, and AML framework.
  - Continue strengthening financial supervision; BNB should remain vigilant on NPLs and ensure banks with high NPLs have sufficient capital buffers.  

*Source: 1bgrea2019001 - 15.      The authorities reiterated their commitment to fiscal discipline. They noted that a*

### 36.      It is proposed that Bulgaria remain on the standard 12-month Article IV cycle.

### 36.      It is proposed that Bulgaria remain on the standard 12-month Article IV cycle.

### Real Sector Developments (2008–18)
- Bulgaria’s growth has been below its peers in recent years.
- 2018 growth drivers:
  - Private consumption was the main contributor to growth in 2018.
  - Negative contribution from net exports widened due to temporary contraction of refinery production and lower growth from trading partners.
- Sentiment:
  - Consumer confidence and business climate remained strong despite some deterioration in Q3.
- Labor market and inflation:
  - The unemployment rate reached a record low while nominal wage growth has moderated.
  - After rising sharply, headline inflation has stabilized while core inflation has slightly declined.
- Key historical real GDP growth figures (selected):
  - Real GDP: 2015: 3.5; 2016: 3.9; 2017: 3.8; 2018: 3.2.
- Table 1 projections (Real GDP, annual percentage change):
  - 2019: 3.3
  - 2020: 3.0
  - 2021: 2.8
  - 2022: 2.8
  - 2023: 2.8
  - 2024: 2.8

### External Sector Developments (2008–18)
- Current account and trade:
  - The current account surplus remained sizable in 2018 though smaller than in 2017.
  - Weak goods exports partly due to temporary factors were offset by dynamic services exports.
  - Terms of trade recovered from the sharp decline in the first quarter of 2018.
- Financial flows and reserves:
  - Financial outflows driven by portfolio largely offset the current account surplus.
  - Resulted in broadly stable gross international reserves and continued improvement of the net international investment position.
- Balance of payments (Table 3, millions of euros):
  - Current account balance: 2015: -16; 2016: 1,244; 2017: 3,368; 2018: 2,539; 2019 (est/proj): 1,293; 2024: 53.
  - Trade balance: 2018: -2,248; 2019: -2,875; 2024: -3,673.
  - Services balance: 2018: 3,313; 2019: 3,238; 2024: 3,232.
  - Gross international reserves (Table 4, billions of euros): 2018: 25,024; projections: 2019: 26,876; 2020: 28,524; 2024: 33,464.
- Current account (percent of GDP, Table 2):
  - 2015: 0.0; 2016: 2.6; 2017: 6.5; 2018: 4.6; 2019: 2.2; 2024: 0.1.
- Exports and imports (Table 1, percent change):
  - Exports of goods and services: 2018: -1.5; 2019: 2.7; 2024: 3.5.
  - Imports of goods and services: 2018: 3.2; 2019: 5.3; 2024: 3.8.

### Fiscal Developments (2008–20; 2015–24 detailed)
- 2018 fiscal outcome:
  - A small cash fiscal surplus is estimated for 2018 due to strong revenue performance and underexecution of EU-funded capital spending.
  - The fiscal reserve declined in 2018 due to Eurobond repayments.
- 2019 outlook:
  - Expenditure is expected to rise in 2019 due to increases in wages, education, healthcare, and capital spending.
- Public debt:
  - Bulgaria’s public debt remains among the lowest in the EU and is projected to decline further in the medium term.
  - General government gross debt (percent of GDP, Table 2): 2018: 20.5; 2019: 19.3; 2020: 18.2; 2024: 14.5.
- Key fiscal indicators (Table 1 and Table 5b):
  - General government net lending/borrowing (cash basis, percent of GDP): 2018: 0.1; 2019: -0.6; 2020: 0.0; 2024: 0.0.
  - General government primary balance (percent of GDP): 2018: 0.8; 2019: -0.1; 2020–2024: 0.5 (2020 onward projected 0.5).
  - Structural overall balance (percent of GDP): 2018: 0.1; 2019: -0.7; 2020: -0.1; 2021–2024: 0.0.
- Revenue and expenditure (Table 5b, percent of GDP):
  - Revenue: 2018: 35.2; 2019: 36.4; 2020: 35.7.
  - Expenditure: 2018: 35.1; 2019: 37.1; 2020: 35.8.
  - Net acquisition of nonfinancial assets (percent of GDP): 2018: 4.9; 2019: 5.7; 2024: 4.1.
- Selected nominal fiscal figures (Table 5a, millions of leva, 2018–2019):
  - Revenue 2018: 37,861; 2019: 41,637.
  - Expenditure 2018: 37,724; 2019: 42,369.
  - Net lending/borrowing 2018: 137; 2019: -732.
  - Fiscal reserve account (end): 2018: 9,013 (percent of GDP 0.7 in 2018).

### Monetary and Financial Sector Developments (2008–18)
- Credit and rates:
  - Credit growth has picked up, supported by low interest rates.
  - Domestic private credit (Table 1): 2018: 8.9 (percent change); projections: 2019: 7.1; 2024: 6.5.
- Banking sector performance:
  - Bank profitability improved in 2018.
  - Capital buffers of the banking system are high and liquidity is high.
  - NPLs have continued to decline but are still higher than in peer countries.
- Financial soundness indicators (Table 7, percent):
  - Capital to risk-weighted assets: 2018Q3: 20.0.
  - Nonperforming loans to total gross loans: 2018Q3: 8.7.
  - Return on assets: 2018Q3: 1.6.
  - Return on equity: 2018Q3: 12.7.
  - Liquid assets to total assets: 2018Q3: 26.0.
- Monetary accounts (Table 6, selected levels, billions of leva):
  - Broad money (M3): 2018: 93.3.
  - Reserve money: 2018: 32.6.
  - Net foreign assets (monetary survey): 2018: 56.1.
- Exchange rate and monetary regime notes:
  - Leva per U.S. dollar (end of period, Table 1): 2015: 1.8; 2016: 1.9; 2017: 1.6; 2018: 1.7.
  - Real effective rate (CPI based, Table 2): 2018: 4.2.

