## 1bgrea2021001

## Source details

**Canonical URL:** [1bgrea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1bgrea2021001.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2021/english/1bgrea2021001.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2021/english/1bgrea2021001.pdf.json)

---

### Recent economic developments and outlook
- Real GDP: growth of 3.7 percent in 2019; contraction of -4.6 percent in 2020; projected partial recovery of 3.6 percent in 2021.
- Quarter dynamics: Q2:2020 GDP: -10.1 percent q/q and -8.6 percent y/y; Q3:2020 rebound of 4.3 percent q/q.
- Demand components:
  - Real domestic demand: 4.6 percent (2019); -3.3 percent (2020); 3.3 percent (2021).
  - Private consumption: 5.5 percent (2019); -2.0 percent (2020); 3.5 percent (2021).
  - Gross capital formation: 4.1 percent (2019); -14.1 percent (2020); 0.3 percent (2021).
  - Exports of goods and services: 3.9 percent (2019); -12.4 percent (2020); 9.7 percent (2021).
  - Imports of goods and services: 5.2 percent (2019); -10.4 percent (2020); 9.1 percent (2021).
- Output gap (percent of potential GDP): 0.2 (2019); -3.1 (2020); -3.1 (2021).
- Potential GDP growth: 3.5 percent (2019); -1.5 percent (2020); 3.5 percent (2021).
- Inflation:
  - GDP deflator: 5.3 percent (2019); 2.1 percent (2020); 2.0 percent (2021).
  - Consumer price index (HICP, average): 2.5 percent (2019); 1.3 percent (2020); 1.2 percent (2021).
  - CPI (HICP, end of period): 3.1 percent (2019); 0.5 percent (2020); 1.9 percent (2021).
- Headline CPI decelerated to 0.6 percent (y/y) in October 2020 from 3.1 percent in February 2020.
- Staff outlook highlights:
  - Real GDP projected to recover by 3.6 percent in 2021 under gradual fading of COVID-19 adverse effects.
  - Inflation projected to remain subdued in 2021 after decelerating to 1.3 percent in 2020.
  - Medium-term projection: real GDP growth decelerates to potential of 2¾ percent by the end of the projection horizon.
  - Level of GDP in 2025 to remain below the pre-pandemic trend by about 4 percent of the projected 2025 GDP.
  - Current account surplus projected to gradually decline to 0.3 percent of GDP by 2025.

### Labor market and social indicators
- Unemployment rate (percent of labor force): 4.2 percent (2019); rose to 5.9 percent in Q2:2020; 5.2 percent in 2020 (annual); 4.8 percent (2021 projection).
- Average monthly wage growth: slowed to 6.1 percent (y/y) in Q2:2020; bounced to 9.9 percent in Q3:2020 (influenced by large increases in select public sector wages).
- Absolute poverty: declined dramatically over the longer term; income inequality has risen during the most recent decade.
- Staff recommendations:
  - Strengthen active labor market policies (ALMPs) and education to raise human capital and growth.
  - Improve social protection and access to education to alleviate inequality and poverty.
  - Conduct comprehensive reviews of public sector wage and pension increases.

### External sector developments and external sector assessment
- Current account balance (percent of GDP): 3.0 percent (2019); 1.2 percent (2020); 2.1 percent (2021).
- Current account surplus in first three quarters of 2020: 1.1 percent of projected GDP (down from 3.4 percent in same period last year).
- Merchandise trade balance (percent of GDP): -4.7 percent (2019); -3.6 percent (2020); -3.9 percent (2021).
- Drivers: contraction in net services surplus (tourism collapse) more than offsetting improvement in trade balance; net income and secondary income balances weakened.
- Net international investment position: -31.2 percent (2019); -29.2 percent (2020); -23.3 percent (2021).
- IMF preliminary assessment: Bulgaria’s external position in 2020 is preliminarily assessed as stronger than the level warranted by fundamentals and desirable policy settings (Annex III).
- Annex III key points:
  - EBA-lite CA gap: projected 2020 cyclically-adjusted CA was 3.7 percent of GDP higher than level consistent with fundamentals; policy gaps account for 6.5 percent of GDP.
  - REER assessments: EBA-lite REER model estimates 2020 REER moderately overvalued by 4.4 percent; staff-assessed REER gap range is -11.0 to 0.
  - FX reserves: end-October 2020 foreign reserves €29.5bn (49.5 percent of projected GDP); import coverage 11.5 months; reserve coverage of short-term external debt 3.6 times.

### Fiscal developments, fiscal response, and medium-term stance
- Key fiscal aggregates:
  - General government net lending/borrowing (cash basis): -1.0 percent of GDP (2019); -3.5 percent of GDP (2020); -4.0 percent of GDP (2021).
  - General government primary balance: -0.4 percent of GDP (2019); -2.9 percent of GDP (2020); -3.4 percent of GDP (2021).
  - Structural overall balance: 0.8 percent (2019); -2.3 percent (2020); -2.8 percent (2021).
  - Structural primary balance: 1.3 percent (2019); -1.7 percent (2020); -2.2 percent (2021).
  - General government gross debt: 18.4 percent of GDP (2019); 24.0 percent of GDP (2020); 25.8 percent of GDP (2021).
- 2020 fiscal deterioration: deficit widened to 3.5 percent of GDP due to a fiscal support package of 2.4 percent of GDP and economic contraction; 2019 deficit of 1.0 percent of GDP included a one-off advance payment for fighter jets amounting to 1.8 percent of GDP.
- Financing: government issued €2.5 billion Eurobonds in September 2020 (10- and 30-year tranches; interest rates 0.375 percent and 1.375 percent).
- Budget framework:
  - Third-revised 2020 budget targeted deficit of 4.4 percent of GDP.
  - 2021 budget and MTBF target deficit of 3.9 percent of GDP in 2021, followed by appreciable decline thereafter.
  - Discretionary fiscal support budgeted at 2½ percent of GDP in both 2020 and 2021.
- Fiscal policy guidance:
  - Continue flexible near-term support; scale up promptly if pandemic worsens, taking advantage of substantial fiscal space.
  - Once recovery entrenched, move fiscal stance closer to medium-term objective.
  - Prioritize revenue mobilization and public spending efficiency; strengthen public investment management and project appraisal.
  - Public sector wage increases and pensions warrant comprehensive review and functional public employment management reform.

### COVID-19 fiscal measures and implementation issues
- Selected quantified measures:
  - Discretionary fiscal support: 2.5 percent of GDP in both 2020 and 2021.
  - Job retention scheme fiscal cost: 0.9 percent of 2020 GDP.
  - Hiring subsidy fiscal cost: 0.1 percent of 2020 GDP.
  - Interest-free loan program amount: 0.2 percent of 2020 GDP.
  - VAT temporary cut revenue forgone: 0.3 percent of GDP spread over 2020 and 2021.
  - Co-financing of EU programs (2020): 0.1 percent of GDP.
- Delivery and implementation observations:
  - Initial implementation slow due to administrative bottlenecks and unfamiliar eligibility criteria from new temporary mechanisms.
  - Authorities relaxed eligibility criteria; delivery picked up.
  - Staff analysis: support to corporate sector announced till October 2020 can fill about 1/3 of the increase in liquidity shortfalls and about 1/8 of the increase in equity shortfalls in 2020.
- Implementation recommendations:
  - Further relax or simplify eligibility criteria and streamline administrative review.
  - Improve access for small firms and non-standard wage earners (including informal sector).
  - Adjust existing social protection system to deliver more social protection spending.
  - Ensure public sector wage increases follow a comprehensive review to improve fiscal management.

### Banking sector conditions, financial stability, and policy measures
- Banking sector snapshot:
  - Domestic private credit growth: 9.7 percent (2019); slowed to 5.9 percent (2020); projected 8.9 percent (2021).
  - Broad money growth: 9.9 percent (2019); 10.6 percent (2020); 7.7 percent (2021).
  - NPL ratio: 6.5 percent at end-Q2:2020; decline in NPL ratio in recent years paused amid contraction.
  - Financial Soundness Indicators (2020Q2): Capital to risk-weighted assets = 23.1; Nonperforming loans to total gross loans = 6.5; Return on assets = 0.9; Liquid assets to total assets = 27.6.
  - Banks remain generally well-capitalized and liquid; profitability declined in 2020 reflecting rising impairment costs.
- Policy measures and supervisory actions:
  - BNB measures to strengthen banks’ balance sheets and liquidity, including reduction of commercial banks’ exposures to lower-quality foreign counterparts and increasing domestically-held liquidity.
  - Loan moratorium: deferral limited to 6 months; take-up rate 15 percent of stock of loans; application window closed end-September 2020; moratorium approved in September expires end-March 2021.
  - Cancellation of planned increase in countercyclical capital buffer to 1.5 percent (remains at 0.5 percent).
  - Capitalization of 2019 profit: BGN 1.6 bn.
  - Possible supervisory options: require banks to retain profits for 2020; reduce counter-cyclical buffers; allow temporary operation below required capital buffers with gradual rebuild as recovery entrenches.
- Risks and outlook:
  - NPLs likely to increase as loan moratoria expire and activity remains sluggish.
  - Supervisors encouraged to ensure timely recognition of problem loans and proactive NPL resolution, including use of the new corporate insolvency framework.
  - Entry into ERM II and banking union (July/October 2020) increased ECB direct supervision of five significant institutions and bolstered market confidence.