### Projections and Key Macroeconomic Framework Metrics (2019–24)
- Growth and inflation (Table 2):
  - Real GDP: 2019: 3.3; 2020: 3.0; 2021–2024: 2.8 each year.
  - Consumer price index (HICP, average): 2019: 2.4; 2020–2024: 2.3 each year.
  - Nominal wages: 2019: 8.9; 2020: 5.9; 2024: 5.6.
- Saving and investment (percent of GDP, Table 2):
  - Gross national saving: 2019: 21.2; 2024: 19.3.
  - Gross domestic investment: 2019: 19.0; 2024: 19.3.
- External sector projections (Table 3 and Table 2):
  - Current account (percent of GDP): 2019: 2.2; 2020: 1.6; 2024: 0.1.
  - Foreign direct investment (percent of GDP): consistently projected at -2.2 for 2019–2024.
- Public debt path (Table 2, percent of GDP):
  - General government gross debt: 2019: 19.3; 2020: 18.2; 2021: 17.1; 2022: 16.2; 2023: 15.3; 2024: 14.5.

*Source: IMF staff calculations and national authorities as presented in the provided content unit.*

### Annex I. Competitiveness and External Sector Assessment

### Annex I. Competitiveness and External Sector Assessment

### Competitiveness — overview
- Staff overall assessment: Bulgaria’s external position is stronger than fundamentals and desirable policy settings. This assessment is subject to substantial statistical and model uncertainty.
- Competitiveness concern: As real wage growth persistently outpaces productivity growth, competitiveness may be eroding.
- Export performance: Improved until 2013, broadly stable since; small decline in 2017 continued in 2018 as tourism receipt increases were offset by poor merchandise export performance due to temporary factors affecting oil exports and a slowdown in demand from major export markets.
- Structural factor: Rapid wage growth — compensation remains well below other EU new member states (NMS) but is rising rapidly and, in real terms, has persistently outpaced labor productivity since 2008.

### Real Effective Exchange Rate (REER) and unit labor costs
- ULC-based REER: Bulgaria’s cost competitiveness as measured by the ULC-based REER has deteriorated significantly in the past decade while it remained broadly stable in the NMS median — indicating a weakening of cost competitiveness.
- Price competitiveness: Deterioration has been more contained; HIPC-based REER evolves broadly in line with the NMS median.
- Measurement note: CPI-based REER analysis likely underestimates the weakening of cost competitiveness, which is better measured by ULC comparison.

### REER model (EBA-Lite) findings
- 2018 CPI-based REER: Estimated to be virtually at its norm, pointing to a slight overvaluation of 1.1 percent in 2018.
- Caveat: CPI-based analysis likely understates weakening of cost competitiveness compared with ULC measures.

### Current account assessment
- Model result: Projected current account is 5.9 percent of GDP higher than the level consistent with fundamentals and desirable policy settings.
- Implied valuation: Points to an undervaluation of 13 percent and estimates the CA-Norm at -1.3 percent of GDP.
- Policy contribution: Only 35 percent of the 5.9 percent CA-gap (2.1 percent of GDP) is explained by a deviation of policy from desirable policy in the medium term; the residual is large and reflects structural factors and distortions not captured by the model.
- Statistical uncertainty:
  - Frequent and substantial revisions to balance of payments affect model results. Example: 2016 current account balance first estimated at 3.9 percent of GDP, revised up to 5.4 percent of GDP, and finalized to 2.6 percent of GDP.
  - Very large errors and omissions in historical data (e.g., -1.8 percent of GDP or -39 percent of current account in 2018, after -3.4 percent of GDP or -52 percent of current account in 2017) suggest significant measurement issues.
  - Over 2014-18, errors and omissions ranged from -3.4 percent of GDP to +3.8 percent of GDP or from -198 percent to +146 percent of current account (this range excludes 2016).

### Financial flows (2017–2018)
- 2017 net portfolio debt outflows: Reached 4.8 percent of GDP, historically large, driven by repayment of a sovereign Eurobond and a large increase in investments in long-term debt securities by non-monetary financial institutions.
- Financial account 2017: Reached 4.4 percent of GDP due to low net FDI inflows and despite a decline in other investment.
- Portfolio outflows 2018 (preliminary): Remained large at 2.4 percent of GDP because some large corporate bonds matured, though more limited than in 2017.
- Other investments outflows 2018: Remained broadly stable, mainly due to change in late 2017 of the deposit rate for banks’ excess reserves from -0.4 percent to -0.6 percent.

### Reserves
- Adequacy: Reserves remain adequate, exceed the upper bound of the suggested adequacy range and the coverage ratio required for the functioning of the currency board, and are well above traditional metrics.
- Currency board coverage (end-November 2018): Reserves coverage ratio exceeded 113 percent.
- Additional metrics: Reserves accounted for 289 percent of short term debt, and for 284 percent of foreign exchange deposit of the population.

### Net International Investment Position (NIIP)
- Improvement: NIIP improved from -92 percent of GDP in 2010 to -35 percent of GDP in 2018 and is projected to reach -11percent of GDP by 2024.
- Drivers 2010–17: Improvement driven by increase in assets and, to a lesser extent, reduction in liabilities.
- 2018 change: Improvement in NIIP by 6.8 percentage points of GDP due to a reduction in liabilities (-4.8 percentage points of GDP) and an increase in assets (+2.0 percentage points of GDP).