### NGEU funds, Recovery and Sustainability Plan (RSP), and investment priorities
- NGEU allocation and timing:
  - Bulgaria expected to receive about 13 percent of the projected 2020 GDP in grants under NGEU during 2021–26.
  - Bulk available under the Recovery and Resilience Facility (RRF), aimed at green and digital transitions and resilience.
- Recovery and Sustainability Plan (RSP) pillars and allocations (BGR billion):
  - Green Bulgaria: 4.537 — reduce energy intensity, promote green transition, increase agriculture competitiveness.
  - Innovative Bulgaria: 2.420 — education, R&D, industrial support.
  - Connected Bulgaria: 2.722 — digital infrastructure, transport carbon footprint reduction, regional competitiveness.
  - Fair Bulgaria: 2.621 — inclusive growth, social services, health system strengthening.
- Implementation priorities:
  - Develop a focused investment plan early and follow through with strong and transparent implementation.
  - Enhance institutional capacity to absorb EU transfers; improve public investment efficiency: project appraisal, multi-year budgeting, procurement.
  - NGEU funds could support green transition away from reliance on coal-fired thermal power plants.
  - Consider careful review of carbon pricing—possibly a carbon tax—to achieve 2030 and 2050 climate targets.
- Fiscal framework notes:
  - MTBF envisages fiscal deficit of 1.8 percent of GDP in 2023, exceeding medium-term objective of structural deficit of 1 percent of GDP.
  - Authorities intend to utilize NGEU funds fully by 2026.

### Debt sustainability and stress tests (Annex II)
- Public DSA highlights:
  - End-2018 nominal gross public debt: 20.1 percent of GDP; end-2019: 18.4 percent of GDP.
  - COVID-19 shock: public debt-to-GDP ratio projected to increase by 5.6 percentage points in 2020.
  - Staff projects fiscal deficit of 3.5 percent of GDP in 2020; fiscal deficit of 4.0 percent of GDP in 2021; around 2 percent of GDP in 2022–2023.
  - Public debt-to-GDP projected to rise to 27.1 percent by 2025.
  - Public gross financing needs (selected exact figures): 2018: 4.2; 2019: 1.3; 2020: 2.0; 2021: 4.7; 2022: 4.8; 2023: 4.3; 2024: 3.9; 2025: 3.6; 2026: 1.9 (percent of GDP).
  - Alternative scenarios indicate public debt likely remain below 35 percent of GDP under various shocks.
- External DSA highlights:
  - External debt-to-GDP: 2009: 106.2; 2019: 57.0; 2020: 69.0; 2021: 67.4; 2022: 66.4; 2023: 65.4; 2024: 64.0; 2025: 63.7.
  - External debt-to-exports ratio (table): 2019: 90.0; 2020: 88.8 (narrative reports alternative series).
  - Eurobond issuance: EUR 2.5 billion on September 15, 2020, split into two EUR 1.25 billion tranches (10- and 30-year); interest rates 0.375 percent (10-year) and 1.375 percent (30-year).
  - Sensitivity: a 30 percent real depreciation in 2020 would raise external debt to 106½ percent of GDP in 2021 (noted as unlikely given fixed exchange rate).
  - Gross external financing needs (billions of US dollars): 2019: 13.0; 2020: 15.8; 2021: 15.5; 2022: 18.7; 2023: 20.4; 2024: 21.8; 2025: 21.0.

### ERM II accession, supervisory changes, and institutional commitments (Annex I)
- ERM II and banking union:
  - Bulgaria joined ERM II in July 2020 and entered close cooperation on banking supervision.
  - With accession to the SSM on October 1, 2020, the ECB exercises direct supervision of significant institutions; oversight of less significant institutions remains with BNB under common procedures.
  - BNB represented on ECB Supervisory Board with rights and obligations including voting rights.
  - Participation in SRM with representative at the Single Resolution Board.
- Policy and reform commitments accompanying ERM II:
  - Legislative basis for borrower-based macroprudential measures; enhance non-banking supervision; identify gaps in insolvency framework and prepare roadmap; strengthen AML transposition; improve SOE governance per OECD Guidelines.
  - Authorities committed to reforms in judiciary and fight against corruption.
- Benefits and risks of euro area membership:
  - Benefits: higher investor confidence, greater trade integration, reduced funding costs.
  - Risks: loss of exit option, greater exposure to two-way spillovers, premium on achieving strong real convergence.

### Risks to the outlook and policy responses
- Risks summary:
  - Risks broadly balanced.
  - Downside risk: deeper/prolonged COVID-19 resurgence or delayed vaccine/therapies could delay 2021 recovery.
  - Upside risks: more rapid global control of COVID-19; faster absorption and use of EU funds (NGEU) combined with structural reforms.
- Risk matrix (selected risks and policy responses):
  - Faster-than-expected wage growth (Likelihood: Medium; Impact: Low/Medium) — policy response: boost labor productivity via education, healthcare, labor market reforms.
  - Slow progress in structural reforms (Likelihood: High/Medium; Impact: High) — policy response: announce and implement structural reforms with clear timeline.
  - COVID-19 proves harder to eradicate (Likelihood: High; Impact: High) — policy response: use fiscal space, allow automatic stabilizers, augment health spending and support as needed.
  - Intensified geopolitical tensions and accelerating de-globalization (Likelihood: High; Impact: Medium/Low-Medium) — policy response: advance structural reforms to bolster competitiveness and use fiscal space for reforms if needed.

### Policy assessment, recommendations and medium-term priorities
- Executive Directors’ view: economy severely affected but expected to recover gradually; policies should remain flexible and evolve with circumstances; structural reforms essential for strong, inclusive growth and income convergence toward advanced EU partners.
- Crisis response and recovery recommendations:
  - Commend fiscal response to protect lives and support activity; welcome 2021 budget maintaining support and strengthening social benefits.
  - Improve design and targeting of support measures; consider scaling fiscal support promptly if pandemic worsens.
  - Shift focus in recovery to reallocation of resources, support viable jobs and firms, and incentivize resource reallocation.
  - Use NGEU funds to invest in recovery and transformation to a greener, more digitalized economy; enhance institutional capacity to absorb EU transfers.
- Medium-term fiscal stance and structural priorities:
  - Move fiscal stance toward medium-term objective once recovery entrenched.
  - Strengthen revenue mobilization and public spending efficiency.
  - Strengthen ALMPs, education, social protection, governance, and anti-corruption efforts.
  - Financial stability: stand ready to reinforce macroprudential tools and encourage timely recognition and resolution of problem loans and effective use of new insolvency framework.

*IMF staff report: Bulgaria — Staff Report for the 2020 Article IV Consultation (Executive Summary and selected sections).*

### 4.6 percent in 2020 as a result of the lockdown at the outset of the crisis and a second wave

### 4.6 percent in 2020 as a result of the lockdown at the outset of the crisis and a second wave of infections together with the reintroduction of new restrictive measures

### Recent economic developments and outlook
- Real GDP: growth of 3.7 percent in 2019; contraction of -4.6 percent in 2020; projected partial recovery of 3.6 percent in 2021.
- Q2:2020 GDP: -10.1 percent q/q and -8.6 percent y/y; Q3:2020 rebound of 4.3 percent q/q.
- Real domestic demand: 4.6 percent (2019); -3.3 percent (2020); 3.3 percent (2021).
- Private consumption: 5.5 percent (2019); -2.0 percent (2020); 3.5 percent (2021).
- Gross capital formation: 4.1 percent (2019); -14.1 percent (2020); 0.3 percent (2021).
- Exports of goods and services: 3.9 percent (2019); -12.4 percent (2020); 9.7 percent (2021).
- Imports of goods and services: 5.2 percent (2019); -10.4 percent (2020); 9.1 percent (2021).
- Output gap (percent of potential GDP): 0.2 (2019); -3.1 (2020); -3.1 (2021).
- Potential GDP growth: 3.5 percent (2019); -1.5 percent (2020); 3.5 percent (2021).
- Inflation:
  - GDP deflator: 5.3 percent (2019); 2.1 percent (2020); 2.0 percent (2021).
  - Consumer price index (HICP, average): 2.5 percent (2019); 1.3 percent (2020); 1.2 percent (2021).
  - CPI (HICP, end of period): 3.1 percent (2019); 0.5 percent (2020); 1.9 percent (2021).
- Headline CPI decelerated to 0.6 percent (y/y) in October 2020 from 3.1 percent in February 2020.

### Labor market and social indicators
- Unemployment rate (percent of labor force): 4.2 percent (2019); rose to 5.9 percent in Q2:2020; 5.2 percent in 2020 (annual); 4.8 percent (2021 projection).
- Average monthly wage growth: slowed to 6.1 percent (y/y) in Q2:2020; bounced to 9.9 percent in Q3:2020, influenced by large increases in select public sector wages.
- Absolute poverty: noted as having declined dramatically over the longer term, while income inequality has risen during the most recent decade.

### External sector developments
- Current account balance (percent of GDP): 3.0 percent (2019); 1.2 percent (2020); 2.1 percent (2021).
- Current account surplus in first three quarters of 2020: 1.1 percent of projected GDP (down from 3.4 percent in same period last year).
- Merchandise trade balance (percent of GDP): -4.7 percent (2019); -3.6 percent (2020); -3.9 percent (2021).
- Drivers: marked contraction in net services surplus (tourism collapse) more than offsetting improvement in trade balance; net income and secondary income balances weakened.
- Net international investment position: -31.2 percent (2019); -29.2 percent (2020); -23.3 percent (2021).
- Preliminary assessment: Bulgaria’s external position in 2020 is preliminarily assessed as stronger than the level warranted by fundamentals and desirable policy settings (Annex III).

### Fiscal developments and public debt
- General government net lending/borrowing (cash basis): -1.0 percent of GDP (2019); -3.5 percent of GDP (2020); -4.0 percent of GDP (2021).
- General government primary balance: -0.4 percent of GDP (2019); -2.9 percent of GDP (2020); -3.4 percent of GDP (2021).
- Structural overall balance: 0.8 percent (2019); -2.3 percent (2020); -2.8 percent (2021).
- Structural primary balance: 1.3 percent (2019); -1.7 percent (2020); -2.2 percent (2021).
- General government gross debt: 18.4 percent of GDP (2019); 24.0 percent of GDP (2020); 25.8 percent of GDP (2021).
- 2020 fiscal deterioration: fiscal deficit widened to 3.5 percent of GDP on account of a fiscal support package of 2.4 percent of GDP and the economic contraction; 2019 recorded a deficit of 1.0 percent of GDP due to a one-off advance payment for fighter jets amounting to 1.8 percent of GDP.
- Financing: government issued €2.5 billion Eurobonds in September 2020.