### Overall assessment (synthesis)
- Reconciling indicators:
  - Current account model: Suggests current account is 5.9 percent of GDP higher than consistent level and implies a 13 percent undervaluation.
  - REER model: Suggests external position broadly consistent with fundamentals and desirable policy settings, pointing to a 1.1 percent overvaluation.
  - Competitiveness analysis: Highlights stronger appreciation of the ULC-based REER than the CPI-based REER.
- Uncertainty: Estimated current account gap subject to substantial statistical uncertainty (large errors and omissions and frequent revisions) and model uncertainty (more than half of the gap is residual).
- Staff conclusion: Drawing on both CA and REER gaps, staff assesses that the external position in 2018 was stronger than fundamentals and desirable policies, although subject to considerable uncertainty.
- Policy implication: Bulgaria needs to maintain a current account surplus over the medium term to further improve the NIIP and to maintain adequate official reserves in the context of capital outflows and a currency board arrangement.

### Authorities’ views
- Agreement: Authorities agree Bulgaria’s external position is currently stronger than warranted by fundamentals and desirable policy settings.
- Reservations: They caution that current account data are likely to be revised down and have reservations on model results (large residual and impact estimates for natural disasters and conflicts that Bulgaria does not experience) and specification (inclusion of health spending).
- Competitiveness view: Authorities consider that faster wage growth than productivity growth may affect competitiveness only in the medium term as exporters still appear to have margin to absorb unit labor cost increases.

### Risk Assessment Matrix (selected risks and policy responses)
- Domestic risks:
  - Faster than expected wage growth (short term) — Relative likelihood: High. Impact: High/Medium (strong domestic demand, inflation acceleration, eroding competitiveness). Policy response: Growth-friendly fiscal consolidation, structural reforms to increase quality labor supply.
  - Slow progress in structural reforms to raise potential growth and mitigate unfavorable demographics (short/medium term) — Relative likelihood: High/Medium. Impact: High (lower potential growth, high structural unemployment, stalling real convergence, increased fiscal risks). Policy response: Accelerate implementation of structural reforms.
  - Limited progress to address banking system weaknesses identified by AQR/stress test and FSAP (short term) — Relative likelihood: Medium. Impact: High/Medium (increased vulnerability to shocks, weakened financial stability). Policy response: Ensure banks have sufficient capital buffers.
- Global risks:
  - Weaker-than-expected growth in the Euro area and Turkey (short/medium term) — Relative likelihood: Medium. Impact: High (lower FDI, deterioration in external accounts, lower growth). Policy response: Accelerate structural reforms, allow automatic stabilizers to operate.
  - Sharp tightening of global financial conditions (Fed normalization and tapering by ECB) (short term) — Relative likelihood: High. Impact: Medium (higher funding costs, lower investment and growth). Policy response: Allow automatic stabilizers to operate short-term; build reserve buffers and strengthen financial-sector resilience medium-term.
  - Rising protectionism and retreat from multilateralism including Brexit uncertainty (short/medium term) — Relative likelihood: High. Impact: Medium (negative impacts on trade, capital and labor flows, long-term growth). Policy response: Accelerate structural reforms to increase growth potential.

### Annex III — Foreign Direct Investment (FDI) (summary)
- FDI flows: Low by historical standards; earlier very large inflows were unsustainable and mirrored large external current account deficits.
- FDI stock: Now highest as a share of GDP among peers, though proportional to Bulgaria’s relatively low per capita income.
- Role of FDI: Important in financing physical capital acquisition, development of exports sector, and raising productivity. Firms with mixed foreign and Bulgarian capital exhibit higher productivity and salaries than purely domestic ones.
- Potential gains from institutional improvements: A recent Fund study estimated that closing gaps in skills shortages, institutional quality, and public infrastructure could result in gains in FDI of 5-7 percentage points of GDP.

### Annex IV — Debt Sustainability Analysis (DSA)

- External DSA — historical and baseline outlook:
  - Historical decline: External debt declined from slightly above 100 percent of GDP in 2009 to a projected about 60 percent of GDP in 2018. Decline driven by private sector deleveraging; private external debt-to-GDP ratio declined by about 42½ percentage points. Public external debt-to-GDP ratio increased by 2½ percentage points over the period.
  - Baseline projection: Gross external debt projected to continue declining, reaching 44 percent of GDP in 2024 because dynamic nominal GDP growth outpaces increase in nominal external debt.
  - Current account excluding interest: Projected to decline from 2.9 percent of GDP in 2019 to 0.7 percent of GDP in 2024 and remain significantly above the debt stabilizing level (-4.4 percent of GDP).
  - Gross financing needs: Projected to increase from 2018 level but remain low by historical standards.
- External debt shock sensitivity:
  - Real depreciation shock: A 30 percent real depreciation in 2018 would increase external debt to 82½ percent of GDP in 2020, declining to 66 percent of GDP by the end of the projection period. (Noted as appearing unlikely given the currency board, euro peg, and large share of euro area in exports — almost half of exports.)
  - Under all other standard shocks and the historical scenario, including the combined shock scenario, external debt-to-GDP would be below its 2018 level during the whole projection period.
- Public DSA — government debt outlook:
  - Public debt trend: General government gross debt projected to decline over the medium term.
  - 2017: Public debt declined to 23.3 percent of GDP, third lowest among EU countries; decline due to primary surplus and Eurobond debt repayment.
  - 2018 estimate: Government debt estimated at BGN 23.0 billion nominal, representing 20.5 percent of estimated GDP. Drivers: fiscal surplus, high nominal GDP growth, and authorities’ decision not to issue new external debt in 2018.
  - Financing plans: Authorities might decide to issue new securities on the domestic market of up to BGN 1 billion in (text ends here).