### Financial sector and credit conditions
- Domestic private credit growth: 9.7 percent (2019); slowed to 5.9 percent (2020); projected 8.9 percent (2021).
- Broad money growth: 9.9 percent (2019); 10.6 percent (2020); 7.7 percent (2021).
- Nonperforming loans (NPLs): the decline in the NPL ratio in recent years has paused amid economic contraction; banks remain generally well-capitalized and liquid.
- Policy measures: financial sector policies helped banks maintain strong balance sheets and keep credit flowing; measures supported allowing banks to absorb deterioration in asset quality and extend credit; supervisors encouraged timely recognition of problem loans and resolution of high NPLs, including through effective implementation of the new insolvency framework.
- Institutional changes: Bulgaria joined ERM II and the banking union in July 2020; ECB now supervises five significant institutions directly; entry has bolstered market confidence and credit ratings (Annex II).

### Policy assessment, recommendations and medium-term priorities
- Executive Directors’ view: economy severely affected but expected to recover gradually; policies should remain flexible and evolve with changing circumstances; structural reforms are important to promote strong, inclusive growth and income convergence toward advanced EU partners.
- Crisis response:
  - Commended fiscal response to protect lives and support economic activity.
  - Welcome for 2021 budget that maintains support and strengthens social benefits.
  - Encourage improvements to design and targeting of support measures.
  - Note that increases in public sector wages and pensions warrant a comprehensive future review.
  - If pandemic worsens, scale up fiscal support promptly, taking advantage of substantial fiscal space.
- Recovery phase:
  - Shift policies toward facilitating reallocation of resources to the post-pandemic economy.
  - Support viable jobs and firms and incentivize resource reallocation.
  - Use Next Generation EU (NGEU) funds to invest in recovery and transformation toward a greener and more digitalized economy.
  - Enhance institutional capacity to absorb EU transfers.
- Medium-term fiscal stance:
  - Move fiscal stance closer to the medium-term objective once recovery is entrenched.
  - Prioritize strengthening revenue mobilization and public spending efficiency.
- Structural reforms and social policy:
  - Strengthen active labor market policies and the education system to raise human capital and growth.
  - Improve the social protection system and access to education to alleviate inequality and poverty.
  - Continue efforts to strengthen governance and fight corruption; improve the business climate.
- Financial stability measures:
  - Stand ready to reinforce macroprudential tools.
  - Encourage supervisors to promote timely recognition and resolution of problem loans and effective use of the new insolvency framework.

*IMF staff report: Bulgaria — Staff Report for the 2020 Article IV Consultation (Executive Summary and selected sections).*

### 8.      Banks have been facing growing headwinds. The sharp economic contraction has led to a

### 8.      Banks have been facing growing headwinds.

### Banking sector conditions and immediate impacts
- Growth of credit to the private sector decelerated to 6.2 percent in October 2020 from 9.7 percent at end-2019, led by slowing credit growth for non-financial corporates.
- The NPL ratio remained unchanged at 6.5 percent at end-Q2:2020, despite a 6-month private debt moratorium introduced in April 2020.
- Profitability has declined reflecting rising impairment costs.
- Banks remain generally well-capitalized and liquid thanks to their strong balance sheets before the crisis.

### Outlook and macroeconomic projections
- Staff estimates real GDP to have contracted by 4.6 percent in 2020.
- Under the assumption that adverse effects of the COVID-19 start fading gradually as therapies improve and the vaccine coverage expands over the course of 2021, real GDP is projected to recover by 3.6 percent in 2021, led by private consumption and supported by an expansionary fiscal policy stance.
- Inflation is projected to remain subdued in 2021 after decelerating to 1.3 percent in 2020.
- Over the medium term, growth is projected to decelerate to its potential; specifically, real GDP growth is projected to decelerate to a potential of 2¾ percent by the end of the projection horizon.
- The level of GDP in 2025 is to remain below the pre-pandemic trend by about 4 percent of the projected 2025 GDP.
- The current account surplus is projected to gradually decline to 0.3 percent of GDP by 2025, due to continuing strength of private-sector consumption and rising medium-term imports driven by EU grants.

### Risks to the outlook
- Risks are broadly balanced.
- Downside risk: If the recent resurgence of COVID-19 were to deepen and prolong social distancing or the progress on vaccine coverage and improvement in therapies be significantly delayed, the projected economic recovery in 2021 could be delayed.
- Upside risks: More rapid progress in controlling COVID-19 globally in the near term; over the medium term, faster or larger-than-expected absorption and use of EU funds (NGEU) for public investment projects combined with supporting structural reforms could boost growth more than expected.

### Authorities’ views
- The authorities broadly concur with the outlook: near-term growth supported by reduced uncertainty, a counter-cyclical fiscal stimulus, and a recovery in employment and disposable income.
- Authorities expect potential growth to be lower than staff projections, partly due to a lower contribution of capital over the medium term.
- Authorities agree with the staff assessment on Bulgaria’s external position.

### Policy discussions — overall stance
- Authorities have provided comprehensive support to mitigate the impact of the crisis.
- Continued policy support and flexibility are warranted in the near term.
- Over time, policies should progressively shift toward facilitating reallocation and addressing structural challenges to support inclusive and transformative growth.

### A. Fiscal policy response to the COVID-19 crisis — key fiscal parameters and stance
- The third-revised budget for 2020 targeted a deficit of 4.4 percent of GDP, largely driven by crisis responses.
- The 2021 budget and Medium-Term Budget Framework target a deficit of 3.9 percent of GDP in 2021, followed by an appreciable decline in deficits in subsequent years.
- Discretionary fiscal support is budgeted to amount to 2½ percent of GDP in both 2020 and 2021.
- It is welcomed that a comparable level of fiscal support is provided in 2020 and 2021 given the sizable economic slack projected in 2021; a gradual withdrawal of fiscal stimulus subsequently, in tandem with economic recovery, is broadly appropriate.

### A. Fiscal policy response — measures and composition
- 2020 measures included: a job retention scheme; income support for individuals including transfers to vulnerable groups; loan guarantees; tax deferrals and grants for firms.
- Wages for public sector employees in the frontline against the pandemic were increased by 30 percent since August.
- The 2021 budget increases health spending further, gives higher weight to supporting individuals, and sets aside 5 percent of the budget as buffers against downside risks.
- 2021 envisages an increase in pension payments and social benefits (such as minimum unemployment benefits), as well as 10-15 percent wage increases for the broad public sector.

### Fiscal measures — quantified items (selected)
- Discretionary fiscal support: 2.5 percent of GDP in both 2020 and 2021.
- Job retention scheme fiscal cost: 0.9 percent of 2020 GDP.
- Hiring subsidy fiscal cost: 0.1 percent of 2020 GDP.
- Interest-free loan program amount: 0.2 percent of 2020 GDP.
- VAT temporary cut revenue forgone: 0.3 percent of GDP spread over 2020 and 2021.
- Co-financing of EU programs (2020 distribution table): 0.1 percent of GDP.
- Total COVID-related fiscal measures distribution (2020, 2021): Total share of GDP 100 100 2.4 2.5 (table formatting preserved from source).

### Implementation issues and recommendations
- Initial implementation of measures was slow due to administrative bottlenecks, unfamiliar eligibility criteria from creating new temporary mechanisms instead of augmenting existing social protection systems.
- Authorities relaxed eligibility criteria and addressed administrative bottlenecks; delivery picked up.
- Recommendations to improve implementation:
  - Further relax or simplify eligibility criteria to facilitate applications.
  - Streamline administrative review.
  - Improve access by small firms and non-standard wage earners (including those in the informal sector).
  - Deliver more social protection spending by adjusting the existing social protection system.
- Staff analysis indicates support to the corporate sector announced till October 2020 can fill about 1/3 of the increase in liquidity shortfalls and about 1/8 of the increase in equity shortfalls in 2020; greater support could be considered to limit likely increases in bankruptcies given expiration of bank-loan moratorium.
- Public sector wage increases should be accompanied by a functional review to improve public employment management; large wage increases should be preceded by a comprehensive review to improve fiscal management and guard against crowding out other priority spending.

### Box 2 — Implementation case studies (job retention scheme and interest-free loans)
- The 60/40 wage subsidy program (introduced in March) used about 18½ percent of the allocated budget by end-June due to unfamiliarity, sectoral exclusion, and stringent eligibility criteria.
- When extended in July with relaxed eligibility and expanded sectoral coverage (including tourism with higher subsidy), average monthly disbursement more than doubled in July–September versus March–June; program benefitted about 237 thousand workers (9 percent of employees in Bulgaria) as of October 2020.
- Interest-free loan program operationalization was slow due to need for agreements between each participating commercial bank and the Bulgarian Development Bank; strict eligibility criteria contributed to high rejection and low disbursement; some criteria relaxed in July 2020, but delivery did not improve much as of November 2020.

### B. Navigating uncertainty and supporting recovery — strategy and triggers
- Fiscal support should be scaled up in the event of a worse-than-expected downturn; health spending and support for individuals and firms should be augmented swiftly, preferably using temporary and well-targeted measures.
- Buffers in the 2021 budget provide the first line of defense, but Bulgaria has fiscal space to enhance support measures further.
- As the pandemic wanes and recovery takes hold, policy focus should shift from preserving activities to facilitating inclusive and transformative growth:  
  - Job retention scheme should become more targeted to support viable jobs and be gradually withdrawn.
  - Strengthen Active Labor Market Policies (ALMPs) to remedy digital skill gaps and skill mismatches.
  - Support to firms should increasingly aim at meeting liquidity and equity needs of viable firms, while discouraging access by firms on a structural path to closure.