*Source: Annex I. Competitiveness and External Sector Assessment (content unit: 1bgrea2019001).*

### 2019. However, the total government debt should not surpass BGN 22.2 billion at end-2019,

### 1bgrea2019001 - 2019. However, the total government debt should not surpass BGN 22.2 billion at end-2019,

### Fiscal outlook and government debt ceiling
- Total government debt should not surpass BGN 22.2 billion at end-2019, according to the draft budget law.
- The authorities have no plan to issue new external bonds in 2019.
- The medium-term budget framework envisages achieving a balanced budget by 2020.
- Fiscal consolidation and a favorable growth-interest rate differential will help reduce general government debt over the medium term.
- Assuming Fiscal Reserve Account (FRA) balance remain unchanged from the projected 2021 level, staff projects a steady decline in the debt-to-GDP ratio from 20.5 percent in 2018 to 14.5 percent in 2024.
- If the authorities were to draw down FRA for financing, the pace of debt reduction could be faster.
- Alternative scenarios indicate that public debt would likely remain below 25 percent of GDP under various shocks.
- Gross financing needs are also projected to remain well below 5 percent of GDP under shocks.

### External debt sustainability (2008–2024) — key projected indicators and dynamics
- Baseline: External debt (in percent of GDP) shows a decline through projections ending at 44.0 (final entry in table).
- Staff projection: Change in external debt series includes values such as 13.1, -9.7, -13.4, 8.5, -0.7, -5.7, -12.8, -4.8, 0.0, -8.5, -0.8, -3.4, -2.7, -2.7, -2.7, -2.9.
- Identified external debt-creating flows include series: 6.1, 2.0, -14.6, 3.7, -7.0, -3.5, 6.3, -8.0, -14.8, -13.9, -6.5, -5.6, -5.1, -4.7, -4.2, -3.7.
- Current account deficit, excluding interest payments (in percent of GDP) includes: 5.8, -0.1, -2.3, -1.3, -3.1, -2.6, -1.2, -3.6, -7.4, -5.3, -2.9, -2.3, -1.9, -1.6, -1.2, -0.7.
- Exports (in percent of GDP) over the historical and projection period: 55.7, 44.7, 50.3, 59.1, 60.8, 64.8, 65.1, 63.9, 64.0, 67.3, 65.2, 63.4, 62.3, 61.4, 60.1, 58.9, 57.5.
- Imports (in percent of GDP): 52.3, 53.3, 58.9, 64.1, 65.5, 66.5, 63.0, 59.7, 63.4, 63.3, 62.8, 62.0, 61.1, 60.1, 59.2, 58.1.
- Net non-debt creating capital inflows (negative) series: -6.8, -2.4, -2.8, -2.6, -2.9, -0.2, -4.9, -1.2, -2.4, -2.4, -2.4, -2.4, -2.4, -2.4, -2.4, -2.4.
- Automatic debt dynamics contributions series: 7.0, 4.5, -9.5, 7.6, -1.0, -0.7, 12.5, -3.2, -5.1, -6.2, -1.2, -0.9, -0.8, -0.7, -0.6, -0.6.
- Contribution from nominal interest rate (in percent) series: 2.5, 1.8, 2.0, 2.2, 1.8, 1.4, 1.2, 1.0, 0.9, 0.7, 0.7, 0.7, 0.7, 0.7, 0.7, 0.7.
- Contribution from real GDP growth series: 3.5, -1.4, -1.6, 0.0, -0.4, -1.6, -3.4, -2.7, -2.4, -1.9, -1.9, -1.6, -1.4, -1.4, -1.3, -1.2.
- Residual, incl. change in gross foreign assets series: 7.1, -11.7, 1.2, 4.8, 6.3, -2.3, -19.2, 3.2, 14.8, 5.4, 5.7, 2.2, 2.3, 2.0, 1.6, 0.8.
- External debt-to-exports ratio (in percent) series: 167.5, 238.3, 192.2, 141.0, 151.0, 140.6, 131.2, 113.7, 105.9, 100.7, 90.8, 92.2, 88.2, 85.1, 82.4, 79.6, 76.4.
- Gross external financing need (in billions of US dollars) series: 28.7, 24.2, 19.9, 19.7, 19.6, 17.2, 18.5, 12.9, 9.9, 10.8, 12.7, 13.7, 14.5, 16.8, 17.8, 19.2.
- Gross external financing need (in percent of GDP) entries include values such as 55.3, 47.7, 34.7, 34.7, 36.6, 35.4, 30.3, 36.9, 24.2, 17.1, 16.7, 10-Year, 10-Year, 19.0, 19.2, 19.0, 20.7, 20.7, 21.0 (table format preserved in source).

### Public Sector Debt Sustainability Analysis (DSA) — Baseline scenario (As of February 21, 2019)
- Nominal gross public debt (in percent of GDP):
  - 2017: 19.0
  - 2018: 23.3
  - 2019: 20.5
  - 2020: 19.3
  - 2021: 18.2
  - 2022: 17.1
  - 2023: 16.2
  - 2024: 15.3
  - 2024 (final projection entry): 14.5
- Public gross financing needs (in percent of GDP):
  - 2017: 4.0
  - 2018: 2.1
  - 2019: 1.3
  - 2020: 1.7
  - 2021: 1.2
  - 2022: 0.8
  - 2023: 2.2
  - 2024: 2.1
  - cumulative final: 2.3
- Sovereign spreads and market indicators:
  - EMBIG (bp): 149
  - 5Y CDS (bp): 79
- Real GDP growth (in percent):
  - 2017: 1.7
  - 2018: 3.8
  - 2019–2024: 3.2, 3.3, 3.0, 2.8, 2.8, 2.8, 2.8 (annual projections)
- Inflation (GDP deflator, in percent):
  - 2017: 2.8
  - 2018: 3.4
  - 2019–2024: 3.1, 2.9, 2.8, 2.8, 2.8, 2.8, 2.8
- Nominal GDP growth (in percent):
  - 2017: 4.6
  - 2018: 7.3
  - 2019–2024: 6.4, 6.3, 5.8, 5.7, 5.7, 5.7, 5.7
- Effective interest rate (in percent) 4/:
  - 2017: 4.5
  - 2018: 3.1
  - 2019: 2.9
  - 2020: 3.0
  - 2021: 3.0
  - 2022: 3.0
  - 2023: 3.1
  - 2024: 3.3
  - final projection: 3.5
- Change in gross public sector debt (in percent of GDP):
  - 2017: 1.1
  - 2018: -4.1
  - 2019: -2.8
  - 2020: -1.2
  - 2021: -1.2
  - 2022: -1.0
  - 2023: -0.9
  - 2024: -0.9
  - cumulative: -0.8 and cumulative total -6.0
- Identified debt-creating flows (in percent of GDP):
  - 2017: 2.0
  - 2018: -4.9
  - 2019: -3.1
  - 2020: -0.8
  - 2021: -0.8
  - 2022: -0.6
  - 2023: -0.5
  - 2024: -0.5
  - cumulative: -0.5 and -3.6
- Primary balance (in percent of GDP):
  - 2017: 0.9
  - 2018: -1.2
  - 2019: -0.3
  - 2020: 0.5
  - 2021: -0.1
  - 2022: -0.1
  - 2023: -0.1
  - 2024: -0.1
  - cumulative: -0.1
- Primary (noninterest) revenue and grants (in percent of GDP):
  - 2017: 32.8
  - 2018: 32.9
  - 2019: 34.8
  - 2020: 36.0
  - 2021: 35.3
  - 2022: 35.0
  - 2023: 35.1
  - 2024: 35.1
  - cumulative: 34.3 and 210.8
- Primary (noninterest) expenditure (in percent of GDP):
  - 2017: 33.8
  - 2018: 31.8
  - 2019: 34.4
  - 2020: 36.5
  - 2021: 35.2
  - 2022: 34.8
  - 2023: 35.0
  - 2024: 35.0
  - cumulative: 34.1 and 210.7
- Automatic debt dynamics (contribution, in percent of GDP):
  - 2017: -0.1
  - 2018: -1.1
  - 2019: -0.8
  - 2020: -0.6
  - 2021: -0.5
  - 2022: -0.5
  - 2023: -0.4
  - 2024: -0.4
  - cumulative: -0.3 and -2.7
- Interest rate/growth differential (in percent of GDP):
  - mirrors automatic debt dynamics series: -0.1, -1.1, -0.8, -0.6, -0.5, -0.5, -0.4, -0.4, -0.3 cumulative -2.7
- Of which: real interest rate contribution series: 0.3, -0.1, -0.1, 0.0, 0.0, 0.0, 0.0, 0.1, 0.1 cumulative 0.3
- Of which: real GDP growth contribution series: -0.3, -1.0, -0.7, -0.6, -0.5, -0.5, -0.5, -0.4, -0.4 cumulative -3.0
- Other identified debt-creating flows series: 1.1, -2.6, -1.9, -0.6, -0.1, -0.1, 0.0, 0.0, 0.0 cumulative -0.8
- Residual, including asset changes (in percent of GDP):
  - 2017: -0.9
  - 2018: 0.8
  - 2019: 0.3
  - 2020: -0.4
  - 2021: -0.4
  - 2022: -0.4
  - 2023: -0.4
  - 2024: -0.4
  - cumulative: -2.4

### Alternative scenarios and stress tests — summary of assumptions and outcomes
- Alternative scenario variants documented: Baseline, Historical, Constant Primary Balance.
- Baseline underlying assumptions (selected):
  - Real GDP growth (2019–2024): 3.3, 3.0, 2.8, 2.8, 2.8, 2.8
  - Inflation (2019–2024): 2.9, 2.8, 2.8, 2.8, 2.8, 2.8
  - Primary Balance (2019–2024): -0.5, 0.1, 0.1, 0.1, 0.1, 0.1
  - Effective interest rate (2019–2024): 3.0, 3.0, 3.0, 3.1, 3.3, 3.5
- Historical scenario assumptions (selected):
  - Real GDP growth (2019–2024): 3.3, 1.6, 1.6, 1.6, 1.6, 1.6
  - Primary Balance (2019–2024): -0.5, -1.0, -1.0, -1.0, -1.0, -1.0
  - Effective interest rate (2019–2024): 3.0, 3.0, 3.1, 3.4, 3.9, 4.4
- Constant Primary Balance scenario sets primary balance at -0.5 for projection years and shows resulting effective interest rate path: 3.0, 3.0, 3.0, 3.2, 3.4, 3.7.
- Stress-test scenarios described:
  - Real GDP growth shock: real GDP growth reduced by 1 standard deviation for 2020-21 with revenue/expenditure and interest effects specified in assumptions.
  - Primary balance shock: primary balance for 2020-21 below baseline by 50 percent of the 10-year historical standard deviation; additional borrowing raises interest rates by 25bp per 1 percent of GDP worse primary balance.
  - Real interest rate shock: nominal interest rate increases by the difference between maximum historical real interest rate and average projected real interest rate.
  - One-time real depreciation of 30 percent occurs in 2018 in a specific scenario.
- Stress-test results summary:
  - Alternative scenarios and stress tests indicate public gross financing needs and gross nominal public debt remain within modeled stress bands, with public debt likely to remain below 25 percent of GDP under various shocks.
  - Predictive densities and percentile bands for gross nominal public debt are presented for 2017–2024 showing concentrated distributions around baseline projections.