### NGEU funds — opportunity and implementation priorities
- Bulgaria is eligible for large transfers from the Next Generation EU (NGEU) funds aimed at supporting recovery and transformation toward a greener, more digitalized, and resilient economy.
- Authorities are developing investment plans emphasizing green transition and digitalization.
- Because NGEU grants need to be used quickly and are large, it is crucial to develop a focused investment plan early and follow through with strong and transparent implementation.
- NGEU funds could help Bulgaria’s green transition from its high reliance on coal-fired thermal power plants for electricity generation.
- Targeted investments should be complemented with a careful review of carbon pricing—possibly through the introduction of a carbon tax—to achieve the 2030 and 2050 climate targets.

*Source: IMF staff report (content unit 1bgrea2021001).*

### Box 3. NGEU Funds Recovery and Sustainability Plan

### Box 3. NGEU Funds Recovery and Sustainability Plan

### NGEU allocation and purpose
- Bulgaria is expected to receive about 13 percent of the projected 2020 GDP in grants under the NGEU funds during 2021–26.
- The bulk of the funds is made available under the Recovery and Resilience Facility (RRF).
- The RRF is designed to finance investment and structural reforms, with certain shares required to be dedicated to green and digital transitions as well as measures aimed at enhancing the resilience of national economies.

### Recovery and Sustainability Plan (RSP) — objectives and pillars
- The authorities are preparing a Recovery and Sustainability Plan (RSP), required for EU member states to receive RRF funds and intended to guide investment spending.
- Bulgaria’s draft RSP outlines policy objectives and needed investment in four areas:
  - Recovery and Resilience Facility (RRF): mitigate the economic and social impact of the coronavirus pandemic and make European economies and societies more sustainable, resilient and better prepared for the challenges and opportunities of the green and digital transitions.
  - Rural/Agriculture Development Fund: support rural areas in making the structural changes necessary in line with the European Green Deal.
  - Just Transition Fund: provide support to EU regions most affected by the transition to a low carbon economy.
  - REACT-EU: continue and extend crisis response and crisis repair measures; contribute to a green, digital and resilient recovery of the economy.

### Scope and structure of the Recovery and Resilience Plan — allocations (BGR billion)
- Green Bulgaria: 4.537
  - Focus: reducing the energy intensity of the economy, promoting the green transition, and increasing the competitiveness of the agriculture sector.
- Innovative Bulgaria: 2.420
  - Aim: increase the quality and scope of education and training, provide support for research and development, and support the industrial sector.
- Connected Bulgaria: 2.722
  - Aim: build a modern and secure digital infrastructure, reduce the carbon footprint of the transport sector, and increase the competitiveness and sustainable development of regions.
- Fair Bulgaria: 2.621
  - Focus: achieving inclusive and more sustainable growth, expanding the scope of social services, and strengthening the health system.

(Source: Government of Bulgaria; Next Generation EU)

### Fiscal framework and medium-term stance
- The MTBF envisages a fiscal deficit of 1.8 percent of GDP in 2023 that exceeds the medium-term objective of a structural deficit of 1 percent of GDP.
- Returning to the medium-term objective would strengthen the fiscal framework to meet unforeseen adversities.
- More public spending could strengthen growth potential and social resilience by improving the quality of education, reducing long-term unemployment, and reducing inequality and poverty.
- The authorities intend to utilize the NGEU funds fully by 2026.
- The authorities assess themselves to be on track to achieving the EU’s 2030 climate target but do not have an active plan to adopt a carbon tax, on which they are waiting for the EU guideline.

### Revenue mobilization and public investment management
- Improving domestic revenue mobilization would help by increasing resources and improving efficiency and transparency of the public sector.
- The sizable VAT compliance gap should be reduced.
- A diagnostic based on the IMF’s Tax Administration Diagnostic Assessment Tool could help assess administrative capability and identify areas for improvement.
- Authorities could explore options, including raising the ceiling on contributory income, which would follow up on the pension benefit increase in the 2021 budget.
- Public investment efficiency and quality can be improved: project appraisal, multi-year budgeting, and procurement identified as largest scope for improvement.
- The nation-wide application of the e-procurement system is welcomed.

### Authorities’ implementation views and policy choices
- The authorities acknowledged initial slow take-up of COVID-19 support policies due to stringent eligibility criteria, unfamiliarity with new mechanisms, and delays in reallocating EU Funds.
- Implementation of support measures is reviewed regularly and designs modified to speed delivery while ensuring appropriate burden sharing.
- The authorities noted a fiscal loosening due to the crisis but reaffirmed medium-term commitment to fiscal prudence.
- Job retention scheme was highly effective in cushioning employment; modalities of phasing-out yet to be decided.
- Wage increases for public sector planned to narrow wage gap; no further wage increases for the public sector planned for 2022–23.
- For the medium-term fiscal stance, the need to strengthen healthcare, provide social support, and preserve employment contributed to a projected 2023 deficit that exceeds the medium-term objective (structural deficit of 1 percent of GDP).
- Authorities committed to strengthening investment planning and fiscal transparency, improving public investment management efficiency and effectiveness, and improving traditionally low absorption of EU funds in early years of program period.

### Financial sector response and stability measures
- The Bulgaria National Bank (BNB) took measures at the onset of the crisis to strengthen banks’ balance sheets and help credit keep flowing.
- Measures included reduction of commercial banks’ exposures to foreign counterparts with lower credit quality, increasing domestically-held liquidity of the banking system.
- Supervisors should be ready to continue using macro-prudential tools to allow banks room to manage possible deterioration of loan quality without unduly constraining credit flows.
- Possible supervisory options: require banks to retain profits for 2020, reduce existing counter-cyclical capital buffers, or allow banks to temporarily operate below required capital buffers; banks should rebuild capital gradually as recovery entrenches.
- Addressing high NPLs will likely be a key challenge as loan moratoria expire and economic activity remains sluggish; supervisors should ensure timely recognition of problem loans and encourage proactive NPL resolution.
- Effective implementation of the new corporate insolvency framework could facilitate NPL resolution.

### Summary of specific financial sector policy responses to the pandemic (as described)
- Loan moratorium:
  - Allows change in the payment schedule of the principal and/or interests.
  - Deferral limited to 6 months.
  - Application window closed at end-September 2020; take-up rate amounted 15 percent of the stock of loans; the moratorium approved in September will expire at end-March 2021.
- Cancellation of the planned increase in the countercyclical capital buffers to 1.5 percent (remain at 0.5 percent).
- Capitalization of the banking system's 2019 profit (amount: BGN 1.6 bn).
- Reduction of commercial banks’ foreign exposures, through risk-based concentration limits on their exposures to individual foreign counterparts.

### Inclusive growth, social protection, and labor market policies
- The high and rising inequality of the pre-crisis decade would not be reversed by the announced anti-crisis policies.
- Announced policies will only partially mitigate the impact of the pandemic on inequality and poverty; support to vulnerable groups is available through one-off transfers, while income support (job retention scheme) is accessible mainly to stable wage earners or self-employed with established social security contribution histories.
- Adjustments to minimum unemployment benefits and pensions provide welcome support, but a broader reform of the social protection system would be needed to stop or reverse the decline in fiscal redistribution.
- Higher and more efficient social protection spending would help reduce inequality and poverty; authorities could review level, targeting, and composition of social protection spending and increase redistributive role of taxation (e.g., by raising the cap on social contributions) without necessarily revisiting the social contract around a low flat income tax.
- Strengthening Active Labor Market Policies (ALMPs) will foster recovery and more inclusive income convergence:
  - Bulgaria’s spending on overall ALMPs is among the lowest in the EU, with a large share going to direct job creation.
  - Training and start-up incentives are found to be effective in reducing long-term unemployment, while direct job creation is less effective.
  - Bulgaria’s skill mismatches are higher than NMS and EU averages; digital competences are important.
  - Public employment services should be strengthened to improve job matching efficiency, particularly for long-term unemployed.
- Education: teachers’ wages are being increased to double their 2017 levels by 2021; spending on education remains low among new EU member states for higher education and can be increased to support reforms; policies should have measurable output-based targets and increased collaboration with businesses.

### Governance, transparency, and anticorruption
- Continue strengthening governance, including enhancing transparency and accountability of emergency fiscal spending.
- Existing information management system allows tracking pandemic-related spending; authorities publish contracts for all public procurement projects.
- Transparency could be strengthened by publishing information on beneficial ownership of legal entities awarded procurement contracts.
- Ex-post audits of COVID-19 related spending would strengthen accountability.
- Continued progress needed in strengthening the judiciary and the fight against corruption to demonstrate judicial independence and effectiveness and to step up fight against high-level corruption.
- The European Commission’s new framework for the rule of law provides a framework to maintain reform efforts.

*Source: Next Generation EU; Government of Bulgaria; IMF staff.*

### 32.      The authorities prefer education to fiscal redistribution as the means to address

### The authorities prefer education to fiscal redistribution as the means to address inequality

### Authorities' views on inequality and education
- The authorities prefer education to fiscal redistribution as the means to address inequality.
- They concur with the desirability of more investment in education, which they think is also a better way to address inequality than higher social spending or progressive taxation for the purpose of redistribution.
- The authorities view the current level of overall ALMP spending adequate, while intending to allocate more resources to training programs.
- They reaffirm their commitment to sustain education reforms, which will take time to yield positive outcomes.

### Governance and transparency
- The authorities are committed to further strengthening governance.
- They plan to continue strengthening the judiciary and the fight against corruption, including through the EU’s rule of law framework.
- On the transparency of emergency spending, the authorities will continue monitoring and accurately recording emergency spending and are willing to undertake ex-post audits of pandemic-related spending.