### Key numeric highlights
- Ceiling for total government debt at end-2019: BGN 22.2 billion.
- Projected public debt-to-GDP: 20.5 percent in 2018 falling to 14.5 percent in 2024.
- Nominal gross public debt (2019 projection): 20.5 percent of GDP.
- Public gross financing needs (2019 projection): 1.3 percent of GDP.
- EMBIG spread: 149 basis points.
- 5Y CDS: 79 basis points.
- Real GDP growth projections (2019–2024): series includes 3.2, 3.3, 3.0, 2.8, 2.8, 2.8.
- Gross external financing need (most recent projection): 19.2 (billion US dollars) in final projection entry.

*Source: IMF staff. (Data and projections drawn from the provided content unit.)*

### Appendix I. Main Recommendations of the 2017 Article IV

### Appendix I. Main Recommendations of the 2017 Article IV Consultation and Authorities’ Actions

### Fiscal Policy
- IMF 2017 recommendation: Save the revenue overperformance in 2017 to strengthen fiscal buffers. Design targeted policies to reduce the VAT gap.
  - Policy action: The fiscal balance (0.8 percent of GDP) substantially exceeded the original budget target. The authorities received a VAT gap TA from the IMF which found a sizable VAT compliance gap.
- IMF 2017 recommendation: Improve public spending efficiency and effectiveness including for EU funds. Conduct a PIMA.
  - Policy action: The authorities received a PIMA TA from the IMF. It identified weakness in public investment management institutions and made policy recommendations.
- IMF 2017 recommendation: Need further pension reforms to address long-term fiscal pressures.
  - Policy action: No near-term pension reform is planned, following the reform in 2015.

### Structural Reforms — Public Goods
- IMF 2017 recommendations:
  - Improve the quality of public goods, including education and training and public health.
  - Pay increases should reflect the findings of a functional review of public sector employment and wages.
  - Active labor market policies need to be more targeted to address skill mismatches and regional disparities.
- Policy actions:
  - Functional review of public sector employment and wages is to be further considered.
  - The government will soon adopt an E-procurement system, and recently signed bilateral agreements with neighboring countries to import workers.
  - Other ongoing reforms include training and job search for NEET and education reforms (e.g. updating curricula and increasing teachers’ salaries).

### Structural Reforms — SOEs
- IMF 2017 recommendations:
  - Enhance the oversight and efficiency of SOEs to reduce contingent liabilities and raise growth potential.
  - Establish a fiscal risk management unit.
- Policy actions:
  - The MTBF started to include SOE contingent liabilities.
  - The government plans to align SOE legislation with OECD guidelines to improve SOE governance and efficiency.
  - No plan to establish a fiscal risk management unit at this stage.

### Structural Reforms — Governance
- IMF 2017 recommendations:
  - Establish a track record in demonstrating judicial independence and effectiveness, and to step up the fight against high-level corruption.
- Policy actions:
  - An anti-corruption commission has been established.
  - The Supreme Judicial Council was split into a College of Judges and a College of Prosecutors to improve independence.

### Financial Sector Policies
- IMF 2017 recommendations:
  - Put in place necessary operating procedures for the new BNB governance model.
  - Introduce a comprehensive strategy for NPL reduction.
  - Complete a multi-year action plan to continue strengthening banking supervision.
  - Address capital shortfalls at banks identified by the AQR and stress test.
  - Complete the regulations and enforce remedies to address concentration and related party risks on the basis of 2017 inspections.
- Policy actions:
  - The new BNB governance model is now fully operational.
  - The BNB plans to adopt the NPL guidelines by the EBA.
  - The BNB has continued strengthening banking supervision, while prioritizing other tasks (most recently the application for the banking union and ERM II) over a multi-year action plan.
  - Two of the banks identified by the AQR and stress test still require larger capital buffers.
    - The smaller bank has raised capital via issuing new shares and the systemic bank raised capital using retained earnings.
  - The BNB has adopted a regulation on related parties.

### Fund Relations and Membership Data (selected items)
- Membership Status:
  - Joined on September 25, 1990. Article VIII status assumed on September 24, 1998.
- General Resources Account (SDR Million; Percent Quota):
  - Quota 896.30 100.00
  - Fund holdings of currency 798.18 89.05
  - Reserve position in Fund 98.13 10.95
- SDR Department (SDR Million; Percent Allocation):
  - Net cumulative allocation 610.88 100.00
  - Holdings 612.52 100.27
- Latest Financial Arrangements (SDR million):
  - Stand By 8/6/2004 – 3/31/07 Amount Approved 100.00 Amount Drawn 0.00
  - Stand By 2/27/2002 – 3/15/04 Amount Approved 240.00 Amount Drawn 240.00
  - EFF 9/25/1998 – 9/24/01 Amount Approved 627.62 Amount Drawn 627.62
- Projected Payments to the Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 2019 0.01; 2020 0.01; 2021 0.01; 2022 0.01; 2023 0.01
  - Total: 2019 0.01; 2020 0.01; 2021 0.01; 2022 0.01; 2023 0.01
- Exchange Rate Arrangement:
  - Since July 1, 1997, the Bulgarian National Bank has operated a currency board arrangement.
  - From July 1, 1997 to December 31, 1998, the lev was fixed to the Deutsche Mark at BGN 1000 per Deutsche Mark.
  - Since January 1, 1999 the lev has been fixed to the euro at BGN 1.95583 per euro.
- Article IV Consultations:
  - Bulgaria is on the 12-month consultation cycle.
  - The 2017 Article IV Board discussion took place on February 14, 2018.
  - The Staff Report was published on February 21, 2018 (Country Report No. 18/46).
- Financial Sector Assessment Program (FSAP):
  - Bulgaria received a joint IMF-World Bank mission on the FSAP in October 2016 and January 2017.
  - The Financial Sector Assessment Report (FSSA) was discussed at the Board on May 22, 2017 and was published on May 23, 2017 (Country Report No. 17/132).
- Technical Assistance:
  - Bulgaria received a technical assistance on public investment management assessment from the Fiscal Affairs Department (FAD) in FY2018.
- Resident Representative:
  - Mr. Hajdenberg is the Regional Resident Representative, based in Bucharest. He took up the position in April 2016.

### Statistical Issues — Data Adequacy and Quality (selected findings)
- General: Data provision is adequate for surveillance purposes.
- National Accounts:
  - NSI compiles national accounts based on the 2010 European System of Accounts (ESA 2010).
  - The NSI released revised national accounts estimates in September 2016, for 2000 to 2014, reflecting implementation of ESA 2010.
  - Key improvements include market-equivalent rental for owner-occupied dwellings; improved coverage of consumption of fixed capital to include purchases of software and software produced on own-account by the general government; and improved household final consumption expenditure sources.
  - Remaining weakness: method used to derive taxes on products (VAT) in constant prices is not consistent with international best practice. Mission set a target date of September 2019 to resolve this issue.
- Labor Market Statistics:
  - Employment and hours worked compiled from Labor Force Survey and Enterprises’ survey (QLCS) and Annual enterprises survey.
  - QLCS sample includes 13100 private sector enterprises out of approximately 203000.
  - Main shortcomings: (i) under-reporting of private sector wages; and (ii) reporting of average gross earnings only and not wages by occupation.
- Price Statistics:
  - CPI series began in 1995; PPI in 2000; HICP in 2005 (for earlier years it is set equal to the CPI); housing price index in 2015.
  - CPI geographic coverage restricted to 27 urban areas that account for an estimated 65 percent of sales.
- Government Finance Statistics:
  - Progress toward accrual accounting and alignment with ESA/EDP data; quarterly GFS on accrual basis for general government reported for publication in the IFS through Eurostat.
  - Since 2015 annual GFS presented in the IMF GFSM 2014 format; MoF continues to submit cash-basis Statement II data.
- Monetary and Financial Statistics:
  - BNB reports monetary data for publication in the IFS based on the ECB framework beginning with data starting in February 2004. Data comply with the MFSM methodology with minor deviations documented in the IFS metadata.
- External Sector Statistics:
  - Bulgaria compiles quarterly balance of payments and IIP according to BPM6. BNB publishes monthly balance of payments data.
  - Participates in CDIS, CPIS, and COFER in line with SDDS Plus requirements.
- Data Standards and Quality:
  - Bulgaria started to adhere to the SDDS Plus in 2016.

*IMF staff report supplementary material and Appendix I: Main Recommendations of the 2017 Article IV Consultation and Authorities’ Actions.*