### Staff appraisal — outlook and risks
- Recovery is expected in 2021 but uncertainty remains large.
- With a sharp economic contraction in 2020, unemployment has risen, inflation remains subdued and credit growth has decelerated.
- Growth is expected to pick up in 2021 although uncertainty is unusually large.
- Main downside risks to the outlook:
  - Prolonged and widespread lockdowns.
  - Slower progress on vaccines and therapies.
- Main upside risks to the outlook:
  - Rapid progress on controlling the virus.
  - Faster absorption of large EU funds.
- The external position is assessed to be stronger than warranted by fundamentals and desirable policy settings.

### Fiscal policy: assessment and recommendations
- Fiscal policy appropriately plans to provide steady support, while implementation can be further strengthened.
- The policy package that aimed at mitigating the impact of the evolving crisis led to an expansion of the fiscal deficit in 2020.
- The delivery of support could be improved, including by adjusting the design of measures and continuing the efforts to improve the implementation.
- The 2021 budget envisages maintaining a similar level of support as in 2020, while increasing some social spending.
- Increases in public sector wages and pension provide a welcome stimulus for the downturn, though warranting a review in the future.
- Policy should be adjusted flexibly as the pandemic evolves:
  - Were the virus resurgence to depress activity further, health spending and support to activity should be augmented in a timely manner.
  - Once recovery takes hold, policies should shift to facilitating resource reallocation and economic transformation.
  - The government should use EU transfers effectively, including the NGEU funds, to facilitate the recovery and help the transformation to a greener and more digitalized economy.
  - Once recovery is entrenched, the fiscal stance needs to move closer to the medium-term objective.
  - To finance ongoing reforms, revenue mobilization should be strengthened and efficiency of public investment improved further.

### Financial stability and banking supervision
- Bank supervisors should continue bolstering financial stability and closely monitor NPL developments.
- Macroprudential policy measures have enhanced banks’ balance sheet and helped credit continue flowing.
- However, NPLs will likely increase during the protracted crisis.
- Macroprudential policy should continue allowing banks room to absorb the deterioration of asset quality while extending necessary credit.
- Supervisors should continue encouraging timely recognition of problem loans during the crisis and proactive efforts to resolve NPLs when the recovery takes hold.

*Source: 1bgrea2021001 - 32.*

### 38.      Once the pandemic wanes, focus should progressively shift to broad-based reforms

### 38.      Once the pandemic wanes, focus should progressively shift to broad-based reforms

### Main recommendation
- Once the pandemic wanes, focus should progressively shift to broad-based reforms to promote inclusive growth.
- Strengthen active labor market policies and the education system, including via higher public spending on them, to help raise human capital and growth.
- Improve the social protection system and access to quality education to help alleviate inequality and poverty.
- Continue efforts to strengthen governance to promote inclusive growth.

### Labor, education, and social protection (policy priorities)
- Strengthen active labor market policies.
- Increase public spending on the education system.
- Improve the social protection system and access to quality education.
- Strengthen governance to support inclusive growth.

### Real sector developments (selected observations, 2012–20)
- Bulgaria saw a sharp drop in real GDP in Q2:2020, followed by a partial rebound in Q3:2020.
- The lockdown triggered a collapse in domestic demand.
- A large decline in tourism arrivals will affect growth and the current account surplus in 2020.
- Business confidence is recovering somewhat from the initial collapse related to the pandemic, while consumer confidence remains low.
- Despite an increase in public sector wages, the pandemic led to a slow-down in wage growth.
- Inflation slowed due to the combined effect of lower domestic demand and lower energy prices.

### Key macroeconomic projections and indicators (selected values from Tables)
- Real GDP: 2019 = 3.7; 2020 = -4.6; 2021 = 3.6; 2022 = 4.3; 2023 = 3.9; 2024 = 3.2; 2025 = 3.0
- Real domestic demand: 2019 = 4.6; 2020 = -3.3; 2021 = 3.3; 2022 = 4.5; 2023 = 5.5; 2024 = 3.8; 2025 = 2.8
- Unemployment rate (percent of labor force): 2019 = 4.2; 2020 = 5.2; 2021 = 4.8; 2022 = 4.4; 2023 = 4.2; 2024 = 4.2; 2025 = 4.2
- GDP deflator: 2019 = 5.3; 2020 = 2.1; 2021 = 2.0; 2022 = 2.6; 2023 = 2.5; 2024 = 2.5; 2025 = 2.5
- Consumer price index (HICP, average): 2019 = 2.5; 2020 = 1.3; 2021 = 1.2; 2022 = 2.0; 2023 = 2.0; 2024 = 2.0; 2025 = 2.0
- Current account balance (percent of GDP): 2019 = 3.0; 2020 = 1.2; 2021 = 2.1; 2022 = 1.6; 2023 = 0.6; 2024 = 0.6; 2025 = 0.3
- Net international investment position: 2019 = -31.2; 2020 = -29.2; 2021 = -23.3; 2022 = -18.1; 2023 = -14.1; 2024 = -9.8; 2025 = -5.8
- Gross international reserves (billions of euros): 2019 = 24.8; 2020 = 26.4; 2021 = 28.9; 2022 = 32.4; 2023 = 36.7; 2024 = 40.3; 2025 = 44.4

### Fiscal sector (selected indicators)
- General government net lending/borrowing (cash basis, percent of GDP): 2019 = -1.0; 2020 = -3.5; 2021 = -4.0; 2022 = -2.0; 2023 = -1.8; 2024 = -1.2; 2025 = -1.2
- General government primary balance (percent of GDP): 2019 = -0.4; 2020 = -2.9; 2021 = -3.4; 2022 = -1.4; 2023 = -1.1; 2024 = -0.6; 2025 = -0.6
- Structural overall balance (percent of GDP): 2019 = 0.8; 2020 = -2.3; 2021 = -2.8; 2022 = -1.4; 2023 = -1.6; 2024 = -1.1; 2025 = -1.2
- General government gross debt (percent of GDP): 2019 = 18.4; 2020 = 24.0; 2021 = 25.8; 2022 = 27.0; 2023 = 27.7; 2024 = 27.4; 2025 = 27.1
- Revenue (percent of GDP): 2019 = 35.1; 2020 = 35.3; 2021 = 36.4; 2022 = 35.3; 2023 = 35.4; 2024 = 36.0; 2025 = 36.1
- Expenditure (percent of GDP): 2019 = 36.0; 2020 = 38.8; 2021 = 40.4; 2022 = 37.3; 2023 = 37.2; 2024 = 37.2; 2025 = 37.3

### External sector (selected observations)
- In Q1–Q3:2020, the current account surplus shrunk.
- Trade contracted in 2020 while the terms of trade improved.
- The NIIP continued to improve due to a reduction in liabilities.
- The pandemic had a large impact on financial flows in part due to banks’ repatriation of overseas investment.

### Monetary and financial sector (selected statistics)
- Credit growth slowed during the pandemic.
- Interest rates remain low and continue to decline for leva loan rate.
- After remaining broadly stable in 2018–19, bank profitability declined in 2020.
- Banks are generally well capitalized and liquid; NPLs have declined but remain high when compared to peers.
- Financial Soundness Indicators (2020Q2):
  - Capital to risk-weighted assets = 23.1
  - Nonperforming loans to total gross loans = 6.5
  - Return on assets = 0.9
  - Liquid assets to total assets = 27.6
  - Core indicators (2019): Capital to risk-weighted assets = 20.4; NPL to total gross loans = 6.6

### COVID-19 related indicators and behavior
- Infections and death rates surged significantly in recent weeks (as reported).
- Business confidence recently rebounded, but consumer confidence remains low.
- Retail sales and electricity generation remained depressed; electricity consumption recovered.
- Mobility rebounded after the first-wave lockdown but declined as the second-wave accelerates; mobility related to work also declined.

*Source: IMF staff compilation and country authorities as presented in the original chapter.*

### Annex I. Bulgaria’s Participation in ERM II and Entry into

### Annex I. Bulgaria’s Participation in ERM II and Entry into Euro Area

### ERM II accession and related commitments
- Bulgaria joined ERM II in July 2020 and entered close cooperation on banking supervision.
- Pre-commitments (made in June 2018 and fulfilled) included:
  - Entering into close cooperation with the ECB (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 issues in transposition of the fourth EU AML directive and transposing the fifth AML directive into national legislation.
  - Improving SOE governance by aligning legislation with the OECD Guidelines on Corporate Governance of SOEs.

### Banking supervision and resolution framework
- Close cooperation implies the BNB is part of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM).
- With accession to the SSM on October 1, 2020:
  - The ECB started exercising direct supervision of significant institutions.
  - Common procedures apply for all supervised entities; oversight of less significant institutions remains with direct BNB supervision under common procedures.
  - The BNB is represented on the ECB’s Supervisory Board with the same rights and obligations as other members, including voting rights.
- Bulgaria participates in the SRM and has a representative at the Single Resolution Board, which performs resolution planning and takes resolution actions in close cooperation with the BNB.

### Policy commitments and structural reform priorities
- The ERM II agreement is accompanied by a firm commitment to pursue sound economic policies aimed at preserving economic and financial stability and achieving a high degree of sustainable economic convergence.
- Authorities committed to implementing policy measures on:
  - The non-banking financial sector.
  - State-owned enterprises.
  - The insolvency framework.
  - The anti-money laundering framework.
- Authorities also committed to continuing reforms in the judiciary and in the fight against corruption and organized crime given their importance for financial stability and integrity.

### Benefits and risks of eventual euro area membership
- Bulgaria must stay in ERM II for at least two years prior to joining the euro area.
- Expected benefits of euro area membership:
  - Higher investor confidence.
  - Greater trade integration.
  - Reduced funding costs.
- Risks and constraints:
  - The exit option is virtually foregone once in the euro area.
  - Bulgaria would be exposed to greater two-way spillover effects from and to other members, raising the premium on having a strong and flexible economy and achieving greater real convergence.