### 3.1 percent, 0.1 percentage point lower than previously estimated in the staff report.

### 1bgrea2019001 - 3.1 percent, 0.1 percentage point lower than previously estimated in the staff report.

### Updated estimates and projections (2018–24)
- Real GDP growth (percent)
  - Staff Report: 3.2 (2018), 3.3 (2019), 3.0 (2020), 2.8 (2021), 2.8 (2022), 2.8 (2023), 2.8 (2024)
  - Revised Staff's Projections: 3.1 (2018), 3.3 (2019), 3.0 (2020), 2.8 (2021), 2.8 (2022), 2.8 (2023), 2.8 (2024)
- Real domestic demand (percent)
  - Staff Report: 6.3 (2018), 4.9 (2019), 4.1 (2020), 3.6 (2021), 3.4 (2022), 3.3 (2023), 3.1 (2024)
  - Revised Staff's Projections: 6.1 (2018), 5.0 (2019), 4.1 (2020), 3.6 (2021), 3.5 (2022), 3.3 (2023), 3.1 (2024)
- Net exports (percentage point contribution to GDP growth)
  - Staff Report: -3.2 (2018), -1.8 (2019), -1.3 (2020), -1.1 (2021), -0.9 (2022), -0.8 (2023), -0.5 (2024)
  - Revised Staff's Projections: -3.0 (2018), -1.8 (2019), -1.3 (2020), -1.0 (2021), -0.9 (2022), -0.8 (2023), -0.5 (2024)
- GDP deflator (percent)
  - Staff Report: 3.1 (2018), 2.9 (2019), 2.8 (2020), 2.8 (2021), 2.8 (2022), 2.8 (2023), 2.8 (2024)
  - Revised Staff's Projections: 3.6 (2018), 2.9 (2019), 2.8 (2020), 2.8 (2021), 2.8 (2022), 2.8 (2023), 2.8 (2024)
- Nominal GDP (millions of leva)
  - Staff Report: 107,541 (2018), 114,329 (2019), 121,012 (2020), 127,883 (2021), 135,145 (2022), 142,819 (2023), 150,929 (2024)
  - Revised Staff's Projections: 107,925 (2018), 114,738 (2019), 121,444 (2020), 128,340 (2021), 135,628 (2022), 143,329 (2023), 151,468 (2024)
- General government net lending/borrowing (percent of GDP)
  - Staff Report: 0.1 (2018), -0.6 (2019), 0.0 (2020), 0.0 (2021), 0.0 (2022), 0.0 (2023), 0.0 (2024)
  - Revised Staff's Projections: 0.1 (2018), -0.6 (2019), 0.0 (2020), 0.0 (2021), 0.0 (2022), 0.0 (2023), 0.0 (2024)
- General government gross debt (percent of GDP)
  - Staff Report: 20.5 (2018), 19.3 (2019), 18.2 (2020), 17.1 (2021), 16.2 (2022), 15.3 (2023), 14.5 (2024)
  - Revised Staff's Projections: 20.4 (2018), 19.3 (2019), 18.1 (2020), 17.1 (2021), 16.1 (2022), 15.3 (2023), 14.5 (2024)
- Current account balance (percent of GDP)
  - Staff Report: 4.6 (2018), 2.2 (2019), 1.6 (2020), 1.2 (2021), 0.9 (2022), 0.6 (2023), 0.1 (2024)
  - Revised Staff's Projections: 4.6 (2018), 2.2 (2019), 1.6 (2020), 1.2 (2021), 0.9 (2022), 0.6 (2023), 0.1 (2024)
- Gross external debt (percent of GDP)
  - Staff Report: 61.5 (2018), 58.1 (2019), 54.8 (2020), 52.1 (2021), 49.4 (2022), 46.7 (2023), 43.8 (2024)
  - Revised Staff's Projections: 59.3 (2018), 55.9 (2019), 52.7 (2020), 49.9 (2021), 47.2 (2022), 44.4 (2023), 41.5 (2024)

### Key immediate finding
- 2018 growth was 3.1 percent, 0.1 percentage point lower than previously estimated in the staff report.
- The data release confirmed that 2018 growth was driven by domestic demand, and the negative contribution from net exports was more moderate than previously estimated.
- This preliminary data has little impact on the economic outlook for 2019 and policy advice.

### Recent developments and outlook
- GDP growth accelerated to 3 percent y-o-y in Q4/2018, up from 2.7 percent y-o-y in the previous quarter.
- Growth acceleration in Q4/2018 was mainly supported by investment and export; final consumption eased to 3.4 percent y-o-y.
- HICP inflation: 2.4 percent in February (early 2019).
- Authorities request further methodological work on the EBA-lite model to address large residuals and overestimation of natural disasters and conflicts impact, and to improve model specifications.

### Fiscal stability and sustainability
- Authorities continue a conservative fiscal strategy, compliant with the European Stability and Growth Pact.
- 2018: fiscal consolidation progressed at a slightly faster pace than initially anticipated due to higher economic growth, strengthened revenue mobilization, and under-execution of capital spending.
- Government used most revenue overperformance to strengthen fiscal buffers and contain cyclicality of private demand.
- 2019 budget: designed to guarantee higher capital expenditures consistent with projected increase in EU funds absorption and to finance education, health and defense reforms.
- Pension system: social security contribution rate increased by an additional percentage point at the beginning of 2018; no near-term further changes planned to the pension reform package.
- Ongoing IMF Technical Assistance: framework to improve public investment management; support to Bulgarian National Revenue Agency to improve tax gap assessment, compliance and collection.
- Project with OECD to align legislation for SOE management with best international practices.
- Public education and health care reforms: implemented to preserve fiscal sustainability and narrow negative public wage premiums.

### Structural reforms and growth potential
- 2018 European Commission Report on CVM: closed monitoring on three out of six areas—judicial independence, legislative framework and organized crime.
- Commission expressed confidence that remaining recommendations can be met before November 2019.
- 2018 amendments to the Public Procurement Act streamlined procurement while preserving transparency; electronic public procurement system expected for general use by the beginning of the second half of 2019 at the latest.
- Progress on addressing air pollution via expansion of environment-friendly transport.
- Authorities and staff agree on need to strengthen growth potential to address demographic challenges, emigration, and structural/income gaps vis-à-vis the EU average.
- Acknowledgement that perceptions of governance reform take time to adjust; reforms continue to build public confidence.

### Financial stability
- Banking sector resilient; profitability, liquidity and capitalization improved since last Article IV Consultation.
- BNB adopted a comprehensive Supervisory Review and Evaluation Process Manual (SREPM) including explicit Pillar 2 capital requirement.
- Market-driven ownership changes and consolidation continued; four acquisition deals completed since 2017.
- Credit growth strengthened due to low interest rates, high credit demand and recovery in economic activity and employment.
- Potential spillover risks remain well contained thanks to stable domestic deposit funding and low reliance on wholesale markets.
- BNB preparing for "close cooperation" with the ECB: synchronising supervisory practices, IT systems and statistics; supporting ECB asset quality review and stress test of six Bulgarian banks (results expected in July).
- Preparations for participation in the Single Resolution Mechanism (SRM): expected parliamentary legal amendments by end of the quarter; BNB working on framework for contributions to Single Resolution Fund (SRF) and transfers from Bank Resolution Fund (established 2015); clarify distribution of responsibilities between Single Resolution Board and BNB.

*Source: 1bgrea2019001 - 3.1 percent, 0.1 percentage point lower than previously estimated in the staff report.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1bgrea2019001.pdf_