---

### Annex II. Debt Sustainability Analysis (Public and External DSA)

### Public debt developments and projections (public DSA)
- End-2018 nominal gross public debt: 20.1 percent of GDP.
- End-2019 nominal gross public debt: 18.4 percent of GDP.
- Gross financing needs increased to 2 percent of GDP in 2019 from 1.3 percent of GDP in 2018 due to a small fiscal deficit and the purchase of jet fighters.
- Government domestic bond issuance in 2019: BGN 967.3 million (0.8 percent of GDP), matching amortization.

- COVID-19 impact in 2020:
  - Public debt-to-GDP ratio projected to increase by 5.6 percentage points in 2020.
  - Staff projects a fiscal deficit of 3.5 percent of GDP in 2020 (2020 budget envisages 4.4 percent of GDP).
  - Gross financing needs forecasted to increase by 2.7 percentage points of GDP in 2020.
  - Authorities raised the 2020 debt ceiling: domestic debt from BGN 2.2 billion to BGN 10 billion; external debt from EUR 8 billion to EUR 10 billion.
  - Authorities issued EUR 2.5 billion Eurobonds on September 15, 2020 (4.2 percent of projected 2020 GDP), split between 10-year and 30-year maturities; interest rates: 0.375 percent (10-year) and 1.375 percent (30-year). Issuance contributed to an increase in fiscal reserves.

- Medium-term projections:
  - Staff projects a fiscal deficit of 4.0 percent of GDP in 2021 and around 2 percent of GDP in 2022–2023.
  - Fiscal stance projected to tighten toward a structural balance deficit target of around 1 percent of GDP in 2024–2025.
  - Public debt-to-GDP ratio projected to increase from 25.8 percent in 2021 to 27.1 percent in 2025.
  - Authorities plan to borrow an average of 4.5 percent of GDP annually in gross terms during 2021–2023, of which 2.5 percent of GDP each year on average will be borrowed from the external market.
  - Alternative scenarios indicate public debt would likely remain below 35 percent of GDP under various shocks.

### Public DSA key baseline indicators (selected exact figures)
- Nominal gross public debt: 2018: 19.9; 2019: 20.1; 2020: 18.4; 2021: 24.0; 2022: 25.8; 2023: 27.0; 2024: 27.7; 2025: 27.4; projection endpoint indicated as 27.1 (in percent of GDP).
- Public gross financing needs: 2018: 4.2; 2019: 1.3; 2020: 2.0; 2021: 4.7; 2022: 4.8; 2023: 4.3; 2024: 3.9; 2025: 3.6; 2026 (table continues) 1.9 (in percent of GDP).
- Real GDP growth (in percent): 2018: 1.5; 2019: 3.1; 2020: 3.7; 2021: -4.6; 2022: 3.6; 2023: 4.3; 2024: 3.9; 2025: 3.2; 2026: 3.0 (as presented in the DSA table).
- Inflation (GDP deflator, in percent): 2018: 2.4; 2019: 4.0; 2020: 5.3; 2021: 2.1; 2022: 2.0; 2023: 2.6; 2024: 2.5; 2025: 2.5.
- Effective interest rate (in percent): 2018: 4.2; 2019: 2.9; 2020: 2.9; 2021: 3.3; 2022: 2.4; 2023: 2.5; 2024: 2.6; 2025: 2.3.

### Public stress tests and scenarios
- Stress test scenarios illustrated include:
  - Real GDP growth shock (assumes: (i) real GDP growth is reduced by 1 standard deviation for 2020-21; (ii) revenue-to-GDP ratio unchanged; (iii) non-interest expenditures unchanged; (iv) deterioration in primary balance leads to higher interest rate; (v) decline in growth leads to lower inflation at 0.25 percentage points per 1 percentage point decrease in GDP growth).
  - Primary balance shock (assumes: (i) primary balance in 2020-21 below baseline by 50 percent of the 10-year historical standard deviation; (ii) additional borrowing increases interest rate by 25bp per 1 percent of GDP worsening of the primary balance).
  - Real interest rate shock (assumes nominal interest rate increases by the difference between the maximum real interest rate over history (last 10 years) and the average real interest rate level over projection).
- Under combined macro-fiscal stress tests, gross nominal public debt rises relative to baseline but remains within scenario bounds illustrated in the DSA figures.

### External debt developments and projections (external DSA)
- External debt-to-GDP ratio evolution:
  - Peak in 2009: 106 percent of GDP.
  - 2019: 57 percent of GDP.
  - 2020: increased to 69 percent of GDP after EUR 2.5 billion Eurobond issuance and declines in nominal GDP and exports.
- External debt-to-exports ratio:
  - 2019: 89 percent.
  - 2020: 127 percent.

- Eurobond issuance specifics:
  - Issued EUR 2.5 billion on September 15, 2020, split into two EUR 1.25 billion tranches with maturities of 10 and 30 years.
  - Interest rates: 0.375 percent for the 10-year issue; 1.375 percent for the 30-year issue.

- Projections and dynamics:
  - External debt ratios projected to decline over the projection period but remain above pre-pandemic levels by 2025.
  - Current account surplus excluding interest payments projected to decline from 1.9 percent of GDP in 2020 to 1.1 percent of GDP in 2025; this surplus is significantly above the debt-stabilizing level of a non-interest current account deficit of 4.0 percent of GDP.
  - Gross financing needs as a share of GDP are expected to increase in 2020 from their low level of 2019 but remain below their 2015–19 average during the projection period.

### External DSA risks and sensitivity
- External debt is sensitive to a real depreciation shock:
  - With a 30 percent real depreciation in 2020 (noted as unlikely given the fixed exchange rate with the euro and large share of exports to the euro area), external debt would rise to 106½ percent of GDP in 2021, before declining to 100 percent of GDP by 2025.
- Under the historical scenario, external debt-to-GDP ratio would increase until 2023 to about 77 percent of GDP before stabilizing.
- Under other standard shocks (including the combined shock scenario), the external debt-to-GDP ratio would remain close to its 2020 level.

### External DSA table highlights (selected exact figures)
- Baseline external debt (in percent of GDP): 2009: 106.2; 2019: 57.0; 2020: 69.0; 2021: 67.4; 2022: 66.4; 2023: 65.4; 2024: 64.0; 2025: 63.7.
- Debt-stabilizing non-interest current account: -4.0 (in percent of GDP).
- External debt-to-exports ratio (in percent): 2019: 90.0; 2020: 88.8 (table shows 2019 90.0, 2020 88.8; narrative reports 2019 89 percent and 2020 127 percent reflecting different series/definitions in the DSA text and tables).
- Gross external financing need (in billions of US dollars): 2019: 13.0; 2020: 15.8; 2021: 15.5; 2022: 18.7; 2023: 20.4; 2024: 21.8; 2025: 21.0.
- Key baseline macro assumptions (selected exact figures):
  - Real GDP growth (in percent): 2019: 3.7; 2020: 2.4; 2021: 1.5; 2022: -4.6; projected 2023: 3.6; 2024: 4.3; 2025: 3.9; baseline table lists multiple year-specific values.
  - Nominal external interest rate (in percent): historical series and projections include values such as 2019: 1.1; 2020: 1.7; 2021: 0.4; subsequent projection values around 1.2–1.4.

### External stress tests and bound tests
- Bound tests and shock illustrations include:
  - Interest rate shock (200 bp shock assumed for the interest rate shock box).
  - Non-interest current account shock and growth shock scenarios.
  - Combined shock (permanent 1/4 standard deviation shocks to real interest rate, growth rate, and current account balance).
  - One-time real depreciation of 30 percent occurring in 2021 in the real depreciation shock scenario.
- Boxed averages in the figures denote baseline and scenario average projections for the respective variables and ten-year historical averages.

*Italic: IMF staff analysis as presented in Annex I and Annex II of the Bulgaria report.*

### Annex III. External Sector Assessment

### Annex III. External Sector Assessment

### Overall assessment and policy responses
- Overall assessment: The external position in 2020 is preliminarily assessed to be stronger than the level implied by medium-term fundamentals and desirable policies.
- Current account (CA) trajectory:
  - Projected to narrow to 1.2 percent of GDP in 2020 from 3 percent of GDP in 2019.
  - CA surplus projected to further narrow in the medium term due to continuing strength of private-sector consumption and rising medium-term imports driven by EU grants.
- Uncertainty: Assessment is highly uncertain given lack of full-year data for 2020 and ambiguous pandemic impacts on the CA (collapse in global trade, international tourism, remittances, and investment income).
- Potential policy responses:
  - Short term: Contain COVID-19 outbreak and its economic consequences; provide relief to households and firms to maintain activities and limit long-term scarring.
  - If pandemic worsens: Scale up policy support promptly, taking advantage of Bulgaria’s substantial fiscal space and strong external position.
  - Medium term: Shift policies to facilitate recovery, transformation, and inclusive growth; make effective and efficient use of expected large EU transfers.

### Foreign assets and liabilities: position and trajectory
- Background trend:
  - From a peak negative NIIP of 100 percent of GDP in 2009, the negative NIIP improved to -31.2 percent in 2019.
  - Contributing factors: increase in foreign reserve assets, reduction of banks’ liabilities to parent companies, increase of foreign assets by domestic companies (mainly pension funds), positive CA developments, and sustained economic growth.
- Assessment and projections:
  - NIIP continued to improve over the first three quarters of 2020 and is expected to reach -29.2 percent of GDP by year-end.
  - Projections of continued CA surpluses and increases in reserve assets suggest further improvement of the NIIP-to-GDP ratio over the medium term.
  - Bulgaria’s overall NIIP financing vulnerabilities are judged moderate, as foreign direct investment fund accounts for an increasingly large share of the position.
- Key 2019 balances (percent of GDP):
  - NIIP: -31.2
  - Gross Assets: 91.5
  - Debt Assets: 12.8
  - Gross Liabilities: -122.6
  - Debt Liabilities: -7.7

### Current account: recent developments, assessment, and model results
- Background developments:
  - External balance has significantly improved in recent years with sizable CA surpluses every year since 2013.
  - First three quarters of 2020: CA surplus of 1.1 percent of GDP (down from 3.4 percent of GDP in same period last year).
  - Drivers: Weak domestic demand reduced the trade deficit, but a sharp decrease in foreign tourist arrivals led to a large contraction in the service balance that more than offset trade gains.
  - Projection: CA surplus projected to narrow from 3 percent of GDP in 2019 to 1.2 percent of projected GDP in 2020.
  - Data caveats: High uncertainty and frequent revisions—January–September net errors and omissions were positive by €2.4bn, making a revision of the full-year surplus likely.
- EBA-lite model assessment:
  - The EBA-lite current account model suggests the projected 2020 cyclically-adjusted CA was 3.7 percent of GDP higher than the estimated level consistent with fundamentals and desirable policy settings.
  - On balance, close to 6.5 percent of GDP is attributed to policy gaps.
    - Low domestic public health care spending contributes 3.4 percentage point to the CA gap.
    - Looser fiscal policy in the rest of the world, relative to Bulgaria, contributes 1.9 percentage point to the excess surplus.
  - Unidentified residuals are large, potentially reflecting idiosyncratic factors, temporary shocks, and structural impediments encouraging higher savings and lower investment.
  - High uncertainty persists due to lack of full-year data, ambiguous pandemic impact, and substantial revisions to CA data.
- Text table: Bulgaria: Results from EBA-lite models, 2020 (in percent of GDP, unless otherwise indicated)
  - CA-Actual: 1.2
  - Cyclical contributions (from model): 0.2
  - Additional temporary/statistical factors: 0.0
  - Natural disasters and conflicts: -0.1
  - Adjusted CA: 1.1
  - CA Norm (from model) 1/: -2.6
  - Adjustments to the norm: 0.0
  - Adjusted CA Norm: -2.6
  - CA Gap: 3.7
    - o/w Policy gap: 6.5
  - Elasticity: -0.43
  - REER Gap (in percent): -8.5 4.4
  - Footnote 1/: Cyclically adjusted, including multilateral consistency adjustments.

### Real exchange rate (REER)
- Background:
  - Wage growth outpacing productivity growth led to ULC-based REER diverging from CPI-based REER and appreciating significantly since 2009.
  - Contributing factors: low initial ULC levels, structural changes, nominal and real convergence, cyclical factors fueling rapid ULC growth pre-2009 crisis.
  - Concern: Faster-rising ULC-based REER raises concerns about eroding price competitiveness, although 2019 wage levels remained substantially below the median NMS level and corporate profits (gross operating surplus) can absorb some labor cost increases.
- Assessment:
  - EBA-lite REER model (October 2020 WEO projections) estimates Bulgaria’s REER in 2020 to be moderately overvalued by 4.4 percent.
  - The REER gap derived from the IMF staff’s CA gap assessment (with elasticity 0.43) implies the real exchange rate was undervalued by 8.5 percent.
  - Given high uncertainty, the staff-assessed REER gap range is -11.0 to 0.
    - Note: The REER gap range derived from the CA gap range (2.7 to 4.7 percent) is –11.0 to –6.3 percent (with an elasticity of 0.43). The range of –11.0 to 0 is determined by putting more weight on the current account model and less on the REER model. It implies a mid-point estimate of REER undervaluation of 5.5 percent.

### Capital and financial accounts: flows and debt dynamics
- Background:
  - In 2019, net capital outflows were recorded, driven largely by other investment and portfolio flows; net FDI inflows remained relatively low.
  - First three quarters of 2020: sizable net inflows of funds largely reflecting a €2.2bn decline in banking sector’s foreign assets (category “other investments: currency and deposits”) in March–April—likely related to BNB measures announced in March to strengthen banks’ balance sheets and liquidity—and the placement of €2.5bn Eurobonds by the government in mid-September.
- Assessment:
  - Bulgaria’s external debt-to-GDP ratio continued to decline in 2019, but gross external indebtedness of Bulgarian residents is expected to rise by 8 percent of GDP by the end of 2020—mainly due to public external debt increasing from 8.9 to 14 percent of projected GDP.
  - Maturity structure: High share of long-term debt reduces vulnerability to international capital flow volatility.
  - Current terms for servicing external obligations by Bulgarian residents are expected to remain favorable.

### FX intervention and reserves level
- Background levels:
  - End-2019 gross international reserves: €24.8bn (40.6 percent of GDP).
  - End-October 2020 foreign reserves: €29.5bn (49.5 percent of projected GDP), mirroring a €2.2bn repatriation of banking sector’s foreign assets in March–April and the placement of €2.5bn Eurobonds in mid-September.
  - Import coverage of reserves rose to 11.5 months.
  - Reserve coverage of short-term external debt increased to 3.6 times.
- Assessment:
  - Foreign exchange reserves are assessed to be adequate under a currency board arrangement.
  - Available FX reserves at end-2019 exceed the upper bound of the suggested adequacy range and the coverage ratio required for functioning of the currency board, and remain well above traditional metrics.

### Risk Assessment Matrix — major risks, likelihood, impact, and policy responses
- Domestic Risks
  1. A faster-than-expected wage growth (medium term)
     - Likelihood: Medium
     - Impact if realized: Low/Medium — Strong consumption, inflation acceleration, and if persistent, erosion of external competitiveness in the long term; overheating could lead to asset and real estate price bubbles.
     - Policy response: Continue structural reform efforts to boost labor productivity, including education, healthcare, and labor market reforms.
  2. Slow progress in structural reforms to raise potential growth and mitigate unfavorable demographics (medium term)
     - Likelihood: High/Medium
     - Impact if realized: High — Lower potential growth, high structural unemployment, stalling real convergence, and increased fiscal risks.
     - Policy response: Announce and implement structural reforms with clear objectives and timeline.
- Global Risks
  3. The COVID-19 pandemic proves harder to eradicate (short/medium term)
     - Likelihood: High
     - Impact if realized: High — Disrupted economic activity; negative global spillovers through trade, tourism, and confidence effects on financial markets and investment.
     - Policy response: Allow automatic stabilizers to operate; use fiscal space to provide adequate support and, if needed, further stimulus; advance structural reform to facilitate reallocation of resources.
  4. Intensified geopolitical tensions and security risks (short term)
     - Likelihood: High
     - Impact if realized: Medium — Political and trade disruptions, higher commodity prices (if supply is disrupted), and lower confidence and investment.
     - Policy response: Continue structural reform efforts to boost productivity and competitiveness.
  5. Accelerating de-globalization (short/medium term)
     - Likelihood: High
     - Impact if realized: Low/Medium — Negative global spillovers through trade, tourism, and confidence effects on financial markets and investment.
     - Policy response: Advance structural reforms that bolster competitiveness and raise potential growth, including labor market reforms; if needed, use available fiscal space to implement reforms.

### Public–private investment relationship in EU member states — key findings and technical notes
- Summary findings:
  - Large-scale public investment financed by EU funds could affect private investment and medium-term growth; accumulation of public capital stock can raise medium-term growth and catalyze private investment (crowding-in), depending on development level and type of expenditure.
  - Panel regression for EU economies suggests presence of a crowding-in effect: public investment has a positive impact on private investment with a one-year lag.
  - Interaction effects: Public investment has a more pronounced positive effect on private investment during negative output gaps and for less developed economies.
  - By subcomponent (with long lags):
    - Public investment in transport: positive effect with 4-year lag (coefficient 0.062 **).
    - Public investment in healthcare: positive effect with 6-year lag (coefficient 0.046 ***).
    - Public investment in education: positive effect with 8-year lag (coefficient 0.099 ***); greater impact than transport but with longer lag.
    - Public investment in general public services: positive effect with 1-year lag (coefficient 0.044 *).
    - Capital expenditures in defense and other small investments: statistically insignificant.
- Regression results (selected coefficients):
  - Model (1) and (2) excerpts:
    - Private investment (-1): 1.039 *** (model 1); 0.620 *** (model 2)
    - Private investment (-2): -0.463 ** (model 1); -0.281 *** (model 2)
    - Output gap: 1.761 *** (model 1); 1.683 *** (model 2)
    - NPL: -0.028 ** (model 1); -0.056 ** (model 2)
    - Convergence interest rate: -0.021 (model 1); -0.037 *** (model 2)
    - Public investment (-1): 0.181 ** (model 1)
    - (Output gap * Public investment) (-1): -0.152 **
    - GDP per capita * Public investment: -0.021 ***
    - Public investment in transport (-4): 0.062 **
    - Public investment in education (-8): 0.099 ***
    - Public investment in healthcare (-6): 0.046 ***
    - Public investment in general public services (-1): 0.044 *
  - Memorandum:
    - Sargan test (p-value): 0.12 / 0.21
    - AR(1) test (p-value): 0.14 / 0.13
    - AR(2) test (p-value): 0.75 / 0.23
- Technical information:
  - Panel regression estimated with difference GMM with individual effects. Annual data cover all EU member states and the UK for 2001–2019; data from Eurostat and IMF; variables logged.
  - Up to 10 period lags for explanatory variables tested; most statistically significant chosen.
  - Public investment subcomponents derived using government functions COFOG (2).
  - Private investment constructed as total gross fixed capital formation minus public gross fixed capital formation in current prices, then deflated by total gross fixed capital price deflator (assumes same deflator for private and public investment).
  - Potential output estimated with Hodrick-Prescott filter with λ=100 for annual data.

*Source: Annex III. External Sector Assessment (BULGARIA), IMF staff analysis and EBA-lite results as presented in the provided document.*

### Appendix I. Main Recommendations of the 2019 Article IV

### Appendix I. Main Recommendations of the 2019 Article IV Consultation and Authorities’ Actions

### Fiscal Policy
- IMF 2019 recommendations:
  - Preserve fiscal buffers that are critical for currency board arrangement and later in the euro area.
  - Strengthen revenue mobilization.
  - Improve public spending efficiency and effectiveness including for EU funds, as guided by PIMA TA.
  - Need further pension reforms to address long-term fiscal pressures.
- Authorities’ actions and status:
  - "Public debt remains low and the fiscal reserve is large."
  - Implemented measures to strengthen efficiency of excise tax collection.
  - Enforced large contracting authorities to use an e-procurement platform (mandatory modules) and planned to extend to all contracting authorities by January 2021.
  - National public investment information system planned to start functioning at the beginning of 2021.
  - "No additional pension reform is planned in the near term."

### Structural Reforms and Public Goods
- IMF 2019 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.
- Authorities’ actions and status:
  - Government plans to prioritize training in digital skills in the next EU cycle.
  - Implemented measures in healthcare to reduce cost of medicines and clean up balance sheets of public hospitals and the national insurance fund.
  - Provided additional funds for the system to cope with the COVID-19 epidemic.
  - "No functional review of public sector employment and wages is planned at this stage."

### State-Owned Enterprises and Governance
- IMF 2019 recommendations:
  - Enhance the oversight and efficiency of SOEs to reduce contingent liabilities and raise growth potential.
  - Establish a fiscal risk management unit.
  - Establish a track record in demonstrating judicial independence and effectiveness, and step up the fight against high-level corruption.
- Authorities’ actions and status:
  - Aligned SOE legislation with the OECD guidelines of SOE corporate governance.
  - Set up the Public Enterprises and Control Agency to develop SOE ownership policy and aggregate report.
  - "No plan to establish a fiscal risk management unit."
  - Council of Ministers adopted a Decree establishing a National mechanism for sustaining reform continuity.
  - Authorities to continue efforts under the EU’s rule-of-law framework.

### Financial Sector Policies and Stability
- IMF 2019 recommendations:
  - Continue efforts to strengthen banking sector supervision.
  - Advance progress in reducing NPLs.
- Authorities’ actions and status:
  - The BNB completed the calibration of the bank-specific Pillar II capital add-ons.
  - BNB entered into close cooperation with the ECB and joined the Single Supervisory Mechanism.
  - BNB adopted the EBA guidelines on management of NPLs.
  - Banks’ NPL reduction plans are assessed in the SREP; BNB closely monitoring banks to ensure timely recognition and proper coverage of NPLs.

### Fund Relations, Membership, and Major Financial Indicators
- Membership and status:
  - Joined on September 25, 1990.
  - Article VIII status assumed on September 24, 1998.
- Quota and SDR information:
  - Quota: 896.30 SDR Million 100.00 percent quota.
  - Fund holdings of currency: 798.18 SDR Million 89.05 percent.
  - Reserve position in Fund: 98.13 SDR Million 10.95 percent.
  - Net cumulative SDR allocation: 610.88 SDR Million 100.00 percent.
  - Holdings: 612.52 SDR Million 100.43 percent.
- Latest financial arrangements (listed with dates and amounts as shown):
  - Stand By 8/6/2004–3/31/07 Amount Approved 100.00 SDR million Amount Drawn 0.00.
  - Stand By 2/27/2002–3/15/04 Amount Approved 240.00 SDR million Amount Drawn 240.00.
  - EFF 9/25/1998–9/24/2001 Amount Approved 627.62 SDR million Amount Drawn 627.62.
- Projected payments to the Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 2021 0.01; 2022 0.01; 2023 0.01; 2024 0.01.
  - Principal and Total: “--” for 2020 and “0.01” entries for subsequent years as above.

### Exchange Rate and ERM II
- Exchange rate arrangement:
  - Currency: lev.
  - Since July 1, 1997, Bulgarian National Bank operates a currency board arrangement.
  - From July 1, 1997 to December 31, 1998 lev fixed to Deutsche Mark at BGN 1000 per Deutsche Mark.
  - Since January 1, 1999 lev fixed to the euro at BGN 1.95583 per euro.
- EU accession:
  - Bulgaria joined the European Union on January 1, 2007.
- ERM II and cooperation:
  - Inclusion of the lev into ERM II in mid-2020 and establishment of “close cooperation” between the BNB and ECB in October 2020.
  - Authorities requested technical assistance from the Dutch government in preparation for next stages toward euro adoption.

### Article IV Consultations, FSAP, and Technical Assistance
- Article IV:
  - Bulgaria is on the 12-month consultation cycle.
  - The 2019 Article IV Board discussion took place on March 20, 2019.
  - The Staff Report was published on March 22, 2019 (Country Report No. 19/83).
- Financial Sector Assessment Program:
  - Joint IMF-World Bank mission on FSAP in October 2016 and January 2017.
  - Financial Sector Assessment Report discussed at the Board on May 22, 2017 and published on May 23, 2017 (Country Report No. 17/132).
- Technical assistance:
  - Received TA on public investment management assessment from FAD and on Bank supervision and Regulation (SREP Manual) from MCM in FY2018.

### Statistical Issues, Data Adequacy, and Dissemination
- General assessment:
  - "Data provision is adequate for surveillance purposes."
  - NSI compiles national accounts based on ESA 2010; revised national accounts estimates released in September 2016 for 2000 to 2014.
- Noted weaknesses and actions:
  - Method for deriving taxes on products (VAT) in constant prices inconsistent with international best practice; mission set a target date of September 2019 to resolve.
  - Labor statistics: QLCS sample includes 13,100 private sector enterprises out of approximately 203,000; public sector enterprises covered exhaustively except schools and kindergartens.
  - Main shortcomings in wage statistics: (i) under-reporting of private sector wages; (ii) reporting of average gross earnings only and not wages by occupation.
- Government finance statistics:
  - Significant progress in implementing accrual accounting for government, budgetary and statistical systems.
  - Quarterly GFS data on an accrual basis for general government reported for publication in the IFS through Eurostat.
  - Since June 2016, general government operations for the SDDS Plus prepared quarterly on accrual basis by NSI and BNB.
  - Since 2014, Bulgarian statistical authorities agreed to use Eurostat option for IMF data transmission to align GFS and ESA/EDP data.
- External sector statistics and participation:
  - Compiles quarterly balance of payments and IIP statistics according to BPM6.
  - Participates in CDIS, CPIS, and COFER.
- Data standards:
  - Bulgaria started to adhere to the SDDS Plus in 2016.
- Table of Common Indicators (as of December 10, 2020) — sample of key reporting dates and frequencies preserved as in source:
  - Exchange Rates: Date of latest observation November 2020; Date received December 2020; Frequency Monthly (M).
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation October 2020; Date received November 2020; Frequency Monthly (M).
  - GDP: Date of latest observation 2020 Q3; Date received December 2020; Frequency Quarterly (Q).
  - External Current Account Balance: Date of latest observation September 2020; Date received November 2020; Frequency Monthly (M).
  - Stocks of General Government and General Government-Guaranteed Debt: Date of latest observation October 2020; Date received November 2020; Frequency Monthly (M).

### Authorities’ Statement and Policy Priorities (Statement by Mr. Paul Hilbers and Mr. Tsvetan Manchev, January 27, 2021)
- Pandemic response and outlook:
  - Authorities agree with staff on need for continued support until recovery firmly takes hold.
  - 2021 fiscal measures will continue to provide counter-cyclical financial assistance to firms and households.
  - Fiscal priority: preserving sustainability of the health care system and medical services to save lives.
  - Recent measures include maintaining temporary relief from import duties and VAT exemption on imports of certain medicine and medical equipment until end-April, and a reduced VAT rate on certain goods and services until end-2021.
- Economic developments and projections:
  - Unemployment "has moderately increased to an average 5.6 percent in 2020."
  - 2021 budget adopted in November projects a deficit of about 3.9 percent of GDP.
  - Authorities expect economic activity to pick up and show a strong recovery over course of 2021, contingent on reduced infection rate and full implementation of vaccination plan.
- Fiscal strategy and medium-term priorities:
  - 2021 budget aligned with medium-term budgetary framework and European Stability and Growth Pact.
  - Aim to rebuild fiscal buffers, minimize economic hardship, reduce risk of economic scarring, enable strong and sustainable recovery while limiting public debt burden to next generation.
  - Bulgaria placed in the "no imbalances" category in 2020 for the first time since 2012 under the EU Macroeconomic Imbalances Procedure.
  - Capacity enhancement of the Agency for Public Enterprises and Control to reduce fiscal risks from SOEs.
- Structural reform priorities:
  - Authorities will allocate more resources to training programs and better integrate them within education reform.
  - Prepare to strengthen governance in line with EU rule-of-law framework; improve public administration model, administrative service delivery standards, and user feedback.
  - New strategy for Public Procurement Sector 2021-2027 to strengthen administrative capacity, standardization, cooperation, traceability, and transparency.
  - Emphasis on green transition via amendments to the Climate Change Mitigation Act to meet Paris Agreement commitments and enhance cost-effective emission reductions and low-carbon investments.
- Financial stability and banking supervision:
  - Banking sector entered pandemic with high profitability, capital adequacy and liquidity ratios.
  - BNB to utilize macroprudential tools; maintain measures to guarantee strong liquidity and capital, including prohibition of banks’ profit distribution.
  - In 2021 focus on operationalizing membership in Single Supervisory Mechanism and Single Resolution Mechanism; organizational changes and new staff employed in supervision and resolution areas.
  - Financing model for bank supervision and resolution overhauled by introducing fees for central bank’s supervision and resolution services.

*Source: Appendix I. Main Recommendations of the 2019 Article IV Consultation and Authorities’ Actions (IMF staff report contents as provided).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1bgrea2021001.pdf_